Panel discussion entitled “Pressing Economic Situation in Lebanon: Challenges and Solutions” at May Chidiac Foundation-Media Institute

NNA - March 29, 2022, The May Chidiac Foundation - Media Institute organized, within the framework of the project “Renewing the Political and Economic Structures in Lebanon” organized in partnership with the Public Affairs Department of the American Embassy in Beirut, a panel discussion entitled “The Stressful Economic Situation in Lebanon: Challenges and Solutions” at the Foundation’s studio. The participants were:

Former Lebanese Deputy Prime Minister and Minister of Health Ghassan Hasbani, former Lebanese Minister of Economy and Industry Dr. Nasser Al-Saidi, Ambassador in charge of coordinating international support to Lebanon Pierre Dukan, former Lebanese Minister of Labor Camille Abu Suleiman and Senior country officer of the International Finance Corporation Saad Sabra.

The journalist and economic expert, Maurice Matta, moderated the discussion that took place on the economic crisis in Lebanon and its repercussions on the living and social conditions in the country.

At the beginning of the discussion, the floor was given to Dr. Nasser Saidi, who started the panel, saying, “The truth is that what is happening in Lebanon has historical dimensions, and the GDP decline since 2018 by about 58 %, exceeds the biggest crisis we have known previously, which was in Chile in 1926. So this is a huge drop. In the gross domestic product, and multidimensional poverty now affects 80 percent of the population and the unemployment rate is up to 50 %, and there is a mass immigration, and thus this leads to a loss of our human capital. The value of the Lebanese pound has fallen by more than 85 %. The economy is in danger right now.

And he added, "So the impact in terms of poverty, and the impact in terms of population, is amazing, just so that people understand a little bit about what we're talking about." A college professor earns about $156 a month, a soldier $54 a month and a judge about $187 a month.

So, you can imagine the impact of this on people's daily lives, but the most dangerous of that is the destruction of wealth, inflation, the depreciation of the exchange rate, and what people call as a eupherism, "Lolar", and the haircuts actually mean that financial wealth as well as other forms of wealth in Lebanon decreased by about 85%. This is the wealth of several generations whose money was introduced into Lebanon. The terrible thing about this situation is that it's man-made, it's not the result of a natural disaster, it's man-made and it's a deliberate policy to actually avoid reform.

And he continued: We need a comprehensive approach because the problem is financial, there was a large financial deficit, which led to a large accumulation of debt, exceeding 175% of GDP, there was a large current account deficit, i.e. overuse, and this was allowed by stabilizing Exchange rate It is a long-term policy of the Central Bank which has allowed us to consume far more than we can afford.

This led to unsustainable deficits, current account deficits and fiscal deficits and these problems exploded effectively at the beginning of 2020 and the implosion was driven by the closing of the banks in October and November 2019. This was unprecedented and created a loss of confidence in the banking system and thus led to a rush to banks, which in turn led to the suspension of payments and the prohibition of deposits in Lebanese pounds and later in dollars as well. The result is indeed an economic and financial crisis, but it must be emphasized that it is also a political crisis and a deep governance crisis. Now, we are living in an educational and health crisis and of course public services have been severely affected as well as electricity and water. Most people do not get two hours of electricity a day. There must be accountability for what happened, and that accountability must also extend to other events that occurred, such as the explosion in the port of Beirut.

To this day, no one has been held accountable, either politically or economically.

And he stressed that there is a need to think about solving the economic, banking and financial crisis as a fundamental solution. And the banking system is at the heart of that so, from now on, what is needed is multidimensional solution. The public debt must be restructured, because the government can no longer amortize the debt. We have three interconnected budgets resulting from the crisis. They are the balance sheet of the government, the banks and the balance sheet of the Banque du Liban, these three are interconnected, and you cannot solve one without the other, so the central bank must also be restructured, starting with a legal audit. This should lead to a restructuring of the banking sector.

We will not be able to move forward in terms of rebuilding the economy and restoring confidence if we do not tackle the core of the problem, which is the banking sector.

