February 2024

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February 2024, N°76
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Here's How We Made a Lasting Impact in February 2024

Navigating Public Sector Salary Demands Following 2024 Budget Approval

Despite the government's approval of the 2024 budget in January, public sector employees have intensified their demands for a salary increase following months of strikes. LIMS raised concerns about inflated revenue projections and excessive expenditure, casting doubt on the feasibility of achieving a balanced budget essential for economic revitalization. With Lebanon's economy shrinking from approximately $54 billion before the crisis to less than $20 billion presently, the government's current revenue streams will fall short of meeting projected expenditures, rendering further salary increases for public sector employees unrealistic.

The financing of an undisclosed budget deficit and a potential salary hike poses significant challenges, especially with Lebanon's limited access to debt markets due to sovereign default. Alternatively, financing this deficit through the central bank, a common practice in Lebanon, risks depleting foreign exchange reserves, enhancing the banking crisis and triggering a new wave of hyperinflation.

LIMS recommended a reduction in public sector employment, allowing half of the current workforce to voluntarily exit their positions, as many already have alternative opportunities in the private sector or abroad. This measure would generate savings, creating room for a partial salary increase. Addressing nepotism and favoritism in public sector hiring is crucial for Lebanon's recovery, as it would streamline operations and foster a more productive workforce.

Assessing Lebanon's New Banking Resolution Proposal

Amid Lebanon's enduring banking crisis, the government has proposed a bank resolution plan to address the escalating challenges that began in 2019. The plan entails the establishment of a restructuring committee tasked with evaluating which banks should undergo liquidation and which ones should undergo restructuring. The restructuring measures encompass various strategies such as depositor bail-ins, bank recapitalization, potential mergers and acquisitions, appointment of interim directors, alterations in capital structures, adjustments to deposit terms and interest rates, among other measures.

Under the proposed plan, restructured banks would reimburse depositors up to $100,000 each over a period of 10 to 15 years, while imposing an 80-90% haircut on amounts exceeding this threshold. This haircut would be facilitated through a bail-in mechanism, lirafication of dollar-denominated deposits, and the conversion of deposits into shares in a depositor recovery fund. This move is expected to enable both the central bank and banks to address the $70 billion losses.

LIMS highlighted that implementing a comprehensive bank resolution framework has long been overdue, with the crisis surfacing four years ago. The delay has led to substantial losses in central bank reserves, plunging from $35 billion to a mere $8 billion, significantly limiting the potential payout to depositors. Moreover, LIMS emphasized that while the proposed plan requests Lebanese citizens to accept substantial haircuts on their deposits, it falls short in offering meaningful reforms in return. It is necessary to incorporate tangible reforms within the framework to prevent a recurrence of the practices that contributed to the crisis. Key reforms include: (1) banning banks from placing deposits with the central bank to mitigate Ponzi scheme-like practices, (2) prohibiting the central bank from lending to the government, a major contributor to financial sector losses, and (3) imposing limits on the central bank's ability to increase the supply of Lebanese pounds unless fully backed by US dollar reserves at a fixed exchange rate.

Implementing these critical reforms holds the potential to rebuild trust within Lebanon's banking sector and plays a pivotal role in regaining the confidence of Lebanese expatriates, who represent a considerable assets for the country's future.

Can Public-Private Partnership Limit Corruption in Lebanon?

LIMS recently published a policy brief within its APPLE C (Apply Public Procurement Law to End Corruption) program, shedding light on the challenges facing Public-Private Partnerships (PPPs) in Lebanon. The brief underscores the detrimental practices within PPPs that sidestep open and competitive bidding processes in favor of pre-selected companies. Ministers often tailor tender conditions to stifle competition and accommodate a specific private entity, often linked through cronyism. This lack of genuine competition in PPPs results in inflated service costs for the public and subpar service quality.

Furthermore, the absence of competition undermines public trust and discourages potential suppliers from participating in public contracts, exacerbating the cycle of limited competition and increased corruption. The brief emphasizes the critical importance of adhering to open and competitive procedures in selecting private partners, rather than favoring cronies under the guise of a PPP.

Additionally, the brief delves into the intricacies of PPP regulations, highlighting that current legislation confines competition to the "Competitive Dialogue" procedure while neglecting other methods that could foster creativity and innovation. Hence, there is an urgent need to reform the legal framework to rectify past failures, enabling true competition and equal opportunities for all stakeholders, to properly offer basic services to the population.

Houthis attacks on ships in red seas: Lebanon should cut down tariffs

Yemen's Houthi assaults on commercial vessels in the Red Sea, a critical artery for global trade, have sparked concerns over maritime security and pose a threat to international supply chains. The International Monetary Fund (IMF) recently cautioned that any escalation of conflict in the Middle East would disrupt trade routes and air traffic, resulting in increased shipping expenses between Europe and the Mediterranean.

