After gaining the vote of confidence from parliament last month, Lebanon’s new cabinet, headed by Prime Minister Hassan Diab, has taken up the tough task of tackling the national crisis, the worst it has seen since its 1975-1990 civil war.
The new government faces a particularly hard economic and financial challenge after months of nationwide protests against government corruption and economic mismanagement had ignited last October. Unlike what officials have claimed, the popular uprising was the effect, not the cause, of the crisis.
Protesters are fed up with a political elite that has ruled the country for decades.
Protesters are fed up with a political elite that has ruled the country for decades. They deem it as corrupt and incompetent and blame it for the financial turmoil.
While the newly formed Lebanese government got confidence from Members of Parliament on February 11, the protesters – who want the whole ruling class out – sent a loud, unequivocal “no confidence, no trust” ahead of the parliamentary session and attempted to block the confidence vote.
Even incoming Prime Minister Diab admitted in early March, “The state is no longer capable of protecting the Lebanese people . . . this government has lost the trust of the people.”
The new cabinet is expected to undertake a major debt restructuring. It appointed US investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP as its financial and legal advisers respectively, in February, to help in the debt restructuring process and overall financial rescue plan for the country.
The government had previously formed a committee tasked with preparing an economic recovery plan that included ministers, government officials, a central bank representative, and economists.
“The only viable option now is to restructure Lebanon’s unsustainable stock of public debt,” Mohammad al Akkaoui, an economist with the Kulluna Irada lobby group for political reform, told Inside Arabia.
“An orderly debt restructuring needs to happen to avoid a disorderly default,” he added, hopeful that the country is now moving in the right direction with discussions among officials and experts underway.
Lebanon’s massive debt, one of the highest debt ratios in the world, stands at $89.5 billion (as of November 2019) or more than 150 percent of the country’s GDP.
Lebanon’s long anticipated economic crisis culminated late last year as capital inflows from abroad slowed down, triggering widespread anti-government protests.
Lebanon’s long anticipated economic crisis culminated late last year as capital inflows from abroad slowed down, triggering widespread anti-government protests. Amid a severe liquidity crunch, banks have imposed capital controls limiting withdrawals to a few hundred dollars a month. Lebanon’s economy has depended heavily on US dollars since the country’s 15-year civil war.
The Lebanese pound, which is still pegged to the dollar, has lost more than 60 percent of its value on the black market. The sharp fall of the local currency has fueled inflation, pushing prices of goods up, and causing the closure of hundreds of businesses and the loss of thousands of jobs.
Nafez Zouk, Global Macro Strategist at Oxford Economics, highlighted that Lebanon is confronting four crises at once: a debt, currency, financial, and economic crisis. He thinks getting out of it entails a “comprehensive” plan that addresses all aspects and implements “reforms” that every Lebanese government has failed to carry out until now.
“The key is to present a plan to creditors and international donors that is credible, implementable, and is viable domestically,” Zouk told Inside Arabia, specifying that the state will most likely need an external source of financing.
Julia Sakr-Tierney, Middle East Policy Analyst at Open Society, similarly argued for a multi-level approach in resolving the crisis. “Lebanon is facing not only a debt crisis but also balance of payment, currency and banking crises, which are all inter-locked, thus addressing the restructuring of the debt can only come with addressing the others alongside,” Sakr-Tierney tweeted.
Diab’s government is facing urgent decisions about upcoming debt payments, especially a ruling on whether to pay or default on the $1.2 billion Eurobond repayment due on March 9.
Diab’s government is facing urgent decisions about upcoming debt payments, especially a ruling on whether to pay or default on the $1.2 billion Eurobond repayment due on March 9, in addition to others that mature in April and June.
Several financial experts have pushed for Lebanon not to default, saying that it would jeopardize the country’s prospects of accessing international investment in the future. A number of economists and activists, on the other hand, have argued that making the payment now would divert already scarce dollars from meeting the population’s basic needs, especially if a future debt restructuring is likely.
Having to deal with serious economic and financial challenges, the government formally requested technical assistance from the International Monetary Fund (IMF) in mid-February. A team of experts from the IMF travelled to Beirut and met with the Lebanese Premier last month.
Though Lebanon’s government only sought technical support from the IMF, it is yet unclear whether it may later ask the fund for financial assistance, which is always conditioned on economic reforms.
Many protesters and economists have not welcomed the IMF’s offer for advice, with the IMF recurrently encouraging austerity and privatization as a fix for Lebanon’s crises, measures that have hurt lower-and middle-income earners.
In 2019, the IMF’s consultation on Lebanon had expressed support for raising the VAT tax rate, eliminating electricity subsidies, and increasing fuel taxes.
“Their policies still overwhelmingly prioritize capital, and lack consideration for how to protect those most affected by recessions and depressions,” Nadine Kheshen, research fellow at Lebanese field-research network Synaps, tweeted.
Zouk opined that, whether via the IMF or alternative sources of financing, Lebanon should undertake long overdue reforms in public spending and revenue collection, pointing to a need to reduce the fiscal and current account deficit.
And, that does not mean the poor should bear the brunt.
There are ways to adopt necessary measures other than just raising taxes for all and cutting public expenditure.
According to Zouk, there are ways to adopt necessary measures other than just raising taxes for all and cutting public expenditure. Instituting a progressive income tax that would tax the wealthy while protecting lower income brackets, for example. Moreover, cutting energy subsidies more for those who can afford it and less for those who cannot; phasing out the subsidies over a few years, not introducing them overnight; and increasing revenues while securing social safety nets to minimize the effect on the poor, Zouk suggested.
“Whether you bring the IMF or not, everybody will have to pay their share. But the government needs to come up with a way to shield the most vulnerable people from bearing the biggest part of that cost,” Zouk noted.
“What matters is to have a good plan that meets the expectations of citizens first, followed by bondholders and multilateral agencies,” Al Akkaoui told Inside Arabia.
Prime Minister Diab spoke about painful measures last month as part of a rescue plan to save the crisis-hit country from complete collapse. Like former Prime Minister Hariri and President Aoun, the new Prime Minister essentially presents austerity measures as inevitable and conditioned out of “necessity.”
In an economy that has served the banks at the expense of the most economically vulnerable for the last 30 years, imposing measures that call upon people to make sacrifices has meant demanding such sacrifices only from the working poor and the middle class while leaving the top earners, the financial sector, and capital owners unaffected.
These days are crucial for Lebanon. There are no signs of a roadmap out of the country’s crisis. The cabinet has yet to decide on the Eurobonds, as government officials and bankers are split on whether to pay the bond or restructure the debt. Lebanon has not run out of time just yet but to avert the worst, it should act now and find a solution that is fair and equitable for all its citizens