Financial Liaising

The banking system collapsed and with it the central bank. The fundamental question: what functions must financial intermediation fulfill during the transition period? And what banking sector does Lebanon need? At what stage of the transition should the banking sector be rebuilt?

The required function of the banking system is to mobilize available internal and external savings and direct them towards investment, in order to facilitate the transition to an economic model that preserves the interests of society, instead of consuming these savings and hide the loss, as the failed model did.

The “restructuring” of the banking system, or rather the establishment of a banking system fulfilling the functions that the country needs, must take place before any negotiations with creditors, Eurobond holders, and current banks, but also with citizens regarding their social contributions and finally with the International Monetary Fund after it has been approached. It must also be carried out prior to any operation of converting receivables into Lebanese pound, imposing any exceptional tax, or any withholding on deposits or deferral of adjustment accounts or conversion of deposits into capital or under any other form. We clearly warn that any reversal of the sequence of these procedures will generate de facto situations that will make it difficult, if not impossible, to set up the banking system that the country needs.

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Societal projects and a state project

We can imagine several possible outcomes of the crisis in which Lebanon found itself sunk in, provided that it is seen as a transition from what no longer exists – even if people keep clinging to it – to that new thing that they find it difficult to imagine soberly.

Therefore, the movement of citizens in a state seeks to avoid having massive immigration as a reaction to the severe economic and financial crisis, which means that society has been sacrificed to preserve the sectarian political system. The movement stems from a political choice, which is the establishment of a political system that has confident legitimacy which allows it to face challenges, a civil system that openly announces its choices in domestic and foreign policy.

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What do financial losses mean?

If we adopt the perspective of liquidity, the losses may seem huge, because it is the liquidity that moves depositors, and it has come to mean “real dollars.” Losses occur when two conditions are met: the first, negative differences between the liquid values ​​corresponding to the creditor’s debt bonds, and the second if the institutional framework that takes care of these expectations or promises is no longer considered, because any financial liability is nothing but a promise to pay, acceptable to both the creditor and the debtor.

It was the duty of the Governor of Banque du Liban to make a decision between reducing the differences between debts and their corresponding values, and strengthening the credibility of the institutional framework on which the comparisons take place in order to postpone their term, which may lead to an inflation of the size of receivables. This may conflict with seeking to enhance the growth of the corresponding values, which may also lead them to inflate the size of payables.

There is no doubt that the amount of foreign currency from available external assets, with the remainder of gold, in addition to the promised external financing will control the choice between the various possible monetary formulas. But what has become constant is that “dollarization” must be abandoned once and for all, because it leads to the loss of all monetary policy’s ability to influence the economy, and a trade-off will have to be made between sharply shrinking consumption and urgently needed investments.

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Negotiating with the IMF

After the IMF mission held 14 meetings with the Lebanese government team, two official statements were issued stating that the government’s plan represents a good starting point for ongoing negotiations, and that the IMF staff’s preliminary view is that the reform program ranged closely in its estimates with the assumptions presented. Rumors about replacing the Governor of Banque du Liban, Riad Salameh, circulated until June 12, 2020, but his replacement was not put on the agenda, while Parliament Speaker Nabih Berri made the statement – after a meeting that included him, President of the Republic, Michel Aoun, and Prime Minister Hassan Diab in Baabda – about three decisions. First, the devaluation of the dollar against the Lebanese currency, and secondly, addressing the International Monetary Fund in one unified language, sponsored by Parliament, and finally keeping Riad Salameh in his position.

The actual reality of the economic collapse triggered a spontaneous anger dynamic, followed by a security dynamic and then an institutional one, with the state declaration of default and preparations for negotiations with the International Monetary Fund.

In response to these moves, the “Citizens in a State” movement, with 30 political groups, organized a march around a clear slogan: “The alternative exists, a transitional government with legislative powers, that establishes the legitimacy of a civil state.”

