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Since the announcement of the subsidy program in 2020, LIMS has been fighting back. Instead, LIMS has been suggesting a quasi-universal basic income (QUBI) paid to the population via cash cards. In June 2021, the government finally adopted the cash cards reform and submitted a draft to the parliament. If 75% of the population register for the cash card program, the cost in the first year will be $1.2 billion, instead of the $6 billion spent yearly on subsidies. This program will therefore cut public sector expenditures by $4.8 billion.
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Since the day subsidies were announced in 2020, LIMS started an extensive media campaign and gave over 100 interviews on ending the subsidy program and replacing it with cash cards. LIMS reached out to the Ministry of Economy and Trade in June 2020 and started working with the minister in-person on the cash cards alternative. In July 2020, the World Bank joined our working group with the ministry, and we were able to take advantage of their extensive international experience in setting up similar programs. On December 2020, the World Bank team involved in the discussion published a “Lebanon Subsidy Reform Note” arguing for the replacement of subsidies with a QUBI.
However, after the parliament adopts the cash card proposal, the fight will be over the funding source of the cash cards and the exit from subsidies. LIMS is already advising against using the remaining foreign reserves for funding. The risk of giving out cash cards based on political affiliation in a scheme to buy votes before the 2022 parliamentary elections is very high if the funding is local. The World Bank on the other hand is willing to unlock a $959 million loan that gained approval 5 years ago before it was frozen. This is only if the government can implement transparency in the way the program is managed. Transparency is key, especially since the Lebanese government has received a lot of international support and funding in the past years for various projects that have completely missed the mark.
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As for subsidies, they led to the scarcity of fuel, medication, and food products. Large quantities of subsidized items are finding their way across the borders and into the surrounding foreign markets to be sold at a premium. Local retailers are stocking up on such goods also, to sell them at a premium in the local black market or once subsidies end. LIMS has repeatedly called for the immediate lifting of subsidies.
LIMS Media Interviews:
- Worn Out Lebanon Seeking To Support Residents With Quasi-UBI, June 7, 2021: Anadol Agency, Article AR
- Exhausted Lebanon Tries To Salvage The Poorest Class With Cash Cards, June 8, 2021: Al Arab, Article AR
- The World Bank Proposes Reactivating Unimplemented Loans To Lebanon, June 21, 2021: Al Hurra, TV Interview AR
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A Quick and Effective Alternative to the Central Bank Subsidy Program
Tuesday May 25, 2021 at the Hilton Habtoor Hotel - Beirut
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LIMS organized a roundtable aimed at suggesting alternatives to the subsidies program. The conference gathered opinion leaders including 11 experts, 8 journalists, 7 academics, 6 think tank leaders, 5 businessmen and 4 speakers. Founder and Director of the Lebanon Crisis Observatory Dr. Nasser Yassine was the first speaker. He helped the Economic and Social Council draft a reform to the subsidy program that would find a consensus between representatives of political parties and concerned ministers. His presentation focused on the importance of removing subsidies progressively while making cash cards the replacement.
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Dr. Leila Dagher, the economic adviser to the prime minister and to the Minister of Economy in Lebanon was the second speaker. She presented the inefficiencies of the subsidy program and argued for their immediate replacement with cash cards ($50 per month for adults and $25 for children). Mrs. Haneen Sayed, lead specialist at the World Bank working on human development and social protection for the Middle East and North Africa region was the third speaker. Since the onset of the economic and financial crisis in Lebanon, she has been leading the World Bank’s social response to the crisis, including a large-scale emergency social safety net project. She explained that there are many lessons to be learned from the experiences of Jordan, India, and Iran who are going through several phases to remove subsidies. She also highlighted the importance of a QUBI and stressed on the challenges associated with the execution of such a program. Finally, Garabed Fakrajian, policy analyst at LIMS, presented a paper arguing for repealing subsidies entirely, immediately, and unconditionally, to allow market adjustments to take place and eliminate all shortages. He also recommended establishing a currency board to stabilize the Lebanese pound and stop inflation, along with deregulating the public transport sector, to allow for an alternative to private vehicles to develop.
