« LEBANON RISING » IMPERATIVES AND HOPES BY TRACY CHAMOUN MAY 2020

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Having read in depth the latest economic plan presented by the government, I have come to the conclusion that although it focuses mainly on financial and fiscal restructuring proposals, it needs to address in a more realistic manner the matter of a concise vision to lead Lebanon out of its present dilemma.

At this stage, it would have been more constructive for the government to also include a recovery timeline, outlining the different steps needed in a chronological progressive way so that people can understand what is being planned, and also what is required of them during this process. It is important to provide an idea of outcomes and deadlines which can also be markers for success and for the accountability of the government.

This document like many documents which have preceded it, is full of good suggestions and in principle if they could all be achieved, it would be tremendous. Many of the technical measures proposed are good and valid. The enactment of laws to ensure transparency, the creation of regulatory bodies to monitor different sector practices, the refinement of procedures regarding tax collection, border control and more, as well as, the introduction of incentives for environmentally friendly projects, and the financing and restructuring strategies for the banking sector, are all valid suggestions. These show a high level of technical knowledge at the Ministry of Finance to offer remedies to the complex administrative entanglements, inefficiencies and hurdles of the Lebanese public sector.

However, we cannot expect the Ministry of Finance alone to formulate a salvation strategy which encompasses far more that the fine tuning of the financial sector. It is like putting a small bandage on a hemorrhaging open wound.

These types of lists of reforms have come and gone many times before. It would be better therefore to set specific and realistic targets and once having attained these, increase the level of commitment to incorporate more and more reforms.

In addition to, not prioritizing the necessary steps that need to be taken, this particular document is qualitatively flawed, because the premises upon which it has been conceived are unfortunately outdated and unrealistic.

The 3 premises outlined by the government as essential pillars for the process of recovery are:

1. The Alleviation of Debt by Increased Taxation.

2. The CEDRE Aid Package.

3. The Dependence on Tourism

These pillars need to be rethought completely. Lebanon’s problems cannot be solved by regurgitating solutions which were defective from the outset, and which in the present context have become meaningless due to many constraining factors, including: Geopolitical pressures which are determining our access to international aid, economic and social emergency concerns related to the increased poverty levels in the country and the imminent threat of famine for a large portion of the population, and finally the whole global recession which has been catapulted, as a result of the impact of the Covid-19 pandemic, on both the micro and macro levels of every country on earth.

The first priority for Lebanon as far as I’m concerned is:

Giving access to fresh money in order to insure that basic goods are replenishing the shelves and existing business can continue to survive. For this reason, two things need to occur:

1. The stabilization of the Lebanese currency:

By exerting martial pressure on:

▪ Any illegal black-market sources by inflicting very large penalties on those who wish to take advantage of the situation.

▪ Any stores or vendors which inflate their prices beyond the legal markers.

2. The funding of essential commercial sectors to ensure access to transactional money for those industries, including:

Food

Pharmaceutical

Agriculture production

Industrial production

In the government proposal there are good recommendations to consolidate the banking sector and to establish new lines of credit, to facilitate the funding of new banks and also to license development banks. The idea being that they would supply the private sector with access to funds for business creation and development and give lines of credit for import and export. This is going to be crucial to kick start the economy. In addition, any recapitalization of the banks should result in the creation of a pool of liquidity or “fresh money” which would be utilized to boost productivity and trade.

Lebanon’s economy must avoid falling into the trap of allowing banks to be driven by their bottom line internal profitability factor – through the abuse of money engineering tactics – and instead, they should be require by law, in order to retain their licenses, to allocate a large part of their lending to the commercial sector.

The government’s emphasis should therefore be directed towards identifying the vital sectors which can yield inherent and rapid economic growth – inherent and rapid being key denominators in the choice. Many such sectors have been outlined in a recent study done by McKinsey which was paid for by the Lebanese government. However, the government should not take that document at face value since it was written under different economic pressures and timelines, but it should conduct a re-evaluation of its suggestions and identify the sectors for growth based on present needs and resulting from the complete collapse of the economy, and the effects of the pandemic.

