LEBANON PUBLIC FINANCE REVIEW Finance? J U LY 2 0 2 2 Copyright © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@ worldbank.org. Attribution Please cite the work as follows: “World Bank. 2022. Lebanon Public Finance Review. © World Bank.” Cover design and typesetting: Sarah Alameddine LEBANON PUBLIC FINANCE REVIEW Finance? 2 LEBA NON PU B L IC FIN A N C E RE VIE W A MESSAGE TO THE LEBANESE PEOPLE Today, Lebanon is confronting compounded shocks digit inflation rates; hoarding of essential goods; which are altering the country in fundamental comprehensive power supply blackouts and water ways. Separate from the effects of COVID-19, which supply shortages across the country; collapse of Lebanon shares with the world, the country’s education, health, and other basic services. financial and economic crisis has been ranked by the Bank as one of the most severe globally since In this Public Finance Review (PFR), we show that the mid-1800’s. It is important for the Lebanese The Deliberate Depression was also deliberate in the people to realize that central features of the post- making over the past 30 years. In fact, the title of civil war economy—the economy of Lebanon’s this PFR questions to what extent this was Ponzi Second Republic—are gone, never to return. It is Finance instead of Public Finance. We show how also important for them to know that this has been the Government consistently and acutely departed deliberate. from orderly and disciplined fiscal policy to serve the larger purpose of cementing political economy Most painfully, a significant portion of people’s interests. It did this by: savings in the form of deposits at commercial banks have been misused and misspent over the past 30 i. Accumulating debt—beyond fiscal needs—to years. These are earnings by expats who toil in maintain deposit inflows under a fixed exchange foreign lands; they are retirement funds for citizens rate, the overvaluation of which permitted and perhaps the sole resource for a dignified excessive consumption, generating an illusion living; they are necessary financing for essential of wealth. medical and education services that consecutive governments have failed to provide; they are funds ii. Acting as distribution channels for subsidies to pay for electricity in light of colossal failures in and transfers—centralized around public Électricité du Liban. services—to further entrench the power- sharing confessional system. Political slogans for the sacrosanct of deposits are hollow and opportunistic; in fact, the constant abuse The Deliberate Depression was also deliberate in the of this term by politicians is cruel. Not only does it way the State was hollowed out of the provision of flagrantly contradict reality, it prevents solutions to basic services to its citizens. This hollowing of the protect most, if not all small and medium depositors, State was a desired/deliberate outcome intended in dollars and in cash. Losses should have been to cement public-private privilege for principal accepted and carried by bank shareholders and economic benefactors of the Second Republic. large creditors, who have profited greatly over the Elite capture of State’s resources for private last 30 years from a very unequal economic model. gains necessitated weakening of public service This should have occurred at beginning of the crisis delivery so that (1) it allowed lucrative and dollar- (over 2 years ago) to limit the economic and social inflated private sector contracts (such as oil import pain of the financial crisis. business, generators, waste collection, but also private schools, hospitals etc.), and (2) confessional The World Bank has called this The Deliberate groups could tighten their grip on citizens by Depression. The series of Lebanon Economic supplanting the State in these service provisions. Monitors have explained that deliberately inadequate policy responses were not due to While Lebanese citizens should know how and why knowledge gaps and the absence of quality advice. this happened, they should also understand that this Instead, they were a result of (i) a lack of political is for Lebanon to engage seriously in the macro- consensus over effective policy measures; and fiscal, financial, and sector reforms the World Bank (ii) political consensus in defense of a bankrupt has been stressing for decades. The earlier these economic system, which benefited a few for so long. reforms will be initiated, the less painful the cost of While social pain was inevitable with the bursting of Ponzi Finance will be on the Lebanese people. the bubble, it has been unnecessarily painful: triple ‫بعشلا ىلإ ةلاسر‬ ‫ينانبللا‬ ‫‪3‬‬ ‫رسالة إلى الشعب اللبناني‬ ‫الفقاعة‪ ،‬فقد كانت هذه المعاناة شديدة األلم بال داع‪:‬‬ ‫ت متفاقمة تضع‬ ‫يواجه لبنان في الوقت الراهن صدما ٍ‬ ‫معدالت تضخم تزيد على ‪%100‬؛ إحتكار السلع األساسية؛‬ ‫البالد على مسار تغيير جذري‪ .‬وبمعزل عن آثار جائحة‬ ‫انقطاع شامل في إمدادات الكهرباء ونقص إمدادات‬ ‫كورونا التي يعاني منها لبنان كسائر بلدان العالم‪ ،‬فقد‬ ‫المياه في جميع أنحاء البالد؛ انهيار قطاعات التعليم‬ ‫نف البنك الدولي األزمة المالية واالقتصادية في‬ ‫صّ‬ ‫والصحة والخدمات األساسية األخرى‪.‬‬ ‫لبنان باعتبارها إحدى أشد األزمات على مستوى العالم‬ ‫منذ منتصف القرن التاسع عشر‪ .‬ومن الضروري أن يدرك‬ ‫المتعمد‬ ‫ّ‬ ‫بين تقرير مراجعة المالية العامة‪ ،‬أن الكساد‬ ‫ي ّ‬ ‫ُ‬ ‫الشعب اللبناني أن أهم عناصر اقتصاد ما بعد الحرب‬ ‫ا وجرى اإلعداد له على مدى الثالثين‬ ‫كان أيض ً‬ ‫ا مقصود ً‬ ‫األهلية – أي اقتصاد الجمهورية الثانية في لبنان – قد‬ ‫ا الماضية‪ .‬إن عنوان هذا التقرير‪ ،‬في الواقع‪ ،‬يتساءل‬ ‫عام ً‬ ‫ا أن يدرك الشعب‬ ‫انتهت إلى غير عودة‪ .‬ومن المهم أيض ً‬ ‫إلى أي مدى كانت هذه العملية مخطط تمويل بونزي‬ ‫م ّ‬ ‫تعمداً‪.‬‬ ‫اللبناني أن ما حدث كان ُ‬ ‫بين التقرير كيف انحرفت‬ ‫بدالً من كونها مالية عامة‪ .‬كما ُ‬ ‫ي ّ‬ ‫و مستمر عن سياسة المالية‬ ‫الحكومة بشدة وعلى نح ٍ‬ ‫مدخرات الناس‪،‬‬‫ّ‬ ‫ا من‬ ‫ا هو أن جزء ً‬ ‫ا كبير ً‬ ‫واألشد إيالم ً‬ ‫العامة المنهجية المنضبطة‪ ،‬وذلك لخدمة الغرض األكبر‬ ‫والتي اتخذت شكل الودائع لدى المصارف التجارية‪ ،‬قد‬ ‫المتمثل في تعزيز مصالح االقتصاد السياسي‪ .‬وقد‬ ‫أسيء استخدامها كما إنفاقها على مدى األعوام‬ ‫ُ‬ ‫قامت بذلك من خالل‪:‬‬ ‫المدخرات التي جناها‬‫ّ‬ ‫الثالثين الماضية‪ .‬تلك هي‬ ‫ا عن وطنهم؛ وهي‬ ‫كدهم العمل الشاق بعيد ً‬ ‫مغتربون ّ‬ ‫ مراكمة الديون – بما يتجاوز احتياجات المالية‬ ‫‪)1‬‬ ‫المعاشات التقاعدية للمواطنين وربما تكون المصدر‬ ‫العامة – للحفاظ على تدفقات الودائع بسعر صرف‬ ‫الوحيد لتأمين عيشهم الكريم؛ وهي مصدر تمويل‬ ‫ثابت‪ ،‬ورفع ُ‬ ‫مبالغ فيه لقيمة الليرة اللبنانية مما‬ ‫ضروري للرعاية الصحية والخدمات التعليمية األساسية‬ ‫سمح باإلفراط في االستهالك‪ ،‬وخلق بالتالي وهم ً‬ ‫ا‬ ‫التي أخفقت الحكومات المتعاقبة في تقديمها؛ وهي‬ ‫بالثروة‪.‬‬ ‫أموال تُستخدم في سداد فواتير الكهرباء في ضوء‬ ‫ العمل بمثابة قنوات توزيع للدعم والتحويالت –‬‫‪)2‬‬ ‫اإلخفاق الشديد في مؤسسة كهرباء لبنان‪.‬‬ ‫المتمركزة حول الخدمات العامة ‪ -‬لزيادة ترسيخ‬ ‫إن الشعارات السياسية المتداولة عن قدسية الودائع‬ ‫النظام الطائفي لتقاسم السلطة‪.‬‬ ‫هي شعارات جوفاء وانتهازية؛ في الواقع‪ ،‬إن إساءة‬ ‫ا في الطريقة‬ ‫ا أيض ً‬ ‫تعمد ً‬ ‫م ّ‬‫المتعمد ُ‬ ‫ّ‬ ‫وكان الكساد‬ ‫متكرر‬ ‫ّ‬ ‫السياسيين استخدام هذا الشعار على نحو‬ ‫التي تم بها تجريد الدولة من قدرتها على تأمين‬ ‫أمر يتّسم بالقساوة‪ .‬فهو ال يتعارض بشكل صارخ مع‬ ‫الخدمات األساسية لمواطنيها‪ .‬وأتى هذا التجريد‬ ‫ا دون التوصل الى حلول‬ ‫الواقع فحسب‪ ،‬بل يحول أيض ً‬ ‫كنتيجة مقصودة تهدف إلى ترسيخ االمتيازات العامة‬ ‫لحماية معظم المودعين من أصحاب الودائع الصغيرة‬ ‫والخاصة للرعاة االقتصاديين الرئيسيين للجمهورية‬ ‫والمتوسطة‪ ،‬إن لم يكن جميعهم‪ ،‬وتكون حمايتهم‬ ‫ّب استحواذ النخبة على موارد الدولة‬ ‫الثانية‪ .‬وتَطل َ‬ ‫بالدوالر األميركي وبالنقد‪ .‬فكان يجب قبول الخسائر‬ ‫لتحقيق مكاسب خاصة إضعاف الخدمات العامة من‬ ‫وتحميلها على المساهمين في المصارف وكبار الدائنين‬ ‫مربحة وضخمة بالدوالر‬ ‫أجل‪ )1( :‬السماح بإبرام عقود ُ‬ ‫ا ضخمة على مدى األعوام الثالثين‬ ‫الذين حققوا أرباح ً‬ ‫األميركي مع القطاع الخاص (مثل أنشطة استيراد النفط‪،‬‬ ‫الماضية من نموذج اقتصادي غير متكافئ‪ .‬وكان من‬ ‫والمولدات الكهربائية‪ ،‬وجمع النفايات‪ ،‬وكذلك المدارس‬ ‫الضروري القيام بذلك في بداية األزمة (أي منذ أكثر‬ ‫الخاصة‪ ،‬والمستشفيات‪ ،‬إلخ)‪ ،‬و(‪ )2‬تمكين المجموعات‬ ‫من عامين) للحد من المعاناة االقتصادية واالجتماعية‬ ‫الطائفية من إحكام قبضتها على المواطنين من خالل‬ ‫الناجمة عن األزمة المالية‪.‬‬ ‫حلولها مكان الدولة في تقديم هذه الخدمات‪.‬‬ ‫لقد أطلق البنك الدولي على هذا الوضع صفة الكساد‬ ‫وبينما يجب أن يدرك المواطن اللبناني كيف ولماذا حدث‬ ‫المتعمد‪ .‬فقد أوضحت سلسلة تقارير المرصد االقتصادي‬ ‫ُ‬ ‫ا أن يعي بأن على لبنان أن ينخرط‬ ‫كل ذلك‪ ،‬عليه أيض ً‬ ‫للبنان أن عدم كفاية االستجابات على صعيد السياسات‬ ‫بجدية في عملية إصالح االقتصاد الكلي والمالية العامة‬ ‫ا لم يكن بسبب الفجوات المعرفية واالفتقار إلى‬ ‫عمد ً‬ ‫يشدد عليها البنك الدولي‬ ‫ّ‬ ‫واإلصالحات القطاعية التي‬ ‫يعزى إلى ما يلي‪ )1( :‬غياب توافق‬ ‫ُ‬ ‫لكنه‬ ‫الجيدة‪،‬‬ ‫المشورة‬ ‫منذ عقود‪ .‬وكلما تم اإلسراع ببدء هذه اإلصالحات‪،‬‬ ‫سياسي على اإلجراءات الفعالة في مجال السياسات‬ ‫ا على‬‫كلما كانت تكلفة تلك المالية الوهمية أقل وجع ً‬ ‫العامة؛ (‪ )2‬وجود توافق سياسي على الدفاع عن نظام‬ ‫الشعب‪ ‬اللبناني‪.‬‬ ‫ا ضئيالً لفترة طويلة‪ .‬وعلى‬‫اقتصادي مفلس‪ ،‬أفاد عدد ً‬ ‫الرغم من حتمية المعاناة االجتماعية نتيجة انفجار‬ 4 LEBA NON PU B L IC FIN A N C E RE VIE W MESSAGE AU PEUPLE LIBANAIS Le Liban est actuellement confronté à de multiples La Banque mondiale a qualifié la situation de chocs qui transforment le pays de manière Dépression délibérée. Différents numéros de la fondamentale. Abstraction faite de la COVID-19, série Lebanon Economic Monitors expliquent que dont les effets se font sentir au Liban comme l’adoption de mesures délibérément inadéquates partout dans le monde, le pays est en proie à une n’a pas tenu à un manque d’information et à crise financière et économique qualifiée par la l’absence de bons conseils, mais qu’elle a résulté : Banque d’inégalée à l’échelle mondiale depuis le i) de l’absence de consensus politique sur des milieu des années  1800. Il est important que le mesures pouvant être efficaces ; et ii) de la volonté peuple libanais comprenne que des composantes politique de défendre un système économique clés de l’économie de l’après-guerre civile désastreux qui a si longtemps profité à quelques —  c’est-à-dire de l’économie de la Deuxième privilégiés. Si l’éclatement de la bulle ne pouvait que République — ont disparu pour toujours. Il est aussi causer des souffrances sociales, ces dernières ont important qu’il sache que leur disparition résulte été inutilement aggravées par un taux d’inflation à d’actions délibérées. trois chiffres ; le stockage de biens essentiels ; des coupures de courant généralisées  ; une pénurie Tragiquement, l’épargne déposée par les citoyens d’eau dans tout le pays  ; et l’effondrement des dans des banques commerciales a, pour une large services d’éducation, de santé et d’autres services part, été utilisée et dépensée à mauvais escient de base. au cours des trente dernières années. Il s’agit des gains durement acquis par des Libanais partis Dans cet examen des finances publiques, nous travailler à l’étranger  ; des pensions qui sont montrons que la Dépression délibérée est le fruit peut-être, pour certains citoyens, l’unique moyen de l’action menée, elle aussi délibérément, au de vivre dignement ; des ressources nécessaires cours des 30 dernières années. De fait, l’on peut se à l’obtention de services de santé et d’éducation demander, comme le titre de cet Examen l’indique, essentiels que l’État n’assure pas ; et des moyens dans quelle mesure les finances publiques n’ont de payer des factures d’électricité dues aux pas plutôt servi à construire une pyramide de Ponzi. défaillances massives d’Électricité du Liban. Nous expliquons comment les autorités publiques se sont systématiquement détournées de toute Les slogans politiques concernant le caractère politique budgétaire rigoureuse et harmonieuse sacro-saint des dépôts sont aussi vides de sens dans le but plus général de conforter des intérêts qu’opportunistes  ; de fait, il est cruel de la part économiques et politiques. À cette fin : des politiciens d’employer constamment cette expression de manière abusive. D’une part, cette i. L’État a accumulé des dettes — supérieures aux dernière est totalement contraire à la réalité et, besoins budgétaires — pour maintenir l’entrée d’autre part, elle fait obstacle à l’adoption de de fonds grâce à un régime de taux de change solutions qui pourraient protéger la plupart, sinon fixe dont la surévaluation a permis d’alimenter la totalité, des titulaires de dépôts de montants une consommation excessive et de créer faibles ou moyens, en dollars et en espèces. Les l’illusion de richesse. pertes encourues auraient dû être acceptées et assumées par les actionnaires des banques et ii. L’État a utilisé les services publics comme les créanciers importants, qui ont grandement courroie de distribution de subventions et profité d’un modèle économique très inégalitaire de transferts pour enraciner encore plus pendant les trente dernières années. Ils auraient de profondément le système confessionnel de surcroît dû le faire au début de la crise financière partage du pouvoir. (il y a plus de deux ans) de manière à atténuer les La dépression délibérée s’est caractérisée par dommages économiques et sociaux provoqués par l’amenuisement également délibéré de la cette dernière. Message au peuple libanais 5 participation de l’État à la prestation de services hôpitaux, etc.), et 2) le resserrement de l’emprise de base à ses citoyens. Ce retrait de l’État avait des groupes confessionnels qui se sont substitués pour objet de renforcer les privilèges conférés à l’État pour assurer ces services. par les relations forgées entre le secteur public et le secteur privé par les principaux acteurs S’il importe que les citoyens libanais sachent économiques de la Deuxième République. Pour que comment et pourquoi leur pays se retrouve dans les élites puissent accaparer les ressources à leurs cette situation, il leur faut aussi savoir que c’est propres fins, il a fallu dégrader les services publics au Liban qu’il incombe de poursuivre résolument assurés de manière à permettre : 1) l’attribution au les réformes macro-budgétaires, financières et secteur privé de contrats et de marchés lucratifs sectorielles que la Banque mondiale prône depuis pour des montants en dollars artificiellement des dizaines d’années. Plus vite les réformes seront gonflés (notamment pour l’importation de pétrole, entreprises, moins lourd sera le fardeau imposé au la fourniture de générateurs, la collecte des peuple libanais par la structure de Ponzi. déchets, mais aussi pour l’enseignement privé, les 6 LEBA NON PU B L IC FIN A N C E RE VIE W ACKNOWLEDGEMENTS The Lebanon Public Finance Review (PFR) is a product The PFR has been completed under the guidance of the World Bank’s Lebanon Macroeconomics, Trade of Eric Le Borgne (Practice Manager) and Saroj and Investment (MTI) Global Practice. Task Team Kumar Jha (Mashreq Regional Director). Zeina Leaders are Wissam Harake (Senior Economist) and Khalil (Senior External Affairs Officer) is the lead Kamel Braham (Human Development Program Lead on communications, outreach, and publishing. for Mashreq). Core team members are: Mahmoud Haidar (Consultant, MTI), Lars Jessen (Lead Debt Co-financing for the PFR was provided by The Specialist, MTI), Haocong Ren (Senior Financial German Federal Ministry for Economic Cooperation Sector Specialist, FCI), Naji Abou Hamde (Economic and Development. Analyst), Amal Talbi (Lead Water Resources Management Specialist), Alexis Lucien Emmanuel The PFR has been developed in partnership with Madelain (Senior Energy Specialist), Mira Morad Charbel Nahas (Professor of Political Economy and (Senior Transport Specialist), Ronald Eduardo Gomez Public Policy, AUB), Elissar Smaha (Researcher), Suarez (Senior Economist, Health), Elisabeth Sedmik Petra Smaha (Researcher) and Mounir Doumani (Economist, Education), Haneen Ismail Sayed (Lead (Researcher). Operations Officer). Other contributors include: Sally Zgheib (Senior Water Supply and Sanitation The team is grateful to the peer reviewers Kevin Specialist, SMNWA); Rajesh Balasubramanian Carey (Lead Economist, MTI), Anna Schneider (Senior Water Supply and Sanitation Specialist, (Senior Policy Officer at Federal Ministry for SMNWA); Sameh Mobarek (Senior Energy Economic Cooperation and Development), Heba Specialist, ISAE1); Tu Chi Nguyen (Senior Energy Elgazzar (Program Leader Human Development, Economist, IMNE1); Yanchao Li (Energy Specialist, HECDR) and Simon J. Stolp (Practice Manager, IMNE1); Rita Ghorayeb (Consultant, IMNE1); Rida ISAE1) for their insightful and constructive El Mawla (Consultant, IMNE1); Anne Cecile Sophie comments. The team would like to also thank Dr. Souhaid (Senior Transport Specialist); Gaelle Samir Daher for his comments. Samaha, Consultant IMNC1); Flavia Nansubuga (HR Specialist, Compensation and Benefits, HRDCB); The team benefitted from guidance and insight Sherin Varkey (Senior Health Specialist, HMNHN); from Christos Kostopoulos (Lead Economist, MTI). Son Nam Nguyen (Lead Health Specialist, HMNHN); Farah Ashfahani (Health Specialist, HMNHN); Katriel The team also thanks the Lebanese Citizen Friedman (ET Consultant, HMNHN); Rim Atoui Foundation for organizing workshops of experts (Consultant, EMNGU); Montserrat Pallares-Miralles over September 28-29, 2021. Views and (Senior Social Protection Specialist, HMNSP); commentary from participants in these workshops Fahmina Rahman Dutta (Social Protection Specialist, provided significant insight and feedback. HMNSP); Khalil Fouad Dagher (ET Consultant, HMNSP); Nathalie Lahire (Senior Economist, The findings, interpretations, and conclusions HMNED); Lucas Gortazar (Consultant, HMNED); expressed in the PFR are those of World Bank Hana Addam El Ghali (ET Consultant, HMNED); staff and do not necessarily reflect the views of Gustavo Nicolas Paez Salamanca (Consultant, the Executive Board of The World Bank or the HMNSP); Kawthar Dara (Consultant, HMNED) and governments they represent. Mohamad Hussein Mansour (Consultant, EMNPV); Cynthia Yammine (Program Assistant, MNCLB); Alain Barakat (Program Assistant, MNCLB) Acknowledgements 7 For information about the World Bank and its For questions and comments on the content of activities in Lebanon, including e-copies of this this publication, please contact Wissam Harake publication, please visit www.worldbank.org/lb (wharake@worldbank.org) or Kamel Braham (kbraham@worldbank.org). Questions from the media can be addressed to Zeina Khalil (zelkhalil@ worldbank.org) 8 LEBA NON PU B L IC FIN A N C E RE VIE W TABLE OF CONTENTS A Message to the Lebanese People. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ‫رسالة إلى الشعب اللبناني‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Message au peuple libanais. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Acknowledgements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ‫موجز‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Résumé .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 I.. Fiscal Policy in the Second Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Chapter 1. Fiscal Landscape. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 A.. Examination Period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 B..Revenues.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 C.. Tax Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 D.. Non-Tax Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 E..Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 F.. Current Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 G.. Public Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Chapter 2. Observations & Analyses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 A.. Primary Deficit/Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 B.. Four Phases of Primary Balance.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 C.. Taxes Over the Period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 D.. Expenditures’ Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 E.. Personnel Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 F.. Electricity Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 G.. Capital Expenditures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 H.. Interest Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 I.. Pressure Points on the Balance of Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 J.. Indebtedness Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 K.. Indicative Fiscal Benchmarking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Chapter 3. Quasi-Fiscal & Other Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 A.. Definition and Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 B.. BdL Subsidized Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 C.. BdL & Commercial Banks’ Mutual Borrowing Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 D.. BdL & Commercial Banks’ Mutual Swap Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 E.. BdL & Commercial Banks’ Financial Engineering Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 F.. Gold Assets Re-Evaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 G.. Masked Dues/Debts on Government: Dues to Municipalities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 H.. Masked Dues/Debts on Government: National Social Security Fund (NSSF). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 I.. Masked Dues/Debts on Government: Government’s Arrears, Dues of Expropriations, Dues to Hospitals, Contractors, etc. Dues to National Deposit Guarantee Institution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 J.. Other Public Finance Related-Activities Causing Deficit/Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 K.. Duality of Budget and Treasury Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 L..Donations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 M.. Settlements of Unpaid Dues’ Budgetary Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 N.. Institutions Out of Due Regulation: The Cases of Beirut Seaport and Lebanon Oil Establishments.. . . . . . . . . . . . . . . . . 62 O.. Government Waivers: The Cases of SOLIDERE and ELYSSAR, the Waiver Granting Agency Investment Development AUTHORITY of Lebanon (IDAL). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 9 II.. Macro-Financial Restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Chapter 4. Compounded Crises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Chapter 5. Baseline Scenario: No Policy Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Chapter 6. Key Policy Decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 A.. On Debt.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 B.. Fiscal Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 C.. The Financial System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 III..Public Service Non-Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Chapter 7. Effect of Fiscal Policies on Key Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Chapter 8. Water Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 A.. Pre-crisis Status of the Water Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 B.. Crisis Impact on the Water Sector.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 C.. Impact on the Residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 D.. Short to Medium Term Solution for Reducing Water Vulnerability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Chapter 9. Electricity Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 A.. Pre-Crisis Status of the Electricity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 B.. Crisis Impact on the Electricity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 C.. Policy Actions to Ensure Continuity of Service Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Chapter 10. Transport Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 A.. Pre-Crisis Status of the Transport Sector .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 B.. Crisis Impact on the Transport Sector (2020 and Beyond). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 C.. Policy Actions and Scenarios to Ensure Continuity of Service Delivery.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Chapter 11. Health Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 A.. Pre-crises Health Sector Status and Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 B.. Effects of the Crises on the Health Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 C..Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Chapter 12. Education Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 A.. Pre-Crisis Structural Education Sector Challenges and Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 B.. Crisis Impact on the Education Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 C..Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Chapter 13. Social Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 A.. The State of Social Protection Programs in Lebanon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 B.. The Impact of the Crises on Social Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 C.. The Way Forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Future Work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Annex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 A.. Taxation - Legal References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 B..Donations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 C.. Settlements and Waivers .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 D..Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 E.. Eurobond Restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 F..References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 10 LEBA NON PU B L IC FIN A N C E RE VIE W List of Figures Figure 1. Lebanon’s fiscal balance was consistenly and significantly negative since the end of the civil war …. . . . . . . . . 29 Figure 2. … with the fiscal deficit averaging 12.2 percent of GDP over the period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 3. A post civil war effort succeeded in considerably enhancing the capacity to levy and collect revenues ….. . 30 Figure 4. … with tax revenues nearly doubling from 9 percent in 1993 to 16 percent in 2004.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Figure 5. The total tax revenues shares for taxes on income and VAT grew at the expense …. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Figure 6. … a declining share for taxes on international trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Figure 7. Non-tax revenues also grew over the period … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Figure 8. … with exceptions in 2006, 2010, and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Figure 9. Expenditures underwent a robust nominal growth … .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Figure 10. … compared to a mild decrease in percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Figure 11. Expenditure categories of “personnel cost” and “interest payments” dominate in both nominal terms … .. . . 34 Figure 12. … and as a percent of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Figure 13. Gross public debt manifested a rapid evolution at a CAGR of 12.6 percent over the period … . . . . . . . . . . . . . . . . . . 35 Figure 14. … peaking at 183 percent of GDP in 2006, falling to 131 percent in 2012, before rising to 171 percent in 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Figure 15. The large overall fiscal deficit was despite an accumulation of a primary surplus … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 16. … when excluding and including “Treasury” operations .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 17. Primary balance in relation to the four phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 18. The four main expenditure items over the period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 19. In nominal terms, personnel expenditures rose steadily …. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 20. … however, they declined as a percentage of GDP, rising again toward the end of the period... . . . . . . . . . . . . . . . . . . 40 Figure 21. A high correlation between oil prices and electricity transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Figure 22. As a result of a steep dis-investment since end-Phase 1,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 23. Government’s capital stock declined steadily over the remaining part of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 24. The spread between nominal interest rates and LIBOR started to decrease in spite of continuously increasing indebtedness levels.