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France Considering a Currency Board Solution for Lebanon
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France has been the frontrunner in the international community pushing for reforms and pledging aid to Lebanon. President Macron visited Lebanon twice in 2020 and the French initiative drew a roadmap to recovery. The plan stipulated the formation of a new government and a credible reform engagement as crucial requisites prior to any support. However, a political deadlock has prevented the formation of a new cabinet to tackle the crisis, thus pushing Lebanon to the brink of collapse. France has since considered altering its approach in the face of the political nonchalance and is reportedly exploring a currency board for Lebanon.
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LIMS hailed the French proposal as a solution that alleviates the economic crisis on the Lebanese people and slammed local decision-makers and economists for their lack of concern for such an urgent reform. LIMS explained that a currency board would stabilize the Lebanese pound and stop inflation immediately. This system would preserve the remaining purchasing power of the population enabling them to access their basic needs. The Lebanese central bank, Banque du Liban (BdL), still has a remaining $14 billion in reserves currently with 95,000 billion in LBP denominated liabilities (comprising of the currency in circulation and the LBP deposits at BdL). Those FX reserves can fully back the Lebanese pound and bring the exchange rate down from the current 17,000 LBP to the dollar black market rate. In as little as 30 days, a currency board can strengthen the LBP, ensure monetary stability indefinitely, and restore some of the lost purchasing power to LBP wage-earners.
With confidence in Lebanese politicians at an all-time-low, LIMS recommends establishing the currency board overseas, away from political disputes. LIMS believes that the monetary authority would operate better under a foreign jurisdiction. This is due to transparency and accountability laws, effectively decoupling the currency from local corruption and political disputes.
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LIMS Media Interviews:
- The French Initiative In Its Latest Form: Establishing A Currency Board, June 12, 2021: Al Jadeed, TV Interview AR
- Is The French’s Plan To Establish A Currency Board A Potential Solution To The Currency Crisis?, June 17, 2021: Marada, Article AR
- Can the French Proposal to Adopt a Currency Board in Lebanon Resolve the Currency Crisis?, June 18, 2021: Annahar, Article AR
- It Is Urgent To Lift Subsidies And Profit From France's Proposal To Establish A Currency Board, June 19, 2021: Radio Liban, Radio Interview AR
- France And Several European Countries Seeking To Assist The Lebanese Directly Following A Loss Of Trust In Politicians, June 23, 2021: Al Jadeed, TV Interview AR
- Squandering The Foreign Reserves Aggravated The Crisis, June 27, 2021: Ahwal Media, Article AR
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LLA 101 – Economic Foundations of Prosperity
June 12-13, 2021 at Le Commodore Hotel, Hamra - Beirut
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The 5th edition of the yearly LIMS Leaders’ Academy (LLA) was opened to prominent grassroots organizations working for change in Lebanon. 87 activists belonging to 42 different groups from across Lebanon gathered for a 2-day workshop. Many activists met for the first time and they all interacted and worked together.
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Day 1: Lectures and Workshops
In the first session, participants had the choice between 4 concurrent sessions tackling the following topics: (1) revitalizing infrastructure in the absence of government funding, (2) an alternative to the subsidy program, (3) educational policies in a free market economy, (4) reviving the banking sector in Lebanon. For the second session, activists who graduated from the 2020 edition presented their work to the new batch of participants and discussed the suggested reforms they developed in LLA 2020. This exercise helped activists expand their reach and meet people from across Lebanon, who shared their vision of change. Participants then gathered for a plenary session where 3 speakers debated the currency crisis in Lebanon and the ability of a currency board to address the problem. At the end of the first day, all attendees gathered in 1 room for the elevator pitch session. 33 participants took the stand one-by-one, presented a pressing matter they wished to address, and had just 1 minute to give their pitch.