Having re-analyzed the needs of the country and taken into consideration the short, medium, and long-term objectives, the government should allocate resources to the identified sectors and provide these with both, tax incentives and capital injections for business development and growth.

In other words, funding shouldn’t be allocated in an ad hoc manner, but should be part of an overall strategy for the country which, would focus by priority on the sectors that promise the highest yields and the most competitive edge for the reinvigoration of the economy and the re-creation of a prosperous middle class. In this way, a vision for Lebanon in the future, where it is going, and how it will get there would become the driving force behind any economic recovery plan.

This brings me to the first pillar in the document which is flawed, and which is the matter of increased taxation and the projections of supplementing GDP through aggressive tax strategies which is claimed would yield up to 3.7% of GDP by 2014.

Realistically, it is blatantly obvious that until a series of productive economic – not fiscal – policies are put in place, the proposed taxation measures presented in the government’s proposal are at best optimistic. As the saying goes: you cannot get blood from a stone.

Tax is a function of productivity and until it is raised to levels where there is surplus income, taxes just add insult to injury on a population that is drowning under the weight of the complete economic collapse of the economy and the volatility of the devaluation of the Lebanese pound. People are living in a world of hyperinflation and dealing everyday with the impossible rise of the cost of living. This has rapidly pushed the majority of them under the poverty line.

Therefore, when it comes to tax reform and taxation, there are two things that need to be taken into consideration. I do agree that the document addresses in a professional manner the technical matters of tax collection and reform, but it fails to contextualize these objectives in the present social dimension of great distress and hardship that the population is experiencing, and therefore, it will also fail in the corollary dimension of tax enforcement and collection.

Firstly, I propose as a priority, on a technical level, regarding the future effectiveness of the national tax system, that the government should obtain financing through PPP tenders, to engage immediately in the process of shifting towards a tailor-made, functional, nationwide, integrated electronic e-government project. This should be completed over the next year. It would incorporate all public transactions and would in essence, by its very nature, curtail petty government corruption.

Converting to e-government is a priority along with the improvement of fiber optic access and the bolstering of the telecom sector. These would make Lebanon more efficiently competitive in the international business arena, more administratively competent internally, and more able to professionally manage the logistics of future investments and the revenue generated from the taxation on such income.

Equally, rather than push for draconian tax measures in this very delicate phase which needs alleviating solutions rather than further obligations, the government should put a moratorium on tax increases for a year, and in the process implement the e-government transition which, would in itself engender future tax reforms in an effective, but delayed manner, and would give the economy time to recover as a result of other driving incentives.

In the meantime, as an alternative to income taxation, I propose that the government invoke special measures to levy a “Poverty Tax Contribution” and that they set up a national “Poverty Tax Fund”.

Whereas the government is proposing in the document to borrow more money from the World Bank and other international donors to fuel such a “Poverty Fund”, this is not optimal in the light of Lebanon’s existing large debt which as of December 2019, was at 175.6% of GDP or 90.2 Billion US$, and which we ultimately have to find a way of servicing.

This “Poverty Tax Contribution” I am suggesting, would be applicable to all depositors, and it would be based on the value of their capital assets in their frozen bank accounts. A fair pro-rated percentage amount would be taxed based on the wealth of the contributors. It would be a monthly contribution paid to the “Poverty Tax Fund”.

The amount of deposits held in the banks is valued today at more than US$ 67 Billion, (based on the old valuation of the Lebanese Pound at US$ 1,500). If one per cent of this sum was paid as a “Poverty Subsidy Tax” it would yield US$ 67 million Dollars for a population of 4.5 million.

As an incentive to encourage the payment of this tax, the capital control measures could be tailored to allow the matching of the monthly tax payment amounts with the granting of the equivalent access to the contributors of the amount taxed, either via direct access to their cash or the ability to make transfers in the equal amount of the taxed contribution.

This “Poverty Tax Contribution”, which resorts to an internal and sustainable solution would be a way for all Lebanese to pull together and help each other without putting Lebanon under further international obligations and indebting future generations.

This fund would provide for disbursements to cover temporary unemployment, health, and education and food for all Lebanese in need. It would be distributed by allocation through a form of decentralized administration by the municipalities, based on the size of their local populations in need. This “Poverty Tax Fund” could sustain the population through this very precarious period of transition, increased poverty and even starvation.

