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    Dear Lebanon – you cannot resolve your massive problems with the same group of people who created them!

    November 2020

    There was a time, not long ago, when Lebanese looked down their noses, or at the least pitied, those wretched refugees from neighbouring Syria who boarded smugglers’ boats from the port cities of Sidon, Beirut and Tripoli for the risky – at times deadly – crossing to Europe, via Cyprus, the island nation in the eastern Mediterranean a mere 165 miles away from the Lebanese coast.

    Now the people of Lebanon, in droves, are doing just that, trusting that their boats will not get caught in storms or last at sea – all in an effort to escape the misery of life in a country that has become a basket case, unable to cope with multiple social problems, reform its sclerotic government institutions and curb a political elite too invested in the system to change it, a country now pitied as much by its own people as by the outside world.

    Evidence of how true that is was presented end of September when Prime Minister Designate Mustafa Adib threw in the towel and stood down following his failure to form a government after a whole month of negotiations with the feuding political blocs in Parliament, who in my opinion appear to put their parochial and narrow agendas ahead of the national interest.

    Failure by an individual as by a nation is not fatal. We all fail at times. Failure to change, and to learn from its experience, however, is.

    At a news conference in September devoted to Lebanon, French President Emmanuel Macron – whose country was the Mandate power in the region in 1943 and carved Lebanon out of Greater Syria that year – took to task those political blocks for their failure to work for the collective good, namely to come up with an audacious plan to form a national unity government, singling out Hizbollah for harsh criticism.

    He said bluntly that the group, which since the 1980s has played an oversized role on the political scene, needed to explain, and do so soon, whether “ it is a serious political party committed to implementing a road map for the country’s future” or a militia operating at the behest of Iran. He wondered additionally whether Lebanon’s power brokers have “betrayed” their obligations to the nation, thus committing “collective treason” (“trakison collective”).

    After defaulting on about 31 billion dollar of eurobonds in March, the country’s currency has declined by about 80% against the US dollar while inflation now exceeds 100%. The devastating explosion in August of close to 3,000 tonnes of improperly – very improperly – stored ammonium nitrate that killed about 200 people and ravaged large swaths of the capital resulted in property damage worth about 15 billion dollar, plunging the country into deeper crisis with an unemployment rate rise to about 50%, fighting words are what is needed to jolt that political elite, whose divisive, what’s-in-it-for-me view of political culture has torn Lebanon apart.

    Meanwhile, Lebanese importers have been unable to bring any new commodities into the country, due to damage of the Beirut port and the fluctuating currency. As a result, there is a sharp shortage of basic commodities, which are now being rationed by the private sector. At some supermarkets customers are being prevented from buying more than two items of any commodity and the same applies to pharmacies – hoarding popular medicine like Advil or land Panadol. Petrol stations are prohibited from filing up cars with more than 20 liters of gasoline.

    These items are bought from abroad using American dollars, which are now a scarce commodity in Lebanon, and yet, solid to end users in Lebanese currency. Importers simply cannot raise the price of those goods in accordance with the value of the American dollar, due to the diminishing purchasing power of ordinary Lebanese. The country is in a shambles; the economy was estimated to contract by 14% before this explosion. But considering the damage done, new estimates suggest a steep contraction of 24% in 2020. Consequently, about 60% of the Lebanese now live below the poverty line, a real tragedy.

    In just one year, the Lebanese have lost about 40% of their purchasing power and 80% of the value of their savings.

    But the Lebanese political elite doesn’t seem to mind the miserable state that the population is in.

    Therefore, thousands of Lebanese returned to the streets and squares across their country last month to mark the first anniversary of the uprising “October Revolution” that has begun to reshape their country last year. Wearing anti-Covid masks, protesters assembled in Martyrs’ Square in central Beirut and marched to the Central Bank headquarters on Hamra Street in the western sector of the capital to make the point that bankruptcy, mismanagement and corruption cannot continue.

    The sombre throng moved on to the port where they lit a torch to commemorate victims of the massive blast on August 4th that devastated the seafront and nearby residential neighborhoods.

    By reviving the stalled but not moribund “October Revolution” Lebanese demonstrated once again that they have not given up on their goal of ending the sectarian system of governance imposed by colonial France before independence in 1943.

    Like the Egyptian revolution of 2011, Lebanese protests began small-scale in the centre of the capital. On the evening of Thursday, October 17th 2019, 150 Lebanese activists mounted a roaming demonstration against a series of fresh taxes culminating in a tax on WhatsApp calls, high unemployment, rising poverty and the lack of potable water and electricity.

    The next day, Friday, schools and universities shuttered. Youngsters shutdown traffic by building barricades and checkpoints on major thorough-fares while others mounted on mopeds toured the city demanding change. The coastal cities of Tripoli, Tyre and Sidon and mountain towns and villages joined in, all supporting the drasty changes they wanted to see.

    On Saturday the 19th, hundreds, then thousands poured down “Bank Street” to Nejmeh Square and spilled into Riyadh Solh Square, launching the Revolution.

    Lebanese from all communities and backgrounds come. Men, women and children. Old and young. Civil servants, doctors, lawyers, shop owners, and housewives. All of them knew how crooked the politicians were. They saw their bank balances. They knew how much they send abroad, not only to themselves – also to their mistresses. By Sunday the 20th, the protests had become a country-wide, popular revolt.

    The protests in my opinion were revolutionary because Lebanese of all faiths rejected the sectarian straight jacket their country had been forced to wear for decades by a political elite which has enriched itself while neglecting the country and its people. Although the Lebanese had previously staged mass protests against a variety of issues – including an end to putting religion on identity cards – none had drawn hundred of thousands demanding “regime change”.

    Mass demonstrations which preceded the ‘October Revolution’ took place following the assassination of former Prime Minister Rafik Hariri on February 14, 2005 who is the father of Saad Hariri, the recently appointed Prime Minister of Lebanon for the third time, who actually caused the ‘October Revolution’ among others.

    For Rafik Hariri’s death some blamed Damascus, others rejected the allegation, dividing the country between the Shias and a Sunni – Christian alliance. On March 8th , Shia Hizbollah and Amal packed central Beirut with half a million people to show support for Syria’s role in Lebanon. On the 14th , the Sunni – Christian alliance did the same. This prompted the Christian Free Patriotic Movement headed by Michel Aoun to defect. Early in 2006, Aoun formed a shia-christian bloc with Hizbollah and Amal, effectively polarizing the country.

    The anti-sectarian October Revolution has stolen thousands of supporters from these faith-based constituencies. They have sometimes formed cooperating, sometimes duelling blocs which have dominated the scene and are determined to preserve an increasingly untenable status quo.

    It is in my opinion increasingly untenable because the Lebanese economy has tanked, its currency has lost more than 80% of its value, unemployment has risen to 50-60%, Covid-19 has taken a heavy toll, and the brain drain is gathering pace. While the pandemic has halted most demonstrations, the October Revolution has not disappeared. Activists continue to press for their agenda and protests take place from time to time.

    Unless the entrenched political class agrees to the formation of a government of “experts” empowered to enact reforms, Lebanon will not receive 21 billion dollar which could rescue the economy form collapse. The politicians have postponed the inevitable for a year, risking Lebanon’s very existence as a state. It remains to be seen how long they can hold on.

    The deadly, devastating ammonium nitrate explosion at Beirut’s port has prompted. Revolutionaries to take on responsibilities the government has failed to assume: organize teams to clear away debris, aid wounded people, comfort families of those killed, and rebuild homes. Instead of protesting in the streets, the revolutionaries are carrying on the campaign for regime change by practical means and winning over more and more Lebanese to their cause.

    The October Revolution has stalled but has not failed. The revolutionaries in my opinion have won victories on several levels. Most Lebanese have learned that if their country is to survive, the mismanaging, corrupt sectarian regime, based on patronage and clientelism, must be uprooted. Last November an independent supporter of the Revolution was elected head of the influential bar association.

    The Chamber of Deputies passed two anti-corruption bills and has refused to adopt legislation which would grant amnesty to politicians who have robbed the state. Eight deputies resigned. Four ministers in the previous caretaker government stood down. An international audit of the Central bank is taking place.

