Excellences, Ladies and Gentlemen, on behalf of the Minister of Finance Mr. Ali Hasan Khalil and the government of Lebanon, I would like to thank the World Bank, the United Nations and the Islamic Development Bank for organizing this event, and the Jordanian authorities for hosting it, and you all, Excellences, ladies and gentlemen, for attending it.
SLIDE 2 – Facts
Before the beginning of the Syrian conflict, Lebanon was already suffering from the consequences of its long war of 1975-1990 that claimed about two hundred thousand killed and more than a hundred thousand handicapped, in addition to the missing people and the enormous damages at all levels. We also faced two very aggressive Israeli wars in 1996 and 2006 that claimed thousands of victims and witnessed systematic demolition of Lebanon’s infrastructure. This situation, among other factors, led to a very high public deficit and to very worrying debt dynamics, and the Lebanese people continued to finance their needs and those of refugees in Lebanon without relying on a significant external assistance, and Lebanon never defaulted in any way to its obligations, whether toward creditors or toward its humanitarian responsibilities, as Palestinian refugees have been present in big numbers (more than 450,000) in Lebanon for a long time.
Despite the trauma that has not yet disappeared, we took our responsibilities on our own, and, at the same time, we managed to keep the country afloat. Already then, the international community could have avoided a lot of security issues all over the world had it properly supported the displaced and the host communities, and had it accepted to fairly share the burden of the Palestinian tragedy.
Despite all of the above, when Syria’s bloody conflict began, Lebanon deliberately wide-opened its borders to an immense flow of displaced, and has willingly provided relief and services to all of them, despite the very difficult circumstances the country was facing. And despite calls for closing borders from those who feared another displaced-related conflict, or those who suspected some of the displaced to be fighters, possibly smuggling weapons into Lebanon, or those who simply wanted to avoid a very large disequilibrium between religious communities, especially at a time when the whole region is divided along sectarian lines, displaced were not denied access into Lebanon. They are free to circulate on Lebanese soil, and no displaced camps were established.
In 2014, World Bank President Jim Yong Kim was among the first to visit Lebanon for an onsite assessment, and to call on the international community for sizeable support. He said the world should be grateful to Lebanon for what it is doing. But until this day, the world has not yet responded in an appropriate manner.
I would like to note that our Syrian brothers are allowed to work, learn, and benefit from all public services in Lebanon. In our public schools, we have introduced a two-shift system to make sure that the displaced are not denied schooling, and today, we have more Syrian students in public schools than Lebanese students. Nevertheless, and despite huge efforts made by the government of Lebanon, more than 220 thousand Syrian children between the age of 6 and the age of 14 remain unschooled. We are committed to provide courses at all levels, at school and university, in addition to all other basic needs. Syrian workers have been very quickly absorbed into various sectors of the economy despite the brutal slowdown that Lebanon is facing. In a few words, displaced Syrians enjoy the same rights than the Lebanese in Lebanon. Host communities have done everything they could to provide relief, and it is remarkable to note that no clash has occurred at any point in time between the displaced and their host communities, despite the fact that the displaced form a very vulnerable community that could easily be manipulated, which is yet another challenge to be monitored.
The reasons why it is critical to support Lebanon in an adequate and timely manner are simple and straightforward: Our countries have nothing to do with the Syrian war, and bear absolutely no responsibility in what is happening. We are providing a global public good by hosting the displaced on behalf of the international community. Alternatively, by closing our borders or by encouraging them to leave, they will have to be taken care of elsewhere. This public good has a cost. We are not really seeking support: We are just asking the international community to foot the bill for what we incurred by carrying the burden alone on its behalf, taking into consideration the past four years of enormous efforts.
If not, our countries run very high risks, with potential severe spillover effect. Already on the institutional level in Lebanon, one direct implication of the Syrian conflict has been the absence of a president for more too years, in addition to an institutional stalemate at all levels. If our fiscal and economic situation continues to deteriorate, the country could enter an instability zone with increased risks of violence, triggering waves of displaced toward other countries. By helping Lebanon, the world would be helping itself. By stabilizing Lebanon and Jordan, you would increase long-term stability in the Middle-East, and avoid spillover threats.
Now let us imagine a country where one person out of four is a displaced. Imagine the whole Mexican population moving into the USA, as President Kim said. The immediate implication is a per capita GDP that falls dramatically and significantly lowers standards of living for all.