As we continue the analysis of the government financial recovery plan, I would like to discuss the second pillar in the document that is flawed, and that is the over-reliance on the CEDRE funding plan.

The entire proposal of the government relies pivotally on the implementation of the CEDRE loan/aid agreement which was concluded last year in France. The total contribution that the government is expecting to receive to jump start the economy are the 11 Billion Dollars that were pledged through CEDRE.

However, today, as a result of the impact of the pandemic on their economies, all the countries that promised to contribute to CEDRE are confronting huge economic hurdles in their own lands. It looks improbable that following the collapse of the global economy and the significant drop in oil prices that these donor countries will be able to spare any sizeable funds to support Lebanon, which, to-date, has failed to comply with any of the regulatory standards imposed by such aid. Therefore, the over-emphasized reliance on financial aid from those countries, in order to bolster the Lebanese economy, is unrealistic and optimistic.

In addition: the content of the CEDRE proposal which was submitted by the previous government is a reflection of the very dysfunctionality of that government. It is a reiteration of all the mistakes of the past, where a “contractor mentality” has governed the economic development of the country. This contractor mentality has also been the source-feeder for the practice of local clientelism, corruption and the funneling of funds into private pockets through fake subsidiaries and offshore shell companies.

The projects put forward in CEDRE are a regurgitation of shelved concepts by the CDR and appear to be completely disconnected from Lebanon’s present social and economic realities.

Although the idea behind them, is that they would create jobs which would alleviate short-term unemployment problems, they do not yield long term income generating solutions for the vulnerable income groups in the country.

If infrastructure development is to lead to economic growth, it has to be preceded by a development strategy that would give the guidelines for project selection based on improvements that target the basic standards of living and provide long-lasting economic growth.

The whole CEDRE proposal needs to be re-analyzed, and certainly not presented at face value! The elements within it, need to be re-prioritized based on actual necessities that have arisen from the collapse of the banking sector, the foreclosures, and the new world order imposed by the Covid-19 pandemic.

These new contextual criteria should drive the prioritization of infrastructure development and not the other way around. In its present form, The CEDRE proposal lists infrastructure development as a collection of big-ticket items that have been ranked first according to the completion of tender documents and their readiness for execution, and secondly according to “socio-economic impact” and their ability to “mitigate the effects of the Syrian refugee crisis”. These criteria in themselves do not offer a sustainable development program.

Therefore, to base the crux of the government recovery proposal on the outdated and mechanistic schematics of CEDER is unproductive.

After having reassessed the value of CEDRE, a selection of projects within the CEDRE proposal could be retained, such as for instance, the improvement of Lebanon’s access to optic fiber, which would be essential to the vision outlined above of the shift towards the establishment of a full e-government.

Finally, I would like to discuss the third pillar of recovery that the government is banking on to lift Lebanon out of its present misery, and this is Tourism. I have to say that I am tired of economic policies for Lebanon being driven by “Tourism”. Tourism should be the icing on the cake of any economic system.

Firstly, a country which is reliant on imports – 80% of all goods bought or manufactured are imported into Lebanon – is a country that is not sustainable from the point of view of productivity and employment.

We need to forget about tourism for a while. Covid-19 is only a confirmation of this since the mobility of the whole world has now come into question and the future of the services industry form travel to hotels, to restaurants, needs to be reconceived and refueled with confidence before it can recover, and nobody knows how long this will take. Therefore, to make tourism a cornerstone of recovery at a time when the country needs fast solutions for creating wealth is not logical.

In addition, the suggestion to hire an outside and no doubt expensive PR firm to market Lebanon’s image at this time is also not feasible, neither from the budgetary point of view nor from the realization aspect. Lebanon has extensive in-house talent and knowledge in this field and any government spending should be directed towards Lebanese citizens first.

The state of dilapidation of the nation, the endemic waste management problem, the objectionable pollution of the sea with wastewater overflow, the lack of health standards leading to contaminated food, the abuse of pesticides in agriculture, added to the capital control problems which are not likely to disappear for at least another year and which severely hamper the food supply chain, make tourism a dim prospect for prosperity.