    And, the World Bank has cancelled a loan to build a dam activists insist would inundate a bio-diverse valley. A few opportunistic politicians have tried to hitch their stars to the Revolution by echoing the call for regime change. The revolutionaries have come to understand that overthrowing the sectarian order could take time.

    Tragically, Lebanon has little time to waste.

    Therefore, in extreme situations like this, it might be advisable to better join hands with a corrupt neighbour than with a corrupt regime to get liquidity.

    Maritime talks between Israel and Lebanon could prove to be beneficial to Lebanon’s battered economy, which overwhelmingly depends on energy imports.

    The two countries, which are technically at war, have taken the initiative to settle a longstanding dispute as they explore for gas in eastern Mediterranean.

    If successful, the outcome will improve Lebanon’s creditor position which is urgently needed to rescue the economy. Lebanon and Israel lay claim to 800 square kilometers of territorial waters that are expected to contain significant gas reserves.

    While the latest estimates on the potential for Lebanese gas discoveries remain unclear, earlier data offered by the government has suggested that the territorial waters could contain as much as 100 trillion cubic feet of natural gas and 865 million barrels of oil. For a country that suffers daily power cuts of up to 12 hours, imports all of its energy needs and spends about 2 billion dollar a year subsidizing its national power company, securing such energy resources is obviously crucial. Most commercial and residential buildings throughout the country have generators.

    The domestic market in my opinion is extremely important for Lebanon, it would make the country more independent as they can develop these potential resources for their own market in the future. The talks also come at a time when Beirut desperately needs to reduce its import bill to be able to get access to emergency funds. Talks with the International Monetary Fund (IMF) on a 10billion dollar bailout package stalled due to political disagreements. However, a resolution of the maritime dispute with Israel could help Lebanon unlock much-needed funds and reduce its public debt of 94 billion dollar, which currently is of the highest level in the world compared to its GDP.

    Lebanon now is keen to replicate the success of Israel, which plans to further develop its large Leviathan and Tamar gas fields and also look for new markets in the region.

    The maritime negotiations are sponsored by the US after both countries appealed to the UN concerning potential infringements on their sovereignty, but the talks have faced delays and postponements due to either Lebanese political crises or disagreement during the talks.

    So far, Egypt and Jordan, which have peace treaties with Israel, have agreed to buy its gas. Lebanon, which does not have a peace treaty with Israel, has been matching its steps in terms of launching licensing rounds for exploratory activities, which have yielded a bonanza of sorts for countries in the eastern Mediterranean.

    However, efforts to invite oil and gas companies to explore its territorial waters have been unfruitful so far.

    Lebanon, once an otherworldly and winsome nation that – at just roughly 4,000 square miles and a population of just above 6 million – is not just the smallest sovereign state in the Arab world but the smallest in mainland Asia, a state whose illustrious ancient history places it as home to the Phoenicians, the enterprising maritime culture that flourished for three thousand years, and whose equally illustrious modern history places it as a cultural hub, traditionally a gathering place for writers, poets, theoreticians, ideologues, artists and belle lettrists, whose creative effusions fueled the Arab struggle for national independence and self-definition, a country that, additionally, enjoyed a diversified economy that included tourism, agriculture, commerce and banking, indeed a country that exuded prosperity, élan and self-confidence.

    Today that country is, well, yes, a basket case.

    By end of October, former Lebanese prime minister Saad Hariri was chosen to try to form a government and tackle the country’s worst crisis since its 1975-1990 civil war. Mr. Hariri, whose last coalition government was toppled about a year ago amid mass protests (October Revolution), secured enough support during parliamentary talks last month to return.

    He promised to establish a “government of non-partisan specialists” after meeting President Michel Aoun and Parliament Speaker Nabih Berri. Mr. Hariri, who has twice been Lebanon’s prime minister before, said he would “work to stop the collapse that threatens the economy, society and security, and to rebuild what was destroyed by the terrible port explosion.

    In the parliamentary vote he was backed by 65 MP’s. Fifty-three did not vote for anyone and there were two absentees. Usually, a prime minister needs to secure two thirds (66%) of the votes in the Lebanese system. Therefore Mr. Hariri’s narrow win will in my opinion put his legitimacy already into question.