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Figure 25. Since 2011 foreign assets of BdL expanded at the expense of commercial banks’ foreign asset position.. . . 44 Figure 26. Difference between estimated fiscal funding needs …. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Figure 27. … and contracted debt was pervasive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Figure 28. Gap between budget and total primary balance accumulated over the period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure 29. The primary deficit was, with rare exception, smaller than the stabilizing deficit.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Figure 30. Services are the main drivers of economic activity in Lebanon … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Figure 32. … biasing the economy toward large external deficits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Figure 31. … dominated by largely low productivity sectors … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Figure 33. Long term structural deficiencies renders the Lebanese economy uncompetitive. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Figure 34. Net Investment In Non-Financial Assets (% of GDP).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Figure 35. Compensation of Employees (% of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure 36. Tax Revenue (% of GDP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Figure 37. QFA activity in Lebanon. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Figure 38. A steady nominal increase in total loans driven by loans benefitting from reductions in reserve requirements … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Figure 39. … increasing relentlessly as a percentage of GDP from 2009, exceeding 90 percent in 2015... . . . . . . . . . . . . . . . . . . 54 Figure 40. Despite slowing inflows, LBP and US$ deposit rates, as well as CD rates and LIBOR remained almost constant until the end of 2017.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Figure 41. Deposit growth has been deccelerating steadily since 2009…. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Figure 42. ... not only nominally, but also as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Figure 43. Transfers to municipalities have been opaque and volatile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figure 44. NSSF arrears have mainly accumulated in the first decade after the end of the civil war and have stagnated.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Figure 45. Revenues from PoB have been variable.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Figure 46. IDAL Investment Types (in US$ Million) (2003-2020). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Figure 47. Valuation effects from exchange rate depreciations will pressure the debt-to-GDP ratio... . . . . . . . . . . . . . . . . . . . . . . . . 70 Figure 48. Eurobond restructuring is insufficient for public debt sustainability ….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Figure 49. … and cannot be expected to provide the needed fiscal space. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Figure 50. Under ScB, debt-to-GDP will improve significantly with eurobond and TB debt restructuring/ cancellation but will remain elevated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Figure 51. Under ScB, Eurobond and TB debt restructuring/cancellation is not sufficient to sufficient create fiscal space.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 11 Figure 52. MOF Transfer, Revenues, Costs and Deficit of EdL Pre-pandemic (2016-2019). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Figure 53. MoF Transfer, Revenues, Costs and Deficit of EdL Pre-pandemic (2016-2019). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Figure 54. Total Energy Generated vs. Collected by EdL (MWh). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Figure 55. EdL Energy Supply (MWh). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Figure 56. Billed Electricity Consumption to Be Collected by DSP (GWh).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Figure 57. Extract of Revenues from the Transport Sector to the Ministry of Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Figure 58. Extract of Revenues from the Transport Sector to the Ministry of Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Figure 59. Infant Mortality Rate per 1,000 Live Births . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Figure 60. Maternal Mortality Ratio (national estimate, per 100,000 live births). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Figure 61. Health Expenditure (as percent GDP) Regional Comparison.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Figure 62. Out-of-Pocket Expenditure per capita (current US$).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Figure 63. Cost of Universalization with Essential Package by Age Group (Percent of GDP).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Figure 64. Cost of Universalization with Essential Package by Service (Percent of GDP).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Figure 65. Learning-Adjusted Years of School vs. Expenditure on Education per Student. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Figure 66. MEHE Budget in Billion LBP, Nominal and Real . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Figure 67. Teacher Compensation in Real and Nominal Terms (Civil Servants and Contract Teachers). . . . . . . . . . . . . . . . . . . . 110 Figure 68. Distribution of SP Spending by Pillars, 2019.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Figure 69. Distribution of SP Spending by Beneficiary Group, 2019.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Figure 70. SSN Spending in MENA, as a % of GDP... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Figure 71. SSN spending in Lebanon as a % of GDP... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Figure 72. Lebanon Year on Year Monthly Inflation Rate from Jan 2020 – March 2022.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 List of Tables Table 1. Sectoral Distribution of Utilized Credit Benefiting from Deductions in Banks’ Reserve Requirements or in Banks’ Liabilities (in Percent). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Table 2. Commercial Banks’ Balance Sheet (as of February 2020–early crisis period)... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Table 3. BdL’s Balance Sheet (as of February 2020-early crisis period).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Table 4. The Impact of Debt and Fiscal Measures on Banks’ Balance Sheet... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Table 5. The Impact of Debt and Fiscal Measures on BdL’s Balance Sheet.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Table 6. The Impact of the New Exchange Rate on Banks’ Balance Sheet.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Table 7. The Impact of the New Exchange Rate on BdL’s Balance Sheet.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Table 8. Education Total Financing, By Financing Sources and School Type (LBP, Billion).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Table 9. Civil and Military Pension Schemes (2019 2020). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Table 10. Selected Economic Indicators for Scenario ScB... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Table 11. Summary statistics for haircuts over the period 1978-2010... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 List of Boxes Box 1. Main Pillars of the Reform Matrix as Published in the LEM Fall 2020.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1 ‫اإلطار‬. 2020 ‫ عدد خريف‬،‫الركائز الرئيسية لمصفوفة اإلصالحات كما نُشرت في تقرير المرصد االقتصادي للبنان‬. . . . . . . . . . . . . . . . . . . . 21 Encadré 1. Principaux piliers de la matrice des réformes publiée dans le numéro du LEM de l’automne 2020... . . . . . . . 27 Box 2. Debt Stabilizing Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Box 3. Excerpts from LEM Fall 2018 entitled De-Risking Lebanon.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Box 4. Gold Assets Re-Evaluation Calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Box 5. Masked Dues/ Debts on Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Box 6. Excerpts of the Lebanon SCD (2016) Related to Elite Capture of Public Service Delivery and The White Paper Presented to GoL in 2016, entitled Priority Reforms for the Government of Lebanon... . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Box 7. Estimating the Cost of an Essential Universal Health Care Package for Lebanon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Box 8. Higher Education Financing and the Lebanese University.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 12 LEBA NON PU B L IC FIN A N C E RE VIE W EXECUTIVE SUMMARY I. Lebanon’s macro-financial bankruptcy is payments (BoP) considerations that drove economic with such (relative) scale and scope that it has policy over the examined period. Motivated by BoP likely undermined the political economy of post- pressures, quasi-fiscal operations undertaken by civil war Lebanon—The Second Republic.1 This the central bank generated massive costs that were political economy thrived under large inflows of unseen, unacknowledged and under-reported. deposits that funded a public-private privilege2 Further, Lebanon continues to be the largest per for the few (including the financial sector) and capita host of refugees globally, as a result of the political patronage that exercised dominion over eruption of the Syria war. The PFR does not dissect public administration. The finality of the sudden this global public good that has been rendered since stop in October 2019, however, seems to be leading 2011, as it has been more thoroughly assessed in to the disintegration of this political economy, as the Bank’s 2020 publication The Fallout of War: The manifested by a collapse of the most basic public Regional Consequences of the Conflict in Syria. services, persistent and debilitating internal political discord, and the resignation/exodus of some of the social and economic elite who have Section I: Fiscal Policy in the traditionally benefited from this model. The poor Second Republic and the middle class, who were never well-served IV. Section I illustrates the role of public finance under this model in the first place, are carrying the in the elite capture narrative, identifying and— main burden of this bankruptcy. In fact, Lebanon is to the extent data permits—quantifying diverted undergoing a socio-political-economic transition to resources. Methods behind GoL’s consistent and an as-yet-unknown re-configuration.3 acute departure from orderly and disciplined fiscal policy are identified. This departure was not due II. The Public Finance Review (PFR) analyzes to the lack of resources—where sizable capital Lebanon’s public finances over a long horizon, to inflows persisted for decades—or alternatives—with understand the roots of the fiscal profligacy and incessant warnings, advise and advocacy for reforms its eventual insolvency. To do so, the PFR links from local stakeholders and international partners. three critical elements in three Sections. Section Instead, the departure was highly consistent with the I: Fiscal Policy in the Second Republic; Section II: objective of serving the interests of an entrenched Macro-Financial Restructuring; Section III: Public political economy, which instrumentalized State Service Non-Delivery. A fourth critical element is institutions using fiscal and economic tools. geopolitics, which is beyond the scope of the PFR. Taken together, these form critical determinants V. Fiscal activities reveal the two most of the outcomes for any future socio-political- prominent and systematized features of this economic re-configuration. political economy, namely: III. We qualify our work with the following i. Debt accumulation to reinforce the confidence important caveats. Firstly, while the examination channel in the macro-financial system. This herein focuses on public finance, it is balance of 1 Lebanon’s economic crisis is likely to rank in the top 10, possibly top three, most severe crises episodes globally since the mid- nineteenth century. Lebanon’s Nominal GDP plummeted from close to US$55 billion in 2018 to an estimated US$22 billion in 2021, with US$ GDP/capita falling by around 60 percent. Such a brutal contraction is usually associated with conflicts or wars. (Spring 2021 Lebanon Economic Monitor, LEM). 2 The collusion of public and private representatives at macro and micro levels to guarantee capture of resources. 3 As early as Spring 2016, the World Bank declared the bankruptcy of the business model for the political economy of The Second Republic; “… a socially and economically bankrupt model, whereby human capital is exported in return for inflows that finance rent-seeking activities that aggravate imbalances.” (Spring 2016 LEM) Ex ecutive S ummary 13 was necessary to maintain robust deposit IX. For illustrative purposes, we undertake inflows under a fixed exchange rate, the scenario analysis and the simulations overvaluation of which permitted excessive incorporated, with the aim of gauging the impact consumption, generating an illusion of wealth. of KPDs. Key takeaways: The realization of political and financial ii. benefits from both excess costs imposed on • Lebanon’s macro-financial system became the citizenry and privileges granted to the few. characterized by strong interlinkages between This occurred through distribution channels the fiscal-monetary-financial sectors, involving subsidies and profit-making that rendering one dependent on the other, as were centralized around public services, one sector’s liabilities constituted another’s further entrenching the power-sharing assets, binding oversized balance sheets. confessional system. • Debt restructuring measures (both domestic and foreign debt) will fail to reduce the debt- VI. From analyses undertaken, the PFR identifies to-GDP to below 100 percent and sufficiently five financial accounts for the Second Republic: create a fiscal space. Hence, growth is essential for debt sustainability. a. Official public internal and external accounts • Debt restructuring measures will incur (fiscal, balance of payments, debt etc.); substantial losses on BdL and commercial b. Undisclosed losses accumulated in BdL banks. accounts and presented only symbolically • Unification of the exchange rate will under “other assets” in the BdL balance sheet; significantly shrink BdL’s and banks’ balance c. GoL deferred or refused due payments (i.e., sheets. arrears) that amount to forced debt and/or • An essential outcome of reforms in the losses on beneficiaries; financial sector would be to notably improve d. Excessive money creation by BdL; and BdL’s Net International Reserve (NIR) position, e. The absence of, or significant deficiencies in, which is currently estimated to be significantly basic public services that taxpayers financed in the negative. publicly, and then once again via substitute • Transparency regarding the disclosure of services from private providers (electricity, standard central banking information, such as water, etc.). NIR, and the use of recognized international accounting practices is a critical component VII. The above elements prefigured the massive of the strengthening of transparency and losses that were imposed on the depositors after accountability of public finances. In fact, the the collapse. sheer size of the sovereign, BdL, and banking system balance sheets would have never reached the elevated levels reached by the Section II: Macro-Financial eve of the crisis in 2019 if economic actors Restructuring had been able to see that the NIR had turned negative long time before the crisis. VIII. Key Policy Decisions (KPDs) for the restructuring of the macro-financial system— primarily, public debt-fiscal-monetary-financial Section III: Public Service Non‑Delivery sectors—are identified and simulated. Section II updates Technical Assistance offered by the Bank X. Section III analyzes the implications of under the PFR to the GoL in early 2020 to help Lebanon’s macro and structural policies on authorities devise a crisis management strategy. We the (failed) provision of key basic services to are able to gauge some of the losses in the system, the population. We illustrate failures in core as partially observed through the balance sheets of components of the social contract as manifested by the three main stakeholders: Government, BdL, and low (and falling) quality of basic public services in the banking sector. the following sectors: Water, Electricity, Transport, Health, Education and Social Protection. 14 LEBA NON PU B L IC FIN A N C E RE VIE W XI. The PFR shows serious gaps in the financing of fragility would be a medium- to long-term agenda, basic public services, prevailing long before—and Lebanese people need immediate assistance. aggravated by—the current crisis. On the revenue This section proposes a series of sector-specific side, low cost-recovery led to an unsustainable measures and policies aiming at addressing the fiscal burden and negatively impacted the provision immediate needs of the population while engaging of electricity and water to the population. The in medium-long-term reforms to improve the sector analyses confirm the inefficiencies in public performance, sustainability and resilience of public spending, which reflect the stressed macro-fiscal service provision. The proposed measures focus on conditions analyzed herein. The low level of capital the following main objectives: expenditures resulted, among others, in lack of investments in additional electricity generation • Ensure sustainability and affordability of capacity and network maintenance. This, in turn, basic services through proper investments, constrained Electricité du Liban (EdL) from meeting better cost-recovery policies and improved electricity demand, promoting instead costly governance, notably in Water, Electricity and and highly polluting alternatives provided (very Transport sectors. lucratively) by the private sector. • Enhance equity in public spending particularly through reducing out-of-pocket (OOP) XII. The successive shocks that hit Lebanon healthcare expenditures, realigning education since 2019 affected both the supply and demand financing, prioritizing progressive social sides in critical sectors. The collapse of the local protection interventions targeted to the poor currency and ensuing economy-wide shortages and vulnerable, and addressing the structural in foreign exchange (FX) have resulted in sharply problems of the public pension to ensure increasing costs across sectors. The sectors also sustainability and fairness. suffered from shortages of goods and services in • Improve efficiency in government spending the economy, resulting in the deterioration of the throughout the sectors. This would include, quality of service provided. The high inflation rates among others, rebalancing the health have led to sharp declines in the purchasing power system toward preventive and primary care, of salaries for public sector employees (among containing overall health care expenditures others). Critical sectors are losing thousands of (notably pharmaceutical), more efficient qualified personnel in the ensuing brain drain from allocation of inputs to public schools (teachers the country. The end of the FX subsidy exacerbated and infrastructure) and adopting policies to the inflationary environment for households. Their reduce the high student repetition. coping strategies consisted of looking for more affordable alternatives (such as moving their XIV. Furthermore, as expounded on in the Lebanon children from private to public schools) when Systematic Country Diagnostic (SCD 2016),4 the available, or simply reducing their utilization of hollowing of the state is a desired/deliberate services through, among others, less hours of outcome intended to cement public-private generators’ electricity, lower consumption of water privilege for principal benefactors of Lebanon’s or delayed health care. post-civil war economy. Elite capture of State’s resources for private gains necessitated weakening XIII. The compounded crises further revealed the of public service delivery so that (1) lucrative and fragility of Lebanon’s service provision model, dollar-inflated private sector contracts could step itself a product of elite capture of State’s resources in (e.g., oil import business, generators, waste for private gains that necessitated weakening of collection, but also private schools, hospitals etc.), public service delivery. While addressing such and (2) confessional groups could tighten their grip 4 World Bank (2016) “Lebanon Systematic Country Diagnostic”. Ex ecutive S ummary 15 on citizens by supplanting the State in these service despite numerous in-depth analyses and provisions. For Lebanon’s public finances, public accessibility of financing. In a series of policy notes, policy, and the public sector to start delivering for the World Bank identified critical macro, structural its citizens, this fundamental feature of the pre- and sectoral reforms to help mitigate risks and crisis regime needs to be overhauled. boost potential growth. In December 2016, the WB published a White Paper that included World Bank staff assessment on needed reforms for a new Policy Implications Government to introduce and implement, following XV. An important value added for the PFR is that two and a half years of a Presidential vacancy and it presents analyses and policy recommendations institutional paralysis.5 This list was later developed across the economy during crisis conditions with and attuned in the WB Strategic Assessment of the a perspective for long-term sustainability. Both Capital Investment Plan (CIP) for Lebanon6 that was the Macro and Sector sections suggest urgent presented in the CEDRE conference in Paris in April interventions that are consistent with longer term 2018. Lastly, in the Fall 2020 Lebanon Economic reforms that have been examined, analyzed and Monitor (LEM), entitled, The Deliberate Depression, stressed repeatedly by the Bank for decades. the Bank presented a reform agenda that looked to strengthen the overall economic management in XVI. Long-term macro and structural deficiencies Lebanon in a way that is more inclusive and more were left unresolved over the post-war period, accountable (see Box 1). 5 World Bank (2016), Priority Reforms for the Government of Lebanon, December 2016. 6 Harake, Wissam and Christos Kostopoulos (2018), Strategic Assessment: A Capital Investment Plan for Lebanon, World Bank Group, Washington DC. 16 LEBA NON PU B L IC FIN A N C E RE VIE W Box 1. Main Pillars of the Reform Matrix as Published in the LEM Fall 2020. At the heart of the proposed reform agenda are 3. An Infrastructure Development Reform governance and accountability reforms that seek Package: Lebanon’s dilapidated infrastructure to strengthen overall economic management in is a developmental constraint. Among the vital Lebanon in a way that is more inclusive and more basic services that are needed, Lebanon lags in (1) accountable; in doing so, the proposed reform electricity, (2) telecommunications, (3) port system, agenda seeks to rebuild trust. The reform agenda (4) transportation, and (5) water and sanitation. compromises the following five pillars: Lebanon needs urgent investment in these sectors, which the state can ill afford, and which the private 1. A Macroeconomic Stabilization Program: sector is unwilling to undertake, given opacity and Lebanon needs to arrest high inflation, rapid weak regulatory governance. Reforms to limit fiscal currency depreciation and the proliferation of and quasi-fiscal deficits of state-owned enterprises, multiple exchange rates. It needs to put in place strengthen management, regulation and governance, a path to public debt sustainability based on debt and encourage private investment will need to be restructuring and a sustainable fiscal framework, prioritized. and to include a strong social protection package. The challenges of fiscal adjustment, and the 4. An Economic Opportunities Reform Package: necessary banking sector restructuring will require The economic crisis will bring new opportunities that full realization of resulting losses according to primarily stem from domestic price adjustments and international accounting norms, which will need the depreciated currency. Enterprises and finance to be distributed according to the hierarchy of must identify these opportunities and use them to claims and in an equitable manner taking into create new jobs. Lebanon will need to lighten the consideration past realized benefits. burden that it places on its enterprises by simplifying processes and procedures, reduce operating costs, 2. A Governance and Accountability Reform and undertake fundamental reforms to level the Package: Lebanon needs to address the primary playing field. Lebanon will also need to ensure that sources of corruption and inefficiency in the the banking sector can perform its intermediation public sector in order to create budgetary savings, function. These reforms can be supported by an improve development impact, and begin to rebuild economic development plan that ensures markets trust between government and citizens. Reforms work efficiently and are unhindered by specific under this package aim to rebuild trust by: (1) sectoral constraints to growth. strengthening management of public funds through public finance, investment, and debt management 5. A Human Capital Development Reform Package: reforms; (2) reforming public procurement, in A key aspect of sustainability and growth for Lebanon’s part to increase fair private sector participation; economy is recapturing the human capital potential. (3) improving transparency and inclusion through For Lebanon, part of the challenge is the fiscal complying with and joining the Open Government constraint of supporting necessary public services. Partnership (OGP); and (4) boosting accountability The other part of the challenge is sector efficiency and through anti-corruption and judicial reforms. These management. A strategy for stabilization, economic reforms can be viewed as the building blocks of a efficiency, and restoration of trust needs to include public sector reform that is needed to rebuild the reforms that support the development of human Lebanese state. capital, and at the same time create fiscal space to dedicate this type of expenditure to support such reforms in a sustainable budget framework. ‫زجوم‬ ‫زجو م‬ ‫‪17‬‬ ‫موجز‬ ‫عمليــة إلعــادة تشــكيل األوضــاع االجتماعيــة والسياســية‬ ‫‪I‬يأتــي حجــم ونطــاق اإلفــاس المالــي الكلــي فــي ‬ ‫ ‪.‬‬ ‫واالقتصاديــة فــي المســتقبل‪.‬‬ ‫و قد يؤدي إلى تقويض االقتصاد‬ ‫لبنان (نســبياً) على نح ٍ‬ ‫السياســي للبنــان بعــد الحــرب األهليــة ‪-‬الجمهوريــة ‬ ‫ ‪III.‬تجــدر اإلشــارة إلــى االعتبــارات التاليــة‪ .‬أوالً‪ ،‬فــي‬ ‫الثانيــة‪ 7.‬فقــد ازدهــر هــذا االقتصــاد السياســي فــي‬ ‫كــز الدراســة فــي هــذا التقريــر علــى الماليــة‬ ‫حيــن تُر ّ‬ ‫مولــت امتيــازات‪ 8‬عامــة‬ ‫ظــل تدفقــات ضخمــة مــن الودائــع ّ‬ ‫العامــة‪ ،‬فــإن اعتبــارات ميــزان المدفوعــات هي التي كانت‬ ‫وخاصــة للقلــة (بمــا فــي ذلــك فــي القطــاع المصرفــي)‬ ‫تحــرك السياســة االقتصاديــة خــال الفتــرة المشــمولة‬ ‫ومحســوبية سياســية مارســت هيمنــة علــى اإلدارة‬ ‫بالدراســة‪ .‬فمــا يقــوم بــه المصــرف المركــزي مــن عمليــات‬ ‫العامــة‪ .‬غيــر أن النهايــة‪ ،‬التــي تمثلــت فــي التوقــف‬ ‫شــبه ماليــة‪ ،‬نتيجــة ضغــوط ميــزان المدفوعــات‪ ،‬نشــأ‬ ‫المفاجــئ خــال شــهر أكتوبر‪/‬تشــرين األول ‪ ،2019‬تــؤدي‬ ‫معتــرف بهــا وغيــر‬‫عنهــا تكلفــة هائلــة لــم تكــن ظاهــرة وال ُ‬ ‫كك هــذا االقتصــاد السياســي‪ ،‬كمــا‬ ‫علــى مــا يبــدو إلــى تفـ ّ‬ ‫واردة فــي أي تقاريــر‪ .‬إضافــة إلــى ذلــك‪ ،‬ال يــزال لبنــان‬ ‫يتضــح مــن انهيــار الخدمــات العامــة األساســية‪ ،‬واســتمرار‬ ‫أكبــر مضيــف لالجئيــن علــى مســتوى العالــم‪ ،‬نســبةً لعــدد‬ ‫الشــقاق السياســي الداخلــي الموهــن ألوصــال الدولــة‪،‬‬ ‫الســكان‪ ،‬وذلــك نتيجــة لنشــوب الحــرب فــي ســوريا‪ .