March 2023

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March 2023, N°65
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Here's How We Made a Lasting Impact in March 2023

Proposal to Transfer State-Owned Enterprises to Private Management Sparks Controversy

Lebanon is currently exploring the possibility of establishing an independent institution to manage government assets in conjunction with the private sector, sparking debate among the country's citizens. Proponents argue that such a move would optimize asset performance, increase revenue, and facilitate the reimbursement of depositors who have suffered losses. However, critics have decried the proposal, characterizing it as "selling the nation's assets" and warning that it would only serve to benefit the wealthy at the expense of future generations and the poor.

LIMS explained that the proposed plan is not tantamount to selling off national assets but rather aims to enhance their value. State-owned enterprises (SOEs) could be transferred to private sector management without losing their status as part of Lebanon's national wealth. The crucial question is whether these assets are currently serving the needs of the Lebanese population. In reality, SOEs are currently delivering a bad service to the population and inflicting a debt burden on future generations.

LIMS supports the concept of transferring SOEs to private ownership or management. However, such models have been subject to cronyism, high costs, and poor service provision in Lebanon in the past. Therefore, LIMS advocates for separation between SOEs and the sectors in which they operate and argues for opening the sectors to competition. For example, the public sector could retain ownership of the national electricity company, EDL, while private firms could be invited to compete with EDL in electricity. The same principle applies in telecommunication, air transportation, casino, tobacco, etc.

Lebanon has experimented with different economic models, and those based on competition between public and private institutions, or exclusively among private companies, have generally delivered outcomes better than public monopolies, private monopolies and Public-Private- Partnership monopolies. Competition is a crucial driver of productivity and efficiency, prompting businesses to innovate, lower costs, and improve quality to attract customers.

Lebanon's Energy Crisis: Doubts Over The Ministry’s Claim

The Minister of Energy and Water has confirmed that the recent request for a $300 million loan, in exchange for a guarantee of four hours of power supply, will be the last of its kind. The Ministry claims that it will be able to finance future fuel purchases using the funds collected from electricity bills, especially since bills are now issued in Lebanese pounds at a near black-market exchange rate, following the recent adjustments and dollarization of electricity prices.

However, LIMS has expressed doubts regarding the Ministry of Energy's claims, citing technical losses and electricity theft as factors that will likely require another loan after the six-month period expires. Despite the high prices of electricity bills, the issue is likely to persist due to ineffective bill collection processes.

LIMS suggested a solution by highlighting the example of Toula, a town in northern Lebanon that resolved its electricity problem through a private initiative that established a solar farm. Toula serves as an excellent role model for resolving the energy crisis in Lebanon.

Import Tariffs Benefit Smugglers, Not the Government

The caretaker finance minister has announced a significant increase in the exchange rate used to calculate import tariffs in a bid to bolster government revenues. The new calculation, which has tripled the previous rate from 15,000 Lebanese pounds (LBP) per dollar to 45,000 LBP per dollar, marks the second adjustment to import tariffs within the past year. In late 2022, the official rate was changed from 1,507.5 LBP to the dollar to 15,000 LBP to the dollar.

The government cited its intention to raise wages and pensions in response to inflation as the rationale for this latest move. According to LIMS, this measure is likely to benefit smugglers and encourage customs evasion, rather than delivering the intended boost to government revenues. Legitimate businesses which comply with their customs obligations would be penalized and made less competitive than those engaging in smuggling and customs evasion. LIMS warned that raising exchange rates on imports without implementing reforms to customs procedures could push honest businesses out of the market and further exacerbate the country's recession.

LIMS added that this measure is unlikely to generate sufficient revenue to support the proposed salary increase. As a result, the government will end up borrowing more from the central bank, further exacerbating hyperinflation and devaluation of the Lebanese pound.

While acknowledging the need to unify exchange rates and bring them closer to market levels for import tariffs, LIMS has emphasized the importance of accompanying this move with broader customs reform. LIMS argued for shifting away from the current system towards a flat tariff rate of 2.5% on all imported goods. By implementing such a reform, the government would discourage customs evasion and expand the tariff base, thus generating additional revenue.

