Lebanon’s latest reform-for-support plan: Intentions and implementation may diverge significantly

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The emergency rescue program revealed by Lebanese Prime Minister Hassan Diab on April 30 purports to address comprehensively Lebanon’s economic collapse. While tabled in more desperate times made even worse by the impact of the coronavirus, the program dusts off the essential deal of earlier Lebanese attempts to attract external support: Lebanon would enact extensive internal reforms and fight corruption, and outside actors would in response open the financial spigots.

What distinguishes this plan from previous reform pitches is the fact that this government rests on the support of only one side of Lebanon’s political spectrum — Hezbollah and its allies. Previous proposed support packages for Lebanon were implicitly (and often not-so-implicitly) designed to strengthen the legitimate state institutions relative to non-state actors, especially Hezbollah. As this government relies exclusively on Hezbollah and its allies for its parliamentary support, that traditional justification for external assistance no longer works. The challenge for Diab will be to persuade donors that this plan does not solidify Hezbollah’s dominance in an increasingly fractured and dysfunctional, if not non-existent, state.

A WISHFUL APPROACH

This plan is more ambitious than its never-implemented predecessors. It calls for an International Monetary Fund (IMF) program that previous governments had ruled out, fearful that IMF intrusiveness would reveal the true extent of Lebanon’s underlying rot. The document outlining the government plan includes bracing statistics demonstrating just how bad things have gotten: 53% inflation this year, 48% of the population already impoverished, $28 billion in external balance of payments financing needed by 2024, and an industrial base accounting for only 8% of GDP, for instance.

In an everything-but-the-kitchen sink approach, it touches on issues ranging from the external debt burden to the dysfunctional power generation to agricultural production and environmental protection. In dry and technocratic language, the document makes clear that all Lebanese should expect some kind of economic and financial “haircut” to achieve a turn-around. “Limiting domestic demand through cutting government spending and reducing wages and benefits will have an impact on private consumption and investment and thus will reduce the demand for imports” is a particularly sobering sentence in light of the belt-tightening that is already provoking violent protests.

But the proposal, despite detailed and sensible analysis, rests on wishful thinking regarding the willingness of Lebanon’s traditional external partners to step in when their attention is focused on their own coronavirus mitigation and economic recovery strategies. Moreover, even if the plan’s authors (reportedly advised by consultants from the international firm Lazard Freres) are given an initial benefit of the doubt for a good-faith declaration of intentions, the question remains whether even the technocrats in this “one-color” Lebanese government — backed only by Hezbollah and its allies — are capable of cleaning house in a transparent and nonpartisan way to promote a sustainable, private-sector led economic revival in a state that exists mostly in name only.

One fears that, in a déjà vu sense, this reform plan will face one of two unpalatable fates: Either it, like its many predecessors in Lebanon, will never be implemented, or — given the unprecedented dominance of Hezbollah and its allies — it will be implemented in a distorted, partisan way, even if that is not what Diab and his ministers intend. In either case, any interest by outside donors to help evaporates.

It is striking how often the need for expansive external assistance is repeated. Two quotes are illustrative: “International financial assistance at favorable terms to close the large external financing gap and finance the development of the infrastructures … are necessary to support the growth of the economy”; and “Extensive social safety nets will be created with the assistance of development partners to provide income support, until Lebanon returns to solid growth and most of its population rises above the poverty line.” In part, this emphasis on outside actors may be aimed at Lebanese skeptics — looking at you, Hezbollah leader Hassan Nasrallah — about the IMF. But, in case the foreign assistance is not forthcoming in the geysers envisioned, the heavy reliance on large amounts of external support also provides a ready-made excuse for the government to claim “not our fault,” if the donors don’t come through.

 

A profound mystery regarding Bassil is his ability to remain untouched by any U.S. sanctions, despite the personal role he plays in expanding Hezbollah’s grip over Lebanon by giving the organization Christian cover and serving as a Hezbollah apologist. For a U.S. administration as focused on Iran as this one, Bassil, especially now that he has left his ministerial post, should be an obvious target

THE FINANCIAL SECTOR

Using language that is surely designed to appeal to last year’s street protesters, the document addresses problems in Lebanon’s private-sector dominated banking sector head-on.

