• Social Issues
    Nov 03, 2021

    Ensuring Responsible Allocation of Special Drawing Rights in Lebanon

    • Fadi Nicholas Nassar, Walid Sayegh, Sarah Hague
    Over the next few months, the International Monetary Fund (IMF) is expected to issue a new wave of Special Drawing Rights (SDRs) to its 190 member countries, in response to the global economic shocks brought about by the COVID-19 pandemic.[1] As a participatory member, Lebanon is set to receive an unearmarked cash injection of around $860 million. Although such a boost in liquidity offers potential short-term relief opportunities at this critical juncture for Lebanon, it comes without any preconditions for use or oversight, thus raising concerns as to how those funds will be used and allocated.
    Lebanon is currently facing one of the worst economic and financial crises in modern history,[2] with per capita GDP plummeting to a 20-year low, and extreme poverty more than tripling in less than two years.[3]At the center of the country’s economic collapse is a larger crisis of governance, limited state capacity, corruption, elite capture, and a deficit of trust in the government. The accumulation of these variables has proven to be a significant impasse in negotiations between the IMF and the Government of Lebanon (GoL), especially over the latter’s willingness to agree on needed reforms to receive more substantial IMF-backed recovery loans.
    Since the beginning of the crisis in 2019, the GoL has not been able or willing to take any steps to halt the leakage of much-needed import dollars, including the passing of a capital control law and the restructuring of its debt and financial sector. Instead, and to mitigate the impact of devaluation on consumer prices, the government set up a costly and inequitable subsidy system[4] that was implemented with, at best, limited operational oversight, leaving it highly susceptible to manipulation.[5] Along with unrestrained capital outflows[6] and expectations of worsening financial conditions, the subsidy contributed to the continued drainage of foreign currencies and the devaluation of the lira from USD/LBP 1,515 to USD/LBP 20,500 (as of 23 July 2021). By the end of June 2021, prices of food products alone had cumulatively increased by ten-fold from September 2019, an impact that has been more severely felt by lower income groups.[7]
    In recent months, the partial lifting of subsidies has accelerated the increase in consumer prices and worsened shortages in medicines and fuel, further reflecting the grave mismanagement of the crisis and accentuating the historical failures in providing needed infrastructure for efficient power generation and an adequate public transportation system. In addition to increasing levels of food insecurity, shortages in fuel, medicines, and other goods now put the delivery of basic services at risk, including the provision of water, hospitalization, and education.
    Against this bleak backdrop, humanitarian programs to protect vulnerable households evidently take priority in the allocation of unconditional aid. However, the question of whether unconditional spending by a state that is mired in corruption is the best course of action, remains valid, particularly given the lack of evidence on the impact of past government-led social assistance programs.

    For example, using the funds to finance the so-called “ration card,” as a response to the lifting of subsidies on essential items could provide relief for up to half a million families.[8] However, with no clear implementation mechanism, including in the identification of eligible households, the risk of misallocation by a ruling class that has repeatedly proven its capacity for unaccountable malfeasance is high. In fact, when news first broke out of the IMF’s planned global COVID-recovery response, Lebanon was cited as a potential case where the injection of unconditional SDRs could dissuade reform efforts in fragile countries paralyzed by high levels of corruption, state obstruction, and public mismanagement.[9]
    Likewise, miscalculated decisions could potentially cause more harm than benefit, given exchange rate instability. For example, retaining the foreign currencies exchanged from allocated SDRs and offering an equivalent value in local currency food vouchers, at a pre-set rate, as proposed in the ration card law, would introduce major economic and moral hazards. Vouchers that are later cashed in for LBP could accelerate inflation, in addition to undermining the dignity of beneficiaries by limiting their ability to spend cash according to their needs – i.e. on healthcare, rent, clothes, and bills.
    Economic risks are significantly more palpable without immediate parallel reforms to slow the currency devaluation, and the value that the ration card would offer could prove negligible compared to the needs of vulnerable households. Data on consumer prices today suggests that a family of five requires more than three times the minimum wage for the monthly cost of one main meal per day,[10] at a time when more than three quarters of the population survive on an income slightly above the minimum wage.[11]
    Consequently, plans to inject around $860 million worth of SDRs in Lebanon cannot ignore or downplay the particularities of Lebanon’s crisis-context or the structural causes behind it. In that respect, two questions need to be addressed before the allocation is made:

     What can the role of international organizations and civil society be in ensuring that the funds are not mismanaged or misallocated?


