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Lebanon’s government has been vainly trying to gain international support that would alleviate the harsh consequences of the economic, financial, and monetary meltdown. After the Port of Beirut explosion, a window of hope opened up when French President Emmanuel Macron visited. The French initiative stressed on forming a new competent government and produced a 2-page roadmap that would unlock foreign aid. While publicly endorsing the French initiative, influential political leaders blocked the formation of the new government over who would control the Ministry of Finance. Facing the impasse, Prime Minister Adib stepped down, signaling the failure of the French initiative, and plunging the country into deep disarray and uncertainty.
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LIMS explained that the finance ministry is crucial in driving reforms as it raises taxes, sets the annual budget, and approves expenditure for every ministry. For years, public spending has exceeded tax revenues and the recurrent deficit built-up substantial public debt. The monetization of debt led to the disastrous hyperinflation impoverishing the population. Meanwhile, tax revenues have dropped considerably in the past year and will continue to dip further following business closures, the port explosion, and hyperinflation. In the current circumstances, the only way to improve government revenues is through lowering government expenditures and rebooting the economy. Growth can be stimulated by allowing private initiative and competition, along with breaking up monopolies. With no government to conduct reforms and broker an IMF deal to alleviate the crisis and open the door for international support, the Lebanese pound exchange rate is expected to deteriorate as people flock to buy hard currencies to brace themselves for what’s coming.
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LIMS Media Interviews:
- VAT Causing Tax Revenues To Drop, This Is Final Alarm Before The Fall, September 14, 2020: Nidaa Al Watan, Article AR
- Urgent…Looking For Minister Of Finance Capable Of Saving $1 Billion Yearly, September 14, 2020: Akhbar Al Yawm, Article AR
- Reason The Shiite Duo Insists On Ministry Of Finance, September 15, 2020: Al Kalima Online, Article AR
- After Adib Stepped Down, Monetary Collapse Will Not Be Immediate, September 26, 2020: Ahwal Media, Article AR
- Adib Stepping Down Will Worsen Monetary Crisis, September 28, 2020: Safir Al Chamal, Article AR
- French Miracle Is Over And Economic Inferno Has Been Unleashed, September 30, 2020: Janoubia, Article AR
- Countless Projects To Save Economy, And The Same Old Solutions, September 30, 2020: Annahar, Article AR
- Lebanese Prime Minister Resigns, September 30, 2020: Ahram Online, Article EN
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Currency Board Would Bring Monetary Stability to Lebanon
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Steve Hanke, professor of applied economics and founder of the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise is the world’s foremost authority on hyperinflation and a leading expert on currency boards and dollarization. He has been monitoring the annual inflation rate of Lebanon. After exceeding 50% per month for 30 consecutive days, Lebanon officially became the first MENA country and the 62nd worldwide country to suffer from hyperinflation. While the IMF is recommending a devaluation followed by a managed float of the currency, Professor Hanke explained that there are no cases among the recorded episodes of hyperinflation where this actually worked.
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Professor Hanke has been working with LIMS and he proposed the currency board solution to halt the continuous devaluation of the Lebanese pound and to stabilize the exchange rate. He showed that all 70 currency boards established since the mid-19th century have managed to restore the trust of investors in the local economy, and none of them have collapsed. Compared to discretionary monetary policy, countries that adopted a currency board showed a higher economic growth rate, lower inflation, and a lower debt to GDP ratio. In this setting, the quantity of money in circulation would be determined by the market, and the established currency board would only emit clone banknotes. In turn, the central bank can no longer cover the state deficit and politicians cannot covet people’s deposits anymore. A currency board is not the solution to all Lebanon’s problems, but such a system offers the stability needed to usher in the needed reforms and encourage the return of investments.
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LIMS Media Interviews:
- Lebanon: An Indispensable Solution 3 Experts Propose, September 10, 2020: The Conservative Edge, TV Interview EN
- No End In Sight For Hyperinflation And Currency Crisis, September 16, 2020: Tellimer, Radio Interview EN
- Lebanon First MENA Country To Suffer From Hyperinflation, September 22, 2020: Le Commerce, Article FR
- Inflation Rocking Lebanese Markets, September 27, 2020: Asharq Al Awsat, Article AR
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Forensic Audit On Central Bank Will Only Show Flawed Results
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Lebanon desperately needs international support to weather the combined crises of hyperinflation, economic recession, and default on sovereign debt. However, the international community’s conditions on any financial support will only come with the adoption of serious reforms. In a bid to prove commitment to such reforms, the government announced a deal with ‘Alvarez & Marsal’ to run a forensic audit on the Central Bank of Lebanon (BDL).