 

When asked whether he believed that the banking sector would survive in Lebanon, he answered: If he wants the private sector to play its role, then it will need the banking and financial sector to finance it, and it will also need external financing. The plan first is to restructure the banking system and we said we need banking decision authority which means we will have to look at mergers and acquisitions and liquidations of some banks, maybe 50% of the banks will disappear but the main point is that we need to recapitalize. Bank shareholders need to understand that they have lost their capital, so we will need to bring in about 20 billion into the recapitalization of the banking system by the shareholders and the bankers themselves.

Secondly I think we need to restructure the central bank, my radical suggestion is that we should change the “Banque du Liban” to something like the Swiss National Bank.

A Swiss National Bank is a company incorporated by number of shares under a monetary law, but is also owned by the public. Owned by part of the government, but also by the public. And it's a registered facility, so what we'll do next is turn it into a joint stock company, the monetary policy will also exist independently. But then depositors can become shareholders in banks and in the central bank.

So, if we had a new central bank, which is very similar to the NSB. I think we would start heading towards a solution.

Thirdly, a National Wealth Fund must be established, whereby state-owned companies, government lands and institutions are part of the National Wealth Fund which is managed independently. It will enable us to improve governments, remove politicians, and take over a lot of state-owned assets from communications to water and electricity and the rest. It must be managed efficiently and independently as it should, as in Temasek in Singapore which bought an average of fifteen per cent for the government.

So, if we put all of that together and start running it efficiently, we can start to reap some revenue in the future. Then the depositors will also become part of the national wealth.

So, instead of experiencing the huge losses that we have now, the depositors will become shareholders in banks, shareholders in the central bank, and shareholders in National Wealth Fund. And if we have a properly structured and governed wealth fund, we can attract a lot of private capital and then we can hope, if we restructure our banking sector by starting to finance the private sector.

I think these are three building blocks that if we really want to solve Lebanon's problems, we have to think about them.

Turning to Ambassador Pierre Duquesne, he said: I imagine that we all know the challenges and solutions, and that the key words are only political will and implementation. And when I say political will, I mean from all stakeholders, not just from the classical political elite, but from everyone, from the economic elite, from the researchers, from the new powers, the entire population. There is still some kind of denial in all sectors.

Regarding the nature of the crisis. Let me take two extremes. Some argue that the crisis is purely financial and even some may say that it is purely a crisis of quality so that it is at least a solvable crisis and these people easily imagine that the passage of time, the classic flexibility and the strong resilience of the Lebanese people will suffice. And another group ie the other party thinks it's purely a governance crisis and that the massive change in leadership and the solution is to fight corruption permanently and you can easily designate names under these two extreme positions I think these two groups share, if I could use John Maynard Keynes' terms, the same critical illusion, They all think in nominal terms, not in real terms and think burden sharing is the answer. The matter is, of course, different in both cases. In the financial sector losses, in the broad sense, the solution to the crisis will, of course, not. What is at stake is not a nominal solution to the crisis, but rather the real solution.

This crisis in its entirety, as has just been said, is multidimensional. And it should be used to complete the redefinition of the Lebanese economic and social model which was sufficiently said to have been based on false prosperity but at an exaggerated exchange rate and mounting debts. Even today, many Lebanese, I repeat in all circles, do not acknowledge the gravity of the crisis or believe that External developments will change the face of Lebanon, and in this context, it has not been addressed. Now the consequences of the war in Ukraine do not represent an altering nature of the crisis, but merely a change in its degree and severity. It is somewhat surprising to see that the Ukraine crisis has increased the structural weakness of the Lebanese economic model, financial turmoil, currency volatility, dependence on imports in general, and the widespread role of fuel imports for energy production. There may be a decrease in the level of these stocks, especially after the explosion in the port.

He added: In this context also with regard to non-various imports from Russia and Ukraine, there is a lack of vision in the economic policy, so all this is before our eyes and has been highlighted. Therefore, the Ukrainian crisis was not a catalyst nor was it a revealer of the Lebanese crisis. But I hope that this crisis in Ukraine, including of course the refugees and the humanitarian side, will not be a competitor in the mentality of the international community and a competitor to the Lebanese crisis.

When asked about what should be done to push the concerned authorities in Lebanon to save this country and how to ensure some economic recovery in Lebanon, he answered: I know a lot about what is happening, I know the backgrounds, and I know what is happening behind the scenes with the Lebanese authorities.

