Lebanon can save its economy, just not with the help of the IMF

Lebanon can save its economy, just not with the help of the IMF
In-depth: Most experts agree that resorting once again to the IMF is a non-starter, as it would only prolong the same vicious cycle of austerity in Lebanon, writes Karim Safieddine
7 min read
24 February, 2020
Lebanon's protesters have blamed the crisis on greedy bankers [AFP]

Since 2019, Lebanon has been grappling with a severe financial crisis made worse by the explosion of mass protests in late 2019, but contrary to what officials in the heavily indebted country have claimed, the uprising was the consequence not the cause of the crisis.

Now, Lebanon has few options left, but most experts agree on one thing: Resorting again to the IMF and international financial institutions is a non-starter.

This, they say, would only prolong the same vicious cycle of austerity coupled with neoliberal policies of privatisation, regressive taxation and increase in tariffs on utilities, all policies that stifle growth and punish ordinary people disproportionately. 

In truth, many symptoms of Lebanon’s malaise began to surface throughout the past three years, climaxing in the autumn of 2019 as the fiscal deficit, public sector strikes in the summer, and a currency crisis coming to a head on 17 October.

Motivated by a lack of funds and drop in telecom revenues, a proposal was set to enforce a tax on Whatsapp calls, triggering the protests that evolved into an uprising, which then forced the government to resign towards the end of October.

Prior to and after the formation of a self-proclaimed technocratic cabinet headed by PM Hassan Diab on 21 January, the country has witnessed attacks and riots targeting commercial banks amidst a liquidity crisis and strict capital control procedures imposed on small depositors in the aftermath of the crisis.

In face of these recurrent challenges, the government announced in mid-February the need for the technical assistance from the International Monetary Fund, as Lebanon struggles to decide what to do about its massive dollar-denominated debt obligations this year, but Beirut has stopped short of asking for a bail out despite its dangerously low foreign currency reserves. 

Bring in the IMF! 

Three weeks earlier, the Institute of International Finance had claimed Lebanon would require a $8.5 billion IMF bailout package contingent on reducing interest rates, instituting privatisation to accommodate fiscal space, and creating a social fund.

However, Lebanese officials, led by Parliament Speaker Nabih Berri, stressed Lebanon’s inability to handle certain IMF conditions, restricting the role of the fund to that of advising for now.

In 2019, the IMF’s consultation on Lebanon had expressed support for raising the VAT tax rate, eliminating electricity subsidies, and increasing fuel excises.

The consultation further made references to past conferences such as CEDRE and commended Banque du Liban for its role in ensuring financial stability, despite rising local anger towards the central bank and the government’s recycled remedies on which they blame the crisis.

With the IMF recurrently encouraging austerity and privatisation as a panacea for Lebanon’s crises, protesters have grown frustrated with the ruling class’s lack of vision. Over the years, such policies have only impoverished lower- and middle-income earners and reduced the public sector to a shell.

Initially, the government of Hassan Diab insisted that Lebanon pay off a controversial $1.2 billion Eurobond maturity to maintain international trust, but this has since become a major headache for the government.

Pressures on dollar reserves, and mounting popular anger calling for prioritising imports of basic commodities over handing over precious dollars to bond holders accused of long-profiteering from the country’s debt, have obliged the government to reconsider.

With the government gradually leaning towards defaulting and restructuring the public debt, local banks have been in panic, as evident from statements by the Chairman of Association of Banks in Lebanon Salim Sfeir, calling on President Michel Aoun not to listen to “pressures from the street”.

This IMF expedition may be used as an excuse to…legitimise the desire of Lebanon’s oligarchy to implement austerity procedures, devalue the currency, cut wages, eliminate subsidies, and enforce privatisation

Alternatives to the IMF

For many in the country, any long-term resolution is rooted in a dilemma revolving around who ought to pay the price of Lebanon’s liquidity crisis: commercial banks and large depositors who made billions from the government’s dubious Ponzi-like financial engineering schemes, or poorer segments of society via an IMF-sponsored bail out conditioned on austerity and indirect taxation?