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LIMS clarified that auditing the central bank is crucial to measure the size of losses in the financial sector and to produce a credible roadmap for restructuring banks, including the central bank. However, this audit will not uncover the nested corruption, since the latter took place in the ministries. Politically, this audit will be used to shift the blame to the central bank and buy time for the political class. Furthermore, LIMS expects for the audit to not be conducted properly. In fact, BDL claimed that the finance ministry has no authority to run an audit on the central bank and therefore the contract is legally void. BDL added that the audit is contrary to the Monetary and Credit Act and banking secrecy laws. Still, the choice of the firm raised suspicions as ‘Alvarez & Marsal’ specializes in restructuring, rather than forensic auditing like ‘Kroll’ whose offer was much cheaper.
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LIMS Media Interviews:
- Forensic Audit In Lebanon With A French Blessing, September 2, 2020: Independent Arabia, Article AR
- What Are The Loopholes Of The BDL Forensic Audit, September 10, 2020: Spot Shot, TV Interview AR
- IMF Insists On Auditing Lebanon’s Central Bank, September 11, 2020: MTV, TV Interview AR
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To Save Lebanon, End Subsidies Now
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To combat hyperinflation, the government launched a subsidy program targeting fuel, wheat, medicine and 300 “essential” items. LIMS stressed that the scheme is funded with dollar deposits, while depositors cannot access their money at the banks. In fact, deposits are being drained without the consent of depositors, banks, or even the parliament. Such an act is very detrimental to the trust in the banking sector and the economy.
Subsidies were intended to make essential consumer products available for cheaper, to help citizens cope with the crisis. However, most subsidized goods ended up being smuggled to neighboring countries or sold locally on the black market for higher prices. So far, product shortages, depletion of the central bank’s reserves, and benefits going exclusively to smugglers has been the result. The subsidy program proved to be a fundamental mistake and ought to be repealed.
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On the other hand, subsidies did indeed helped stabilize the exchange rate at 7,000 LBP to the dollar, but the central bank announced that no means are available to continue the program beyond the three upcoming months. LIMS explained that additional currency devaluation is expected to occur when subsidies are lifted. The size of this devaluation will correlate with the loss of reserves, meaning the more reserves we lose in the subsidy program, the stronger the currency devaluation and hyperinflation will be when the subsidies stop.
LIMS worked with the World Bank and the Ministry of Economy and Trade on cash transfers, as an alternative to subsidies. Cash transfers would directly help individuals, give them the liberty of choosing where to spend the money, and cost substantially less than subsidies. Such a reform would also take the program away from the central bank (depositors’ money) and put it back in the government budget where it belongs. The shift would reveal the true cost of the program, impose some fiscal constraints, and allow the scrutiny of the parliament.
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LIMS Media Interviews:
- USD Price To Further Soar In Lebanon If No Proper Deal With IMF, September 9, 2020: Xinhuanet, Article EN
- Subsidies Reserves Almost Up, What’s The Alternative, September 9, 2020: MTV, TV Interview AR
- Are Subsidies Helping The Citizens Or The Traders, September 11, 2020: OTV, TV Interview AR
- Next Government Has Huge Challenges To Face, The Biggest Being Reforms, September 12, 2020: Radio Lebanon, Radio Interview AR
- Next Government Has Huge Challenges To Face, The Biggest Being Reforms, September 12, 2020: El Ektisad, Article AR
- What Will Happen After The Subsidies Reserves Are All Spent, September 15, 2020: Annahar TV, TV Interview AR
- Ration Cards A Temporary Solution Soon To Be Plagued By Inflation, September 24, 2020: Nidaa Al Watan, Article AR
- Lebanon Heading Towards More Inflation And Increase In Prices, September 30, 2020: Sawt Kol Loubnan: Radio Interview AR
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Restructuring Banking Sector Vital To Regaining Depositors’ Trust
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BDL Circular 154 asked banks to convince clients who have transferred abroad more than $500,000 between July 2017 and August 2020, to repatriate 15% of the transferred amounts. Banks’ executives and politically exposed persons (PEPs) should repatriate 30% instead of 15%. Banks should then use the recovered money to enhance their liquidity at correspondent banks abroad. The circular hints at sanctioning those who do not comply using the anti-money-laundering/counter terrorist financing law.
