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Blueprint to Establish Leading Infrastructure, Economy & Finance in Lebanon (BELIEF)
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People in Lebanon lost their incomes, jobs, and life savings due to a massive economic slowdown coupled with high inflation, a devaluation of the currency, a banking crisis and a government default on public debt. BELIEF in Lebanon is a blueprint suggesting three axes of reform. (1) On the fiscal side, the blueprint recommends repealing all taxes and replacing them with a single plain low flat tax, coupled with dismantling monopolies and opening the market to competition. (2) On the monetary side, we argue for repealing the central bank, better known as Banque du Liban (BDL) and replacing it with a currency board that would deprive the monetary authorities of the ability to finance the government. (3) On the banking side, we suggest a resolution mechanism, similar to the process used in the Bernie Madoff fraud case.
The Ministry of Information organized a meeting at the prime minister’s headquarters, the Grand Serail to discuss the government's financial rescue plan with a group of specialists. The meeting was attended by the ministers of information, finance, labor, administrative development and environment, affairs for the displaced, foreign affairs, and a group of experts. Prime Minister Hassan Diab also attended part of the discussion. During the meeting, Dr. Patrick Mardini presented the recommendations of BELIEF in Lebanon.
Janoubia news website explained that BELIEF in Lebanon suggests alternative solutions to the government’s program. The blueprint shows that after executing the haircut on bondholders currently planned by the government, excessive levels of sovereign debt will be quickly restored. It suggests reducing taxes, allowing competition, and cutting spending to stimulate sound growth instead of increasing taxes in a shrinking economy. Most importantly, the BELIEF in Lebanon advises transforming the central bank into a currency board which would stop the freefall of the Lebanese pound against foreign currencies and restore the needed credibility to re-attract deposits and foreign investments.
Our Media Interview:
Blueprint to Reclaim Lebanon, Janoubia, April 26, 2020, Read Article Ar.
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First Step towards Floating the Lebanese Pound
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As a result of LIMS participating in a wide array of media exposure, along with meeting with policymakers, the central bank became motivated to adopt certain policies targeted at curbing the damage caused by the present currency crisis. Previously, policymakers kept the Lebanese pound to the US dollar exchange rate artificially below market rate. Since more than 75% of deposits in Lebanon are denominated in dollars, the artificial exchange rate meant loosing 42% of every withdrawal. LIMS’ campaign has contributed to the adoption of the central bank’s circulars 148 and 149 allowing account holders with less than $3,000 to withdraw their money at the market rate instead of the official rate. They represent more than 1.7 million small accounts held by the most impoverished of depositors.
However, banks are using a “market” exchange rate of 2,600 Lebanese pounds (LBP) to the US dollar for those withdrawals, while the actual market rate is 3,000 LBP to the dollar, meaning that depositors will effectively lose more than 10% of their money’s worth. The 10% discount only applies for depositors with less than $3,000 in their accounts, whereas all other depositors will lose 50% of their money’s value, since the official rate remains at 1,515 LBP to the dollar. LIMS stressed on the importance of allowing all account holders to withdraw their money at the true market rate, meaning a devaluation of the currency, to reflect market reality.
Results followed shortly thereafter. Lebanon’s central bank issued circular 151, allowing for all depositors with more than $3,000 in their US dollar accounts, to withdraw their money in the local currency, at the “market rate”. The remaining step is now to unify the so called “market rate” in use by banks with the actual market rate.
Our Media Interviews:
• Dollar to Further Rise Amidst Restrictions and Chaos, Janoubia, April 7, 2020, Read Article AR
• Small Depositors Now Have Access to Their Money, Al Joumhouria, April 4, 2020, Read Op-ed AR
• Capital Control Law Did Not Pass but Is Enforced Anyway, New TV, April 3, 2020, Watch Interview Ar
• Central Bank Allows Small Depositors to Withdraw Money, LBCI TV, April 5, 2020, Watch Interview Ar
• First Step in the Right Direction for Depositors, New TV, April 6, 2020, Watch Interview AR
• Central Bank Can No Longer Control Exchange Rate, New TV, April 17, 2020, Watch Interview AR
• Central Bank Depreciating the Lebanese Pound Further, New TV, April 21, 2020, Watch Interview AR
• The Lebanese Pound Cannot Survive Without the Dollar, Lebanon 24, April 26, 2020, Read Article AR
• Central Bank Should Not Collide with Government, France 24, April 29, 2020, Watch Interview AR
• Government Solutions Not Enough in this Crisis, OTV, April 30, 2020, Watch Interview AR
• LIMS Building Solid Foundation for Lebanon’s Future Success, Atlas Network, April 22, 2020, Read Article En.