IMF Warns Government to Quit Borrowing from Central Bank

The International Monetary Fund (IMF) issued a warning that Lebanon is in a precarious state, a year after committing to reforms that have yet to be put into action. The warning emphasized that the Lebanese government should refrain from borrowing from the central bank. LIMS highlighted that the same day of the IMF’s warning, the government decided to borrow additional funds from the central bank at odds with the IMF's recommendations.

Those funds would be used to increase public sector salaries fueling the wages-inflation cycle. Despite the government's claim of seeking an accord with the IMF, no serious actions have been executed. LIMS believes that it is not in the interest of the decision maker to move forward with the agreement yet. They prefer to expend the remaining 9 billion dollars of foreign exchange reserves without transparency or oversight. Once these funds are exhausted, the final agreement may come into effect.

In order to break this downward trajectory, LIMS argued that Lebanon should freeze foreign exchange reserves, and return them to the depositors. Only then the government would be inclined to seriously pursue the deal with the IMF and start making significant reforms in Lebanon. As long as the central bank still has money, the government will continue its spending spree without any appropriate reform plan in place.

Currency’s Deterioration Creates Worry and Confusion

The Lebanese pound (LBP) witnessed excessive volatility in dropping to 143,000 LBP to the dollar before regaining some ground to 95,000 LBP to the dollar, after the central bank’s announced that it would start selling the local currency at 90,000 LBP to the dollar, on the Sayrafa currency exchange platform. Some voices started blaming money exchanges accusing them of manipulating the currency to make profits at the expense of everyone else and argued for restricting money exchange operations to banks

LIMS showed that currency devaluation is the main reason behind poverty in Lebanon. The collapse of purchasing power had a significant impact on people's ability to afford basic necessities, which has led to lifestyle changes. Therefore, the poverty rate doubled from 40% pre-crisis to nearly 80% today. However, blaming money changers for raising the exchange rate is counterproductive a scapegoat tactic. The continuous currency devaluation is due to the incessant increase of the currency in circulation. The uncertainty surrounding the central bank governor's end of term, the ongoing banking crisis, and the long-term bank strike also fueled the devaluation given the loss of trust. As for restricting money exchange to banks, it would reduce competition and liquidity in the foreign exchange market leading to higher transaction costs for every operation.

LIMS added the appreciation of the Lebanese pound in the second half of the month is due to the central bank’s intervention deciding to buy Lebanese pounds for LBP90,000 to the dollar at the sayrafa platform. Since the central bank is using banks dollar deposits as foreign exchange reserves, this intervention would lead to further bank losses and eventually higher haircut on depositors.

To put a stop to the dramatic deterioration of the LBP, LIMS suggested that the first step should be to halt the printing of more money. This could be accomplished either through passing a law to prohibit the pumping of more LBP into the market or by the central bank change of policy. Additionally, the central bank should refrain from using foreign currency reserves. Failure to take these steps will result in continued sharp fluctuations in the exchange rate and the further devaluation of the LBP.

Dollarization Gains Ground Amidst Currency Volatility and Public Sector Strikes

The Ministry of Economy has decided to adopt a policy of dollarizing prices for supermarkets, given the national currency's volatility and the need to protect consumers and merchants. Despite this move, the public remains apprehensive about the process. Concurrently, public-sector employees have extended their strike, calling for the dollarization of their salaries in order to insulate themselves from further currency devaluation.

According to LIMS, the Lebanese pound (LBP) is now rarely used as a store of value and is only employed as a medium of exchange. Many Lebanese citizens prefer to carry US dollars, only converting them to LBPs for use in supermarkets, gas stations, restaurants, and shops. However, these businesses often convert the LBP back into US dollars due to a lack of trust in the LBP's value. This cycle of currency conversion is costly and indicative of the pervasive lack of confidence in the LBP. Dollarization should be expanded to include other sectors, such as gas prices and hospitals. By setting prices for these services in Lebanese pounds, gas stations and hospitals could be compelled to cease operations each time the Lebanese pound is devalued.

On the other hand, LIMS warned of the risks of wage-price inflation spirals and insisted that no increase in public sector salaries should occur until the sector undergoes restructuring, given its high number of employees and low productivity. However, dollarizing wages would enforce a certain level of discipline upon the government, which is unable to print dollars and would thus be required to address its fiscal deficit before granting raises.

