French Mobilization for an Irreformable Lebanese Economy

On Friday, 6 April, another conference will be held to save Lebanon and its economy. France plays a central role in its organisation, but its success is far from guaranteed.

Ministry of Finance, Beirut., 2017.

Lebanon is rich but a country to be pitied! For decades, this tiny nation, lost in the turmoil of the Middle East, has suffered from the chronic illness of its economy and its outdated institutions. This coming Friday, in Paris, it has hopes that the international community gathered to study the case will once again administer a sizable dose of fresh cash to promote reforms and sustain its faltering economy.

Fifty countries, not less, and several international institutions (including the IMF and the World Bank) as well as multinational consulting firms have all been invited to this Economic Conference for Development through Reforms and with Business dubbed ‟CEDRE,” to be held in the splendors of the Foreign Ministry on the Quai d’Orsay, with France, Lebanon’s eternal friend, in the role of host. And it should be noted that Paris has given this gathering the pretty name of the tree which covers the hills of Lebanon, the evergreen cedar.

France always thinks big and is keen to avoid any confusion between this auspicious assembly and the meetings of Lebanon’s key donors, known as ‟Paris II” and ‟III”, held since the beginning of the new century, with no more tangible results than the funds paid out.

Incompressible Debt and Bank Fragility

Now as then, Lebanon’s public debt amounts to some 150% of its GDP, the highest rate in the world after Japan (a country which can afford it) and Greece, only just emerging from a crisis which bled it dry. The bulk of that sovereign debt, estimated at 80 billion dollars, is carried by the Lebanese banking system, luckily very robust thanks to customers’ deposits (three times the GDP), the banks being the one sound pillar of an economy which has been listless since the start of the Syrian war in 2011.

But there is a price to pay for this solution (for this expedient, rather), because the government is trapped in a vicious circle, must continually borrow more to pay the interests; according to experts, the service of the debt amounted to a third of the state budget in 2017.

Like an old car engine, the economy is running on a closed circuit, but accidents will happen, and the country nearly paid a heavy price when Premier Saad Hariri was practically made prisoner a few months ago in Saudi Arabia (to which his company is heavily indebted). This led to an unprecedented political crisis and a run on the Lebanese pound: interest rates on deposits doubled in view of the financial risks, depositors having understandably obeyed a survival reflex before France, in the role of Zorro, rushed in to “save soldier Hariri” from the clutches of his Arabian jailers.

This was made possible by a personal intervention of President Emmanuel Macron who quickly and successfully came to the Premier’s rescue. For this, he received the support of Washington, in spite of the alliance between Donald Trump and Mohammad bin Salman, crown prince and strong new man of Saudi Arabia, determined to have it out with Iran and who was punishing Hariri for his coalition government with Hezbollah, Tehran’s Shiite ally and hence the Saudis’ sworn enemy. As we can see, things are very simple in the Middle East where diplomatic billiards are greatly appreciated when war is not an option.

Be that as it may, the crisis was soon over and Lebanon, which has seen worse, weathered the shock.

So once again this country, ever teetering on the brink, is still miraculously standing, thanks to the goodwill of its Arab and international “friends” whose spoiled darling it appears to be.

And yet the recent Saudi experience (when the Arab countries of the Gulf provided rather uncertain support) probably showed Lebanese leaders that they could not count on their “friends” or patrons indefinitely, that their goodwill could quickly turn to jealousy or score-settling. Whence the advice offered to Lebanon by France, the European Union and the IMF (which has rung the alarm bell): the country must make serious efforts to become self-sufficient. But can it possibly do so?

Projects With No Guarantee of Results

Concretely Saad Hariri has said he wants to obtain 6 billion dollars from international donors in order to finance public infrastructure projects, a sum meant to be part of the first phase of a Capital Investment Program covering the period 2018–2022, and amounting to a grand total of 10 billion dollars. These projects deal with electricity, water management and transportation. “Of the 10 billion dollars, between 3 and 4 billions will be spent on public-private partnerships (PPP),” he declared in a recent press conference in Beirut reported by the Lebanese media. In his view, the objective for Lebanon at the CEDRE conference is to “ensure the funding of the remaining projects (. . .) through credit facilities and interest rates not exceeding 1.5% and with a maturity of 10 to 30 years.”

For the Lebanese decision makers, the total duration of this investment program, which aims to modernize the country’s infrastructure, will be 12 years, for a total of 23 billion dollars. The CEDRE participants will concern themselves only with the first phase of the funding plan. In theory, the reforms, modernization and expenses will be monitored in real time to make sure that all goes well.

But these splendiferous figures are quite over the heads of the average Lebanese who no longer expect anything from their leaders and a generally corrupt political class which expects them to put up with the sorry state of public service, garbage collection, and waste treatment, not to mention the daily power cuts, up to three hours in the capital and far more in the underprivileged regions of the country, plus many other vicissitudes (strikes and various crises, etc.)

“We’ve organized this conference to help Lebanon, but as far as any results are concerned, we just have to wait and see,” a rather skeptical senior French official tells us. He also has doubts as to the country’s real intentions to reform, a word in the mouth of every Lebanese, from the civil society activist to the President of the Republic.

“To reform Lebanon, you have to begin with people’s mindset, and unfortunately that is where the political class and the senior civil servants are not forthcoming.” This seems to be the unanimous opinion of all the decision makers in the civil society and even certain politicians who have no compunction about incriminating themselves! At fault is a mixture of greed, innate egotism, political-religious alliances, vested interests, unearned incomes, lack of civic-mindedness, etc. In short, a system mingling feudalism and modernity.

