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On October 1, highly controversial power barges belonging to the Turkish company Karadeniz, officially stopped supplying Lebanon with electricity, when the contract expired without renewal. The barges had been providing Lebanon’s national electricity company, Electricte du Liban (EDL), with electricity from 2013 until recently.
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For the past years, LIMS has been arguing against renting power barges. EDL had been supplying 2 hours of electricity per day with the help of barges and will continue to do so without them. EDL’s power plants are not running at full capacity. This is due to the company’s inability to generate enough income to buy fuel. With no fuel available, adding power plants on land and in water will not increase electricity supply. EDL’s selling price is around 1 cent per kilowatt-hour (kWh) compared to a cost above 25 cents per kWh. The selling price explains both the yearly losses of EDL and its inability to raise enough income to purchase fuel. As for generating energy, EDL has the capacity to supply more than the 12 hours of electricity per day in selected power plants at the cost of 13.93 cents/kWh, compared to the 2 hours per day at 13.99 cents/kWh of the now-departed power barges.
The 2013 contract signed with Karadeniz, did not go through the scrutiny of the Tender Board. Suspicions of kickbacks surfaced when the tender book was drafted in a way to exclude all but the winning company and the signed contract was considered overpriced, squandering billions of dollars of public funds. Later in 2019, the Ministry of Energy and Water tried to rent 2 additional power barges from the same company, by bypassing the Tender Board once more. LIMS was at the forefront of the opposition and contributed to stopping the deal from going through. LIMS insisted on having the ministry go through the Tender Board. Naturally, the Tender Board repealed the tender for the lack of competition and equal opportunity.
The political establishment in Lebanon, not used to scrutiny nor to checks and balances, started plotting against the Tender Board since that incident. They used a twisted scheme pretending to want to modernize the “public procurement law” with the help of the World Bank, while in reality their real intention has always been to get rid of the Tender Board and replace it with a rubber stamp.
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LIMS Media Interviews:
- EDL Seeking to Improve Electricity Coverage Following The Departure Of Turkish Power Barges, November 23, 2021: VDL, Radio Interview AR
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The New Public Procurement Authority: A Rubber Stamp
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During the past decades, 95% of public contracts escaped the scrutiny of the Tender Board as ministers and decision makers preferred to do unchecked public tenders. They used a loose interpretation of the law, pretending that the Tender Department’s jurisdiction is strictly limited to ministries and does apply to other government entities such as public funds, councils, bodies, government companies, etc. Then, decision makers used those unchecked entities to conduct most public tenders, which led to massive corruption in government contracts to a point where two famous Lebanese contractors ended up sanctioned by the United States for bribes and kickbacks. Had it been allowed to perform its tasks in all public tenders, the Tender Board could have curtailed corruption dramatically. LIMS has repeatedly commended the independence of the Tender Board and the integrity shown by its director, Dr. Jean Ellieh, who works conscientiously, despite all political pressures exerted on him.
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On June 30, the Lebanese parliament ratified a new public procurement law. The Tender Board was renamed the Public Procurement Authority (PPA) and was given a different mission. The PPA was stripped from the ability to conduct public tenders and the practice of doing the tenders in various governmental institutions as well as ministries became the norm in the new law. The PPA’s role was reduced to a supervisory body on all public procurement.
The new public procurement law especially targeted, Dr. Jean Ellieh, the honest director of the Tender Board, who stood up to malpractices in the conduct of public tenders. While all employees of the Tender Board were maintained at their ranks in the newly created PPA, Ellieh was the exception. He was made “acting” director (rather than permanent director) and his fate as head of the PPA now depends on the government’s decision. The government was tasked to appoint not only a director, but also the members of the PPA, who are supposed to monitor the work of the government itself! LIMS highlighted this flagrant conflict of interest and called for reforming the public procurement law to ensure the PPA’s independence from the government. LIMS also insisted on the importance of restoring Ellieh as permanent head of the PPA, given his proven record in guaranteeing proper scrutiny of public tenders.
