Economic crisis and challenges in Lebanon
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  • The collapse: current economic situation
  • Where do we stand on adjusting to the triple crisis?
  • Mikati and the IMF: Subsidies, Energy sector, K-control, Banking reforms?
Diagnostic: an exaggerated collapse
  • The initial shock is a sudden of external flows
  • But aggregate spending decreased by much more
  • Because GDP collapse as well, bringing poverty and misery
  • Exacerbating elements: fiscal crisis and inflation; banking crisis
  • Policies that help fasten a recovery – Fiscal, Credit, devalution, external support – did not follow.
  • What resulted is an exaggerated adjustment
In shares of 2018 GDP (except last column)
Ajustement par le bas”

National accounts 2018 to 2021: percentage change

Adjustment of the External Accounts

Lots of capital flight, competing with imports, leading to an enormous real devaluation

Source: BdL last bulletin

Understanding the triple crisis
  1. Capital inflows: ~20% GDP, ~ $10 bil./year, into bank accounts
  2. Banks mainly deposit at BdL ($CDs about $80bn)
    • High Interest Rate and fixed XR keep the money coming
  3. BdL sells a lot of the $ (at LBP1505) to importers
    • This finances the trade deficit
    • If IR was lower, flow would stop, and a devaluation needed
  4. BdL lends much of the LBP to the Gov.
    • At lower IR – explains some of the losses of BdL
    • The rest of the losses is “cost of carry” for the “Reserves”
  5. Government finances its deficit
    • But primary deficit about balanced -> most of the funds back to depositors
    • Rise of “paper wealth” pushes consumption and import
  6. Overvalued XR and high IR tax domestic production and exports
How did we get there? Debt dynamics

Source: IMF art 4, 2019

Early height in debt ratio did not trigger crisis – deficit was falling, and GCC/West supportive
In past decade, primary in balance-> deficit was financing debt service
Debt ratio deterioration ajer 2011 largely due to growth collapse and rising interest rates
10 points action plan and achievements

1 Empowered economic emergency steering committee

2 Government imposed capital and banking controls

3 Decisively deal with public sector debt

4 Embark on a credible fiscal reform

5 Deal with private sector debt

6 Repair BdL’s balance sheet

7 Bring the banking sector back to health

8 Preserve social peace through a focus on social justice

9 Re-think the FX/monetary policy mix

10 Stabilization and Structural Reform Facility

Dec 2019. Firas Abi Nassif, Edward Asseily, Bilal Bazzy, Hala Bejani, Amer Bisat, Henri Chaoul, Ishac Diwan, Haneen el Sayed, Ali El Reda Youssef, Saeb el Zein, Nabil Fahed, Philippe Jabr, Sami Nader, May Nasrallah, Paul Raphael, Jean Riachi, Nisreen Salti, Nasser Saidi, Kamal Shehadi, Maha Yahya, Bassam Yammine, Gerard Zouein.

IMF requirements
  • PM: “some things we can, others we cannot do”
    • Seems focused on energy, subsidies/SSN
  • IMF main “prior action”: at minima, start process to reduce public debts so that IMF loans can be reimbursed in future with a high enough probability
    • Also, capital control (so new $$ do not leak out)
    • Safety net (reputational)
  • Negotiable time-table and “effort” for:
    • XR unification
    • Plan for fiscal adjustment
    • Banking reforms
Subsidies and Safety Net
  • Unsustainable
    • Draining national assets(~$5bil/y)
    • More than total fiscal expenditures!
  • Regressive and full of leakages
    • Less than 20% of “subsidy goes needy
    • A good share goes in contraband
  • Generates corruption and inefficiency
    • High incentives for speculative storage
    • Support over-consumption, esp. of energy

  • To be replaced by a SN
    • WB 200-300 mil project
    • Government has a~1 bil. Plan wt no financing plan yet
    • Discussions on going on modalities
Energy sector
  • Goal: lower production cost (from c27 to 17/KW) AND increase EDL supply to 24h (1500MW), AND full cost recovery (from c10 to ~c20).
  •  This eliminates private generators (~c35/KW), saves the Gvt $1-2 bil in subsidies (EDL + mazout), reduces pollution (shij to gas)
  • The plan requires time/money: to fix generators, add capacity, improve governance
  • Regional help: Iraq. Egypt/Jordan: $400 mil. Each (about 800MW)
Distributing the losses
Highly imbricated balance sheets. Losses are:
  • Government debt = $90 bil (LBP + Eurobonds) [BdL, Banks, Eurobonds]
  • BdL’s own losses, $35 bil+ ? [Bank deposits]
  • Bank losses loans to private sector ($15bn?)
  • Total losses to digest: $50-90bn??

Note: figures in table from Sep 2019, later figures include lots of netting out

Debates on Banking sector reforms

All choices distributive as Debt (mainly) internal. To repay is take from Fadi to give to Nabil, and to default is to take from Nabil to give to Fadi.

  1. Banks equity (first line of defense) – but resisting
  2. Haircuts [plain/reprofiling/good-bad banks] – Distributive fight
  3. State assets (incl. gold, privatize, put in a fund) – Distribution? State revenues?

Differences in plans

  • Government/Lazard: all of 1 (22bn), a bit of 3 (not gold, “corruption refunds”), 2 paid by large depositors, new banks
  • ABL: default only on Eurobonds; lots of 3 ($40bn, incl. gold), some bank capital preserved
  • (Salame: leave BdL debt out of the mix)
  • Status quo: the small depositors taxed heavily through Lirification
A large and unequal deposit base

Deposits went down by $15 bil during 2019. from very large depositors Lack of capital controls have reduced the “taxable base” further

How much haircuts, how much can small depositors be protected?

How much recovery? mid-2021
In 2019, could have protected all accounts below $500,000
Long Term prospects
  • Igniting growth – stabilization with a human face
  • Sustaining growth: inclusive growth, a strong state, social justice, environment

Comparative advantages

  • entrepreneurial culture
  • rich intellectual capital (educational system)
  • valuable “brand”, steeped in culture
  • Integration in the global economy /Diaspora
  • Closeness to the GCC and European markets.
Tax revenues/GDP
Income distribution

World Inequality Database

Infrastructure and Business climate