May 2023

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May 2023, N°67
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Here's How We Made a Lasting Impact in May 2023

LIMS News and Opinion Website: WWW.LIMSLB.COM

LIMS organized a launching ceremony for its news and opinion website, www.limslb.com, which attracted 58 guests, including 33 journalists and 10 academics. This digital media uses social media channels to enhance reach. The project was made possible through the generous sponsorship of the Atlas Network, who recognized its potential and awarded it the Smart Bet Award.

During the event, Mr. Brad Lips, the CEO of the Atlas Network, drew attention to the staggering amount of misinformation and fake news that the global public currently faces. He emphasized the critical role of journalists in seeking the truth, particularly in economic matters where uncovering accurate information can be challenging due to government communication lacking transparency. Thus, the significance of this platform cannot be overstated, as it serves as a trustworthy source of credible economic information and analysis.

Ms. Kristelle Mardini, the COO of LIMS, highlighted some key features of the website, including the LIMS Exclusive section. This section publishes exclusive policy briefs in addition to simplified and easy-to-read papers that summarize key reports from institutions such as the Audit Bureau, the Central Inspection, and the Public Procurement Authority. These briefs also provide policy recommendations. Furthermore, the platform covers various news and analysis related to Lebanon's economic crisis and is designed to offer a customized experience for users.

Dr. Patrick Mardini, the CEO of LIMS, emphasized the importance of data-driven analyses. He utilized the platform's economic indicators to explain Lebanon's current economic situation and demonstrate how accurate data can disprove fake news. For instance, the devaluation of the exchange rate is not related to the trade deficit, contrary to common assumptions, but to increasing the money supply. Media professionals and researchers were encouraged to utilize the website extensively for news, data, and analysis in their reports on Lebanon's economy.

Overall, the launching ceremony of LIMS' news and opinion website marked an important milestone in combatting misinformation and providing reliable economic insights. With its user-friendly features, policy briefs, and data-driven approach, the platform aims to empower journalists, researchers, and the public alike in their pursuit of accurate information and informed discussions on Lebanon's economic landscape.

Click for Website Launching Ceremony Photo Album

Public-Private Partnerships in Lebanon: Challenges and Solutions

Public-private partnerships (PPPs) in Lebanon have encountered numerous challenges, raising concerns about irregularities and cronyism across various sectors. Recent developments in the management of postal services, maritime transport, and mechanical inspection underscore the limitations of these partnerships, prompting the need for enhanced competition and transparency.

LIMS explained that the attempt to outsource the management of postal services to a private company faced significant setbacks. The tender process was ultimately repealed as the sole bid received failed to meet the specified requirements. Notably, the current operator, Liban Post, was unable to participate due to a lack of revenue sharing with the government, as highlighted in the Audit Bureau's report.

LIMS also released a policy brief on the maritime transport sector that experienced a lack of competition, with only one bidder, CMA-CGM, vying for the tender. The control of maritime transport operations in Lebanon by CMA-CGM, including container terminals in Tripoli and Beirut, raises concerns about monopolistic tendencies.

Similarly, the issue of insufficient competition extends to the mechanical inspection sector as well. While efforts have been made to improve the tender process, the exclusive appointment of a single company to manage inspections would lead to long queues and inconveniences for vehicle owners. To address this issue, the ministry announced that more centers will be created. However, this solution would be costly and inefficient.

LIMS argued that Lebanon should consider a paradigm shift to foster healthy competition and benefit end users. In the case of postal services, instead of awarding the entire sector to a single company, the country should open the doors for multiple companies to enter and compete. Similarly, in the mechanical inspection sector, allowing licensed auto repair shops to perform inspections would introduce much-needed competition. Furthermore, Lebanon should embrace competition in maritime transportation by opening up all its ports, including Tyre, Saida, Jounieh, Batroun, and the rest. By encouraging competition in these sectors, Lebanon can ensure that end users receive improved services, increased options, and competitive pricing. The infusion of competition will drive innovation, efficiency, and accountability, benefiting both the public and the economy as a whole.

State-Owned Enterprises: Is the Sovereign Fund a Solution?

In the midst of the economic crisis, Lebanon is struggling to provide basic economic services to its population. Faced with mounting challenges, the idea of establishing a sovereign fund to manage state-owned enterprises (SOEs) has gained traction. Proponents of this approach argue that recruiting top private management will ensure good governance, transparency, financial viability, operational efficiency, and ultimately lead to improved service provision. While opponents of the sovereign fund argue that it may serve as a veiled scheme to sell off Lebanon's state asset.

