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Bassel F. Salloukh, associate professor of Political Science at the Lebanese American University, and LCPS research fellow

December 2018
Lebanon’s Ghosts of Christmas Past, Present and Future

Much like Ebenezer Scrooge’s selfish deeds, Lebanon’s past monetary and fiscal policies have finally come home to roost. As 2018 ends, most Lebanese have but one haunting worry: What kind of economic showdown will 2019 bring? To confront these fears, we must first determine how we managed to find ourselves in such a wretched economic condition, one that will continue to haunt our future prospects.
There is nothing magical about Lebanon’s present economic crisis. It is rooted in the ghosts of past economic visions and choices. The lopsided pre-war merchant republic was recycled, producing a postwar rentier economy anchored on largely nonproductive tourism, real estate and financial sectors, regressive tax rates, and depressed wages. High interest rates were the price paid to stabilize the Lebanese Lira and ensure a steady increase in bank deposits which, alongside remittances from an ever-growing immigrant population, were used to redress the country’s balance of trade deficit. Considered at the time a necessary short-term measure, this postwar economic philosophy rewarded investments outside the real economy and financed a way of life based on uber-consumption, allowing many Lebanese to live beyond their otherwise logical means. Consumption rather than savings became the Lebanese way of life—capital concentration took precedence over sound fiscal policies. Today we are reaping the results of these past ghosts: 1% annual economic growth in 2018, 6.2% average inflation rate year-on-year through July, $83.7 billion in public debt by August 2018 (compared with $3 billion in 1993), a total fiscal deficit at 8.3% of GDP through June of 2018, “unsustainable”—as the World Bank keeps reminding us—debt-to-GDP ratio of 155% at the end of 2018, expected to rise to 166% by 2020, and a trade deficit of $11.7 billion through August 2018.
This postwar economic model overlapped with a peculiar political economy incentivizing cronyism, endemic corruption organically connected to the Taif Accord’s power-sharing arrangement with its massive sectarian redistributive policies, and political mobilization along mainly sectarian lines. Nowhere is this more glaringly evident than in the predatory rent-seeking practices of the postwar political elite, a fiscal evasion gap of some $5 billion in 2017—the equivalent of 10% of 2017’s GDP, according to Bank Audi estimates—and the ballooning of the public sector’s workforce size and wage bill. Constituting some 300,000 employees in 2017 and representing 35% of GDP according to Banque du Liban (BDL), Lebanon’s central bank, the postwar public sector emerged as a source of political rent, part of the sectarian political elite’s ensemble of clientelist networks and strategies deployed to produce docile sectarian subjects. The result is a Lebanese state that looks nothing like the modern Weberian state with a measure of institutional autonomy from private societal interests. Rather, it is an archipelago of clientelist networks that sustains the political economy of sectarianism.
Most worrying today is the insouciance creeping into reactions to persistent International Monetary Fund and World Bank warnings regarding the gravity of present economic conditions. This is especially so if we try to peek into our future economic prospects. If we do that, we see three potential but alarming and overlapping trends: 1) increased pressures on BDL’s foreign exchange reserves, 2) a persistent balance of payments deficit exacerbating the country’s perennial balance of trade deficit, and 3) rising debt financing as a result of pressures to raise interest rates and a concomitant increase in the debt-to-GDP ratio which, at least according to analysis of one worst case scenario published in Al-Akhbar in November 2018, may reach 215% in the next five years.
Now that we can see the specters of our future more clearly, will policy makers, much like Scrooge, step back from economic ruin, and start thinking about how to address what is a glaring contradiction between existing monetary policies and the need to reboot the real economy beyond non-productive rentier structures? Will they realize that relying on unorthodox monetary policies to rectify predatory and populist postwar fiscal policies cannot continue indefinitely, especially given new geopolitical realities and emerging market pressures? And if they decide to embark on an economic restructuring beyond the freshman logic guiding the infrastructural projects presented at the CEDRE conference, has anyone paused to think for a minute about how to spread across classes and sectors the inescapable pain and agony that comes with deep economic reforms, but especially the privatization of strategic public services?
It is axiomatic that the postwar political economy with all its distortions has now run its course. But to exonerate the average citizen from part of the blame is to miss how the sectarian system operates through a combination of material and immaterial incentives to obviate the emergence of alternative forms of interest-based identities and modes of political mobilization. It is high time we free ourselves from the ghosts of economic policies past, and start making the kind of difficult fiscal choices that can reverse the present meltdown, without torpedoing the livelihoods of the poor and disadvantaged. Anything else would be sheer humbug!

This article was also published in the latest issue of Executive Magazine.

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