Low Productivity
Financial Policy
Monetary and Banking Policy
Savings and Investment
Privatization
Social Conditions

Late last April, a team of Lebanese economists presented a report to shore up the national economy and check further erosion in the value of the national currency. Before its resignation on May 6, 1992, the cabinet of Prime Minister Omar Karami decided to adopt many of the economists` recommendations, most of which mainly centered on cutting public spending, reducing the budget deficit, and improving local productivity.

“Lebanon is suffering from spiraling inflation coinciding with a sharp drop in local productivity at a time when the country is on the threshold of reconstructing and rebuilding its devastated infrastructure... As such, attention should focus on two main issues: namely inflation and financial and monetary policy, on the one hand, and the production capacities of the national economy and the level of production, on the other.”

The economists blamed runaway inflation on the creeping growth of the public sector budget. The deficit exceeded 70% in 1987, between 1988 and 1990, the budget deficit stood at 85%. According to initial estimates prepared by the Central Bank, the deficit dropped to 57% in 1991.

A lack of government control on the country’s sources of revenues and unchecked public spending were the main causes of deficit in the government budgets before 1990. In 1991, the volume of revenue rose, but public expenditure remained as high, keeping the deficit above the tolerable rate, the report said, adding that “the persistence of a huge budget deficit implies that more money will be printed, putting higher pressure on the economy and causing a larger fluctuation in the value of the national currency.” The economic experts called for “scheduling the reduction of the public deficit and its inflationary consequences” as a key to curbing inflation and stabilizing the exchange rate of the national currency.

Low Productivity

The report explained that Lebanon’s 16-year-long civil war destroyed many factories and much of the country’s basic infrastructure -- electricity, water supplies, communication networks, etc. -- which severely limited the country’s capacity for production. This was exacerbated by the flight of capital, a sharp drop in investment resources, and the emigration of a large part of the skilled workforce: All this has led to a sharp drop in the volume of local productivity which has fluctuated tremendously since the outbreak of the war in 1975... Between 1986 and 1988, production increased slightly, but it dropped significantly between 1989 and 1990 due to violent domestic and external developments during that period... An improvement in production was recorded in 1991 following the restoration of relative security and political stability. Nevertheless, the volume of production remains well below average compared to figures before 1975. The report underlined the importance of orienting the Lebanese economy towards exploiting national production capacities and modernizing production means as a part of plans for Lebanon’s reconstruction.”

Financial Policy

The report focused on the need to plan for the reduction of the deficit in the public sector, including the state budget and other auxiliary budgets, as the key to restoring some financial balance between expenditures and revenues. It charged that “the persistence of uncalculated spending, coupled with an unchecked rise in the overall bill for salaries in the public sector and the absence of a parallel increase in the volume of public revenues, put pressure on the national economy and led to the sharp deterioration in economic and living conditions.” In order to adopt an appropriate financial policy aimed at bringing the financial situation in the public sector under control, the committee of experts made the following recommendations:

1. Place a ceiling on public spending so as not to exceed 1,700 billion Lebanese pounds in 1992, keeping the budget deficit at 35 percent of overall spending in the public sector. This measure demands an increase in public revenues through taxation of at least 1,100 billion pounds. Based on those ceilings, and according to initial estimates of national production for 1992, the volume of revenue is expected to decrease by 10 to 12 percent, the report said. It called for rescheduling public spending on a quarterly instead of an annual basis, to allow financial departments to undertake a review of the situation should this be required.
   
   In addition to putting a ceiling on public expenditure, the committee of economists also called for keeping government borrowing from the Central Bank within 10 percent of overall public spending, on condition that payment of the loans be made on a monthly basis and in a balanced way all year round... Servicing the rest of the deficit should be achieved through subscription to Treasury bonds in a transitional fashion until financial balance is achieved, the report said, noting that the policy of borrowing is the main cause for inflation. The report pointed out that the government’s financial policy should, for the next three years, remain geared towards gradually reducing the public deficit until a complete balance is achieved between the state’s true resources and its public expenditures: “Since the Government’s reconstruction plan is bound to need an increase in unavoidable expenditures, the anticipated deficit should be directly linked to reconstruction and development projects within proportions to be defined at the time in light of existing conditions.
2. Introduce basic reforms in the taxation system with a view to making it conform more with the requirements of economic and social revival. The committee’s proposals in this regard were:

• Giving priority to improving and modernizing methods of levying taxes and custom fees.
• Raising the customs dollar to half its real market rate, as a first step, on all taxable items; tightening surveillance of attempts to smuggle goods into the country.
• Raising the cost of fuel within certain limits and in a way not to encourage smuggling.
• Increasing the annual car registration tax.
• Passing a law to settle and punish violations in building construction.
• Reducing the rates of income tax on individuals, companies, and free enterprises.
• Assessing the value of public properties and studying ways to make beneficial use of them.

