|
|
|
|
|
Political and Economic Challenges Facing Government
February 12, 2020- Al Aman Online Magazine, Beirut, Lebanon
In 2020, the Lebanese government has to pay $5.2 billion of dollar denominated debt: $1.2 billion Eurobond maturing on March 8, $700 million in mid-April, $600 million in June, and $2.7 billion in interest. Authorities have been debating whether they should default starting with the March payment. Dr. Mardini explained that no one is willing to lend money to the Lebanese government anymore, to finance the excessive yearly budget deficit. In reality, the government is trying to choose between defaulting or expropriating depositors’ money to make the payments. Depositors’ money has been hijacked by the central bank with the practice of implicit capital controls and kept in reserves, triggering the appetite of government.
|
|
|
|
Lebanon on Its Way to Bankruptcy
February 18, 2020- New Lebanon Online Magazine, Beirut, Lebanon
The Lebanese exchange rate reached an all-time high in 30 years exceeding 2,500 LBP to the dollar. People’s panic exacerbated after speculation about the government defaulting on its debt and declaring bankruptcy. Dr. Mardini made the news by stating that Lebanon has been bankrupt since 2015 and has been postponing the declaration, by resorting to people’s deposits in order to rollover government debt. He explained that, today, the government has one of two choices: (1) default on paying the debt and start negotiating a debt restructuring, or (2) take what is left of deposits and then default.
|
|
|
Government Looking for Way to Drain Depositors’ Money
February 11, 2020- Annahar Newspaper, Beirut, Lebanon
Regardless of its decision to pay, default, or default selectively on its debt, the Lebanese government is aiming at the remaining $30 billion in reserves at the central bank and looking for an excuse to seize them. Dr. Mardini warned against using this money to pay public employees’ salaries, subsidize electricity, and import goods. The central bank should show independence in this critical period and say no to funding government with what remains from depositors’ dollars. The government on the other hand would have to reduce public spending and decrease its size. Dr. Mardini cautioned officials and asked them to treat local and international bondholders similarly to avoid arbitrage in selling bonds. Resorting to depositors’ money may lead to a Venezuelan scenario and hyperinflation, he added.
|
|
|
|
Lebanon Requests Technical Help from IMF
February 17, 2020- Al Jadeed News Report, Beirut, Lebanon
Lebanon has formally requested that the IMF send a technical delegation to help draw up a comprehensive economic, monetary, and financial rescue plan. According to Dr. Mardini, this request is only the first step towards asking for a financial assistance program. He is expecting the IMF to require a devaluation of the exchange rate, privatizing government companies, new taxes on gasoline and VAT, the reduction of pensions, and possibly the choice between a haircut on depositors’ accounts or the default of some banks. The team negotiating with the IMF should advance the population’s interest, rather than special interests. He particularly cautioned against turning privatization into a political partition of government assets and increasing taxes in a recessionary environment. The IMF usually underestimates the short run recessionary impact of its policies which might lead people to protest against the IMF.
|
|
|
|
Recession could be Limited to 4-5 years, If Essential Reforms Enforced
February 19, 2020- Monte Carlo Radio, Beirut, Lebanon
In his interview, Dr. Mardini explained that Lebanon suffered from -1% recession in 2019 and is expected to reach -3% in 2020. Since October 2019, 220,000 people lost their jobs. Citizens additionally lost value from their deposits in Lebanese pounds since the exchange rate devaluated, and in US dollars since withdrawals are capped and limited. All of this is due to a $91 billion in public debt and 11% of the GDP budget deficit. The Lebanese government has been spending more than its revenues for decades which has led to the current crisis. The international community is only willing to step in and help Lebanon when the government undertakes structural reforms. Those reforms include reducing the number of public employees and cutting government spending in order to reach a mid-term deficit projection of 4-5% of the GDP. Also, he highlighted the importance of opening vital sectors to competition rather than privatizing them as monopolies in order to attract new capital and revitalize the economy.
