Mr. President, Ladies and Gentlemen,
Following the civil war, and since Lebanon entered its new socioeconomic model, it seemed that the overwhelming majority of players, whether local or international, enthusiastic or sceptical, permanent or occasional, have considered this model as the only one available and viable. Therefore, any questions about its validity and outcome have been considered as destructive and sometimes suspicious.
This self-imposed “pensee unique” and the massive adherence to the policies that were put in place were meant to promote and protect the confidence factor, which is still seen as key for success. Therefore, it became very difficult to challenge the assumptions of the model and the outcome of the policies that were put in place, as public debate was likely to jeopardize confidence and therefore stability.
Without necessarily disagreeing with any of them, concepts such as pegging the pound to the dollar, trying to achieve growth through budget spending, giving top priority to debt service payments, concentrating all the efforts on real estate, tourism and banking, or relying on a permanent and massive inflow of capitals were presented as obvious ones and were not allowed to be debated, as if no other choice was given. Incidentally, the permanent need of capital injection in the above-mentioned model strengthened even further what I like to call the dictatorship of confidence. Without total confidence in the model, no permanent massive inflows were achievable, and therefore, even crimes could be accepted for the sake of confidence.
By the way, this bias was by no means a local one. Most of Lebanon’s partners in the world totally agreed with this approach. Bi-laterals and multilaterals, donors and Bretton Woods institutions (the IMF and the World Bank), were more than willing to dismiss any other views, and it took a very long time and some very poor results in Lebanon to trigger some questions. Finally, some serious disapproval is arising, and some interesting debate is taking place, even if political reasons contribute in keeping the discussions away from the public.
At this level of my speech, I would like to make it clear that my purpose has not been, until now, to dismiss any of Lebanon’s previous and ongoing policies, nor to promote any of those suggested by different parties, if any. My point is simply to say that public socioeconomic and financial policies are too important to be decided – sometimes imposed – without public debate and prior consultation of the stakeholders. To think that the economy will do well thanks to a magic wand does not make sense, and such an effort requires wide support and a great deal of convincing. It cannot be the “chasse gardee” of a group, however good this group is. Having said so, one major problem has also been the absence of a different project, except for a few specific cases, and the willingness of most players to discuss details before even discussing the overall picture.
Allow me now to give a brief description of the existing model, before proposing some ideas for the future. Basically, a description of Lebanon nowadays ought to take into consideration the following:
- Lebanon has not had solid and sustainable growth since the end of the civil war. Per capita GDP has declined steadily and the purchasing power has decreased. The activity has focused on real estate, tourism and banking, and these sectors have lost a significant part of their highly skilled workforce in the past two years, and will need to replace it to maintain their competitiveness. Unemployment is high and no accurate figures are available for growth and unemployment, which gives an idea about the lack of interest in the real economy. The level of indebtedness of the private sector is extremely high. The economy is widely dollarized.
- The budget deficit has been extremely high in the nineties, and remained very high in the 2000’s. Public debt to GDP is the highest in the world, and still deteriorating. The current account deficit is also very high. These facts impose on Lebanon to attract massive inflows of capital on a regular basis which are channelled through the banking sector toward financing the deficit. About five billion dollars in hard currencies are needed every year to finance the state, and the dollar-denominated requirements put a permanent pressure on the central bank’s reserves.
- Foreign investment is low by regional standards, and corruption and red tape are high according to international reports. The cost of utilities is very high and reflects negatively on the business environment. The level of consumption, when put together with the inflows of capital and the debt dynamics, indicates a Dutch disease phenomenon.
Based on those facts, Lebanon has been facing several challenges during the past few years, as no fundamental change of policies occurred.
- Uninterrupted inflows have to be secured, through attractive (and costly) conditions or through aid, such as Paris II and Paris III. Of course, by no means should we have an outflow of capital that would endanger the system, so even when we face extreme exogenous shocks (such as the assassination of late Prime Minister Hariri, or the 2006 war), the banking sector has to be compensated at the expense of the Treasury to preserve its attractiveness.
- Primary surpluses have to be achieved in order to curb the debt dynamics. In the absence of structural reforms, this meant purely and simply an increase of the tax burden that has been sizeable and regular, and that have compensated for the lack of imagination of the governments.
- A reduction of the stock of debt needs to be achieved, and therefore, privatisation of public utilities and securitization of state assets have been the favourite topics of a wide range of politicians in the past decade.
