|Date: Jan 17, 2020|
|Source: The Daily Star|
|Missed signs foretelling Lebanon crisis|
How did we get there? Lebanon has traditionally been famous (or infamous!) for its ability to maintain for a long period of time a “double deficit” situation:
Foreign trade deficit.
This has been considered by experts as a risky situation, difficult to understand but it was also argued that a surplus in balance of payments could make up for the two deficits and therefore the significant fund inflows would end up in the Lebanese banking system to finance both deficits.
What policymakers and administrators did not foresee was the fact that the fund inflows would, one day, dry up and the economy would need fresh funds for imports and for capital investments.
Moreover, the infrastructure needs to be upgraded so that the productive sectors are able to provide growth in manufactured goods and services for local consumption and international exports.
Politicians also did not expect the drop in foreign inflows caused by various slowdowns in countries that host a large Lebanese diaspora.
Last but not least, corrupt politicians did not really care to implement needed reforms because they are reaping the benefits of a financial bubble created by easy money and high interest rates.
Politicians’ actions clearly lost focus and a large scale lack of trust emerged among the majority of the population.
Other factors that affected the balance of payments deficit is the increased number of refugees competing with local labor and pushing national unemployment to higher levels.
In the absence of a clear economic plan, and despite McKinsey consulting recommendations, no one cared to adopt a policy to protect low income jobs and local industries.
The most obvious consequences of the above are the following:
Inflation sharply increased due to the quick depreciation of the Lebanese pound on the parallel market.
Wages and employment levels have dropped significantly, hurting all sectors and wide groups of the population.
What Now ?We will see in 2020 a severe double-digit percentage GDP contraction as well as a loss of personal income.
Our objective should be to limit the damage and prevent a large-size crash.
Main measures should be to restore confidence by :
Reducing the volatility in the Lebanese pound exchange rate.
Agreeing on a new Cabinet urgently.
Creating a “crisis cell” to start negotiations with local and foreign Eurobonds holders and creditors to extend bond maturities and lower the interest rates payments.
Legalize the informal capital controls applied by the banks.
Agree with IMF and CEDRE donators to bring in a significant cash infusion in the economy.
Bring back the profitable sectors to the Lebanese state (telecoms, ports, public domains, fuel & gas imports, etc.)
Mandate the judiciary system to crack down on corruption with the objective to start prosecuting frauds and recuperating stolen public funds.
Start working on a long term political reform system. Abolish confessional system and shift to a modern civil society.
Time is of the essence now and implementation of measures should not be delayed as we see a degradation of the situation on a daily basis.
Habib Husni is a Lebanese economist.
A version of this article appeared in the print edition of The Daily Star on January 16, 2020, on page 4.