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On November 1, 2022, the Ministry of Energy and Water decided to increase electricity prices for the first time since the 1990s, from an average of 0.5 cents per kilowatt hour (kWh) to 10 cents per kWh for the first 100 kWhs consumed. Everything above that is to be priced at 27 cents per kWh. The motive behind the price increase is to unlock a World Bank loan that would be used to import electricity from Jordan and gas from Egypt to reach around 8-10 hours of daily power. To illustrate, EDL, the national electricity company, has only been providing Lebanon with an average of 2-3 hours of electricity per day for the past year. In mid-November, news came out that the government will use the remaining $300 million of the $1.135 billion in Special Drawing Rights (SDR) funds received from the International Monetary Fund to start importing gas and electricity.
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LIMS explained that increasing electricity prices is not enough to obtain the World Bank loan. Lebanon should appoint the power sector regulatory body to allow oversight before any funding can happen. However, the Ministry of Energy and Water wants to maintain its grip over the sector without any accountability or supervision and refuses to create the regulatory body. Therefore, the ministry prefers to use SDR money instead. On the other hand, even if the funding is obtained, EDL will be unable to increase the electricity supply for a long time, as the business’ costs will much exceed its revenues, even with the price hike. EDL’s stated breakeven cost is around 30 cents per kWh. However, when technical and non-technical losses are taken into consideration, the costs amount to around 50 cents per kWh. Therefore, the new price will not be enough to foot the import bill.
LIMS argued for transferring electricity licensing to the local level. Toula, a town in the Zgharta region for instance, was able to provide its 200 households with 24 hours of electricity per day through coupling a solar farm with private generators. Privately managed by the church, the solar farm uses the microgrid of the private generator to channel electricity to households. However, during times when the area has no sunlight, private generators are only utilized. Municipalities can learn from Toula’s example, attract investors in renewable energy and facilitate its distribution through the local microgrid. This solution can help them bypass EDL and provide electricity to their households.
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LIMS Media Interviews:
- Economic Expert: Solve Electricity Problem Without The Depositors' Dollars, November 13, 2022: Lebanon Debate, Article AR
- Electricity In Lebanon Trapped Between World Bank’s Conditions And Iranian Territorial Route, November 14, 2022: Independent Arabia, Article AR
- Extra Feeding Hours, But You Won't Be Able To Pay The Bills...And For Public Sector Employees: Say Goodbye To Your Salary Increase Soon! November 18, 2022: Lebanon On, Article AR
- Lebanon Generates Solar Energy Through Residents’ Initiatives: An Alternative Energy Source For A Lost Country, November 24, 2022: Legal Agenda, Article AR
- Exclusive On Electricity: Government Chose Easiest Way, i.e. The Rest Of The Depositors' Money, November 27, 2022: Beirut 24, Article AR
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Official Devaluation of the Currency and Debate over Capital Controls
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Starting on February 1, the Lebanese pound will be officially devalued by 90%, from 1,500 to 15,000 Lebanese pounds (LBP) for each dollar. Despite the large devaluation, the new rate will not reflect reality since the dollar is traded at 40,000 LBP on the black market. The official devaluation will impact depositors that placed their dollars at the bank before October 2019. Currently, they are only allowed to make withdrawals in LBP at unfair exchange rates of 8,000 or 12,000 LBP up to a certain monthly limit (typically the first $400) and at the official 1,500 LBP for amounts beyond that limit. This multiple exchange rate scheme has led to a haircut of 70% to 96% on withdrawals.
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LIMS explained that increasing the withdrawal rate to 15,000 LBP will give depositors the impression that they are receiving a larger amount and a lower haircut. Yet, in reality, these withdrawals come from expanding the money supply. In turn, this will only lead to further LBP depreciation on the black market, widening the gap with the official rate.
Such a multiple exchange rate regime is applied because banks have imposed capital controls on their clients. Depositors have the chance to recover part of their money, only if they accept the unfair exchange rates. At present, the Lebanese parliament is studying a capital control proposal to unify the conditions and limit the discretion of banks. The main articles subject to debates concern the scope of the exceptions to capital controls and the special committee that would oversee it. LIMS clarified that capital control measures are supposed to be temporary—a policy that should have been in place 3 years ago at the start of the banking crisis. However, the current law is being treated as a goal by itself, not a means to an end. Moreover, the law is not aiming to protect depositors’ rights. In fact, it is legalizing the current banks practices, barring depositors from accessing their funds, while giving the government and central bank the authority to spend said funds. Unfortunately, the central bank and government have wasted around $20 billion of the originally $30 billion in reserves at the central bank and under capital controls they will consume the rest.