• Lebanon Struggles to Climb Out of Financial Crisis amid Coronavirus, Spiegel Politics, April 30, 2020, Read Article En
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Devaluation and Haircut Part of Government Rescue Plan
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Leaked to the media was a draft version of the government’s economic plan, exposing official figures and proposed solutions. The government and the central bank actually incurred $71 billion of losses and decided to transfer it to commercial banks. As the Lebanese government and the central bank have been on a borrowing spree with depositors’ money from the banks for decades, and spent it on profitless projects, the government has come to a dead-end and does not have the means to pay back the borrowed funds. Losses on the banks’ private loan portfolio represent $12.2 billion, making total banks’ losses a whopping $83.2 billion. The plan suggested impairing $20.7 billion of bank capital leaving $62.5 billion of losses to depositors. Therefore, the Lebanese prime minister announced in a press conference that account holders with less than $500,000 will not be affected by the planned haircut. Given that more than 75% of deposits are denominated in dollars, the government cannot inflate its way out of the losses. The central bank is therefore working on a plan to de-dollarize the Lebanese economy. This implies that the dollar withdrawals will be systematically replaced with Lebanese pounds.
LIMS cautioned officials that the de-dollarization policy would increase the demand for dollars further. Since they no longer trust the local currency, Lebanese people are systematically converting their money to dollars, to preserve the value of their money. In fact, the Lebanese pound has reached 4,000 to the dollar, which is the highest rate witnessed so far. The central bank tried to force exchange offices to peg it to 3,200 but to no avail. LIMS announced that the only way to stabilize the exchange rate would come from separating the monetary policy from the government deficit. We also suggested that the real solution lies in transforming the central bank into a currency board, which would stabilize the exchange rate and give greater confidence in the market.
Our Media Interviews:
• Lebanon Expected to Seek IMF Financial Assistance, Al Araby, April 3, 2020, Read Article AR
• Capital Control Law Not Passed in Parliament, Assas Media, April 5, 2020, Read Article AR
• Capital Controls Only Imposed on the Weak, Al Joumhouria, April 6, 2020, Read Op-ed
• Not All Account Holders Should Be Treated the Same, LBCI TV, April 9, 2020, Watch Interview AR
• Public Asset Management Company to Keep Monopolies, New TV, April 10, 2020, Watch Interview AR
• Government Not Held “Accountable” For This Crisis, LBCI TV, April 11, 2020, Watch Interview AR
• Current Governmental Plan Unfair to Most Depositors, New TV, April 16, 2020, Watch Interview AR
• Government Plan to Punish Citizens, Not Fixing the Problem, Al Estiklal, April 17, 2020, Read Article Ar
• Holding Wealthy Accountable Cannot Solve Lebanon’s Crisis, Al Joumhouria, April 21, 2020, Read Op-ed
• Implicit Capital Controls Imposed by Banks, France 24, April 24, 2020, Watch Interview AR
• Lebanese Pound to Further Devaluate During Crisis, Al Majalla, April 25, 2020, Read Article Ar
• Government Plan Will Confiscate Money and Keep Spending, Nidaa Al Watan, April 30, 2020, Read Article AR
• Lebanon’s Central Bank Relaxes Rules on Withdrawing in US Dollars , Xinhua Net, April 21, 2020, Read Article EN
• Lebanese Banks Could be Biggest Losers from Debt Default, Al Jazeera, April 28, 2020, Watch Interview EN |
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Implicit Capital Controls Imposed by Banks
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Data shows that from the start of the protest on October 17, 2019, until January 14, 2020, $2.3 billion was transferred offshore to Swiss bank accounts. Everyone else in Lebanon has not been able to withdraw or transfer their own money because of de facto capital controls imposed by banks.
The Lebanese parliament has been trying to pass a capital control law that would “legalize” what the banks have been doing for the past months. LIMS has been opposing capital controls, showing that such measures would only apply to hard-working business owners and regular individuals. Depositors with good connections, who had benefitted from the Ponzi scheme throughout the past 4 years, were most likely the ones allowed to transfer their money overseas. This policy is a serious breach of private property and is counterproductive, as it will substantially reduce capital transfers to Lebanon.
In order to prevent a haircut on their deposits, clients started buying real estate which revived a market that was undergoing a recession. LIMS expects the real estate sector to undergo a contraction after the haircut.