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Day 2: Working Groups
The second day started with a speed exchange session, where participants introduced themselves to each other. Then, they suggested urgent economic challenges they wish to address, and from this activity, 10 working groups emerged. Activists who did not know each other the previous day, found themselves working together on topics of common interests. Facilitators helped them look for market-oriented solutions to those challenges. Groups then chose representatives to present their ideas for reforms. The highlight of the day was the session delivered by Director General of the Tender Board Dr. Jean Ellieh. He discussed the importance of conducting a forensic audit on public tenders. The session was very engaging and interactive. Moreover, the audience was enthusiastic to learn about the different schemes public officials use to go around the laws, to tender a contract for their cronies
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Devaluation Correlated With Loss of Foreign Exchange Reserves
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BdL launched “Sayrafa”, a new electronic platform intended to register foreign exchange transactions and reflect the market exchange rate of the Lebanese pound. Pundits were hoping the platform would stabilize the exchange rate. However, the Lebanese pound continued its devaluation on the black market, sharply diverging from the rate recorded on Sayrafa, despite the yearly remittances that flow into Lebanon. LIMS clarified that the disproportionate printing of money and the loss of trust in the local currency outdoes the impact of remittances. With or without Sayrafa, the pound will continue to lose value, as long as excessive printing of the currency continues.
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LIMS also added that a new variable came to play, which is the size of foreign exchange reserves held by the BdL. The continuous depletion of reserves erodes trust in the local currency and systematically leads to further devaluation. Despite that, the government does not seem to be doubling back on squandering the reserves. The required reserves threshold has yet again been lowered to subsidize imports, provide a treasury advance to the state-owned electricity company, and support the dollar withdrawals in accordance with BdL Circular 158. LIMS explained that as the BdL runs out of foreign currency backup, LBP holders will continue to lose their confidence in the monetary system. As a result, people will rush to convert their holdings into a safer and more stable store of value, namely the US dollar.
From this perspective, liquidating a fraction of Lebanon’s gold reserves deepens the problem as it further weakens trust in the local currency. If both foreign exchange and gold reserves are depleted, nothing will hold back the catastrophic collapse of the LBP. The only course of action to strengthen the currency once again is to raise the BdL reserves, not lower them, which is possible if lawmakers heed France’s revised initiative by establishing a currency board.
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LIMS Media Interviews:
- Remittances Not Enough To Halt The Economic Collapse, June 7, 2021: Janoubia, Article AR
- What Is Causing the Depreciation of The Lebanese Pound? Are There Any Solutions?, June 9, 2021: OTV, TV Interview AR
- The Dollar Exchanges At 15,000 LBP, What Is Causing The LBP Depreciation?, June 10, 2021: Al Jadeed, TV Interview AR
- New Cause For The Currency Collapse, June 12, 2021: Lirarate, Article AR
- New Basis To Strengthen The Lebanese Pound, June 15, 2021: Lebanon Economy Files, Article AR
- Will Lebanon Resort To Its Gold Reserves?, June 18, 2021: Independent Arabia, Article AR
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The Multiple Exchange Rate System Continues
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The State Shura Council, Lebanon’s highest administrative court, suspended the execution of Central Bank Circular 151 that allowed banks to return dollar deposits in Lebanese pounds (LBP) at the rate of 3,900 LBP to the dollar. However, after a meeting between the president of the republic, the central bank’s governor, and the president of the State Shura Council, it was decided that Circular 151 is still valid. LIMS explained that the council’s initial decision reasserts the right of depositors to access their deposits in the currency of denomination. This measure mandates banks to pay dollar account holders in US dollars. From this point forward, non-compliant banks would have had to deal with judicial lawsuits if the decision was maintained, most likely leading to an indictment of banks.
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In addition to continuing Circular 151, the central bank (also called Banque du Liban or BdL) has since issued Circular 158. This new circular gives the option for depositors, who opened dollar accounts before October 31, 2019, to withdrawal $800 per month. The withdrawal is divided into $400 in cash and the equivalent of $400 in LBP, at the exchange rate of 12,000 LBP to the dollar. LIMS highlighted that the funding source of the cash withdrawals remains unspecified and advised against using BdL’s required reserves for that purpose. LIMS also warned against printing more banknotes to finance the withdrawal of the LBP portion. LIMS predicts a depreciation of the LBP once the circular comes into effect, given the reduction of foreign exchange reserves and the increase in currency in circulation.