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LIMS also weighed in on the ongoing forensic audit of Lebanon’s central bank and insisted that the scope of the audit must be expanded to encompass public tenders. The squandering of public funds occurred at the ministerial level. In fact, those ministries managed to hand public contracts to their cronies, to avoid going through the Tender Board. Excessive public contracts led to yearly budget deficits and an ever-growing public debt. In 2020, the government ended up defaulting on the payment of dollar denominated debt and resorted to printing Lebanese pounds to continue funding fiscal deficit, creating a major currency and banking crises. Therefore, LIMS concluded that any credible forensic audit should include public contracts. Furthermore, LIMS insisted on the importance of having an independent and transparent PPA, able to control future public expenditures.
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LIMS Media Interviews:
- Lebanon: Consequences Of The Economic Crisis And The Potential To Recover, November 12, 2021: Noon Post, Article AR
- Tender Department In The Clutches Of The Government, November 16, 2021: Al Joumhouriya, Article AR
- Alvarez & Marsal Threatens And Central Bank Governor Salameh Stalls, November 25, 2021: Al Taharri, Article AR
- GDP Down By Two Thirds In Two Years, November 27, 2021: Nidaa Al Watan, Article AR
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Currency Board Crucial to Bolster Lebanese Pound
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The minister of economy and trade declared that the real exchange rate should be around 10,000 to 12,000 Lebanese pounds (LBP) to the dollar and blamed mobile applications that track the black-market exchange rate for currency manipulation. Meanwhile, the exchange rate has been trading at 25,000 LBP to the dollar on the black market. LIMS insisted that exchange rate cannot be determined by a minister or even a governmental decree. The exchange rate obeys the market dynamics of supply and demand and mobile applications simply mirror the reality of the market. Following an eightfold increase of the currency in circulation in a 2-year span, it is only logical that the exchange rate sank to a new record low of 25,000 LBP to the dollar.
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For almost 3 decades, a pegged exchange rate of 1,500 Lebanese pounds (LBP) to the dollar kept the currency stable and allowed the economy to prosper. In late 2019 however, the peg collapsed and Lebanon moved to a floating exchange rate on both the central bank’s platform called Sayrafa, and the black market. LIMS explained that in countries as unstable as Lebanon, a floating exchange rate is unsuitable, because it falls prey to political, social, diplomatic, and security issues. Unstable countries need stable currencies that are independent from both internal and external shocks. Therefore, a currency board is the only solution to Lebanon’s monetary crisis. LIMS went on to distinguish between the old peg and a full-reserve monetary arrangement, such as a currency board. To illustrate, the old peg allowed the central bank to finance government expenditure creating a twin deficit problem and was maintained by the manipulation of interest rates to attract capital inflows. A currency board is neither allowed to finance the government, nor to conduct monetary policy; interest rates and money supply are determined by market forces.
The currency board proposal has received pushback from the government and banks. Instead of engaging in fiscal reforms, the government prefers to continue financing public expenditure through inflation and currency devaluation. Banks too, prefer to redeem their dollar deposits in LBP printed by the central bank, to cover the loss they made on lending to the public sector (the government and central bank). LIMS urged policymakers to establish a currency board immediately to save the purchasing power of all LBP-earners. Meanwhile, as the LBP continuously depreciates, LIMS expects more people to turn to harder currencies like the dollar, or even to cryptocurrencies like Bitcoin, despite their high volatility.