‬وال‬ ‫واســتقالة‪/‬هجرة بعــض النخــب االجتماعيــة واالقتصاديــة‬ ‫لــل هــذا التقريــر هــذه المنفعــة العامــة التــي يقدمهــا‬ ‫يح ّ‬ ‫التــي كانــت اســتفادت مــن هــذا النمــوذج‪ .‬فــي الوقــت‬ ‫لبنــان إلــى العالــم أجمــع منــذ عــام ‪ ،2011‬حيــث قــد خضعــت‬ ‫نفســه‪ ،‬فــإن العــبء األكبــر لألزمــة يقــع علــى كاهــل‬ ‫لتقييــم متعمــق فــي تقريــر للبنــك الدولــي بعنــوان نتائــج‬ ‫الفقــراء والطبقــة المتوســطة‪ ،‬وهــي الفئــات التــي لــم‬ ‫الحــرب‪ :‬تبعــات الصــراع فــي ســوريا علــى المنطقــة‪.‬‬ ‫يكــن النمــوذج القائــم يلبــي حاجاتهــا أص ـاً‪ .‬فــي الواقــع‪،‬‬ ‫تحــول اجتماعــي وسياســي‬ ‫ّ‬ ‫يمــر لبنــان اآلن بمرحلــة‬ ‫القســم األول‪ :‬سياســة الماليــة العامــة فــي ‬ ‫واقتصــادي فــي عمليــة إعــادة تشــكيل غيــر معروفــة‬ ‫الجمهوريــة الثانيــة‬ ‫‪9‬‬ ‫أبعادهــا بعــد‪.‬‬ ‫ ‪IV.‬يوضــح القســم األول دور الماليــة العامــة فــي ‬ ‫ ‪II.‬يحلــل تقريــر مراجعــة الماليــة العامــة أوضــاع‬ ‫يحــدد‬ ‫ّ‬ ‫ســردية اســتحواذ النخبــة علــى المــوارد‪ ،‬حيــث‬ ‫الماليــات العامــة فــي لبنــان علــى مــدى أفــق زمنــي ‬ ‫ـدر حجمهــا‪ ،‬بالقــدر الــذي تســمح‬ ‫ـوارد المحولــة ويقـ ّ‬ ‫ّ‬ ‫المـ‬ ‫طويــل لفهــم جــذور اإلســراف فــي الماليــة العامــة ‬ ‫بــه البيانــات‪ .‬ويقــوم بتحديــد األســاليب التــي تســببت فــي‬ ‫وإفالســها فــي نهايــة المطــاف‪.‬‬ ‫ى وللقيــام بذلــك‪ ،‬يربــط‬ ‫و مســتمر عــن سياســة‬ ‫ابتعــاد الحكومــة اللبنانيــة علــى نحـ ٍ‬ ‫الماليــة العامــة المنتظمــة والمنضبطــة‪ .‬ولــم يكــن هــذا‬ ‫هــذا التقريــر ثالثــة عناصــر حيويــة فــي ثالثــة أقســام‪.‬‬ ‫ا عــن نقــص المــوارد حيــث اســتمرت تدفقــات‬ ‫االبتعــاد ناتج ـ ً‬ ‫القســم األول‪ :‬سياســة المالية العامة في الجمهورية ‬ ‫رأس المــال الكبيــرة لعقــود‪ ،‬أو فــي البدائــل عــن هــذه‬ ‫الثانيــة؛ القســم الثانــي‪ :‬إعــادة هيكلــة الماليــة الكليــة؛‬ ‫السياســات‪ ،‬مــع اســتمرار التحذيــرات والمشــورة والدعــوة‬ ‫القســم الثالــث‪ :‬عــدم تقديــم الخدمــات العامــة‪ .‬وثمــة‬ ‫إلــى اإلصــاح مــن أصحــاب المصلحــة المحلييــن والشــركاء‬ ‫عنصــر حيــوي رابــع هــو الوضــع الجيوسياســي‪ ،‬لكنــه‬ ‫الدولييــن‪ .‬بــدالً مــن ذلــك‪ ،‬كان ابتعــاد الحكومــة متّســق ً‬ ‫ا‬ ‫يتجــاوز نطــاق هــذا التقريــر‪ .‬وتشــكل هــذه العوامــل‬ ‫إلــى حــد كبيــر مــع الهــدف المتمثــل فــي خدمــة مصالــح‬ ‫مجتمعــة عوامــل بالغــة األهميــة فــي تحديــد نواتــج أي‬ ‫وربمــا بيــن أشــد ثــاث أزمــات ‪ ،‬حـ ً‬ ‫ـدة علــى‬ ‫االقتصاديــة التــي يواجههــا لبنــان المركــز األول علــى األرجــح بيــن أشــد عشــر أزمــات‪ّ ،‬‬ ‫ّ‬ ‫ســتحتل األزمــة‬ ‫ ‬ ‫‪7‬‬ ‫مســتوى العالــم منــذ أواســط القــرن التاســع عشــر‪ .‬فقــد انخفضــت قيمــة إجمالــي الناتــج المحلــي للبنــان مــن حوالــي ‪ 55‬مليــار دوالر عــام‬ ‫‪ 2018‬إلــى مــا يقــدر بنحــو ‪ 22‬مليــار دوالر عــام ‪ ،2021‬فــي حيــن انخفــض نصيــب الفــرد مــن إجمالــي الناتــج المحلــي بنحــو ‪%60‬مــن حيــث القيمــة‬ ‫ا بــأن هــذا االنكمــاش الشــديد يصاحــب فــي العــادة الصراعــات أو الحــروب‪ ( .‬المرصــد االقتصــادي للبنــان‪ ،‬ربيــع ‪.)2021‬‬ ‫الدوالريــة‪ .‬علم ـ ً‬ ‫تواطؤ ممثلي القطاعين العام والخاص على المستويين الكلي والجزئي لضمان استحواذهم على الموارد‪.‬‬ ‫‪8‬‬ ‫ ‬ ‫ا مــن ربيــع عــام ‪ ،2016‬أعلــن البنــك الدولــي إفــاس نمــوذج االقتصــاد السياســي للجمهوريــة الثانيــة؛ «‪ ...‬نمــوذج مفلــس اجتماعيــ ً‬ ‫ا‬ ‫اعتبــار ً‬ ‫ ‬ ‫‪9‬‬ ‫واقتصادي ـاً‪ ،‬يتــم بموجبــه تصديــر رأس المــال البشــري مقابــل التدفقــات الوافــدة التــي تمــول األنشــطة الريعيــة التــي تــؤدي إلــى تفاقــم‬ ‫االختــاالت»‪( .‬المرصــد االقتصــادي للبنــان‪ ،‬ربيــع ‪)2016‬‬ ‫زجوم‬ ‫‪18‬‬ ‫‪LEBA NON PU B L IC FIN A N C E RE VIE W‬‬ ‫حــدث القســم‬‫ي ّ‬ ‫والقطــاع المالــي‪ -‬ويجــري محاكاتهــا‪ُ .‬‬ ‫اقتصــاد سياســي مترســخ اســتخدم مؤسســات الدولــة‬ ‫الثانــي المســاعدة الفنيــة التــي قدمهــا البنــك الدولــي‬ ‫مــن خــال األدوات الماليــة واالقتصاديــة‪.‬‬ ‫بموجــب هــذا التقريــر إلــى الحكومــة اللبنانيــة فــي أوائــل‬ ‫عــام ‪ 2020‬لمســاعدة الســلطات علــى وضــع إســتراتيجية‬ ‫ ‪V .‬تكشــف أنشــطة الماليــة العامــة عــن اثنتيــن مــن‬ ‫إلدارة األزمــات‪ .‬ويمكننــا قيــاس بعــض الخســائر فــي‬ ‫أبــرز ســمات هــذا االقتصــاد السياســي وأكثرهــا منهجيــة‪،‬‬ ‫ا مــن خــال ميزانيــات أصحــاب‬ ‫النظــام‪ ،‬كمــا لوحــظ جزئيــ ً‬ ‫وهمــا‪:‬‬ ‫المصلحــة الرئيســيين الثالثــة‪ ،‬وهــم‪ :‬الحكومــة‪ ،‬ومصــرف‬ ‫ تراكــم الديــون لتعزيــز قنــاة الثقــة فــي النظــام‬ ‫‪.i‬‬ ‫لبنــان‪ ،‬والقطــاع المصرفــي‪.‬‬ ‫ا للحفــاظ علــى‬ ‫المالــي الكلــي‪ .‬وكان ذلــك ضروريــ ً‬ ‫ ‪IX.‬ألغــراض التوضيــح‪ ،‬نجــري تحليــا للســيناريوهات‬ ‫تدفقــات وافــدة قويــة للودائــع بســعر صــرف ثابــت‪،‬‬ ‫ً‬ ‫مبالــغ فيــه لقيمــة الليــرة اللبنانيــة ممــا ســمح‬ ‫ونمــاذج المحــاكاة المدمجــة‪ ،‬وذلــك بهــدف قيــاس أثــر‬ ‫ورفــع ُ‬ ‫القــرارات الرئيســية لسياســات إعــادة هيكلــة النظــام‬ ‫باإلفــراط فــي االســتهالك وخلــق ثــروة وهميــة؟‪.‬‬ ‫المالــي الكلــي‪ .‬فــي مــا يلــي اســتنتاجات مهمــة‪:‬‬ ‫ تحقيــق منافــع سياســية وماليــة مــن التكاليــف‬ ‫‪.ii‬‬ ‫الزائــدة المفروضــة علــى المواطنيــن واالمتيــازات‬ ‫يتســم النظــام المالــي الكلــي فــي لبنــان بروابــط‬ ‫ ‬ ‫•‬ ‫الممنوحــة للقلــة‪ .‬وحــدث ذلــك مــن خــال قنــوات‬ ‫قويــة بيــن القطاعــات الماليــة والنقديــة والماليــة‬ ‫التوزيــع التــي تتضمــن دعــم‪ ،‬وتحقيــق أربــاح كانــت‬ ‫العامــة‪ ،‬ممــا جعــل أحدهــا يعتمــد علــى اآلخــر‪ ،‬حيــث‬ ‫متمركــزة حــول الخدمــات العامــة‪ ،‬ممــا زاد من ترســيخ‬ ‫تشــكل التزامــات أحــد القطاعــات أصــوالً للقطــاع اآلخــر‪،‬‬ ‫النظــام الطائفــي لتقاســم الســلطة‪.‬‬ ‫ممــا يربــط ميزانياتهــا‪.‬‬ ‫لــن تــؤدي تدابيــر إعــادة هيكلــة الديــون (ســواء‬ ‫ ‬ ‫•‬ ‫ـدد هــذا‬ ‫ ‪VI.‬بنــاء ً‬ ‫ا علــى التحليــات التــي تــم إجراؤهــا‪ ،‬يحـ ّ‬ ‫الديــن المحلــي أو األجنبــي) إلــى خفــض نســبة الديــن‬ ‫التقريــر خمســة حســابات ماليــة للجمهوريــة الثانيــة‪:‬‬ ‫إلــى إجمالــي الناتــج المحلــي إلــى أقــل مــن ‪ ،%100‬أو‬ ‫ الحســابات الداخليــة والخارجيــة الرســمية العامــة‬ ‫‪.2‬‬ ‫ا فــي الماليــة العامــة‪ .‬ومــن ّ‬ ‫ثــم‪،‬‬ ‫ا كافيــ ً‬ ‫خلــق حيــز ً‬ ‫(الماليــة العامــة‪ ،‬ميــزان المدفوعــات‪ ،‬الديــن‪ ،‬إلــخ‪.).‬‬ ‫فــإن النمــو ضــروري الســتمرارية القــدرة علــى تحمــل‬ ‫ الخســائر المتراكمــة غيــر المعلنــة فــي حســابات‬ ‫‪.3‬‬ ‫أعبــاء الديــن‪.‬‬ ‫مصــرف لبنــان ولــم تُعــرض إال بشــكل رمــزي تحــت‬ ‫س ـتُكبد إجــراءات إعــادة هيكلــة الديــن مصــرف لبنــان‬ ‫•‬ ‫ ‬ ‫«أصــول أخــرى» فــي المركــز المالــي لمصــرف لبنــان‪.‬‬ ‫والبنــوك التجاريــة خســائر ضخمــة‪.‬‬ ‫ قيــام الحكومــة اللبنانيــة بتأجيــل أو رفــض‬ ‫‪.4‬‬ ‫ســيعمل توحيــد ســعر الصــرف علــى خفــض ميزانيــات‬ ‫ ‬ ‫•‬ ‫المدفوعــات المســتحقة (أي المتأخــرات) التــي تصــل‬ ‫ا شــديداً‪.‬‬ ‫المصــرف المركــزي والبنــوك انخفاضــ ً‬ ‫إلــى فــرض الديــن و‪/‬أو الخســائر علــى المســتفيدين‪.‬‬ ‫تتمثــل إحــدى النتائــج األساســية لإلصالحــات فــي‬ ‫ ‬ ‫•‬ ‫ إفراط مصرف لبنان في طبع النقود‪.‬‬ ‫‪.5‬‬ ‫ٍ‬ ‫ملحــوظ فــي مركــز‬ ‫تحســن‬ ‫ٍ‬ ‫القطــاع المالــي فــي‬ ‫ غيــاب الخدمــات العامــة األساســية أو اتســامها‬ ‫‪.6‬‬ ‫صافــي االحتياطــي الدولــي لــدى مصــرف لبنــان‪،‬‬ ‫بأوجــه قصــور شــديدة‪ ،‬وهــي الخدمــات التــي‬ ‫ا علــى نحــو ســلبي بنســبة عاليــة‪.‬‬ ‫يقــدر حاليــ ً‬ ‫والــذي ُ‬ ‫يمولهــا دافعــو الضرائــب الذيــن يتحملــون تكلفتهــا‬ ‫تعــد الشــفافية فــي مــا يتعلــق باإلفصــاح عــن‬ ‫•‬ ‫ ‬ ‫مــرة أخــرى مــن خــال خدمــات بديلــة تقدمهــا شــركات‬ ‫المعلومــات القياســية لمصــرف لبنــان‪ ،‬مثــل صافــي‬ ‫خاصــة (الكهربــاء‪ ،‬والميــاه‪ ،‬إلــخ)‪.‬‬ ‫االحتياطــي الدولــي واســتخدام الممارســات‬ ‫ا بالــغ‬ ‫المحاســبية الدوليــة المعتــرف بهــا‪ ،‬مكونــ ً‬ ‫ ‪VII.‬دلّــت العناصــر المذكــورة أعــاه علــى الخســائر‬ ‫األهميــة لتعزيــز شــفافية الماليــات العامــة‬ ‫الهائلــة التــي فُ رضــت علــى المودعيــن بعــد االنهيــار‪.‬‬ ‫وخضوعهــا للمســاءلة‪ .‬وفــي الواقــع‪ ،‬لــم يكــن‬ ‫حجــم الميزانيــات الســيادية والخاصــة بمصــرف‬ ‫القسم الثاني‪ :‬إعادة هيكلة المالية الكلية ‬ ‫ا المســتويات‬ ‫لبنــان والنظــام المصرفــي ليبلــغ أبــد ً‬ ‫المرتفعــة التــي وصــل إليهــا عشــية األزمــة فــي‬ ‫ ‪VIII.‬يحــدد هــذا القســم القــرارات الرئيســية لسياســات‬ ‫عــام ‪ ،2019‬لــو كانــت الجهــات االقتصاديــة الفاعلــة‬ ‫إعــادة هيكلــة النظــام المالــي الكلــي ‪ -‬تحديــداً الديــن‬ ‫تمكنــت مــن رؤيــة أن صافــي االحتياطــي الدولــي قــد‬ ‫العــام وقطــاع الماليــة العامــة والقطــاع النقــدي‬ ‫ا قبــل قبــل نشــوب األزمــة بزمــن طويــل‪.‬‬ ‫تحــول ســلب ً‬ ‫ّ‬ ‫زجوم‬ ‫زجو م‬ ‫‪19‬‬ ‫الحكوميــة) عنــد توفرهــا‪ ،‬أو ببســاطة الحــد مــن‬ ‫القسم الثالث‪ :‬عدم تقديم الخدمات العامة‬ ‫اســتخدامها للخدمــات كخفــض ســاعات توليــد الكهربــاء‬ ‫بالمولــدات أو خفــض اســتهالك الميــاه أو تأخيــر اللجــوء‬ ‫ ‪X .‬يحلــل القســم الثالــث تداعيــات السياســات الكليــة ‬ ‫للرعايــة الصحيــة‪ ،‬ضمــن إجــراءات أخــرى‪.‬‬ ‫والهيكليــة للبنــان علــى (الفشــل فــي) تقديــم الخدمــات‬ ‫األساســية الرئيســية للســكان‪ .‬ويوضــح أوجــه الفشــل‬ ‫ا هشاشــة نموذج‬ ‫ ‪XIII.‬كشــفت األزمــات المتفاقمــة أيض ً‬ ‫فــي المكونــات األساســية للعقــد االجتماعــي كمــا يتضــح‬ ‫تقديــم الخدمــات فــي لبنــان‪ ،‬وهــو فــي حــد ذاتــه نتــاج‬ ‫مــن ضعــف (وتراجــع) جــودة الخدمــات العامــة األساســية‬ ‫اســتحواذ النخبــة علــى مــوارد الدولــة لتحقيــق مكاســب ‬ ‫فــي القطاعــات التاليــة‪ :‬الميــاه والكهربــاء والنقــل‬ ‫خاصــة اســتلزمت إضعــاف الخدمــات العامــة‪ .‬وفــي حيــن‬ ‫والصحــة والتعليــم والحمايــة االجتماعيــة‪.‬‬ ‫أن معالجــة هــذه األوضــاع الهشــة تمثــل أجنــدة متوســطة‬ ‫إلــى طويلــة األجــل‪ ،‬فــإن الشــعب اللبنانــي بحاجــة إلــى‬ ‫يظهــر هــذا التقريــر فجــوات خطيــرة فــي تمويــل‬ ‫ ‪ُ XI.‬‬ ‫مســاعدة فوريــة‪ .‬ويقتــرح هــذا القســم سلســلة مــن‬ ‫الخدمــات العامــة األساســية‪ ،‬كانــت ســائدة قبــل األزمــة ‬ ‫التدابيــر والسياســات القطاعيــة المحــددة التــي تهــدف‬ ‫الحاليــة بمــدة طويلــة وتفاقمــت بســببها‪ .‬وعلــى صعيــد‬ ‫إلــى تلبيــة االحتياجــات الفوريــة للســكان مــع بــدء إصالحــات‬ ‫اإليــرادات‪ ،‬أدى انخفــاض معــدل اســترداد التكلفــة إلــى‬ ‫علــى المــدى المتوســط لتحســين أداء الخدمــات العامــة‬ ‫ا علــى توفيــر‬ ‫أعبــاء ماليــة غيــر مســتدامة وأثــر ســلب ً‬ ‫واســتدامتها وقدرتهــا علــى الصمــود‪ .‬وتركــز التدابيــر‬ ‫الكهربــاء والميــاه للســكان‪ .‬وتؤكــد التحليــات القطاعيــة‬ ‫المقترحــة علــى األهــداف الرئيســية التاليــة‪:‬‬ ‫أوجــه القصــور فــي اإلنفــاق العــام‪ ،‬والتــي تعكــس‬ ‫أوضــاع االقتصــاد الكلــي والماليــة العامــة التــي تــم‬ ‫ ضمــان اســتدامة الخدمــات األساســية وتحمــل‬ ‫•‬ ‫تحليلهــا فــي هــذا التقريــر‪ .‬وأدى انخفــاض مســتوى‬ ‫تكلفتهــا مــن خــال االســتثمارات الســليمة‪ ،‬وتحســين‬ ‫اإلنفــاق الرأســمالي‪ ،‬مــن بيــن عوامــل أخــرى‪ ،‬إلــى نقــص‬ ‫سياســات اســترداد التكلفــة‪ ،‬وتحســين الحوكمــة‪،‬‬ ‫االســتثمارات فــي زيــادة قــدرات توليــد الكهربــاء وصيانــة‬ ‫الســيما فــي قطاعــات الميــاه والكهربــاء والنقــل‪.‬‬ ‫الشــبكات‪ .‬وأدى ذلــك بــدوره إلــى إعاقــة مؤسســة‬ ‫ تعزيــز اإلنصــاف فــي اإلنفــاق العــام‪ ،‬الســيما مــن‬ ‫•‬ ‫كهربــاء لبنــان عــن تلبيــة الطلــب علــى الكهربــاء‪ ،‬ممــا عـ ّ‬ ‫ـزز‬ ‫خــال خفــض اإلنفــاق الشــخصي المباشــر علــى‬ ‫اللجــوء إلــى بدائــل باهظــة التكلفــة وعاليــة التلــوث (و‬ ‫الرعايــة الصحيــة‪ ،‬وإعــادة تنظيــم تمويــل التعليــم‪،‬‬ ‫مربحــة للغايــة) يقدمهــا القطــاع الخــاص‪.‬‬ ‫وإعطــاء األولويــة لإلجــراءات التدخليــة التدريجيــة‬ ‫فــي مجــال الحمايــة االجتماعيــة التــي تســتهدف‬ ‫ ‪XII.‬أثــرت الصدمــات المتعاقبــة التــي أصابــت لبنــان‬ ‫الفئــات الفقيــرة واألكثــر احتياجــ ً‬ ‫ا مــن اللبنانييــن‪،‬‬ ‫منــذ عــام ‪ 2019‬فــي القطاعــات الحيويــة علــى جانبــي ‬ ‫باإلضافــة إلــى معالجــة المشــاكل الهيكليــة‬ ‫العــرض والطلــب‪ .‬فقــد أدى انهيــار العملــة المحليــة‬ ‫للمعاشــات التقاعديــة العامــة لضمــان االســتدامة‬ ‫ومــا أعقبــه مــن نقــص فــي النقــد األجنبــي علــى‬ ‫والعدالــة‪.‬‬ ‫مســتوى االقتصــاد كلــه إلــى زيــادة حــادة فــي التكلفــة‬ ‫ تحســين الكفــاءة فــي اإلنفــاق الحكومــي فــي‬ ‫•‬ ‫فــي هــذه القطاعــات‪ .‬وعانــت تلــك القطاعــات أيضــ ً‬ ‫ا‬ ‫جميــع القطاعــات‪ .‬ويشــمل ذلــك‪ ،‬علــى ســبيل المثال‬ ‫مــن نقــص الســلع والخدمــات داخــل االقتصــاد‪ ،‬ممــا‬ ‫ال الحصــر‪ ،‬إعــادة التــوازن فــي النظــام الصحــي عبــر‬ ‫أدى إلــى تدهــور نوعيــة الخدمــات المقدمــة‪ .‬وأدى‬ ‫التركيــز علــى الرعايــة الوقائيــة والصحــة األوليــة‪،‬‬ ‫ارتفــاع معــدالت التضخــم إلــى انخفـ ٍ‬ ‫ـاض حـ ٍ‬ ‫ـاد فــي القــوة‬ ‫واحتــواء اإلنفــاق العــام علــى الرعايــة الصحيــة‬ ‫الشــرائية لرواتــب موظفــي القطــاع العــام (علــى ســبيل‬ ‫(الســيما المســتحضرات الصيدالنيــة)‪ ،‬وزيادة الكفاءة‬ ‫المثــال ال الحصــر)‪ .‬وتفقــد القطاعــات الحيويــة نتيجــة‬ ‫فــي تخصيــص مســتلزمات المــدارس الحكوميــة‬ ‫لذلــك آالف الموظفيــن المؤهليــن عبــر نزيــف المــوارد‬ ‫(المعلميــن والبنيــة التحتيــة)‪ ،‬واعتمــاد سياســات‬ ‫البشــرية الــذي تشــهده البــاد‪ .‬وأدى انتهــاء دعــم‬ ‫للحــد مــن ارتفــاع معــدالت الرســوب لــدى الطــاب‪.‬‬ ‫النقــد األجنبــي إلــى تفاقــم الضغوطــات التضخميــة‬ ‫علــى األســر‪ .‬وتشــمل إســتراتيجيات التكيــف الخاصــة‬ ‫ ‪XIV.‬عــاوة علــى ذلــك‪ ،‬وكمــا ورد فــي الدراســة‬ ‫بهــذه األســر البحــث عــن بدائــل ميســورة التكلفــة (مثــل‬ ‫التشــخيصية المنهجيــة للبنــان (الدراســة التشــخيصية ‬ ‫نقــل أطفالهــا مــن المــدارس الخاصــة إلــى المــدارس‬ ‫زجوم‬ ‫‪20‬‬ ‫‪LEBA NON PU B L IC FIN A N C E RE VIE W‬‬ ‫عرضــت علــى المؤتمــر االقتصــادي للتنميــة (ســيدر) فــي‬ ‫ُ‬ ‫المنهجيــة‪ 10،)2016 ،‬فــإن تفريــغ الدولــة هــو نتيجــة مرغوبــة‪/‬‬ ‫باريــس فــي شــهر أبريل‪/‬نيســان ‪ .2018‬وأخيــراً‪ ،‬وفــي تقريــر‬ ‫متعمــدة تهــدف إلــى ترســيخ االمتيــازات العامــة والخاصــة ‬ ‫المرصــد االقتصــادي للبنــان عــدد خريــف ‪ 2020‬الــذي صــدر‬ ‫للمســتفيدين الرئيســيين مــن اقتصــاد لبنــان بعــد الحــرب‬ ‫بعنــوان الكســاد المتعمــد‪ ،‬قــدم البنــك أجنــدة إصالحيــة‬ ‫ّــب اســتحواذ النخبــة علــى مــوارد الدولــة‬ ‫األهليــة‪ .‬وتَطل َ‬ ‫تســتهدف تعزيــز اإلدارة االقتصاديــة فــي لبنــان بطريقــة أكثــر‬ ‫لتحقيــق مكاســب خاصــة إضعــاف الخدمــات العامــة لكــي‪)1( :‬‬ ‫شــموالً وخضوعــ ً‬ ‫ا للمســاءلة (انظــر اإلطــار ‪.)1‬‬ ‫تحــل محلهــا عقــود القطــاع الخــاص المربحــة والمتضخمــة‬ ‫بالــدوالر األميركــي (علــى ســبيل المثــال‪ ،‬أنشــطة اســتيراد‬ ‫النفــط‪ ،‬والمولــدات الكهربائيــة‪ ،‬وجمــع النفايــات‪ ،‬والمــدارس‬ ‫الخاصــة والمستشــفيات‪ ،‬إلــخ‪ ،).‬و(‪ )2‬تحكــم الجماعــات‬ ‫الطائفيــة قبضتهــا علــى المواطنيــن بــأن تحــل محــل الدولــة‬ ‫فــي تقديــم هــذه الخدمــات‪ .‬ويجــب إصــاح هــذه الســمة‬ ‫األساســية لنظــام مــا قبــل األزمــة لكــي تبــدأ الماليــة العامــة‬ ‫والسياســة العامــة والقطــاع العــام فــي لبنــان بتقديــم‬ ‫الخدمــات لمواطنيــه‪.‬‬ ‫االنعكاسات على صعيد السياسات‬ ‫ ‪XV.‬ثمــة قيمــة مضافــة مهمــة لهــذا التقريــر وهــي ‬ ‫أنــه يعــرض تحليــات وتوصيــات علــى صعيــد السياســات‬ ‫فــي مختلــف القطاعــات االقتصاديــة فــي ظــل األزمــة مــن‬ ‫منظور االســتدامة على المدى الطويل‪ .‬ويشــير القســمان‬ ‫الكلــي والقطاعــي إلــى إجــراءات تدخليــة عاجلــة تتســق مــع‬ ‫ا التــي قــام البنــك الدولي بدراســتها‬ ‫اإلصالحــات األطــول أمــد ً‬ ‫ا علــى مــدى عقــود‪.‬‬ ‫وتحليلهــا والتشــديد عليهــا مــرار ً‬ ‫ا وتكــرار ً‬ ‫ ‪XVI.‬تُركــت أوجــه القصــور الكليــة والهيكليــة طويلــة األجل‬ ‫دون معالجــة طــوال فتــرة مــا بعــد الحــرب‪ ،‬علــى الرغــم مــن‬ ‫التحليــات المتعمقــة العديــدة وإمكانيــة الحصــول علــى ‬ ‫التمويــل‪ .‬وفــي سلســلة مــن مذكرات السياســات‪ ،‬حدد البنك‬ ‫الدولــي إصالحــات بالغــة األهميــة‪ ،‬ســواءً أكانــت إصالحــات‬ ‫علــى صعيــد االقتصــاد الكلي أو إصالحات هيكلية أو إصالحات‬ ‫قطاعيــة‪ ،‬وذلــك للمســاعدة فــي تخفيــف المخاطــر وتعزيــز‬ ‫النمــو المحتمــل‪ .‬وفــي شــهر ديســمبر‪/‬كانون األول ‪،2016‬‬ ‫تضمــن تقييم ـ ً‬ ‫ا‬ ‫ّ‬ ‫نشــر البنــك الدولــي «الكتــاب األبيــض» الــذي‬ ‫أعــده خبــراء البنــك بشــأن اإلصالحــات الالزمــة كــي تطبقهــا‬ ‫حكومــة جديــدة‪ ،‬وذلــك بعــد عاميــن ونصف العام من شــغور‬ ‫‪11‬‬ ‫منصــب رئيــس الدولــة والشــلل الــذي أصــاب مؤسســاتها‪.‬‬ ‫وتــم إعــداد هــذه القائمــة فــي وقــت الحــق وإدراجهــا بمــا‬ ‫يتناســب مــع التقييــم اإلســتراتيجي الــذي أجــراه البنــك‬ ‫الدولــي لخطــة االســتثمار الرأســمالي فــي لبنــان‪ ،12‬والتــي‬ ‫البنك الدولي (‪« )2016‬الدراسة التشخيصية المنهجية للبنان»‪.‬‬ ‫‪ 0‬‬ ‫‪1‬‬ ‫البنــك الدولــي (‪ ،)2016‬اإلصالحــات ذات األولويــة للحكومة اللبنانية‪،‬‬ ‫ ‬ ‫‪11‬‬ ‫ديســمبر‪/‬كانون األول ‪2016‬‬ ‫وســام حركــة وكريســتوس كوســتوبولوس (‪ ،)2018‬تقييــم إســتراتيجي‪ :‬خطــة لالســتثمار الرأســمالي فــي لبنــان‪ ،‬مجموعــة البنــك الدولــي‪،‬‬ ‫ ‬ ‫‪12‬‬ ‫واشــنطن العاصمــة‪.‬‬ ‫زجوم‬ ‫‪21‬‬ ‫اإلطار ‪ .1‬الركائز الرئيسية لمصفوفة اإلصالحات كما ُ‬ ‫ نشرت في تقرير المرصد االقتصادي للبنان‪ ،‬عدد خريف ‪2020‬‬ ‫حزمــة إصــاح تطويــر البنيــة التحتيــة‪ :‬تشــكل البنيــة‬ ‫‪.3‬‬ ‫ ‬ ‫تقــع إصالحــات الحوكمــة والمســاءلة‪ ،‬التــي تســعى إلــى ‬ ‫التحتيــة المتهالكــة فــي لبنــان عقبــة أمــام التنميــة‪.‬‬ ‫تدعيــم اإلدارة االقتصاديــة العامــة فــي لبنــان بطريقــة ‬ ‫ومــن بيــن الخدمــات األساســية الحيويــة المطلوبــة‪،‬‬ ‫أكثــر شــموال وخضوعــاً للمســاءلة‪ ،‬فــي صميــم أجنــدة‬ ‫ً‬ ‫يســجل لبنــان تأخــرا فــي القطاعــات التاليــة‪ )1( :‬الكهربــاء‪،‬‬ ‫اإلصــاح المقترحــة ؛ وبذلــك‪ ،‬تســعى هــذه األجنــدة إلــى ‬ ‫و(‪ )2‬االتصــاالت‪ ،‬و(‪ )3‬شــبكة الموانــئ‪ ،‬و(‪ )4‬النقــل‪ ،‬و(‪)5‬‬ ‫إعــادة بنــاء الثقــة‪ .‬وتتنــاول أجنــدة اإلصــاح الركائــز الخمس‬ ‫إمــدادات الميــاه والصــرف الصحــي‪ .‬ويحتــاج لبنــان إلــى ضخ‬ ‫التاليــة‪:‬‬ ‫اســتثمارات عاجلــة فــي هــذه القطاعــات التــي ال تســتطيع‬ ‫برنامــج لتحقيــق اســتقرار االقتصــاد الكلــي‪ :‬يحتــاج‬ ‫ ‬ ‫‪.1‬‬ ‫الدولــة تحمــل تكاليفهــا‪ ،‬والتــي ال يرغــب القطــاع الخــاص‬ ‫لبنــان إلــى وقــف ارتفــاع معــدالت التضخــم‪ ،‬وســرعة‬ ‫ا لمــا يحيــط بهــا من غمــوض وضعف‬ ‫فــي القيــام بهــا‪ ،‬نظــر ً‬ ‫انخفــاض قيمــة العملــة‪ ،‬وانتشــار أســعار الصــرف‬ ‫الحوكمــة التنظيميــة‪ .‬ومــن الضــروري إعطــاء األولويــة‬ ‫ا الســتدامة القــدرة‬ ‫المتعــددة‪ .‬وينبغــي لــه أن يضــع مســار ً‬ ‫لإلصالحــات الراميــة إلــى الحــد مــن عجــز الماليــة العامــة‬ ‫علــى تحمــل أعبــاء الديــن العــام علــى أســاس إعــادة‬ ‫وشــبه الماليــة العامــة فــي المؤسســات المملوكــة‬ ‫هيكلــة الديــون ووضــع إطــار مالــي مســتدام‪ ،‬وأن يعتمــد‬ ‫للدولــة‪ ،‬وتدعيــم اإلدارة والتنظيــم والحوكمــة‪ ،‬وتشــجيع‬ ‫حزمــة قويــة مــن تدابيــر الحمايــة االجتماعيــة‪ .‬ويتطلــب‬ ‫االســتثمارات الخاصــة‪.‬‬ ‫كل مــن التحديــات الماثلــة أمــام تصحيــح أوضــاع الماليــة‬ ‫حزمــة إصــاح الفــرص االقتصاديــة‪ :‬ســتوفر األزمــة‬ ‫‪.4‬‬ ‫ ‬ ‫العامــة وإعــادة هيكلــة القطــاع المصرفــي الضروريــة‬ ‫ا جديــدة تنبــع فــي المقــام األول‬ ‫االقتصاديــة فرصــ ً‬ ‫ا للمعاييــر‬ ‫اإلدراك الكامــل للخســائر الناتجــة وفقــ ً‬ ‫مــن تعديــل األســعار المحليــة والعملــة التــي انخفضــت‬ ‫المحاســبية الدوليــة‪ ،‬والتــي ســيتعين توزيعهــا وفقــ ً‬ ‫ا‬ ‫قيمتهــا‪ .‬ويجــب علــى الشــركات ومؤسســات التمويــل‬ ‫للتسلســل الهرمــي للمطالبــات وعلــى نحــو منصــف مــع‬ ‫تحديــد هــذه الفــرص واســتغاللها لخلــق فــرص عمــل‬ ‫مراعــاة المنافــع الســابقة التــي تحققــت‪.‬‬ ‫جديــدة‪ .‬وســيحتاج لبنــان إلــى تخفيــف العــبء الــذي يلقيــه‬ ‫حزمــة إصــاح الحوكمــة والمســاءلة‪ :‬يحتــاج‬ ‫‪.2‬‬ ‫ ‬ ‫علــى كاهــل مؤسســاته مــن خــال تبســيط العمليــات‬ ‫لبنــان إلــى معالجــة المصــادر الرئيســية للفســاد وعــدم‬ ‫واإلجــراءات‪ ،‬وخفــض تكاليــف التشــغيل‪ ،‬وإجــراء إصالحــات‬ ‫الكفــاءة فــي القطــاع العــام مــن أجــل تحقيــق وفــورات‬ ‫أساســية لتحقيــق تكافــؤ الفــرص‪ .‬وســيحتاج لبنــان أيضــ ً‬ ‫ا‬ ‫فــي الموازنــة‪ ،‬وتحســين األثــر اإلنمائــي‪ ،‬والبــدء فــي‬ ‫إلــى ضمــان قــدرة القطــاع المصرفــي علــى أداء وظيفتــه‬ ‫إعــادة بنــاء الثقــة بيــن الحكومــة والمواطنيــن‪ .‬وتهــدف‬ ‫فــي الوســاطة‪ .‬ويمكــن مســاندة هــذه اإلصالحــات بخطــة‬ ‫اإلصالحــات فــي إطــار هــذه الحزمــة إلــى إعــادة بنــاء‬ ‫للتنميــة االقتصاديــة تضمــن عمل األســواق بكفــاءة ودون‬ ‫الثقــة مــن خــال مــا يلــي‪ )1( :‬تعزيــز إدارة األمــوال‬ ‫عوائــق بســبب قيــود قطاعيــة محــددة تعــوق النمــو‪.‬‬ ‫العامــة مــن خــال إصالحــات الماليــة العامــة واالســتثمار‬ ‫حزمة إصالح تنمية رأس المال البشري‪ :‬يتمثل أحد‬ ‫ ‬ ‫‪.5‬‬ ‫وإدارة الديــون؛ (‪ )2‬إصــاح المشــتريات العامــة‪ ،‬وذلــك‬ ‫الجوانــب الرئيســية لالســتدامة ونمــو االقتصــاد اللبنانــي‬ ‫ألســباب منهــا زيــادة المشــاركة العادلــة للقطــاع الخــاص؛‬ ‫فــي اســتعادة إمكانــات رأس المــال البشــري‪ .‬وبالنســبة‬ ‫(‪ )3‬تحســين الشــفافية والشــمول مــن خــال االمتثــال‬ ‫للبنــان‪ ،‬يتمثــل جــزء مــن التحــدي فــي القيــود الماليــة‬ ‫لشــراكة الحكومــة المفتوحــة واالنضمــام إليهــا؛ (‪)4‬‬ ‫التــي تعــوق مســاندة الخدمــات العامــة الضروريــة‪ .‬أمــا‬ ‫تعزيــز المســاءلة مــن خــال مكافحــة الفســاد واإلصالحــات‬ ‫الجــزء اآلخــر مــن التحــدي فهــو كفــاءة القطــاع وإدارتــه‪.‬‬ ‫القضائيــة‪ .‬ويمكــن النظــر إلــى هــذه اإلصالحــات علــى‬ ‫ويجــب أن تتضمــن أي إســتراتيجية لتحقيــق االســتقرار‬ ‫أنهــا الركائــز األساســية إلصــاح القطــاع العــام المطلــوب‬ ‫والكفــاءة االقتصاديــة واســتعادة الثقــة اإلصالحــات التــي‬ ‫إلعــادة بنــاء الدولــة اللبنانيــة‪.‬‬ ‫تدعــم تنميــة رأس المــال البشــري‪ ،‬وفــي الوقــت نفســه‬ ‫خلــق حيــز مالــي لتخصيــص هــذا النــوع مــن المصروفــات‬ ‫لدعــم هــذه اإلصالحــات فــي إطــار مســتدام للموازنــة‪.‬‬ 22 LEBA NON PU B L IC FIN A N C E RE VIE W RÉSUMÉ I. La faillite macro-financière du Liban est quatrième facteur d’importance crucial, sort du d’une telle ampleur et d’une telle envergure cadre du présent Examen. Conjointement, les trois (relatives) qu’elle a probablement compromis facteurs indiqués précédemment détermineront l’économie politique du Liban de l’aprèsguerre les résultats de toute reconfiguration sociopolitico civile — c’est-à-dire, de la Deuxième République13. économique à venir. L’économie politique s’est caractérisée par une période florissante due aux importants flux de fonds III. Il nous faut ici formuler d’importantes mises qui ont financé la situation privilégiée d’un petit en garde au sujet de nos travaux. Premièrement, nombre d’acteurs bénéficiant de relations forgées si l’examen qui fait l’objet de ce rapport couvre entre les secteurs public et privé14 (y compris le les finances publiques, ce sont des considérations secteur financier) et dont l’influence politique a ayant trait à la balance des paiements qui ont motivé dominé l’administration publique. L’arrêt soudain la politique économique suivie durant la période et irrémédiable de ces flux en octobre 2019 semble considérée. Les opérations quasi budgétaires toutefois avoir provoqué la désintégration de cette effectuées par la banque centrale en raison des économie politique, dont témoigne l’effondrement pressions exercées sur la balance des paiements de la plupart des services d’utilité publique de base, ont eu des coûts considérables qui n’ont pas été la discorde débilitante caractérisant le processus pleinement mis en évidence, reconnus ou déclarés. politique et la démission ou la fuite d’une partie Le Liban a de surcroît continué d’accueillir le plus des élites sociales et économiques qui avaient grand nombre de réfugiés par habitant à l’échelle jusquelà profité de ce modèle. Les classes pauvres mondiale, par suite de l’éruption de la guerre en et moyennes, qui n’ont jamais tiré d’avantages de Syrie. L’Examen des finances publiques n’étudie pas ce modèle, assument toutefois l’essentiel de la ce bien public mondial, qui persiste depuis 2011, charge imposée par cette faillite. De fait, le Liban car il a fait l’objet d’une évaluation plus approfondie poursuit une transition sociopolitico économique dans le rapport intitulé The Fallout of War: The qui débouchera sur une nouvelle organisation dont Regional Consequences of the Conflict in Syria publié la forme est encore inconnue15. en 2020 par la Banque. II. L’Examen des finances publiques analyse l’évolution de ces dernières sur une longue période Section I : Politique financière durant de manière à exposer les racines profondes de la Deuxième République cette prodigalité financière et sa défaillance à IV. La Section I décrit la manière dont les terme. Il relie, à cette fin, trois facteurs cruciaux, finances publiques ont soutenu l’accaparement qui font l’objet de trois sections. Section I : Politique des ressources par les élites, en indiquant et, dans financière durant la Deuxième République  ; Section la mesure permise par les données disponibles, II : Restructuration macro-financière  ; Section en quantifiant les ressources détournées. Elle III : Absence de services publics. La géopolitique, 13 La crise économique libanaise comptera vraisemblablement parmi les dix, et peut-être les trois, plus graves crises observées dans le monde depuis le milieu du XIXe siècle. Le PIB nominal du Liban qui était de l’ordre de 55 milliards de dollars en 2018 a chuté à un niveau estimé à 22 milliards de dollars en 2021, tandis que le PIB par habitant en dollars a diminué d’environ 60 %. Une contraction aussi brutale se produit généralement dans le contexte d’un conflit ou d’une guerre. (Spring 2021 Lebanon Economic Monitor, LEM). 14 Collusion de représentants du secteur public et privé aux niveaux macro et microéconomiques dans le but de garantir la mainmise sur les ressources. 15 La Banque mondiale avait, dès le printemps 2016, annoncé la faillite du modèle d’activité de l’économie politique de la Deuxième, République, en déclarant qu’il s’agissait d’un modèle non viable sur le plan social et économique, qui donne lieu à l’exportation de capital humain en échange d’entrées de fonds finançant des activités de recherche de rentes qui ne font qu’aggraver les déséquilibres. (Spring 2016 LEM) R ésumé 23 recense les méthodes adoptées par les autorités b. L’existence de pertes non déclarées dans les libanaises pour s’écarter systématiquement de toute comptes de la Banque du Liban, inscrites de politique budgétaire harmonieuse et rigoureuse. manière symbolique dans la rubrique « Autres Ces divergences n’ont pas tenu à un manque de actifs » de son bilan ; ressources (les entrées de fonds sont demeurées c. Le report à une date ultérieure par les autorités importantes pendant plusieurs dizaines d’années) libanaises du paiement des montants exigibles ou à l’impossibilité d’agir autrement — les parties ou leur refus de les régler (arriérés), ce qui a prenantes locales et les partenaires internationaux eu pour effet de contraindre les détenteurs de n’ayant cessé de fournir des avertissements et ces créances à s’endetter ou à enregistrer une des conseils et de promouvoir la poursuite de perte ; réformes. De fait, la voie suivie cadrait pleinement d. Une création de monnaie excessive par la avec la volonté de servir les intérêts d’un système Banque du Liban ; d’économie politique enraciné dans le cadre duquel e. L’absence ou l’insuffisance marquée des les instruments budgétaires et économiques ont services publics de base financés par les servi à exploiter les institutions de l’État. versements des contribuables à l’État, puis le paiement de services de remplacement à des V. Les activités budgétaires mettent en relief prestataires privés (électricité, eau, etc.). les deux aspects systématiques les plus notables de cette économie politique, à savoir : VII. La situation décrite précédemment a provoqué des pertes considérables pour les i. L’accumulation de dettes pour renforcer la déposants après l’effondrement du système. confiance dans le système macrofinancier. Il était nécessaire de procéder de la sorte pour assurer la poursuite d’importantes entrées Section II : Restructuration de fonds dans un contexte caractérisé par macrofinancière un régime de taux de change fixe, dont la VIII. Des analyses ont été menées dans le but de surévaluation a favorisé une consommation recenser et de simuler les principales décisions excessive et a créé l’illusion de richesse. stratégiques concernant la restructuration du ii. La réalisation des avantages politiques et système macro-financier — essentiellement financiers dus à la fois aux coûts excessifs la dette publique, les finances publiques et les assumés par la population et aux privilèges secteurs monétaire et financier. La section II décrit conférés à un petit nombre de personnes. Cette les dernières modifications apportées à l’assistance situation a été permise par le recours à des technique proposée aux autorités libanaises par la circuits de distribution donnant lieu à l’octroi Banque dans le cadre de l’examen des finances de subventions et à la réalisation de bénéfices publiques au début de 2020 afin de les aider à dans le domaine des services publics, ce qui a formuler une stratégie de gestion de la crise. Il est encore conforté le système confessionnel de possible d’évaluer certaines des pertes encourues partage du pouvoir. par le système, qui sont en partie visibles dans les bilans des trois principales parties prenantes : VI. L’examen des finances publiques recense, l’État, la Banque du Liban et le secteur bancaire. sur la base des analyses effectuées, cinq aspects des comptes financiers durant la Deuxième IX. Nous avons procédé à une analyse de République : scénarios et à des simulations intégrées à des fins d’illustration, dans le but d’évaluer Les comptes publics officiels internes et a. l’impact des grandes décisions stratégiques. Les externes (comptes budgétaires, balance des principales conclusions qui peuvent en être tirées paiements, dettes, etc.) ; sont indiquées ci-après : 24 LEBA NON PU B L IC FIN A N C E RE VIE W • Le système macrofinancier du Liban s’est, base essentiels à la population. Nous exposons à terme, caractérisé par la création de les défaillances des principaux éléments du contrat liens étroits entre les secteurs budgétaire, social dont témoigne la qualité insuffisante (et monétaire et financier, qui a rendu ces de plus en plus réduite) des services publics de derniers tributaires les uns des autres, les base dans les secteurs suivants : eau, électricité, passifs enregistrés dans un secteur devenant transports, santé, éducation et protection sociale. des actifs pour un autre, et a relié des bilans d’un niveau excessif. XI. Cet examen des finances publiques fait • Les mesures de restructuration de la dette ressortir l’existence de graves carences au (intérieure et extérieure) ne permettront pas niveau du financement des services publics de de ramener le ratio de la dette au PIB à moins base, qui existaient bien avant la crise actuelle, de 100 % et de créer une marge de manœuvre mais que cette dernière a encore aggravées. Du budgétaire suffisante. Seule la croissance côté des recettes, le faible taux de recouvrement pourra assurer la viabilité de la dette. a provoqué une charge budgétaire intenable et a • Les mesures de restructuration de la dette eu des répercussions négatives sur l’alimentation engendreront de fortes pertes pour la Banque en électricité et en eau de la population. Les du Liban et les banques commerciales. analyses sectorielles confirment l’inefficacité des • L’unification du taux de change aura un dépenses publiques qui s’explique par les tensions important effet de contraction sur le bilan de macrobudgétaires analysées dans le présent la Banque du Liban et sur ceux des banques rapport. La faiblesse des dépenses d’équipement commerciales. s’est traduite, notamment, par l’absence • Il est essentiel que les réformes du secteur d’investissements dans de nouvelles capacités financier permettent de considérablement de génération d’électricité et dans l’entretien du améliorer la position des réserves réseau. Il n’a, de ce fait, pas été possible à Électricité internationales nettes de la Banque du Liban du Liban de répondre à la demande d’électricité, ce qui, selon les estimations, est actuellement qui a favorisé le recours aux solutions de rechange fortement négative. coûteuses et très polluantes, fournies (de manière • Les efforts de renforcement de la transparence très lucrative) par le secteur privé. et de la responsabilisation dans le domaine des finances publiques doivent impérativement XII. Les chocs qui se sont succédés au Liban améliorer la divulgation des informations depuis 2011 ont eu des répercussions aussi bien générales de la banque centrale, notamment la sur l’offre que sur la demande dans les secteurs position des réserves internationales nettes, et essentiels. L’effondrement de la monnaie nationale imposer l’utilisation de pratiques comptables et la pénurie de devises qui s’en est suivie à l’échelle agréés au plan international. De fait, les bilans de l’économie ont fortement accru les coûts dans de l’État, de la Banque du Liban et du système les différents secteurs. Ces derniers ont également bancaire n’auraient jamais atteint les niveaux souffert de l’insuffisance des biens et services très élevés enregistrés juste avant la crise disponibles, qui a provoqué une dégradation de la de 2019 si les acteurs économiques avaient qualité des services assurés. Le taux d’inflation, qui eu la possibilité de constater que les réserves était très élevé, a entraîné de fortes diminutions du internationales nettes étaient devenues pouvoir d’achat des rémunérations des employés du négatives longtemps avant la crise. secteur public (entre autres). La fuite des cerveaux du pays prive des secteurs essentiels de milliers de travailleurs qualifiés. Les ménages sont en butte Section III : Absence de services à une inflation encore plus rapide parce que les publics dépenses en devises ne sont plus subventionnées. Ils font face à la situation en recherchant des X. La section III analyse les répercussions des solutions de remplacement meilleur marché dans politiques macros et structurelles du Liban sur la mesure du possible (par exemple, en transférant l’offre (extrêmement déficiente) de services de dans le système public leurs enfants jusquelà R ésumé 25 scolarisés dans le privé), ou simplement en ayant de santé (en particulier pharmaceutiques), moins recours aux services (par exemple, en d’affecter plus efficacement les intrants réduisant l’usage d’électricité produite par des (enseignants et équipements) aux écoles générateurs ou leur consommation d’eau ou encore publiques et d’adopter des politiques visant en repoussant des consultations médicales). à réduire les taux de redoublement qui sont actuellement élevés. XIII. Les crises qui se sont mutuellement renforcées ont fait ressortir la fragilité du XIV. Par ailleurs, comme l’explique le diagnostic modèle de prestation de services libanais qui, systématique du Liban (SCD, 2016),16 la dégradation pour permettre l’accaparement par les élites des des services de l’État est un résultat souhaité/ ressources de l’État pour leur propre bénéfice, a délibéré des efforts menés pour consolider les exigé la dégradation des services publics. Bien privilèges tirés des liens tissés entre les secteurs qu’il ne soit possible de remédier à la précarité public et privé par les grands acteurs de l’économie de la situation qu’en poursuivant un programme à libanaise après la guerre civile. Pour permettre moyen et long terme, le peuple libanais a besoin aux élites d’accaparer les ressources à leurs d’une aide immédiate. Cette section présente une propres fins, il a fallu dégrader l’offre de services série de mesures et de politiques particulières qui publics de manière à permettre : 1) l’attribution au ont pour objet de répondre aux besoins pressants secteur privé de contrats et de marchés lucratifs de la population tout en mettant en place des pour des montants en dollars artificiellement réformes à moyen et long termes conçues de gonflés (notamment pour l’importation de pétrole, manière à améliorer la performance, la viabilité l’obtention de générateurs, la collecte des déchets, et la résilience des services publics. Les mesures mais aussi pour l’enseignement privé, les hôpitaux, proposées visent principalement à atteindre les etc.), et 2) le resserrement de l’emprise des groupes objectifs suivants : confessionnels qui se sont substitués à l’État pour assurer ces services. Il importe de remettre à • Assurer la viabilité des services de base et niveau cette composante fondamentale du régime veiller à ce qu’ils soient d’un coût abordable d’avant la crise pour que les finances publiques, en procédant à des investissements adaptés, la politique publique et le secteur public puissent en prenant des mesures pour améliorer le commencer à réellement servir les citoyens. recouvrement des coûts et en améliorant la gouvernance, notamment dans les secteurs de l’eau, de l’électricité et des transports. Répercussions sur les politiques • Accroître l’équité des dépenses publiques, publiques notamment en réduisant les dépenses de XV. L’examen des finances publiques a une santé à la charge du patient, en réaménageant importante valeur ajoutée parce qu’il présente des le financement de l’éducation, en donnant analyses et des recommandations stratégiques la priorité à des interventions de protection à l’échelle d’une économie en situation de crise, sociale progressives, ciblées sur les groupes en vue de créer des conditions viables à long de population pauvres et vulnérables, et en terme. Les sections consacrées à la situation remédiant aux problèmes structurels du macro-économique et aux secteurs proposent régime de pension public pour assurer sa des interventions d’urgence compatibles avec la viabilité et son équité. poursuite des réformes à plus long terme examinées, • Améliorer l’efficacité des dépenses publiques analysées et recommandées à maintes reprises par dans tous les secteurs. Il s’agit notamment la Banque depuis des dizaines d’années. de rééquilibrer les opérations du système de santé au profit des soins préventifs et XVI. Il n’a pas été remédié aux défaillances primaires, de maîtriser les dépenses globales macro et structurelles existant de longue date 16 Banque mondiale (2016) « Lebanon Systematic Country Diagnostic ». 26 LEBA NON PU B L IC FIN A N C E RE VIE W durant la période de l’aprèsguerre, malgré les été ultérieurement complétée et adaptée dans nombreuses analyses approfondies qui leur ont l’évaluation stratégique de la Banque mondiale été consacrées et la disponibilité de financements. du plan d’investissement en capital établi pour le La Banque mondiale a recensé, dans sa série Liban18 qui a été présenté lors de la Conférence Policy notes, des réformes macro, structurelles économique pour le développement, par les et sectorielles pouvant contribuer de manière réformes et avec les entreprises (CEDRE), fondamentale à atténuer les risques et à accélérer organisée à Paris en avril 2018. Enfin, la Banque la croissance potentielle. En décembre 2016, la a présenté dans le numéro de l’automne 2020 Banque mondiale a publié un livre blanc présentant du Lebanon Economic Monitor (LEM) (Rapport de les évaluations des membres de ses services suivi de la situatin économique du Liban), intitulé sur les réformes que devrait adopter et mettre The Deliberate Depression, un programme de en œuvre une nouvelle équipe gouvernementale, réformes visant à renforcer la gestion économique après deux années et demie de vide à la présidence d’ensemble au Liban d’une manière plus inclusive et de paralysie institutionnelle17. Cette liste a et plus responsable (voir l’Encadré 1). 17 Banque mondiale (2016), Priority Reforms for the Government of Lebanon, décembre 2016 18 Harake, Wissam et Christos Kostopoulos (2018), Strategic Assessment: A Capital Investment Plan for Lebanon, Groupe de la Banque mondiale, Washington DC. R ésumé 27 Encadré 1. Principaux piliers de la matrice des réformes publiée dans le numéro du LEM de l’automne 2020. Le programme proposé se fonde essentiellement sur libanaises fait obstacle au développement. Le Liban des réformes de la gouvernance et de la responsabilité n’assure pas suffisamment la fourniture de services ayant pour objet de renforcer la gestion économique essentiels de base dans les domaines : 1) de l’électricité, d’ensemble au Liban d’une manière plus inclusive 2) des télécommunications, 3) du système portuaire, et plus responsable ; il vise, ce faisant, à rétablir la 4) des transports et 5) de l’approvisionnement en confiance. Le programme de réformes comporte les eau et de l’assainissement. Il lui faut impérativement cinq piliers suivants : réaliser des investissements dans ces secteurs, que le secteur public n’a pas les moyens de financer et que 1. Programme de réformes pour la stabilisation le secteur privé est peu désireux d’effectuer en raison macro-économique : le Liban doit maîtriser une de l’opacité et des carences du cadre réglementaire. inflation soutenue, la rapide dépréciation de sa monnaie Il importera de donner la priorité aux réformes visant et la prolifération de taux de change multiples. Il doit à limiter les déficits budgétaires et quasi budgétaires suivre un plan basé sur la restructuration de la dette des entreprises d’État, à renforcer la gestion, la et l’établissement d’un cadre budgétaire durable pour réglementation et la gouvernance, et à encourager promouvoir la viabilité de la dette publique, et aussi l’investissement privé. adopter des mesures de protection sociale. Il sera nécessaire, pour faire face aux difficultés posées par 4. Programme de réformes des perspectives l’ajustement budgétaire et réorganiser comme il se économiques : la crise économique est source de doit le secteur bancaire, de comptabiliser les pertes nouvelles opportunités dues, essentiellement, aux en appliquant les normes comptables internationales, ajustements des prix intérieurs et à la dépréciation de la et de les assumer de manière équitable en respectant monnaie. Les entreprises et les institutions financières la hiérarchie des créances, compte tenu des bénéfices doivent recenser ces dernières et les exploiter pour antérieurement réalisés. créer de nouveaux emplois. Le Liban devra alléger le fardeau qu’il impose à ses entreprises en simplifiant 2. Programme de réformes de la gouvernance et de les processus et les procédures, en réduisant les coûts la responsabilité : le Liban doit s’attaquer aux sources de fonctionnement et en procédant à des réformes primaires de la corruption et de l’inefficacité dans le fondamentales assurant des conditions équitables. secteur public pour pouvoir réaliser des économies Le Liban devra également veiller à ce que le secteur budgétaires, améliorer l’impact des mesures sur le bancaire puisse assumer sa fonction d’intermédiation. développement et commencer à rétablir la confiance Il sera possible d’appuyer ces réformes au moyen d’un entre les autorités publiques et les citoyens. Les plan de développement économique garantissant un mesures incluses dans ce programme visent à rétablir bon fonctionnement des marchés non entravé par des la confiance : 1) en renforçant la gestion des ressources obstacles sectoriels à la croissance. publiques grâce à la poursuite de réformes des finances publiques, des investissements et de la gestion de la 5. Programme de réformes de la valorisation dette ; 2) en réaménageant le système de passation de du capital humain  : la viabilité et la croissance de marchés publics dans le but, notamment, d’accroître l’économie libanaise sont largement tributaires du une participation équitable du secteur privé ; 3) en recouvrement du potentiel de son capital humain. améliorant la transparence et l’inclusion grâce à Pour le Liban, le problème tient en partie à la charge l’adhésion au Open Government Partnership et au respect financière imposée par le soutien aux services publics de ses directives ; et 4) en accroissant la responsabilité nécessaires, mais est aussi lié à l’efficacité de la grâce à la poursuite de mesures de lutte contre la gestion des secteurs. Toute stratégie de stabilisation, corruption et de réformes du système judiciaire. Ces d’efficience économique et de rétablissement de différentes mesures peuvent être considérées comme la confiance doit prévoir la poursuite des réformes les éléments constitutifs d’une réforme du secteur nécessaires à la valorisation du capital humain ainsi public nécessaire à la reconstruction de l’État libanais. que la création de la marge de manœuvre budgétaire requise pour consacrer des ressources à la poursuite 3. Programme de réformes pour le développement de ces réformes en les inscrivant dans un cadre des infrastructures : l’état déplorable des infrastructures budgétaire durable. 28 LEBA NON PU B L IC FIN A N C E RE VIE W I. FISCAL POLICY IN THE SECOND REPUBLIC F iscal P olicy in the S econd R epublic 29 C hapter 1 . FISCAL LANDSCAPE A. EXAMINATION PERIOD 1. The period under examination spans 1993- 2. When compared to GDP (Figure 2), the overall 2019, ending with the eruption of the financial and deficit widened from 9 percent in 2013 to 26 percent economic crisis in Q4-2019.19 Henceforth, we shall in 2000, before gradually improving through 2011 refer to that time as simply the period. Over the where it reached 6 percent. From 2012 it once period, the overall fiscal balance registered an un- again widened until reaching 11 percent in 2019. interrupted deficit that expanded, in nominal terms, Never during this whole post-civil war period has by 8.1 percent, on a Compound Annual Growth Rate Lebanon’s budget ever been in balance or surplus. basis (CAGR) (Figure 1).20 The average overall deficit during the period was 12.2 percent of GDP. Figure 1. Lebanon’s fiscal balance was consistenly and Figure 2. … with the fiscal deficit averaging 12.2 percent significantly negative since the end of the civil war … of GDP over the period Sources: Ministry of Finance and CAS. Sources: Ministry of Finance and CAS. 19 Where data is available, sources are duly cited. Where data is missing and can be estimated, the methodology is clearly explained. Where data is missing and cannot be estimated, or is not estimated under the PFR, a place holder is indicated for possible future work. 20 The Compound Annual Growth Rate from observation t = 0 to t = n is such that at=n and at=0 are values of at time and respectively. 30 LEBA NON PU B L IC FIN A N C E RE VIE W B. REVENUES 3. On the revenue side, budget and treasury receipts. For instance, in 1997, the respective receipts21 are composed of three components: shares were: 67 percent, 14 percent, and 19 tax revenues, non-tax revenues (detailed and percent, while in 2019, they became 75, 20, analyzed separately below), and treasury receipts. and 5 percent, respectively. We note two important trends over the period: c. This also applies to the percentage share points of GDP (Figure 4), where tax revenues a. Total revenues CAGR was quite solid at 8.8 nearly doubled from 9 percent in 1993, to 16 percent, marking a considerable capacity to percent in 2004, and remained practically at levy and collect revenues (Figure 3). the same level until 2019. b. Tax revenues increasingly dominated total revenues over non-tax revenues and treasury Figure 3. A post civil war effort succeeded in considerably enhancing the capacity to levy and collect revenues … Source: Ministry of Finance. Figure 4. … with tax revenues nearly doubling from 9 percent in 1993 to 16 percent in 2004. Sources: Ministry of Finance and CAS. 21 The terms budget and treasury receipts/expenditures are adopted as per formal public finance statements. Details and implications of such usage are explained in the quasi-fiscal chapter. Combined, budget and treasury receipts or expenditures give an aggregate cash-basis account of public revenues and expenses. F iscal P olicy in the S econd R epublic 31 C. TAX REVENUES 4. Key inflection points of tax revenues (and 31 percent in 2019 (fluctuating between 5 and associated policy undertakings) are analyzed 7 percent of GDP). Meanwhile, the share of in paragraph ‎ C. The evolution of tax revenues total tax revenues for taxes on international (Figure 5)22 reveals three notable features: trade concurrently dropped from 60 percent in 2000 to 14 percent in 2019 (or from 7 to a. A robust growth of 7.9 percent CAGR (over 2 percent of GDP). The introduction of the the 2000-2019 period), further confirming Value Added Tax (VAT), effective as of 2002, the observation made earlier regarding the partially substituted for taxes on international capacity of the state to levy taxes, noting that trade (mainly customs), which substantially this period was dominated by a fixed exchange declined as a result of Lebanon entering into rate regime. trade agreements. b. A considerable growth in the shares of total c. A relatively stable share (on the low side) for tax revenues (over the 2000-2019 period) taxes on property, hovering from 7 percent of for (i) taxes on income, profits and capital tax revenues in 2000 to 12 percent in 2019, and gains, which rose from 17 percent in 2000 to constituting merely 1 to 2 percent of GDP. This 43 percent in 2019 (or from 2 to 7 percent of was the case despite massive investments GDP); and (ii) domestic taxes on goods and and price appreciation in property markets services, which increased from 7 percent to over the period, Figure 6. Figure 5. The total tax revenues shares for taxes on income and VAT grew at the expense … Source: Ministry of Finance. Figure 6. … a declining share for taxes on international trade Sources: Ministry of Finance and CAS. 22 The detailed breakdown of tax revenues is not available from the Ministry of Finance (MoF) for the years 1993-1999 and it is therefore detailed here along two categories only: direct and indirect taxes. 32 LEBA NON PU B L IC FIN A N C E RE VIE W D. NON-TAX REVENUES 5. Non-tax revenues (Figure 7 and Figure 8) show: b. Several departure points from the overall trend, notably in 2006, 2010 and 2014, in both a. A smaller overall growth pattern with a CAGR levels and as a share of GDP; these will be (over the 2000-2019 period) of 5.3 percent and subject to a subsequent closer examination in the percentage of GDP fluctuating between 2.5 this PER. and 6.7 percent. Figure 7. Non-tax revenues also grew over the period … Source: Ministry of Finance. Figure 8. … with exceptions in 2006, 2010, and 2014 Sources: Ministry of Finance and CAS. F iscal P olicy in the S econd R epublic 33 E. EXPENDITURES 6. Over the period, the evolution of total 25 percent of GDP in 2019. A more detailed expenditures (Figure 9 and Figure 10) illustrate look at current expenditures is presented in the the following: following paragraph. Treasury expenditures, predominantly consisting of transfers to a. Nominally, a robust growth at 8.5 percent CAGR, EdL until 2008, and later registered under compared to a mild decrease in percentage of “various transfers” are further elaborated in GDP. Subsection F. b. Current expenditures’ growth occurred at 8.2 c. Substantially diminishing capital expenditures, percent CAGR. They peaked at 34 percent of especially as a share of GDP from a peak of 8 GDP in 1997, declined to 21 percent in 2013- percent of GDP in 1994 to 1 percent of GDP in 2015 and then started increasing again to reach 2019; these are examined in paragraph ‎ G. Figure 9. Expenditures underwent a robust nominal growth … Sources: Ministry of Finance. Figure 10. … compared to a mild decrease in percentage of GDP Sources: Ministry of Finance and CAS. 34 LEBA NON PU B L IC FIN A N C E RE VIE W F. CURRENT EXPENDITURES 7. Figure 11 and Figure 12 show a pattern of “interest payments.” These categories will be two dominating categories: “personnel cost” and furthered examined individually. Figure 11. Expenditure categories of “personnel cost” and “interest payments” dominate in both nominal terms … Source: Ministry of Finance. Figure 12. … and as a percent of GDP Sources: Ministry of Finance and CAS. G. PUBLIC DEBT 8. Public Debt, as Figure 13 and Figure 14 show, 9. The trajectory of FX debt suggests a steady manifested a rapid evolution at a CAGR of 12.6 increase in authorities’ dependence on it for percent over the period. As a ratio of GDP, gross financing until mid-2000’s, after which the share public debt reached 183 percent in 2006, falling to of the FX debt to total debt declined somewhat, 131 percent in 2012, before growing again to reach remaining at comparable levels until 2018 before 171 percent in 2019. increasing suddenly in 2019. F iscal P olicy in the S econd R epublic 35 10. Between 1993 and 1997, FX debt consisted 11. After 2006, the sharp increase in oil chiefly of development/reconstruction loans. prices constituted an external transitory shock Starting in 1998, authorities’ justification for that sharply accelerated capital inflows, and issuing Eurobonds was to substitute for the more subsequently, GDP growth, lowering the debt-to- expensive LBP debt. As illustrated in Figure 13, GDP ratio. The resulting excess in liquidity was there was instead a parallel increase in both LBP reflected in the evolution of public debt; a further and FX debts until 2001, and then after Paris II analysis is provided below. conference. Figure 13. Gross public debt manifested a rapid evolution at a CAGR of 12.6 percent over the period … Sources: Ministry of Finance. Figure 14. … peaking at 183 percent of GDP in 2006, falling to 131 percent in 2012, before rising to 171 percent in 2019 Sources: Ministry of Finance and CAS. 36 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 2 . OBSERVATIONS & ANALYSES A. PRIMARY DEFICIT/SURPLUS 12. From 1993 till 2019, the Government of above, what are key elements to examine to gain Lebanon accumulated a Primary Surplus of 22 a better understanding of the underlying deeper trillion LBP at the level of budgetary revenues and dynamics? Simply put, how does a country with a expenditures (Figure 15); the cumulative primary cumulative primary surplus over 26 years be the surplus, when “treasury” operations are included, theatre of such a monumental collapse as the one comes to around 5 trillion LBP (Figure 16). Yet, the that struck in Q4-2019? overall fiscal balance manifested a chronic deficit that accumulates to some 123 trillion LBP, while 14. In this Chapter, key analyses are proposed the debt-to-GDP ratio grew from 48 percent to a to address the main intricacies of the fiscal staggering 171 percent over the same period. landscape, and to suggest a framework that depicts the underlying policy levers. 13. The question therefore becomes: with the capacity to levy and collect revenues as shown Figure 15. The large overall fiscal deficit was despite an accumulation of a primary surplus … Sources: Ministry of Finance. F iscal P olicy in the S econd R epublic 37 Figure 16. … when excluding and including “Treasury” operations Sources: Ministry of Finance and CAS. B. FOUR PHASES OF PRIMARY BALANCE 15. We examine the primary balance evolution of capital inflows driven by an improved using a phase-based approach for the underlying sentiment in the aftermath of the Paris II fiscal policy directions. Four phases are inferred/ Conference, surging oil prices, and positive considered (Figure 17). spillovers of the global financial crisis of 2008. The latter involved capital fleeing from a. Phase 1, 1993-1997: A post-civil war phase global financial institutions to Lebanon’s marked with the optimism of reconstruction, bank-deposit regime, which offered attractive reflected by a clearly negative primary returns and was perceived as a safe haven. balance. This included increased spending Another outlier in 2006 corresponds to as the for recruitment of personnel to the civil and war with Israel as a well as to paying a judicial security bodies and capital expenditures, settlement to the mobile companies that had incurring debt. a BOT (Build, Operate, Transfer) arrangement b. Phase 2, 1998-2002: This phase saw the with the GoL. beginning of an undeclared/informal austerity d. Phase 4, 2012-2019: A pre-crisis phase era, notably with a steep reduction in capital of turmoil that was heavily impacted by expenditures and increases in taxation, the eruption of war in Syria, the massive narrowing the primary deficit to almost influx of Syrian refugees (making Lebanon balance. The exception is a short episode of a the host for the largest per-capita refugee steep deficit in 2000, which can be considered population in the world), the economic fallout as an outlier in this phase. This was driven (closure of trade routes, oil price sharp by payments of accumulated arrears from fluctuations, losses in tourism) and political/ past years and other fiscal bookkeeping security unrest. Hence, the primary balance undertakings. reflected these stresses falling prey to the c. Phase 3, 2003-2011: A respite phase marked many severe repercussions. This phase also by a clear primary surplus and the amassing witnessed (i) a heavy expansion of “financial 38 LEBA NON PU B L IC FIN A N C E RE VIE W engineering” operations by the central bank administration, State Owned Enterprises, (Banque du Liban, BdL) in an attempt to and military & security agencies, in addition prevent/delay a sudden stop scenario; and (ii) to wages and taxation increases, specifically proliferation of political financial spending via leading up to the 2018 elections. a surge in partisan recruitment into the public Figure 17. Primary balance in relation to the four phases Source: Ministry of Finance and CAS C. TAXES OVER THE PERIOD 16. Analyzing the revenue side more closely c. Phase 3: the introduction of the VAT and the reveals the following inflection points over the re-introduction of taxes on interest income in four phases that illustrate the afore-mentioned 2002 allowed tax revenues to increase again capacity to levy and collect taxes:23 to reach 16 percent of GDP by 2004, dropping again over 2005-2006 from another economic a. Phase 1: despite an annulment of the tax on slowdown and the 2006 war with Israel. The interest income and a reduction of the income increase observed between 2007 and 2010 (3 tax (1994/1995), tax revenues increased by percent of GDP) was due to accelerated growth. 