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Long lines at gas stations and empty shelves at pharmacies began to appear in Lebanon due to nationwide fuel and medicine shortages. LIMS argued that subsidies are responsible for shortages since they incentivize importers to re-export their products and sell them at a higher price abroad. Additionally, smugglers buy the goods from gas stations and pharmacies at the subsidized price to sell them overseas for fresh dollars. As a result, people who are already suffering from hyperinflation, must now deal with nearly empty shelves.
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To make matters worse, subsidies cost around 40,000 billion LBP per year, which is double the amount of annual government spending. However, since the program is administered by the central bank, the money is spent from outside the general budget and without parliamentary approval. Foreign currency reserves used to finance subsidies are dwindling down at alarming rates and depositors are slowly losing hope at any recovery of their life savings.
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The program has managed to stabilize the exchange rate at around 7,500 LBP to the dollar, since importers of subsided goods get their dollar from the central bank’s reserves, hence reducing the demand for dollars on the black market. However, such a move is too costly and the longer it lasts, the stronger the devaluation will be when the policy is revoked, meaning subsidies must be lifted sooner, rather than later.
In all actuality, the devaluation of the local currency remains the key component behind price hikes. Therefore, rather than wasting people’s deposits trying to address the consequences, the government should move beyond temporary solutions, by stopping the monetization of the debt. As for the period of transition out of subsidies, direct cash transfers would provide a more targeted and less costly support mechanism.
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LIMS Media Interviews:
- Fuel Queues Pave The Road To Hell, October 2, 2020: Independent Arabia, Article AR
- French Initiative Silently Fails, As Collapse Imminent, October 2, 2020: Al Majalla, Article AR
- Subsidies Lead To Smuggling, What Are The Alternatives, October 5, 2020: OTV, TV Interview AR
- Government Spends 40,000 Billion LBP Yearly From Outside The Budget, October 7, 2020: MTV, TV Interview AR
- Loopholes Exist In Subsidy Policy And Alternatives, October 8, 2020: Annahar TV, TV Interview AR
- Lebanon Should Adopt Effective Aid Mechanism Before Lifting Subsidies, October 9, 2020: Xinhuanet, Article EN
- Experts Warn Alternative Aid Program Necessary Before Lifting Subsidies, October 10, 2020: Alborsa News, Article AR
- Lebanon Faces Social Disaster As Reserves Evaporate And Subsidies Are Lifted, October 13, 2020: Al Jazeera, Article AR
- How To Effectively Transform The Subsidy Program, October 14, 2020: VDL, Radio Interview AR
- 60% Below Poverty Line, What’s The Alternative To Lifting Subsidies, October 25, 2020: Al Estiklal, Article AR
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Establishing Currency Board Would End Crisis
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In the midst of a severe economic, financial, and currency crisis, the central bank governor declared in a very controversial statement “the worst of the crisis is behind us”. LIMS clarified that the governor likely feels obliged to provide reassurance to the public, hoping to restore trust in the currency and the financial system. Yet, Lebanon has reached a stage where reassuring words can backfire, if not coupled with serious reforms. As the government and central bank persist in increasing the money supply to fund public debts and deficits, the Lebanese pound will continue to lose value.
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Adopting a currency board remains Lebanon’s last hope at monetary stability and economic growth. Such a system would end the discretionary policy that allows the central bank to print excessive quantities of cash and to waste foreign exchange reserves on subsidies. Furthermore, a currency board would also attract capital back to Lebanon, lower interest rates, reboot the economy, and increase foreign exchange reserves as well as government income. Carrying out this reform would open the door for other urgently needed policies such as cutting public spending, balancing the budget, dismantling the state’s monopolies, restructuring the banking sector, and allowing foreign banks to enter the market.
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LIMS Media Interviews:
- Lebanon’s Debt Ranks 3rd Worldwide, October 4, 2020: AlJadeed, TV Interview AR
- Printing Money Too Easy For The Government To Fund Its Expenses, October 5, 2020: MTV, TV Interview AR
- Crisis Did Not Reach Peak Yet, October 5, 2020: Nidaa Al Watan, Article AR
- Currency Devaluation To End When Money Printing Stops, October 6, 2020: LBC, TV Interview AR
- What Did Salameh Mean When He Said, “The Crisis Is Behind Us”, October 6, 2020: Safir Al Chamal, Article AR
- Worst Monetary Crisis In Lebanese History, A Currency Board Is The Solution, October 8, 2020: AlKalima Online, Article AR
- What’s A Currency Board, How It Operates And How It Stops Hyperinflation, October 20, 2020: Annahar TV, TV Interview AR
- Dr. Mardini Disagrees With Salameh, “The Crisis Will Peak When Subsidies Are Lifted”, October 23, 2020: Al Bayan, Article AR
- Lebanese Economy Hanging On The Edge, Is The Solution To Erase Zeros, October 23, 2020: Nidaa Al Watan, Article AR
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Schools And Hospitals Remain Financially Fragile
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Amidst the economic crisis, schools and hospitals are battling an existential threat. Parents are unable to pay private school tuition and 100,000 students are expected to shift to lower quality public schools. LIMS explained that a student at a public school costs the government 4,488,000 LBP per year, while the average tuition in private schools is around 3,769,500 LBP. Therefore, instead of covering the cost of public schools, the government should switch to a voucher system where the money is paid to students’ parents directly. The parents will have the choice of using this voucher in either a public or private school. Implementing a school voucher system would allow for better quality and more affordable schools to remain in business.