So, I think what we can try to do is take things a little differently, I'm not going to get into the discussion about financial losses and so on, because I said it's not necessary.

And he continued: I will suggest that during an election campaign and here is where Lebanon is, like France. Not only the government but also the people will talk about the usual topics that we imagine will be on the agenda.

 We all know that Lebanon is rich in local resources like water, sun, etc. When people talk about energy, they talk about regulating and reforming the sector and reducing the role of private generators and so on

But they say nothing, oddly enough, to increase the share of renewable energies under a national plan.

I know they are local initiatives, but they do not include the national vision. I am referring to what I may know behind the scenes. I am not Lebanese, I am French, but at the end of the plan it was recently established that there are five goals, and none of these five increases a portion of renewable energy sources and at the end of the period, in 2030, perhaps a stock will be placed at a rate of 10 % of energy production is under consideration. Therefore, the role of the public sector is to stipulate that there is another unstable issue that must be raised, which is the problem of governance, bad governance, and corruption. And I know that because of that there is a feeling among the Lebanese that the state is not a good party, you know? The same sentiment was present in Eastern Europe before or in the early 1990s. On the other hand, the international community does not trust public finances and is now directing its humanitarian aid to the population through NGOs and international organizations. I think that there can be discussion at least on two issues: What should be the role of the state in the various sectors? Health and education come first, but also transportation, energy and water, so these are some of the basic needs. This is not brought up in public debate by anyone and secondly, this is a risk as the risk of being a failed state. How do you avoid Lebanon becoming a new republic of NGOs?

Of course, inequality is exacerbated by the crisis itself but also by the means of dealing with it and I would argue with that. The dollarization of bank accounts on one hand and, on the contrary, the dollarization of cash payments is a factor that increases inequality.

So it is no longer a question of monetary policy but rather a part of inequality so there must be a reversal now, let me refer to social protection and social inclusion.

Later, former Minister Ghassan Hasbani said during his intervention: I will not add much to what has already been said, but we all know the diagnosis, how far the crisis has reached and how deep it is. Unfortunately, if we continue the way things are going, I think that the situation will be deeper and more complex in the future. So, it seems there is no end to how bad the situation can get to a point where we really no longer have foreign reserves, we are completely cut off from the rest of the world and very difficult to be part of any international equation.

He added: There is no sign of how a recovery plan will be developed, there is a lot of talk, a lot of ideas in the previous government and the current government, and there is an IMF program that is still far from being implemented, but without implementation.

Today it is a matter of political mix, political will, and seriousness in managing the country, and addressing the state issues that led to the economic collapse.

All the events were talking about whether it was a financial deficit, a trade deficit, economic stagnation and collapse, but all of these things are interconnected and return to the political situation that led to complete chaos in the management of the country. It is certainly a problem of governance and a problem of corruption but it is also a problem of globalization of Lebanon and the Lebanese political system was not used to this in the past because the international community has always turned a blind eye and is trying to create a common denominator to accept the situation and continue to move forward with the situation that has been increasing for the past 30 years.

This was until the international community woke up to this situation and the fact that it could no longer continue, we started to realize the drying up of capabilities and resources so what we're looking at now is practically a failed state scenario and we're looking at a state that is politically controlled by certain groups that have power over the decision, that have the power to obstruct any decisions. If we continue to ignore the fact that today there is no sovereign, independent and properly functioning state and we continue to ignore the fact that some parts of the international community still consider this to be in fact an effective counterpart, then on the other side we will have to deal with the same problem.

Lebanon today is in need of a rescue that requires international intervention and requires international sponsorship. Other than that, we constantly hear that the solution must come from within, and from time to time someone withdraws from the system, leaving others to try to solve problems. . We cannot expect the same groups that created and caused problems to go forward and try to solve the problem that exists today. It only serves certain political agendas. We have to look at that honestly and state the problem clearly. It is part of a regional and global situation that cannot be completely cut off, and what we need in Lebanon now is a political rescue plan that will eventually lead to an economic rescue plan.

And he continued: I do not think that this government will sign anything with the International Monetary Fund, let's be realistic. Because this government represents the existing parliament and it represents the dominant political parties today that have representation in the current parliament.