LIMS Media Interviews:
- Mardini To LebTalks: The Capital Control Does Not Protect Lebanese Deposits, November 8, 2022: Lebtalks, Article AR
- Exchange Rate Of 15K For Withdrawals, If Implemented Soon, Will The Situation Improve Or Deteriorate Further? November 8, 2022: MTV, TV Interview AR
- It Is Unfair To Hold The Depositor Responsible For The Losses And Consequences That The Monetary Crisis Has Reached And To Protect The Government And Banque Du Liban, November 8, 2022: VDL, Radio Interview AR
- Capital Control On The Joint Committees’ Table Again, November 26, 2022: VDL, Radio Interview AR
- New Capital Control: Confiscation Of Depositors' Remaining Dollars, November 28, 2022: Al Joumhouriya, Article AR
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Taxes on Dollar-Denominated Salaries Amid Currency Devaluation
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The Ministry of Finance issued, and later retracted, a statement about taxes for salaries denominated in US dollars. They will be paid after converting the salary to Lebanese pounds (LBP) using the central bank’s Sayrafa exchange rate platform—currently 30,300 LBP to the dollar— instead of the much lower official rate of 1,515 LBP.
LIMS explained that the tax brackets were modified in the 2022 budget, but not sufficiently enough to keep up with the LBP’s devaluation. The devalued exchange rate used to convert the salaries from LBP to US dollars will put taxpayers at a higher tax bracket without any actual increase in their income. Those higher implicit taxes will burden the already struggling residents and lead to a hike in tax evasion. Consequently, this will only motivate skilled workers to seek alternatives abroad. The same applies for tax exemptions and refunds. For example, the 7.5 million LBP exemption was worth $5,000 prior to the crisis. Yet now, the updated 37.5 million LBP exemption is worth around $1,200 at the Sayrafa rate.
LIMS argued for tax reform rather than tax increases. A much more efficient and less burdening system would be to repeal the progressive income tax and replace it with a flat rate. This reform would make tax evasion less desirable and allow skilled workers to keep a larger portion of their income, in turn helping retain talented workers within the country. Higher taxes will only delay recovery, deepen poverty, and further the economic collapse. Poverty rates have exceeded 80% and the currency has lost more than 95% on its value since the beginning of the crisis. Consequently, families have been struggling to keep food on the table
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LIMS Media Interviews:
- Lebanon...A Fragile Economy Reflects Chaos In The Street, November 29, 2022: Ronahi, Article AR
- Following The Decision Of The Minister Of Finance…How Much Will Payroll Taxes Be Worth? November 30, 2022: Beirut24, TV Interview AR
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Tenets Behind the Currency’s Devaluation Remain Present in Lebanon
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For the past three years, the Lebanese pound (LBP) has been depreciating, surpassing 40,000 LBP to the dollar throughout November. The currency devaluation continues despite the maritime border with Israel and the rumors about Lebanon possibly become an oil producer.
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LIMS explained that the maritime border deal created a positive climate that should have led to an appreciation of the LBP. However, the central bank stepped in, pumping 25 trillion LBP to purchase $418 million from the market. The increase of currency in circulation by 20% in less than a month explains the depreciation of the LBP. Then, after absorbing these dollars, the central bank reinjected parts of it in the market, which only resulted in a slight stabilization of the currency.
LIMS added that in the long run, the LBP will remain on a depreciating trend, given that the fiscal deficit and the banking crisis are both financed through increasing currency in circulation. Lebanon did not apply any monetary, fiscal, or banking reform since the beginning of the crisis in 2019 and resorted to shifting the burden of the crisis to the poorest via hyperinflation and currency devaluation.
LIMS Media Interviews:
- Decline In Domestic Products And Collapse Of Salaries...These Are The Most Affected By Lebanon’s Crisis! November 3, 2022: Leb Economy, Article AR
- Positive Indicators, The First Is The Demarcation Agreement, But The Reality Of The Dollar Is Negative...What Is The Reason? November 4, 2022: Annahar, Article AR
- After Both The Presidential And Government Vacancy...What Will The Next Lebanese Scene Look Like? November 4, 2022: Hawar News, Article AR
- Rise In The Dollar Exchange Rate On The Black Market…This Is What Was Recorded This Morning! November 5, 2022: Lb Mirror, Article AR
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Atlas Liberty Forum & Freedom Dinner
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LIMS attended Atlas Network’s annual Liberty Forum and Freedom Dinner in New York City from November 16 to 17, along with more than 500 activists and leaders from around the world. The event was a fantastic opportunity to meet organizations from across the globe, while sharing challenges and experiences on how to effectively advance market reforms. During the event, LIMS was presented with the award for the Investors Summit, which was won by the organization back in December of 2021.
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LIMS Wins the 2022 Smart Bets Impact Award
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LIMS was the winner of the 2022 Smart Bets Impact Award for the LIMS News and Opinion Website project. LIMS website was transformed into a platform that publishes daily economic news, analyses, and exclusive stories about Lebanon. A data section presenting key economic indicators of Lebanon in a user-friendly format was also included. The website appears 2nd on Google when people search for the central bank’s exchange rate platform (better known as Sayrafa) and visitors stay 9 minutes on average on the data section. Since the creation of the new website, Facebook reach, Twitter referral to website, and webmail referral to website tripled. The results presented won LIMS the prize this year, which comes with the responsibility to build and move forward with the website for the future.
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