How gas windfall could save Lebanon from bankruptcy
Lebanese President Michel Aoun gave a speech last week in which he lashed out at the political elite, the central bank and the banking system, holding them responsible for the bankruptcy of the country. He called for a forensic audit, after which the government would become eligible to receive aid.
The president mentioned those who had saved for their retirement only to see their savings evaporate, as well as those who can no longer send money to their children studying abroad, those who can’t afford to go to hospital and those who can’t even pay for their daily food.
An audit, if conducted properly, would hurt Aoun’s son-in-law Gebran Bassil, who is already sanctioned for corruption by the US under the Global Magnitsky Act, along with other members of his party and his allies. An audit would mean the end of the current political elite, including the Aoun clan. But an audit is needed to conduct the reforms required if Lebanon is to rise like a phoenix from the ashes.
However, an audit will not return the money of those who deposited their savings in the Lebanese banks. Though Aoun is placing the blame on the banks that did not abide by the country’s credit and money laws, it is the corrupt government that has been asking the central bank to fund its exorbitant and inflated expenses. Hence, the government is responsible for returning people’s hard-earned money — and there should be pressure on it to do so.
People are now exchanging their deposits for 30 cents on the dollar on the black market. Through the banks, savers are undergoing a compulsory “haircut,” as the banks give them 3,900 Lebanese pounds to the dollar, whereas the market rate has been varying between 10,000 and 15,000. Sanitizing the banking sector and returning people’s deposits — at least the initial capital they deposited, without the accumulated interest — is necessary. However, these deposits were made with banks that invested in treasury bonds and the money raised from those bonds was given to the government, which has never paid it back. Refinancing Lebanon’s debt is necessary for the country to regain the confidence of its people and of the international community.
However, there might be a chance to do that if Lebanon plays its cards right when it comes to gas deposits in the Mediterranean. The first step toward being able to exploit these natural resources is to demarcate the country’s maritime borders with Israel, as no company will invest in contested territory. Such talks started during the Obama era, but Lebanese Parliament Speaker Nabih Berri prevented them from being completed in order to keep a point of contention with Israel and as a poke in the eye to the US. This changed last September, when his Amal Movement colleague Ali Hasan Khalil was sanctioned by the US for corruption and providing material support to Hezbollah. Berri wanted to avoid sanctions at all costs, so he allowed the demarcation negotiations to restart.
Refinancing Lebanon’s debt is necessary for the country to regain the confidence of its people and of the international community.
Dr. Dania Koleilat Khatib
On this, the US should push Israel to agree with Lebanon on the contested “point 23”. Tel Aviv is insisting on a previous demarcation point that eats up part of Lebanon’s lawful maritime territory. Washington should consider that this area would be a form of extra assistance for a country that badly needs to lift itself from the abyss. Even if it takes seven years to start extracting gas, the fact there are proven reserves would mean Lebanon could refinance its government bonds and raise capital, allowing it to return people’s savings.
We have to remember that the state of Qatar was dealing with a severe budget deficit in the 1980s. It reached its new wealthy status only in the late 1990s, when liquefied natural gas (LNG) exports started. The massive investments required to build LNG production facilities and transport vessels exceeded the entire Qatari gross domestic product, so would not have been possible without the use of sophisticated financial instruments. In addition to involving Japanese LNG buyers in the construction and financing, the government also used future sales revenues via long-term purchase agreements, as well derivatives instruments such as call options.
Futures, forwards and call and put options are financial instruments whereby parties enter into a contract to buy or sell a certain commodity at a certain price on a certain date. The key is to have a clear estimate of the amount of reserves Lebanon has, in order to know the derivatives that will be most appropriate to use. This can bring immediate funds for the state, either by generating cash from the sale of future gas production or by hedging a debt instrument such as gas-linked financing. The refinancing of the debt could also be linked to the gas — i.e., the owner of a bond will be paid from the money received once the gas is sold. Hence the bonds would have collateral against them. This would regenerate the confidence the country lost when it defaulted on its Eurobond debt last March.
A revival of trust in the system would encourage the flow of investment and help inject liquidity into the system. This would be much better than the suggestion of selling off all the government’s assets and privatizing everything, which would strip the state of all its returns and any role it has in services provision, leaving the average citizen much worse off. Moreover, the government assets and facilities that are dysfunctional due to corruption would have to be sold at a discount, ensuring Lebanon would not get a proper return from the sale.
Gas can save Lebanon from bankruptcy and help revive confidence in the state and the banking sector, but the prerequisite for this is full-fledged reforms, which the current political elite are incapable of conducting.
• Dr. Dania Koleilat Khatib is a specialist in US-Arab relations with a focus on lobbying. She is co-founder of the Research Center for Cooperation and Peace Building, a Lebanese NGO focused on Track II. She is also an affiliate scholar with the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut.