Lebanon: No reform adjustment?

There are three reasons for scepticism about genuine economic, administrative or political reform in Lebanon. These reasons are related to the regional geopolitical landscape, the local political background and the economic and financial situation. However, Lebanon has a vested interest in reforming the subsequent Taif "system", as it cannot survive as it is.

Geopolitically, Lebanon is more of a regional tug-of-war zone than ever before, with Iran's influence being strongly countered by Western countries (the United States, France), not to mention Turkey, Russia, the Gulf States and Israel itself. The Fertile Crescent, made up of Iraq, Syria and Lebanon, has effectively formed a real buffer zone, separating the three main regional protagonists— Iran, Turkey, and Israel.

While the Shiites subsequently stepped up their political clout in the New Moon, the Iranians could not just impose themselves there because they had a tough opponent in Iraq. Iraq's Shiite Arabs, who make up two thirds of the population, are themselves divided by the various external forces associated with them, as the recent Iraqi elections demonstrated.

Meanwhile, Lebanon and the Allah Party have Israel in the south and Syria in the north and east (Russia has a strong presence there). However, while Moscow has shown closeness to Tehran, it has also been so close to Ankara and Tel Aviv (this is particularly noteworthy given Moscow's lack of criticism of the Iranian army and its associates who have shelled Syria almost mercilessly on the Hebrew state since 2017).

In fact, Russia maintains a balanced stance, equal in distance from the protagonists of the three regions. Based on this, Russia-Iran relations are far from clear and transparent, especially on the Lebanese issue. In addition, Iran's influence on the Lebanese stage has been strongly opposed by other forces.

For example, while the Allah Party is an armed faction of the Islamic Republic of Lebanon, as its Secretary-General has said, other local political parties maintain close relations with various external forces, including Saudi Arabia, Turkey or Russia. At the same time, Western countries often meddle in many political and economic issues (not to mention the delineation of the Israeli-Lebanese [maritime] border, in which the United States plays a key role).

Finally, the deal was extended to include France, which made a strong comeback on the Lebanese stage more than a year ago with the Help of France's initiative. Paris is a complex regional game that links the Mediterranean issues to those of Lebanon, Syria and Iraq, where France has a special military presence.

The fact that Lebanon is at risk in competition in these regions has come at a high price, because the slightest internal development, even a simple cabinet formation, still depends on the goodwill and agreements of the foreign powers, which can be questioned at any time (differences among Lebanese internal political actors clearly fuel this external intervention).

So if Lebanon is therefore an "occupied" State, who is the occupier? Because it is true that it is actually [occupied] by many forces, it is not really [occupied]. No one is a [Lebanese] "protector", everyone wants to prevent others from doing so. This is the definition of "no man's land".

The differences that mark the domestic political landscape complicate the situation in Lebanon and lead to an innate weakness in State authority. This weakness was already evident before the 1975-90 civil war, exacerbated by the Taif accords and culminated in the 2008 Doha agreement.

The latter grants all large communities a de facto veto (through the "obstruction of third parties" in the Cabinet, and the need to adopt major decisions through the "national and sectarian consensus" enshrined in the Constitution).

This turned the Lebanese state into a hybrid structure, or a kind of "Frankenstein monster", which was brought together by multiple political sectarian "tribes", each with "one piece" of various ministries and administrative departments, and able to hinder good functioning overall, if its requirements were not met.

Political reforms are often proposed as a way to lift the situation. But such reforms can only go in two directions: either through centralization to thwart sectarian centrifugal forces, or through local decision-making processes, which will lead to decentralization (whatever form) and limit points of contention while empowering them. The community itself.

However, a centralized system - which is more or less authoritarian - is currently impossible, because there are no external guarantors (both regional and international actors are caught up in competition with each other), and lebanon's "arbiters", that is, one. Religious groups that assume local leadership: Christians trying to play this role lost it when war broke out in 1975; Sunnis tried to do so after 1990, but after the assassination of Rafik Hariri in 2005, Sunnis in the country who opposed the Regime of Bashar al-Assad in 2011 were forced into mass exile.

Finally, Shiites who tried to take on the challenge after the signing of the Doha agreement in 2008 are now suffering a severe defeat from an economic crisis exacerbated by a security collapse (the bombing of the port of Beirut on August 4, 2020 and the gun battle in Tayyouneh on October 14).

What does president Emmanuel Macron's "French initiative" mean, that all Lebanese components support it, except that these components (including the Allah Party) admit that they cannot proceed outside this framework?

This certainly does not mean that these troops (and their external sponsors) have granted France an exclusive blank cheque. But it clearly highlights the weakness and inability of the Lebanese central authorities to implement reforms.

