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What Are the Top Three Priorities for Lebanon's New Government in the Coming Weeks?

posted on: Jan 31, 2020

What Are the Top Three Priorities for Lebanon's New Government in the Coming Weeks?

SOURCE: CARNEGIE MIDDLE EAST CENTER

BY: MICHAEL YOUNG

Nasser al-Saidi | President of Nasser Saidi & Associates, former Lebanese economy minister

The Lebanese government must focus, first, on a macro-fiscal-financial-banking program. Lebanon’s key macroeconomic indicators point to a severe economic, financial, banking, currency, and current account crisis: a fiscal deficit of 15 percent of GDP and climbing; a sovereign debt equivalent to 160 percent or more of GDP; inflation nearing 30 percent; a depreciation of the Lebanese pound in the parallel market of around 40 percent; and officially declared international reserves of $31.5 billion, while Morgan Stanley estimated net reserves at $11.5 billion at the end of 2019.

The immediate step required is for a ministerial crisis task force (not another “committee”) tasked to prepare a macro-fiscal-financial-banking reform plan, in coordination with the International Monetary Fund (IMF) and the World Bank to include sovereign and central bank debt restructuring. The aim is to rapidly, within the next four weeks, establish an Economic Stabilization and Liquidity Fund for Lebanon, multilaterally funded by the IMF and World Bank, along with the Paris IV participants amounting to some $25 billion in order to stabilize the economy, support growth promoting infrastructure investment (in partnership with the private sector), fiscal reform, balance of payments support, banking sector (including the central bank) restructuring and debt restructuring, by providing guarantees of principal of restructured, longer maturity debt.

Second, the government must provide a social safety net. The sharp drop in economic activity (given the lack of government, business, and consumer confidence amid growing protests) has led to growing layoffs and unemployment, business closures and bankruptcies, falling incomes, a severe decline in household consumption, thereby pushing more people into poverty. The World Bank estimates the extreme poverty rate, that is people below the food poverty level, at 20 percent of the population (760,000)*, while 41 percent of the population (1,500,000) is below the poverty line. The government needs to set-up a targeted social safety net (via cash transfers mainly) to provide support for the elderly and most vulnerable segments during the painful reform process, with the aim of lowering inequality and reducing poverty in the medium term.

Third, the government must introduce an anti-corruption and stolen asset recovery program. Endemic corruption, bribery, nepotism are a cancer eating and destroying Lebanon’s economy and its social and political fabric. Lebanon is the 37th most corrupt nation out of total 180 countries. Protestors have, justifiably, focused on high-level corruption. The new government must prioritize combating corruption at all levels by appointing and empowering a special anti-corruption prosecutor and unit and implementing an anti-corruption program with respect to taxation and revenue collection as well as reforming government procurement law and procedures. In addition, the state must recover assets that have illicitly and criminally appropriated by politicians and their associates.

Recovering stolen assets can be a wealth-generating strategy if implemented properly with complete transparency. Lebanon will require international cooperation and building appropriate capacity to support asset recovery. It must abolish the Banking Secrecy Law of 1956, lifting the veil on the misappropriated monies and assets of politicians, their cronies, and civil servants.

Mona Alami | Senior non-resident fellow at the Atlantic Council and Trends Research covering Middle East politics and economic issues

The new Lebanese government faces major challenges in the months ahead. Its three main priorities are undoubtedly addressing the economic crisis, adopting a foreign policy more reassuring to the international community and Gulf Arab states, as well as reconciling competing political agendas within the cabinet to avoid paralysis.

Addressing the economic collapse requires that the new government secure much needed liquidity to finance Lebanon’s basic needs in the coming year, estimated by economists at a minimum of $5 billion. The cabinet will also have to take measures to limit the devaluation of the Lebanese pound, reduce the country’s debt liability, with a possible restructuring, as well as create a clear legal framework for capital controls—so far applied haphazardly and illegally by the banking sector. Unlocking international donor funds will also require the implementation of reforms envisioned by the CEDRE conference held in Paris in April 2018 to assist Lebanon, including ones linked to fighting corruption.

Adopting a more appeasing foreign policy is thus of the utmost importance in the next phase, as the new government needs all the help it can get, more specifically from Arab countries. Finally, the government will have to harmonize dissonant voices within its ranks to avoid paralysis. Government deadlock would only accelerate the collapse of the economy and increase political instability.

Daniel Azzi | Retired chairman and CEO of a Lebanese bank

The government should immediately pass a clear and transparent capital controls law to replace the capricious practices currently being imposed by banks, which are decentralized to the branch level and riddled with favoritism. The cherry on top would be to apply this retroactively to politically exposed persons, or those connected with them, going back to October 17, 2019, when the uprising began.

Do not default on Eurobonds. In the future, when we rebuild from the carnage of this period, we will need those foreigners who loaned us money in the past. Come clean with the Lebanese people about the reality of their deposits, among other things. Announce a specific plan of action to remove uncertainty, which is causing a great deal of instability in the market and the street. Once people are clear on the extent of the bad news, they can deal with it much more easily than today, when rumors and guesswork are driving reactions.

Pass and announce a haircut law that primarily limits the damage to 0.3 percent of depositors—circa 6,000 people with an average wealth of over $10 million, proportional to the excess interest received above a reasonable amount (say 7 percent). Ultimately this interest was not created from a legitimate cash-producing enterprise, but, like a Ponzi scheme, from the principal of newer investors.

Maha Yahya | Director of the Carnegie Middle East Center in Beirut

Three actions must be taken in parallel. First, the government must form an empowered economic emergency crisis team that would include key ministries and top Lebanese experts willing to serve. The role of this commission would be to put in place a rescue plan focused on a policy mix most suitable for Lebanon, but based on equitable burden sharing and the preservation of the wealth especially of the middle and lower middle class. The aim would be to stem a deepening recession that could reach double digits if nothing is done and slow the debilitating repercussions on the Lebanese, including expanding poverty. This would include controlling currency devaluation, addressing ad hoc capital controls, and calling for a debt moratorium. It would also include preserving remaining financial reserves to support the purchase of basic goods and other primary spending and putting in place a social protection plan and an efficient, environmentally sound plan to address the electricity sector.

Second, Lebanon must seek external support based on an economic rescue and reform plan. It needs an immediate dispersal of cash so that the downward spiral of the economy doesn’t spin completely out of control. Such funding is most likely to come from the International Monetary Fund and Western donors.

Third, the government must close the trust gap with the Lebanese. To do so, it can support the independence of the judiciary and commence work on a new electoral law. The pain the Lebanese will need to bear for decades of mismanagement of their country’s resources can only be softened if there is a credible political process that tells them never again.

* The figure has been corrected, as the original figure of 250,000 was wrong.