So, any action that this government takes will be reflected in the parliamentarians you mentioned. And from a political perspective, realistically, it's very difficult and that's why we didn't have as radical solutions as we would expect like an IMF program. For the same reasons we encountered a problem with the implementation of CEDRE. And I had this conversation with Mr. Duquesne several times before and after CEDRE where we were all trying to put reforms as a precondition and we did everything we could, but there was a political hitch and many political hitches in those reforms. So I totally understand, respect and agree with all the solutions that are being made. Put it on the table. And I agree that the IMF program is the only starting point for solutions but the concerns expressed by Mr. Duquesne, I also fully share them if there is no solution today with this current government there will be a caretaker government that may be for some time and then there will be Presidential elections after that, so we will not witness any progress in the economic aspect until we have a complete political solution after the presidential elections.

When asked about what the international community should pay attention to when coming to help a country like Lebanon, he replied:

He should be aware of the lies of the Lebanese political class. First I think we've been through this many times in the past and Mr. Duquesne has seen it himself many times I think. I think it's very important to understand that this conversation that we're having now would be very useful and moving if it were, say, two or three years ago, a more appropriate time then. Now I think we are further from this kind of discussion of recovery. And we need to understand that the international community has always been misled by the people in power in Lebanon. And recovery through the International Monetary Fund.

All the ideas are great, we have laws in place and we have electrical law and telecom law and all kinds of other great reform ideas. And recently we had the Public Procurement Law. These are very good titles, very good excuses to get the attention of the international community with legislation but we can even have a capital control law with empty content or malicious content, and laws being thrown left and right without a whole program to bring it all together as one package. Because you can't have the Capital Control Act and wait 5 years before you have any reforms in the government or any hope of getting a decision on bank restructuring for example.

We came up with the idea of ​​using public assets more than three years ago or two and a half years ago. It was partly adopted in the government's plan, in the Diab government's plan but it was camouflaged in various forms so there is always a good title to the legislation there is always a good promise for reforms. There are visits and in these visits a lot of promises are thrown on the table and yet nothing is achieved. In fact the main issue here, as already said, is most of what the IMF program would demand if a lot of it was achieved by default, except for the parts that require reforms in the public sector that remove power from the political class for example, something as simple as a specially designated regulatory body Right for electricity or telecommunications, the use of assets in terms of setting up a privatization program when the value of these assets is at the right level, we have more than 70 laws that are not enforced.

We are completely transitioning to the informal economy gradually, the banking sector is barely escaping the political class, trying to get the last reserves that are in the central bank without making solutions.

We have a judicial system that is used as a tool by the ruling elite and who are basically trying to take every dissent or attempt to reform out of the equation. This is completely devastating to the rest of the banking sector

And we're facing a situation where the international community is still hoping that these ideas will be implemented by someone or somewhere and that someone will do a good job, that can't happen now I think we are beyond that. What we need to start focusing on very quickly is how the international community can avoid these pitfalls now, and start talking about more policy solutions.

 

When Dr. Camille Bou Suleiman was asked whether he agreed that Lebanon today needs a political rescue plan and if Lebanon is considered a failed state today, he replied:

We're not a total failed state, but we're fast approaching that, I want to try to focus a little more on the positives and not go into the reasons why we're really here.

I think we know them I think there was really a deliberate attempt as the World Bank actually said, to not address the causes and actually to deepen the crisis. I think there are a few important things for us to know.

First, I think that there is no understanding in Lebanon of the importance of time, and if we had started with the solution two and a half years ago when the crisis started, we would probably have been out of the crisis by now.

It took Ukraine less than two and a half years to get out of its crisis, and it took Greece about three years. We wasted two and a half years.

We were in a much better position at the beginning of the crisis in terms of reserves were much higher we wasted maybe $20 billion in reserves without any accountability or transparency. So time is incredibly powerful, and the politicians in Lebanon do not understand the value of wasting time. This is the first comment.

The second is that accountability is obviously critical and I personally think that anyone who transferred any money after October 19 was obviously subject to exceptions, such as medical emergencies and overseas students. But any politician, bank or shareholder about the money has committed a crime in my view and should return the money so I think accountability is important. And we need to do any solution by having credible people, because the solutions will be difficult, of course, not as difficult as the situation we lived with, 90% inflation and consumption, but there will be sacrifices. We need credible people to try to discuss these solutions with the population, but we are confusing accountability with solution.