“Ministries or administrations, divided up between different individuals serve to fill their pockets. For example, the funds provided by the UN for Syrian refugees in Lebanon (25% of the country’s population). . . People in charge of these at the Ministry of Education have been accused of misappropriation, but the system is well oiled, or else nobody dares speak up.” The UNICEF official who brings this accusation prefers to remain anonymous.

Energy, Economy’s Greatest Handicaps

The issue of electricity is to be dealt with at the conference and provides a good example of what is left undone in Lebanon despite all the money that has been made available over the years. The grid is in such a state of disrepair and is afflicted with such a colossal debt that it constitutes one of the Lebanese economy’s greatest handicaps.

Despite the plummeting crude-oil prices, the transfers of state resources to the public company Electricité du Liban (EDL) still represented in 2015 the country’s third largest budgetary expenditure (8.4% of the total, 1.14 billion dollars) after the service of the debt (34.6%) and civil servants’ wages (34.7%). It is worth remembering that until the civil war (1989-90), EDL was able to export a surplus of energy to neighboring Syria. Over the last few years, plans to modernize and privatize the sector have been tabled with an eye to saving money for the public purse, laws have even been passed but have not so much as begun to be implemented. For the critics of privatization the risk is that the inefficiency, opacity and corruption of the public sector will simply be replaced by the similar defects of the private sector.

In June 2010, the Energy Minister launched a “comprehensive energy plan” which promised electricity around the clock by 2014–2015, based on a total investment of 4.87 billion dollars, including some private financing. The goal was to raise the total production capacity to 4,000 megawatts (MW) by 2014 and 5,000 after 2015, as against an actually available capacity in 2011 of 1685 MW. Seven years after this plan was adopted, power production is still lower than 2000 MW, and rationing is still in effect. As a result, the Lebanese continue to rely on rented generators, as in civil war days or in present-day Syria. And yet Lebanon benefits from an exceptional annual solar access. César Abi Khalil, the present Energy Minister, blames the failure of his predecessor’s plan on “obstacles” and “shortcomings” which prevented its full application. Make of that what you will. Already in 2002, a law was passed providing for the privatization of electricity at the initiative of the Hariri government following the Paris II conference, at which donors’ pledges of financing for Lebanon were conditioned on “structural reforms.” However, these were never carried out. In Lebanon, people tend to say that major reforms are primarily political. Truer words were never spoken! And this is especially the case when politics are a constant source of discord and rivalry between individuals, parties and factions in a country where seventeen different religious communities are represented in Parliament with each demanding a slice of the cake.

Glimmer of Hope or “Triumph of Money”

In this context, two important developments may well have occurred in the nick of time to raise a glimmer of hope for this conference, two “UFOs” so to speak: the-last-minute adoption by parliament of a tighter budget than expected just one week before the opening of the Paris conference, and the scheduling of a general election in May. But why are these events like UFOs in the Lebanese sky when they are almost banal occurrences everywhere else in the world? The answers are not so banal. This was only the second budget voted since 2005. The country has functioned for twelve years without a Finance Law, owing to internal divisions and the paralysis of political institutions.

The other exceptional event, the planned general election, will result in a new parliament for the first time since . . . 2009! Better late than never, we might say.

Lebanon adopted Thursday 29th of March a budget in deficit of 4.8 billion dollars whereas the first version counted on a deficit of 6.7 billion dollars. Nevertheless, the country is overwhelmed by deficits, budget deficits, current accounts and trade balance.

Delayed by several misadventures, the adoption of this budget as well as the passing of other laws related to private investment has been accelerated as part of this same overall economic project meant to put public finances back in order and lay the groundwork for infrastructural investments amounting to 23 billion dollars over a period of twelve years, to be discussed in Paris.

However, will the coming election have the beneficial consequences which everyone is hoping for? There will be all-female lists of candidates, the civil society is doing its best to bring out the vote, and the campaign is in full swing. But pessimists wonder about the role of money. Thus the French language business monthly Le Commerce du Levant titles its April editorial: “The Triumph of Money.” “The May election will no doubt be played out like the previous ones under the shadow of money and clientelism,” the Lebanese magazine predicts. “Already, during the 2009 election, there was talk of a total of at least one billion dollars spent.”

And there was nothing far-fetched about this figure. If we are to believe Ammar Abboud of the Lebanese Association for Democratic Elections (ADE), it was based on the difference between capital movements observed by the Central Bank before and during the election. An ‟enormous sum,” this spokesperson claims, quoted in the article, which goes on: ‟Today, while we do not know exactly how much money is involved, sums equivalent to 2009 could theoretically be injected into the country according to LTA (Lebanese Transparency Association), even respecting the limits of electoral spending as defined by the new electoral law of June 2017, which allows each candidate and his/her list to spend up to 15 million dollars, in keeping with the number of registered voters in his/her district and the number of candidates on their list.”

Some IMF experts consider CEDRE to be nothing more than a ‟marketing operation,” and that the ‟cancer” that undermines Lebanon lies in the lack of governance and corruption. Instead of begging for money, they believe, Lebanon would be better advised to implement the reform programs, which have remained under way, and are likely to bring 6 billion dollars into the state coffers.