CBSP, Subsidies, Economic Update, Social Safety Net

Subsidies: Another Policy to Squander People’s Deposits

13:24 | 1 June 2020LIMS output
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Subsidies

The sharp devaluation of the pound went hand-in-hand with an explosion of inflation in the country. The Lebanese government reacted by subsidizing fuel items, which lead to massive smuggling of fuel to Syria and a domestic shortage.
LIMS gave 1 TV and 3 newspaper interviews on this topic criticizing the policy and explaining that subsidies are a “feel good policy” that harms the poor and deprives them from vital subsidized commodities. Why would anyone sell diesel at the subsidized price of 11,000 liras when it could be sold on the black market for 17,000 liras or smuggled to Syria for 22,000 liras? Subsidies, in all actuality, led to a shortage of diesel, a necessary commodity to operate electricity generators, which in turn caused electricity outages. The domino effect is monumental, since electricity is used in every aspect of production.

LIMS also highlighted that the money used to finance these subsidies comes from foreign exchange reserves held by the central bank which represents, in reality, the remainder of people’s dollar deposits in commercial banks. Subsidies are therefore responsible for the transfer of depositors’ withheld dollars to the pockets of smugglers and black market traders. The cost of this operation will be impacted by depositors, who could witness a larger than expected haircut on their deposits. They may also suffer from a larger devaluation of the lira, while being forced to withdraw their dollars in liras at an official rate below the market rate.


LIMS Media Interviews:

  • Smuggling Increases to Syria Due to Subsidies, Anadol Agency, June 9, 2020, Interview AR
  • Subsidizing Goods Incentivizes Smuggling to Syria, Nidaa Al Watan, June 24, 2020, Interview AR
  • Government Wastes Remaining Reserves on Subsidies, An-Nahar, June 25, 2020, Interview AR
  • Cutting Subsidies and Market Competition Key to Lebanon’s Salvation, OTV, June 26, 2020, TV Interview AR