1 percentage point (pp) of GDP in both 1994 This growth was fueled by reconstruction and 1995, driven by the post war growth in efforts after the 2006 war, followed by massive economic activity, especially characterized by capital inflows escaping the global financial a massive influx of capital. crisis and due to favorable higher oil prices. b. Phase 2: in the budget of 1999, taxes on income This particular period constituted a missed and consumption were increased leading to a opportunity for the Government to undertake 1 pp of GDP rise in each of direct and indirect taxation measures to benefit from very taxes. Tax revenues subsequently underwent favorable external factors (especially capital a sharp reduction in 2000 and 2001 (close to 2 in-flight and oil prices’ appreciation). pp of GDP) due to a slowdown of the economy d. Phase 4: from 2011 till 2016, tax revenues (0 and 1 percent growths in GDP, respectively). stagnated in absolute value and decreased by 3.5 pp of GDP indicating that growth was 23 Refer to the Annex for a brief description of Tax changes over the period. F iscal P olicy in the S econd R epublic 39 driven by sectors little impacted by taxation was in 2017, where taxes on interest income (notably real estate, also fueled by subsidies and VAT were raised to 7 and 11 percent, on housing loans). The most recent attempt at respectively, which managed to slightly introducing fiscal measures to boost revenues increase tax revenues (by 1 pp of GDP). D. EXPENDITURES’ DRIVERS 17. Four components constitute the majority of Advances, and for the rest of the period under expenditures and bear important dynamics that Various Transfers. reflect key policymaking and political efforts c. Interest payments: a key lever of quasi fiscal that drove Lebanon’s fiscal position. As per the undertakings, as we shall examine in greater terminology used in published GoL fiscal accounts, detail in the following chapter. these categories are: d. Capital expenditures: the prominent parameter that distinguishes Phase 1 from subsequent a. Personnel cost: corresponding data include phases. Figure 18 shows the four expenditure wages and benefits of public servants. items as percentage of GDP over the period. b. GoL transfers to EdL: until 2008, transfers to EdL were made under the rubric Treasury Figure 18. The four main expenditure items over the period. Source: BdL and WB Staff Calculations E. PERSONNEL COSTS 18. Over the period, contrasting expenditures spending under this category served as an elite under this category against the official and capture instrument for partisan politics and social growing GDP shows a profound and indicative manipulation rather than one for boosting human divergence (Figure 19). This is further reflected capital and public administration. When compared in Figure 20 showing personnel expenditures as with a few countries with similar socio-economic percentage of GDP decreasing from 12 percent profile, personnel costs in Lebanon shows a further to close to 8 percent between 2000 and 2011. stark contrast, as explained in Subsection K of this Subject to Lebanon’s governance deficiencies, Chapter. 40 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 19. In nominal terms, personnel expenditures rose steadily … Sources: Ministry of Finance. Figure 20. … however, they declined as a percentage of GDP, rising again toward the end of the period. Sources: Ministry of Finance and CAS. 19. In phases 1 and 2, personnel costs as a correction measures took place after four years percentage of GDP were stable while nominal of social unrest. Specifically, an advance payment GDP doubled. This included a one-off wage was passed in 2012 followed by a law in 2017 that correction measure in 1998 to catch up with provided the rest of the wage increase. This wage lost purchasing power. In phase 3, the share of increase was coupled with a large increase in personnel expenditures to GDP fell from 12 to 9 recruitment in both civil service and in the military. percent as a consequence of the austerity-respite dynamics. In the beginning of phase 4, one-off wage F iscal P olicy in the S econd R epublic 41 20. The share of public employment is estimated external factors and size, albeit with some varying at some 14 percent,24 a rate substantially lower contexts. The personnel costs were consistently than the lowest share assessed in LIC to MIC at lower levels in Lebanon, in all the period (from 45 to 22 percent, respectively).25 The under examination, albeit with an elevated rate comparative consideration used in Lebanon’s case of informality, assessed at some 55 percentage is provided for in paragraph 38 below and Figure of total employment.26 Hence, the costs of public 31, whereby the personnel costs (as percentage employment were not excessive in GDP percentage of GDP) were analyzed in comparison with Jordan, terms, but certainly in terms of efficiency and Cyprus, and Tunisia—countries with  comparable political cooptation. macroeconomic profile, exposure to similar F. ELECTRICITY TRANSFERS 21. Electricity tariffs were last adjusted in decisions adopted after 1997. The lack of nominal terms in 1997 based on the assumption investments resulted in reduction of generation of a price of oil at around US$20 per barrel—in capacity and hence a larger dependence on real terms these tariffs have plunged. Whereas oil private sources, thus precluding any political prices took off toward end of the 1990s, electricity support for tariff increases. tariffs remained unchanged. This no-decision b. Importantly, rationing power production by stance lasted for 25 years thus far and can hardly BdL also served to reduce the impact on the be explained in the context of a pure public finance FX reserves of the Central Bank, pushing approach. In addition to setting a tariff significantly substitution of electricity consumption to below cost recovery, non-payments of electricity private generators’ suppliers that, in turn, bills by consumers are widespread. These drew on commercial banks’ financing using contribute, to a large extent, to EdL’s large and banks’ own foreign assets. This is despite the chronic losses (dating back to the early 1980s) and fact that the FX needed by private generators the need for similarly sized and frequent budget would be greater on a per kilowatt basis, due transfers to EdL. to the more expensive (and more polluting fuel used (diesel versus fuel oil), as well as other 22. More generally, a political economy inefficiencies. Hence, power rationing by EdL equilibrium in the electricity sector was cemented cost the economy at large more FX. over the period. This explains lack of progress on c. After 2011, BdL commenced more aggressive addressing long-standing structural bottlenecks operations to collect commercial banks’ in the electricity sector, despite readily available foreign assets as part of its gross reserves. technical and financial means. Important economic This substitutability factor is clearly in effect factors that drove this equilibrium include: from 2011 as foreign assets of BdL expanded at the expense of commercial banks’ foreign a. Failure to allocate necessary investment asset position (Figure 25). The substitution financing to increase production capacity in itself, aside from its economic burden on line with rising demand as a result of austerity consumers, became increasingly untenable. 24 Islam, Asif M., Dalal Moosa, and Federica Saliola. 2022. Jobs Undone: Reshaping the Role of Governments toward Markets and Workers in the Middle East and North Africa. Washington, DC: World Bank. doi:10.1596/978-1-4648-1735-9. License: Creative Commons Attribution CC BY 3.0 IGO. 25 Merotto, Dino, Michael Weber, and Reyes Aterido. 2018. “Pathways to Better Jobs in IDA Countries: Findings from Jobs Diagnostics.” World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO. 26 “Labour Force and Household Living Conditions Survey 2018-2019 Lebanon, Beirut, 2020”. Issued by the Lebanese Republic Central Administration of Statistics (CAS); International Labour Organization (ILO); and the European Union (EU). 42 LEBA NON PU B L IC FIN A N C E RE VIE W 23. More specifically, in fiscal reporting, high correlation between oil prices and these electricity transfers depict the fuel subsidy in transfers, as depicted in Figure 21.27 state-owned power generation, and hence, the Figure 21. A high correlation between oil prices and electricity transfers Source: Ministry of Finance, World Bank G. CAPITAL EXPENDITURES 24. Investment expenditures practically 25. Capital expenditures tightening reflects collapsed after Phase I, Lebanon’s reconstruction. the need for less expansionary fiscal policy and Figure 22 illustrates the steep dis-investment subsequently, at signs of market stress arose, as of 1997.28 Shortly thereafter, it reached levels austerity measures. The ensuing deterioration of that fall below minimal maintenance and service- public services compounded the needs, and costs, continuity.29 let alone levels found in Low-Income, of public service substitution (with private services) Developing Countries (LIDCs) or even in fragile and subsequent financing needs. states.30 As a result, the Government’s capital stock declined steadily over the period (Figure 23). 27 No phases were shown in this graph as the main driver in the electricity subsidy is an external factor, namely the price of oil. 28 Reported investment expenditures are composed of two components: first, as reported by MoF, and second, the capital expenditures undertaken by the Council of Development and Reconstruction (CDR). The latter was financed by foreign debt that the CDR contracted directly but that was not reported in public accounts/debts. 29 “The sole maintenance of the public capital stock (not considering natural resources), including a complete overhaul of the power sector would broadly cost 2.3 percent of GDP every year (over the period 2005-9); and the Ministry of Economy and Trade concludes that the depreciation of public infrastructures represented 2.4 percent of GDP in 2002.” (Public Investment Program, CDR, 2006, page 42). 30 Gurara, Daniel, Vladimir Klyuev, Nkunde Mwase, Andrea Presbitero, Xin Cindy Xu, and Geoffrey Bannister. 2017. Trends and Challenges in Infrastructure Investment in Low-Income Developing Countries, IMF WP/17/233, November 2017. F iscal P olicy in the S econd R epublic 43 Figure 22. As a result of a steep dis-investment since end-Phase 1, Sources: Ministry of Finance and CAS. Figure 23. Government’s capital stock declined steadily over the remaining part of the period Sources: Ministry of Finance and CAS. H. INTEREST EXPENDITURES 26. With the issuance of Eurobonds in 1998, 27. The capacity to incur such indebtedness over the spread between nominal interest rates31 and a prolonged period of a fixed peg regime, through LIBOR started to decrease in spite of continuously recycling of foreign assets internally between the increasing indebtedness levels. The spread BdL and commercial banks—as will be discussed narrowed to its lowest level in the middle of phase at length in the following chapter—allowed 3, as capital inflows surged, before widening again excessive consumption/subsidy. This, however, to a somewhat stable trend thereafter (Figure 24). came at the expense of increased risk to sudden stop scenarios, where the arrest of capital inflows exposes the whole system to a perilous threat of exhausting itself, as the crisis of Q4-2019 shows. 31 The nominal interest rate on gross public debt (in LBP and FX) was computed by dividing total interest payments (in LBP and FX) in year n, as reported by the ministry of finance, by the average of the gross public debt in years n and n-1. 44 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 24. The spread between nominal interest rates and LIBOR started to decrease in spite of continuously increasing indebtedness levels. Source: Ministry of Finance, Federal Reserve Economic Data I. PRESSURE POINTS ON THE BALANCE OF PAYMENTS 28. Due to the strong linkages between Lebanon’s decreasing coverage starting in Phase 1 and well fiscal position and the balance of payments (BoP), into Phase 2, recovering considerably thereafter we proceed to examine key indicators of the latter through Phase 3, only to start declining again in over the period. The Monetary Coverage of Broad phase 4, reaching therein alarming levels towards Money (M4) by Net Foreign Assets32 reveals a its end, in a direct correlation with the crisis pattern that, when mapped onto the four phases of eruption. our analysis (Figure 25) shows the following trend: Figure 25. Since 2011 foreign assets of BdL expanded at the expense of commercial banks’ foreign asset position. Source: BdL 32 This is calculated by dividing banks’ net foreign assets by M4 sourced from BdL. F iscal P olicy in the S econd R epublic 45 J. INDEBTEDNESS LEVELS 29. We examine Lebanon’s debt accumulation, 31. Results of the calculations are illustrated in which, as a ratio to GDP, became one of the highest Figure 26 and Figure 27. This exercise allows us to globally, reaching 171 percent by the eve of the draw the following conclusions: financial crisis. In principle, accumulating debt leads to an increase in interest rates, inviting capital a. There is a seeming volatility in regard to lending placements thereto at the expense of productive beyond or below deficit/needs resulting in a investments (i.e., the crowding-out effect). It also cumulative LBP6.7 trillion of additional public restricts the State’s margin of maneuver, eventually debt,36 as the graph shows. causing a financial crisis.33 Thence the concern with b. By end-2019, the theoretical debt based on the sustainability of public debt. financing requirements comes out to be about half (54 percent) of actual gross public debt (as 30. We begin by assessing recorded borrowing reported by MoF), when considering cumulative levels in relation to deficits. This is based on the budgetary and treasury operations. comparison of actual and theoretical gross public c. By end-2019, the theoretical debt based on debt at year ends, incorporating roll-over and new financing requirements comes out to be 31 debt. Specifically, we calculate theoretical debt based percent of actual gross public debt (as reported on financing requirements34 and compare it to actual by MoF), when considering only cumulative gross public debt and the difference between funding budgetary. needs and contracted debt,35 all at years’ end. We do so for both, budgetary operations and cumulative budgetary and non-budgetary (treasury) operations. Figure 26. Difference between estimated fiscal funding needs … Note: Positive numbers indicate debt contracted on top of funding requirements. Negative numbers indicate that the additional debt contracted in the year is lower than the funding requirements. Theoretical debt is calculated assuming interest rates calculated using reported interest expenditure and debt figures. Sources: Ministry of Finance and CAS. 33 The Lebanese Money and Credit Code, by prohibiting the Central bank from financing the state deficit, had imposed, in principle, a strong constraint regarding the accumulation of deficits and debts. 34 Theoretical debt at time t equals theoretical debt at time t-1, plus the primary deficit at t (as reported by MoF), plus the interest incurred on the theoretical debt at time t. The interest incurred on the theoretical debt at time t is equal to the theoretical debt at time t-1 multiplied by the rate on interest payments at time t. The rate on interest payments at time t is calculated as the ratio of interest payments at time t (as reported by MoF) to the average of actual gross public debt at times t-1 and t (as reported by MoF). 35 The difference between funding needs and contracted debt at time t, is the difference between (i) actual gross public debt at time t (as reported by MoF) and (ii) actual gross public debt at time t-1 (as reported by MoF) plus the overall fiscal deficit at t (as reported by MoF). 36 When we sum the difference between funding needs and contracted debt from 1993 to 2016, we get LBP 6.7 trillion for cumulative budgetary and treasury operations. 46 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 27. … and contracted debt was pervasive. Note: Positive numbers indicate debt contracted on top of funding requirements. Negative numbers indicate that the additional debt contracted in the year is lower than the funding requirements. Theoretical debt is calculated assuming interest rates calculated using reported interest expenditure and debt figures. Sources: Ministry of Finance and CAS. 32. We proceed to formulate conditions for debt dynamics are considered sustainable when (i) stabilization of the debt-to GDP-ratio. These the nominal interest rate i is inferior to the nominal conditions are derived from standard accounting GDP growth rate g, that is ig effect. These relations translates to imposing a maximum limit on the are based on all variables being measured in primary deficit-to-GDP ratio. Such a limit depends national currency. The sustainability of debt in forex on the debt level, interest rates, the GDP growth depends more on the outflow of net exports but also rate and inflation (deflationary effect on GDP). As on the delta between rates of interest on assets and suggested by Equations 1 and 2, we deduce that liabilities, in forex. Box 2. Debt Stabilizing Conditions We describe debt dynamics using classical Denoting the growth rate if Yt as gt = Yt/ Yt-1 -1 formulations. Specifically, Dt/Yt= -Pt/Yt+(Dt-1/Yt-1)*(1+it)/(1+ gt) Rt ≡ due collected revenues Denoting dt= Dt/Yt and pt= -Pt/Yt, the above Xt ≡ primary due paid expenses equation becomes dt= -pt+dt-1*(1+it)/(1+ gt) Hence the primary balance is, pt= -dt+dt-1*(1+it)/(1+ gt) Pt= Rt-Xt For debt to be stable, dt=dt-1 For an initial public debt Dt-1, the debt service is Hence, the debt stabilizing primary balance, ptS, St=Dt-1*it would be ptS= -dt-1+dt-1*(1+it)/(1+gt) (Equation 1) Public debt then becomes: Dt= -Pt + Dt-1*(1+it) ptS= (it-gt)/(1+gt) * dt-1 (Equation 2) As a ratio of GDP, denoted by Yt Dt/Yt= -Pt/Yt+ Dt-1*(1+it)/Yt F iscal P olicy in the S econd R epublic 47 33. It is therefore quite remarkable that this was classic and legal rules of public funds management not at all the case in Lebanon; nevertheless, this had been respected (debt, deficit, etc., without state of affairs lasted nearly for thirty years. How even integrating the operations and losses of the could it have been possible? To illustrate the complex Central Bank), and to compare their evolution with mechanisms according to the above classifications the one observed in actuality. Figure 28 below plots and between the cited actors, several approaches the cumulative budget primary balance (excluding are postulated. treasury accounts) with cumulative total primary balance (including treasury accounts), illustrating 34. The simplest way would be to estimate the the gap/difference between the two. We specifically state of public finances in the narrow sense, if the note is the drop-off from 1997 onwards. Figure 28. Gap between budget and total primary balance accumulated over the period. Source: Ministry of Finance. Figure 29. The primary deficit was, with rare exception, smaller than the stabilizing deficit. Source: WB staff calculations. 48 LEBA NON PU B L IC FIN A N C E RE VIE W 35. Second, we go a step further and apply of GDP). The period before 1997 has not been the common stabilization rule of the ratio of covered by the publication of national accounts. public debt to GDP mentioned above. Then, But there was a dramatic rise in domestic prices, we no longer distinguish between regular and which was not enough to offset the spending spree, irregular expenditures, but we continue to omit which was much more about appeasing the militias the quasi-fiscal actions of the Central Bank and than financing reconstruction, as well as dramatic their consequences. Figure 29 above compares the reductions in taxation. stabilizing primary balance (relative to GDP) with the actual primary balance, with the evolution of 37. Public borrowing obviously served other growth rates, interest rates and the deflator. objectives than financing the public deficit. We posit that a key objective was to meet balance of payments 36. The rare years (2002 and 2007-2009) in which needs via sustaining the banking system profitability the primary deficit was lower than the stabilizing and attracting capital inflows, as evidenced in deficit were those in which the GDP deflator was Chapter 3, Subsections ‎ C and ‎D. More generally, at its highest level (5-10 percent), along with real fiscal policy in Lebanon was an integral component growth (7-10 percent). In fact, those in which capital of a defective growth model, which, while subject inflows surged, obviously for external reasons, to excessive external and internal shocks, was whether due to the Paris II Conference in 2002 or deliberate and reasonably well targeted. In Box 3, the oil boom between 2007 and 2011, accompanied we take from the LEM, Fall 2018, entitled De-Risking by the arrival of large donations following the war Lebanon to present a brief growth decomposition in 2006 (the balance of payments surplus in each that highlights important characteristics on growth of these phases was between 10 and 20 percent and productivity in Lebanon. Box 3. Excerpts from LEM Fall 2018 entitled De-Risking Lebanon. Lebanon’s real GDP growth has decelerated sharply Lebanon’s economy is heavily consumption based, since 2010, but its main drivers have remained with private consumption averaging 88.4 percent services characterized by low productivity and of GDP over the 2004-2016 period (Figure 32). low employability potential for high-skill labor. The main supply-side sectors identified above— The service sector constituted 72.4 percent of real real estate, trade, public administration, etc.—do GDP over the 2004-2016 period, while industry and not produce the consumption goods in demand, agriculture made up a much less 14 percent and 4.3 which are instead largely imported. This renders percent of GDP, respectively (Figure 30). Real estate is the external sector a large net negative on output, the largest service sector, averaging 13.7 percent of averaging -24.4 percent of GDP over the 2004- GDP over the same period (Figure 31), and increasing 2016 period. Meanwhile, total investments at 23 to 17.3 percent if combined with construction. percent of GDP has mostly been focused on a non- Wholesale and retail trade is also a principal output productive, rent-seeking, real estate sector. for the economy, making up 13.4 percent of GDP. This is followed by public administration at 9.4 Lebanon ranks as one of the least competitive percent of GDP and financial services at 7.3 percent economies, both globally and regionally. The Global of GDP. All but financial services are low value-added Competitiveness Index (GCI) by the World Economic sectors and do not generate high-skill employment Forum ranks Lebanon 105th of 137 countries, ahead opportunities. Additionally, all but wholesale and of only Yemen in the region (Figure 33). Moreover, trade of the aforementioned sectors, lend themselves Lebanon’s backslide in competitiveness has been the to rent seeking. most marked in the region over the past decade. The leading drags on Lebanon’s competitiveness have On the demand side, the economy is strongly biased been its macro-economic environment, a dilapidated towards a large structural external deficit position. infrastructure and weak institutions and governance. F iscal P olicy in the S econd R epublic 49 As a result, the economy has struggled to reduce for about 47.3 percent of all new employment, widespread poverty and to generate inclusive public and private services for 34.7 percent, and growth, as job creation has been weak and poorly construction for nearly 10 percent (ILO 2015). Thus, distributed. The long-run, employment-growth and in mirroring the structure of the economy, elasticity is estimated to be 0.2 (World Bank 2012), relatively low productivity activities dominated much lower than an estimated MENA average of employment growth, while growth in productive 0.5 (IMF 2 014). Meanwhile, the employment that activities such as communications, agriculture has been generated has been concentrated in low and manufacturing was marginal. Moreover, since productivity activities as those involving higher foreign labor dominated low skilled (less productive) productivity have not grown proportionally. Over activities, high GDP growth rates have not translated the past decade or so, domestic trade accounted into significant job creation for the Lebanese. Figure 30. Services are the main drivers of economic Figure 31. … dominated by largely low productivity activity in Lebanon … sectors … Sources: CAS and WB staff calculations. Sources: CAS and WB staff calculations. Figure 32. … biasing the economy toward large external Figure 33. Long term structural deficiencies renders deficits. the Lebanese economy uncompetitive. Sources: CAS and WB staff calculations. Sources: WEF Global Competitiveness Report. 50 LEBA NON PU B L IC FIN A N C E RE VIE W K. INDICATIVE FISCAL BENCHMARKING 38. Cyprus, Tunisia, and Jordan are countries that b. Compensation of employees, as percentage of were included for comparative benchmarking vis- GDP (Figure 35): Across all the period under à-vis Lebanon, due to their similar macroeconomic examination, the ratio for Lebanon was lower profiles, exposure to similar external factors and than in the other three countries, decreasing size—albeit with some varying contexts. until the mid-2000s. Only Cyprus comes close post 2011, and only as a result of the very a. Net investment in non-financial assets, as harsh financial crisis it underwent. percentage of GDP (Figure 34): Thus benchmark c. Tax revenues, as percentage of GDP (Figure was found to be significantly higher in Lebanon 36): In spite of the increase in taxation ratios than in the other three countries in the 1990s as detailed above, and the manifested capacity post-civil war era, dropping dramatically of the state to levy taxes especially following thereafter. From 2000 until 2011, Lebanon the end of the civil war, Lebanon’s relatively invested substantially less than its peers (as low taxation ratio is prominent among the percentage of GDP). Following the regional four countries. Jordan’s tax ratio becomes turmoil and ensuing economic hardships, comparable to Lebanon’s from the end of the the investment ratios in Tunisia and Jordan first decade of the millennium, due to a sharp also declined, while investments were also slowdown of economic activity.37 weighed down by the financial crisis in Cyprus. Figure 34. Net Investment In Non-Financial Assets (% of GDP) Source: Ministry of Finance, CDR (1993-1996), WDI 37 This is due to first the global financial crisis (via the impact on the GCC countries) followed by the regional turmoil. F iscal P olicy in the S econd R epublic 51 Figure 35. Compensation of Employees (% of GDP) Source: Ministry of Finance, CDR (1993-1996), WDI Figure 36. Tax Revenue (% of GDP) Source: Ministry of Finance, CDR (1993-1996), WDI 52 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 3 . QUASI-FISCAL & OTHER ACTIVITIES A. DEFINITION AND SCOPE 39. “Central banks and other public financial 40. QFA activities are considered under three institutions (PFIs) play an important role as agents types: Classical, which are commonly known of fiscal policy in many IMF member countries. Their central bank QFA operations, the activity of Gold activities in this guise can affect the overall public Assets Re-Evaluation, and Public Finance Activities sector balance (the balance of both the nonfinancial Masking Dues/Debts. We also discuss a category and the financial public sectors), without affecting of Other Public Finance Related-Activities Causing the budget deficit as conventionally measured. Deficit/Loss. to complete the picture of the fiscal These activities, which are often referred to as performance, to the extent of information and data quasi-fiscal operations or activities (QFAs), may availability (Figure 37). also have important allocative effects.”38 Figure 37. QFA activity in Lebanon. 