LIMS Media Interviews:
- State Shura Council Annuls Central Bank Circular 151, June 1, 2021: Al Jadeed, TV Interview AR
- State Shura Council’s Decision Concerning Banks, June 4, 2021: Safir Al Chamal, Article AR
- Did The Central Bank Issue Its Own Capital Control Law?, June 5, 2021: Independent Arabia, Article AR
- How Did The Monetary Crisis Revive The Productive Sectors In Lebanon, June 5, 2021: OTV, TV Interview AR
- Exchange Rate With The Imminent Lift Of Subsidies And The Dwindling Reserves, June 6, 2021: Annahar, Article AR
- Capital Control Law Lacks Funding, June 8, 2021: Annahar TV, TV Interview AR
- Circular 158, Pre-Oct ’19 And Post-Oct ’19 Dollars No Longer Identical, June 10, 2021: Janoubia, Article AR
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Debt Monetization Continues
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According to the World Bank, Lebanon’s GDP fell 20% in the year 2020 and is projected to shrink by another 7% in 2021, pushing the country into a deeper recession. Meanwhile, residents have lost their purchasing power as the Lebanese pound continues to depreciate, and 55% of the population are now beneath the poverty threshold. LIMS pointed out that in the face of crisis, the government remains reluctant to enact reforms. Instead, officials are simply resorting to debt monetization, while disregarding the implications on the economy and society. The currency will devaluate indefinitely if the practice of excessive money printing is not revoked. Lebanon’s human capital flight will continue, culminating in an inevitable societal explosion. Demands to increase wages became prevalent so that employees could cope with the projected surge in prices. LIMS warned against such a reckless proposition, saying that in the current circumstances, the government could only increase wages by printing more money. Furthermore, public institutions must first eliminate overstaffing and wasteful spending. Only after increasing productivity can a wage increase happen, as to not prompt further inflation.
- What The Lebanese Must Know Concerning The Imminent Collapse, June 9, 2021: Lebanon Economy Files, Article AR
- The Crisis And Inflation Eating Away At Wages, June 21, 2021: MTV, TV Interview AR
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Public Monopolies Holding Economy Back
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Following decades of mismanagement, government electricity is on for merely one hour a day in Lebanon. To avoid a total blackout, Lebanon’s president requested Banque du Liban (BdL) to grant a loan to the government to purchase fuel for the power plants. LIMS considered this a perpetuation of the same policies that wrecked the sector, by continuously wasting public funds or accruing debt on an inefficient monopoly. The issue is twofold. On the one hand, the state-owned Electricité du Liban is unable to provide electricity around the clock, due to a lack of fuel to operate the power stations. On the other hand, the rampant carelessness of the company saw it run on a large yearly loss that restricts the ability to secure the required fuel for power plant use.
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LIMS placed the deficit on the high costs of corrupt contracts, overstaffing, the rent of power ships, and on the low revenues due to the 40% waste on the total production, the inefficient invoice collection, and the subsidized billing rate.
Plans to build new power plants or switch existing ones to natural gas are outdated solutions now. The electricity crisis can only be fixed through market competition, decentralization, and solar energy. Recent technological advancements have made solar panels and lithium storage batteries cheaper than ever. Production and storage costs of solar have reduced to 6-9 cents per kWh compared to the current 26 cents per kWh cost of electricity in Lebanon.
The repercussions of the frail electricity coverage are reflected in the underperforming industrial and agricultural sectors, both heavily dependent on a reliable power grid. LIMS also pointed out that even broadband internet and data services are constrained by the state monopoly OGERO. Subscribers to the company have internet speed that is notoriously expensive and slow. Poor internet connection has always been the Achilles heel to a potentially thriving tech sector thanks to the lauded local human capital. Similar to the electricity industry, telecommunications would also benefit from enhanced market competition. Such a move would ensure better and cheaper services that can serve the domestic economy.
LIMS Media Interviews:
- Competition In The Electricity Sector Paves The Way Towards Renewables, June 15, 2021: IWISH TV, TV Interview AR
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