When the IMF arrives in a country they don't start asking who was responsible for the crisis. Rather, they deal with solutions. In Lebanon, with the fewest number of goals, we need goals. But we can't wait to get the accountability done completely before moving on to a solution. I think we need to do three things right away.

First, trying to reach an agreement with the International Monetary Fund before the elections, before May. I don't think it's impossible, I think it's possible of course but it won't be implemented because the prior procedures will need the new parliament. What we need is to turn to the IMF,

There is no other solution, no one has suggested a viable solution.

This is first, and secondly, we urgently need a capital control law as soon as possible and we cannot continue like this. I don't think people understand the harm that happens without capital control, in addition to the lack of norms for transferring money abroad.

Most importantly, we need to protect the assets of the banks abroad, these are not the assets of the banks, and these are the assets of depositors and anyone who gets paid. Because they understand that offshore judgment is being paid by other depositors it's like someone is transferring money after October 19th, except one is doing it legally and another is doing it illegally. But the net result on the depositors is also the same, if we risk losing the attachments on the bank account it also affects the new money and the new coins, because the banks are still the same as the banks so we need a law to control the capital.

And for those who worry that in the last draft they granted immunity to bankers, well, let's make a provision that says nothing in this law grants immunity to anyone for the past.

So I think this is an easy point to address. But we need a capital control law. We need to restructure the bank appropriately, as Dr. Saidi and others said. We cannot let every depositor sue independently and go to court that is why bankruptcy systems exist.

The existing laws in Lebanon, the two laws dealing with bank restructuring and bankruptcy are unfortunately very old and not fully adapted to the situation.

We need a proper framework to solve the bank problem. We need a proper process it’s quite messy and unacceptable from a legal perspective.

That everyone does selective credit control That's why you have bankruptcy rules, we need to stop spending the mandatory reserve in the central bank including now the artificial increase in the Lebanese pound makes no sense so it doesn't make sense to support the currency in the absence of a reform plan and of course we need a proper reform plan by the government that the government should share and discuss publicly with stakeholders There is no time to do all this, but I still think we can get somewhere between now and May 15.

 

And when Mr. Saad Sabra made his intervention, he said: A lot has been said, and I completely agree with all the points that were said regarding the diagnosis and analysis of what happened in Lebanon and what led us here, and what the problems are.

I think it goes back to several decades that sort of coalesced until I got here and in October 2019 there were events that shut down the banking sector I would like to repeat this, because I agree with Dr. Saidi that this was one of the important catalysts that really led to this situation today which is deteriorating. I also agree with Mr. Hasbani that there is no rock bottom and the situation will continue to deteriorate in this way. But I think the idea for me is that instead of looking back and analyzing the situation, because everyone knows that Lebanon has lived through several shocks, but the trauma we are experiencing today is very multidimensional and very complex. It is an accumulation of many errors. But now to move forward I mean to be completely honest, I also agree with Mr. Abu Suleiman that the situation today can be viewed from this kind of mentality.

When asked what kind of incentives exist and that the Lebanese can benefit from, he preferred:

Signing the agreement with the IMF is an incentive, that's the main thing. It's a nice positive trick that can create some kind of signal that Lebanon is going somewhere.

When asked whether it is feasible and currently possible, his answer was:

There are a lot of obstacles on the political front but let me focus a little bit on where Lebanon is going in terms of mobilizing support, mobilizing capital, and maybe a little focus on the private sector. Because the truth is that Lebanon is in a crisis and there is a fine line between being in a crisis situation and a development situation.

For the international community to be able to support Lebanon and the Lebanese people if they take a very hard work on that mentality because of that very bleak vision.

So, as part of the crisis, there will be a piecemeal approach here and there. We hear about emergency funding here, humanitarian support that's happening here and there, but it's limited and won't be able to meet the requirements and you'll see some social protection projects or health education funding.

But if I look at the broader baseline of the economy today I'm trying to focus a little bit on the private sector, the private sector is still the engine of this economy. -- May Chidiac Foundation - Media Institute

 

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