Our Media Interviews:
• Banks Cease Giving Depositors Dollars, New TV, April 1, 2020, Watch Interview AR
• Lebanon’s Economic Freedom Put to The Test, Assas Media, April 8, 2020, Read Article AR
• Smallest Depositors Bear 10% Haircut, Al Ektisad, April 9, 2020, Read Article AR
• Imminent Crisis in Real Estate Market, Nidaa Al Watan, April 13, 2020, Read Article AR
• Lebanese Pound Is in Freefall, Daraj, April 27, 2020, Read Article AR
• Dollar on the Rise Again, Business Echoes, April 27, 2020, Read Article AR
• Lebanon Heading Towards De-Dollarization, Raseef 22, April 28, 2020, Read Article AR
• Central Bank Policy Gives Haircut to Some Accounts, Favors Other Accounts, Xinhua Net, April 12, 2020, Read Article EN
• Minimizing People’s Financial Losses Vital to Lebanon’s Future Growth, Xinhua Net, April 20, 2020, Read Article EN |
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Allowing Competition in Vital Sectors Essential to Resolve Crisis
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Lebanon’s economy has reached a zombie state, where the only way state-owned businesses have been able to operate is through getting more government funding, with little profit or massive losses from it, depending on the sector. It is no wonder why the population has been accusing their leaders for years now, of the rampant corruption and mismanagement of public funds.
The government rescue plan entails creating a public asset management company (PAMC) which would include entities such as the casino, airline, and airport, among others. Account holders who have been subdued to the haircut will be given shares in this fund but the same monopolies will be kept in the hand of the government, hindering any growth in the economy.
LIMS continues to argue for a multi-layer solution, which includes abolishing government monopolies, and then invite private companies to offer the same services to the public. This solution would not only offer a high-quality service, but it would also help lower the price, due to competition. The new market structure would also stop excessive government spending that has led the country to having one of the highest amounts of debt-to-GDP globally, reaching 175%. The expensive Bisri Dam is a staggering example.
LIMS also cautioned against involuntary mergers and acquisitions on banks planned by the government. Forced M&As would allow those with political connections to borrow money from the central bank and forcibly acquire other banks. LIMS insisted that the government is the main cause of the crisis Lebanon is facing and it should be held accountable first, before all other actors.
Our Media Interviews:
• $600 Million Dam Continuation Despite Lebanon’s Bankruptcy, Nidaa Al Watan, April 7, 2020, Read Article AR
• Half the Economy in Complete Lockdown, MTV, April 15, 2020, Watch Interview AR
• Faulty Fuel Coming to Lebanon Raising Serious Accusations, VDL Radio, April 28, 2020, Listen to Interview AR
• Dismantling Government Monopolies Would Revive Economy, Al Jazeera, April 29, 2020, Watch Interview EN
• Fixing Lebanon’s Zombie Economy, Al Jazeera, April 29, 2020, Watch Interview EN |
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Low Oil Prices Creates Golden Opportunity for Lebanon
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It is a known fact that the government has been subsidizing electricity for over the past 3 decades and has decreased subsidies for 2020. During the COVID-19 pandemic, the fall in oil prices has presented a huge opportunity for the state-owned electricity company, EDL. LIMS urged officials to totally eliminate subsidies through changing the current pricing system into an index variable system, allowing the cost of electricity to be dependent on the price of fuel. This would hedge against the risk of the fluctuation in oil prices and eliminate subsidies to the sector.
Our Media Interviews:
• Golden Opportunity for Lebanon in Electricity Sector, An-Nahar Newspaper, April 10, 2020, Read Article AR
• Another Lost Opportunity for Lebanon as Oil Prices Drop, Nidaa Al Watan, April 22, 2020, Read Article AR |
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COVID-19 Lockdown Puts Lebanese Economy in Deeper Crisis
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Lebanon was already facing the horrors of the financial, economic, and banking crisis before the COVID-19 pandemic hit. LIMS expected government revenues to melt down this year due to the lockdown and explained that the government should focus on encouraging businesses to stay open, by eliminating taxes and import tariffs. LIMS also addressed the services and tourism sector, which represents half of the economy and has been closed due to the pandemic. There is a big chance this sector will not open again once this is over, due to the already grave economic crisis in the country.
Our Media Interview:
Corona Puts Further Pressure on Businesses in Lebanon, New Lebanon, April 15, 2020, Read Article AR |
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