Lebanon’s austerity plan offers no real reforms

Lebanon’s austerity plan offers no real reforms

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Lebanese Prime Minister Hassan Diab speaks to the media outside Beirut’s International Airport, Lebanon, April 5, 2020. (Reuters)

The Lebanese government this week leaked its long-awaited “reform plan,” which is supposed to form the basis for its negotiations with the International Monetary Fund (IMF) and international donors. The plan is well drafted with technical and professional language and it has many figures, numbers and charts that are guaranteed to impress at first sight. However, it is an austerity plan, where the average citizen will bear the brunt of bailing out the country while existing politicians get a free pass.

At the outset, the plan states some realities that have long been denied by the political system. The plan admits that the currency is overvalued, which hinders competitiveness, and that the dollar peg is no longer sustainable. It recognizes that the central bank’s reserves are depleted — something the governor has repeatedly refuted. It also admits that a full-fledged IMF program cannot be avoided.

The plan makes other important confessions. The first is to pinpoint the destructive role the central bank played by acting like the government’s cashier and the lethal instruments it utilized; namely the financial engineering that has been in use since 2016. It also admits that the banking sector is too big for the Lebanese economy, standing at about 425 percent of gross domestic product.

It also lays down clear objectives, such as fighting corruption, restructuring debt and the financial system, reforming the public sector, and streamlining expenditures. Though the report says the objectives will be attained if reforms are conducted and if external support is garnered, it still fails to offer a proper execution mechanism, a proper timeline or an indication as to how the Lebanese public and the international donors can verify that the reforms have been conducted. The plan says that the treasury will increase tax audits without giving any explanation about how. The plan talks about tighter control of customs, in ports, airports and at land borders. Again, there is no explanation of how compliance can be measured. Smuggling, which is a large part of Lebanon’s tax evasion, is conducted by influential political parties. It is almost impossible, in the current situation, for the Lebanese government or security forces to stop it. 

Reforms are impossible with the current political structure. This government was formed only when the corrupt politicians — those who brought the country to its knees — agreed on dividing the positions among themselves and putting their people in the key roles, while they rule from behind the scenes. Will they allow the government to prosecute them? Very unlikely.

The plan describes how the “government will conduct an immediate crackdown on corruption in the public sector and appoint well-renowned international forensic specialists to retrieve the stolen funds.” It does not say who those specialists will be accountable to. The corrupt people are still in control. Will they allow themselves to be exposed and prosecuted? Again, very unlikely.

While the clauses about increasing taxes on the average citizen are crystal clear, the narrative and clauses about “reform” are very vague and are used as optics to lure the international community into a deal with a government that has no credibility.

The plan also carries fake optimism. It supposes that the government will, in the medium term, be able to go back to the capital market — i.e., to issue bonds and other instruments to raise money. This is, even in the best-case scenario, unattainable. It also has lots of gaps. For example, it mentions attracting foreign direct investment (FDI) but does not describe any incentives. An important factor is to encourage FDI to lower the cost of energy, which is very high in Lebanon. However, instead of decreasing the cost of production, the plan proposes raising tariffs — an ultimate turn-off for investors.

The plan calls for the central bank to be audited. This is an important step, as no one knows the real amount of the reserves, with only estimates available. It hints at a “haircut” without using the term. It uses more eloquent wording: A “bail-in.” It comes up with creative ways of telling people they are basically going to lose an important chunk of their deposits. Depositors will be compensated by shares in the banks that lost their money or from the proceeds of funds where money retrieved from corrupt politicians will be injected. This means that, once money from corrupt politicians is recovered, depositors will be repaid. It says that the banking sector will contribute to the “restructuring of the central bank liabilities.” It does not say who exactly is going to foot the bill. It proposes a “fair, targeted and proportionate” contribution by “large depositors.” It does not describe how gradually the bail-in will be performed or what the benchmark is. It says that the assets of 90 percent of depositors will be preserved. It fails to mention the funds of influential politicians, which are kept intact overseas. 

It comes up with creative ways of telling people they are basically going to lose an important chunk of their deposits.

Dr. Dania Koleilat Khatib

Though in reality the plan has no real substance, the international community can still use it to put requests forward and start a dialogue with the government in an effort to save the country. The document says that external financial support and help to conduct government reforms are needed. This can be a point the CEDRE conference donors’ committee and the IMF can use. They can ask the central bank and the Ministry of Finance to be accountable to them directly. This will control the current corruption. Most importantly, the donor community should ask the government to give it a list of politicians and officials it intends to investigate. And the donors’ committee should be the one contracting the forensic experts.

When the average citizen is asked to give up his hard-earned savings and bear increasing taxes that will make him poorer in order to bail out Lebanon, the least he can get in return is to see the people who drove the country to this situation brought to justice. 

  • Dr. Dania Koleilat Khatib is a specialist in US-Arab relations with a focus on lobbying. She holds a PhD in politics from the University of Exeter and is an affiliated scholar with the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut.
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