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LIMS Media Interviews:
- The Right To Protection From Inflation, November 1, 2021: TRT Arabic, TV Interview AR
- The Only Roadmap To Stabilize The Currency, November 1, 2021: Al Joumhouriya, Article AR
- The Exchange Rate In Light Of The Crisis Between Lebanon And The Gulf, November 2, 2021: Lebeconomy, Article AR
- This Is How The Lebanese Pound Can Reclaim Some Of Its Power Against The Dollar, November 4, 2021: Lebanon 24, Article AR
- Dr. Mardini: Floating Exchange Rate Must Be Dropped In Favor Of A New Monetary Arrangement, November 5, 2021: VDL News, Article AR
- Lebanon: In The Face Of Crisis, Bitcoin Is Gaining Ground, November 9, 2021: Middle East Eye, Article FR
- Dr. Mardini: IMF Negotiations Not A Substitute For Diplomatic Relations With The Gulf States, November 14, 2021: Al Jadeed, TV Interview AR
- Authorities And Banks Benefiting From The Monetary Collapse And Inflation, November 14, 2021: Leb Talks, Article AR
- What Are The Factors That Can Cause A New Collapse Of The Lebanese Pound? November 14, 2021: VDL News, Radio Interview AR
- 3 Steps To Boost The Income Of The Lebanese And Lower The Dollar Exchange Rate, November 14, 2021: Lebanon 24, Article AR
- Dr. Mardini: A Currency Board Fixes The Exchange Rate And Strengthens The Lebanese Pound, November 15, 2021: Janoubia, Article AR
- The Way To Improve Citizens’ Lives, November 21, 2021: Lebanon 24, Article AR
- What Is Behind The Collapse Of The Exchange Rate, November 24, 2021: OTV, TV Interview AR
- Lebanon Under A Floating Exchange Rate Since Late 2019, November 25, 2021: VDL News, Radio Interview AR
- What Awaits The Lebanon People, November 25, 2021: Al Kalima Online, Article AR
- No Reform is Possible Without A Stable Currency, November 25, 2021: MTV, TV Interview AR
- Currency Board Is Needed To Set Firm Economic Stability And Allow Growth, November 25, 2021: RLL, Radio Interview AR
- Important Facts About The Exchange Rate Hysteria, November 25, 2021: Lebeconomy, Article AR
- Only One Solution Can Halt The Collapse Of The Lebanese Pound, November 27, 2021: Tayyar.org, Article AR
- A Currency Board To Lay Solid Foundations For Economic Stability And Growth, November 30, 2021: VDL News, Radio Interview AR
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Lebanon Must Repeal Tariffs and Embrace Unilateral Free Trade
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The customs duty in Lebanon is still levied at the official rate of 1,500 Lebanese pounds (LBP) per US dollar. In a bid to increase public revenue, the government is aiming to adjust the exchange rate used for the customs duty in the 2022 general budget draft. The new rate should be at around 8,000 LBP to the dollar, which is lower than the 20,000 LBP to the dollar exchange rate of the Sayrafa platform and the 25,000 LBP to the dollar rate of the black market.
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LIMS commented on how the multitude of rates hurts the economy, as it complicates economic calculations and stressed on the importance of unifying all exchange rates. LIMS added that raising customs duty in the current crisis constitutes economic suicide. Businesses that rely on trade will close or move abroad, customs evasion will increase, and trade volume will shrink. With less entities paying tariffs, the government will end up with less revenues, reaching the exact opposite of the intended measure. Raising tariffs not only is a proven counter-productive policy, but it increases the economic burden on an already exhausted population. Businesses will transfer the tariff hikes onto the customers by increasing prices or end up laying off employees and shutting down completely, due to unprofitable costs of production.
Therefore, LIMS argued for unilateral free trade and called for the repeal of all tariffs and non-tariff barriers, saying that Lebanon would be better off without customs. Exports in Lebanon require 96 hours of border clearance, 48 hours to clear the needed paperwork, and a total fee of $580. Imports require 180 hours of border clearance, 72 hours to clear paperwork, and a total fee of $925. On the other hand, numerous countries completely repealed tariffs and are able clear export and import paperwork in as little as 1 and 12 hours respectively. Why would companies want to work in Lebanon, if in addition to the monetary, social, and political instability, they need to put up with additional burdens on trade?
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LIMS Media Interviews:
- 2022 Budget Draft: Increased Customs Duty Will Aggravate The Crisis, November 20, 2021: VDL, Radio Interview AR
- Raising Tariffs Negatively Impacts Economic Activity, November 27, 2021: Addiyar, Article AR
- Higher Customs Duty Bodes Ill For Lebanon, November 29, 2021: Independent Arabia, Article AR
- Raising Customs Duty Will Shut Down Businesses, November 30, 2021: Albachaer, Radio Interview AR
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Lebanon’s Isolation from the Gulf Terrible for Economy
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On October 29, following controversial statements by the Lebanese information minister, the Kingdom of Saudi Arabia (KSA) expelled the Lebanese ambassador and halted imports from Lebanon. The rest of the Gulf Cooperation Council (GCC) countries will reportedly follow suit.
