LIMS explained that the government was unable to produce a balanced budget, despite outrageous increases in tariffs and taxes, defaulting on the payment of the Eurobond debt, and not accounting for the expected losses from the national electricity company. The deficit will be financed through inflation and currency devaluation since the government is unable to access debt financing. 

LIMS described the draft budget as wishful thinking, for it understates expenses and overstates revenues. The government seeks to increase total revenue by almost 3-fold, from 13.6 trillion LBP in 2019 to 39.15 trillion in 2022, betting on additional tariffs and tax hikes. However, in a country already going through a gruesome economic crisis, increasing import tariffs will hurt consumers and businesses. Consumers will end up paying higher prices, while many businesses will end up relocating overseas, shutting down completely, or resort to evading customs. This would result in a much larger than anticipated deficit. 

With an exhausted population unable to withstand any additional tax burdens, LIMS proposed lowering taxes to support struggling local businesses, and repealing customs entirely, so that Lebanon could compete with other more attractive destinations for doing business. The government should pursue fiscal discipline through lowering the needless expenses, rather than raising taxes during a recession. Balancing the budget is now more crucial than ever because any deficit would be funded through inflation that disproportionately impacts the poor.

LIMS pointed out that the continued plummeting of the LBP is due to an erratic monetary policy. The past 2 years saw an increase of currency in circulation from 6,000 billion LBP in late 2019, to 42,000 billion LBP at the outset of 2022. Authorities printed money to cover the government deficit and commercial banks’ losses, rather than passing reforms. Moreover, the transition to a floating exchange rate is also driving the LBP’s volatility given the permanent political, social, diplomatic, and security matters. 

Since the beginning of the crisis, Lebanese banks started applying capital controls on the dollars deposited prior to October 2019, also called “old dollars”. Old dollars can only be withdrawn in LBP at an exchange rate set by the central bank, lower than that of the market rate, and financed through increasing the money supply. LIMS clarified that the LBP’s devaluation in the first half of January to 33,000 LBP to the dollar was fueled by the central bank’s decision to raise the exchange rate of old dollar withdrawals from 3,900 to 8,000 LBP to the dollar. It was also the central bank’s intervention through Circular 161 that brought the exchange rate down to 21,000 LBP to the dollar. However, the drop was achieved at the expense of the FX reserves, thus increasing the central bank’s losses, and exacerbating the banking crisis. 

LIMS restated that only a currency board can ensure long-lasting monetary stability in as little as 30 days. Due to its strict, rule-based monetary arrangement and full reserve system, a currency board guarantees a fixed exchange rate indefinitely. 

Therefore, LIMS suggested to use the pre-election period to push for important reforms that could become popular and gain support. Specifically, having succumbed to pressure from the international community that demanded transparency, the Lebanese parliament ratified a new Public Procurement Law that expanded the scope of work of the Tender Board (now renamed the Public Procurement Authority) to cover all public tenders. This reform, if implemented properly, could place checks on public spending and on electricity tenders contributing to 2 of the 4 IMF axes. 

Effective in 5 months, former employees of the Tender Board will be kept in their ranks at the new Public Procurement Authority, except for Dr. Jean Ellieh, who was made the acting director—rather than permanent director. However, the new law has some holes, as the government now has the authority to replace the acting director at will and to discretionally select members of the Public Procurement Authority, tasked with monitoring the government itself. In the face of this blatant conflict of interest, LIMS called for reinstating Dr. Ellieh as permanent director, given his proven record of upholding the law. Additionally, LIMS suggested amending the Public Procurement Law to ensure independence of the supervisory body from the government, and that employees be selected based on merit, not nepotism.