To achieve a more comprehensive dollarization, one approach would be to convert all contracts from LBP to USD, withdraw the LBP from circulation, and replace it with dollars. Alternatively, a currency board could be implemented, with all prices and contracts retained in Lebanese pounds while 100% of the currency in circulation is backed by USD reserves.

Depositors and Banks Face Huge Crisis in Cash-Strapped Lebanon

Lebanese banks have resumed their open strike and concerns about the total collapse of the banking sector started to arise. LIMS explained that the banking system holds $84 billion in the central bank, which are depositors’ funds. As long as the central bank is unable to return the money in dollars to banks, the sector will have a solvency problem and will be unable to pay depositors. Banks also face liquidity problem since they hold $4.1 billion in correspondent banks, but they owe $4.3 billion.

LIMS added that banks are hoping for a capital control law to shield them against depositors’ lawsuits, but the Lebanese government is currently a caretaker government, and the parliament is unlikely to legislate laws given the presidential void. Restructuring the banking sector is also on the table, with talks about reducing the number of Lebanese banks from 50 to approximately 10 banks. This would mean that 80% of the banks would disappear.

LIMS highlighted that over the past three years, significant resources have been expended while debating how to distribute losses in the financial system between banks depositors and the government. Meanwhile, a depletion of the central bank foreign exchange reserves was taking place from $30 billion to $10 billion, and 60% of the GDP in USD has disappeared. Out of $93 billion of depositors' funds, only $10 billion remain, and the focus of the discussions has been on how to distribute the $80 billion that was lost, rather than how to preserve and return the remaining funds to depositors. It is important to shift focus from distributing losses to distributing the remaining $10 billion cash and implementing measures to prevent further losses.
Unlike the slow banking resolution in Lebanon, the failure of three US banks was contained quickly to prevent contagion to other banks and transmission to the rest of the economy.

Addressing the Education Crisis in Lebanon: Independence for Public Schools

LIMS participated in two high-level meetings to address the education crisis in Lebanon. The first, held on March 8, 2023, was organized by the Loubnan Hawiyati Education Committee, and featured Member of Parliament Melhem Khalaf and MP Najat Aoun, alongside education experts. The second, sponsored by the Minister of Education and Higher Education, was organized by UCPEC Keserwan-Ftouh-Jbeil on March 30, 2023.

LIMS emphasized that the economic downturn and currency devaluation have led to a doubling of the poverty rate in Lebanon, making it difficult for parents to afford high tuition fees. Private schools have had to adjust by reducing tuition fees from around $2,500 per student to $700-$1000 per student today. However, schools are struggling to reduce costs related to electricity and internet, and have adjusted teachers' salaries to retain staff. Despite the crisis, parents still prefer to enroll their children in paid private schools (67%) rather than free public schools (33%). This trend is not due to a lack of resources in public schools, where the average student cost to the government is around $2,000.

LIMS argued that the ongoing public school teacher strike, which seeks a wage increase, is misguided and would only exacerbate hyperinflation and currency devaluation. The solution lies in granting public schools more financial and administrative independence, enabling them to reduce costs and diversify their sources of income.

LIMS Addresses Economic Crisis in Lebanon at Arab Society for Social Security Meeting

On March 9, 2023, LIMS addressed the Arab Society for Social Security about Lebanon's ongoing currency crisis. LIMS highlighted the country's increasing money supply as the root cause of the collapse of the Lebanese pound (LBP) and criticized the managed float exchange rate regime for leading to further currency devaluation and inflation.

The money supply increase stems from two factors: financing the fiscal deficit and addressing the banking crisis. Despite the government's attempts to increase taxes, its income is decreasing, making borrowing from international financial markets difficult after the default of the payment of Eurobonds. Additionally, the central bank borrowed billions of dollars from commercial banks, but most of the money was lost, leading the central bank to reimburse its debt to banks in LBP by increasing the money supply.

LIMS emphasized the urgent need to halt money printing, reform fiscal policy, and reduce government expenditures. Furthermore, opening the banking sector to competition is critical for addressing the banking crisis and stabilizing the economy.

References
LIMS Media Interviews