As capital inflows to Lebanon slowed, even the unsustainable high interest rates on foreign currency paid by the banks proved unable to prevent capital flight. In late 2019, in the absence of national regulations, the banks started to impose what the document calls “de facto” or “informal” capital controls. According to the government’s program, in a visually arresting description, the government will “claw back sums which have unlawfully escaped the country,” and excessive interest rates on dollar accounts will also be “clawed back.”

But this raises a question: Given that Lebanon’s central bank had not imposed nationwide, uniform capital controls, was sending funds abroad in late 2019 really a crime, or just unpatriotic? Did bank depositors — including foreign commercial and individual depositors seizing what was a then perfectly legal opportunity — commit a crime in retrospect in accepting the high interest rates on offer? The potential for political score-settling by going after only certain clients may be irresistible for a government as one-sided in its political support as this one.

The document also talks about voluntary or forced consolidation, mergers, and sales of equity in Lebanon’s banks to foreign partners. While banking reform and consolidation is undoubtedly needed, the process could be distorted. Whatever their irresponsible and clubby practices, the banks had largely, under U.S. pressure, cleansed their books of Hezbollah accounts to avoid U.S. sanctions. The private-sector dominated banks provided something of a counterweight to Hezbollah inside the Lebanese system, since no one wanted to see a collective banking failure.

The forces behind the current government have no interest in preserving the banking sector’s independence. Even with the envisioned participation of international experts, state oversight of essential financial reform can evolve into Hezbollah-dominated state control of a once proud sector of Lebanon’s economy. International supervisors will be powerless to prevent Hezbollah encroachment on the financial sector, should Hezbollah — now that the banks, reviled by an enraged public unable to access their accounts, are no longer sacrosanct — be determined to force the banks to learn a lesson on Hezbollah’s terms.

LAUDABLE BUT UNREALISTIC ANTI-CORRUPTION GOALS

The much-needed fight against corruption, also an understandable demand of the pre-coronavirus street protesters, can also easily morph into a partisan tool for Hezbollah and its allies to go after their political enemies. Certain public figures will have their finances examined for a period going back 30 years. The political backers of this government will want the investigations to aim at those who oppose the Hezbollah-Damascus-Tehran axis, even though corruption is a far more generalized problem in Lebanon. Will Diab and his ministers be able to withstand pressure from Hezbollah and former Foreign Minister Gebran Bassil to look selectively and politically at corruption allegations? Or, will corruption investigations become a means to purge anti-Hezbollah political and economic actors from the public square, finalizing the terrorist movement’s takeover of the Lebanese state and economy?

While the anti-corruption mechanisms outlined include “fighting smuggling across all points of entry,” this government will surely look the other way when it comes to Hezbollah smuggling and illegal economic activities. Hezbollah demonstrated in May 2008 how it handles governments that try to force Hezbollah to follow the law: Faced by a government decision to remove Hezbollah’s corrupt airport officials and dismantle its illegal telecommunications system, Hezbollah seized parts of Beirut by force. Notably, the anti-corruption plan is also silent on fuel imports, off-shore power generation, and fuel smuggling to Syria, all shady practices linked to allies of Bassil, President Michel Aoun’s son-in-law and would-be successor, and the architect of Aoun’s alliance with Hezbollah. (A profound mystery regarding Bassil is his ability to remain untouched by any U.S. sanctions, despite the personal role he plays in expanding Hezbollah’s grip over Lebanon by giving the organization Christian cover and serving as a Hezbollah apologist. For a U.S. administration as focused on Iran as this one, Bassil, especially now that he has left his ministerial post, should be an obvious target.)

The program also envisions establishing some entities that would manage state assets and receive the funds “clawed back” from corruption, capital outflows, and excessive interest payments. These entities are envisioned to be run by a combination of international experts and Lebanese from the government, private sector, and civil society. This on paper might be a way to wrest at last the de facto control of some state properties, monopolies, import licenses and so forth from the prevailing sectarian allocations that traditionally allow Lebanese politicians, in addition to enriching themselves, to provide patronage to maintain their status. But one hopes that the Lebanese citizens themselves, who went out to the streets last year to denounce the sectarian system, will scrutinize quite closely how the appointments to these proposed entities will be made, lest one type of spoils system be replaced by a new one even less representative of, or accountable to, Lebanon’s population.