After four years through which the country has faced the seism on its own, Lebanon had the highest displaced per capita country in the world with 232 displaced per 1000 inhabitants in 2014. Lebanon’s 2015 GDP growth, which was initially projected to be 2% by the IMF, is estimated to be nil by the Lebanese Central Bank. The economic loss in 2015 alone amounts to $5.6 billion due to the displaced crisis, which represent 11.3% of GDP. The cumulative overall economic loss from 2011 till 2015 amounts to more than $15 billion. Lebanon’s response to the crisis includes trade and direct investment aspects that I will not emphasize on today as I would like to focus on the impact.
SLIDE 5 SOCIAL AND ECONOMIC
On the labor market, unfair competition and sluggish growth due to the crisis have placed more than 190,000 Lebanese into poverty, in addition to the existing one million who were pushed deeper into poverty leading to an increase in the overall poverty rate in Lebanon since 2011 from 28% to 34%. The unemployment rate has doubled to more than 20%, one-third of the Lebanese youth are unemployed representing a 50 percent rise since 2011, in a labor force estimated to be 50 percent larger than pre-crisis according to the IMF in addition to an increase in informality which brought downward pressure on wages. Host communities’ desperation increases as they lose jobs and as they fail to compete with Syrian labor, while they witness the deterioration of basic services and utilities. If we keep in mind the local price inflation due to direct support to the displaced that excludes host communities, they have yet another big problem to deal with. Channeling money to displaced only triggers hostility, standards of living, and access to public services.
SLIDE 7 FISCAL
Lebanon’s debt to GDP has risen for the first time in 8 years to 138% in 2015 knowing that it is already one of the highest in the world. Without the direct impact of the Syrian crisis, it would have been at 122% at year end. This alone translates into an extra burden of $600 million every year.
As oil prices are falling, and due to their strong correlation with remittances, we have higher financing needs to face, a much higher deficit than projected without Syria’s war impact. The bank deposits increased by only 3.72% between January 1st and November 30, 2015 according to the Central Bank of Lebanon, compared to 12% in 2010, just before the beginning of the Syrian conflict. In the meantime, Lebanon will mobilize $16 billion for its existing financing needs in 2016 for the rollover and servicing of the debt.
In the meantime, our fiscal deficit grew to more than 8% of GDP, with additional cumulative expenditure directly related to the Syrian displaced crisis amounting to $0.54 billion, and lost revenues of around $1 billion in 2015, a total of $2.4 billion since 2011 due of numerous factors related to the Syrian crisis. In fact, for the first time since the end of Lebanon’s civil war in 1990, our fiscal revenue decreased in 2015 by 10%, bringing revenue to GDP to 19.3%.
End of slide 7 fiscal impact
The crisis has negatively affected key growth drivers, such as construction, tourism and the service sector. Exports have decreased due to the deterioration of Lebanon’s only land export route which crosses Syria.
The depletion of Lebanon’s environment on one hand, and of its infrastructure on the other, including public schools and hospitals, roads, and public utilities, is very quick and massive.
Although the displaced benefit from various subsidized goods like electricity, bread, medication, and others, 59% of the Syrian children between 6 and 14 years old present in Lebanon remain out of school as I already mentioned, and 41 percent of the displaced population lives in substandard shelter conditions, and around US$20 million of due bills for the hospitalization of displaced Syrians are uncovered.
For the electricity only, and knowing that Lebanon has borne more than $2 billion losses yearly between 2011 and 2014, and more than $1.2 billion in 2015, the number of additional users has officially reached 1.17 million, and the cumulative cost related to Syrian displaced only has reached $434 million. As the Lebanese were waiting to finally enjoy 24 hour supply per day, and due to increased demand, they are still getting 12 to 14 hours a day, if not less. On the other hand, the incremental degradation of the environment due to the presence of the displaced population can be translated by an increase of 20% in air emissions, between 8 and 12% increase in water demand, between 8 and 14% in wastewater generation and 33% in urban densification. The yearly cost on the environment is estimated at $3.7 billion.
Water and telecommunications’ services have clearly declined, and some severe utilities problems are directly related to the massive presence of the displaced.
Generally speaking, Lebanon spends an increased amount of money on infrastructure needs, including water, electricity, and roads, to cater for development needs and for servicing the displaced.