|
|
|
|
Default Fuel Financial and Currency Crisis
|
|
|
|
Role of Monetary Policy in Current Default Crisis
February 16, 2020- Al Estiklal Online Magazine, Beirut, Lebanon
Notably, the roots of the current debt crisis go back to the government overspending on public projects and having an excessive number of employees. Dr. Mardini highlighted the fact that the government won’t manage to pay its debt, unless serious reforms are made in reducing public spending. Such solution would improve Lebanon’s credit rating and bring it back to international financial markets. He warned about using any of the central bank’s $30 billion in reserves to pay for public debt and explained that in 2015, Lebanon had a discreet change in monetary policy. The central bank had switched targets from a pegged exchange rate to financing the fiscal deficit channeling depositors’ dollars at low interest rates into wasteful government spending. This policy managed to delay the default for 5 years but ended up sacrificing the population’s life savings.
|
|
|
|
|
Floating the Lebanese Pound would Save People’s Deposits
February 4, 2020- France 24, Paris, France
Local banks are exercising a $300 biweekly withdrawal cap on depositors with dollar accounts. Any amount required above the cap must be withdrawn in Lebanese pounds at the official rate. The official exchange rate remains at 1,500 LBP for 1 USD that is almost 40% lower than the real market value. Dr. Mardini explained that Lebanese banks are not breaking the law when choosing to serve withdrawals in the local currency instead of US dollars, because the Lebanese pound is a fiat currency and legal tender in Lebanon. For the same reason, banks are still accepting repayment of dollar loans in Lebanese pounds at the official exchange rate. He argued that in order to protect the value of people’s savings (75% of accounts in Lebanon are in US dollars), the government should float the official exchange rate allowing the deprecation of the Lebanese pound. This reform however should go hand-in-hand with deep cuts in government expenditure to restore trust and enable the return of capital inflows.
|
|
|
|
Lowering Interest on Deposits Artificial and Unattractive
February 13, 2020- Al Jadeed News Report, Beirut, Lebanon
At present in Lebanon, a new regulation issued by the central bank is making interest rates lower on deposits. Dr. Mardini pointed out that due to massive public debt and the risk of Lebanon’s default on the Eurobonds maturing in March, people won’t accept lower returns. Account holders are expecting very high interest rates to compensate for the risk taken and the current decision should lead to outflows. However, since the banks are currently restricting the free movement of capital, deposits are stuck in the Lebanese banking system. As a matter of fact, banks promised account holders high returns for fresh dollars and used the fresh dollars to subscribe to central bank papers. The central bank lent their money to a risky government and then decided to lower interest rates on accounts, while organizing with banks implicit capital controls.
|
|
|
|
Central Bank Decides to Lower Interest Rates on Mortgages
February 26, 2020- Al Jadeed news report, Beirut, Lebanon
In his interview, Dr. Mardini explained that lowering interests on loans logically followed the reduction of interest rates on deposits. He highlighted the fact that these measures are limited to existing mortgages, as no more money is available at the banks to give for new loans of any sorts. Interest rates on all loans have already been very high due to the increased risk of government default, which has put pressure on the economy and has led to the closure of companies, increased unemployment, and the current financial crisis.
|
|
|
|
|
Currency Arbitrage on Airplane Tickets?
February 16, 2020- VDL Radio Station, Beirut, Lebanon
Middle East Airlines (MEA) has drastically changed their policy, by only accepting to be paid by customers in US dollars. Dr. Mardini clarified that the airline company cannot refuse to be paid in Lebanese pounds. He indicated that there are 3 currencies in circulation today: (1) the Lebanese pound (LBP), (2) the dollar in real market value of 2,500 LBP and (3) the dollars seized at the bank’s fixed rate of 1,500 LBP to the dollar. This decision would lead to a currency arbitrage on airplane tickets since people are trying to save their dollars trapped at the bank. They can now purchase MEA tickets in dollars at the official pegged rate of 1,500 LPB to the dollar, instead of buying those dollars from the currency exchanger office at 2,500 LBP to the dollar. However, it is still not clear if the airline company will be able to use these dollars to pay foreign providers, since it would be a breach in the capital control firewall.