LIMS explained that the primary objective of the proposed sovereign fund is to eliminate the losses incurred by SOEs and gradually phase out budgetary transfers, particularly within the energy sector. These are entities such as Electricity du Liban (EDL) and Ogero, the national internet provider. However, LIMS highlighted that the SOEs are not only state-owned companies, but also hold a monopoly over their respective sectors.

Regardless of whether the SOE’s are managed through a sovereign fund, a public-private partnership, or directly by the ministry, it is imperative to address the monopolistic control that these SOEs possess over essential sectors. This is particularly relevant considering Lebanon's current struggles with electricity outages, internet disruptions, and exorbitant costs. The introduction of competition in the electricity sector holds immense potential for Lebanon's manufacturing and agriculture areas. Similarly, introducing competition in the internet sector would have a transformative impact on businesses in sectors of telecommunications, e-commerce, and technology. Those reforms would attract domestic and foreign investments, contribute to the growth, foster innovation, and enhance Lebanon's competitiveness in the global landscape.

Customs Dollar Soars, Prompting Concerns over Price Hikes and Unfair Competition

The Lebanese government decided to raise the exchange rate used for calculating the price of imported goods for customs purposes, commonly known as the “customs dollar”. The rate has surged from 60,000 Lebanese pounds (LBP) to the US dollar to a staggering 86,000 pounds, marking the fourth increase in the past year in a desperate attempt to counter the relentless devaluation of the national currency. Under the revised calculation, the value-added tax imposed on imported goods is now based on the 86,000 LBP to USD rate as well. The exchange rate is established on the Sayrafa platform—an electronic exchange platform utilized by the central bank. This move aims to generate additional revenue to finance public sector salary increases.

LIMS pointed out that this development has raised concerns over the imminent surge in prices of imported goods. The extent of the price increase will largely depend on the specific customs rate applied to each item, with goods subjected to a 10% rate projected to witness a modest rise, while those subjected to a 50% rate are anticipated to bear a more substantial burden. This predicament has cast a long shadow over various productive sectors, most notably commerce and tourism, which heavily rely on imported goods.

LIMS added that augmenting customs rates and taxes only applies to law-abiding companies that dutifully declare their imported goods. This situation would inadvertently confer an unfair advantage to illegal entities engaged in customs evasion and smuggling. Consequently, this disparity impedes the ability of legitimate enterprises to effectively compete, ultimately driving them towards closure or prompting them to resort to tariff and tax evasion themselves. As a result, the "customs dollar" adjustment will have far-reaching consequences on unemployment and overall economic output, failing to generate the anticipated revenues required to fund the promised salary increases. This revenue shortfall will inevitably force the government to further rely on borrowing from Lebanon’s central bank, Banque du Liban, thereby compounding the financial losses of the central bank and exacerbating the already dire banking and currency crisis.

Suggesting a viable solution, LIMS advocates for the establishment of a flat customs tariff. As an example, a fixed low rate of 2% could be implemented without exceptions or exemptions, thereby offsetting the adverse effects of customs exchange rate hikes. Such a reform would serve as a deterrent to customs evasion, fostering fair competition among businesses and ensuring a level playing field for all actors in the marketplace.

Temporary Exchange Rate Stability Amid Impending Transition at Banque du Liban

The impending conclusion of Riad Salameh's tenure as the governor of Banque du Liban—the country’s central bank—marks a significant juncture for Lebanon's ailing economy. Having held the position for three decades and garnering accolades in the past, Salameh now finds himself under siege from various quarters. Widely regarded as a primary culprit behind the prevailing banking and economic crisis, he stands accused of employing intricate financial engineering maneuvers to conceal a Ponzi scheme, whereby he persuaded banks to deposit their clients' funds with the central bank, only for those funds to subsequently disappear. Furthermore, allegations of personally benefiting from certain money laundering operations tied to commissions generated from the sale of government securities have further tarnished Salameh's reputation. Nonetheless, the closing months of Salameh's mandate have witnessed a stability for the Lebanese pound exchange rate hovering around 93,000 Lebanese pounds (LBP) to the US dollar after three years of incessant devaluation.