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LIMS also explained that the COVID-19 pandemic doubled the burden for hospitals as most of them are currently running at a loss. The government and the social security sector prevent hospitals from increasing their prices, while operational costs have significantly increased due to hyperinflation. In fact, the central bank subsidizes 85% of the cost of medical supplies at the rate of 1,500 LBP to the dollar, but hospitals still have to cover the remaining 15% at the black market rate of 7,500. Furthermore, non-subsidized products such as detergents and other items are solely paid at the black market rate. Therefore, hospitals find themselves incurring financial losses and unable to adjust their medical staff’s salaries to offset the decrease in purchasing power due to inflation. Qualified doctors and nurses are emigrating out of Lebanon in record numbers. LIMS recommended allowing hospitals to increase their prices to save them from closure.
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LIMS Media Interviews:
- What’s Next For Healthcare In Lebanon, October 1, 2020: Annahar TV, TV Interview AR
- Good Healthcare The Hostage Of Medical Subsidies, October 30, 2020: Legal Agenda, Article AR
- Public Education More Expensive Than Private, October 1, 2020: Spot Shot, Article AR
- Privatizing The Public Transportation Sector Could Replace Private Cars, October 16, 2020: VDL, Radio Interview AR
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Volatile Exchange Rate amid Political Developments
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Ex-PM Saad Hariri became the new prime minister-designate after Mustapha Adib failed to form a government and stepped down. Hariri pledged to abide by the French initiative and the exchange rate dropped from above 9,500 LBP to the dollar, to below 7,000. LIMS explained that the current improvement is not sustainable as the exchange rate depends on three factors: confidence, growth, and money supply. Endorsing the French initiative during official speeches, the new PM-designate brought back some confidence. People became hopeful that the economy would enter a recovery phase and the Lebanese pound would regain value. Positive expectations encouraged some USD hoarders to exchange a portion of their savings to the local currency, which increased the dollar supply in the market. Simultaneously, the LBP supply dropped due to central bank Circular 573 announcing restrictions on LBP withdrawals. However, LIMS warned that while these measures can help the LBP appreciate in the short run, they are unsustainable in the long run. Economic growth remains in negative territory, money in circulation continues to grow exponentially, and political promises can fall short of the public’s expectations, thus leading to a sharp depreciation of the local currency.
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LIMS Media Interviews:
- Mistrust Impacting Black Market Exchange Rate, October 9, 2020: Spot Shot, TV Interview AR
- Government Formation Influencing The Exchange Rate, October 15, 2020: Annahar TV, TV Interview AR
- Why The Exchange Rate Dropped Following The Naming Of Hariri As New Prime Minister, October 22, 2020: LBC, TV Interview AR
- Naming Hariri As New Prime Minister Brought Some Hope Back To The Lebanese And Lebanese Pound, October 24, 2020: Mustaqbal Web, Article AR
- Are The Exchange Rate Changes Realistic Or Simply Manipulation, October 24, 2020: Al Ahed, Article AR
- Reasons Behind The Drop Of The US Dollar Exchange Rate, October 26, 2020: LBC, TV Interview AR
- USD Price Drops In Lebanese Market Amid Positive Political Atmosphere, October 26, 2020: Xinhuanet, Article EN
- Implication Of Circular 573 And Reasons Behind The Drop Of The US Dollar Exchange Rate, October 26, 2020: VDL, Radio Interview AR
- ”Dramatic” Drop Of The Dollar Exchange Rate, What Is The Role Of Mobile Applications, October 26, 2020: Annahar, Article AR
- Does The New Cabinet Formation Impact The Exchange Rate, October 29, 2020: Radio Liban Libre, Radio Interview AR
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Remaining Foreign Exchange Reserves Spent on Renting Powerships
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While the government is still unable to pay the $163 million in fresh dollars for the rental of 2 powerships, the Ministry of Energy and Water tried to broker a settlement with the central bank to cover the bills. LIMS explained that if the central bank pays, the cash would come from the remaining foreign exchange reserves. In fact, these dollars are part of people’s life savings and deposits that are inaccessible to the public. Persisting with the same old schemes, the government is allocating depositors money to public expenditures, despite the current crisis. Meanwhile, the electricity sector is responsible for roughly $40 billion in public debt, yet the state-owned power company EDL works for merely a few hours daily. This is a testimony to the dysfunction of the electricity plan initiated by government in 2010, which aimed to fund through public spending, energy projects including the rental of powerships.
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Nowadays, politicians are trying to silence critics by appointing a new management board for the national electricity company and a regulatory body for the electricity sector, and though important, such a move will not solve the lingering crisis. LIMS explained that changing the titles and names of the people in charge, while maintaining the same outdated government monopoly, is doomed to fail. Only competition between private electricity companies can allow uninterrupted, affordable, cleaner and a more reliable energy supply.
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LIMS Media Interviews:
- Powerships Depleting Dollar Deposits, What’s The Solution, October 29, 2020: Annahar TV, TV Interview AR
- Dollar Crisis Threatens Heavy Power Cuts With Winter On Its Way, October 30, 2020: Annahar, Article AR
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