The report also called for lifting the immunity on civil servants and purging the public administration, which is plagued with corruption, red tape, bribery, and inefficiency. The purge should result in reducing the total number of civil servants by 20 percent. Specialized and efficient elements should be appointed to fill key administrative positions... The purge should first target absentees and civil servants who have emigrated.

Monetary and Banking Policy

The report said the objectives of monetary policy could not be realized without financial planning because the growing monetary deficit is directly related to a lack of well studied or checked public spending, coupled with a lack of increase in the volume of revenue. In light of the existing financial conditions in the country, the committee stressed the need to maintain a policy of monetary control and restraint on the percentage of subscriptions to Treasury bonds, on condition that this proportion should decrease gradually and simultaneously with a further control on the overall monetary conditions in the public sector. It called for maintaining a free exchange market whereby the pound’s rate would be determined by market forces of supply and demand. The Central Bank would interfere only occasionally to head off sharp fluctuations and maintain a relatively stable market.

The committee also emphasized the need to reorganize and consolidate the banking sector with the aim of attracting deposits and savings... Furthermore, the orientation and planning of economic policies require the existence of up-to-date statistics and evalprocedures in the various fields. As such, the committee recommended the reand modernization of the Department of Statistics as an independent body, and the establishment of centers for statistics in every single ministry.

Savings and Investment

The report also pointed out that the best domestic sources for savings were the following:

• Individual savings from business-generated profits.
• Compulsory savings, including fees paid into retirement plans as part of the social security system, and the public savings that the government might realize if revenues exceeded spending, or profit was made by state-run institutions and services.

“The volume of savings by individuals and businesses has shrunk over the war years for two main reasons: the drop in the real value of salaries and other forms of income, and the flight of a large part of savings and bank deposits outside Lebanon... However, Lebanon still holds a considerable amount of savings and reserves in Lebanese pounds as well as in foreign exchange which amounted to 6.2 billion dollars at the end of 1991.”

Foreign or other sources of financing and saving were listed by the report as follows:

• Savings of Lebanese abroad.
• Savings and revenues of companies and businesses abroad owned totally or partially by Lebanese.
• Arab and foreign savings which could be attracted back for local investment.
• Loans and financial aid and assistance from friendly governments, international funds, and monetary institutions.

“It is needless to point out,” the report said, “that attraction of private revenue and investment depends a great deal on the existence of proper and encouraging financial and investment conditions in the country, while foreign loans and financial assistance are directly linked to political stability and the existence of an efficient civil service.”

“The report also listed a series of recommendations aimed at attracting foreign capital and encouraging investment in Lebanon:

• Reducing income tax, and simplifying and modernizing the taxation system. The committee proposed imposing a 10 percent income tax on individuals, small businesses, and free enterprises, and a 15 percent tax on profits made by large companies including financial and monetary establishments.
• Speeding up the reconstruction of the country’s infrastructure within available capacities.
• Making use of Lebanese savings and reserves. This requires the establishment of an organized and sound stock market to process paper and monetary bonds. The modernization of Beirut’s stock market is bound to boost the overall investment atmosphere in the country.
• Making use of public property, including mortgaged real estate offered to the Central Bank in exchange for the money it expended. to float a number of Lebanese banks which are in crisis and short of liquidity.

The committee recommended the reactivation of the National Bank for Development, on condition that it become a joint venture between the public and private sectors. The committee also underlined the urgent need to rebuild the capital’s downtown commercial center, as well as other war-damaged Lebanese centers, in order to boost the economy and investment. It asserted the importance of retaining the existing economic system which encourages free competition in all economic fields.

Privatization

The report stated: “In light of the absence of the proper political conditions for introducing basic and real reforms on the corrupt and ailing civil service, due to sectarian and factional considerations, the committee specifically raised the issue of privatizing certain economic activities and services now run by the public sector, including telecommunications, garbage collection, water, and electricity... The privatization policy has served the development objectives of many industrialized and developing countries. Nevertheless, it remains directly linked to the nature of each country, including its political, economic, and social structure.

“The concept of privatization, if applied to Lebanon, would imply either an association between the private and public sectors in owning and running public establishments, or a total transfer of ownership of these establishments to the private sector. In both cases, the actual administration should be placed in the hands of the private sector without any interference by politicians.”

The committee warned against touching the Central Bank’s gold reserves under the present unstable political and administrative conditions, because the gold cover constitutes a main factor in the confidence and trust of depositors and investors.

Social Conditions

The report also tackled the deteriorating social and living conditions resulting from the drop in national production, and the erosion of the value of the national currency. “Soaring inflation and the depreciation of the Lebanese pound have led to a redistribution of income and wealth in a way that has widened the gap between classes in the society... Furthermore, the forcible uprooting or displacement of almost one third of the total population in Lebanon exacerbated the problems of housing and unemployment, leading to the emigration of a large number of Lebanese and a brain-drain which further complicated the economic situation.