What should be done to get Lebanon out of this crisis? And more importantly, who should, or can, do it? Many solutions have been circulated, including bailouts, foreign lending programs under the IMF or other institutions, further cuts to public spending, and funding safety nets for the impoverished.
But most proposed solutions until today lack two major components: A comprehensive economic view, and a realistic political incentive perspective. Let’s start with the second one: Any reform or rescue plan will have winners and losers. Yet everyone knows that 1% of the Lebanese people own 50% of the wealth. And that political parties in power for the last 30 years have protected, benefited and worked with this rich class, amassing a large pool of illegal assets and wealth, both in Lebanon and abroad. Just look at the Lebanese coastline for the countless number of illegal resorts and properties built on it.
Would you expect reforms to serve the interests of the 1% of the Lebanese people or the 99%? Will political parties in power work for the welfare of the average citizen, and have the rich oligarchs pay their fair share? The 2017 budget saw higher VAT and general taxes on everyone, and spared any fine or tax on large illegal properties, no wealth tax, and a modest increase in tax on deposits, applied to everyone without any progressive component. The new Diab government does not seem to be heading in the direction of implementing any decision outside the narrow interests of the ruling cartels.
Now back to the first point. Someone used to say “it’s the economy, stupid”. And in fact, it is. The Lebanese economy was relying on foreign inflows, through remittances, bank deposits, tourism and real estate investment to finance itself. After 2011 and the Syria crisis these inflows started a dramatic decline. Instead of reacting to this situation with solid fiscal and economic reforms, the ruling parties and monetary authorities digged deeper: they increased interest rates to attract (and keep) dollar deposits, and they rewarded the banks through financial engineering to get their dollars with profitable certificates and transfers, and with these dollars they financed a growing and more expensive public debt.
Rulers promised to cut the public deficit and tackle corruption but instead kept siphoning off money lent by the Central Bank and the banks in more nepotism and failed projects, and simultaneously increasing their private wealth.
The economy was slowing down because of the decline of foreign transfers, and sectors which relied directly or indirectly on these transfers were being affected. Private consumption, which was up to 80% of GDP and its main growth engine, slowed down dramatically. And as consumption slowed down, companies in the services sectors lost revenue, increased their loans, started layoffs or ultimately shut down.
Bank owners and monetary authorities saw this coming, but instead of taking drastic action towards the politicians’ wasteful spending, actually played along by financing public debt through the Central Bank, getting richer along the way, and hoping for a miracle solution (that needed to come from abroad, and touch their own accumulated wealth). When the dollar exchange rate started increasing in the non-bank market as early as Spring 2019, bank owners and their wealthy friends politicians felt that the outlook was starting to turn negative, and began transferring big parts of their wealth abroad, according to various sources inside the banking industry.
As the October 2019 revolution kicked off, citizens rushed to the banks to withdraw their money, fearing more fluctuation in the national currency. Instead of answering the protesters demands and devising emergency solutions that would appease the public, the banks and their politicians friends decided to freeze all financing to the economy, block bank accounts, and start rationing available cash (while at the same time continuing to transfer the wealth of many oligarchs abroad).
As of November 2019 banks effectively cut off the financing of the economy, stopping loans and overdrafts to already struggling companies, freezing private loans, and drying out access to cash. People’s reaction was to push on the bank runs and deposit their money in their houses. Private consumption declined further, company revenue plummeted, unemployment increased, which further cut down on consumption.
Saving Lebanon’s economy requires restarting the consumption growth engine, and/or devising other sources of growth. Restarting consumption requires higher (or stable) local incomes and foreign consumption through exports of services and increased tourism.
We cannot have higher income without creating jobs, and these jobs cannot be solely created in the government. The private sector would create jobs if it sees opportunities to sell. With low national consumption this looks like a closed vicious cycle. Therefore a central way out is to boost exports, both immediately through targeted partnership contracts and medium term through investments in productive export-oriented sectors (agro-food, textiles, design and IT services, etc.).
Foreign transfers and deposits look highly unlikely to pick up again, at least not before the banks restructure their assets and prove they can provide visibility and stability. Re-boosting tourism requires political stability and regional agreements, which are also unlikely given the nature and biases of the new government.
So how do we restart the real economy, in which priority sectors, with how many jobs, and who can finance this? I believe an economic emergency plan that stabilizes government finances on one side with debt restructuring and cuts in inefficient spending, and restructures bank assets by rationalizing the interest gains of large depositors, would contribute to stabilize the status quo, but would not create jobs. Plus this plan would need some form of foreign financing which would impose austerity conditions.
We need re-distributive policies and foreign investment attraction options that are biased for the people, biased towards job-creating investments in sustainable sectors away from the rentier attitude that plagued our past. We should establish national investment programs and funds, which would get equity participation through transfers from large depositors (switch their excessive interest earnings into equity holdings in these investment funds) and from the diaspora. These national and regional investment funds would target job-creating growth enhancing support measures to existing companies and new ventures, without the need for foreign borrowing (which would be restricted to some form of emergency borrowing in the short term to cover basic necessities).