38 Mackenzie, G.A. and Peter Stella. 1996. Quasi-Fiscal Operations of Public Financial Institutions, IMF Occasional Paper 142, October 1996, page 1. F iscal P olicy in the S econd R epublic 53 B. BDL SUBSIDIZED LOANS 41. As of 1997, Lebanon’s central bank launched tax for commercial banks in only one year, 2015 a number of initiatives to entice medium (LBP2,811 billion, or US$1.85 billion), or 29 percent and long-term lending to the private sector.39 of the consolidated income of banks (LBP17,403 Notably, in 2001, BdL allowed for a reduction in billion).41 In excess of 76 percent of this subsidized commercial banks’ reserve requirements in return lending went to the housing sector (Table 1). for undertaking lending in a number of sectors, including IT, agriculture and tourism. 43. The large subsidy relative to commercial banks’ revenues and profits clearly point to its 42. The reduction in banks’ reserve requirements dominant role in banks’ operations, let alone was substantially expanded in 2009. “The success constituting a major public policy intervention by of these incentives led BdL to increase the deduction the central bank. This served BdL’s pivotal role in ceiling to 90 percent in January 2011.”40 As part of safeguarding the dollar peg at low interest rates, at this subsidy scheme, BdL lent a total of US$3.37 the expense of increased indebtedness and more billion over the 2013-15 period (Figure 38). This entrenched dependence on inflows of US$ deposits. constituted just under twice the net profit after Table 1. Sectoral Distribution of Utilized Credit Benefiting from Deductions in Banks’ Reserve Requirements or in Banks’ Liabilities (in Percent) Deductions in Reserve Requirements Mar-12 Mar-13 Mar-14 Mar-15 Housing Sector 76.60 77.11 77.94 79.59 Productive Sectors 3.89 3.65 3.91 3.89 Microcredits and Microcredit Institutions 0.06 0.43 0.37 0.24 Educational Sector 1.34 1.54 1.72 1.87 Environmentally Friendly Projects 0.40 0.46 0.57 0.50 Deductions in Liabilities Mar-12 Mar-13 Mar-14 Mar-15 Housing Sector 12.67 16.70 19.64 22.87 Productive Sectors 4.10 4.12 2.70 1.79 Subsidized Loans Guaranteed by Kafalat 1.96 2.31 2.17 1.96 Source: BdL Quarterly Bulletin (2015 Q1) Table 3.4.7 (for utilized credit benefiting from deductions in banks’ liabilities subject to reserve requirements) and Table 3.4.8 (for utilized credit benefiting from deductions in banks’ reserve requirements). The figures provided in the Table account for utilized credit in both LBP and/or foreign currencies 39 For a detailed description of this QFA, see World Bank. 2016. The Big Swap: Dollars for Trust, Lebanon Economic Monitor, Fall 2016. 40 Ibid, page 29. 41 Association of the Banks in Lebanon (ABL, www.abl.org.lb/Library/Files). 54 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 38. A steady nominal increase in total loans driven by loans benefitting from reductions in reserve requirements … Sources: Ministry of Finance. Figure 39. … increasing relentlessly as a percentage of GDP from 2009, exceeding 90 percent in 2015. Sources: Ministry of Finance and CAS. C. BDL & COMMERCIAL BANKS’ MUTUAL BORROWING ARRANGEMENTS 44. Starting in the 1990s, BdL consistently involved mutual-borrowing operations, whereby intervened with domestic banks (generally BdL assumes part of the losses on the acquired small or medium size) that faced difficulties, by banks’ balance sheets. Engaged sums were orchestrating a takeover by another local bank. relatively modest and were differed over multi- The main declared driver was the safeguarding of year undertakings. deposits and sustaining trust in the banking sector as the “backbone” of the economy and stability. 45. This was a key strategy to maintain confidence Larger banks were enticed to undertake the buying in the banking sector and sustain the peg and operations, with the support and encouragement of deposits’ attractiveness. For instance, the BdL list BdL in the form of medium to long-term financing of banks in Lebanon, updated in February 2021, schemes of needed buy-iwns; the mechanisms reached 142 in its count42—a very high number for 42 BdL, https://www.bdl.gov.lb/pages/index/4/25/List-of-Institutions-Supervised-by-BdL.html F iscal P olicy in the S econd R epublic 55 a country the size of Lebanon, but also indicative July 2006, coinciding with the Israel war, and of the many operations of the sort described. This remained elevated for two years, after which it compares to 61 active banks in the list—an estimate subsided. It traced the movement of the 3-month based on a manual count of known active banks. LIBOR before breaking away from it in November This strategy was inconsistent with best practices in 2017—PM Hariri’s resignation episode from Saudi banking resolution, which necessitated the principle Arabia—maintaining a high level for two years, of allowing non-systemic banks to fail. Instead, such before spiking again in March 2020 when Lebanon arrangements gave way to future larger and more defaulted on its debt payments. Paris II Conference systematic mutual borrowing arrangements. in November 2002 led to a sharp decrease in rates on LBP deposits and an even sharper decrease in 46. Figure 40 illustrates the combined and CDs’ rates. The 2008 global financial crisis and the sequenced effects of BdL’s operations over the increase in oil prices further disconnected rates on period. During phase 1 and most of phase 2, rates US$ deposits from LIBOR. on US$ deposits remained close to the 3-month US$ LIBOR, while rates on LBP deposits were 47. Apart from transitory episodes—especially slightly above LBP CDs’ rates. The issuance of the 2005 assassinations and political turmoil, and Eurobonds (starting in 1998) decreased pressure the 2005-2006 increase in international rates— on LBP deposit rates, progressively narrowing rates on LBP and US$ deposits, as well as those on the gap with rates on US$ deposits. Meanwhile, CDs and LIBOR remained almost constant until the the J.P. Morgan Emerging Markets Bond Index end of 2017, even though inflows were substantially Global (EMBIG) spread for Lebanon spiked in diminishing. The crisis became imminent. Figure 40. Despite slowing inflows, LBP and US$ deposit rates, as well as CD rates and LIBOR remained almost constant until the end of 2017. Source: BdL and Federal Reserve Economics Data. D. BDL & COMMERCIAL BANKS’ MUTUAL SWAP ARRANGEMENTS 48. Swap arrangements were initially intended and more swift rescue packages than earlier and to compensate a few relatively large commercial was consistent with BdL’s strategy of maintaining banks for losses incurred in their regional confidence in the banking sector and sustaining the operations—Iraq, Turkey, etc.43 This involved larger peg and deposits’ attractiveness. It also gave way to 43 See for example, Reuters in 2015, https://www.reuters.com/article/iraq-kurds-economy-idUSL8N13M46420151204 56 LEBA NON PU B L IC FIN A N C E RE VIE W a second more strategic goal of compensating for This second mutual swap scheme will be enlarged diminishing deposit inflows (Figure 41 and Figure and progressively generalized, as the following 42) especially in the times when the Syrian war paragraph depicts. was most active and oil prices dropped sharply. Figure 41. Deposit growth has been deccelerating steadily since 2009… Source: BdL Figure 42. ... not only nominally, but also as a percentage of GDP Source: BdL and WB Staff Calculations E. BDL & COMMERCIAL BANKS’ FINANCIAL ENGINEERING ARRANGEMENTS 49. Following the eruption of the war in Syria, operations—dubbed financial engineering—to the Lebanon experienced a deterioration in its tune of US$13 billion44 to incentivize FX deposit balance of payments. This included a combination inflows and reinforce BdL’s reserve position.45 of worsening exports combined with diminishing capital inflows within the context of a sharp 50. This mechanism exposed the difficulty that deceleration in economic growth. In response, BdL was facing in sustaining its strategy of winning BdL set in motion, starting in Q2-2016, large swap time and hoping for better days. The ensuing 44 IMF 2016 Article IV Consultation Report 45 These operations are studied in a series of Lebanon Economic Monitors, specifically in: World Bank (2016), The Big Swap: Dollars for Trust, Lebanon Economic Monitor, Fall 2016 F iscal P olicy in the S econd R epublic 57 operations set the stage for much larger losses when US$2.7 billion in income from interest earned on the the crisis finally erupted in Q4-2019 crisis. Such bank accounts, most of which are at the BdL, in 2018 arrangements between the BdL and the commercial relative to the year before. This produced stable net banks helped disguise the real interest rate cost on income of US$2.2 billion in 2018 in an otherwise inflated government debts. The IMF 2016 Article weak economy and despite higher taxes, rising NPLs IV Consultation Report, states that an “additional and declining credit to the private sector.”46 F. GOLD ASSETS RE-EVALUATION 51. BdL cancelled, in three stages (2002, 2004 a disguised reduction of the public debt and to and 2007), a total amount equivalent to US$3.73 depriving BdL of interest income on the cancelled billion of public debt in Lebanese pounds debt, while reducing the public account deficit for all (LBP5,597 billion, Box 4) that it held against subsequent years. When applying the interest rates purely accounting re-evaluations of gold. These calculated based on public interest expenses and cancellations were, at least partially, components the gross public debt, the US$3.73 billion disguised of the series of Paris Conference agreements. As reductions in the public debt effectively hid in BdL far as is publicly known, no actual disposal has accounts an additional debt of some US$10.3 billion taken place.47 The operations in question led to (LBP15,929 billion). Box 4. Gold Assets Re-Evaluation Calculation The effect of the re-evaluation of gold on the public debt is calculated as if this operation did not take place, since the public debt has been artificially deflated therefrom. The respective debt is effectively hidden in BdL accounts as it continues to incur interests on it. To calculate the 2019 hidden debt generated for each of the gold re-evaluations—LBP2,7000, LBP517 and LBP2,380 billions in 2002, 2004 and 2007, respectively—accrual of would-be debt service is added. That is, for the 2002 re-evaluation operation, the 2019 hidden debt would be =LBP2,700(1+r2003)(1+r2004)(1+r2005)…(1+r2019)=LBP9,118 The same formula would be used on the remaining two operations. As such, when incorporating the interest rate reported by the ministry of finance, the re-evaluated amount of 5,597 billion LBP becomes 15,929 billion LBP. Year Re-evaluation of gold reserves (LBP billions) Hidden Public debt in 2019 (LBP billions) 2002 2,700 9,118 2004 517 1,439 2007 2,380 5,373 Total 5,597 15,929 Source: IMF Reports, MoF and World Bank staff calculations. 46 IMF 2016 Article IV Consultation Report 47 The legality of these operations is questionable. On the one hand, the Money and Credit Code that established the BdL in 1964 stipulates that in the event of a disposal of gold, 80 percent of the profits made would revert to the Treasury. On the other hand, Law 46 of 1986 came to prohibit the disposing of gold assets in any form. 58 LEBA NON PU B L IC FIN A N C E RE VIE W G. MASKED DUES/DEBTS ON GOVERNMENT: DUES TO MUNICIPALITIES 52. The bulk of municipalities’ revenues are account” or to individual municipalities—that were collected through the central government, intermittent, volatile and opaque (Figure 43). Due especially fees on telecom: 10 percent on all bills.48 to lack of data, we are unable to estimate arrears MoF statements show transfers to municipalities— resulting from unsettled municipality fees on whether to the “independent municipalities’ electricity or on imports. Figure 43. Transfers to municipalities have been opaque and volatile. Source: Ministry of Finance 53. Municipalities’ dues, receivable or collected dues, especially mobile telephony priced in US$, through the government, are effectively debts since 1995, were long withheld and only partially until settled. The main use of funds collected by remitted, mainly in 2016. The estimated telecom the government on behalf of municipalities was arrears due to municipalities are LBP2,538 billion.49 to finance large solid waste handling. Telecom H. MASKED DUES/DEBTS ON GOVERNMENT: NATIONAL SOCIAL SECURITY FUND (NSSF) 54. Government arrears resulting from dues anew, increasing arrears from LBP1,000 billion to to the National Social Security Fund (NSSF) is reach LBP3,185 billion in 2019​ . When incorporating estimated to be US$5.4 billion (Figure 44). Arrears the reported interest rate on the public debt during have mainly accumulated in the first decade after this period, the arrears reach LBP8,101 billion of the end of the civil war and have stagnated since—if unreported public debt, equivalent to US$5.37 disregarding interest on the debt between 2004 and billion, at the official peg rate (as of May 2022). 2013​. In 2014, the state stopped settling its dues 48 Municipalities should have also been receiving a custom tax: 3.5 percent on all imports. This, however, has never been implemented. 49 Calculations on arrears accumulating as of 1997: estimated total collected LBP5,925 billion minus total settled 3,335LBP billion. Source: Ministry of finance, Ministry of Telecom and Banks estimations where data was not available. F iscal P olicy in the S econd R epublic 59 Box 5. Masked Dues/ Debts on Government Actual data for Government’s annual dues to fill total EOY arear values for the earlier years. For the NSSF (flow data) and total, end of year, (EOY) example, total EOY arears in 2004 would be total arrears to the NSSF (stock data) are available from EOY arears in 2005 (stock) minus arears in 2004 2005 onward, while the annual paid dues to the (flow); the latter would the (regression-estimated) NSSF (flow data) are available from 1993. To be annual dues (flow) in 2004 minus annual paid able to calculate cumulative arears to the NSSF, we dues (flow). We proceed to calculate year-on-year would want to find/estimate values for the years (yoy) debt evolution (flow), by subtracting total EOY 1993-2004. We proceed as below. arears at time t-1 (stock) from that at time t (stock). First, we estimate annual dues to the NSSF (flow) This hidden unreported debt should also be subject prior to 2005 using an exponential regression to interest rate. Specifically, we calculate the EoY taking GDP as the independent variable. The arears incorporating interest accrued at time t, regression’s R2 is 0.92. Given actual data for total which we did by applying the interest rate on EoY EOY arears (stock) are available starting in 2005, arears incorporating interest accrued at time t-1, we work backwards using regression results to plus yoy debt evolution at time t. Source: MOF Figure 44. NSSF arrears have mainly accumulated in the first decade after the end of the civil war and have stagnated. Note: Dues between 1993 and 2004 have been estimated based on a regression of dues to GDP ran on the years 2005 to 2018; Dues of 2019 are assumed to be the same as 2018 Note: Dues between 1993 and 2004 have been estimated based on a regression of dues to GDP ran on the years 2005 to 2018; Dues of 2019 are assumed to be the same as 2018 Sources: NSSF, Ministry of Finance, Central Administration of Statistics 60 LEBA NON PU B L IC FIN A N C E RE VIE W I. MASKED DUES/DEBTS ON GOVERNMENT: GOVERNMENT’S ARREARS, DUES OF EXPROPRIATIONS, DUES TO HOSPITALS, CONTRACTORS, ETC. DUES TO NATIONAL DEPOSIT GUARANTEE INSTITUTION 55. The required empirical data for assessing and their contribution to public debts are not to be these masked dues on government, as cited in underestimated, however. Further investigative the respective categories, were not found in any work, outside the scope of the present fiscal review, official reference that is available across the many should be undertaken in the future. examined sources. The qualification of such dues J. OTHER PUBLIC FINANCE RELATED-ACTIVITIES CAUSING DEFICIT/LOSS 56. This category includes various activities— Given their impact, especially in terms of effects on listed below—that were found to be substantially deficit or loss in financial resources, but also their relevant in terms of their sizes and effects on qualification as to the nature of public management public finances, although they would not qualify of the GoL, these activities are substantially relevant to be strictly accounted for as QFA, nor was data in the examination of public finances. sufficiently available to assess their amplitude. K. DUALITY OF BUDGET AND TREASURY OPERATIONS 57. The Lebanese legal framework for cases, such as unscheduled treasury advances undertaking public expenditures and revenues for an emergency fund, or for securing some is delimited by due parliamentary budgetary extra financing to EdL, etc. The principle remains processes. Lebanon had no ratified budget from that, in spite of the necessary or urgent nature 2005 until 2017; expenditures were based on of such payments, they should fall within the special measures. Specifically, when budgets are budget limitations and as such be settled within not ratified in time, exceptions are granted by law a year from the undertaking or covered by a due for expenditures to extend for a maximum of one budgetary process. extra month. In such a case, expenditures may be undertaken on a 1/12 basis of either (i) the 59. In actuality, the GoL adopted a practice of previous year’s (or last) ratified budget or (ii) a draft undertaking expenditures outside of the strict budget submitted by cabinet but not yet ratified binding legal framework. First, expenses were by parliament. undertaken from the treasury account with no regard to budgetary provisions or due processes. 58. Outside of budgetary revenues and Second, the 1/12 extra month expenditures were expenditures, treasury revenues and expenditures considered open in time, especially during extended denote such transactions that are made out of the political deadlocks. Third, donations approved by official treasury account. The payments from or to the executive branch were considered expendable the treasury account may include transactions that with no prior budgetary approval. Fourth, the are either (i) necessary for executing the budget authorizations granted in the budget for borrowing that are of a transitory nature (e.g., performance within set budget deficit ceilings, were extended to guarantees), or dues to third parties (e.g., collection include ‘treasury deficits’ as well, rendering such of dues to municipalities), or (ii) urgent/exceptional constraints practically inexistent. F iscal P olicy in the S econd R epublic 61 L. DONATIONS 60. Over the period, both in-kind and cash 61. It is worthy to note the spikes of cash donations increased in size and number (see donations in years 2000, 2006, and 2007, for Annex ‎B). In-kind donations, which are approved reconstruction purposes. In year 2006, the largest through decrees by the Council of Ministers, 3 cash donations combined amounted to LBP1,765 seldom included respective financial estimations/ billion (more than 5 percent of the GDP for that valuations. An extensive review of cash donations year) from Kuwait, KSA, Qatar and the World Bank.50 in the years 1992-2000 reveals that they were In comparison, the ‘other non-tax revenues’ that accepted through decrees that systemically noted usually include donations in the budget did not a budgetary item under which the donation was exceed LBP85 billion in year 2006. accounted. Following 2000, this due process became an exception. Instead, respective donations were transferred outside the public budget accounts. M. SETTLEMENTS OF UNPAID DUES’ BUDGETARY PROVISIONS 62. Reviewing the budget documents for the In addition, amid controversial delineations and period reveals an increasingly systematic ownership of lands, fraudulent deeds are easily undertaking of establishing settlements of unpaid achievable. Another way for relinquishing public dues. This came in the form of substantially domains is the settlement of illegal occupation of discounting past dues, whether for consumed public property. Encroachments on the maritime services, incurred charges or fees, or non-payments domain, but also lands reclamations (from the of imposed taxes, under the justification of enticing sea), have increased in surface area and number respective late partial payments. through the civil war period (1975-1991) but also during reconstruction years. 63. Not only did such settlements annul substantial receivables, but moreover—given the 65. After the war, the General Directorate of recurrence of the practice—they encouraged non- Cadastral Registries in Lebanon surveyed 2.8 payment of public dues in general and treated million square meters of illegally occupied paying citizens in a penalizing and inequitable public maritime domains. Such practices ensure fashion. This damaged the credibility and image of high profitability for a small elite mostly from GoL in public finances’ management. the maritime public domain (for example, resorts owners and real estate companies) hindering the 64. Public estates occupation, specifically the public’s access to the coast. maritime public domain, have been conceded to private individuals or companies. Public lands 66. Recently, and with recurring crises, the constitute a major part of State assets. Usufruct of government formulated decrees or included public domains, notably maritime public domain, articles within budget laws to settle encroachments was facilitated de jure since the 1940s through on public domains, mainly maritime domains, to decree 4810/1966. This decree allows property ensure public income from settlements’ fees and owners adjacent to the public maritime domain to fines. The first attempt was in the mid-1990s to occupy part of the coast for private use. Typically, fund the wage correction back then. However, all the government leases these lands for minimal such undertaking failed to retrieve public assets fees over long periods of time and even grants from occupation or increase state revenues. In further exceptions allowing for further exploitation. contrast, they embedded an acceptance of the de 50 Source: cabinet decrees 17882, 17972 and 18034. 62 LEBA NON PU B L IC FIN A N C E RE VIE W facto situations. For instance, after several deadline domain was set for November 2019. Until that date, extensions, the final delay to submit requests for less than a third of the “encroachers” had submitted settlement of encroachments on the maritime public due formal requests to the Ministry of Public Works. N. INSTITUTIONS OUT OF DUE REGULATION: THE CASES OF BEIRUT SEAPORT AND LEBANON OIL ESTABLISHMENTS.51 67. Port of Beirut (PoB): Upon the expiry of a the seaport until end of 1990. The Government concession granted by the French “Mandate” of Lebanon thereafter put in place a “temporary Government in 1925 to the French company commission”, that effectively took hold of the assets “Compagnie du Port, des Quais et des Entrepots de and operations. The Ministry of Finance had no Beyrouth” in 1960, a Lebanese company “Compagnie visibility on the accounts of this temporary entity. As de Gestion et d’Exploitation du Port de Beyrouth” was such, there is a lack of transparency and credibility entrusted with continuing to operate and manage behind PoB transfers to the Treasury (Figure 45). Figure 45. Revenues from PoB have been variable. Source: Ministry of Finance 68. Lebanon Oil Installations: These include two commission, “Lebanon Oil Establishments”, was pipelines with sea-terminals, stocking facilities put in charge of managing the facilities. The storage and refineries, respectively installed to bring oil facilities were partially destroyed in the Israeli from Saudi Arabia and Iraq, named Zahrani Oil invasion of 1982; however, the remaining capacities Installations (ZOIL, was owned by Trans Arabian are still considerable, even in regional terms. The Pipeline, TAPLINE), and Tripoli Oil Installations refinery in ZOIL was completely stopped in 1989, (TOIL, was owned by Iraq Petroleum Company, IPC).52 as was TOIL in 1992. Lebanon Oil Installations The Government of Lebanon de-facto inherited the thereafter acted as a trade agency and storage associated assets in the seventies: large storage facility, importing various types of petroleum in facilities, sea terminals and (currently out-of-order) competition and complementarity with private refineries and pipelines. The GoL, however, did not importers and distributors. The Ministry of Finance establish any legal framework for their subsequent receives yearly transfers with no visibility of the operations and management. A transitory associated accounts, as well. 51 Other State-Owned Enterprises (SOE) could be considered following the same framework, pending the availability of respective data; for example: Régie Libanaise des Tabacs et Tombacs, Middle East Airlines, Casino du Liban, etc. 52 See website leboilinst.com. F iscal P olicy in the S econd R epublic 63 O. GOVERNMENT WAIVERS: THE CASES OF SOLIDERE AND ELYSSAR, THE WAIVER GRANTING AGENCY INVESTMENT DEVELOPMENT AUTHORITY OF LEBANON (IDAL) 69. The required empirical data for assessing and Tourism sectors. In addition to its role as the Government waivers, the cases of SOLIDERE investment promotion agency, IDAL is entrusted and ELYSSAR, were not found in official sources. with the active promotion and marketing of The implications of such waivers are not to be Lebanese exports including agricultural and agro- underestimated, however. Further investigative industrial products.53 work, outside the scope of the present fiscal review should be undertaken. 