According to LIMS, the present stability owes itself to the central bank's reduction of the Lebanese pounds in circulation to below 70 trillion, down from over 84 trillion at the commencement of the year. This reduction in money supply was achieved through the central bank's acquisition of LBP from the markets, further depleting its USD reserves in the process. However, LIMS posits that the growth of the money supply is expected to accelerate, resulting in further devaluation of the LBP for two key reasons. Firstly, the quantity of foreign exchange reserves remains limited, constraining the central bank's ability to intervene. Secondly, the surge in public sector employees' salaries lacks sufficient revenue backing, leading the government to resort to borrowing from the central bank. Such borrowing would only perpetuate the harmful wage-price spiral.

LIMS underscored the potential escalation of pressure and erosion of confidence in the Lebanese pound should uncertainties on the future of transitioning to a new central bank governor remain. The incoming governor must inspire trust in their capacity to curtail the unrestrained printing of Lebanese pounds and restrict the central bank's funding of the fiscal deficit. Financing the salary increments of the public sector by expanding the money supply will merely perpetuate the detrimental wage-price spiral, exacerbating the country's economic woes.

Lebanon's Potential Gray Listing by the Financial Action Task Force

Recent media reports have highlighted the looming possibility of Lebanon being placed on the gray list of countries subjected to special monitoring by the Financial Action Task Force (FATF). This development stems from concerns over inadequate measures taken by Lebanon to combat money laundering and terrorist financing.

According to analysis of LIMS, three key factors have contributed to the potential downgrade of Lebanon. Firstly, there has been a significant shift towards a cash-based economy, which makes it challenging to trace and monitor illegal financial transactions. Secondly, the lack of transparency regarding economic rights holders has raised suspicions and hampered efforts to combat illicit financial activities. Lastly, the non-cooperation of the judiciary in freezing assets and executing foreign judicial decisions has further undermined Lebanon's compliance with international standards.

LIMS added that if Lebanon were to be placed on the FATF gray list, it would result in more stringent financial controls and increased compliance costs for correspondent banks. This, in turn, would have a profound impact on the domestic market, leading to reduced transfers, heightened scrutiny of importers, and increased costs associated with financial transactions.

To mitigate the risk of gray listing, the central bank has taken steps such as initiating the implementation of digital wallets and exploring the possibility of licensing new online banks. These initiatives aim to demonstrate Lebanon's commitment to reducing the cash-based economy currently representing around 50% of Lebanon’s activity. This digital shift would allow greater transparency, facilitate financial inclusion, enable online and international transactions amidst the ongoing banking crisis, and enhance financial stability in the event of a bank failure. However, concerns about privacy arise as individuals value the confidentiality of their financial transactions. It is also important to differentiate between digital wallets and cryptocurrencies, as the former refers to a digital representation of fiat currency (e.g., digital Lebanese pound), whereas the latter encompasses decentralized digital currencies such as Bitcoin.

Despite the potential benefits, the Association of Banks in Lebanon (ABL) has expressed reservations about licensing electronic banks. LIMS argued that ABL fears competition as the new digital banks would function similarly to traditional banks but without physical branches. The entrance of new banks into the market will grant them a significant advantage over existing banks, as they will not be burdened by the current banking crisis and capital controls on their clients, thereby enhancing their competitive position. Therefore, the requirement of a substantial capital threshold of $50 million for launching electronic banks was set as a barrier to entry. LIMS argues that allowing new banks into the market would stimulate economic activity by attracting fresh dollar deposits and facilitating lending. Simultaneously, existing banks should undergo restructuring and resume their role in financial intermediation.

Can the US Federal Reserve's Hawkish Stance Stop International De-Dollarization?

The US Federal Reserve's recent decision to raise interest rates to their highest level since 2007 reflects mounting concerns over inflationary pressures. The implications of this move on global markets, as well as the responses from other central banks, are being scrutinized.

LIMS indicated that this increase underscores the Federal Reserve's commitment to curbing inflation. However, the task remains challenging, particularly in the face of the continuous increase in wages. The rise in interest rates presents its own set of challenges for banks, as it diminishes the value of their assets and amplifies borrowing costs. In the event of bank failures, authorities have demonstrated a clear commitment to liquidating banks while safeguarding deposits. The Fed believes in the ability of such a resolution to restrain contagion and halt the spread of a banking crises. However, this policy cannot shield the real economy from repercussions. LIMS foresees an impending economic slowdown as a consequence of escalated borrowing expenses. This development is expected to purge the market of businesses reliant solely on the availability of low-cost borrowing, thereby reallocating capital towards companies addressing more pressing demands. The prevailing market valuations appear overly optimistic, built upon unrealistic expectations of a decline in interest rates.