P.S: A couple of hours after the interview, the MEA reversed the decision.
|
|
|
|
The Fight to Implement Electricity Law 129 of 2019
|
|
|
|
Electricity Reforms Seem Doubtful after Officials Release Vague Statement
February 4, 2020- MTV Lebanon, Beirut, Lebanon
Upon a new cabinet being formed in Lebanon, a statement from the Prime Minister Hassan Diab’s cabinet included a dubious section related to electricity. The statement talks about accelerating the reform which Dr. Mardini interpreted as granting the Ministry of Energy and Water a discretionary authority to control the entry of private power producers to the market. He also clarified that the government of Lebanon can no longer afford any spending on building new power plants or renting power ships. He gave the example of how the government decided to build 3 costly floating storage regasification units, even though Lebanon only needs 1, making the 2 additional units a complete waste of taxpayers’ money.
|
|
|
|
|
Barriers Exist for Independent Power Producers to Enter Market
February 7, 2020- Al Joumhouria Newspaper, Beirut, Lebanon
Dr. Mardini criticized the government’s exclusive focus on electricity production. He explained that 34% of all production is wasted in transmission and distribution and the remaining 66% is sold at a loss, which means electricity bill collectors can only recover 42% of the cost. He added that the production gap would be filled once the government properly implements Law 129, adopted in 2019 that allows independent power producers (IPPs) to build power plants on their own expense. Dr. Mardini also emphasized on the importance of freeing IPPs from the different restrictions that the ministry is trying to put, in order to discourage them from entering the market. The most obvious of those restrictions consists on conditioning the market access to a costly and inefficient temporary solution like power ships. More competition, a better service and lower prices at no cost to the government, could be made possible, if expensive temporary solutions would be taken off the table.
|
|
|
|
Temporary Solutions in Electricity: Twisting Law 129
February 7, 2020- VDL Radio Station, Beirut, Lebanon
Dr. Mardini criticized the way the Ministry of Energy and Water is handling Law 129 of 2019 by forcing independent power producers (IPPs) to essentially deploy a temporary solution in addition to the long-term power plant. Other restrictions include imposing a specific type of fuel on producers. The costly conditions will push away interested investors, causing more losses on electricity to the government. He suggested allowing private producers to enter openly into the market, as a way of encouraging them and accelerating the process of building the desperately needed power plants. Lebanese industrialists, among others, have expressed their interest in producing electricity, which would lower their cost given their huge electricity demands, as well as provide their entourage with better services at lower prices.
|
|
|
|
|
Bottom Line: More Competition and Transparency Vital in Electricity Sector
February 12, 2020- VDL Radio Station, Beirut, Lebanon
The newly appointed Lebanese government seems to be heading towards a return to the practices that have been in place before Law 129 was enacted in May 2019. Dr. Mardini indicated that those practices were tried out in 2010 when the Ministry of Energy and Water promised to provide 24 hours of electricity per day by 2014 for an estimated cost of at $4.9 billion. After failing to achieve the target, the ministry came back in 2015 and asked for $5.4 billion that time around. The government did not have enough money for such a costly plan and kept borrowing funds for electricity projects that became responsible for 50% of the public debt. Dr. Mardini advised instead to unbundle electricity production, transmission, and distribution. The 2019 electricity law already allowed private producers into the electricity sector. The government should now open the distribution market as well. He also suggested reinforcing the Tender Department’s role to ensure checks and balances on the action of the ministry, enhance fair competition, and stop unnecessary spending on electricity, especially on temporary solutions like power ships.
|
|
|
|
|
|
|
|
|
