So when Gravity Beckons, the Poor Don’t Fall Fall 2019 LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL PREFACE The Lebanon Economic Monitor provides For information about the World Bank and an update on key economic developments its activities in Lebanon, including e-copies of and policies over the past six months. It also this publication, please visit www.worldbank. presents findings from recent World Bank org.lb work on Lebanon. It places them in a longer- term and global context, and assesses the To be included on an email distribution list implications of these developments and other for this Lebanon Economic Monitor series changes in policy on the outlook for Lebanon. and related publications, please contact Its coverage ranges from the macro-economy Alain Barakat (abarakat@worldbank. to financial markets to indicators of human org). For questions and comments on the welfare and development. It is intended content of this publication, please contact for a wide audience, including policy Wissam Harake (wharake@worldbank.org) makers, business leaders, financial market or Christos Kostopoulos (ckostopoulos@ participants, and the community of analysts worldbank.org). Questions from the media and professionals engaged in Lebanon. can be addressed to Zeina Khalil (zelkhalil@ worldbank.org). The Lebanon Economic Monitor is a product of the World Bank’s Lebanon Macroeconomics, Trade and Investment (MTI) team. It was prepared by Wissam Harake (Country Economist) and Naji Abou Hamde (Economic Analyst), under the general guidance of Christos Kostopoulos (Lead Economist) and Eric Le Borgne (Practice Manager). Wissam Harake (Senior Economist), Lars Jessen (Lead Debt Specialist) and Patrick van der Wansem (Consultant) contributed the Special Focus. Zeina Khalil (Communications Officer) is the lead on communications, outreach and publishing. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. PREFACE | 1 THE WORLD BANK TABLE OF CONTENTS PREFACE ............ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ‫ ﻣﻠﺨّﺺ ﺗﻨﻔﻴﺬي‬........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 I. THE PERFECT STORM? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 II. MACRO-FINANCIAL CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 A. Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 B. Fiscal Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 C. The External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 D. Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 III. LEBANON IN CRISIS: crisis management STRATEGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 SPECIAL FOCUS ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 7 DEBT MANAGEMENT STRATEGY AND FINANCING OPTIONS FOR LEBANON . . . . . . 2 7 ANNEX I: MACRO-ECONOMIC ASSUMPTIONS OF QUANTITATIVE ANALYSIS . . . . . . . . . . . . . . . 3 8 ANNEX II: CONCESSIONALITY TERMS FOR FSI, FSII AND FSIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 0 SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 LIST OF BOXES Box 1. Downgrading Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 LIST OF TABLES Table 1. Lebanon credit rating by the three main rating agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9 Table 2. Indication of size of assumed reforms, in percent of GDP and in currency amounts . . . 2 9 Table 3. Cost of debt in 2024 under different scenarios (2019: 6.7 percent) . . . . . . . . . . . . . . . . . . . . . . 3 2 Table 4. Cost of carry of concessional financing, in US$ millions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 Table 5. Macro-fiscal assumptions – unchanged policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7 Table 6. Macro-fiscal assumptions - reform scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9 Table 7. Lebanon Selected Economic Indicators, 2013-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2 2 LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL LIST OF FIGURES Figure 1. Net exports and fixed capital formation a main drag on real GDP in 2019. . . . . . . . . . . 1 1 Figure 2. Volatile pre-2011 growth made way for a consistently slow growth period. . . . . . . . . 1 1 Figure 3. Changes in the fiscal balance have reflected structural changes in the economy as well as policy decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3 Figure 4: After 2010, the debt-to-GDP ratio regained an upward trajectory. . . . . . . . . . . . . . . . . . . . . . 1 4 Figure 5: Exports of services have historically helped offset the large structural trade deficit. ........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 Figure 6: The range of resources available to meet the balance of payments narrowed. . . . . . 1 5 Figure 7: Lebanon NFA position has been under stress since 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 Figure 8. Inflation on a decelerating trend… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 Figure 9. … while the Lira appreciates in real terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7 Figure 10. Despite banks offering higher deposits rates… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 Figure 11. … total deposits contract for the first time since the early 90s. . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 Figure 12. Banks are deleveraging from the private sector … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8 Figure 13. … as they further concentrate their holdings with the central bank. . . . . . . . . . . . . . . . . . . . 2 0 Figure 14. Lebanon’s risk premia have widened significantly compared to emerging markets … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 Figure 15. … but deposit rates in Lebanon are broadly in line with those from emerging markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0 Figure 16. Interest cost of debt surpassed growth for much of Lebanon’s post-war economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8 Figure 17. Debt to GDP (left) and interest to revenue (right) under scenarios of unchanged policies and reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9 Figure 18. Debt to GDP (left) and interest to revenue (right) with concessional financing. . . . . 3 1 Figure 19. Interest cost on Lebanese government debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 Figure 20. Debt to GDP for alternative financing measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 Figure 21. Interest to revenue for alternative financing measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 3 THE WORLD BANK EXECUTIVE SUMMARY I. Lebanon is in Crisis. While it is from the broader dynamics of conflict in the too early to gauge the economic impact Middle East). Under the guise of preserving of recent events, it is important to note post-war confessional balances, a post- that even prior to the eruption of the war elite emerged to command the main demonstrations, the World Bank projected economic resources, both private and public, a small recession in 2019; we now estimate generating large rents and dividing the spoils that the recession will be deeper. There has of uncompetitive markets and a dysfunctional been an unprecedented banking holiday, and hallowed state. with banks closed over October 18-31 for retail and other transactions, reopening III. Lebanon needs a credible crisis thereafter with informal capital controls and management strategy. This strategy other uncoordinated measures, then closing should involve short-term measures to again for 10 days on November 9. Critical contain the crisis, as well as medium- to short-term financing for businesses has been long-term measures to address structural interrupted, leading to disruptions all along issues. Several packages of measures the supply chain and an ultimate impact on out to be analyzed in light of their impact workers. Unemployment is expected to rise on the short-, medium- and long-term and poverty, already high, will follow. The development of Lebanon, and in particular, emerging parallel exchange market is likely their distributional impacts. With this in to trigger inflationary pressures, hurting the mind, below is an illustrative example of poor and middle class disproportionally. what the contour of such a credible strategy Shortages of imports are also expected to could include: materialize. • Element 1: Addressing External II. The crisis is a culmination Imbalances. Lebanon runs a large of chronic conditions that have long structural trade imbalance which drives impeded Lebanon’s development process. one of the largest current account Lebanon’s Systematic Country Diagnostic deficit-to-GDP ratios globally (>20% (SCD)1 identified elite capture, hidden of GDP), while maintaining a nominal behind the veil of confessionalism and dollar peg to the Lebanese Pound (LBP) confessional governance, as one of two set in 1997. This has resulted in a overarching constraints for the country’s significant exchange rate overvaluation. economic development (the other being The resulting large external financing conflict and violence, stemming, in part, needs exposes the country to a severe shortage of inflows should confidence were to falter. 1 Le Borgne, Eric and Jacob, Thomas (2016), Promoting Poverty Reduction and Shared Prosperity: • Element 2: A Progressive Path to Fiscal A systematic Country Diagnostic, World Bank Group, Report No. 103201, January 2016. Sustainability. Lebanon has one of the 4 | EXECUTIVE SUMMARY LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL highest debt-to-GDP ratios globally, suggestions include: Revise and accumulated from persistent and large update bank resolution framework; fiscal deficits since the end of the civil war. Recapitalization of the deposit insurance This imposes an elevated gross public fund as needed, and aligning of the deposit financing need, a good part of which is in insurance scheme with best practices; dollars, further aggravating the balance Conducting intensified supervision; of payments. Lebanon would need to Strengthening NPL resolution. undertake a sustained fiscal adjustment process. Equity considerations would • Element 4: Strengthened Social Safety warrant highly progressive measures Nets. Pre-existing inequities and social that target key inefficiencies and disenfranchisement will be further realize resources from those who have aggravated in the event of a crisis or a disproportionately benefited from severe recession. In order to cushion Lebanon’s unequal growth model. these negative effects, Government Measures include: Addressing the cost could consider programs designed to of debt; Electricity reforms; A progressive respond to the short-term needs of the global income tax. In addition, we suggest poor. These can include, for example, the following financial management and scaling up the e-card food voucher of State-Owned Enterprises (SOE) reforms: the National Poverty Targeting Program Establishment of a Single Treasury (NPTP); providing an education cash Account; Elimination of unnecessary transfer for children from extreme poor extra budgetary funds; Establishment of households who are vulnerable to transparent accounting and reporting dropping out of schooling; increasing of revenues, costs, investments needs access to quality healthcare for poor between: (i) OGERO, MoT and MoF, and Lebanese; and a wage subsidy scheme for (ii) the Port of Beirut. for youth. • Element 3: Regaining Efficacy of • Element 5: Enhancing Growth and Banking Sector. The reliance on Forcefully Tackling Governance. continued deposit inflows to fund the Illegal activities are not sanctioned by large financing needs of both the public the state when they involve politically and private sectors while ensuring or confessionally connected or wealthy currency stability presents enormous actors, exacerbating elite capture and the challenges to the sovereign-commercial patronage system. This has been fertile bank relationship. The banking sector grounds for corruption, nepotism and balance sheet is among the largest inequality; Transparency International’s globally, amounting to 437 percent of Corruption Perception Index 2019 GDP by September 2019, 70 percent ranked Lebanon 138 out of 180 countries of which are lent to the sovereign (split worldwide in 2019, indicating endemic between 58 percent to the central bank corruption and making Lebanon among and 12 percent to the Government). the 50 most corrupt countries in the Meanwhile, economic conditions are world. Suggested measures include: being reflected on banks’ loan portfolio. Implement judiciary reforms; Annul To help address these vulnerabilities, the law on Exclusive Agencies and EXECUTIVE SUMMARY | 5 THE WORLD BANK liberalization of the brand retail sector; Adopt a law on the recovery of Stolen Assets; Adopt a new Public Procurement Law that is aligned with international best practices; Passage and implementation of a new Competition Law that is aligned with international best practices; Adoption of a unified vision for the ICT sector and clear consensus on policy. IV. Lebanon’s challenge has been on the implementation side, especially, cross- entity coordination, sustaining momentum, and monitoring and evaluation. This can be addressed by establishing a reform secretariat that tracks the implementation of these reforms across Government. The reform secretariat should be staffed by top experts selected through a competitive process. It would report directly to Government and establish partnership with Civil Society Organizations and the private sector. V. A new Government can gain credibility by quickly implementing a crisis management strategy and advancing strong governance reforms that help break the hold of the elite capture. Indeed, political discord has been a primary source of pressures. A new effective Government is a necessary, albeit insufficient, step toward crisis management. 6 | EXECUTIVE SUMMARY ‫‪LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL‬‬ ‫ﻣﻠﺨّﺺ ﺗﻨﻔﻴﺬي‬ ‫اﻟﻌﻨﺼﺮ اﻷول‪ :‬ﻣﻌﺎﻟﺠﺔ اﻻﺧﺘﻼﻻت اﻟﺨﺎرﺟﻴﺔ‪ .‬ﻳﺸﻬﺪ ﻟﺒﻨﺎن‬ ‫•‬ ‫‪ .I‬ﻟﺒﻨﺎن ﻓﻲ أزﻣﺔ‪ .‬ﻣﻦ اﻟﺴﺎﺑﻖ ﻷواﻧﻪ ﻗﻴﺎس اﻟﺘﺄﺛﻴﺮ اﻻﻗﺘﺼﺎدي‬ ‫اﺧﺘﻼﻻ ﻫﻴﻜﻠﻴﺎً ﻛﺒﻴﺮا ً ﻓﻲ اﻟﻤﻴﺰان اﻟﺘﺠﺎري ﻣﻤﺎ ﻳﺆدي اﻟﻰ‬ ‫ً‬ ‫ﻟﻸﺣﺪاث اﻷﺧﻴﺮة‪ ،‬ﻟﻜﻦ ﺗﺠﺪر اﻹﺷﺎرة إﻟﻰ أﻧﻪ ﺣﺘﻰ ﻗﺒﻞ اﻧﺪﻻع‬ ‫إﺣﺪى أﻛﺒﺮ ﻧﺴﺐ اﻟﻌﺠﺰ ﻓﻲ اﻟﺤﺴﺎب اﻟﺠﺎري إﻟﻰ اﻟﻨﺎﺗﺞ‬ ‫اﻟﻤﻈﺎﻫﺮات‪ ،‬ﻛﺎن اﻟﺒﻨﻚ اﻟﺪوﻟﻲ ﻗﺪ ﺗﻮﻗّﻊ رﻛﻮدًا ﺧﻔﻴﻔﺎً ﻓﻲ ﻋﺎم‬ ‫اﻟﻤﺤﻠﻲ اﻹﺟﻤﺎﻟﻲ ﻋﻠﻰ ﻣﺴﺘﻮى اﻟﻌﺎﻟﻢ )أﻛﺜﺮ ﻣﻦ ‪ ٪٢٠‬ﻣﻦ‬ ‫ﺪر اﻵن أن ﻳﻜﻮن اﻟﺮﻛﻮد أﻋﻤﻖ‪ .‬ﻓﻘﺪ ﺷﻬﺪت اﻟﺒﻼد‬ ‫‪٢٠١٩‬؛ وﻧﻘ ّ‬ ‫اﻟﻨﺎﺗﺞ اﻟﻤﺤﻠﻲ اﻹﺟﻤﺎﻟﻲ(‪ ،‬ﻣﻊ اﻟﺤﻔﺎظ ﻋﻠﻰ ﺗﺜﺒﻴﺖ إﺳﻤﻲ‬ ‫ﻋﻄﻠﺔ ﻣﺼﺮﻓﻴﺔ ﻏﻴﺮ ﻣﺴﺒﻮﻗﺔ‪ ،‬ﺣﻴﺚ أﻏﻠﻘﺖ اﻟﻤﺼﺎرف أﺑﻮاﺑﻬﺎ ﻓﻲ‬ ‫ﻟﺴﻌﺮ ﺻﺮف اﻟﻠﺪوﻻر ﺑﺎﻟﻠﻴﺮة اﻟﻠﺒﻨﺎﻧﻴﺔ ﻣﻨﺬ ‪ .١٩٩٧‬وﻗﺪ أدى‬ ‫اﻟﻔﺘﺮة ﻣﻦ ‪ ١٨‬إﻟﻰ ‪ ٣١‬أﻛﺘﻮﺑﺮ‪ /‬ﺗﺸﺮﻳﻦ اﻷول أﻣﺎم ﻣﻌﺎﻣﻼت اﻟﺘﺠﺰﺋﺔ‬ ‫ذﻟﻚ إﻟﻰ ﺳﻌﺮ ﺻﺮف ﻣﺒﺎﻟﻎ ﻓﻲ ﻗﻴﻤﺘﻪ‪ .‬وﻗﺪ ﻧﺠﻢ ﻋﻦ ذﻟﻚ‬ ‫وﻏﻴﺮﻫﺎ‪ ،‬ﻟﺘﻌﺎود ﻓﺘﺤﻬﺎ ﺑﻌﺪ ذﻟﻚ ﻣﻊ ﺿﻮاﺑﻂ ﻏﻴﺮ رﺳﻤﻴﺔ ﻋﻠﻰ رأس‬ ‫ﺮض اﻟﺒﻼد ﻟﺴﻴﻨﺎرﻳﻮ‬ ‫اﺣﺘﻴﺎﺟﺎت ﺗﻤﻮﻳﻞ ﺧﺎرﺟﻲ ﻛﺒﻴﺮة ﺗ ُﻌ ّ‬ ‫اﻟﻤﺎل وﻏﻴﺮﻫﺎ ﻣﻦ اﻟﺘﺪاﺑﻴﺮ ﻏﻴﺮ اﻟﻤﻨﺴﻘﺔ‪ ،‬ﺛﻢ أﻏﻠﻘﺖ ﻣﺮة أﺧﺮى‬ ‫اﻟﺘﻮﻗﻒ اﻟﻤﻔﺎﺟﺊ إذا ﻣﺎ ﺗﻌﺜﺮت اﻟﺜﻘﺔ‪.‬‬ ‫ﻟﻤﺪة ﻋﺸﺮة أﻳﺎم ﻓﻲ ‪ ٩‬ﻧﻮﻓﻤﺒﺮ‪ /‬ﺗﺸﺮﻳﻦ اﻟﺜﺎﻧﻲ‪ .‬وﺗﻮﻗّﻒ اﻟﺘﻤﻮﻳﻞ‬ ‫اﻟﻘﺼﻴﺮ اﻷﻣﺪ اﻟﻀﺮوري ﻟﻠﺸﺮﻛﺎت‪ ،‬ﻣﻤﺎ أدى إﻟﻰ اﺿﻄﺮاﺑﺎت ﻋﻠﻰ‬ ‫اﻟﻌﻨﺼﺮ اﻟﺜﺎﻧﻲ‪ :‬اﻟﻤﻀﻲ ﻓﻲ ﺳﻴﺎﺳﺎت ﺗﻘﺪﻣﻴﺔ ﻧﺤﻮ‬ ‫•‬ ‫ﻃﻮل ﺳﻠﺴﻠﺔ اﻟﺘﻮرﻳﺪ وأﺛﺮ ﺳﻠﺒﺎً ﻋﻠﻰ اﻟﻌﻤﺎل ﻓﻲ اﻟﻤﻄﺎف اﻷﺧﻴﺮ‪.‬‬ ‫اﻻﺳﺘﺪاﻣﺔ اﻟﻤﺎﻟﻴﺔ‪ .‬ﻳﺴﺠﻞ ﻟﺒﻨﺎن إﺣﺪى أﻋﻠﻰ ﻧﺴﺐ‬ ‫وﻣﻦ اﻟﻤﺘﻮﻗﻊ أن ﺗﺮﺗﻔﻊ اﻟﺒﻄﺎﻟﺔ وﻳﺘﻔﺎﻗﻢ اﻟﻔﻘﺮ‪ ،‬اﻟﻤﺮﺗﻔﻊ أﺻﻼً‪.‬‬ ‫اﻟﺪﻳﻦ إﻟﻰ اﻟﻨﺎﺗﺞ اﻟﻤﺤﻠﻲ اﻹﺟﻤﺎﻟﻲ ﻋﻠﻰ ﻣﺴﺘﻮى اﻟﻌﺎﻟﻢ‪،‬‬ ‫ﺟﺢ أن ﻳﺆدي ﺳﻮق اﻟﺼﺮف اﻟﻤﻮازي اﻟﻨﺎﺷﺊ إﻟﻰ‬ ‫ﻛﻤﺎ ﻣﻦ اﻟﻤﺮ ّ‬ ‫وﻗﺪ ﺗﺮاﻛﻤﺖ ﻫﺬه اﻟﻨﺴﺒﺔ ﻧﺘﻴﺠﺔ ﻋﺠﻮزات ﻣﺎﻟﻴﺔ ﻛﺒﻴﺮة‬ ‫ﺮ ﺑﺎﻟﻄﺒﻘﺔ اﻟﻔﻘﻴﺮة واﻟﻤﺘﻮﺳﻄﺔ ﺑﺸﻜﻞ‬ ‫ﺿﻐﻮط ﺗﻀﺨﻤﻴﺔ‪ ،‬ﻣﻤﺎ ﻳﻀ ّ‬ ‫وﻣﺴﺘﻤﺮة ﻣﻨﺬ ﻧﻬﺎﻳﺔ اﻟﺤﺮب اﻷﻫﻠﻴﺔ‪ .‬وﻳﻔﺮض ذﻟﻚ ﺣﺎﺟﺔ‬ ‫ﻏﻴﺮ ﻣﺘﻨﺎﺳﺐ‪ .‬ﻛﻤﺎ ﻣﻦ اﻟﻤﺘﻮﻗﻊ أن ﻳﺤﺪث ﻧﻘﺺ ﻓﻲ اﻟﻮاردات‪.‬‬ ‫ﻛﺒﻴﺮة اﻟﻰ اﻟﺘﻤﻮﻳﻞ اﻟﻌﺎم‪ ،‬ﺟﺰء ﻛﺒﻴﺮ ﻣﻨﻪ ﺑﺎﻟﺪوﻻر‪ ،‬ﻣﻤﺎ ﻳﺰﻳﺪ‬ ‫ﻣﻦ اﻟﺘﺄﺛﻴﺮ اﻟﺴﻠﺒﻲ ﻋﻠﻰ ﻣﻴﺰان اﻟﻤﺪﻓﻮﻋﺎت‪ .‬ﺳﻴﺤﺘﺎج ﻟﺒﻨﺎن‬ ‫‪ .II‬ﺗﻤﺜّﻞ اﻷزﻣﺔ ﺗﺘﻮﻳﺠﺎً ﻟﻠﻈﺮوف اﻟﻤﺰﻣﻨﺔ اﻟﺘﻲ أﻋﺎﻗﺖ ﻋﻤﻠﻴﺔ‬ ‫إﻟﻰ إﺟﺮاء ﻋﻤﻠﻴﺔ ﺗﻜﻴّﻒ ﻣﺎﻟﻲ ﻣﺴﺘﺪاﻣﺔ‪ .‬ﻛﻤﺎ ﺗﺴﺘﺪﻋﻲ‬ ‫ﺪدت دراﺳﺔ اﻟﺘﺸﺨﻴﺺ‬ ‫اﻟﺘﻨﻤﻴﺔ ﻓﻲ ﻟﺒﻨﺎن ﻟﻔﺘﺮة ﻃﻮﻳﻠﺔ‪ .‬ﻓﻘﺪ ﺣ ّ‬ ‫اﻋﺘﺒﺎرات اﻟﻤﺴﺎواة اﺗﺨﺎذ ﺗﺪاﺑﻴﺮ ﺗﻘﺪّ ﻣﻴﺔ ﺗﺴﺘﻬﺪف أوﺟﻪ‬ ‫اﻟﻤﻨﻬﺠﻲ ﻟﻠﺒﻨﺎن‪ ١‬ﺳﻴﻄﺮة اﻟﻨﺨﺒﺔ اﻟﺘﻲ ﺗﺘﺨﻔّﻰ وراء ﻏﻄﺎء اﻟﻄﺎﺋﻔﻴﺔ‬ ‫اﻟﻘﺼﻮر اﻟﺮﺋﻴﺴﻴﺔ وﺗﺄﺧﺬ اﻟﻤﻮارد ﻣﻦ أوﻟﺌﻚ اﻟﺬﻳﻦ اﺳﺘﻔﺎدوا‬ ‫واﻟﺤﻜﻢ اﻟﻄﺎﺋﻔﻲ‪ ،‬ﻛﺄﺣﺪ اﻟﻌﺎﺋﻘﻴﻦ اﻟﺮﺋﻴﺴﻴﻴﻦ ﻟﻠﺘﻨﻤﻴﺔ اﻻﻗﺘﺼﺎدﻳﺔ‬ ‫ﺑﺸﻜﻞ ﻏﻴﺮ ﻣﺘﻨﺎﺳﺐ ﻣﻦ ﻧﻤﻮذج اﻟﻨﻤﻮ ﻏﻴﺮ اﻟﻤﺘﻜﺎﻓﺊ‬ ‫ﻓﻲ اﻟﺒﻼد )واﻟﻌﺎﺋﻖ اﻵﺧﺮ ﻫﻮ اﻟﺼﺮاع واﻟﻌﻨﻒ‪ ،‬اﻟﻠﺬان ﻳﻨﺒﻌﺎن ﺟﺰﺋ ً‬ ‫ﻴﺎ‬ ‫ﻓﻲ ﻟﺒﻨﺎن‪ .‬وﺗﺸﻤﻞ اﻟﺘﺪاﺑﻴﺮ ﻣﺎ ﻳﻠﻲ‪ :‬ﻣﻌﺎﻟﺠﺔ ﻛﻠﻔﺔ اﻟﺪﻳﻦ؛‬ ‫ﻣﻦ اﻟﺪﻳﻨﺎﻣﻴﺎت اﻷوﺳﻊ ﻧﻄﺎﻗًﺎ ﻟﻠﺼﺮاع ﻓﻲ اﻟﺸﺮق اﻷوﺳﻂ(‪ .‬وﺗﺤﺖ‬ ‫إﺻﻼﺣﺎت ﻗﻄﺎع اﻟﻜﻬﺮﺑﺎء؛ ﺿﺮﻳﺒﺔ ﺗﺼﺎﻋﺪﻳﺔ ﻣﻮﺣﺪة ﻋﻠﻰ‬ ‫ﺳﺘﺎر اﻟﺤﻔﺎظ ﻋﻠﻰ اﻟﺘﻮازﻧﺎت اﻟﻄﺎﺋﻔﻴﺔ ﻟﻔﺘﺮة ﻣﺎ ﺑﻌﺪ اﻟﺤﺮب‪،‬‬ ‫اﻟﺪﺧﻞ‪ .‬ﺑﺎﻹﺿﺎﻓﺔ إﻟﻰ ذﻟﻚ‪ ،‬ﻧﻘﺘﺮح اﻹﺻﻼﺣﺎت اﻟﺘﺎﻟﻴﺔ ﻋﻠﻰ‬ ‫ﻇﻬﺮت ﻧﺨﺒﺔ ﻣﺎ ﺑﻌﺪ اﻟﺤﺮب ﺗﺘﺤﻜّﻢ ﺑﺎﻟﻤﻮارد اﻻﻗﺘﺼﺎدﻳﺔ اﻟﺮﺋﻴﺴﻴﺔ‪،‬‬ ‫ﻣﺴﺘﻮى اﻹدارة اﻟﻤﺎﻟﻴﺔ واﻟﻤﺆﺳﺴﺎت اﻟﻤﻤﻠﻮﻛﺔ ﻣﻦ اﻟﺪوﻟﺔ‪:‬‬ ‫ﺔ وﺗﺘﺎﻗﺴﻢ اﻟﻐﻨﺎﺋﻢ‬ ‫ﺳﻮاء اﻟﻌﺎﻣﺔ أو اﻟﺨﺎﺻﺔ‪ ،‬وﺗﻮﻟّﺪ رﻳﻮﻋﺎً ﺿﺨﻤ ً‬ ‫إﻧﺸﺎء ﺣﺴﺎب ﺧﺰﻳﻨﺔ واﺣﺪ؛ إﻟﻐﺎء اﻟﺘﻤﻮﻳﻞ ﻏﻴﺮ اﻟﻀﺮوري‬ ‫اﻟﻨﺎﺗﺠﺔ ﻋﻦ اﻷﺳﻮاق ﻏﻴﺮ اﻟﺘﻨﺎﻓﺴﻴﺔ وﻋﻦ اﻻﺧﺘﻼل اﻟﻮﻇﻴﻔﻲ اﻟﺬي‬ ‫ﻣﻦ ﺧﺎرج اﻟﻤﻴﺰاﻧﻴﺔ؛ إﻧﺸﺎء ﻧﻈﺎم ﺷﻔﺎف ﻟﻠﻤﺤﺎﺳﺒﺔ واﻹﺑﻼغ‬ ‫ﺷﻬﺪﺗﻪ اﻟﺪوﻟﺔ‪.‬‬ ‫ﻋﻦ اﻹﻳﺮادات واﻟﺘﻜﺎﻟﻴﻒ واﻻﺣﺘﻴﺎﺟﺎت اﻻﺳﺘﺜﻤﺎرﻳﺔ‬ ‫ﺑﻴﻦ )‪ (i‬أوﺟﻴﺮو ووزارة اﻻﺗﺼﺎﻻت ووزارة اﻟﻤﺎﻟﻴﺔ و)‪(ii‬‬ ‫‪ .III‬ﻳﺤﺘﺎج ﻟﺒﻨﺎن إﻟﻰ اﺳﺘﺮاﺗﻴﺠﻴﺔ ﻹدارة اﻷزﻣﺔ ذات ﻣﺼﺪاﻗﻴﺔ‪.‬‬ ‫ﻟﻤﺮﻓﺄ ﺑﻴﺮوت‪.‬‬ ‫ﻳﺠﺐ أن ﺗﺘﻀﻤﻦ ﻫﺬه اﻻﺳﺘﺮاﺗﻴﺠﻴﺔ ﺗﺪاﺑﻴﺮ ﻗﺼﻴﺮة اﻷﺟﻞ ﻻﺣﺘﻮاء‬ ‫اﻷزﻣﺔ‪ ،‬ﺑﺎﻹﺿﺎﻓﺔ إﻟﻰ ﺗﺪاﺑﻴﺮ ﻣﺘﻮﺳﻄﺔ إﻟﻰ ﻃﻮﻳﻠﺔ اﻷﺟﻞ ﻟﻤﻌﺎﻟﺠﺔ‬ ‫اﻟﻌﻨﺼﺮ اﻟﺜﺎﻟﺚ‪ :‬اﺳﺘﻌﺎدة ﻓﻌﺎﻟﻴﺔ اﻟﻘﻄﺎع اﻟﻤﺼﺮﻓﻲ‪.‬‬ ‫•‬ ‫ﻴﻦ دراﺳﺔ ﺣﺰﻣﺔ ﻣﻦ اﻟﺘﺪاﺑﻴﺮ ﻧﻈﺮا ً‬ ‫اﻟﻘﻀﺎﻳﺎ اﻟﻬﻴﻜﻠﻴﺔ‪ .‬ﻛﻤﺎ ﻳﺘﻌ ّ‬ ‫ن اﻻﻋﺘﻤﺎد ﻋﻠﻰ اﺳﺘﻤﺮار ﺗﺪﻓﻘﺎت اﻟﻮداﺋﻊ ﻟﺘﻤﻮﻳﻞ‬ ‫إّ‬ ‫ﻟﺘﺄﺛﻴﺮﻫﺎ ﻋﻠﻰ اﻟﺘﻨﻤﻴﺔ اﻟﻘﺼﻴﺮة واﻟﻤﺘﻮﺳﻄﺔ واﻟﻄﻮﻳﻠﺔ اﻷﺟﻞ ﻓﻲ‬ ‫اﻻﺣﺘﻴﺎﺟﺎت اﻟﻀﺨﻤﺔ ﻟﻠﻘﻄﺎﻋﻴﻦ اﻟﻌﺎم واﻟﺨﺎص ﻣﻊ ﺿﻤﺎن‬ ‫ﻟﺒﻨﺎن‪ ،‬ﻻ ﺳﻴﻤﺎ ﻣﻦ ﻧﺎﺣﻴﺔ ﺗﻮزﻳﻌﻬﺎ اﻻﺟﺘﻤﺎﻋﻲ‪-‬اﻻﻗﺘﺼﺎدي‪ .‬وﻣﻦ‬ ‫اﺳﺘﻘﺮار اﻟﻌﻤﻠﺔ ﻳﻀﻊ ﺗﺤﺪﻳﺎت ﻫﺎﺋﻠﺔ أﻣﺎم اﻟﻌﻼﻗﺔ ﺑﻴﻦ‬ ‫ﻫﺬا اﻟﻤﻨﻄﻠﻖ‪ ،‬ﻧﻄﺮح ﻓﻲ ﻣﺎ ﻳﻠﻲ ﻣﺜﺎﻻً ﻟﻤﺎ ﻳﻤﻜﻦ أن ﺗﺘﻀﻤﻨﻪ ﻣﺜﻞ‬ ‫ﺪ اﻟﻤﻴﺰاﻧﻴﺔ اﻟﻌﻤﻮﻣﻴﺔ‬ ‫اﻟﺪوﻟﺔ واﻟﻤﺼﺎرف اﻟﺘﺠﺎرﻳﺔ‪ .‬وﺗُﻌ ّ‬ ‫ﻫﺬه اﻻﺳﺘﺮاﺗﻴﺠﻴﺔ اﻟﻤﻮﺛﻮق ﺑﻬﺎ‪:‬‬ ‫ﻟﻠﻘﻄﺎع اﻟﻤﺼﺮﻓﻲ ﻣﻦ ﺑﻴﻦ اﻷﻛﺒﺮ ﻓﻲ اﻟﻌﺎﻟﻢ‪ ،‬ﺣﻴﺚ وﺻﻠﺖ‬ ‫إﻟﻰ ‪ ٤٣٧‬ﻓﻲ اﻟﻤﺎﺋﺔ ﻣﻦ إﺟﻤﺎﻟﻲ اﻟﻨﺎﺗﺞ اﻟﻤﺤﻠﻲ ﺑﺤﻠﻮل‬ ‫‪ 1‬إرﻳﻚ ﻟﻮ ﺑﻮرن وﺟﺎﻛﻮب ﺗﻮﻣﺎس )‪ ،(٢٠١٦‬ﺗﻌﺰﻳﺰ اﻟﺤﺪ ﻣﻦ اﻟﻔﻘﺮ‬ ‫ﺮض ‪ ٧٠‬ﻓﻲ اﻟﻤﺎﺋﺔ ﻣﻨﻬﺎ ﻛﺪﻳﻮن‬ ‫ﺳﺒﺘﻤﺒﺮ‪ /‬أﻳﻠﻮل ‪ ،٢٠١٩‬وﺗ ُﻘ َ‬ ‫واﻟﺮﻓﺎه اﳌﺸﱰك دراﺳﺔ اﻟﺘﺸﺨﻴﺺ اﳌﻨﻬﺠﻲ ﻟﻠﺒﻼد‪ ،‬ﻣﺠﻤﻮﻋﻪ اﻟﺒﻨﻚ اﻟﺪوﱄ‪،‬‬ ‫ﺳﻴﺎدﻳﺔ )‪ ٪٥٨‬ﻟﻤﺼﺮف ﻟﺒﻨﺎن و ‪ ٪١٢‬ﻟﻠﺤﻜﻮﻣﺔ اﻟﻠﺒﻨﺎﻧﻴﺔ(‪.‬‬ ‫اﻟﺘﻘﺮﻳﺮ رﻗﻢ ‪ ،١٠٣٢٠١‬ﻛﺎﻧﻮن اﻟﺜﺎ ‪/‬ﻳﻨﺎﻳﺮ ‪٢٠١٦‬‬ ‫‪ | 7‬ﻣﻠﺨّﺺ ﺗﻨﻔﻴﺬي‬ ‫‪THE WORLD BANK‬‬ ‫ﺗﻨﺎﻓﺴﻴﺔ‪ .‬ﻋﻠﻰ ان ﺗﻘ ّ‬ ‫ﺪم اﻟﻬﻴﺌﺔ ﺗﻘﺎرﻳﺮﻫﺎ ﻣﺒﺎﺷﺮة إﻟﻰ اﻟﺤﻜﻮﻣﺔ‬ ‫وﻓﻲ اﻟﻮﻗﺖ ﻧﻔﺴﻪ‪ ،‬ﺗﻨﻌﻜﺲ اﻟﻈﺮوف اﻻﻗﺘﺼﺎدﻳﺔ ﻋﻠﻰ‬ ‫وﺗﻘﻴﻢ ﺷﺮاﻛﺔ ﻣﻊ ﻣﻨﻈﻤﺎت اﻟﻤﺠﺘﻤﻊ اﻟﻤﺪﻧﻲ واﻟﻘﻄﺎع اﻟﺨﺎص‪.‬‬ ‫ﻣﺤﻔﻈﺔ ﻗﺮوض اﻟﻤﺼﺎرف‪ .‬ﺗﺘﻀﻤﻦ اﻻﻗﺘﺮاﺣﺎت ﻟﻠﻤﺴﺎﻋﺪة‬ ‫ﻓﻲ ﻣﻌﺎﻟﺠﺔ ﻣﻜﺎﻣﻦ اﻟﺨﻄﺮ ﻫﺬه ﻣﺎ ﻳﻠﻲ‪ :‬ﻣﺮاﺟﻌﺔ وﺗﺤﺪﻳﺚ‬ ‫‪ .V‬ﺑﺈﻣﻜﺎن ﺣﻜﻮﻣﺔ ﺟﺪﻳﺪة أن ﺗﻜﺴﺐ اﻟﻤﺼﺪاﻗﻴﺔ ﻣﻦ ﺧﻼل‬ ‫إﻃﺎر ﺗﺴﻮﻳﺔ وﺿﻊ اﻟﻤﺼﺎرف؛ إﻋﺎدة رﺳﻤﻠﺔ ﺻﻨﺪوق اﻟﺘﺄﻣﻴﻦ‬ ‫اﻹﺳﺮاع ﻓﻲ ﺗﻨﻔﻴﺬ اﺳﺘﺮاﺗﻴﺠﻴﺔ ﻹدارة اﻷزﻣﺔ واﻟﺪﻓﻊ ﺑﺈﺻﻼﺣﺎت‬ ‫ﻋﻠﻰ اﻟﻮداﺋﻊ ﺣﺴﺐ اﻟﺤﺎﺟﺔ‪ ،‬وﻣﻮاءﻣﺔ ﺧﻄﺔ اﻟﺘﺄﻣﻴﻦ ﻋﻠﻰ‬ ‫ﻗﻮﻳﺔ ﻋﻠﻰ ﺻﻌﻴﺪ اﻟﺤﻮﻛﻤﺔ ﺗﺴﺎﻋﺪ ﻋﻠﻰ ﻛﺴﺮ ﺳﻴﻄﺮة اﻟﻨﺨﺒﺔ‪.‬‬ ‫اﻟﻮداﺋﻊ ﻣﻊ أﻓﻀﻞ اﻟﻤﻤﺎرﺳﺎت؛ إﺟﺮاء رﻗﺎﺑﺔ ﻣﻜﺜﻔﺔ؛ وﺗﻌﺰﻳﺰ‬ ‫ﻴﺎ ﻟﻠﻀﻐﻮط‪ .‬إن‬ ‫ﻟﻄﺎﻟﻤﺎ ﺷﻜﻠﺖ اﻟﺨﻼﻓﺎت اﻟﺴﻴﺎﺳﻴﺔ ﻣﺼﺪ ً‬ ‫را رﺋﻴﺴ ً‬ ‫إدارة اﻟﺪﻳﻮن اﻟﻤﺘﻌﺜﺮة‪.‬‬ ‫ﺗﺸﻜﻴﻞ ﺣﻜﻮﻣﺔ ﺟﺪﻳﺪة ﻓﻌﺎﻟﺔ ﻫﻲ ﺧﻄﻮة ﺿﺮورﻳﺔ‪ ،‬وإن ﻛﺎﻧﺖ‬ ‫ﻏﻴﺮ ﻛﺎﻓﻴﺔ‪ ،‬ﻟﻠﻤﻀﻲ ﻧﺤﻮ إدارة اﻷزﻣﺔ‪.‬‬ ‫اﻟﻌﻨﺼﺮ اﻟﺮاﺑﻊ‪ :‬ﺗﻌﺰﻳﺰ ﺷﺒﻜﺎت اﻷﻣﺎن اﻻﺟﺘﻤﺎﻋﻲ‪ .‬ﺳﺘﺰداد‬ ‫•‬ ‫ﺣﺪة ﻋﺪم اﻟﻤﺴﺎواة واﻟﺤﺮﻣﺎن اﻻﺟﺘﻤﺎﻋﻲ ﻓﻲ ﺣﺎل ﺣﺪوث‬ ‫أزﻣﺔ أو رﻛﻮد ﺣﺎدّ‪ .‬وﻣﻦ أﺟﻞ ﺗﺨﻔﻴﻒ وﻃﺄة ﻫﺬه اﻵﺛﺎر‬ ‫ﻤﻤﺔ ﻟﺘﻠﺒﻴﺔ‬ ‫اﻟﺴﻠﺒﻴﺔ‪ ،‬ﺑﺈﻣﻜﺎن اﻟﺤﻜﻮﻣﺔ اﻟﻨﻈﺮ ﻓﻲ ﺑﺮاﻣﺞ ﻣﺼ ّ‬ ‫اﺣﺘﻴﺎﺟﺎت اﻟﻔﻘﺮاء اﻟﻘﺼﻴﺮة اﻷﺟﻞ‪ .‬وﻗﺪ ﻳﺸﻤﻞ ذﻟﻚ ﻋﻠﻰ‬ ‫ﺳﺒﻴﻞ اﻟﻤﺜﺎل‪ ،‬ﺗﻮﺳﻴﻊ ﻧﻄﺎق اﻟﻘﺴﻴﻤﺔ اﻹﻟﻜﺘﺮوﻧﻴﺔ ﻟﺸﺮاء‬ ‫اﻷﻏﺬﻳﺔ ﻣﻦ اﻟﺒﺮﻧﺎﻣﺞ اﻟﻮﻃﻨﻲ ﻟﺪﻋﻢ اﻷﺳﺮ اﻷﻛﺜﺮ ﻓﻘﺮا ً؛ ﺗﻮﻓﻴﺮ‬ ‫ﺗﺤﻮﻳﻼت ﻧﻘﺪﻳﺔ ﺗﻌﻠﻴﻤﻴﺔ ﻟﻸﻃﻔﺎل ﻣﻦ اﻷﺳﺮ اﻷﺷﺪ ﻓﻘﺮا ً‬ ‫ﺮب ﻣﻦ اﻟﻤﺪرﺳﺔ؛ زﻳﺎدة ﻓﺮص اﻟﺤﺼﻮل‬ ‫ﺮﺿﻴﻦ ﻟﻠﺘﺴ ّ‬ ‫اﻟﻤﻌ ّ‬ ‫ﻋﻠﻰ اﻟﺮﻋﺎﻳﺔ اﻟﺼﺤﻴﺔ اﻟﺠﻴﺪة ﻟﻠﻠﺒﻨﺎﻧﻴﻴﻦ اﻟﻔﻘﺮاء؛ وﻧﻈﺎم دﻋﻢ‬ ‫اﻷﺟﻮر ﻟﻠﺸﺒﺎب‪.‬‬ ‫اﻟﻌﻨﺼﺮ اﻟﺨﺎﻣﺲ‪ :‬ﺗﻌﺰﻳﺰ اﻟﻨﻤﻮ وﻣﻌﺎﻟﺠﺔ اﻟﺤﻮﻛﻤﺔ ﺑﺸﻜﻞ‬ ‫•‬ ‫ﺣﺎزم‪ .‬ﻻ ﺗﻌﺎﻗﺐ اﻟﺪوﻟﺔ اﻷﻧﺸﻄﺔ ﻏﻴﺮ اﻟﻘﺎﻧﻮﻧﻴﺔ ﻋﻨﺪﻣﺎ ﺗﺘﻮرط‬ ‫ﻓﻴﻬﺎ ﺟﻬﺎت ﻓﺎﻋﻠﺔ ﺛﺮﻳﺔ أو ذات رواﺑﻂ ﺳﻴﺎﺳﻴﺔ أو ﻃﺎﺋﻔﻴﺔ‪،‬‬ ‫ﻣﻤﺎ ﻳﺆدي إﻟﻰ ﺗﻔﺎﻗﻢ ﺳﻴﻄﺮة اﻟﻨﺨﺒﺔ وﻧﻈﺎم اﻟﻤﺤﺴﻮﺑﻴﺔ‪.‬‬ ‫وﻗﺪ ﺷﻜﻞ ذﻟﻚ أرﺿﻴﺔ ﺧﺼﺒﺔ ﻟﻠﻔﺴﺎد واﻟﻤﺤﺴﻮﺑﻴﺔ وﻋﺪم‬ ‫ﻨﻒ ﻣﺆﺷﺮ اﻟﻔﺴﺎد اﻟﺼﺎدر ﻋﻦ ﻣﻨﻈﻤﺔ‬ ‫اﻟﻤﺴﺎواة‪ .‬ﻓﻘﺪ ﺻ ّ‬ ‫اﻟﺸﻔﺎﻓﻴﺔ اﻟﺪوﻟﻴﺔ ﻟﺒﻨﺎن ﻓﻲ اﻟﻤﺮﺗﺒﺔ ‪ ١٣٨‬ﻣﻦ ﺑﻴﻦ ‪ ١٨٠‬ﺑﻠﺪ‬ ‫ﺮ‬ ‫د ﻣﺴﺘﺸ ٍ‬‫ﻓﻲ اﻟﻌﺎﻟﻢ ﻓﻲ ﻋﺎم ‪ ،٢٠١٩‬ﻣﻤﺎ ﻳﺸﻴﺮ إﻟﻰ ﻓﺴﺎ ٍ‬ ‫وﻳﺠﻌﻞ ﻟﺒﻨﺎن ﻣﻦ ﺑﻴﻦ اﻟﺒﻠﺪان اﻟـ‪ ٥٠‬اﻷﻛﺜﺮ ﻓﺴﺎدًا ﻓﻲ‬ ‫اﻟﻌﺎﻟﻢ‪ .‬وﺗﺸﻤﻞ اﻟﺘﺪاﺑﻴﺮ اﻟﻤﻘﺘﺮﺣﺔ ﻓﻲ ﻫﺬا اﻟﻤﺠﺎل‪ :‬ﺗﻨﻔﻴﺬ‬ ‫إﺻﻼﺣﺎت ﻗﻀﺎﺋﻴﺔ؛ إﻟﻐﺎء ﻗﺎﻧﻮن اﻟﻮﻛﺎﻻت اﻟﺤﺼﺮﻳﺔ وﺗﺤﺮﻳﺮ‬ ‫ﻗﻄﺎع اﻟﺘﺠﺰﺋﺔ اﻟﺘﺠﺎري؛ إﻋﺘﻤﺎد ﻗﺎﻧﻮن ﻻﺳﺘﺮداد اﻷﺻﻮل‬ ‫اﻟﻤﺴﺮوﻗﺔ؛ إﻋﺘﻤﺎد ﻗﺎﻧﻮن ﺟﺪﻳﺪ ﻟﻠﻤﺸﺘﺮﻳﺎت اﻟﻌﺎﻣﺔ ﻳﺘﻮاﻓﻖ‬ ‫ﻣﻊ أﻓﻀﻞ اﻟﻤﻤﺎرﺳﺎت اﻟﺪوﻟﻴﺔ؛ إﻗﺮار وﺗﻨﻔﻴﺬ ﻗﺎﻧﻮن ﻣﻨﺎﻓﺴﺔ‬ ‫ﺟﺪﻳﺪ ﻳﺘﻮاﻓﻖ ﻣﻊ أﻓﻀﻞ اﻟﻤﻤﺎرﺳﺎت اﻟﺪوﻟﻴﺔ؛ إﻋﺘﻤﺎد رؤﻳﺔ‬ ‫ﻣﻮﺣﺪة ﻟﻘﻄﺎع ﺗﻜﻨﻮﻟﻮﺟﻴﺎ اﻟﻤﻌﻠﻮﻣﺎت واﻹﺗﺼﺎﻻت وإﺟﻤﺎع‬ ‫واﺿﺢ ﻋﻠﻰ اﻟﺴﻴﺎﺳﺎت‪.‬‬ ‫‪ .IV‬ﻟﻘﺪ ﺗﻤﺜ َ‬ ‫ّﻞ اﻟﺘﺤﺪي اﻟﺬي ﻳﻮاﺟﻬﻪ ﻟﺒﻨﺎن ﻋﻠﻰ ﻣﺴﺘﻮى اﻟﺘﻨﻔﻴﺬ‪،‬‬ ‫وﺧﺎﺻﺔ اﻟﺘﻨﺴﻴﻖ ﺑﻴﻦ اﻹدارات‪ ،‬واﻟﺤﻔﺎظ ﻋﻠﻰ اﻟﺰﺧﻢ‪ ،‬واﻟﺮﺻﺪ‬ ‫واﻟﺘﻘﻴﻴﻢ‪ .‬وﻳﻤﻜﻦ ﻣﻌﺎﻟﺠﺔ ذﻟﻚ ﻋﻦ ﻃﺮﻳﻖ إﻧﺸﺎء ﻫﻴﺌﺔ إﺻﻼح‬ ‫ﺗﺮﺻﺪ ﺗﻨﻔﻴﺬ ﻫﺬه اﻹﺻﻼﺣﺎت ﻋﺒﺮ اﻟﻤﺆﺳﺴﺎت اﻟﺤﻜﻮﻣﻴﺔ‪ .‬وﻳﻨﺒﻐﻲ‬ ‫أن ﺗﻀﻢ ﻫﻴﺌﺔ اﻹﺻﻼح ﻛﺒﺎر اﻟﺨﺒﺮاء اﻟﺬﻳﻦ ﻳﺘﻢ اﺧﺘﻴﺎرﻫﻢ ﺑﻄﺮﻳﻘﺔ‬ ‫| ‪8‬‬ ‫ﻣﻠﺨّﺺ ﺗﻨﻔﻴﺬي‬ LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL I. THE PERFECT STORM? 1. Lebanon is in a high-risk situation • Convertability of the Lira was interrupted as it faces a combination of a balance of and is currently supported by short-term payments crisis, in parallel with a deep lending from BdL at 20 percent interest political crisis. Hundreds of thousands of rate. people poured onto the streets starting on • Severe limitations on dollar withdrawals October 17, marking a serious challenge from deposits. to the ruling class. On October 29, PM • Severe limitations on transfers of money Hariri resigned with little coordination with out of the country. the other main political parties, leaving • BdL asked banks to increase equity open the timeline and nature of a new capital by 20 percent, 10 percent of Government. Even prior to these events, which should be provided by end-2019 economic conditions, especially on the and the rest by June 2020. macro-financial front, have been acute; a • Importers of goods, through their shortage of dollars in the market resulted in respective professional associations, are parallel exchange rates, as well as informal expressing social and political discontent restrictions and control mechanisms on via strikes and demonstrations. dollar deposits and transfers out of the Importers need to settle dollar liabilities country—an unprecedented situation for with receivables in Lebanese lira (LL). Lebanon’s historically free capital account. Previously, they were able to convert The political crisis has aggravated these back to dollars via their banks. The conditions as banks closed over October limitations on bank exchanges have 18-31 for retail and other transactions, diverted them to exchange bureaus, reopening briefly thereafter with informal which are charging more LL for the dollar capital controls, before being closed again for than the official exchange rate. 10 more days. A new effective Government • On October 1, BdL released a circular is a necessary, albeit insufficient, step toward establishing a mechanism that crisis management. guarantees dollar payments (and thus exchanges at the official rate) for critical 2. The shortage of dollars in the imports: fuel, medicine and wheat. market has become palpable. Recent • With a large part of the consumption on-the-ground manifestations of macro- basket imported (and, more generally, financial stresses, which are unprecedented imports accounting for 60 percent of in Lebanon, include: GDP), and thus susceptible to parallel • Parallel exchange rates, especially in pricing, the above cuts across the the more retail (and less voluminous) economy. exchange bureaus market. BdL seems to • Social tensions are spreading across the be effectively backing bank exchanges population as an expression of general only. discontent with economic conditions. THE PERFECT STORM? | 9 THE WORLD BANK 3. A liquidity crunch in both foreign exchange (FX) and LL has ensued with ripple down effect on the supply chain of the real economy, leading businesses to inventory hoarding, shrinking operations, as well as demands for spot and cash-based payments. FX shortages2 are being reflected in a parallel exchange market that has discounted the LL by as much as 30 percent, although this rate has fluctuated heavily. In a highly dollarized economy, FX liquidity is a binding constraint on LL liquidity.3 Exchange market pressures and liquidity conditions are inducing a two-pronged effect on the real sector: (i) limitations on transfers out of the country imply that (capital/wholesale) imports for businesses are constrained; (ii) critical financing for current spending by businesses even in LL has been interrupted, leading to disruptions all along the supply chain. 4. A main difference between current conditions and previous episodes of exchange market pressure is that it is starting from an elevated risk situation that is about two years old, with reduced buffer levels and negligible growth. In addition, this time around, there is no single political or security act that will be seen as a reset to the deteriorating macro situation. Macroeconomic forecasts in this issue have been completed on October 1, prior to latest events, and as such, we expect a significant downward bias on LEM projections. 2 Banks have set withdrawal ceilings for deposits in FX and LL at around US$1000 and LBP 2 million, per week per account (including businesses), with anecdotal evidence suggesting that many banks are working with lower ceilings on dollar. 3 In addition to withdrawal ceilings on LL deposits, overdrafts have also been severely restricted and punitive interest rates charged. Overdrafts and other facilities are a main mechanism for short term financing for businesses. 10 | THE PERFECT STORM? LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL II. MACRO-FINANCIAL CONDITIONS Percent (%) A. Output and 12 10 8 Demand 6 4 2 0 -2 5. The economy stagnated in 2018 -4 and is expected to contract in 2019. -6 -8 While growth has been slow since 2011 at -10 2011 2012 2013 2014 2015 2016 2017 2018 e 2019 f the outbreak of the war in Syria, the past Private Consumption Government consumption couple of years have specifically witnessed a Gross fixed capital formation Net exports Statistical discepancy GDP deceleration that is in part due to tightened monetary policy, used in defense of the Figure 1. Net exports and fixed capital formation a main drag on real GDP in 2019. exchange rate. Sources: CAS and WB staff calculations. 6. High frequency indicators for Q1- Q3 2019 point to a broad-based slowdown, 18 Real GDP Growth (%) 16.4 with tourism an exception—tourist arrivals 16 rose by 7.6 percent, year-on-year (yoy), in 14 12 the first eight months of 2018 (8M-2019), 10.8 11.3 10.1 10 9.3 9.2 compared to 4 percent over the same period 8 8.1 7.5 8.0 in 2018. The real estate sector was a main 6 6.4 drag on the economy as illustrated by a 29.8 4 3.8 3.9 3.9 3.4 2.7 2.7 2.6 percent and 28.1 percent yoy declines in 2 1.1 1.7 1.7 0.9 1.9 0.4 1.6 0.6 0.2 cement deliveries and construction permits, 0 -0.2 -0.8 respectively, over 8M-2019. This compares -2 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 to respective 4.7 percent and 25.7 percent contractions for the same indicators over 8M- Figure 2. Volatile pre-2011 growth made way for a consistently slow growth period. 2018. Further, the BLOM-PMI Index, which Sources: CAS and WB staff calculations. captures private sector activity, averaged 46.8 in 9M-2019, indicating persistent contraction of activity (<50 represents a contraction rose by 0.9 percent over 8M-2019, non-fuel of activity). On the demand side, private imports decreased by 15.7 percent, in strong consumption, boosted by tourism, regains reflection of the sluggish economy. its traditional role of leading real GDP growth (Figure 1). Net exports, on the other hand, is 7. Post-civil war growth dynamics a negative contributor to GDP, as the rise in in Lebanon have undergone multiple exports is projected to be more than offset structural changes (Figure 2). Over the by import growth, with the latter driven by 1992-2010 period, growth was characterized fuel imports; in fact, even as total imports by high volatility, resulting from frequent MACRO-FINANCIAL CONDITIONS | 11 THE WORLD BANK negative political and security shocks, budget included the following measures: (i) in sequence with periods of recovery, raising the tax rate on interest income from optimism, international bailouts (i.e. Paris bank deposits from 7 percent to 10 percent; 1,2 and 3 etc.), and even positive shocks.4 (ii) increasing income tax for high-earners Since 2011, however, real GDP growth rates from 20 percent to 25 percent; and (iii) have been persistently sluggish as traditional raising import tariffs by 3 percent. In regard drivers—real estate, construction, finance to expenditures, measures included (i) caps and tourism—were greatly afflicted by the on wages and benefits for public sector regional turmoil. Nonetheless, we can draw a employees; (ii) some pensions measures; and distinction in growth dynamics between the (iii) cuts in government purchases of goods 2011-2016 and the 2017-present periods. and services. While the government aimed Over the former period, real GDP growth to reduce the overall deficit by 4 percentage average 1.7 percent, as real economy factors points (pp) to 7.6 percent of GDP in 2019, were directly impacted by eruption of wars its tardy ratification (July) and optimistic in the region, particularly in Syria. Since revenue projections make this target overly 2017, however, real GDP growth decelerated ambitious. Budget 2020 is currently under further to average 0.2 percent, as monetary preparation. and financial conditions became the main determinant. Specifically, the past couple of 9. Partial-year fiscal data suggest that years have reflected decelerated growth that improvement in the fiscal position is driven is linked to a policy of liquidity tightening by accumulation of arrears and tightened meant to counter rising macro-financial spending. Despite an 8 percent decrease risks. This includes a significant decrease in VAT revenues in 7M-2019, reflecting the in subsidized lending by the central bank, contraction in the economy, the overall the Banque du Liban (BdL), that was being deficit fell by 1.4 pp of GDP, driven by a 9.2 channeled via commercial banks to (mostly) percent decline in expenditures. Similarly, the the real estate sector, providing a rare source primary balance improved by 0.8 pp of GDP of growth impetus since 2012. over the same period to maintain a surplus. Considering that 2019 budget measures were not yet in effect, the improving fiscal balance has been accomplished in part through low B. Fiscal Sector quality measures, including accumulation of arears, cuts in unnecessary spending and the 8. Following a sharp deterioration in deferment of others. For the whole year, the the Government’s fiscal position in 2018, overall fiscal balance is projected to register a belatedly ratified Budget 2019 aimed a deficit of 9 percent of GDP, with a small for a reduction in the overall deficit via primary surplus, compared to overall and a number of revenue and expenditure primary deficits of 10.7 percent and 1.1 measures. On the revenue side, the 2019 percent, respectively, in 2018. 10. The changing economic and 4 The global financial crisis of 2007-2008 reaped financial conditions over the past couple benefits for Lebanon as the country was perceived as a of years along with policy changes have safe haven for regional capital that was exiting troubled western banks. structurally weakened Lebanon’s fiscal 12 | MACRO-FINANCIAL CONDITIONS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Revenues, Expenditures, Fiscal & Primary Balances 30.0 2.0 Primary Balance (rhs) 20.0 Other Non-Tax Revenues 0.0 Transfers from the Telecom Surplus Revenues Other Tax Revenues 10.0 Customs -2.0 (% of GDP) VAT Taxes on Income, Profits, Capital Gains 0.0 Personnel Cost -4.0 Expenditures -10.0 Interest Payments -6.0 -20.0 Transfers to EdL Transfers to Municipalities Other Current Expenditures -30.0 Capital Expenditures -8.0 Fiscal Balance (rhs) -40.0 -10.0 2011-2016 2017-2018 Figure 3. Changes in the fiscal balance have reflected structural changes in the economy as well as policy decisions. Sources accounts. A comparison between the 2011- c. The fall in imports (see Section C) are 2016 and 2017-2018 period reveals the leading to softer custom revenues, following (figure 3): which have fallen by 0.2 pp to average 0.9 percent of GDP in the latter period. On the revenues side: d. Revenues from the telecom sector have a. Revenues from taxes on income, profits regressed by 1.1 pp to average 2.1 and capital gains have averaged 5.2 percent of GDP in the latter period. This percent of GDP over the 2017-2018 is a largely unexplained decline. period, increasing by 1.4 percentage points (pp) compared to the 2011-2016 On the expenditures side: period. The increase in this category a. Personnel costs have risen from an has been driven equally by income average of 9.4 percent of GDP during taxes on profits and interest earned. 2011-2016, to 10.8 percent of GDP The former benefitted from a surge in over 2017-2018, driven almost equally 2017, as banks paid taxes on a spike in between (i) salaries and wages and profits in 2016 (from engaging in BdL’s (ii) retirement and end of service financial operations), while the latter compensation. This is due to the surge was a principal revenue measure that in public sector hiring leading up to the was introduced in Q3 2017 as part of the 2018 parliamentary elections along with salary scale reforms. pension implications for the salary scale b. The worsening economy induced softer reforms introduced in 2017. revenues associated with consumption, b. Despite falling global interest rates, debt which is the largest expenditure servicing has increased over the two component of GDP. Specifically, revenues periods from an average of 8.8 percent from Value Added Taxes (VAT) declined to 9.4 percent of GDP, on account of from an average of 4.7 percent of GDP rising debt levels and higher Lebanese over the 2011-2016 period to 4.4 percent cost of borrowing. of GDP over the 2017-2018 period. c. Capital expenditures have risen by 0.4 pp to average 1.6 percent of GDP during MACRO-FINANCIAL CONDITIONS | 13 THE WORLD BANK Gross Public Debt Exports and Imports of Goods and Services 90 200 90 (% of GDP) 80 180 70 70 160 50 140 30 60 US$ Billion 120 10 Percent 50 100 40 -10 80 30 -30 60 -50 20 40 -70 10 20 -90 0 0 -110 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 External public debt (US$ bln) Gross public debt Domestic public debt (US$ bln) as a percentage of Exports of Goods & Services (BoP) Trade Balance Gross public debt (US$ bln) GDP (rhs, %) Imports of Goods & Services (BoP) Current Account Balance Figure 4: After 2010, the debt-to-GDP ratio Figure 5: Exports of services have historically regained an upward trajectory. helped offset the large structural trade deficit. Sources: BdL and WB staff calculations. Sources: BdL and WB staff calculations. 2017-2018. This coincides with the 11. The Government has been unable holding of parliamentary elections in to access the market at reasonable cost 2018 and the resumption of executive since Spring 2019, turning instead to bdL and legislative work, following a long to meet Eurobond redemptions. On several period of institutional paralysis. occasions, the Ministry of Finance (MoF) d. The increased spending detailed above expressed an interest in accessing the market from 2011-2016 to 2017-2018 has been with new Eurobond issues. However, market partially offset by lower transfers to EdL, appetite has been lacking in part due to: (i) the which decreased by 0.9 pp, constrained fact that returns earned by banks on financial by power rationing and lower fuel prices. engineering operations carried by the central Savings were also sourced from a halt in bank were higher than those offered by MoF; payments to the National Social Security (ii) a shortage of liquidity as banks’ assets are Fund (saving 0.2 pp), likely reflecting mostly tied up with the central bank; and (iii) arrears, and a 0.2 pp cut in transfers limited appetite from foreign investors given to Municipalities due to lower telecom Lebanon’s risk profile. As a result, in April revenues, which constitute a main and May 2019, BdL repaid, using its foreign revenue source for local government. exchange reserves, Eurobond maturities of $500 million and $650 million, respectively, Overall: through bridge financing to the MoF. Overall, a. The overall fiscal balance has deteriorated the debt-to-GDP ratio is expected to persist from an average deficit of 7.5 percent of in an unsustainable path, at 151 percent by GDP during 2011-2016, to a deficit of end-2019, with over 60 percent denominated 8.4 percent of GDP for 2017-2018. in local currency. b. The primary balance has also deteriorated from an average surplus of 1.3 percent of GDP during 2011-2016, to a surplus of 0.8 percent of GDP for 2017-2018. 14 | MACRO-FINANCIAL CONDITIONS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Capital and Financial Accounts regressed since 2010, dragged by travel and 30 25 financial services, with the former reflecting 20 a contraction in the tourism sector and the 15 latter a retreat in banks’ strategy of regional % of GDP 10 5 expansion. Imports of goods and services 0 -5 underwent a similar dramatic shift, falling -10 from a high of 102 percent of GDP in 2008 -15 2002-2010 2011-2018 to a low of 58.8 percent in 2018. As much of Liabilities Direct Investment Portfolio Investment Assets the consumption basket is imported, and as Capital Accont Reserve Assets consumption is by far the largest component Errors and Omissions Capital, financial plus errors of GDP, lower GDP growth rates will directly Figure 6: The range of resources available impact imports. to meet the balance of payments narrowed. Sources: BdL and WB staff calculations. 13. The large trade imbalance drives one of the largest current account deficit- to-GDP ratios globally. Deteriorating C. The External Sector economic conditions constrain remittance outflows and can simultaneously incentivize 12. Exports and imports underwent remittance inflows, as expatriates boost a marked decline over the past decade, assistance to their families at home, leaving reflecting both geopolitical, real economy net remittances improved. Remittance and financial conditions. Lebanon’s exports inflows, however, are also strongly (of goods and services) have been severely determined by exogenous factors such as affected by the regional turmoil, although economic conditions in host countries and a decline in their share of GDP has been geopolitical tensions. Nonetheless, assuming in effect since 2008, when they peaked at unchanged conditions, the current account 78.1 percent of GDP (Figure 5).5 By 2018, deficit is projected to be close to 21 percent exports had contracted to 34.6 percent of of GDP in 2019, compared to 21.9 percent GDP, the lowest share since 2002, with both in 2018. merchandize goods and services sharing this dynamic. Exports of merchandize goods 14. The economy is structurally and have been particularly affected by the closure heavily dependent on capital and financial of Syrian routes, through which exporters inflows to finance its current account traditionally accessed the GCC and Iraqi deficit. This dependence has become markets. Although some of these routes more acute as the current account deficit have since reopened, Lebanese exports have expanded in recent years. In addition, there yet to recover substantially, due likely to a have been structural shifts in the capital and combination of informal barriers and lost financial accounts since the period prior to markets. Exports of services have equally the regional crisis, reflecting a diminished range of resources available for Lebanon (Figure 6). In the pre-Syria war period (2002- 5 While the drop in the GDP share of exports from 2010), the main inflows were sourced from 2008 to 2010 can be attributed to a denominator effect net foreign direct investments (FDI) and of exceptionally high GDP growth rates, the following years experienced a decline in the value of exports. net other investments (loans, currency and MACRO-FINANCIAL CONDITIONS | 15 THE WORLD BANK Cumulative Change in Net Foreign Assets’ Position deposits at commercial banks has stagnated 25 (% of GDP) in 2019, which, once accrued interest 20 are netted out, implies capital outflows.7 15 Mirroring diminished confidence, the deposit % of GDP 10 dollarization rate reached 74.4 percent by 5 September 2019, up from 70.6 in September 0 2018. As a result, the country’s NFA position -5 declined by US$ 4.5 billion over only the first -10 9 months of 2019 (approximately 7 percent 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 9M-2019 -15 of GDP) (Figure 7). This compares to NFA losses of US$ 4.8 billion for all of 2018 and Figure 7: Lebanon NFA position has been US$ 156 million in 2017. This has reflected under stress since 2011. on BdL’s gross foreign exchange reserves. Sources: BdL and WB staff calculations. which shrank by US$ 5 billion, year-on-year (yoy), to US$ 38.5 billion by end-July 2019, deposits), averaging 9.8 percent of GDP and of which foreign currencies amounted to 17 percent of GDP respectively, that partially US$ 29.3 billion. offset an accumulation in reserves asset at an annual average of 9.3 percent of GDP. The war period (2011-present) witnessed a sharp decline in net FDI and other investments, D. Money and averaging instead 3.2 percent of GDP and 12.9 percent of GDP, respectively.6 These, Banking however, were mitigated by a slower accumulation of reserves assets, which fell to 16. Following a spike in prices in 3 percent of GDP. 2018,8 itself a correction on the heels of a two-year deflationary period, the inflation 15. Despite repeated financial rate is expected to ease in 2019. After operations by BdL over the past few years reaching a peak in Q3-2018, the 12-month in support of Lebanon’s Net Foreign headline inflation rate commenced a marked Asset (NFA) position, the economy has deceleration (Figure 8). Over 9M-2019, been steadily draining US dollars since headline inflation rate averaged 2.6 percent 2011—an unsustainable situation for driven by average yoy increases of (i) 3.9 a country with a large current account percent in the prices of food and non-alcoholic deficit and a fixed exchange rate. More beverages; (ii) 14 percent in the prices of recently, this hemorrhaging has intensified clothing and footwear; (iii) 2.4 percent in reflecting diminishing confidence and high- house rent prices; and (iv) 5.1 percent in the risk premia. The stock of private sector 7 This dynamic was further exacerbated by the 6 Interestingly, an important resource in managing closing of loans taken out on cash collateral. this transition has been a better identification of the 8 The inflation rate averaged a 6.1 percent in 2018, balance of payments, as errors and omissions fell from in good part due to the salary scale increases in 2017, an average outflow of 4.5 percent of GDP in the pre- a strong rebound in commodity prices, especially fuel crisis period to an inflow of 0.1 percent in the crisis products, and a low-threshold effect after 2 deflationary period. years. 16 | MACRO-FINANCIAL CONDITIONS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL 9 Drivers of -12 Months Headline Inflation 8 7 6 5 Percent (%) 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Aug-15 Aug-16 Aug-17 Aug-18 Aug-19 Oct-15 Oct-16 Oct-17 Oct-18 Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Food&Non-alcoholic beverages Furnishings, household equipment Alcoholic Beverages & Tobacco Health Headline Inflation growth Clothing & Footwear Transportation Actual Rent Communication Core Inflation 12-M Growth Owner Occupied Education Water, electricity, gas and other fuels Other Figure 8. Inflation on a decelerating trend… Sources: CAS and WB staff calculations. cost of education. Similarly, core inflation RER of Major Foreign Currencies (Foreign basket/Lebanese basket) (excluding food, water, electricity and gas 0.003 0.00075 and transportation) increased by an average 0.0028 0.0007 0.00065 of 3.2 percent (yoy) in 9M-2019. 0.0026 0.0006 0.0024 0.00055 17. Lebanon’s real exchange rate (RER) 0.0022 0.0005 is overvalued and continues to appreciate 0.002 0.00045 0.0018 0.0004 vis-à-vis major trading partners. Following Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 a steady and prolonged depreciation, the Lebanese pound gained real value with Emirati Dirham Saudi Riyal $US (rhs) Jordanian Dinar (rhs) respect to the currencies of Jordan, United Arab Emirates, United States and Saudi Arabia9 Figure 9. … while the Lira appreciates in real terms. (Figure 9). Since all aforementioned countries Sources: CAS and WB staff calculations. are linked to the dollar, this represents higher inflation rates for Lebanon compared to the others. The appreciation generally began in political discord, BdL initiated in July 2019 the second half of 2016, as prices recovered a new financial operation to encourage from a two-year deflationary streak. In inflows of hard currency. This involved addition, the pound also appreciated in real commercial banks soliciting dollar investors terms relative to the Turkish lira, Egyptian to place medium- (3 yrs) or long-term (10 yrs) pound and Iran’s rial, all of which recently deposits at elevated interest rates, which are underwent large depreciations. then placed in term deposits (TDs) at BdL or invested in BdL Certificate of Deposits (CDs). 18. In response to a worsening NFA While this operation partially offset outflows, position, partially induced by domestic the benefit was temporary and came at a high cost to BdL, with exchange market pressures resuming in September. 9 By May 2019, the Lebanese pound underwent a yoy real appreciation of 3.3, 1.7 and 5 percent for Jordan, USA and Saudi Arabia, respectively. MACRO-FINANCIAL CONDITIONS | 17 THE WORLD BANK 25.0 Deposit Average Interest Rate 19. Following exchange market pressures and sovereign downgrades, BdL 20.0 Deposit Average Interest Rate on US$ Deposit Average Interest Rate on LBP solicited a single large direct deposit from LIBOR rate (US$ 3m) 15.0 a foreign investor, signaling an adjustment Percent (%) in its strategy by bypassing commercial 10.0 banks. In August 2019, BdL announced that it had secured up to US$1.4 billion as a five- 5.0 year deposit from a foreign private investor. This transaction is traded in the Euro market 0.0 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 20. In fact, Lebanon entered Figure 10. Despite banks offering conditions of high-risk premia since the higher deposits rates… November 2017 crisis10, to which BdL Sources: BdL and WB staff calculations. responded by significantly tightening monetary conditions using direct, indirect, 25 Deposits at Commercial Banks conventional and non-conventional tools. (% yoy change) Subsidized loans backed by BdL to the real 20 Total Deposits economy were curbed and interest rates Resident Deposits 15 Non-resident Deposits raised; average interest rates on deposits in US$ and LL increased by 285 and 357 basis Percent (%) 10 point (bps), respectively, over the October 5 2017-September 2019 period (Figure 10). A principal objective for the policy-induced 0 monetary tightening has been to boost Jul-18 May-14 May-19 Nov-11 Nov-16 Dec-13 Mar-15 Dec-18 Aug-15 Oct-14 Sep-12 Feb-13 Sep-17 Apr-12 Feb-18 Apr-17 Jun-11 Jun-16 Jan-11 Jan-16 Jul-13 BdL’s foreign exchange reserves and limit -5 the LL resources in the market that can be Figure 11. … total deposits contract for the first used against the exchange rate. This is in a time since the early 90s. context of surging risk premia and rising Sources: BdL and WB staff calculations. dollarization. In August 2019, reflecting heightened macro-financial risk, Fitch Rating Commercial Banks' Loans to the Private Sector Agency downgraded Lebanon by two notches (% yoy change) 25 Loans to Non-residents to CCC, followed by a downgrading to Caa2 20 Total Loans to Private Sector by Moody’s and to CCC/C by Standard & 15 Loans to Residents 10 Poor’s in November (see Box 1). Percent (%) 5 0 21. Amid falling confidence, tight -5 -10 monetary policy failed to prevent deposit -15 outflows, while negatively impacting -20 -25 private sector lending. Total private sector Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Figure 12. Banks are deleveraging 10 For in-depth analysis, see De-Risking Lebanon, the from the private sector … Lebanon Economic Monitor, Fall 2018 Issue. This is Sources: BdL and WB staff calculations. generally the period following the resignation episode of Prime Minister Hariri in Riyadh. 18 | MACRO-FINANCIAL CONDITIONS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Box 1. Downgrading Lebanon On November 15th, Standard & Poor’s downgraded Lebanon’s sovereign rating by two notches to CCC, from an earlier B-, with a negative outlook. Prior to that, on November 5th Moody’s downgraded Lebanon’s sovereign rating to Caa2 with under-review outlook. Fitch had already downgraded Lebanon’s sovereign rating to CCC, from B-, on August 23rd. Table 1 below summarizes Lebanon credit ratings by the three main rating agencies: Moody’s, Standard & Poor’s, and Fitch. Table 1. Lebanon credit rating by the three main rating agencies. MOODY’S STANDARD & POOR’S FITCH Rating Effective Date Rating Effective Date Rating Effective Date Long term Caa2 5 Nov. Long term CCC 16 Nov. Long term CCC 23 Aug. 2019 2019 2019 Outlook Under Review Outlook Negative Context Context Context » Description of rating: increased » Description of rating: extremely » Description of rating: substantial extremely speculative speculative credit risk » 8 notches below investment grade » 8 notches below investment grade » 7 notches below investment grade (junk) (junk) (speculative) (Fitch has all 5 CCC » Countries with the same rating: » Countries with the same rating: categories that S&P uses combined Argentina, Cuba, Mozambique, Argentina (CCC-), Republic of into 1) Congo (CCC+), Zambia (CCC+) » Countries with the same rating: Zambia, Republic of Congo deposits in commercial banks shrank by 1.3 investors in sovereign debt,11 and as a result, percent yoy in September 2019, dragged by have a very high exposure to sovereign credit a 2.4 percent outright contraction in resident risk. This exposure continues to increase; private sector deposits, notwithstanding Lebanese banks’ sovereign debt exposure12 a 1.8 percent rise in non-resident private rose by 514 bps (yoy) to 70.3 percent deposits (Figure 11). On the lending side, of banks’ consolidated balance sheet by commercial banks’ outstanding credit to September 2019, of which exposure to the the private sector declined by 9 percent by central bank alone constituted 58.2 percent September 2019, compared to an increase of 2.4 percent in September 2018 (Figure 12). While this deleveraging is shared by both resident and non-resident private sectors, it 11 Interest income, as obtained from BilanBanques, is heavily weighed toward the former. amounted to 66 percent and 76 percent of total consolidated banks’ income in 2017 and 2018, 22. Banks’ asset concentration with respectively. the sovereign is a systemic vulnerability. 12 The sovereign debt exposure is computed as a ratio of commercial banks’ aggregate investment in Treasury Commercial banks’ have long been large Bills and Bonds, Eurobonds and deposits at BdL relative to total assets. MACRO-FINANCIAL CONDITIONS | 19 THE WORLD BANK 23. Banks pay lower deposit rates 120 Commercial Banks Assets (% of total assets) relative to comparator countries, a 100 phenomenon largely explained by a 80 captive/home-biased depositor base. In Percent (%) 60 comparison with emerging market risk/ 40 return profile, Lebanon’s risk premium has 20 been consistently higher, but interest rates are broadly around the average. As illustrated 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 in Figure 14, risk premia paid on Lebanon’s Claims on Non-resident Banks' LBP lending to residents Eurobonds have been significantly higher financial sector (rhs) Banks sovereign exposure Other Banks' FX lending to residents than that paid on emerging market debt. However, this has not been compensated for Figure 13. … as they further concentrate their holdings with the central bank. by relatively higher interest rates on deposits (Figure 15). This is explained by a depositor Sources: CAS and WB staff calculations. base that is relatively captured as both resident and non-resident depositors13 have Emerging Markets CDS: 14.0 Top3, Bottom 3, and Average historically exhibited strong resiliency toward 12.0 political and security shocks in Lebanon. In 10.0 addition, there has been strong confidence 8.0 by depositors in the central bank, which has 6.0 become renowned for its crisis management 4.0 successes (2005 Hariri assassination, 2006 2.0 war etc.). More recently, the financial 0.0 engineering operations have helped mitigate Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 the drain from net foreign asset position of List Average (excl. Lebanon) Bottom 3 Top 3 Lebanon the economy, without having to increase interest rates at a time when the risk premium Figure 14. Lebanon’s risk premia have widened significantly compared to emerging markets … was surging and global interest rates rising. The question of whether there remains Sources: JP Morgan and WB staff calculations. discretionary space in the form of interest rate increases, is not clear; while Figure 14 Emerging Markets Deposit Rate 18.0 and Figure 15 might suggest so, the captured 16.0 depositor base lowers the threshold interest 14.0 12.0 rate above which a negative signaling effect 10.0 8.0 might be triggered. 6.0 4.0 2.0 0.0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Sample Average Top 3 Bottom 3 LBN avg deposit rate (LBP) LBN avg. deposit rate (US$) Figure 15. … but deposit rates in Lebanon are broadly in line with those from emerging markets. 13 Lebanese expatriates are the main constituency for Sources: JP Morgan and WB staff calculations. non-resident depositors. 20 | MACRO-FINANCIAL CONDITIONS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL III. LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY 24. The Spring 2016 issue of the the two overarching constraints include Lebanon Economic Monitor (LEM) macroeconomic instability, insufficient declared Lebanon’s socio-economic investment in infrastructure (especially model bankrupt.14 The objective was to in lagging regions), weak business warn against the non-sustainable nature environment, mismatch of skills with labor of Lebanon’s economic model. It was market needs and weak institutions and presented as part of an analysis that regulatory framework. suggested short-term and medium-term solutions, during a period when Lebanon 26. What followed was a series of had a margin of maneuverability in terms of publications/policy notes in which the time and resources. World Bank (WB) identified specific structural and sectoral reforms that help 25. The SCD concludes that at the root mitigate risks and boost potential growth. of Lebanon’s failure to generate inclusive In December 2016, the WB published a growth and reduce widespread poverty is White Paper which included World Bank the presence of two mutually reinforcing staff assessment on needed reforms for and pervasive (overarching) constraints: a new Government to introduce and (a) Elite Capture hidden behind the veil implement, following two and a half years of confessionalism and confessional of a Presidential vacancy and institutional governance and (b) conflict and violence paralysis. The White Paper15 presented a (stemming, in part, from the broader menu of priority reforms over two-time dynamics of conflict in the Middle East). horizons—the first 100 days of the new While the second constraint is exogenous, Government, where 10 priority reforms largely beyond the control of domestic were listed, and the medium term. This policy makers, the former is endogenous list was later developed and attuned and subject to the idiosyncrasies of in the WB Strategic Assessment of the the Lebanese system of governance, Capital Investment Plan (CIP) for Lebanon16 especially over the post-civil war period. that was presented in the CEDRE conference Institutionalized confessionalism intended in Paris in April 2018. The Assessment listed as protection for the mosaic of religious specific structural and sectoral reforms that sects in a country that lacks a sectarian can enable the Government’s CIP. majority has developed into pervasive elite capture and patronage system. Other (more traditional) constraints are nested within 15 World Bank (2016), Priority Reforms for the Government of Lebanon, December 2016. 14 World Bank (2016), A Geo-Economy of Risks and 16 Harake, Wissam and Christos Kostopoulos (2018), Rewards, the Lebanon Economic Monitor, Spring 2016 Strategic Assessment: A Capital Investment Plan for Issue. Lebanon, World Bank Group, Washington DC. LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY | 21 THE WORLD BANK 27. In the Fall 2018 issue of the LEM, Lebanon, and in particular, their distributional the WB observed that risk premia for impacts. With this in mind, below is an Lebanon had sharply increased, driven by a illustrative example of what the contour of confluence of (local and global) factors and such a credible strategy could include: faced with inadequate policy responses.17 Fiscal and electricity sector reforms and Element 1: Addressing External investments were highlighted as critical Imbalances short-term initiatives for the Government. 30. Lebanon runs a large structural 28. Lebanon is in Crisis. While it is trade imbalance which drives one of the too early to gauge the economic impact largest current account deficit-to-GDP of recent events, it is important to note ratios globally (>20% of GDP), while that even prior to the eruption of the maintaining a nominal dollar peg to the demonstrations, the World Bank projected Lebanese Pound (LBP) set in 1997. This a small recession in 2019; we now estimate has resulted in a significant exchange rate that the recession will be deeper. There has overvaluation. The resulting large external been an unprecedented banking holiday, financing needs exposes the country to a with banks closed over October 18-31 for severe shortage of inflows should confidence retail and other transactions, reopening were to falter. thereafter with informal capital controls and other uncoordinated measures, then closing Immediate measures again for 10 days on November 9. Critical short-term financing for businesses has been » Capital controls and other approaches interrupted, leading to disruptions all along to contain the exit of foreign exchange. the supply chain and an ultimate impact on Capital controls may serve a short-term workers. Unemployment is expected to rise purpose and need to be carefully designed. and poverty, already high, will follow. The emerging parallel exchange market is likely » Distributional impact considerations to trigger inflationary pressures, hurting the & equitable burden sharing. poor and middle class disproportionally. Crisis containment measures will have Shortages of imports are also expected to a distributional impact on households, materialize. enterprises, investors and banks. It is important to assess the impact of measures 29. Lebanon needs a credible crisis on economic agents and to ensure fair management strategy. This strategy should burden sharing. Government should set as involve short-term measures to contain a a policy objective equitable or progressive potential crisis, as well as medium- to long- burden sharing, where equity refers to the term measures to address structural issues. ability to contribute and the extent to which Several packages of measures out to be one has benefited from the unsustainable analyzed in light of their impact on the short-, accumulation of vulnerabilities. medium- and long-term development of 17 World Bank (2018), De-Risking Lebanon, the Lebanon Economic Monitor, Fall 2018 Issue. 22 | LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Short-term measures of demonstrating that the financial sector is sharing the cost of the crisis is to help reduce » Clear and transparent assessment of the interest burden on the short and medium fundamentals. term (See Special Focus). Once a crisis has been contained, it is important to accurately assess where the » Reduced pension payouts. economic fundamentals stand, including Immediate measures to better align the public structural imbalances, risk premia, understand pension system include: to more correctly history (past drivers), and assess prospects to apply the multiplier rule’ for the military to ensure that the selected policies are pragmatic only include hazardous categories and service and fair. periods and recalculate accrual rates for all civil servants. Another measure is to limit Element 2: A Progressive Path to Fiscal survivor pensions to spouse and children. Sustainability Short-term measures 31. Lebanon has one of the highest debt-to-GDP ratios globally, accumulated » Electricity reforms. from the accrual of persistent and large The loss-making, publicly owned Electricité fiscal deficits since the end of the civil du Liban (EdL) imparts a staggering burden war. This imposes elevated gross public on Lebanon’s public finances as structural financing needs. Lebanon would need and large operating losses (dating back to the undertake a fiscal adjustment policy to rein 80s) are covered by the central government. in its fiscal deficit using highly progressive In fact, annual budgetary transfers to EdL measures that target expensive inefficiencies averaged 3.8 percent of GDP over the last and realize resources from those who have decade, amounting to close to half of the disproportionally benefited from Lebanon’s overall fiscal deficit. At peak in 2012, the unequal growth model. On the expenditure government transferred US$2.2 billion to EdL, side, Lebanon’s total expenditures amounted equivalent to 5.1 percent of GDP. to 31.5 percent of GDP in 2018, of which 9.5 percent of GDP were interest payments As such, there is a need to: eliminate all and 3.4 of GDP were transfers to EdL18, HFO and diesel for EDL power generation leaving little discretionary space and even by securing LNG supply and unbundle gas less capacity for much needed capital supply (FRSU) and temporary generation from expenditures. Proposals include: IPPs; consider also progressive electricity tariff reforms; accelerated reduction of technical Immediate measures and non-technical losses; competitive bids for new IPP Capacity; » Addressing cost of debt. The financial sector has been benefitting from » Unification of tax rates on income by an implicit subsidy (a positive ‘cost of carry’) sources. from the BdL financial operations. One way Lebanon’s tax structure has large variations across income sources and distorts the flow of financial savings away from productive 18 In addition to payment of interest and principal on EdL debt. investment. Bank deposits earn relatively LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY | 23 THE WORLD BANK high returns, which by policy is intended to To help address these vulnerabilities, support the exchange rate. Meanwhile, the considerations include: government’s tax rate on interest earned is 10 percent, compared to 17 and 15 percent Short-term measures on corporations and individuals, respectively. In addition, it is estimated that the largest 1 33. While necessary banking sector and percent of deposit accounts hold 50 percent client assessments are being undertaken, the of total deposits, while the largest 0.1 percent authorities may consider actions on liquidity of accounts hold 20 percent of total deposits management and contingency planning, such as: (WB-IMF FSAP, 2017). Hence, the benefits of the lower financial income tax rate are highly » Revise and update bank resolution skewed toward the very rich. framework. The FSAP19 discussed the legal reforms Short- to medium-term measures needed to ensure that (i) insured deposits remain fully protected; (ii) losses are allocated » Financial management and SOE to shareholders and, as needed, creditors reforms (in accordance with the creditor hierarchy); Establishment of a Single Treasury Account, and (iii) public support to failing banks, if eliminate unnecessary Extra Budgetary warranted, is minimized. Funds; Establish transparent accounting and reporting of revenues, costs, investments » Recapitalization of the deposit needs between: (i) OGERO, MoT and MoF, insurance fund as needed, and align and (ii) Port of Beirut. deposit insurance scheme with best practices. Element 3: Regaining Efficacy The FSAP recommended that in the long-term of Banking Sector the deposit insurance scheme “be reformed and made an operationally independent 32. The reliance on continued deposit public sector agency, governed by a Board inflows to fund the large financing needs composed of public sector representatives of both the public and private sectors and nonbank private experts, and fully funded while ensuring currency stability presents on an ex ante basis via industry premiums”, enormous challenges to the sovereign- with increased coverage and options to commercial bank relationship. The finance asset and liability transfers, under the banking sector balance sheet is very large “least cost” criterion, to support resolution. by global standards, at 437 percent of GDP by September 2019. Sovereign exposures » Conduct intensified supervision. amounted to 70 percent of total banking Update early intervention/prompt corrective assets. Meanwhile, economic conditions are action regime for weak banks; and update/ being reflected on banks’ loan portfolio; gross activate recovery plans. non-performing loan (NPL) ratio (excluding accrued interests on NPLs) has more than doubled from below 5 percent at the end of 2016 to 10.3 percent as of February 2019. 19 World Bank-IMF Financial Stability Assessment Program (2016). 24 | LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Short-term measures Element 5: Boost Growth and Forcibly Tackle Governance » Strengthen NPL resolution. The authorities could consider imposing 35. Illegal activities are not sanctioned regulatory requirements to promote timely by the state when they involve politically NPL recognition and provisioning, providing or confessionally connected or wealthy supervisory guidance for banks to develop actors, exacerbating elite capture and the a credible NPL management and recovery patronage system. This has been fertile strategy; Review existing out-of-court grounds for corruption, nepotism and workout framework; Consider NPL resolution inequality; Transparency International’s infrastructure options (AMC, decentralized Corruption Perception Index 2019 ranked bank-led strategy, immediate private/market Lebanon 138 out of 180 countries worldwide solutions, depending on composition of in 2019, indicating endemic corruption in NPLs and legal framework for insolvency and and making Lebanon among the 50 most creditor rights). corrupt countries in the world. Suggested measures include Element 4: Strengthened Social Safety Nets Short-term measures 34. Pre-existing inequities and » Annulment of Exclusive Agencies social disenfranchisement will be further and liberalization of the brand retail aggravated in the event of a crisis or a sector. severe recession. In order to cushion these Lebanon’s Legislative Decree No. 34 of negative effects, Government could consider 1967 grants exclusive agencies and sole programs designed to respond to the short- distribution rights to importers of all products term needs of the poor. The measures could excepting foodstuffs, washing products. This become part of Lebanon’s long-term social undermines competition and efficiency and protection and human capital development facilitate collusive behavior. system. Four short- and medium-term mitigating measures could be considered: » Law on the recovery of Stolen Assets. A main impediment to fighting corruption is » (i) scaling up the e-card food voucher of a lack of a well-articulated judicial process on the National Poverty Targeting Program how to recover assets that were obtained in (NPTP); (ii) providing an education illegitimate ways. cash transfer for children from extreme poor households who are vulnerable to » Adopt a new Public Procurement Law dropping out of schooling; (iii) increasing that is aligned with international best access to quality healthcare for poor practices. Lebanese; and (iv) a wage subsidy Corruption and clientelism are particularly scheme for youth. pronounced in the public procurement market. Thirty percent of the 561 firms surveyed by the Enterprise Surveys state that they are expected to give gifts to secure government contracts. This should also LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY | 25 THE WORLD BANK include limits on Ministers’ ability to procure the economy’s short-term financing needs, projects independently. especially those denominated in dollars. This involves financing needs for both the » An independent and effective public and private sectors, with the latter judiciary. the larger of the two. For the public sector The judiciary is the Government’s main this is concentrated on meeting Eurobond antibody against corruption. Currently, coupon payments and maturing Eurobonds. Lebanon’s judiciary suffers from significant Financing needs for the private sector is more political and other (ie. financial) interferences complicated, generated from banks’ deposit and distortions. Progress on fighting rates and imports that reflect and affect real corruptions cannot be realized if deficiencies economy conditions. Falling confidence within the judiciary are not addressed. works as a downward spiral that raises financing needs (higher Eurobond coupon Medium-term measures and deposit rates), increasing expectations of a default, which further lowers confidence. » Passage and implementation of a new Competition Law that is aligned with 37. The Special Focus identifies international best practices. credible financing and debt management Unlike many of its peers, Lebanon lacks a strategies for the public sector in Lebanon. competition law, which would establish These strategies aim to complement an antitrust enforcement framework that macroeconomic and structural reforms in prohibits anticompetitive agreements, abuse order (1) for Lebanon to achieve sustainability of a dominant position and anticompetitive in its public debt over the medium-term; and concentrations (mergers). (2) to create necessary fiscal space in the short term for the Government to redirect » Telecom reforms. scarce resources toward more productive The adoption of a unified vision for the sectors of the economy. A caveat is that ICT sector and clear consensus on policy; financing strategies for the public sector, Standardization of the terms and conditions including in dollars, remain incomplete as the of all Data service providers licenses bulk of the economy’s financing needs are in (among others revenue sharing, right to the private sector. Nonetheless, achieving build infrastructure, spectrum usage; debt sustainability and creating a fiscal space Standardization of the terms and conditions are important components of macro-financial of all Data service providers licenses (among stability, largely via the confidence channel others revenue sharing, right to build in the short-term and enhancing potential infrastructure, spectrum usage); Drafting growth in the medium to long term. clear, transparent and non-discriminatory terms and conditions for access to MoT fiber infrastructure (prices, methods of allocations, SLA, etc…) 36. Lebanon’s macro-financial stresses are dictating that resources and policy attention are directed towards meeting 26 | LEBANON IN CRISIS: CRISIS MANAGEMENT STRATEGY LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL SPECIAL FOCUS the various scenarios also contextualized DEBT MANAGEMENT political economy implications and financial market reactions. This technical exercise STRATEGY AND aims to inform political leadership, who will ultimately make final debt management FINANCING OPTIONS decisions. FOR LEBANON20 40. Public debt in Lebanon is on an unsustainable path. The debt-to-GDP ratio is at around 150 percent and almost Summary half of government revenues are directed towards interest payments. Under current 38. In response to a request from policies, debt-to-GDP will be increasing the Ministry of Finance, the World Bank to 175 percent in five years, and well conducted an analytical exercise to identify above 200 percent in ten years. For debt a credible financing and debt management to stabilize relative to GDP under current strategies for Lebanon. These strategies macroeconomic policies and interest rates, aim to complement macroeconomic and real growth would have to be more than structural reforms in order (1) for Lebanon 4 percent or more annually, from current to achieve sustainability in its public debt zero growth; for sustainability it is helpful over the medium-term; and (2) to create that inflation remains above three percent. necessary fiscal space in the short term for Meanwhile, interest cost will consume the Government to redirect scarce resources most of the government revenues. In 2019, toward more productive sectors of the interest payments on public debt consumed economy. Common to all of the options is almost half of government revenues and that that they are temporary and preconditioned share is projected to increase to 65 percent in on structural and macroeconomic reforms five years (14 percent of GDP) and more than that achieve substantial cost savings. 80 percent in ten years. 39. The Medium-Term Debt 41. Stabilization or structural Management Strategy (MTDS) Analytical improvement of the debt overhang Tool, developed by the World Bank and the can only be achieved with structural IMF, has been applied for the underlying and macroeconomic reforms that can analysis of the different options. While generate economic growth. Simulations the exercise is quantitative, analysis of show that if structural and sectoral reforms are implemented, leading to restored confidence, lower market interest rates and 20 The authors are Wissam Harake (Senior Economist), a ‘growth dividend’ of 1.5 percentage points, Lars Jessen (Lead Debt Specialist) and Patrick van der Wansem (Consultant). debt-to-GDP could fall. Financing measures SPECIAL FOCUS | 27 THE WORLD BANK can supplement that impact with a further 35 Interest Cost of Debt vs. RGDP Growth 7-8 percentage point reduction in the Debt- 30 to-GDP ratio. 25 20 Percent (%) 42. For financing measures to have an 15 additional and sustainable impact, they 10 would need to be conditional on decisions 5 and implementation of the reforms. Financing measures can generate meaningful 0 1998 1999 2000 2001 2002 2003 2004 2011 2012 2013 2014 2015 2016 2017 1992 1993 1994 1995 1996 1997 2005 2006 2007 2008 2009 2010 2018 fiscal space through lower cost of debt. -5 Cost of Total Debt Cost of FX Debt RGDP Growth Simulations show that (temporary) savings on interest can be 10-15 percentage points Figure 16. Interest cost of debt surpassed growth for much of Lebanon’s post-war economy. as a share of revenues. Sources: Lebanese authorities and WB staff calculations. 43. From a wide spectrum of options to reduce the debt cost for the government, 44. A main driver of debt dynamics in the analysis focused on local, temporary, Lebanon has also been elevated cost of concessional new financing measures. debt. Cost of debt has been traditionally high, In principal, concessional financing can be with annual yields on the 2-year Treasury backed up by international donors. However, Bonds (TBs) averaging 27 percent between the focus here is on domestic solutions as 1991-1993, the early years of reconstruction. this is predicted by the fact that the bulk While having declined appreciably since, of Lebanon’s creditors are residents. With the cost of debt21 has remained significantly this being a rare advantage, it is critical for higher than real GDP growth rates, driving a this resource not to be wasted. As such, persistently higher debt-to-GDP ratio (Figure concessional financing provided by domestic 16). The exception has been the period of investors in government bonds needs to above potential GDP growth rates between be strictly aligned to a multi-year reform 2007-2010, which lead to the afore-described program. Moreover, alternatives are either decrease in the debt-to-GDP ratio. not very likely, have limited impact or could be destabilizing. With concessional financing, several realistic variations have Reform Scenario been simulated and reviewed. The most important impact is the creation of fiscal 45. The Government of Lebanon space for Government; concessional committed under CEDRE to an ambitious financing, in combination with structural and fiscal consolidation program. The macroeconomic reforms, can bring down government presented at the CEDRE interest cost up 25 percent (amounting to conference a Vision for Stabilization, Growth more than LBP 2,500 billion) compared to the and Employment in which it pledged “a fiscal reform scenario without financing measures, consolidation of 5 percentage points of GDP thus reducing the ratio of debt interest payments-to-revenues, at least temporarily, to around 32 percent in 2023 (instead of 60 21 Cost of debt in this case is proxied simply by calculating the interest payments at time t divided by percent under unchanged policies). stock of debt at time (t-1). 28 | SPECIAL FOCUS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Table 2. Indication of size of assumed reforms, in percent of GDP and in currency amounts22 Projected reforms 2020 2021 2022 2023 2024 Average Primary balance % GDP 0.5% 1.5% 2.5% 3.5% 4.5% LBP 254,162 1,071,987 1,216,055 1,395,696 1,572,662 1,102,112 Impact of reforms USD 169 711 807 926 1043 731 65% 175% Baseline Baseline 60% Reform 165% Reform 55% 155% 50% 45% 145% 40% 135% 35% 125% 30% 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 Figure 17. Debt to GDP (left) and interest to revenue (right) under scenarios of unchanged policies and reforms Sources over the next five years (i.e. one percentage 46. The reform commitments imply point a year). This will be achieved through an improvement of the primary budget revenue measures, including improved in the amount of about LBP 1,100 billion collection and a reduction of loopholes, on average per year, moving the primary as well as a reduction in spending where balance to a surplus of 3.5 percent of GDP possible, including through a reduction in by 2023. Figure 17 below compares the the government’s transfers to EdL which projected trajectory of debt to GDP under a averages around 3.8 percent of GDP, as part scenario of unchanged policies and a reform of a broader effort to improve cost recovery scenario. Under current policies, economic in infrastructure services.” Additionally, growth and market prices are unlikely the Ministerial Statement for the new to improve, with debt and debt service government states “Commit, as of the 2019 persisting on an unsustainable path reaching, budget, to implement a financial correction respectively, 175 and 65 percent of GDP in by reducing the budget deficit by no less just the next five years. 22 than 1 percentage point of GDP per year for five years, by increasing the revenues and reducing the spending, starting with reducing 22 This and all proceeding simulations in this note the annual deficit of Electricité du Liban, until have used the year 2019 as base year and 2020-2024 as ending it”. complete calendar years of simulations. Hence, 2020- 2024 denote years 1-5 post reforms and/or measures taken. SPECIAL FOCUS | 29 THE WORLD BANK 47. The reforms will have both direct financing measures. More than 10 different and indirect impact on the debt overhang. strategies were reviewed, some with A sustained and ample primary surplus can several variations, to reduce the (cost of) break the deficit-debt spiral. While tight debt with considerations for qualitative and fiscal policy may initially suppress economic quantitative merits and risks. In terms of growth, this is expected to be outweighed the potential efficacy for reducing debt and by the restoration of confidence that is so cost, concessional financing concurrent with vital to the Lebanese economy. This, in the reform program can be very effective, as combination with effective implementation is demonstrated below. It implies that the of a capital investment program, which government will receive new financing, in prioritizes strategic infrastructural Lebanese lira and in US dollars, well below bottlenecks and allows for increased private market cost for some time during the reform sector participation, can generate a growth period. dividend, enabling interest rates to fall from the current high levels. These indirect effects 50. There is an economic equity have been incorporated in the quantitative case for the burden of fiscal reforms to model (see Annex I for macroeconomic be shared across income strata. Fiscal assumptions on the different scenarios). consolidation measures are generally socially painful. Commercial banks are viewed to have greatly benefited for many years from Options for Lowering investing in government bonds. In fact, since the economic downturn in 2011, the banking Interest Cost sector has posted high profits as it benefited from financial engineering operations. 48. As part of a structural and It is important to stress that any option macroeconomic reform package, financing with implications for the banking system measures can reinforce the positive impact would need to be assessed within a more on Lebanon’s fiscal position, especially comprehensive macro-financial stability with regard to the fiscal space. While framework. structural reforms are the main instrument to achieve debt stability or debt reduction, 51. The quantitative consequences financing measures can reinforce the positive of concessional financing for alternative dynamics by generating necessary fiscal options have been simulated. The key space for the government. It is also a tool that indicators for measuring effectiveness of the can facilitate the sharing of the reform burden various strategies are: (a) the ratio of debt to among different sectors of the economy, GDP, which is relevant for long-term debt including the financial sector. World Bank sustainability; and (b)the ratio of interest has considered a wide spectrum of financing cost to government revenues, reflecting the options and financial operations that could fiscal space available for Government. The lower interest cost and help restore fiscal average interest paid on the debt is included space for more productive expenditures. as an additional indicator. As described in the previous section, both are currently 49. After reviewing various strategies, unsustainably high. The quantified impact the focus was narrowed to concessional of alternative financing operations has 30 | SPECIAL FOCUS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL 65% 170% 60% 160% 55% 50% 150% 45% 140% 40% 35% 130% 30% 120% 25% 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 FS1: 1% 3-yr bonds, 50%, 3 yr Baseline FS1: 1% 3-yr bonds, 50%, 3 yr Baseline FS2: 1% 5&7-yr bonds, 50%, 3 yr Reform FS2: 1% 5&7-yr bonds, 50%, 3 yr Reform FS3: Step-up coupon, 100%, 3yr FS3: Step-up coupon, 100%, 3yr Figure 18. Debt to GDP (left) and interest to revenue (right) with concessional financing Sources been based on the MTDS Analytical Tool as • FSIII: a range of maturities that reflect developed by World Bank and IMF. the current portfolio—7 to 10 years for US$-denominated bonds, and 52. Of the possible combinations of 3 to 10 years for LBP-denominated key terms in concessional financing, three bonds; possible strategies have been selected: Financing Strategy I (FSI), Financing iii. On coupon rate: Strategy II (FSII) and Financing Strategy III • FSI, FSII: a highly concessional rate (FSIII). Specific terms of these instruments of one percent; are detailed in Annex II. The variations are • FSIII: a step structure, where merely an illustration. Ultimately, any strategy bonds pay one percent over the is an outcome of negotiations. With that in concessionality period (2020, 2021, mind, we describe the main characteristics 2022) automatically reverting to and variations for FSI, FSII and FSIII, namely: current market rates thereafter; i. On concessionality period:23 • FSI, FSII and FSIII offer concessionality iv. On volumes: terms over 2020, 2021 and 2022; • FSI, FSII: half of the Government’s financing needs in LBP and US$. ii. On instrument/bond maturity: • FSIII: all of the Government’s • FSI: three-year maturity for bonds financing needs in LBP and US$. denominated in both LBP and US$; • FSII: US$-denominated bonds have a maturity of five years and LBP-bonds 53. The impact of all three strategies have a maturity of seven years; would be material, creating savings of up to LBP 2,800 billion (about US$ 1.9 billion) in the budget by 2024. The interest cost-to-revenues ratio would drop from 23 This is the period during which bonds with the current 45 percent to about 32 percent concessionality terms are issued, after which Government returns to market terms. by 2024, compared to strongly increasing SPECIAL FOCUS | 31 THE WORLD BANK Table 3. Cost of debt in 2024 under different scenarios (2019: 6.7 percent) Scenarios 2024 Baseline 9.1% Reform 7.2% FS1: 1% 3-yr bonds, 50%, 3 yr 6.6% FS2: 1% 5&7-yr bonds, 50%, 3 yr 5.8% FS3: Step-up coupon, 100%, 3yr 7.6% 9.0% 54. Alternatively, the impact of the different strategies can be measured by the 8.0% average interest cost of debt. Whereas the 7.0% indicators above are connected to the macro- fiscal context, the interest rate indicator is a 6.0% more direct financial indicator. Those interest 5.0% rates are averaging rates on old debt as well as on marginal new financing. Still, the current 4.0% 2019 2020 2021 2022 2023 situation is grave enough that the impact Baseline Reform FSI of the different strategies clearly comes out FSII FSIII (Table 3, Figure 19). Figure 19. Interest cost on Lebanese government debt. Sources Burden Sharing under current policies; or merely stabilizing 55. The financial sector been under reforms without financing measures. benefitted from a positive ‘cost of carry’ Due to the step-up to current high interest on the difference between long-term rates, savings generated from FSIII are government bonds and central bank bills temporary and fade out in subsequent years. on the one hand, and shorter deposits on It is important to note that this would have the other. Government financing in past significant fiscal implications and would years has followed a prudent approach of need government to prepare in advance issuing longer-term maturities as much as for mitigation measures, otherwise fiscal the market would allow. This has reduced stresses can be sudden and sharp. To a lesser refinancing and interest rate risks and extent, this also applies to FSI. Additionally, has allowed existing debt to carry a lower the simulations also suggest that FSI, FSII and interest rate than current market yields. FSIII would contribute a reduction of around These policies were supported by BdL which 7 percentage points in the debt-to-GDP ratio, transformed some of that debt using central on top of the reductions generated from bank CDs with even longer maturities. As a reforms (Figure 18). result, liquidity was locked in, strengthening financial stability. In return, banks were 32 | SPECIAL FOCUS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Table 4. Cost of carry of concessional financing, in US$ millions26 Cost of carry impact 2020 2021 2022 2023 2024 2025 average FS I -518 -770 -1,100 -695 -330 -683 FS II -518 -770 -1,100 -1,100 -1,100 -1,017 -934 FS III -647 -842 -1,134 - - -875 protected against the transformation risk 2016 in the form of a SWAP, with the intention from short-term deposits into long bond of attracting inflows into the country and investments.24 This protection has come boosting its own stock of foreign exchange in the form of an implicit guarantee by the reserves as well as banks’ capital base.25 central bank to prevent individual bank This was followed by other SWAPs with failures—typically by arranging/subsidizing differentiated terms but similar objectives takeovers of vulnerable banks. As a result, the of reinforcing the economy’s NFA position, financial sector profited from the difference and more specifically, increasing BdL’s stock of high, long rates and the rates on (shorter) of foreign exchange reserves. Common to all deposits, in what appeared to be a relatively operations is a type of premium offered by safe manner. BdL to incentivize banks to engage in these SWAP operations. The cost has been carried 56. More recently, successive financial on BdL’s balance sheet. 26 engineering operations initiated by BdL and intended to reinforce the economy’s 57. As far as burden sharing is net foreign assets (NFA) position and boost concerned, the potential contribution bank capital—in light of decelerating capital from the banks should be defined by the inflows—have provided additional profits negative cost-of-carry. Banks invest the to banks, with cost carried by BdL. Since deposits they receive in government bonds, 2011, the economy suffered 5 consecutive but with concessional financing, the return years of decline in its NFA position, a unique rate is below the cost basis, the deposit rate. condition and an appreciable vulnerability for In the simulations, this negative carry would Lebanon. In response, BdL initiated its first start at US$ 500 million. As a reference large scale financial engineering operation in for how much the banks could potentially contribute, the estimated total profits of the 24 Under the latest BIS Basel III prudential rules, which may not yet apply in Lebanon, two ratios regulate liquidity requirements of the banks: The Liquidity 25 For more in-depth discussion of BdL’s 2016 Coverage Ratio (LCR) for short liquidity and the Net financial engineering operations, refer to: World Bank Stable Funding Ratio (NSFR) for long-term liquidity. The (2016), The Big Swap: Dollars for Trust, the Lebanon LCR relates eligible high-quality liquid assets (HQLA) – Economic Monitor, Fall 2016 Issue. consisting primarily of sovereign debt and reserves held 26 The assumption is that the fall in interest rates in the at central banks – to theoretical net cash outflows over reform scenario applies also to deposit rates, i.e. US$ thirty days in the event of a severe liquidity shock. The deposit rates fall from the current level of 4.90 percent NSFR requires that assets maturing in more than one to 4 percent as of 2020; the LBP deposit rates fall from year (weighted) and certain off-balance sheet items are 8 to 6.5 percent. Coupons are paid in the following year 100 percent covered by available stable resources. (a simplification in case of semi-annual coupons). SPECIAL FOCUS | 33 THE WORLD BANK Lebanese banks were around US$ 2.5 billion extended support has ultimately a very similar in 2018. Thus, in the first year of concessional impact to concentrating the concessional financing, the cost would be around 20 financing to three years. Concessional percent of 2018-profits; it should be noted financing with longer maturities obviously that BdL expects bank profits to be lower has a stronger impact compared with a three- in 2019. In following years, the cost would year intervention. increase due to accumulation of concessional financing. Under FSIII, the strategy with step- External donor support up coupons, the burden would be confined to three years; with FSI and FSII, the burden 60. Substantial and credible economic is dependent on the maturities of the bonds, reforms may entice external donors to making FSII with the longer bonds clearly the provide budgetary support in the form costliest alternative for banks. of grants or guarantees. External project financing, especially under the CEDRE commitments, are separate from general Alternative Financing budget financing and are left out of the debt management challenges addressed Strategies in this report. However, in view of those commitments, it is considered less likely that 58. The study considers a wide donors will be prepared to provide budget spectrum of alternative financing strategies support. Nevertheless, the impact of financial that could lead to a reduction in the cost of support in the form of grants or guarantees debt. Many strategies have been simulated on international bonds has been analyzed. and the quantitative and qualitative features It is assumed that bond guarantees are have been reviewed. In addition to the option provided without premium, as market-based of concessional financing described above, premia would do little for a reduction of debt alternative strategies and their impact are cost.28 In other words, the donor-element is briefly outlined below. effectively the guarantee premium absorbed by the donor. The simulations assume Variations in concessional financing either a one-off grant of US$ 2 billion or guarantees for US$ 5 billion Eurobonds; such 59. There are multiple strategies contributions may not be very realistic, but possible for concessional financing other even then, the impact on the debt indicators than those discussed above. The study is limited. Quantitative analysis shows that examines concessional financing over shorter bond guarantees tend to be more effective versus longer periods, i.e. one year and up to than grants with regard to interest cost, but five years.27 The impact of just one year of grants are more effective in reducing debt to concessional financing has a limited impact. GDP. On the other hand, a more gradual but 27 For simulations of the latter, the share of 28 Structures with market-based premia would only concessional financing can be assumed constant or help to gain international market access when stand- gradually regressing from 50 to 10 percent of the alone access would not be possible, for example due to government’s financing needs in each of US$ and LBP. a rating’s downgrade. 34 | SPECIAL FOCUS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Taxation on banks maturities in US$ have been ignored as the flat yield curve would barely produce 61. Another option is to introduce a a cost reduction). As a consequence of tax on banks as a measure to directly share shorter-term issuance, the profitability the burden of the reforms. In contrast of the banks would be affected. As far as to other financing options in this report, the government is concerned, a strategy such a measure would be a matter of fiscal of issuing mainly short-term debt would policy and the prerogative of Government reverse the policies of the past years, which and Parliament. These taxes should not centered around extending the average replace other fundamental reforms that are maturity. More short-term debt raises the required. From a quantitative perspective, refinancing risk, which might not suit the the taxation on bank profits is assumed at fragile Lebanese situation. In addition, more US$ 750 million, or 30 percent of estimated exposure to variable interest rates is riskier; gross profits in 2018. This is equivalent to 1.3 while Lebanon’s fiscal position can benefit percent of GDP per year and is in the order from lower rates that might result from of the cost of the concessional financing successful reforms, it can also be exposed above. The taxation leads to a cumulative to higher rates that can result from volatile improvement in the debt-to-GDP ratio by security and geopolitical developments, we 4.5 percentage points over five years. There well as from global monetary conditions. is a marginal improvement on the interest- The instrument, also known as a floating to-revenue ratio, which can be explained rate note (FRN), would be new and demand by the relatively high cost of new financing for the product would need to be tested. compared to alternative financing strategies. A challenge from a practical point of view Obviously, a change in taxation would would be identifying a proper and market- require Parliamentary approval. based reference rate. Shift towards variable and short-term debt Zero-coupon bonds 62. The least effective option to 63. In theory, debt cost on a cash basis reduce debt cost is to tap new financing could be reduced by issuing zero coupon using shorter maturity and variable bonds. From a budget perspective, under rate bonds. This is a completely market- cash accounting rules, long-term zero- based solution with no contributions from coupon bonds can be attractive as they have concessional instruments. Interest rates no interest cost until repayment. However, for shorter maturities are generally lower there is a balloon-payment at maturity which than those for long maturities, reflecting a increases refinancing risks. The advantages positively sloped yield curve. For example, for the Government of Lebanon of issuing the difference between the 15-year bond and zero-coupon bonds would appear to be the 6-month treasury bill yields is currently quite limited. While it is possible to reduce about five percentage points. While this interest cost, this relief would be temporary, option does little for the debt-to-GDP ratio, since the interest payments are pushed to it does gradually create additional fiscal the maturity date of the bond. Also, there space, running up to almost LBP 1 billion may be negative signaling effects, since only (US$ 670 million) after five years; (shorter countries under very substantial financial SPECIAL FOCUS | 35 THE WORLD BANK 175.0% 65.0% 60.0% 165.0% 55.0% 155.0% 50.0% 45.0% 145.0% 40.0% 35.0% 135.0% 30.0% 125.0% 25.0% 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 Baseline Reform Baseline Reform FS1: 1% 3-yr bonds, 50%, 3 yr FS2: 1% 5&7-yr bonds, 50%, 3 yr FS1: 1% 3-yr bonds, 50%, 3 yr FS2: 1% 5&7-yr bonds, 50%, 3 yr FS3: Step-up coupon, 100%, 3yr AC1: FSI for 1 year FS3: Step-up coupon, 100%, 3yr AC1: FSI for 1 year AC2: FSI for 5 years, 50%-10% AC3: FSII for 5 years AC2: FSI for 5 years, 50%-10% AC3: FSII for 5 years More short&variable debt Grant ext donor, once, $2bn More short&variable debt Grant ext donor, once, $2bn Guaranteed Eurobonds, $5bn, 1yr Special bank tax (US$750mio) Guaranteed Eurobonds, $5bn, 1yr Special bank tax (US$750mio) Figure 20. Debt to GDP for alternative Figure 21. Interest to revenue for alternative financing measures financing measures Sources Sources stress have been issuing zero-coupon the most updated information set available bonds. at the time. 65. The duration of financing Summary of Strategies measures has a major influence on the results. The study reviewed periods of one, 64. The simulations of the different three and five years. Structural reforms take measures illustrate the extent to which several years to implement, justifying multi- financing measures may contribute to year financing measures. Three years of Lebanon’s fiscal position. Figure 20 and financing measures have been the basis for Figure 21 below compare the impacts of FSI, most simulations. FSII and FSIII, as well as those for most of the alternative strategies discussed above. 66. Support for a concessional The thick (blue and black) lines are the financing strategy stems from a qualitative same as those in Figure 17, showing paths and quantitative assessment of feasibility for the baseline case (no reforms) and the and impact. As can be seen from Figure 20, case of reforms. We can also note that most the impacts on the debt-to-GDP ratio goes strategies have an impact on debt to GDP. in the same direction for most strategies, There is however larger dispersity on how with concessional financing having the the strategies affect the indicator of interest strongest effects. Regarding the interest cost- to revenues. For that indicator, concessional to-revenues ratio, while the results are more financing has the largest, albeit temporary dispersed, concessional financing over at impact. It should be stressed again that while least 3 years offer the best results. the data presented in this report are mere simulations based on a set of assumptions 67. More fundamentally, the and cannot be viewed as real projections, results show that with realistic options, they are based on an internationally Lebanon’s fiscal position can be put back renowned and tested methodology and uses on a virtuous fiscal path. The simulations demonstrate that a combination of structural 36 | SPECIAL FOCUS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Table 5. Macro-fiscal assumptions – unchanged policies Baseline 2019 2020 2021 2022 2023 2024 Real GDP growth (%) -0.2 0.3 0.4 0.5 0.5 0.5 GDP deflator (%) 6.2 3.1 3.3 3.4 3.3 3.4 Nominal GDP growth (%) 6.0 3.4 3.7 3.9 3.9 3.9 Nominal GDP (LL bn) 90,495,672 93,578,142 97,073,705 100,875,157 104,807,571 108,908,772 Total govt revenue (% GDP) 20.5 21.8 22.0 22.0 22.0 22.0 Primary expenditures (% GDP) 20.3 21.8 21.6 21.5 21.5 21.5 Primary balance (% GDP) 0.3 0.0 0.4 0.5 0.5 0.5 and macroeconomic reforms and financing measures have the potential of bringing Lebanon back into a more sustainable macro- fiscal situation. SPECIAL FOCUS | 37 THE WORLD BANK ANNEX I: MACRO-ECONOMIC ASSUMPTIONS OF QUANTITATIVE ANALYSIS 68. The financing strategies in this 10 percent reflecting current valuation report have been analyzed in the context of risks, especially credit risk, and by of two scenarios for macro-economic extension, credit spreads for Lebanon. and interest rate projections: a baseline While international investors have scenario and a reform scenario. This helps limited holding of Lebanese Eurobonds segregate the impact of these strategies from (estimates range between 20 and 30 that of the reforms. percent), they are able to influence marginal pricing. 69. The baseline scenario is the current outlook that reflects the status While a downside scenario is that interest quo and precludes reforms and the capital rates rise further, we have assumed that investment program (CIP). WB outlook they remain steady at current levels for the have been used for these projections. purpose of the simulation of the baseline scenario. 70. The key characteristics of the baseline scenario are: 71. In the more optimistic reform scenario, the growth and fiscal outlook • Sluggish economic activity with almost are improving through a combination no real economic growth; of tangible reforms and the CIP implementation. In this case, market and • A primary balance trajectory which popular confidence are expected to be starts from a deficit under current fiscal reinforced. Clearly, this scenario does not conditions but that converges to balance. materialize by itself, but only if the authorities The downside risk is that the low take decisive action on reforms. While the economic growth leads to a worsening optimistic projections vary more among of the fiscal situation; sources, we have adopted the following reasonable assumptions: • Sizable financing needs driven by the large twin deficits, unsustainable public • The primary balance improves annually debt and volatile market sentiment; by one percentage point of GDP. This size of budget adjustment has already • Elevated risk premia reflected by the been agreed in the context of CEDRE. persistence of relatively high interest The reform measures themselves are not rates, in light of the large financing needs. specifically addressed in this report. Both Eurobonds and TBs with longer maturities are assumed to remain above 38 | ANNEX I: MACRO�ECONOMIC ASSUMPTIONS OF QUANTITATIVE ANALYSIS LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL Table 6. Macro-fiscal assumptions - reform scenario Reforms 2019 2020 2021 2022 2023 2024 Real GDP growth (%) -0.2 3.25 3.4 3.5 4.0 4.0 GDP deflator (%) 6.2 3.8 3.5 3.25 3.25 3.0 Nominal GDP growth (%) 6.0 7.2 7.0 6.9 7.4 7.1 Nominal GDP (LL bn) 90,495,672 96,987,379 103,794,923 110,919,147 119,104,980 127,585,255 Total govt revenue (% GDP) 20.5 21.8 22.0 22.3 22.8 22.8 Primary expenditures (% GDP) 20.3 21.3 20.5 19.8 19.3 19.3 Primary balance (% GDP) 0.3 0.5 1.5 2.5 3.5 4.5 • Growth will be the result of opposing T-bills. This is a market-induced drop impacts: on one hand, fiscal reforms and not an exogenous monetary policy are initially contractionary, while the measure. The inverted yield curve on CIP implementation will take time.29 On Lebanese USD-denominated bonds will the other hand, renewed confidence, normalize and their interest rates will which would be impactful in the short end up about half a percentage point term, will combine with a gradually lower than those for LBP bonds. The increasing growth dividend generated lower rates are assumed as of 2020, from CIP implementation. The net result remaining constant thereafter. The fiscal is a projected positive growth dividend effect materializes the year following the that starts at � of a percentage point, decline in interest rates; in reality with accelerating to 3.5 to 4 percent. As a semi-annual coupons, it would show a result of higher growth, inflation will bit faster. also be somewhat higher, which is in fact beneficial for debt. • The gap between the two scenarios provides an indication of the needed • Interest rates: as confidence is fiscal adjustment, amounting to reinforced by reforms, credit spreads more than LBP 1,100 billion (US$ can fall back to historical levels of 750 million) per year during the next relatively low risk periods in Lebanon five years. See Table 1 in the main text. (from about 700 to 450 basis points). With risks to the downside increasing Domestic interest rates are anticipated (high macro-financial risks, geopolitical to drop by about two percentage points tensions.), the reform quantifications to 8 percent at long maturities, and up should probably be seen as a minimum to 1 percentage point (to 5 percent) for requirement. 29 Government expenditures preclude CEDRE and CIP related spending. Only the growth dividend is taken into account in the projections. ANNEX I: MACRO�ECONOMIC ASSUMPTIONS OF QUANTITATIVE ANALYSIS | 39 THE WORLD BANK ANNEX II: CONCESSIONALITY TERMS FOR FSI, FSII AND FSIII 72. Of the possible combinations of just one year has been included in of key terms in concessional financing, the next section).31 three possible strategies have been selected. Steering variables can be (a) the • Advantages of this option include concessional interest rate, (b) the duration of the simplicity of the instrument and the concessional period, (c) the range of the the gradual fading out of its impact concessional instruments and (d) the finance on interest cost in years four to six, volume applied to concessional financing. with the last concessional bonds The variations are merely an illustration. maturing in 2025. Ultimately, any strategy is an outcome of negotiations. • An important disadvantage is the i. Financing Strategy I (FSI) offers short maturity of the bond, elevating concessional bonds in two currencies, liquidity and refinancing risks during LBP and US$. In view of the dollarization a phase of recuperation. on the balance sheet of domestic banks, it would be evident to have concessional • As these concessional bonds bonds in both currencies. would be issued alongside more • Bond maturity is assumed three market-oriented bonds, decision- years for both currencies.30 makers can negotiate the share of total financing that would be • The coupon rate is set at a highly concessional; in the simulations, half concessional level of one percent. of gross annual financing needs are covered by the concessional bonds • The concessional period of the during each of three years. combined package of reforms and financing measures covers three ii. Financing Strategy II (FSII) is similar year, i.e. concessional bonds would to FSI except for diverging and be issued for three consecutive longer bond maturities. In FSII, US$- years, 2020 to 2022 (the alternative denominated bonds have a maturity of five years and LBP-bonds have a maturity of seven years. Challenging redemptions 30 Maturity would be more or less aligned to the during the reforms period are avoided in duration of the concessional period but long enough to have impact. Moreover, the redemption concentration could be avoided by assuming slightly diverging maturities in the US dollar bonds and the Lira bonds 31 An extension could always be negotiated in due (see also the next two strategies below). course for remaining reform years. 40 | ANNEX II: CONCESSIONALITY TERMS FOR FSI, FSII AND FSIII LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL this strategy. An important consequence back to market rates at the time of is that the reduction of interest cost is issuance. Bonds issued in 2021 extended over a longer period. The would offer concessionary rates in issuance of the concessional bonds 2021 and 2022, and bonds issued occurs again over a period of three years, in 2022 would offer concessionary from 2020 to 2022, and covers half of rates in 2022, all reverting to market the gross financing needs. rates at issuance starting in 2023. iii. Financing Strategy III (FSIII) applies a step-up coupon, decoupling the period • It is assumed that all gross financing of concessionality from the maturity needs are covered by step-up bonds, of the bonds. Compared to the first both in LBP and USD. strategy, this mitigates a concentration of redemptions. • The drawback of this strategy is • The coupon rate would be that interest cost will jump back concessional during the period of up in 2022. However, parties could 2020 to 2022 and subsequently always negotiate a more gradual restored (stepped up) to the current step-up structure, like a step-up of market rate for the remaining one percent point per year as of the maturity of the bond. As yields differ fourth year. per maturity, the concessionality would be expressed as a discount to 73. For practical purposes, it is prevailing rates; in the simulations, recommended to keep all the concessional a reduction of five percentage points bonds, both those denominated in has been applied. For example, a USD and LBP, strictly under Lebanese five-year bond would initially have documentation and law. First, these a coupon of 3 percent instead of 8 bonds are targeted toward domestic banks percent until 2023 and subsequently and investors, while minimizing market a market-conform coupon.32 segmentation. While they could be tradeable Likewise, a ten-year bond would instruments, they are not intended to trade start with a coupon of 5 instead of 10 internationally, avoiding any unwanted percent, stepping up to 10 percent arbitrage (in that sense, even a loan format as of 2023. could be considered). Secondly, Lebanese documentation and law would keep issuance • Bonds are issued over three years, costs down and make issuance much more such that bonds issued in 2020 would flexible. Overall, it is important that there is offer concessionary rates for 2020, a clear distinction between concessionary 2021 and 2022, thereafter reverting bonds and standard Eurobonds, with the latter also held by non-residents. 32 Meanwhile, in the reform scenario, and precluding financing measures, it is anticipated that the success of reforms will drive market rates down by ¾ percent in short bills to 2 percent in ten-year bonds. The step- up coupon increases to the current market rate and would not follow the fall in market rates; however, the concessional and the step-up rate are ultimately a matter of negotiation. ANNEX II: CONCESSIONALITY TERMS FOR FSI, FSII AND FSIII | 41 THE WORLD BANK TABLE 7. Lebanon Selected Economic Indicators, 2013-2020 2014 2015 2016 2017 2018 2019 2020 2021 Est. Est. Est. Est. Est. Proj. (annual percentage change, unless otherwise specified) Real sector Real GDP 1.9 0.4 1.6 0.6 0.2 -0.2 0.3 0.4 Real GDP per Capita /1 -3.8 -3.7 -1.1 -0.9 -0.3 -0.7 -0.2 -0.1 Agriculture (share of GDP) 4.2 3.6 3.8 4.2 4.2 4.0 4.1 4.1 Industry (share of GDP) 13.6 12.8 12.7 12.1 12.6 12.5 12.5 12.8 Services (share of GDP) 72.3 73.3 72.6 72.7 73.9 75.3 74.8 74.7 Net indirect taxes (share of GDP) 9.8 10.3 10.9 11.0 9.4 8.2 8.6 8.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Money and prices CPI Inflation (p.a) 1.2 -3.7 -0.8 4.5 6.1 1.6 1.5 2.3 GDP Deflator 1.1 3.0 0.9 3.6 2.5 6.2 3.1 3.3 Money (M3, including non-resident deposits) 6.0 5.1 7.3 4.2 3.0 -1.0 3.0 3.0 Investment & saving Gross Capital Formation 24.0 21.1 20.9 19.8 19.5 19.4 19.9 21.5 o/w private 19.8 22.4 19.5 18.3 17.9 17.8 17.2 18.5 Gross National Savings -2.2 4.1 0.5 -2.9 -2.5 -1.5 -1.5 0.2 o/w private -4.6 0.1 -3.1 -6.1 2.9 5.9 5.5 7.0 0 -0 0 0 -0 0 0 0 Central Government Finance Revenue (including grants) 22.5 19.2 19.4 21.8 20.4 20.5 21.8 22.0 o/w. tax revenues 14.3 13.7 13.7 15.4 15.0 15.2 16.0 16.0 Total expenditure and net lending 28.8 26.9 28.6 28.4 31.1 29.5 31.6 31.8 Current 27.2 25.5 27.2 27.0 29.5 27.9 28.8 28.8 o/w Interest Payment 8.7 8.9 9.3 9.3 9.6 9.2 9.8 10.2 Capital & Net Lending (excluding foreign financed) 1.5 1.4 1.4 1.5 1.6 1.6 2.8 3.0 Overall balance (deficit (-)) -6.2 -7.7 -9.3 -6.7 -10.7 -9.0 -9.8 -9.8 Primary Balance (deficit (-)) 2.4 1.2 0.0 2.7 -1.1 0.3 0.0 0.4 External sector Current Account Balance -26.1 -16.9 -20.5 -22.8 -21.9 -20.8 -21.4 -21.3 Trade Balance -29.8 -22.9 -23.6 -24.6 -24.2 -23.9 -24.1 -24.5 o/w Export (GNFS) 39.9 39.7 37.3 35.9 34.6 34.4 34.3 34.5 Exports of Goods 9.4 8.0 7.7 7.6 6.8 7.0 7.0 7.0 Exports of Services 30.4 31.7 29.6 28.3 27.8 27.4 27.3 27.5 o/w Import (GNFS) 69.7 62.5 60.9 60.5 58.8 58.3 58.4 59.0 Imports of Goods 42.3 35.2 35.0 34.5 33.5 33.3 33.9 34.2 Imports of Services 27.3 27.4 25.9 25.9 25.3 25.0 24.6 24.8 Net private current transfers: 4.9 6.8 4.8 2.3 2.8 3.5 3.4 3.7 Remittances 5.8 7.2 6.6 5.1 4.3 5.1 4.9 5.0 Net Income reciepts -1.2 -0.9 -1.6 -0.5 -0.5 -0.5 -0.7 -0.5 Capital Accounts 0 0 0 0 0 0 0 0 Gross Reserves (months of imports GNFS) /2 /3 13.1 13.8 15.2 15.6 14.3 12.8 12.0 11.2 Total Public Debt Total Debt Stock (in million US$) 66,564 70,325 74,900 79,530 85,139 90,512 96,579 102,863 Debt-to-GDP ratio (percent) 137.8 140.7 146.2 149.0 150.3 150.8 155.6 159.7 Memorandum Items: Nominal GDP (in billion LBP) 72,806 75,336 77,243 80,491 85,384 90,496 93,578 97,074 Exchange Rate, Average (LBP/US$) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 GDP (in million US$) 48,296 49,974 51,239 53,394 56,639 60,030 62,075 64,394 Source: Government data, and World Bank staff estimates and projections. /1 Population figures, which include Syrian refugees registered with the UNHCR, are taken from the United Nations Population Division /2 Gross Reserves (months of imports GNFS) = (Imports of Goods & Services / Gross Res. excl. Gold)*12 /3 Total Imports using the BOP data from the Quarterly Bulletin of BDL 42 | ANNEX II: CONCESSIONALITY TERMS FOR FSI, FSII AND FSIII LEBANON ECONOMIC MONITOR | SO WHEN GRAVITY BECKONS, THE POOR DON'T FALL SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON (for an exhaustive list, please go to: http://documents.worldbank.org/curated/en/docadvancesearch/ docs?query=&cntry=82571&majorDocTY=906674,658101) Title Publication Document Type Date Mashreq 2.0: Digital Transformation for Inclusive Growth and 2019/06/25 Report Jobs: Executive Summary (English) Shedding Light on Female Talent in Lebanon’s Energy Sector 2019/04/01 ESMAP Paper Behavioral Strategies to Support Social Stability in Lebanon 2019/03/28 Working Paper Droughts and Agriculture in Lebanon: How Gender-Diverse 2019/01/01 Working Paper Boards Bring Value to Lebanese Companies (English) Lebanon Economic Monitor, Fall 2018: De-Risking Lebanon 2018/10/30 Working Paper Why aren’t more Lebanese women working? 2018/05/01 Brief Strategic assessment: a capital investment plan for Lebanon – 2018/04/06 Working Paper investment opportunities and reforms Doing Business 2018: reforming to create jobs – Lebanon 2017/11/01 Working Paper Jobs for North Lebanon: Value Chains, Labor Markets, Skills 2017/09/01 Working Paper And Investment Climate in Tripoli and the North of Lebanon Priority reforms for the government of Lebanon 2017/05/27 Working Paper Lebanon Economic Monitor, Spring 2017: A Call for Action 2017/04/01 Working Paper The role of financial services in humanitarian crises 2017/01/01 Working Paper Lebanon Economic Monitor, Fall 2016: The Big Swap: Dollars for trust 2016/11/08 Working Paper Lebanon - Lake Qaraoun Pollution Prevention Project (English) 2016/06/22 Project Lebanon Economic Monitor, Spring 2016: A geo-economy of risks and reward 2016/06/02 Working Paper Lebanon - Promoting poverty reduction and shared 2016/01/01 Publication prosperity: systematic country diagnostic (English) The welfare of Syrian refugees: evidence from Jordan and Lebanon (English) 2015/12/22 Publication Snapshot of poverty and labor market outcomes in Lebanon 2015/12/08 Working Paper based on household budget survey 2011-2012: central administration for statistics and World Bank Lebanon economic monitor, April 2015: the economy of new drivers and old drags 2015/04/27 Working Paper MENA Quarterly Economic Brief, January 2015: Plunging Oil Prices 2015/01/29 Brief Economic effects of the Syrian war and the spread of 2014/12/01 Policy Research Working Paper the Islamic state on the Levant Lebanon Economic Monitor: Fall 2014 (English) 2014/10/31 Brief New coincident and leading indicators for the Lebanese economy (English) 2014/06/01 Policy Research Working Paper Lebanon Economic Monitor: Spring 2014 (English) 2014/04/30 Brief Lebanon Economic Monitor: Fall 2013 (English) 2013/10/31 Brief Lebanon - Economic and social impact assessment of the Syrian conflict (English) 2013/09/20 Board Paper Lebanon Economic Monitor: Spring 2013 (English) 2013/06/25 Brief Lebanon - Economic and labor force impact of the 2013/06/01 Policy Note change in the wage structure of the public sector (English) SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON | 43 The World Bank www.worldbank.org/lb