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LIMS expressed a deep worry about the implications of the Gulf’s economic boycott on several levels. Firstly, Lebanon is set to lose some of its biggest export markets in KSA and the United Arab Emirates, valued respectively around $250 million and $550 million yearly. These 2 countries account for 23% of all Lebanese exports. Severed economic ties will especially reflect negatively on Lebanon’s industry and agriculture sectors that cannot rely on the local market to discharge their production. Businesses may end up relocating abroad to bypass the newly imposed export restrictions. Such a move would only add to the already high unemployment figures. Secondly, Lebanon will be deprived from Saudi investments in media outlets, hotels, and touristic attractions, among others. Thirdly, KSA’s financial support will be off the table, at a time when Lebanon desperately needs it. KSA had continuously supported Lebanon in the past to ensure that stability was preserved. One week prior to the diplomatic crisis, KSA transferred $3.2 billion and $5.3 billion to Pakistan and Egypt respectively to help stabilize their economy. In contrast, Lebanon is aiming for a $4 billion loan from the IMF on 4-year installments as a best-case scenario. Economic isolation of this magnitude will weaken the confidence in the Lebanese economy and drive away potential investors.
LIMS also highlighted that the ongoing tensions with the Gulf will ramp up the pressure on the exchange rate and lead to further devaluation of the Lebanese pound against the US dollar. With the central bank desperate to maintain the fragile monetary stability, the official Sayrafa exchange platform witnessed a 450% increase in daily trade volume from $1 million to $4.5 million. LIMS pointed out that the higher trade volume suggests that the central bank is injecting dollar liquidity from its FX reserves to try and match the increased demand and avoid a monetary collapse. However, this practice is unsustainable and threatens to destabilize the currency in the medium run. With all the ongoing crises, Lebanon cannot afford to lose its most important export markets, nor the capital inflow and investments from the Gulf. Therefore, LIMS has called for the immediate restoration of diplomatic ties with the GCC countries, to avoid further damages to an already exhausted economy.
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LIMS Media Interviews:
- DHL Halts Mail And Shipping From Lebanon To KSA, November 1, 2021: Al Modon, Article AR
- How Will The Arab Boycott Impact The Exchange Rate, November 2, 2021: Spot Shot, TV Interview AR
- How Dangerous Are Saudi Sanctions On The Economy, November 5, 2021: France 24 Arabic, TV Interview AR
- What Are The Repercussions Of The Diplomatic Crisis With KSA, November 6, 2021: Radio Liban, Radio Interview AR
- Central Bank Desperate To Avoid New Monetary Disaster, November 11, 2021: Lebanese Forces, Article AR
- Lebanon Misses Out On Financial Aid To Pakistan And Egypt, November 11, 2021: Leb Economy, Article AR
- Lebanese Losses From Export Ban To KSA, November 11, 2021: Al Majalla, Article AR
- Third Immigration Wave: Lebanese Desperate To Leave, November 18, 2021: VDL, Radio Interview AR
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Time to Lift Medical Subsidies
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After fuel subsidies were repealed in October, the Ministry of Public Health announced that medical subsidies will be lifted as well, with the exception of chronic disease medications. For over a year, LIMS campaigned for the repeal of the Central Bank Subsidy Program, and finally managed to have fuel subsidies lifted in October. This move ended months of fuel shortages that paralyzed the entire economy. LIMS welcomed the partial lifting of medical subsidies and continued to call for the total repeal of all medical subsidies to ensure their availability in the market, similar to what happened with fuel just a month ago. Lebanon wasted $1.2 billion in 2020 on medical subsidies, most of which went missing from the market. These sums ought to be handed directly to the patients rather than the retailers and drug distributors. Implementing this policy would eliminate all incentives of smuggling, and slow down the draining of what remains of the central bank’s FX reserves.
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LIMS Media Interviews:
- Government Repeats The Failed Fuel Experiment With Medicine And Expects Different Results, November 17, 2021: Nidaa Al Watan, Article AR
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