The government should focus instead on three sectors. These are:

Agriculture

Industry

Technology and Innovation

Agriculture: Lebanon is blessed with fertile soil and with microclimates. It has a huge range of growing possibilities, including a very mature wine industry. All these should be redefined and leveraged to create a food supply chain that is both internally sustainable and internationally appealing and sought after.

However to achieve this, Lebanon needs to develop a nationwide policy regarding the modernization of its agriculture sector to service both, the internal needs of the population with an indigenous food supply source that would mitigate famine in times of hardship, and also to deliver produce that is derived from the evolving needs of export efficiencies to different countries.

Lebanon cannot continue to sell the same type of produce to countries that have developed their own production and no longer require what Lebanon has to offer. This is a grave problem for the balance of trade where the past income producing staple export products, such as potatoes, onions, apples are no longer competitive regionally or internationally. The updated contents of any export basket of Lebanese products needs to be at the basis of a new agricultural schematic for the country.

In additional, a national policy of improving the soil, of protecting it and treating it like a national heritage, is also vital to the sustainability of the agricultural sector for generations to come. A policy of moving towards environmentally sound practices like organic growing, permaculture, biodiversity, and fair trade have to become the trademark of the quality for future Lebanese goods to make Lebanon stand out and have a competitive edge.

Industry: Every dark cloud has a silver lining, and provided that the government makes available the funds necessary for the industrial sector to function in this capital restricted climate, so that companies can get access to raw materials from abroad, then the devaluation of the Lebanese currency should make Lebanese products more competitive on the international market.

However, international standards of production should be raised to improve the export potential of Lebanese goods. In addition, this sector needs to become more dovetailed to the regional opportunities offered through the different trade agreements that are already in place.

Boosting the industrial sector should also be part of the government’s strategy to formulate a sustainable vision for that sector and should be accompanied with the provision of policies to offer subsidies, tax cuts and incentives to promote such development and growth.

Technology and innovation: Lebanon has a very high level of education; however, it has remained stagnant and has not evolved to take into account the new skill sets required for this century. Beginning with the education system, policies and directives should be developed with leading universities to determine the future needs and directions of the world. Based on this, the government should set aside a development fund to help support technological research and startups.

Not that I like to make comparisons, especially with Israel, but it is necessary to be brutally direct in these matters. They have become a leading force in the field of technological innovation which is giving them a competitive advantage in the world today. This did not happen by chance. They have a dedicated Ministry of Science and Technology that is responsible for the state’s investment in scientific research with a direct link that connects academic research with industrial development.

The Ministry of Science and Technology has positioned Israel at the forefront of science and technology, and it has boosted Israel’s economic growth, and Israel’s international status. The percentage of Israelis engaged in scientific and technological inquiry, and the amount spent on research and development (R&D) in relation to gross domestic product (GDP), is among the highest in the world. In Israel 200 start-ups are created annually and more than 2500 start-up companies are operating throughout the country. Exports of Hi-tech products comprise about 50% of all Industrial Exports, and totalled 51.4B$ in 2018.

Israel ranked number 15 in this year’s Networked Readiness Index, published in the Global Information Technology Report by the World Economic Forum. By contrast, out of 148 listed in that index Lebanon was not even mentioned!

We need to wake up from our internal petty squabbles and find a way of putting Lebanon back on its feet. But to do this, Lebanon needs to return to the drawing board. The government should create an emergency think tank composed of a selection of the highest quality experts in each sector and together they should formulate a vision for “Lebanon Rising”. This responsibility cannot be left to the Ministry of Finance alone.

However, in the meantime the government must first formulate a strategy based on the timeliest of imperatives:

1-Helping the poor survive this very difficult period.

2-Boosting the productive sectors of the existing economy to start jobs again

3-Modernizing government to transition into the digital age

4-Prioritizing sectors with rapid yield and planning their funding and development based on long term vision and objectives.

My advice: success will be a function of taking the proper time to think things through, as well as, not being reactive but acting purposefully to rebuild something that will have meaning for future generations, and guide Lebanon out of these dark times.

We are confronting our destiny – Lebanon needs to rise better, stronger and above all wiser!

Tracy Chamoun