LIMS explained that the surge in shipping costs between Asia, China specifically, and the Mediterranean would directly impact Lebanon by driving up the prices of imported goods, thereby contributing to domestic inflation. Furthermore, Lebanese exports, particularly those bound for the Gulf region via the Red Sea route, would encounter reduced competitiveness due to heightened freight charges. To mitigate the repercussions on international trade, LIMS recommended that the Lebanese government consider repealing customs duties and tariffs on imports and exports to offset some of the elevated shipping costs. Additionally, easing procedures at ports to facilitate smoother trade flows is deemed crucial.

Moreover, fostering stronger trade ties with Europe by easing trade restrictions could yield benefits for Lebanon, given its strategic position between shipping routes. Implementing proactive measures to reduce trade barriers and enhance connectivity could help mitigate the adverse economic impacts of escalating global shipping costs.

LIMS Policy Analyst Initiates a Legal Dispute Against the Ministry of Energy and Water

The Lebanese national electricity provider, Electricité du Liban (EDL), raked up substantial financial losses over several decades, primarily due to subsidized electricity pricing. The situation was exacerbated by the currency devaluation that commenced in 2019, as electricity prices in Lebanon are denominated in Lebanese pounds while the fuel required for power generation is imported in US Dollar. When EDL eventually adjusted its pricing structure, it employed a formula that was deemed unfair and unlawful by LIMS.

According to LIMS, EDL's pricing methodology included a costly fixed fee known as the "rehabilitation allowance," which deviated from a consumption-based pricing model. This approach disproportionately burdened low-income households that practiced energy conservation, as they ended up paying a higher average price per kilowatt-hour (Kwh) compared to wealthier, energy-intensive, households. Moreover, given EDL's limited electricity supply, this "rehabilitation allowance" essentially became a fee charged to households without corresponding service provision. Additionally, EDL incorporated an artificial exchange rate into its pricing formula, set at 20% above the market rate. This further contributed to the financial strain on consumers.

In response to these grievances, Mr. Ghassan Baydoun, a policy analyst at LIMS, initiated a legal challenge against the Ministry of Energy and Water for irregularities in electricity pricing. In a noteworthy development, the Ministry announced the elimination of the "rehabilitation allowance" and the adjustment of the exchange rate in electricity bills, effective May 2023. This decision is anticipated to yield substantial cost savings for consumers and alleviate the financial inequities faced by vulnerable segments of the population.

Meanwhile, EDL issued warnings of power disconnections for government entities, public institutions, and municipalities due to outstanding bills. This move was met with criticism from LIMS, highlighting the irony of EDL's financial predicament, as it is a net borrower from the state. These inter-institutional disputes underscore the inefficiencies within Lebanon's public sector, particularly in managing the electricity industry. LIMS argued for private production and distribution of electricity on the local level leveraging solar energy innovations and their decentralized nature. The institute proposed streamlining the licensing process for private entities as a swift and cost-effective remedy for the sector's challenges.

LLA 101 - Beirut Vicinities Workshop: Empowering Municipalities To Deliver Basic Services

On February 10, 2024, LIMS Leaders Academy held the LLA 101 Economic Foundations of Prosperity workshop in Metn and Baabda coastal regions. Drawing a cohort of 33 forward-thinking participants engaged at the municipal level, the workshop delved into a spectrum of solutions to local challenges.

The workshop's agenda covered the region's specific challenges, such as water scarcity and traffic jams, alongside broader cross-regional concerns like the electricity crisis and waste management. Through collaborative discussions and brainstorming sessions, the participants engaged in crafting solutions tailored to the municipal landscape. One of the workshop's standout achievements was the formulation of actionable recommendation paper. These recommendations revolved around empowering municipalities to attract private sector investments and fostering a competitive environment in service delivery.

In addressing water-related challenges, the focus turned to local-level solutions, advocating for private sector involvement in water management and production. This included exploring avenues such as well drilling, seawater desalination, wastewater treatment, among others. For tackling traffic congestion, the proposed strategy emphasized collaborative efforts between municipalities, schools, and local businesses to optimize scheduling and minimize simultaneous pickups and deliveries. Additionally, initiatives were proposed to involve local businesses in infrastructure improvements, particularly in enhancing internal roads and sidewalks to enhance pedestrian traffic.

In response to the electricity crisis, participants advocated for diversifying energy sources, with a spotlight on renewable energy options. The recommendations also underscored the importance of enabling private electricity producers to compete within the existing infrastructure, utilizing both the local microgrid and the national grid for energy distribution. On the waste management front, decentralization emerged as a key theme, with an emphasis on fostering competition among multiple companies for waste collection, sorting, and treatment.

To ensure the practical implementation of these recommendations, a district committee was established at the conclusion of the workshop, tasked with overseeing and driving forward the suggested initiatives.

References
LIMS Media Interviews