Addressing the risks of international de-dollarization, LIMS added that the US dollar continues to maintain its status as the primary reserve currency, with approximately 60% of international central bank reserves held in dollars. Despite some diversification away from the dollar, the overall impact on its global usage remains relatively limited. The interest rate hikes undertaken by the US demonstrate its ability to tackle inflation, albeit at the potential cost of economic recessions or banking crises. Such disciplined monetary policy, often rare in developing countries due to institutional weaknesses, can restore the appeal and attractiveness of the US dollar.

LIMS Leader’s Academy – LLA 101: Economic Foundations of Prosperity

LIMS organized two workshops on May 27 and May 28, 2023, in the cities of Beirut and Tripoli. The workshops delved into the pressing economic challenges currently plaguing Lebanon and shed light on the role that municipalities can play in revitalizing prosperity. Participants included reform-minded candidates preparing for the forthcoming municipal elections and activists seeking alternatives to traditional sectarian political parties.

Each workshop comprised three sessions. The first session concentrated on region-specific economic challenges such as local governance, encompassing political, security, and administrative interventions that impede the decision-making processes at the municipal level. Additionally, the underutilization of local assets, such as the ports in both Beirut and Tripoli, along with other commercial and historical areas, was addressed. The second session focused on tackling cross-regional economic challenges such as the prevalent electricity outages, the need for efficient waste management systems, and the increase in crime levels and insecurity. The third session served as an opportunity for the participants to collaboratively develop a set of recommendations. Moreover, a committee was appointed to disseminate these findings at the local level.

Key recommendations included (1) engaging in decentralization and granting further autonomy for municipalities, (2) highlighting and leveraging private initiatives to enhance the image of the regions, (3) collaborating with the private sector on the rehabilitation and operation of commercial, cultural, historical, and tourist attractions, (4) encouraging private investments in electricity and facilitating the integration with local microgrids or national power grids, (5) promoting competition in waste management and allowing for diverse pricing structures, (6) involving entrepreneurs in the development of innovative solutions for resolving transportation issues, and (7) the reinforcement of the rule of law at the municipal level.

These proposed ideas will undergo more comprehensive and detailed discussions in future workshops. The intention is to build upon the existing foundation, gathering additional insights and expertise.

May 27, 2023: Click for Beirut Workshop Photo Album

May 28, 2022: Click for Tripoli Workshop Photo Album

International Immigration Conference for the Development of Tripoli and the North

The conference took place on May 5 at the Beirut Arab University at the Tripoli branch, in collaboration with the Lebanese Businessmen of France (HALFA) and the Sunday Cultural Council. The session on enhancing the image of Tripoli and developing investment in local tourism was moderated by LIMS. The aim of the session was to address the negative perceptions of Tripoli in the media and devise strategies to make it more attractive to both local and international tourists. One of the main concerns raised during the session was the inclusion of Tripoli on the list of cities to avoid by several embassies, citing security risks. To counter this issue and showcase the true vibrancy of Tripoli as a welcoming destination, practical solutions were sought. Experts from diverse fields took the stage as speakers presenting innovative approaches to draw visitors to Tripoli.

LIMS Speaks about Lebanon’s Current Financial and Monetary Crisis at Conference

LIMS was invited as a keynote speaker to a conference organized by the Scientific Committee at the Order of Engineers and Architects in Tripoli on May 20.

LIMS showcased using charts a compelling correlation between the augmentation of currency in circulation (M0) and the subsequent devaluation of the Lebanese pound (LBP). Periods of exchange rate stability were consistently accompanied by a stable money supply. The data also revealed that the trade deficit did not exhibit a direct correlation with currency devaluation, indicating a distinct phenomenon plaguing Lebanon—a wage-price spiral. In an attempt to curb the effects of inflation, the government has resorted to salary increments. However, this course of action proves to be a mere double-edged sword as these wage increases are, in essence, funded through inflation itself. Meanwhile, the central bank finds itself grappling with substantial losses incurred from borrowing in USD from commercial banks to subsequently lend to the government in LBP. The central bank is now striving to offset these losses through an expansionary monetary policy, thereby engendering inflationary pressures.

LIMS recommended a series of measures to restore economic vitality. First and foremost, halting any additional money creation. Second, reducing taxes and curbing government spending to resuscitate the ailing economy. Furthermore, the need to prudently safeguard the remaining foreign exchange reserves held at the central bank was emphasized. The compelling opportunities at the local level were also highlighted, particularly in decentralized electricity production and waste management.

References
LIMS Media Interviews