Long before Dubai was Dubai, Lebanon was Dubai. In the 1950s, '60s and '70s it was a regional center for banking and finance, an entrepot and a playground for wealthy Arabs and Westerners. When the oil billions started to flow into the Gulf after 1973, it was Beirut banks that managed much of the wealth.
Fifteen years of civil war and the grip over the country variously by Syria, Iran and Hezbollah brought an end to that fabulous era. So did the exodus of the Christian Lebanese that had made Beirut what it was in its heyday.
Lebanon’s economy has been in slow-growth mode for years. Meanwhile, its debt has ballooned and today is equal to more than 150% of gross domestic product (compared with less than 130% for Greece on the eve of its financial crisis). Poverty is endemic. Infrastructure and government services are dysfunctional, as evidenced by piles of garbage in the street and sporadic electricity.
Lebanon’s leaders are well aware of the problem but they have been in no hurry to address it. The current government was formed last January after 252 days of coalition negotiations. It took four months to get a key piece of electricity reform approved by parliament in April and last Friday — seven months into the year — won passage of the 2019 budget.
Electricity reform might seem like a side issue in a country on the verge of financial collapse, but subsidies for Electricite du Liban (EDL), the state power monopoly, account for about a quarter of the government’s annual budget deficit. It’s also a major factor in holding back economic development, since in spite of all the aid EDL provides power in some cases as little as 12 hours a day.
Don’t count on 24/7 power in Lebanon anytime soon. The reform sets lofty goals for building more power plants without creating a regulatory infrastructure or incentives for the private sector to build them. In any case there’s too much money at stake to be made by the “generator mafia” of private power suppliers who are linked to Lebanon’s political establishment. Reform stands little chance.
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The budget is more of the same. A package of tax increases and spending cuts, Lebanese politicians and an array of international financial officials have praised it as a first step on the road to Lebanon’s recovery.
Yet, like electricity reform, the budget is more like a Potemkin facade designed to impress an audience of international donors and foreign investors that all is well, or at least getting better, while business goes on as usual.
Several days after the event, the exact details of the budget have not yet been made public, but it’s supposed to reduce the deficit to a big 7.6% of GDP from a giant 11.5% in 2018. During the debate some MPs were calling to slash it to 6.6%. Why not? Sounds good, and it won’t happen, so not to worry.
In fact, the International Monetary Fund thinks the deficit this year will come in at about 9.75%. Deficits like that they aren’t the one small step toward recovery but another giant step to ever bigger debt.
Tsarina Catherine the Great may have been taken in by Potemkin’s stage set villages, but it’s harder to fool all of the markets all of the time. The cost of insuring Lebanon’s debt, a barometer of how investors gauge default risk, briefly eased in the wake of parliament’s approving the budget. This week, however, it surged to the highest of any government in the world.
Lebanon’s political system, where political parties are based on religious affiliation and system of mutual back scratching, is incapable of change. Economic reforms of the kind that could turn the country around would upend the delicate balance of power and strike at powerful interests. Instead, the establishment seems to be counting on outsiders to come to its rescue.
In fact, $11 billion in aid was pledged a year ago by Western and Gulf countries. The money is supposed to be released only when Lebanon shows it’s making structural reforms of the kind it so far is only making the motions of doing.
Lebanon’s leaders may be betting that money will eventually be made available without any pesky strings attached when the country is at risk of default. If there isn’t a good economic case for bailing out a corrupt and dysfunctional country, there’s always the geopolitical case that something has to be done to prevent instability.
From the point of view of Lebanon’s political establishment, a crisis would solve everything at no cost. Be patient, keep pretending, it will happen -- and then manna from heaven.
Well, not quite. Bailouts always come at a price, just ask the Greeks, who a decade later are still struggling.
It’s even sadder in Lebanon’s case because it still has the potential to be a second Dubai; instead it’s leaders are content to make it a second Greece, to protect narrow interests.