71. Analyzing the available data on IDAL subsidy of investments in the period 2003-2020 shows an 70. The Investment Development Authority overwhelming focus on the tourism sector—66 of Lebanon (IDAL) is the national investment percent of all projects’ investment costs or promotion agency that was established in US$1.276 billion, where a closer look reveals that 1994 with the aim of promoting Lebanon as the main costs therein are real estate in nature— a key investment destination, and attracting, followed by the industry sector, 23 percent, Agro- facilitating and retaining investments in the food at 8 percent, and the cluster of Technology, ICT, country. Investment Law No. 360, enacted in 2001, Telecommunication, and Media at some 3 percent reinforced IDAL’s mission, providing a framework (Figure 46). Two observations are noteworthy: First, for regulating investment activities in Lebanon, data regarding the cost of subsidies is not available, and providing investors with a range of incentives but the description of respective waivers includes and business support services. It identified a set of NSSF, Taxation, and assets and/or operations’ priority sectors that showed the most promising charges and fees. Second, numbers regarding opportunities in terms of their investment potential job creation may be inflated as they are lopsided and impact on socio-economic growth, including towards the tourism sector where part-time jobs the Agriculture, Agro-Industry, Manufacturing, could have been dominant. Industry, IT, Media, Technology, Telecommunication Figure 46. IDAL Investment Types (in US$ Million) (2003-2020) Source: www.investinlebanon.gov.lb 53 www.investinlebanon.gov.lb 64 LEBA NON PU B L IC FIN A N C E RE VIE W II. MACRO- FINANCIAL RESTRUCTURING Macro -F inancial R estructuring 65 C hapter 4 . COMPOUNDED CRISES 72. For almost two years, Lebanon’s economy has 74. In 2020, the World Bank (WB) termed Lebanon’s been assailed by compounded crises, beginning economic and financial crisis a Deliberate with an economic and financial crisis, followed by Depression.56 Lebanese authorities countered the COVID-19, then quite dramatically, the explosion assailment of compounded crises with deliberately at the Port of Beirut (PoB), and most recently, the inadequate policy responses. The inadequacy is war in Ukraine.54 Of the three crises, the economic due less to knowledge gaps and/or quality of advice and financial crisis has by far the largest and the and more the result of a combination of (i) a lack of most persistent negative impact, potentially ranking political consensus over effective policy initiatives; among the top three most severe economic collapses and (ii) political consensus in defense of a bankrupt worldwide since the 1850s, according to the Spring economic system, which benefited a few for so long. 2021 LEM Lebanon Sinking (to the Top 3).55 In fact, the role of elite capture as a constraint to development in Lebanon was a central thesis of the 73. In October 2019, the economy plunged into WB’s 2016 Lebanon Systematic Country Diagnostic. a financial crisis brought about by a sudden stop Even prior to the onset of the crisis, the WB has long in capital inflows, which precipitated systemic identified Lebanon as a Fragile Conflict Violence failures across the macro-financial system. This (FCV) country, and as such, the dire socioeconomic included severe impairment of the banking sector, conditions risk systemic national failings with large losses in deposits, a currency crisis and regional and potentially global consequences. triple digit inflation rates. Further, a government default on its foreign debt (Eurobonds) on March 75. This section presents (updated) elements 7, 2020, marked the first-ever sovereign default from work delivered to the Government of for Lebanon. The Eurobond default precluded Lebanon in the Spring 2020 under the Public access to international markets for foreign Finance Review. This was in response to a request financing. Discussions with creditors on Eurobond by the then-incoming Government under PM restructuring have made no discernable progress. Hassan Diab to assist in its crisis management strategy. We presented technical analysis with the 54 On August 4, 2020, a massive explosion rocked the PoB, destroying much of it and severely damaging the dense residential and commercial areas within a 1- to 2-mile radius. See World Bank (2020), Beirut Rapid Damage and Needs Assessment, August 2020. 55 In the Spring 2021 LEM (https://openknowledge.worldbank.org/handle/10986/35626), the Lebanon crisis is contrasted with the most severe global crises episodes as observed by Reinhart and Rogoff (2014) over the 1857–2013 period. See Reinhart, Carmen M., and Kenneth S. Rogoff. 2014. “Recovery from Financial Crises: Evidence from 100 Episodes.” American Economic Review 104 (5): 50–55. 56 World Bank. 2020. Lebanon Economic Monitor Fall 2020: The Deliberate Depression. Washington, DC: World Bank Group. https:// openknowledge.worldbank.org/handle/10986/34842. 66 LEBA NON PU B L IC FIN A N C E RE VIE W objective of achieving macro-financial stabilization equilibrium” of these policies across the sovereign- and poverty mitigation. We identified Key Policy BdL-bank balance sheets. This is not intended as Decisions (KPDs) that were (and continue to be) a comprehensive macroeconomic stabilization necessary for such a strategy. The objective was to strategy. The original work preceded discussions undertake simulations on the impact of the KPDs, with the IMF and helped guide Government in its adopting qualitative and quantitative assumptions thinking. The KPDs are summarized below for illustrative purposes. We examine the “general Key Policy Decisions KPD-D1 Debt Restructuring GoL to identify realistic targets for restructured terms for the outstanding stock of Eurobonds KPD-D2 Debt Restructuring GoL to identify new terms for its LL-denominated debt and debt held by BdL KPD-F1 Fiscal Reforms GoL to identify primary fiscal targets over the medium term consistent with debt sustainability KPD-F2 Fiscal Reforms GoL to identify progressive fiscal measures that meet primary balance targets KPD-F3 Fiscal Reforms GoL to implement fiscally-critical electricity reforms, such as the elimination of all HFO and diesel for EDL power generation by securing LNG supply and unbundle gas supply (FRSU); the introduction of progressive electricity tariff reforms; the accelerated reduction of technical and non-technical losses KPD-B1 New Monetary and Exchange Rate Regime BdL to adopt a new monetary and exchange rate regime that achieves unification and sustainability in the exchange rate consistent with the resources available and expected to the monetary authority KPD-B2 A Comprehensive Financial Sector Restructuring GoL to adopt and implement a bank resolution strategy to restructure the banking sector Macro -F inancial R estructuring 67 C hapter 5 . BASELINE SCENARIO: NO POLICY ACTION 76. We proceed by first specifying a baseline seriously engage in negotiations over restructuring scenario (ScB) of no policy action, followed by a the terms, which can involve face value of bonds, simulation of the KPDs impact. The purpose is to coupon payments and maturities.57 In ScB, we specify a ScB scenario of non-action against which assume these conditions persist. the impact of KPDs can be gauged. Select economic indicators for this scenario are presented in Table 78. Under ScB, Lebanon’s recession persists, 10 in the Annex. The context for this scenario is: is arduous and prolonged as the economy fails to reach a bottom. Real GDP in 2022 is projected • Lebanon will not be able to tap international to contract by a further 6.5 percent, subject markets for foreign financing. to extraordinarily high uncertainty. Principal • Informal capital controls will remain in assumptions include, continued inadequacy of effect preventing depositors access to their macroeconomic policy responses, but the country deposits. is able to retain a minimum level of stability on the • A multiple exchange rate system persists. political and security scenes. Conditions of runaway • We preclude a runaway inflation-depreciation inflation-depreciation, while a plausible scenario, is spiral, which is a plausible scenario. not assumed. Inflation rates remain in triple digits, • Inflation rates remain in triple digits, subdued subdued only by BdL’s ability to control narrow only by BdL’s ability to control narrow money money supply. Our projections are presented in supply. Table 10. They come with wide confidence intervals attributed to (i) a downside risk of gross FX reserves 77. The decision to default on the Eurobonds is depletion, renewed covid outbreaks, higher a fait accompli marking the first ever sovereign commodity prices, especially oil; and (ii) an upside default for Lebanon. On March 7, 2020, the risk if Government agrees to and implements a Government of Lebanon (GoL) decided against comprehensive macroeconomic stabilization and paying US$1.2 billion in Eurobonds that was due reform program, such as the outline of the EFF it on March 9. This marked the country’s first ever reached a staff-level agreement with the IMF (but, sovereign default. Since then, Government has at as May 2022, is not yet in effect as numerous not paid any dues on its outstanding Eurobonds. prior actions remain to be met). In fact, Government and creditors have yet to 57 Toward that end, GoL has been advised by international financial and legal advisors, Lazard Ltd. and Cleary Gottlieb Steen & Hamilton, respectively. 68 LEBA NON PU B L IC FIN A N C E RE VIE W 79. Monetary and financial turmoil continue to such as lirafication and monetization of the fiscal drive crisis conditions, more acutely through deficit, will continue to be critical to the inflationary interactions between the exchange rate, narrow environment. We assume that in 2022, the average money and inflation. The centrality of this exchange rate (AER)58 suffers a similar depreciation dynamic on the macro framework is an important as in 2021 (211 percent). That will keep the inflation determinant of our macroeconomic outlook. Hence, rate in the triple digits. policy with implications on narrow money supply, 58 This is a World Bank estimate of the average exchange rate in the economy in the context of the multiple exchange rate environment. For a more detailed account on the AER, please refer to: World Bank. 2020. Lebanon Economic Monitor Fall 2020: The Deliberate Depression. Washington, DC: World Bank Group. https://openknowledge.worldbank.org/handle/10986/34842. Macro -F inancial R estructuring 69 C hapter 6 . KEY POLICY DECISIONS A. ON DEBT 80. Public debt ratios, which were already GoL allocated a considerable portion of its unsustainable, are further aggravated by the budget to debt servicing. In 2019, the last year economic crisis. The debt-to-GDP ratio rose from the Government fully serviced its debt, interest 154 percent in 2018—already an extraordinarily payments on public debt amounted to around 10 high ratio—to 180 percent in 2021. Although the percent of GDP, consuming almost half of total sharp depreciation in the local currency has implied government revenues. a significantly lower dollar value for domestic debt, lowering the dollar value for total debt 82. Restructured terms on the outstanding (the numerator in the debt-to-GDP ratio); this is, stock of Eurobonds are a key parameter for however, more than offset by a significantly lower projecting Lebanon’s debt profile. As mentioned denominator, GDP in US$, also due to currency earlier, Government and creditors have yet to depreciation, leaving a larger debt-to-GDP ratio seriously engage in the process of negotiations (Figure 47). So, whereas the surge in inflation is on restructuring the terms, which involve face rapidly eroding the real value of domestic debt, value of bonds, coupon payments and maturities. the sharp depreciation of the currency continues Negotiations are expected to take months, and their to make Lebanon’s sovereign debt burden outcome, while highly uncertain at present, will unsustainable. Under ScB, the debt-to-GDP ratio is factor decisively on Lebanon’s debt outlook. A Key projected to reach 272 percent by end-2022.59 Policy Decision is thus: 81. If public debt were to be serviced at full face ➤ KPD-D1: GoL to identify realistic targets for value, interest payments would be prohibitive, restructured terms for the outstanding stock making this scenario unsustainable. Historically, of Eurobonds. 59 Debt-specific ScB assumptions that reflect the status-quo include: • On domestic debt: Government continues to service Treasury Bonds (TBs) held by commercial banks but extends its favorable arrangement with the central bank that allows it to suspend payments on TB coupon payments held by BdL. • On foreign debt: Government remains in default status on its Eurobonds, unable to make payments on principal and interest. Government, however, continues to service multilateral and bilateral debt. 70 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 47. Valuation effects from exchange rate depreciations will pressure the debt-to-GDP ratio.60 Sources: Lebanese authorities and WB staff calculations. 83. For illustration, we simulate the effects on to-GDP ratio, which proxies for debt sustainability the debt outlook under ScB conditions for both over the medium term; and (ii) the interest cost to Good Case and Bad Case outcomes for Lebanon total Government revenues, which proxies for the in its discussions over Eurobond restructuring. fiscal space available for Government to redirect We consider a 50 percent haircut on the face value scarce resources toward more productive sectors of the Eurobonds to be a realistic Good Case (GC), of the economy. while a 25 percent cut would be a realistic Bad Case (BC). This is based on a study by Edwards (2015)61 84. Eurobond restructuring will neither be who examined debt restructuring determinants sufficient nor durable to make Lebanon’s debt and outcome using data on 180 sovereign defaults structurally sustainable. While there is a striking over the period 1978-2010.62 We simulate the improvement in the debt-to-GDP ratio under the GC impact on two main debt indicators: (i) the debt- assumption—with the simulation illustrating a fall Figure 48. Eurobond restructuring is insufficient for Figure 49. … and cannot be expected to provide the public debt sustainability … needed fiscal space. Blue line is 25% haircut on Eurobonds, and green line is Blue line is 25% haircut on Eurobonds, and green line is 50% haircut on Eurobonds. 50% haircut on Eurobonds. Sources: MoF and WB staff calculations. Sources: MoF and WB staff calculations. 60 To convert domestic debt to US$, we use the World Bank Average Exchange Rate for 2020, 2021 and 2022, estimated at LBP3,688/US$, LBP11,843/US$ and LBP38,000/US$, respectively. 61 Edwards, Sebastien. 2015. Sovereign Defaults, Debt Restructuring and Recovery Rates: Was the Argentinean Haircut Excessive? NBER, February 2015, Cambridge, MA. E for further explanation. 62 Please see Annex ‎ Macro -F inancial R estructuring 71 Figure 50. Under ScB, debt-to-GDP will improve Figure 51. Under ScB, Eurobond and TB debt significantly with eurobond and TB debt restructuring/ restructuring/cancellation is not sufficient to sufficient cancellation but will remain elevated. create fiscal space. Sources: MoF and WB staff calculations. Sources: MoF and WB staff calculations. by 116 pp of GDP—it remains highly elevated at 159 for (i) a reduction of 2 pp in interest rates on the percent of GDP (Figure 48). Similarly, while there is outstanding stock of Treasury bonds (TBs); (ii) plus a corresponding improvement in the interest cost- cancellation of TBs held by BdL; (iii) plus cancellation to-revenue ratio—with the simulation illustrating of Eurobonds held by BdL;63 and (iv) plus 50 percent a fall by 220 pp—it persists as a critical pressure (Good Case) haircut on the face value of Eurobonds. point on public finances at 232 percent (Figure 49). We can deduce the following: Moreover, as neither the cost of debt is addressed, nor the country’s fiscal leakages corrected, both • If face value haircuts on outstanding TBs are indicators would likely resume a robust upward not considered—say, so as to not to further trajectory. This suggests a second Key Policy damage banks’ balance sheets—netting out Decision: domestic debt held by BdL can be an option to reduce the debt-to-GDP ratio and increase ➤ KPD-D2: GoL to identify new terms for its the fiscal space. LBP-denominated debt and debt held by BdL. • None of the measures will reduce the debt- to-GDP to below 100 percent and sufficiently 85. For illustration, we simulate the debt outlook create a fiscal space. of restructuring terms on LBP debt and debt held • Option iv generates the best results. by BdL, also under ScB conditions. Figure 50 and • Debt measures are insufficient for debt Figure 51 present the simulated outlook on debt-to- sustainability; growth is essential. GDP and interest-to-revenues ratios, respectively, B. FISCAL REFORMS 86. Lebanon would need to undertake fiscal reforms would likely resume an upward trend. This signifies to reinforce confidence in its fiscal policy. In fact, persistent fiscal leakages and inefficiencies, which even with the more ambitious debt measures, debt- if not addressed, can lead Lebanon back to debt to-GDP and interest-to-revenues remain elevated and 63 Including the stock of Eurobonds as a measure would need to be checked with the Government’s international advisors, on account of the pari passu clause. 72 LEBA NON PU B L IC FIN A N C E RE VIE W unsustainability and debt distress. This suggests the which accounted for an average of 76 percent of following Key Policy Decision: total spending over the past decade. ➤ KPD-F1: GoL to identify primary fiscal targets 89. Electricity reforms should be prioritized. over the medium term consistent with debt The loss-making, publicly owned EdL imparts a sustainability. staggering burden on Lebanon’s public finances as structural and large operating losses (dating back 87. To achieve primary fiscal targets, fiscal to the 80s) are covered by the central government. measures should be highly progressive. Equity In fact, annual budgetary transfers to EdL averaged considerations would warrant highly progressive 3.8 percent of GDP over the last decade, amounting measures that target key inefficiencies and realize to close to half of the overall fiscal deficit. At resources from those who have disproportionately peak in 2012, the government transferred US$2.2 benefited from Lebanon’s unequal growth model. billion to EdL, equivalent to 5.1 percent of GDP. If unaddressed, the electricity sector will derail ➤ KPD-F2: GoL to identify progressive fiscal recovery programs for the economy, necessitating measures that meet primary fiscal targets. the following Key Policy Decision: 88. Lebanon’s expenditures are characterized by ➤ KPD-F3: GoL to implement fiscally-critical large budget rigidities which limit fiscal space and electricity reforms, such as reduction of HFO flexibility to react to shocks. These expenditures and diesel input for EDL power generation are concentrated on wages, pensions, debt by securing gas supply; the introduction of servicing and transfers to EdL, the combination of progressive electricity tariff reforms; and significant reductions in technical and non- technical losses. C. THE FINANCIAL SYSTEM 90. BdL ensured that banks offer attractive dollar becoming the dominant buyer of government paper, spreads to finance the macro-financial system and intermediated in the secondary market. and maintain the peg. BdL offered incentives and resources for banks to keep attracting foreign 91. As explained earlier in Chapter 3, BdL also deposits and meet the economy’s large external intervened heavily in the real economy through financing needs year after year. More specifically, subsidized lending. The real economy became BdL introduced various refinancing schemes as increasingly dependent on BdL financing, especially well as certificates of deposits (CDs), denominated after 2011.66 As balance of payments pressures in both US dollars and LBP, with maturities that compounded, BdL’s interventions became more extend over 15-year, 20-year and 30-year horizons. unorthodox, leading to the financial operations As such, private deposits, which were almost an that began in 2016 (which became known as exclusive financing source for banks, were primarily financial engineering), offering costly incentives for placed with BdL; by February 2020, the deposit banks, carried opaquely by BdL, to increase their to liability ratio was 78 percent,64 while sovereign FX placements in BdL. Financial burdens on the exposure was 68.2 percent,65 of which 56 percent central bank multiplied, compromising its role as is exposure to BdL alone. BdL also bid on Treasury the financial sector’s stabilizer of last resort. bills and bonds (TBs) in the primary market, 64 This is calculated as total deposits at commercial banks (private plus public sectors) over the total balance sheet. 65 The sovereign debt exposure is computed as a ratio of commercial banks’ aggregate investment in Treasury Bills and Bonds, Eurobonds, and deposits at BdL relative to total assets. 66 For a historical review on BdL subsidized lending please refer to: World Bank (2016), The Big Swap: Dollars for Trust, The Lebanon Economic Monitor, Fall 2016 Macro -F inancial R estructuring 73 92. This resulted in strong linkages across balance fiscal-monetary-financial sectors, rendering one sheets, with a banking-sovereign feedback loop that dependent on the other. Cross linkages were established was always a critical source for macroeconomic risk. as one sector’s liabilities constituted another’s assets, It also became progressively more difficult to continue binding oversized balance sheets. Hence, what attracting foreign deposits as banks’ balance sheets otherwise could be self-contained shocks quickly led expanded to reach almost five times GDP. The finality to systemic failures. These linkages are illustrated in of the sudden stop in October 2019 converted this risk Table 2 and Table 3, which present respectively banks’ into a systemic macro-financial crisis. and BdL’s balance sheets as of February 2020, the early part of the crisis; assets and liabilities are broken 93. Lebanon’s macro-financial system became down according to main categories, and per currency characterized by strong interlinkages between the denomination (LBP or US$). Table 2. Commercial Banks’ Balance Sheet (as of February 2020–early crisis period). Sources: MoF and WB staff calculations. Table 3. BdL’s Balance Sheet (as of February 2020-early crisis period). Public Debt TBs: $58 bln Eurobonds: $32 bln Sources: MoF and WB staff calculations. 74 LEBA NON PU B L IC FIN A N C E RE VIE W On BdL On commercial banks 94. It is critically important to resolve a large 96. GoL will need to adopt a strategy for negative Net International Reserve (NIR) position restructuring the banking sector that includes for the central bank. According to the central bank, recognition and distribution of losses in an BdL’s amount of gross foreign assets (excluding equitable manner. Equity considerations would gold) amounted to US$13.1 billion in currencies warrant highly progressive burden-sharing and US$4.2 billion in securities as of January 2022. measures that realize resources from those who These gross assets, however, are faced by liabilities have earned excessive returns on non-productive of a different magnitude in the form of commercial investments. Further, standard principles for banks’ foreign currency placements with the BdL. addressing losses in banks’ balance sheets This data is not published, but based on World include: (a) a recognized hierarchy of losses, (b) Bank staff estimations using publicly available sustainability, and (c) equity. Options based on bank- information, these liabilities could approach the by-bank assessment include liquidation, negotiated US$80 billion mark. As a result, NIR (excluding recapitalization, statutory bail-in, asset separation/ gold) would be highly negative at, at least, US$70 transfer or merger for limited cases. Government billion. A staggering amount, equivalent to around also has the prerogative and legal jurisdiction to three times the current (and declining) dollar value apply a wealth tax on some or all deposits as a tool of Lebanon’s GDP. to restructure the financial sector. 95. The peg has been dislodged in favor of ➤ KPD-B2: GoL to adopt and implement a multiple exchange rates and unification at the bank resolution strategy to restructure the official rate is discounted. The sudden stop in banking sector. FX inflows implies an inconsistency between the official peg and the outlook on Lebanon’s balance of 97. An essential outcome of the reforms in the payments. The US$ banknote exchange rate (BNR) financial sector would be to notably improve BdL’s is subject to heavy fluctuations but has depreciated NIR position. the Lebanese Lira by over 90 percent compared to the official exchange rate (LBP 1507.5/US$ as 98. To illustrate interlinkages across the macro- of May 2022). The market for the BNR, which is financial system we simulate, for illustrative managed by numerous (small-sized) exchange purposes, the below KPD assumptions (KPDA): bureaus across the country, has become a main supplier of dollars for both real and financial ➤ KPDA-D1: Lebanon achieves a Good Case activity. Meanwhile, commercial banks, which retain outcome on the negotiations over the Eurobonds, reducing face values by 50 the official exchange rate, have heavily restricted percent; withdrawals and transfers of customers’ dollar deposits. ➤ KPDA-D2: Other debt measures also include: • A reduction of 2 pp in interest rates on the ➤ KPD-B1: BdL to adopt a new monetary outstanding stock of TBs; and exchange rate regime that achieves • Cancellation of TBs held by BdL; unification and sustainability in the exchange • Cancellation of Eurobonds held by BdL; rate consistent with the resources available and expected to the monetary authority. Macro -F inancial R estructuring 75 ➤ KPDA-F2: GoL adopts a wealth tax on dollar positions.68 This reduced banks’ holdings of deposits in the amount of $30 billion, divided Eurobonds to US$4.8 billion by December between 2/3 on resident deposits and 1/3 2021. The restructuring reduces this further on non-resident deposits. For equity and to US$2.4 billion. burden sharing purposes, the wealth tax • On the labilities side, the imposition of the should exclude smaller depositors—for wealth tax reduces resident and non-resident example, depositors with total accounts of deposits by US$20 billion and US$10 billion, below US$150,00067 respectively. • On the assets side, the wealth tax allows 99. BdL and banks will incur losses on their US$30 billion to be netted out of banks’ balance sheets due to the Sovereign debt deposits with BdL. restructuring, while the wealth tax will help • Banks’ balance sheet is reduced by US$32 deleverage the financial sector. Table 4 and billion. Table 5 present the balance sheets of commercial • Net impact on banks’ capital position US$-2.4 banks and BdL, respectively, as of December 2021, billion. superimposed with a simulation of the first-degree impact of debt and fiscal measures. Main takeaways For BdL: include: • Cancelation of TBs and Eurobonds held by BdL, reduces BdL’s asset position by US$38 For banks: and US$4.2 billion, respectively.69 • On the assets side, the Good Case outcome • On the labilities side, financial sector deposits on Eurobond restructuring reduces their face decline by US$30 billion. value by 50 percent. Since early 2020, banks • BdL’s NIR improves by US$26 billion (but have been deleveraging away from Lebanese remains negative by several tens of billions Eurobonds, even prior to the Government’s of US$; multiples of GDP). default. Further, in 2020, BdL instructed • BdL’s balance sheet is reduced by US$43 banks to take a 45 percent loss on Eurobond billion. 67 The tax can be split in varying proportions between resident and non-resident customers deposits. 68 In August 2020, BdL issued Circular 567 instructing banks and financial institutions operating in Lebanon to apply a statutory Expected Credit Loss (ECL) of 1.89 percent on foreign currency placements with the Central Bank (including certificate of deposits) and 45 percent on foreign currency placements with the Government. These provisions will be constituted progressively over a period of five years. 69 According to BdL, the central bank holds US$5.03 billion worth of Lebanese Eurobonds in its balance sheet. However, per BdL’s published data, foreign securities at BdL amount to US$4.192 billion by December 2021. While the difference could reflect BdL- specific accounting measures, we assume that BdL’s Eurobond position is equal to the lesser of the two: US$4.192 billion. 76 LEBA NON PU B L IC FIN A N C E RE VIE W Table 4. The Impact of Debt and Fiscal Measures on Banks’ Balance Sheet. Table 5. The Impact of Debt and Fiscal Measures on BdL’s Balance Sheet. 100. Introducing a new exchange rate: For banks • FX assets and FX liabilities in US dollars are ➤ KPDA-B1: Unification of the exchange rate at unvaried. LPB20,000/US$70 • The dollar value of LBP denominated assets declines by US$54 billion. 101. The impact of KPDA-B1 on the balance sheets • The dollar value of LBP denominated of banks and BdL are illustrated in Table 6 and liabilities declines by US$60 billion. Table 7, respectively. Main takeaways include: 70 This is used for illustrative purposes to gauge the impact on the balance sheets. For this to be a successful outcome, it would be a part of a macroeconomic stabilization strategy that would achieve unification and stabilization of the exchange rate. Macro -F inancial R estructuring 77 • Banks’ balance sheet is reduced by US$54 • The dollar value of LBP denominated assets billion. declines by US$70 billion. Net impact on banks’ capital position US$-2.4 • The dollar value of LBP denominated billion. liabilities declines by US$40 billion. • BdL’s NIR improves by US$26 billion (but For BdL: remains negative by several tens of billions • FX assets and FX liabilities in US dollars are of US$; multiples of GDP); unvaried. • BdL’s balance sheet is reduced by US$70 billion. Table 6. The Impact of the New Exchange Rate on Banks’ Balance Sheet. Table 7. The Impact of the New Exchange Rate on BdL’s Balance Sheet. 