Events followed, with Hezbollah Secretary-General Hassan Nasrallah declaring that Lebanon should head east, and led to the resignation of the first advisor to the Minister of Finance.

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Facade government program

The government estimated the losses based on budgets, so its estimates differed between the successive versions of its program, and formula No. 41 adopted the number 83 billion dollars, while formula No. 42 reduced the number to 63 billion dollars! However, the estimation of the cumulative needs for external financing over the five years of the program remained constant at the same level (27-28 billion dollars), with the expectation of Formula No. 41 a gradual slide of the exchange rate from 3000 Lebanese pounds per dollar to 3,500 pounds between 2020 and 2024, while the estimates of Formula No. 42 ranged between 2,500 and 4,300 Lebanese pounds per dollar.

In light of the government’s confusion, the Governor of Banque du Liban issued circulars, imposing a set of measures that were capable of toppling several governments in any normal country. He transferred deposits in foreign currencies to the Lebanese pound and took all the liquidity of the banks, as well as seized transfers in foreign currencies received from abroad through money transfer companies, imposed credit and debit interest rates, rescheduled loans for the private sector, created several exchange rates according to the types of operations and customer categories, and proceeded to control currency exchange rates, relying on attracting an influx of money from expatriates. At a time when banks did not adhere to neutrality, and while the bankers felt the danger of losing their capital and the ownership of their institutions after they were unable to comply with the circulars of Banque du Liban, which obligated them to increase their own funds by injecting new funds, the GS-I consultant office produced a plan for the Association of Banks entitled “Contribution in the financial recovery plan of the Lebanese government. This report concluded that the Lebanese state must pay the losses that it caused its accumulation, and the report also suggested transferring public property, estimated at $40 billion, to a “debt liquidation fund,” whether or not this fund would issue long-term bonds based on its assets in an amount equal to the total of these assets. The state transfers the interests of those bonds to Banque du Liban in exchange for writing off its debt.

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The shock being foretold yet denied

This financial system was able to continue and benefited from the effect of the stimulants of Paris 2. Despite the political tension, the effects of the July war, and the war in Syria, the regime benefited from the rise in oil prices and the increased inflow of money due to the global financial crisis (2008). But this system was disrupted, under the hands of a weak government in 2015, the risks grew and the waste crisis came as a warning sign, so that 2016 had a first restoration attempt that was implemented on three fronts: the financial level by covering the losses of banks with financial engineering by about 6 billion dollars, the social level in a festive Municipal election, and the political level, where the presidential settlement was completed under the advice of outsiders.

Despite all the attempts, the “trust” did not last, so a second restoration attempt was launched in 2018. France organized the CEDRE conference, which promised to bring in billions, while Banque du Liban was subscribing to Eurobonds of approximately 5.5 billion dollars in order to bring in funds from abroad, betting on the success of the election festival. Parliament this time.

In October 2018, we in the “Citizens in a State” movement issued a warning of complete bankruptcy and called on the leaders of the sects to proactively negotiate a fair and purposeful distribution of losses because they are functionally unable to manage the inevitable crisis.

With the leaders clinging to their illusions and seeking to fictitiously reduce the deficit by writing off the debt service clause to the limits of zero, betting on a miracle from the Central Bank and believing that it would be smart to impose a tax on the communication service through the WhatsApp application, the October 17, 2019 demonstrations came to surprise everyone except for the banks that decided on the same day to stop paying.

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Social transformation

In light of this political and economic system that began in the mid-1980s, the country witnessed massive immigration and the number of arrivals to Lebanon increased. The number of Lebanese immigrants became equivalent to two-thirds of the number of residing Lebanese. The number of non-Lebanese residents also reached two-thirds of the number of Lebanese residents. This led to a significant change in the age structure of residents between 1997 and 2009. Lebanese under the age of 20 represented 34% of the residents, while this percentage reached 57% among Syrian refugees.

