CBSP, Subsidies, Economic Update, Social Safety Net

Subsidies Worsening Lebanon’s Crisis

13:43 | 1 May 2021LIMS output
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Subsidies Worsening Lebanon’s Crisis

After defaulting on Eurobond payments in early 2020, the Lebanese government has been resorting to debt monetization to cover the budget deficit. The expanded money supply brought about an acute inflation of prices. As a result, the government responded by creating a subsidy program that covered fuel, medication, wheat, and a consumer basket of goods. LIMS warned against the subsidy policy, pointing out that dollar deposits at the banks are funding the program. Depositors are then forced to withdraw their money in printed Lebanese pounds instead, causing inflation, rather than abating it and increasing the prices of all non-subsidized goods. At the same time, subsidized products end up smuggled or in shortages due to retailers stocking up to resell for higher profits in the future. LIMS called for the immediate repeal of the subsidy program, even if no alternative is put in place, for subsidies have only served to squander dollar deposits and degrade the economic conditions nationwide.

At present, the central bank is down to the required reserves and unable to finance the subsidy policy any further. The Lebanese caretaker government found itself compelled to lift subsidies that cost $6 billion per year. In fact, the government is looking to implement a quasi-universal basic income (QUBI) using cash cards that cover the basic needs of all Lebanese citizens. LIMS acknowledged that a QUBI is more cost efficient than subsidies, but the plan needs financing. LIMS rejected funding the program using the central bank’s required reserves. It is immoral to forbid depositors from withdrawing cash dollars from their banks, and then squandering their money on government programs. In the absence of an alternative form of financing, repealing subsidies coupled with establishing a currency board remains the only solution. Such measures would decrease the price of non-subsidized goods and offsetting the increase in the prices of subsidized items.

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