Time is running out to save Lebanon from disaster

Time is running out to save Lebanon from disaster

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Time is running out to save Lebanon from disaster

Crowds swell with boiling frustrations. The tension is palpable. Protesters gather on the streets, peacefully for now. It is happening on almost every continent; in fact, if this year is remembered for anything, it will be the unprecedented number of protest movements illustrating the gaping chasms in our increasingly polarized world. Whether it is climate change, war, human rights, immigration, politics, economics or society as a whole, ever widening gaps in ideology, income, race and religion have served only to incense the marginalized.

Beirut and other parts of Lebanon are awash with some of these themes. Weak but intransigent government and public impatience are now threatening to unleash the true cost of a political class resistant to change, and teetering on the brink of collapse.

A dollar crunch has sent the Lebanese lira into freefall; it has lost about 20 percent of its value on the black market, and the hard currency shortage will lead to greater inflationary pressure on food and essential goods, most of which are imported.

These woes add to a growing list of grievances that have sent many Lebanese pouring on to the streets to demand change. Half-salaries, lost jobs, empty shops and small business owners considering permanent closure combine with frustrations from electricity shortages, poor infrastructure and undrinkable water. Corruption is rampant, exacerbated by grossly unequal wealth distribution; about 3,000 people together take the same share of national income as half the population.

Lebanese banks that were once the pillar of the economy operate under tight restrictions to limit withdrawals of dwindling deposits. Billions in funds have already left the country since protests began in October, compounding a local banking crisis that began in 2011, when the porous border with Syria led to an influx of 1.5 million refugees. That put downward pressure on tourism and created surging demand for public utilities such as water and electricity.

Loan defaults in the private sector have also skyrocketed; the rate is greater than in the US during the 2008 financial crisis. That does not bode well for the third-most indebted country in the world. Interest obligations ultimately consume nearly half of public revenues, which are already squeezed by an enormous payroll covering some 300,000 public employees, about 13 percent of the workforce.

Economic woes add to a growing list of grievances that have sent many Lebanese pouring on to the streets to demand change.

Hafed Al-Ghwell

It is not all bad news; Lebanon repaid a $1.5 billion Eurobond this week, buying time to tackle the gigantic tasks of setting the country back on course. However, without a prime minister and politicians unable to agree on who will succeed Saad Hariri, there is hardly enough time until the next mandatory repayment in March 2020. In addition, protesters are unlikely to be assuaged by promises of reform from a political class they wish to remove from the corridors of power in favor of a more technocratic leadership.

Higher bond yields, increasingly illiquid markets, crippled banks, excessive borrowing, an unsustainable public-sector wage bill, corruption, gross wealth inequality and political paralysis are all conspiring to deliver Lebanon a day of reckoning. Half-measures or governing through a crisis with shoddy, ill conceived quick fixes will not work. The average Lebanese will need to trust the government again, meaning the current leadership will have to co-sign their own removal — a non-starter for a political elite not swayed by swelling protests. In addition, any meaningful reform will probably target the ballooning debt and deficit via more taxes on the banks and significant reductions in public sector jobs. This will inevitably pit civil servants, loath to lose precious incomes, and banks, loath to reduce profits, against a public that has run out of patience.

Lebanon’s options are not easy. No amount of populist rhetoric can deliver on much-needed objectives without encountering resistance from entrenched interests. The fact that the prime minister’s office is vacant is unhelpful, but there is a silver lining. Most Lebanese agree that a technocratic, competent, and non-partisan government is needed, not only to craft solutions and implement them, but also to restore trust and faith in public office. Any incoming prime minister must also subscribe to this ideal beyond lip-service, and actually establish the entities to address the crisis and give them the authority to do so. They must also be prepared to face stiff opposition to any plans to rationalize the public sector to cut the deficit. This means having feasible plans for greater privatization, with a special emphasis on leaving as few unemployed former civil servants as possible.

Ultimately, they will also need to address the elephant in the room that is runaway public debt, which will probably not go down well with the local banks. More taxation is one thing, but what is needed is a sustainable approach to servicing outstanding debt, which may require debt restructuring that will allow the government more time to achieve tax revenue goals and get the deficit under control. The latter will certainly reap the benefits of unlocking up to $11 billion in loans and grants pledged to Lebanon by international donors.

However, time is short. The longer it takes to find Hariri’s replacement, the more likely it is that Lebanon faces a worthless currency, runaway inflation and mass protests that would make the Greek debt crisis look like a cakewalk.

  • Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell
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