     Should the funds be allocated for urgent short-term humanitarian assistance, or for longer-term projects that would reduce Lebanon’s need for foreign currencies, and solve long-standing structural weaknesses?

    To be sure, there are no easy answers, especially at a time when socioeconomic and political conditions are in flux, and state institutions continue to fail in providing clarity on key indicators, including the remaining foreign currency reserves, the cost of subsidies, and up-to-date import data, among others. However, it is urgent that some issues are addressed prior to the SDR allocation, particularly as these funds could, aside from their socioeconomic impact, either provide a lifeline for a system that survives on patronage and clientelism, or offer an entry point for long-term reforms and recovery.
    Here, certain steps and measures could be taken, such as: an IMF-enforced requirement for a public declaration by the GoL of its SDR distribution strategy, the inclusion of civil society in setting up an oversight mechanism for the funds, and the rallying of international donor support to ensure a cooperative, transparent, and efficient economic recovery strategy (through, for example, pledges of matching the IMF SDR allocation in return for oversight conditions and transparency on the use of the funds).
    In the aftermath of the Port of Beirut blast, the World Bank, the European Union, and the United Nations stressed that “decisive action” was needed to save Lebanon from its multiple crises.[12] Nearly one year later, despite the persistent absence of such leadership from the GoL, that need remains. As the IMF prepares to hand the government the largest international aid package since the start of the crisis, the real question is: who is ready to take it?

    [1] SDRs were created by the IMF to serve as an international reserve asset. Although not a proper currency, SDRs act as a claim to a currency held by an IMF member and in this sense can boost liquidity in a country when injected.  
    [2] World Bank, Lebanon Economic Monitor (Spring 2021).
    [3] ILO and UNICEF, Towards a social protection floor for Lebanon (March 2021).
    [4] LCPS and UNICEF, After the End of Subsidies in Lebanon: The Need for an Inclusive and Comprehensive Social Protection Strategy (June 2021).
    [5] Anecdotal evidence suggests that some subsidized imports were re-exported for US dollars or hoarded by distributers in anticipation of further inflation or the lifting of subsidies.
    [6] The deficit in the balance of payments exceeded US$ 10.5 billion in 2020 (BDL), whereas estimates of the cost of subsidies ranged between US$ 3.3 - 3.6 billion. (UNICEF; World Bank)
    [7] LCPS and UNICEF, After the End of Subsidies in Lebanon: The Need for an Inclusive and Comprehensive Social Protection Strategy (June 2021).
    [8] Al Monitor. "Lebanon's Parliament Backs $556M Cash Subsidy." July 1, 2021. Accessed July 29, 2021..
    [9] See, for example, Forde, Kaelyn. "What Are SDRs and Why Are They a Hot Topic at the IMF Meeting?" April 06, 2021. Accessed July 29, 2021..
    [10] American University of Beirut, Lebanon Crisis Monitor (July 2021).
    [11] Ibid.
    [12]World Bank, United Nations, and European Union. "Decisive Action and Change Needed to Reform and Rebuild a Better Lebanon." August 31, 2020. Accessed July 29, 2021..
    Fadi Nicholas Nassar is a research fellow at the Lebanese Center for Policy Studies (LCPS). His research focuses on international humanitarian and relief interventions in fragile and conflict settings, popular uprisings and social movements, and Lebanese and Middle Eastern politics. He is Assistant Professor of Political Science and International Affairs and Director of the Institute for Social Justice and Conflict Resolution at the Lebanese American University (LAU). Fadi holds a PhD from the War Studies Department at King’s College London. A graduate of Georgetown University’s Edmund A. Walsh School of Foreign Service, he also received a Master of Public Administration from Columbia University.
    Walid Sayegh  Economic and social policy specialist at UNICEF Lebanon
    Sarah Hague Chief of Social Policy for UNICEF Lebanon Country Office
Sign up for our Newsletter
Thank you for subscribing to our newsletter!