On the other hand, decentralization is not the only solution, because while it can attribute some of the problems to the local or municipal level, the central state in distress will continue to be responsible for key issues (monetary policy and central bank, defense and military, foreign policy, oil and gas resource management, customs policy and opening up of foreign trade, and economic models). So, things are not going well.

What can be done in this case? It is noteworthy that the Lebanese authorities seem to have decided to address the most pressing issues, prioritizing two key themes: financial issues involving public debt and the balance sheet of the Bank of Lebanon, which is closely related to the banking sector (banks hand over most of their liquidity — the people's deposits — to the State and the BDL).

However, the Lebanese authorities are coping with this situation through an extremely brutal "clean-up": the real value of deposits denominated in local currency has fallen from $50 billion in 2019 (1,500 francs against the dollar at the official exchange rate) to a parallel market price of less than $3 billion.

At the same time, if the current "implicit" cuts are legitimized and applied, the real value of dollar deposits trapped in banks (so-called "lollars") will fall from nearly 100 billion today to less than 20 billion. All bank withdrawals for all accounts.

According to this calculation, the total value of bank deposits (LIRA + USD) approaching $170 billion before the 2019 crisis would fall to around $20 billion (with discounts). If enacted, legislated, or formalized (the BDL continues to set the official exchange rate at $1,500 against the dollar), this dizzying decline will place the lion's share of the adjustment burden on depositors, while cleaning up banks, BDL, and status at once.

Thus, the current debate centers on banks (which can use their capital and even foreign reserves), the state (which can contribute part of its assets), the BDL (which would incur future debt; gold reserves are a completely independent issue), and borne by depositors and the population in general.

Once this distribution of losses is formalized, the country will be able to harmonize the various exchange rates according to the free market exchange rate. The gradual recovery of trade balances following a sharp drop in imports (which is the inevitable result of a decline in living standards) and the termination of BDL subsidies (especially fuel subsidies) could slow the rise in the exchange rate (at least in theory, as confidence in the country remains weak). This will all happen against the backdrop of a sharp increase in poverty and inequality.

The authorities' second priority appears to be focused on public entities, such as the Lebanese Electricity Company or the port of Beirut, which was partially destroyed in 2020. In other words, entities that are critical to the functioning of the economy may be being used by foreign stakeholders to rebuild their capabilities.

In addition to this, the issue of oil and gas reserves, which is potentially strategic in the long run, and the issue of rationing cards, should provide a minimum safety net for citizens.

Ensuring a "clean-up" of the financial sector, a thorough overhaul of the minimum infrastructure and a minimum social safety net: this is the essence of the current national plan – the crisis management plan.

However, all of the above means that only the real questions are touched upon, as there are still many questions that remain unanswered. What about reforming the judicial system or the civil service? How can we clean up public administration and reduce the large number of unproductive employees while maintaining an efficient civil service and digitizing public services (e-government)? What economic model does Lebanon want to adopt? Should the country introduce a different tax system to promote productive investment?

What infrastructure does Lebanon wish to prioritize and on what economic strategy is it based on? Will Syria and Iraq be open to the West? Will priority be given to the development of the environment, tourism or services?

In short, can we make real economic reforms in the face of unstable political systems?

It is also unclear whether Lebanon will cease to be the stage of regional conflict, which also dooms any political plan to failure due to political stalemate.

Obviously, all these questions are difficult to answer, and alas, the Lebanese authorities are likely to ignore them at this stage.

Current measures, particularly negotiations with the International Monetary Fund, will be aimed solely at securing economic assistance that will enable the country to maintain its lead (as is the case with energy supplies in Egypt, Jordan, and Syria).

At the same time, these negotiations will ensure that the Lebanese financial system regains credibility with the assistance of the International Monetary Fund. Lebanon will therefore make the choice of "adjustment without reform".

In reality, however, this choice is not really an option, because the Lebanese system cannot survive as it is. Without economic, social and political reforms, there will be no hope on the horizon, people will lose complete confidence in the future, and change will take the form of mass migration, undermining the internal balance.

Admittedly, this is not the first time since the 19th century that Lebanon has suffered a crisis that has forced part of its population to leave the country, thus (literally!). Eliminates a large part of the possibility of socio-political disputes or controversies, while ensuring the flow of funds through remittances from Lebanese abroad.

The difference is that this time the economic crisis has become more intense, and the almost sustained instability that has occurred at the end of the half-century has exhausted the population, and nearly a third of the country's inhabitants are not Lebanese.

So which communities and which political leaders can be sure that they won't be losers in this game?

For change, regional and international compromises are needed, new agreements on Lebanon and the potential to change the current deadly status quo.

Will certain leaders and political parties, including Allah parties, among others, run the risk of not being at odds with this external dynamic, leading to a new wave of instability?

While the issue remains unresolved, in any case we must hope that change can take place quickly and peacefully, preferably in the upcoming parliamentary elections.