Based on this, we see that the reality of the Lebanese social and economic scene, before the outbreak of the current crisis, has become completely different from the common idea that the Lebanese had in mind. Workers in the formal sector constitute only 29% of the workforce, with 19% informal wage earners. Unemployment is particularly high among women, and it increases with the level of education (noting that unemployment rates are calculated only among those who have not emigrated).

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Effects of the socioeconomic model known as the “Dutch Disease”

Followed pattern results:

  • First, local resources are allocated largely to the production of non-tradable services, and employment opportunities are reduced in sectors producing exchangeable goods and services.
  • Second, the prices of local factors of production have risen without a parallel increase in their productivity, and with the narrow wage labor opportunities, women’s work got restricted to a limited number of professions.

The case of Lebanon is distinguished from that of countries that have witnessed similar developments:

  • The flow of funds is not linked to the export of natural resources such as oil, but rather to the money transfers of Lebanese expats, who thus turn into an export item.
  • Unlike the oil countries, this money accumulated in the form of deposits and debts.

The effects of the consolidation of the “Dutch disease” on the economy:

The effects of this pattern on the economy are permanent and numerous. The internal financial blocs in Lebanon are constantly accumulating and latent losses are generated in assets, and the prices of non-exchangeable goods and services are rising. We are also witnessing an over-investment of capital in the production of non-tradable goods and services and a fading out of investment in other sectors. In addition, heavy reliance is placed on cheap non-resident labor, sources of income become unstable and the share of wages in local income declines. Companies have become heavily indebted, as the average interest burden in most branches of the Lebanese industry exceeds 70% of profits before interest, taxes and depreciation, and most institutions remain very small and are of the family type. The annual net outflow of emigration is estimated at about 40,000. The outcome of emigration cancels all-natural increase in the Lebanese population of working age.

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Public Finance

Two periods must be distinguished:

The first period, between 1993 and 1997, witnessed primary deficits averaging 8% of GDP.

The second era came after 2001, when the primary deficits did not exceed 1%.

Thus, the political-economic system has adopted, in the first stage, the option of spending without reckoning, betting on regional peace and striving to focus on its client base (excess of employment, nepotism contracts…) without concern for the accumulation of debt.

The total amount of declared and implicit taxes that the Lebanese have paid is estimated at $316 billion for services whose economic value does not exceed $116 billion, or 37%. The rest went as interest on debt and as clientelist distribution. This coincided with an annual public deficit in the balance of goods and services amounting to 25% of GDP, which was covered by capital inflows. These flows accumulated inflated bank liabilities, which allowed financing a huge amount of consumption and an increasing, exaggerated demand in the real estate sector.

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Restoring the stolen money

We are aware that the current regime is responsible for the wastage that has occurred over the past few decades. We are equally aware that some groups benefitted from this wastage more than others. However, we do not believe in proposing requests or reforms under this same system and we do not trust any of the system’s theatrics in passing laws to restore the stolen money. Below are some essential points to consider when discussing this topic:

  • Wastage and theft did not come about through isolated incidents, but rather through legal and systematic actions – that is, through laws passed by the regime itself – and “profits” were distributed across large numbers of beneficiaries. Those responsible have formal, legal immunities as well as sectarian, political ones and they do not hesitate in invoking them.
  • If initiated and successful, restoring the stolen money would require years and we cannot overlook the costliness of time during this critical transition period. Additionally, if the money were to be restored while the current regime is still in power, it will return to the regime itself because it represents, albeit as a facade, the state.
  • It is not realistic to expect a parliament or government subordinate to the sectarian leaders to make laws and appoint judges in opposition to the leaders’ interests.
  • The approach imposed on us today is the political confrontation of the system. Any scattering of efforts and proposals is dangerous, especially when demands reinforce the legitimacy of those being demanded.

In summary, attempts to propose any reforms under the same ruling system are nothing but theatrics and a waste of time.

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