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LIMS explained that depositors transferred their assets overseas before 2019 because they had valid concerns about the solidity of Lebanese banks and recent events show that they were right in doing so. Those transfers had nothing to do with money laundering or financing terrorism, which makes the legality of the threat in the circular questionable. On another hand, all depositors have completely lost faith in the Lebanese banking sector. Some are actually willing to pay for real estate and other assets up to triple the regular price, if the seller is willing to accept bank checks for payment, in order to salvage some value from their bank deposits. No benefits will convince depositors to return their money, unless coerced. However, coercion would be counterproductive and would destroy any chance the banks have to regain new depositors’ trust.
Instead, LIMS suggested opening the banking sector to foreign banks and allowing them to enter the market, by removing all legal restrictions and complications. Unlike existing banks who currently have problems with their assets and liabilities, newcomers will have positive capital. They would be able to attract deposits and extend loans allowing the economy to be rebooted, thus kick-starting growth.
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LIMS Media Interviews:
- Central Bank Circular Legalizes The Penalization Of Depositors, September 2, 2020: Spot Shot, TV Interview AR
- Most Lebanese Banks Have Negative Capital, September 16, 2020: Al Jadeed, TV Interview AR
- How Can Small Depositors Withdraw Their Money From Banks, September 21, 2020: Annahar, TV Interview AR
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Lebanon Should Open Infrastructure Projects to Competition
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Lebanon’s infrastructure is in ruins after years of mismanagement and incompetence. Clean water is in shortage, telecommunication services are insanely expensive, and electricity is responsible for roughly half the public debt. Ineptitude and negligence also resulted in the catastrophic explosion at the Port of Beirut.
LIMS pointed out that the government irresponsibility invested in monopolies in these sectors throughout the years, as such entities failed to deliver basic decent services. While the government seeks to build new power plants, LIMS explained that the problem is due to pricing. As long as the government continues to subsidize the electricity bill and sell energy at a loss, the electricity company cannot afford to purchase fuel and run the energy production plants at full capacity, resulting in heavy outages. Electricity prices should be adjusted first which would encourage private companies to enter the market and increase capacity following law 129 of May 2019.
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Regarding water, the government systematically borrows money to build ecologically disastrous dams. LIMS showed that 75% of the water demand in Lebanon goes to irrigation, and using modern watering techniques could have been a cheaper, more efficient, and more eco-friendly solution. On the other hand, if dams are truly needed, meaning there is substantial demand on their water that would cover initial investment costs and generate a return on investment, private companies should be able to finance and manage those projects. Likewise, international companies have already shown interest in wanting to rebuild and manage the destroyed Beirut port. This model would be much more effective than maintaining the same old government management process that led to the disaster in the first place.
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LIMS Media Interviews:
- Will The Economy Withstand The Political Turmoil, September 2, 2020: Liban Libre, Radio Interview AR
- Shining A Light On Lebanon’s Key Moment, September 7, 2020: Atlas Network, Radio Interview EN
- Dryness Of The Exploded Dam Averted A Catastrophe, September 7, 2020: Nidaa Al Watan, Article AR
- What Reforms Are Expected From The Upcoming Government, September 9, 2020: Annahar TV, TV Interview AR
- France Insists On Solving Electricity Crisis Using High Tension Lines, September 15, 2020: El Ektisad, Article AR
- Solutions In Front Of The New Government. Will It Be Able To Contain The Crises, September 21, 2020: El Estiklal, Article AR
- Will The UAE Normalization Lead To Haifa’s Port Replacing Beirut’s, September 24, 2020: Anadol Agency, Article AR
- Long Term Solution For The Water Problem, September 30, 2020: VDL, Radio Interview AR
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