Another important burden to be considered is security. With 1.2 million displaced on Lebanese soil according to UNHCR, and more than 1.5 million according to the Lebanese authorities, small delinquency has risen. On the other hand, and as a direct consequence of Syria’s conflict, the Lebanese Armed Forces are fighting extremists from Daech and Jabhat Al Nosra on the northeastern border. While some of the displaced are believed to represent a threat in the back of the LAF, Lebanon had to recruit 15 thousand persons in the armed forces during the past two years, which is a 20% increase in the numbers and an extra direct yearly burden of $147 million every year. We are also substantially increasing our ammunition and maintenance military expenditure, in line with the support received from the USA and other friendly countries, as we need to match this support and our new recruits with adequate recurrent expenditure.
As the displaced may remain displaced for an average of seventeen years according to previous crises’ statistics, short-term answers only are obviously not helpful. While humanitarian needs continue to exist and need to be addressed through humanitarian funding channels, additional financing needs should be leveraged to strengthen the capacities of Lebanon and its host communities to absorb the shocks on their economic and social fabric. In addition, concessional financing facility to complement existing humanitarian and stabilization financing should be provided to address medium-term development needs in Lebanon in sectors impacted by the Syrian conflict and the large presence of displaced.
End of slide 9
Taking into consideration that there are consistently large gaps in humanitarian and stabilization financing, for example only $1.4 billion were reportedly received of the $2.4 billion funding needed through LCRP 2015 and that more than 90% of the funding has been outside of the budget to the UN or the NGOs, the appropriate response must have three dimensions:
- The first response is exclusively grant based of a total of $2.48 billion according to the Lebanon Crisis Response Plan of 2016 of which 35% is destined for stabilization and 65% for humanitarian programs toward the displaced and the host communities. (DISTRIBUTE APPENDIX 1). Let me on the other hand emphasize that grants remain absolutely critical for aid and relief, but also for the sustainability of Lebanon and its going concern, given the huge increased pressure on public finance and debt dynamics due to the displaced crisis.
2- The second is adequate budget support. As already outlined, Lebanon has very sizeable increased expenditure due to the Syrian displaced crisis on various budget components such as education, health, social affairs, military, and subsidies, as well as debt servicing. Therefore the total budget support needed amounts to $2.01bn required in the form of a yearly Eurobond interest rate subsidy of $402 million or any other direct budget support mechanism. (Appendix 2)
Buying down interests on existing loans of $ 4.04 billion due until 2048 and interest of $776 million (assuming total disbursement of loans) is critical to allow Lebanon to move forward with them despite its deficit and its level of indebtedness. (Also Appendix 2)
End of slide 13
3- The third is at the level of development needs since the country is facing heavy development needs, some of them being already in the pipes, from which displaced would benefit greatly in addition to the Lebanese population. (DISTRIBUTE APPENDIX 3). This consists of the priority development investment programs of $4.3 billion that should receive very concessional financing (Appendix 3).
The total amount needed for budget support and development needs would then reach $6.3 billion over 5 years, in addition to the humanitarian needs of $2.48 billion over 2016.
Those needs are big, but they are real and all closely tied to the refugees’ issue. Their prioritization will be finalized in line with donors’ response.
End of slides 14
Excellences, Ladies and Gentlemen, those needs are real and accurate. They are simply enormous for a country like Lebanon, given its size and its existing problems. The grant component is of utmost importance, in addition to budget support and concessional financing. The words of Antonio Guttierrez calling for allowing institutions like the WB to provide budget support grants in times of crises are still echoing. It is only fair that sizeable budget support offset extra expenditure created by the load of displaced, including extra debt servicing.
Channeling adequate and timely support is critical, and if it fails to match the needs, we might be faced with an increased risk to economic and social security, increased tensions between communities and increased risks of breakdown of service provision systems, increased risks of diseases, malnutrition and morbidity, youth – diverging their potentials and capacities into undesirable negative coping mechanisms, more illegal migration of displaced Syrians and the international community might have to settle the bill with additional interests at some point in time, later on.
Meanwhile, our countries would have been irreversibly hit, the displaced will have fled to other places, and more instability factors, among which poverty and insecurity, would have been created.
Thank you very much.
LEBANON Presentation Second Working Group Meeting Jan 25 2016