“This IMF expedition may be used as an excuse to…legitimise the desire of Lebanon’s oligarchy to implement austerity procedures, devalue the currency, cut wages, eliminate subsidies, and enforce privatisation,” writes economist and journalist Mohamad Zbeeb.

Local experts have insisted that the reliance on the IMF and similar international bodies represents a continuity in Lebanon’s economic broken model, in which the interests of beneficiaries in the banking sector and the top 1% have been prioritized at the expense of the rest of the Lebanese people for decades. 

And there are altenatives to Lebanon’s history with neoliberal policy. Dr. Jad Chaaban, a local economist and university professor who has been supplying the uprising with invaluable economic literacy, suggests on his blog that any plan ought to incorporate a national job creation task force, progressive taxation, national funds targeting startups, and the importation of strategic reserves of major commodities.

"Proposed IMF procedures or bailout can buy time if one is not interested in structural change, but a genuine solution requires a meaningful and radical transformation to a productive economy under a completely reorganised financial system," Beirut-based economics writer Ali Nour told the New Arab.

"Such a project must commence with reconstructing the financial sector not to be centered around incentivising inflated deposits via high interest rates. This should be accompanied by a fiscal policy encompassing high taxes on rentier investments, ranging from interest payments to real estate speculation," he continued.

A history of neoliberal adjustments

According to the World Inequality Database, Lebanon suffers from a very high level of income inequality - the top 1% earn approximately 25% of the country’s GDP. 

In the Lebanese context, neoliberal policy has taken a particular crony-capitalist shape. As a consociational system, sectarian leaders and politicians have historically accommodated their cronies with corporate monopolies and interests in unproductive sectors. 

According to a World Bank report released in 2016, monopolies connected to politicians in Lebanon have slowed down competition and hindered diversity in an economy predominantly fixated on real estate and tourism. The report also emphasized the country’s relatively high import and export costs, poor infrastructure, and cumbersome procedures.

On the other hand, in the past two decades, the role of international bodies in locating solutions to Lebanon’s crisis-prone economic system has been heavily contested, as evident by proposals forwarded in the meetings of Paris I, II, and III. 

In response to the extensive accumulation of debt during the 1990s, Lebanon’s first Paris meeting in early 2001 concluded not only with fiscal reforms relevant to issues of governance and institutions, but also major privatization initiatives.

In the process, hundreds of public servants were subsequently laid off and their bargaining contracts cancelled, while major tax breaks were instituted and the real estate sector bubble further exacerbated.

In late 2002, Paris II proceeded in a similar direction, stipulating the privatization of the water sector and ports, alongside what was formally labelled the “corporatization of telecommunication and power companies”. 

These initiatives have been promoted following the rationale that “the privatization of basic public services will improve the quality of services” – a dubious claim that never materialised in Lebanon. 

Four years later in Paris III, in exchange for a ‘generous package’ of grants and soft loans from 40 international donors, the country’s leaders proclaimed to commit to extreme measures centered on increasing VAT from 10 to 12%, reducing fuel subsidies, and completely privatizing electricity and mobile phone sectors. 

Since the early 2000s, Lebanon’s experience with these international bodies and donor conferences has been rather unchanging, with the aforementioned proposals recycled every few years.

Taking into account recent packages such as CEDRE contingent on similar conditions, and the latest consultations of the IMF in October, many questions have been raised on whether the vision set by PM Hassan Diab and the current cabinet can ever bring about a breakthrough relative to Lebanon’s history with the international bodies and conferences.

“Technical assistance, which is what the government has asked for so far, is not binding. And we don’t get any money in return. It’s literally just advice,” economist Dr. Nisreen Salti told the New Arab.

“My own estimation is that the government’s constant delays in taking a public position on anything related to the economy indicate that its position will be one borne more out of practical or political considerations than out of principle, firm belief, or sound policy,” she continued.

In the meantime, Lebanon’s protests continue, their newest slogans vowing to give the government no confidence, and to continue pushing to build a different Lebanon that breaks away with the past, completely.

Karim Safieddine is a political writer and student living in Lebanon

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