In fact, it is very interesting to consider the three points that I have just mentioned from the donors’ point of view. Of course, donors at Paris III were looking for an immediate and short-term support that would allow Lebanon to survive on one hand, and to start dealing with its financial problems. Therefore, they provided aid (cash injection, point 1) in return to a government commitment of increasing both the VAT and the tax on interest earnings (increasing the primary surplus, point 2) and to privatising the telecoms (reduction of the debt stock, point 3). We have here all the spirit of Paris III.
Nevertheless, the said donors, although under pressure and unable to impose strong conditionalities, did not make the same mistake twice. The amount of money given for project financing outweighed by far the direct budgetary support, which means that the donors would like to see the much needed structural reforms happen thanks to their contribution, instead of giving money again to bail out a system that has reached its limit. Neglecting this aspect of Paris III might prove dangerous on the long run, and even if the present circumstances leave no choice for Lebanon but to try to shift these amounts toward budgetary support, the message ought to be received.
Ladies and Gentlemen,
Having briefly analysed the facts and gone through the characteristics of the present model, and having pointed out the requirements of the said model if it was to remain unchanged, or at least during a transitional phase, let me now try to address some of the issues that can be, in my personal opinion, the pillars of the much needed reform in Lebanon. Many of them, you shall note, are often in the headlines. Nevertheless, it took a lot of work to finally impose them as important topics on one hand, and on the other hand, they remain headlines, without being clearly detailed and broken down into deliverable pieces. Let me go through them as follows:
- The redistribution of wealth:
One very important element of social and economical stability is a better redistribution function. This implies a reform of the tax system (nowadays, most of the burden lies on consumption, a little bit lies on income, and nearly nothing lies on wealth), but also different budgetary policies and more efficient transfers among regions, sectors and categories. What is needed is positive action instead of minimum compensation. For example, to those who wonder why the army retirees get high benefits, the answer is that when most of them go back to live in Akkar after retiring, there is not much to be done in their neighbourhood, in addition to the fact that their pension is a key element for the local micro-economy. Thus, in this example, the solution to the benefits’ cost has to go together with the development of the regions.
- The social safety nets:
If we have tough reforms to put the economy back on track, the poor are going to suffer. And if we do nothing and let the economy collapse, the poor are going to suffer. Therefore, it is impossible for Lebanon to avoid the establishment of proper social safety nets that are of utmost importance for maintaining the poor into the economy and to avoid bearing the cost of exclusion, criminality, social turmoil, and declining growth. In particular, a re-definition of a social security system is much needed, and crucial choices are to be taken in education and health. May I just remind you that the government of Lebanon pays a lot of money for public education and public health, and at the same time, it subsidizes private education and private health?
- Re-defining the role of the state:
What is the main role of the public authorities? Regulation? Organization? Providing services? One of the main problems faced by Lebanon today is that the functions of the state are kept in a grey area and that state intervention can alternate with the absence of the state. Naturally, the issue of public enterprises is included in this point, as maintaining them in the public sphere or not needs to be decided based on the above-mentioned role. This would once and for all clarify the future of the utilities in the country. It would also help in liberalizing the economy and open it up to competition.
- Promoting growth:
Strong and sustainable growth is probably the best answer to the debt issue. But it requires much more than what has already been tried, such as lower taxes. Growth requires a clear vision for what Lebanon can and should do, a stable legal and judiciary environment, an elimination of the red tape and a significant improvement in the access to the market accompanied with an efficient administration, some modern pieces of legislation in favour of some specific sectors, an adequate labour market legislation, and a modern bankruptcy law. Once this is achieved, it will be up to the Lebanese to attract part of the wealth that is transferred to the region, among others, and to rely on their advantages to do so.
- Reforming the labour market:
It always strikes me to see that very few people mention the importance of reforming the labour market and eliminating its rigidity and making it more appealing to skilled workers in particular.
- Re-visit the monetary policy in view of the new fiscal policy
Changes in the monetary policy are difficult to imagine before embarking on a broad reform agenda. But once Lebanon is on track, the targets and constraints of the monetary policy become important topics for debate. Once the fiscal situation enters a virtuous circle, questions such as the role of the central bank in financing the deficit, the cost of the peg, the rigidity of interest rates, or the accumulation of reserves will rise. Of course, everything becomes easy when the situation is improving.
In a nutshell, I wanted to give some ideas for an alternative approach. In fact, those six points cover most of the socioeconomic and financial issues that matter in Lebanon. Seeing things through this prism allows to bring much more than small improvements to a system: it brings a complete change of the existing system. It is a different scope of activity, and it requires a clear vision of the overall picture. It is definitely a much more difficult exercise, but we all agree that Lebanon deserves more dedication and imagination.