The plan and its annexes also provides details on job creation and growth, some of which come across as more realistic than others. Doubling the number of high-end tourists seems to be a pipe dream: To the extent that Gulf Arabs remain free-spending in the aftermath of coronavirus and plummeting oil prices, it is unlikely they will return to a country increasingly dominated by a Iranian-backed militia and Christian allies like Bassil who cite the “Sunni demographic threat” and “Sunni terrorism” to justify their fealty to Hezbollah. With Germany and the United Kingdom declaring Hezbollah a terrorist entity, “high-end” Europeans may also be wary.

Curiously, for a plan that purports to uproot the old system and revolutionize Lebanon’s economy, the references to parliament are fleeting. The document notes that new laws may be required for certain aspects of the program, but a parliamentary debate on the overall plan, despite the fundamental changes to the Lebanese system envisioned, does not seem to be part of the design. As flawed as Lebanon’s electoral and parliamentary democracy is, it is telling that the program ignores the one functioning democratic institution in Lebanon. Given how closely the parliament is divided, bypassing parliament may be a sign of the vulnerability of Diab’s government — or simply another sign of Hezbollah’s intolerance for transparency and democratic accountability. Presumably the Lebanese people, who have used the street to express their disdain and distrust for all political leaders, will insist on more public debate.

 

HOLDING OUT HOPE FOR AN INTERNATIONAL RESPONSE

Whatever the plan’s flaws and potential misuse for partisan mischief, the bottom line is that the Lebanese economy no longer delivers for its citizens. The capital inflows from remittances and high interest yields that delayed Lebanon’s collapse for years will not magically return. Diab is correct that the time is right for fundamental changes, and the basic trade-off of genuine (and intrusively scrutinized) Lebanese reform for external assistance is the right approach. As the document itself emphasizes, no better option exists.

But the dilemma is whether anyone outside of Lebanon is willing to demonstrate leadership now to assemble, from multiple sources, the external financial package that is needed to respond to Diab’s plan. International partners are distracted by their own coronavirus-related economic worries, and multilateral efforts will probably be focused more generally on how to address the economies most devastated by coronavirus (which, at least to date, does not include Lebanon).

Moreover, external actors who are paying attention to Lebanon have reason for skepticism, given previous broken promises for reform. In addition, external supporters should not be tricked into giving the financial means for Hezbollah and Bassil to go after their domestic foes in the name of reform — or to provide dollars that are siphoned off to Syria and Iran. Indeed, Assistant Secretary of State for Near Eastern Affairs David Schenker has been quoted in the Lebanese media as underscoring the need for Lebanon to first prove it can implement the reforms and then talk later to external actors about support.

A sensible response from the international partners, then, would be to say: “Fine, we’ve read your plan and we are working now to put together the package to support it.” But any disbursements of the assistance, per best practices of the international financial institutions, will be incremental and rigorously condition-based. The conditions must be both economic and political.

To prevent external support from inadvertently reinforcing Hezbollah-Syrian-Iranian interests in Lebanon, donors will need to specify that implementation requires buy-in from a broader consensus of Lebanon’s political forces than the one-sided support sustaining Diab’s government. Should these conditions be met, it will take strong leadership from the Americans and/or French to assemble a supporting coalition willing to augment IMF and International Bank for Reconstruction and Development (IBRD) programs. If the violent Lebanese street protests worsen, as economic desperation and even hunger rise, there will be pressure for quicker action, with the risk that the conditions soften. So better for potential supporters to act swiftly now in defining the conditions explicitly, as well as assembling the support that would respond to, and provide the incentive for, effective Lebanese actions for reform and social safety net measures.

All of this assumes that a Lebanese state able to implement programs still exists, and that the international community can still come together to help prevent a desperate situation from becoming worse (both in terms of popular misery and Hezbollah’s encroachment). Both propositions need to be tested.

A final note: Of all the crises facing Lebanon, solid waste management remains one of the most perplexing. How can successive governments of a country of only five million people (including refugees) and limited geographic scope be incapable of collecting the trash? Mountains of garbage provoked Lebanese protests starting in 2015. In Diab’s new reform program, the Lebanese government takes its cue from President Trump’s approach to coronavirus testing: “Responsibility for solid waste management will be decentralized to municipalities.

BROOKINGS

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Lebanon’s latest reform-for-support plan: Intentions and implementation may diverge significantly

by Jeffrey Feltman time to read: 10 min
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