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Lebanon’s economic rescue plan only buys ‘a few more years before we run into the next crisis’

June 1, 2020 at 3:52 pm

The Central Bank of Lebanon [Karan Jain/Flickr]

“Whatever financial technical solutions you put in place, the underlying problem is a political dysfunction here… what we have now doesn’t work and is never going to work… [the rescue plan] buys [us] a few more years before we run into the next crisis,” says Mike Azar.

Azar is a senior project finance advisor with a graduate degree in international economics who commentates on Lebanon’s economic crisis as part of a civil society group called the NERDS. The NERDS, which stands for ‘Nasty Economy Requires Drastic Solutions’, are a loosely affiliated group that started on Twitter in late November with the anonymous handle @lebfinance.

Azar tweets under the handle @AzarsTweets and terms the NERDS a “brand” because the group has no official coordination or structure. Each individual is free to share their own opinion and analysis, and many members of the group disagree.

“I think an important thing to mention [is], when I’m talking to you now, I’m talking to you on behalf of myself. There may be lots of people who are loosely connected to the NERDS who may have a different view than I do,” he says.

Azar’s, and others, analysis is now published on Finance 4 Lebanon – a blog site created especially for the group by Elie Habib, co-founder of music streaming site Anghami. The posts are amalgamations of the NERDS’s Twitter threads which explain and analyse everything from how Lebanon’s exchange rates are calculated, to thoughts on government policies and discussions of mismanagement by prominent banking officials.

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I caught up with Azar to get his take on Lebanon’s economic rescue plan and to find out if the roadmap is a realistic solution to what, he says, is a self-inflicted crisis.

Initially, Azar claims the plan is “generally… on the right track”, but when we drill down to the logistics of implementing the roadmap, it becomes clear there are issues. One of these problems is Lebanon’s dysfunctional political system. Azar says the political will and cohesion necessary to implement painful initiatives laid out in the plan simply does not exist.

“I don’t even know if this country has the technical capabilities to [implement reforms], let alone the political will to do it… all [reforms] are painful to somebody.”

Moreover, Azar claims political pressure has already shaped the plan. Between a draft, leaked on 27 April, and the final iteration, passed by the cabinet on 30 April, several passages which targeted politicians and senior public servants were removed. Plans to conduct forensic audits of every government contract in the past 30 years as well as bank accounts held by politicians, senior public servants, and their families were scrapped.

Even though some policies were removed from the final draft, Azar says the plan still contains initiatives which aim to tackle public sector corruption. He says this means the plan could be implemented piecemeal, with elites picking and choosing policies which protect their interests, while ignoring others.

“But that’s a problem too, the plan is a self-contained thing, you have to do all of it to really get out” of the crisis.

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One area where this rings true is the oversized banking sector. Lebanon’s banks have rejected the government’s rescue plan and produced their own roadmap which, they say, is “more realistic”. The bank’s plan seeks to protect bank shareholders and this, Azar says, is because “here banks are the bank’s shareholders”. Banking sector reforms, however, are fundamental to the government’s plan.

The lack of political will and the incompatibility of the rival plans means it is unlikely the government will be able to implement the necessary reforms. This means the plan could be implemented piecemeal or not at all, which, Azar claims, will perpetuate the crisis. Partial reform is a “sub-optimal solution that just kicks the can down the road a few years”, he says.

One factor which has caused the banking sector to become bloated is a disproportionate reliance on unsustainable foreign currency, particularly US dollar, deposits sent by the diaspora – inflows which Lebanon’s economy relies on.

The government rescue plan seeks to build a more sustainable economic model by encouraging inflows of alternatively sourced foreign currency. The policy, constructed from recommendations in the 2018 McKinsey report, demands an increase in tourism and agricultural exports – specifically avocados.

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However, Azar says, the government-predicted booms in both sectors are predicated on the necessary infrastructure already existing. It does not. Instead, Azar claims, Lebanon is years away from having the regulations around food safety, packaging and branding to be competitive in the international avocado market.

He says, “it’s not just about seeing what is the most value-added crop and saying let’s do it.”

The same is true for the tourism industry. The plan assumes the number of tourists annually will double in the five years but does not account for building infrastructure to accommodate more people.

“There’s a lot of question marks around [the] assumption [of a tourism boom] but it is a pretty fundamental part of the plan… [but] how are you going to expand the airport, fix the roads and have power if you don’t have dollar funding for these things?” Azar says.

Beyond improbable tourism and agriculture sector booms, however, Lebanon could receive US dollar funding from the International Monetary Fund (IMF), and, according to reports, the government is seeking a $10 billion bailout.

However, IMF bailouts are tied to conditions and successive Lebanese governments have struggled to unlock reform-conditional aid as a result of political pressures. $11 billion reform-conditional CEDRE aid, pledged in 2018, has never been released, because successive governments failed to pass reforms. Nevertheless, the rescue plan relies on foreign aid payments.

Azar says, however, any international aid could be tantamount to a bailout of the political class, and delay economic collapse, without solving Lebanon’s financial problems.

The plan, if implemented in its entirety, could put Lebanon’s economy on a more sustainable financial path, according to Azar. However, it is more likely the plan will be applied gradually, because it relies on political will for implementation.

“The political class is not yet ready to do what needs to be done, or what is the right thing to be done because it touches too much on their vested interests,” Azar claims. Nevertheless, implementing this, or any plan may only buy “a few more years before we [Lebanon] run into the next crisis, unless political reforms are implemented and people see some accountability, including through financial audits of the public sector”.

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