CBSP, Subsidies, Economic Update, Social Safety Net

Subsidies Add Fuel to the Fire

14:31 | 1 October 2020LIMS output
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Subsidies

Long lines at gas stations and empty shelves at pharmacies began to appear in Lebanon due to nationwide fuel and medicine shortages. LIMS argued that subsidies are responsible for shortages since they incentivize importers to re-export their products and sell them at a higher price abroad. Additionally, smugglers buy the goods from gas stations and pharmacies at the subsidized price to sell them overseas for fresh dollars. As a result, people who are already suffering from hyperinflation, must now deal with nearly empty shelves. 

To make matters worse, subsidies cost around 40,000 billion LBP per year, which is double the amount of annual government spending. However, since the program is administered by the central bank, the money is spent from outside the general budget and without parliamentary approval. Foreign currency reserves used to finance subsidies are dwindling down at alarming rates and depositors are slowly losing hope at any recovery of their life savings. 

The program has managed to stabilize the exchange rate at around 7,500 LBP to the dollar, since importers of subsided goods get their dollar from the central bank’s reserves, hence reducing the demand for dollars on the black market. However, such a move is too costly and the longer it lasts, the stronger the devaluation will be when the policy is revoked, meaning subsidies must be lifted sooner, rather than later. 

In all actuality, the devaluation of the local currency remains the key component behind price hikes. Therefore, rather than wasting people’s deposits trying to address the consequences, the government should move beyond temporary solutions, by stopping the monetization of the debt. As for the period of transition out of subsidies, direct cash transfers would provide a more targeted and less costly support mechanism. 

LIMS Media Interviews:
  • Fuel Queues Pave The Road To Hell, October 2, 2020: Independent Arabia, Article AR
  • French Initiative Silently Fails, As Collapse Imminent, October 2, 2020: Al Majalla, Article AR
  • Subsidies Lead To Smuggling, What Are The Alternatives, October 5, 2020: OTV, TV Interview AR
  • Government Spends 40,000 Billion LBP Yearly From Outside The Budget, October 7, 2020: MTV, TV Interview AR
  • Loopholes Exist In Subsidy Policy And Alternatives, October 8, 2020: Annahar TV, TV Interview AR
  • Lebanon Should Adopt Effective Aid Mechanism Before Lifting Subsidies, October 9, 2020: Xinhuanet, Article EN
  • Experts Warn Alternative Aid Program Necessary Before Lifting Subsidies, October 10, 2020: Alborsa News, Article AR
  • Lebanon Faces Social Disaster As Reserves Evaporate And Subsidies Are Lifted, October 13, 2020: Al Jazeera, Article AR
  • How To Effectively Transform The Subsidy Program, October 14, 2020: VDL, Radio Interview AR
  • 60% Below Poverty Line, What’s The Alternative To Lifting Subsidies, October 25, 2020: Al Estiklal, Article AR