    Mr. Hariri will face major challenges in navigating Lebanon’s power-sharing politics and agree on a Cabinet that must address a mounting list of problems that include a banking crisis, a currency crash, rising poverty and crippling state debts. It is in my opinion paradoxical that a prime minister, who has actually put Lebanon through his previous dealings into one of the most indebted countries in the world now is seeking for a mandate to stop a collapse he himself has actively initiated.

    “Le sens commun n’est pas si commun”

    But in politics, an absurdity seems not to be a handicap – just look at the U.S.

    Prospects for an economic recovery in Lebanon are in my opinion dismal. The new government must be capable in recognizing the economy’s large fiscal and monetary gaps and implement a comprehensive, credible and consistent reform programme.

    The immediate priorities are economic stabilization and rebuilding trust in the banking and financial system. Lebanon desperately needs a recovery programme of about 30-35 billion dollar – akin to the Marshall Plan that helped rebuild Europe after the Second World War in addition to the funds to rebuild Beirut’s port and city centre.

    To achieve this, the new government will have to implement rapidly an agreement with the International Monetary Fund, based on a national consensus. The confidence-building policy reform measures over the next six months in my opinion include:

    A credible capital controls act to protect deposits, restore confidence and encourage the return of remittances and capital back into the country. Credit, liquidity and access to foreign exchange are critical for private sector activity, which is the main engine of growth and employment. The restructuring of public, domestic and foreign debt to reach a sustainable ratio of debt to GDP. Given the exposure of the banking system to the debt of the government and central bank (known by its French acronym, BDL), public debt restructuring would involve a restructuring of the banking sector, too.

    A bank recapitalization process that includes a process of merging smaller banks into larger banks. Bank recapitalization requires a bail-in of the banks and their shareholders – through a cash injection and the sale of foreign subsidiaries and assets – of some 25 billion dollar, to minimize a haircut on deposits as seen before in Cyprus. This will require passage of a modern insolvency law.

    Monetary policy reform is needed as well to unify the country’s multiple exchange rates, move to inflation targeting – that is, price stability – and shift to greater exchange rate flexibility. Multiple rates create market distortions and incentivize more corruption. The BDL will have to stop all quasi-fiscal operations and government lending. Credible reform requires a strong and politically independent banking regulator and monetary policymaker.

    Reform the Electricite du Liban (EDL), the country’s largest utility, and appoint a new board to improve governance and efficiency. Reform the inefficient subsidies regime that covers electricity, fuel, wheat and medication. These generalized subsidies do not fulfil their purpose – only 20% goes to the poor. All that the subsidies do is benefit rich traders and middlemen and they are the basis of large-scale smuggling into sanctions-ridden Syria, while food poverty has affected some 25% of Lebanon’s own population. Subsidies reform should be part of a social safety net to provide support for the elderly and vulnerable.

    Pass a modern government procurement act. This would help prevent corruption, nepotism and cronyism.

    Restructure and downsize the public sector. Start by removing the 20% of public sector “ghost workers” – people on company payrolls who don’t actually work for the company – and establish a National Wealth Fund, a holding company that would independently manage public assets. These include basic public utilities like water, electricity, public ports and airports, Lebanon’s carrier Middle East Airlines, the telecom company Ogero, the Casino du Liban, the state-run tobacco monopoly and others.

    All these assets are currently non-performing, over-staffed by political cronies and suffer from nepotism. In most cases, they are a drain on t he treasury.

    A comprehensive IMF programme that includes structural reforms is necessary. It is the only way in my opinion to restore trust in the economy and win back the trust of the private sector, the Lebanese diaspora, foreign investors and aid providers. This would then attract funding from international financial institutions and Cedre Conference participants, including the EU and the GCC. Such measures, if properly executed, would translate into financing for reconstruction and access to liquidity. They would also stabilize and revive private sector economic activity. Without the immediate implementation of these reforms, Lebanon in my opinion is heading for a lost decade.

    Now Lebanon, you tell me if Hariri is the right prime minister and the right person for such a reform agenda… As I said “Le sens commun n’est pas si commun”