78 LEBA NON PU B L IC FIN A N C E RE VIE W 102. To ensure an overall clean-up of the banking be justified in the public interest and system, resolution actions need to be based on a in compliance with the principle that rigorous and thorough bank-by-bank assessment creditors do not face higher losses than of losses. Any resolution action taken should be under the liquidation counterfactual (see driven by principles developed to ensure legal below for the NCWOL under 18). soundness and the future stability of the financial • Attribution of losses to creditors in system. These principals establish the framework proportion to the losses incurred by for KPDA-B1 measures. each individual bank, and not “across the board,” in order to avoid penalizing banks ➤ KPDA-B2: that are less exposed to investments • Allocation of losses in line with the in problem assets and their respective creditor hierarchy, i.e., shareholders creditors. losing before creditors. • Banks with a non-viable business • Further clarification, in law, of the creditor structure are to be liquidated or, in hierarchy in case of liquidation, as a basis duly justified cases, good assets to be to allocate losses. transferred to Bridge Bank (indirect bail- • Any deviation from pari-passu treatment in). or the liquidation hierarchy needs to P ublic S ervice Non-D elivery 79 III. PUBLIC SERVICE NON-DELIVERY 80 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 7. EFFECT OF FISCAL POLICIES ON KEY BASIC SERVICES 103. Dilapidated public service delivery is a sector before the crisis? (b) What has the impact of principal manifestation of the hollowing of the the crisis been on delivering services to the people? State, which we argue, is a desired/deliberate and (c) What policy measures are recommended to outcome intended to cement public-private initiate reforms aimed at addressing the structural privilege for principal benefactors of Lebanon’s issues accumulated over the pre-crisis phase, on post-civil war economy. As expounded on in the SCD one hand, and ensure continuity of service provision (2016) (Box 6), elite capture of the State’s resources on the other hand. for private gains necessitated the weakening of public service delivery so that (1) lucrative and 105. The sector chapters build on the most recent dollar-inflated private sector contracts can step evidence and findings from the World Bank work in (e.g., oil import business, generators, waste on each sector, complemented by additional collection, but also private schools, hospitals, etc.), analyses for the purposes of this report. They and (2) confessional groups can tighten their grip benefited from a Facebook survey undertaken on citizens by supplanting the State in these service in July 202172 to collect information on Lebanese provisions. This is what the 2016 SCD described as perception regarding the quality and access to the hollowing of the state as an equilibrium strategy public services. The main recommendations for the elite; it is therefore a desired outcome for presented in this section have also benefited from them, as opposed to a failure of the system. the feedback of a panel of experts facilitated by the Lebanese Citizen Foundation during consultations 104. This section analyzes the implications of which took place in November 2021. Lebanon’s macro and structural policies on the provision of key basic services to the population: 106. On the revenues side, we found that low cost- Water, Electricity, Transport, Health, Education, recovery led to an unsustainable fiscal burden and and Social Protection. The period of examination negatively impacted the provision of electricity and covers the pre-crisis phase identified in the macro- water to the population. The main challenge comes fiscal analysis as well as the crisis period (2019- from the electricity sector where obsolete tariffs, 2021).71 Sector chapters attempt to respond to which have not changed since 1994, combined with three main questions: (a) What was the status of the collection losses result in very low cost-recovery: 71 Throughout this section, crisis denotes the ongoing economic and financial crisis that commenced in end-2019. 72 An online survey was initiated on July 39, 2021 using Facebook Ads Manager (Facebook, Instagram, Messenger, Audience Network). The survey targeted 72 unique audiences to ensure that responses are demographically representative. The survey was completed by about 7,000 respondents. P ublic S ervice Non-D elivery 81 EDL’s billing for energy delivered to customers protection73 spending was targeted to the poor and covered only 30-50 percent of its expenditures in vulnerable compared to 93 percent spent on formal 2016 to 2018—and only 54 percent of those billed workers in the public sector. amounts were actually collected. Reliable financial data for Water Establishments operation is missing, 109. As a result of inefficient policies, Lebanon’s but operational costs recovery is estimated to be in historically heavy reliance on private sector the range of 60-70 percent. provision of basic services and inequality of access to such services have been sustained 107. Looking at expenditures, Lebanon does over the pre-crisis phase. In 2018: 37 percent of not allocate sufficient public resources to key electricity demand was covered by private diesel services essential to the accumulation and generators; only 2 percent of motorized trips, in protection of its human capital. While Lebanon Beirut and Tripoli, were undertaken using buses spends more of its GDP on health than other operated by the Railways and Public Transport comparable countries in the MENA region, Authority; public hospitals accounted for only 18 Government contribution represents only 29 percent of the available beds in the country; and percent compared with 33 percent for households 56 percent of students were enrolled in private out of pocket. Government spending on education is schools. This was mostly the result of government among the lowest in MENA, ranging between 2 and failure to provide reliable quality services, as the 3 percent of GDP over the past fifteen years, about bulk of public expenditures was directed to pay for half of the minimum international benchmarks for interests, EdL deficits and personnel costs, with public education financing (4 to 6 percent of GDP). little left to Capital and Operational expenditures. Similarly, the Government had spent a mere 0.02 Such deliberate government failure which, as percent of GDP on social assistance in 2017 and mentioned above, was intended to benefit private 2018, far below MENA (1 percent) and global (1.54 interests and confessional organizations, puts percent) averages. a heavy financial burden on Lebanese families and penalizes the poorest and most vulnerable 108. The sector analyses confirm the parts of the population who are most in need of inefficiencies in public spending, which reflect government support. the stressed macro-fiscal conditions analyzed earlier. The low level of capital expenditures 110. The successive shocks that hit Lebanon since resulted, among others, in lack of investments 2019 (Financial crisis, Port of Beirut explosion in additional electricity generation capacity and and COVID 19) affected both the demand and network maintenance. This, in turn, constrained supply sides in the sectors under examination. EdL from meeting electricity demand, promoted The inevitable end of the FX subsidy exacerbated costly and highly polluting alternatives and, the inflationary environment.74 Over the summer of ultimately, resulted in rolling blackouts ranging, 2021, acute shortages of fuel75 for both the private before the crisis, from three hours in Beirut to 13 and public utilities led to severe electricity blackouts hours in some rural areas. Another manifestation across the country; EdL, cut power supply to as of inefficiencies in public expenditures is spending little as 2 hours per day; private generators could on social protection: In 2019, spending on social only partially compensate and faced constraints in protection programs reached 6 percent of its GDP, obtaining diesel fuel supply. Shortages in gasoline higher than the average for Arab countries of 4.6 caused long queues for motor vehicles, leading to percent. However, only 3 percent of all social disputes and even violence between those waiting. 73 Spending on social protection includes social assistance, social protection, and social welfare programs 74 The subsidy was first imposed on critical imports—energy, medicine, and wheat—end-2019, then later extended to essential food imports (as identified by the Ministry of Economy and Trade). In this set up, the central bank, BdL offered favorable (lower exchange rates) to importers of these goods, financed by BdL’s gross FX reserve position. This led to the drain in precious and scarce FX resources. 75 Supplies were available at inflated prices, which could only be afforded by a very few privileged consumers. 82 LEBA NON PU B L IC FIN A N C E RE VIE W The health sector also suffered unduly, due to the economy, resulting in the deterioration of the scarcities in essential medications and medical quality of service provided. The high inflation rates services while facing COVID-19 conditions. While have led to sharp declines in the purchasing power these distortions have since moderated, this was of salaries for public sector employees, heavily at the cost of surging price levels that have further affecting morale and the quality (and quantity) shrunk residents’ purchasing power. Households’ of work delivered. Critical sectors are losing coping strategies consisted of looking for more thousands of qualified personnel, often fleeing affordable alternatives (such as moving their the country: 30-40 percent of medical doctors and children from private to public schools) when nurses according to the World Health Organization available, or simply reducing their utilization of (WHO) and about 10,000 teachers according to the services through, among others, less hours of Center for Educational Research and Development generators electricity, lower consumption of water (CERD).76 Overall, the growing levels of poverty and or delayed health care. unmet basic needs of the population pose a high risk of further deteriorating Lebanon’s human capital. 111. On the supply side, infrastructure damages due to the Port of Beirut explosion, price increases 112. The compounded crises further revealed the and shortages of goods (especially energy), and fragility of Lebanon’s service provision model, human resources losses disrupted further the which relied heavily on the private sector, with a provision of basic services. The Beirut explosion relatively inefficient and low-performing public in 2020 damaged 292 of the 813 health facilities in sector. Addressing this fragility should be a priority. the country, significantly reducing access to care, This section includes recommendations for critical especially for the vulnerable. Crisis-related macro- reforms aimed at improving the performance, financial conditions have had a large bearing sustainability, and resilience of public service on the sectors, as the analysis here illustrates. provision. The proposed measures could be part The collapse of the local currency and ensuing of the medium-term fiscal framework considered economy-wide shortages in FX have resulted in as part of the GoL recovery package. The section sharply increasing costs for the sectors; much of also proposes a series of sector specific measures these costs are directly related to the exchange aimed at addressing the immediate needs of the rate (i.e., imports, dollar-contracted services, etc.). population in terms of access to water, electricity, Triple-digit inflation rates have also raised costs transport, health and education services, while denominated in Lebanese Lira. The sectors also providing financial assistance to the increasing suffered from shortages of goods and services in numbers of poor and vulnerable households. 76 CERD (2021). “Statistical Bulletin 2020–2021. P ublic S ervice Non-D elivery 83 Box 6. Excerpts of the Lebanon SCD (2016) Related to Elite Capture of Public Service Delivery and The White Paper Presented to GoL in 2016, entitled Priority Reforms for the Government of Lebanon. A key feature of sectarian organizations has been The electricity sector is a striking example of their role in providing crucial social services such as an underperforming sector negatively affecting education and health, and provision of welfare support Lebanon’s macroeconomic situation, economic to the most vulnerable groups—channeled through growth and its households. First, fiscal transfers to NGOs and the private sector. While this has been vertically integrated public utility EdL are the cause arguably beneficial in the absence of effective state of a significant part of the country’s public debt. institutions, it has deepened both societal cleavages Second, different sources consistently point towards and institutionalized a discriminatory and inequitable electricity as being a binding constraint to Lebanon’s system for regulation of social and economic life, competitiveness and ease of doing business. And given that provision and targeting of services has often third, a majority of Lebanese are connected to private been linked to electoral campaigning. When combined generators to compensate for the deficiencies of the with the privatization of public service delivery and public service delivery. This is despite a strong demand direct financing by the state, this has also led to steep for having higher electricity quality even at a much inequalities in access to services due to exorbitant higher price. Political and confessional cleavages are costs for service delivery by private sector actors. preventing the materialization of reforms that have been on the table for more than 30 years. On Education & Health Education in Lebanon is characterized by multiple On Governance adjacent systems, including public and private Governance is at the root of Lebanon’s failure to deliver systems, functioning independently from each other. basic services and generate inclusive growth and The majority of students in Lebanon attend private jobs. As such, a structural improvement in governance schools. Data also reveal that the poor tend to attend will not only provide typical returns reaped by other lower-quality public schools, and the wealthy attend countries, but in the Lebanon-specific case, it will also higher-quality private schools. It should also be reinforce resiliency to external shocks to which the noted that the education system in Lebanon, because country is frequently exposed. of its strong stratified nature—along income and confessional lines—does not perform its classic civic Toward that end, the following medium-term reforms mission of being the “glue” that binds citizens to the are emphasized: (i) complete the decentralization State. reform including a restructuring of the fiscal transfer system to provide localities with sufficient There also exists a two-class health system, with resources and a clear delineation of roles between an inefficient and inequitable public health sector the central and local governments; (ii) implement and a high-quality private sector. Service delivery is the Public Procurement Law of 2013 with a view complex with both public and private institutions as to empowering the Central Tender Board (CTB) as providers. Out-of-pocket expenditures are the largest an independent regulatory body, enhance public source of health financing and a shared inequitably procurement capacity-building by the Institute of across households. Finance, and move towards e-procurement at CTB; (iii) boost Public Financial Management (PFM) capacity in On Infrastructure budget planning, preparation and execution to ensure The strong influence of private sector and efficient allocation of resources and improved service sectarian interests in Government facilitated by the delivery; (iv) adopt proactive disclosure measures to confessional system of governance has both impeded mitigate corrupt practices by limiting discretionary equitable and efficient distribution of investments in opportunities for public officials and increasing infrastructure (both construction and maintenance) accountability; and (v) enhance capacity of both the and precluded the development of a national strategy Central Administration of Statistics (CAS) and the that addresses infrastructure development as part of Balance of Payments (BoP) unit at BdL to collect and a broader holistic and inclusive development vision disseminate regular high quality data by providing for the country. sufficient resources and securing their mandates. 84 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 8 . WATER SECTOR A. PRE-CRISIS STATUS OF THE WATER SECTOR 113. The 15-year civil war (1975-1990) had been mostly intermittent and unreliable reaching a devastating impact on Lebanon with the as low as three hours per day across many regions destruction of infrastructure along with the rapid in the summer. This led to increasing reliance on urbanization of Beirut and neighboring cities, much more expensive private tankers and bottled which was driven by internal displacement and water. the influx of refugees. Dilapidated infrastructure coupled with increasing demand from a large 115. The WEs have been in precarious conditions population led to the unsustainable use of ground since their formation, suffering from inadequate water, despite the construction of Qaraoun Dam technical, financial and commercial performance, and Litani Hydroelectric Project. making it challenging for them to deliver adequate services. The WEs do not have a history of providing 114. The period commencing 2001 saw the audited financial statements for public scrutiny, consolidation of water service provision through which makes analysis for this chapter difficult.77 the formation of the four Water Establishments (WEs): South Lebanon, North Lebanon, Beirut and 116. Only 8 percent of the wastewater receives Mount Lebanon, and Beqaa. Historically, about 79 secondary treatment, and the rest is discharged percent of the population was connected to the into water courses with or without preliminary public water supply system, though the service has treatment. B. CRISIS IMPACT ON THE WATER SECTOR 117. The economic and financial crisis resulted in basis for considerable parts of WE cost structure. a thirteen-fold increase in the cost of supplying However, WEs do not receive financial support from water from public utilities. The US dollar is the the Government and rely mostly on tariff collections, 77 In the second quarter of 2021, the Ministry of Energy and Water requested the four WEs to provide summarized financial information with emphasis on their cost structures and evolution of billed and collected revenue for the period from 2018 to now as well as a projection to 2024. These are the data that has been used for analysis in this document. However, the information available from the four utilities does not allow a full comparative analysis. Based on data submitted and discussions with North Lebanon WE (NLWE) and Beqaa WE (BWE) an understanding of electricity costs for these two establishments was obtained. The other two WEs, i.e., South Lebanon WE (SLWE) and Beirut Mount Lebanon WE (BMLWE) did not report a specific breakdown of the expenditure for electricity. P ublic S ervice Non-D elivery 85 which are denominated in LBP. Consequently, important to note that, in addition to the above- the depreciation in the LBP exacerbated the gap mentioned cost items that are directly purchased in between WEs revenues and expenditures. While dollars, other major items, such as treatment and the WEs were able to sustain operations through disinfection reagents, are also linked to the FX even acquiring subsidized fuel, delaying maintenance, if not directly purchased in dollars. and receiving international donor support, the removal of fuel subsidies adds to their financial 121. In the 2019 Update to the National Water burden and puts the water supply at risk. According Sector Strategy, all WEs were projected to to UNICEF “Unless immediate action is taken, the experience a steep increase in billed revenue due public water supply networks will collapse and, to a combination of new customers signed, higher directly or indirectly, eliminate access to safe water tariffs and improved collection. These projections to more than four million people.”78 did not materialize and all WEs have witnessed a fall in revenue collection which has further 118. Electricity blackouts have affected the WE exacerbated the operational deficit of utilities. ability to treat, pump and distribute water. Total energy costs (electricity and fuel) constituted 122. WEs suffer depletion of human resources. between one-third to one-half of the operational Staff salaries, denominated in LBP, lost a significant expenditures (OPEX) for the WEs.79 WEs were able share of their purchasing power. Further, the fuel to provisionally benefit from (i) the inefficient and crisis created additional transportation costs to costly FX subsidy on fuel imports,80 and (ii) fuel staff. The combined impact on the staff is significant, subsidies provided by the Government from June with many not coming to their offices—a dynamic 2021 through September 2021. With the removal of shared across the public administration. Naturally, both types of subsidies, the WEs that rely exclusively there will be increasing pressures on the WEs to on generators may collapse within months.81 increase salaries at some point to at least make up for part of the loss in purchasing power. Such 119. In addition, fuel and diesel shortages impacted decision of increasing salaries will depend on the the distribution of other water alternatives (i.e., national government. water tankers and bottled water) that Lebanese residents have traditionally relied on to cope with 123. The absence of audited financial statements water shortages. The prices of these alternatives for the WEs hinders any reliable financial analysis have significantly increased, and in some cases of their performance. For the BWE, the cost have doubled or tripled compared to January 2021. recovery (calculated as cash inflow/total OPEX) was expected to increase from 0.58 in 2019 to 120. The sharp devaluation of the LBP has made 0.76 in 2024. The OPEX between 2019 and 2020 it difficult for the WEs to buy spare parts and has remained consistent at approximately LBP23 equipment which are mostly quoted in dollars. billion despite the sharp devaluation, which The Beqaa WE (BWE) saw the share of Operation implies a decline in the level of the service and and Maintenance costs in their OPEX increasing operations given the increase in energy, fuel and from 2 to 13 percent between 2018 and 2020. These maintenance costs. The North Lebanon WE (NLWE) included water and wastewater testing equipment, expects its cost recovery ratio to fall from 0.74 to other consumables, software licenses and fees 0.58 during this period mainly due to a reduction in to some contractors directly paid in dollars. It is revenue collection. 78 UNICEF. July 2021. Drying-up Lebanon’s water supply system: on the verge of collapse. 79 For NLWE the energy cost was LBP9.7 billion representing one-third of the OPEX in 2020. For BWE, the energy cost in 2020 reached LBP10.2 billion accounting for more than 43 percent of total OPEX for the period. presentation at the BWE-Donor Workshop June 2021 - Unpublished. 80 Starting in end-2019, BdL offered favorable exchange rates for importers of certain essential goods, including fuel, medicines and wheat. This scheme, however, drained much of the gross FX reserves at BdL and could not be sustained. By Q3 2020, the FX subsidy was removed for most of these imports. 81 UNICEF. July 2021. Drying-up Lebanon’s water supply system: on the verge of collapse. 86 LEBA NON PU B L IC FIN A N C E RE VIE W 124. In June 2021, the O&M of Wastewater 125. Using 2018 as a base year, it is estimated Treatment Plants (WWTPs) were formally that the annual operational costs for all four transferred from CDR to the WEs. However, it is WEs reached US$105 million. More than half of not clear if this has already been implemented. In these costs originate at Beirut Mount Lebanon WE the case of BWE, these include the treatment plants (BMLWE). However, due to its size and customer in Zahle, Baalbeck, and Jeb Jannine – Saghbine. base, it is also the only establishment that reached Based on information available from the BWE, these cost recovery of operational costs in 2020 although contracts could increase the annual O&M burden by CAPEX cannot be covered. It is worth stressing the LBP2.7 billion to LBP4.5 billion or by 20-43 percent.82 limitation in estimating the OPEX based on WEs Similar concerns are observed in NLWE where the projected financial statements due to the absence combined annual operational costs for a group of of audits at the WEs. WWTPs to be transferred to the establishment can reach the equivalent of US$10 million. C. IMPACT ON THE RESIDENTS 126. Most residents rely on (privately run) trucks • Four out of five residents live in areas with and bottled water to cope with the shortages in less than 6 hours of water supply per day, supply from the WEs. The remaining un-connected while only 15 percent reported water supply residents receive their supply from a combination of more than 12 hours. of sources such as water trucks, illegal tapping, • There is excessive dependence on bottled and private and municipal sources. With continued water and tanker trucks. Over the last year, power cuts, the supply could be reduced further the price of a tanker has increased from to 35 liters per capita per day (lpcd) against the LBP9,000-LBP30,000 for one cubic meter standard of 165 lpcd. to LBP75,000-LBP125,000, compared to LBP1,000 per day for one cubic meter of tap 127. The feedback received from the Facebook water supply.84 The price of water tankers survey, undertaken by the World Bank in June breached LBP250,000 in some areas. 2021, confirms the above analysis:83 128. The cost of water supply from alternative • Most residents are not receiving water sources, in the face of the collapse of the public supply from the WEs. Less than one-fourth water system, is likely to increase by 200 percent. of respondents have utility connections. This is likely to hit the poor and vulnerable A majority of those sampled do not rely on the hardest. service provision by utilities but depend instead on bottled water. 82 Data on the impact of transfer of O&M of WWTPs in other WEs are not available. 83 See footnote 59 for specific information about the Facebook survey. 84 UNICEF. July 2021. Drying-up Lebanon’s water supply system: on the verge of collapse. P ublic S ervice Non-D elivery 87 D. SHORT TO MEDIUM TERM SOLUTION FOR REDUCING WATER VULNERABILITY 129. Over the medium term, there should be 130. While addressing energy insecurity and a concerted effort to improve the capacity of financial instability is crucial to improving the the WEs to become credible entities on whom reliability and sustainability of water services, in residents can depend for basic services. The the short-term the impact on the most vulnerable gradual erosion of public confidence in the utilities residents could be mitigated through: has been a constant feature over the last decade. While residents depended on the private sector to • Time bounded cash and equipment support meet the service gap, the recent crisis has shown from development partners to continue to that the private sector cannot completely replace provide minimum services. This could be in the WEs when it comes to providing service over the form of hard currency for purchases of a large geographical area. At the same time, there fuel and spare parts for pumping stations are certain measures that could be introduced and treatment plants. to reduce the dependence on grid connected • Tanker trucks (contracted by WEs in electricity. These include: emergency situations) ensuring delivery of public water to low-income regions that are • Solar panels for water treatment plants suffering from acute shortages of water • Bio-gas generation facility for medium- to supply. In such a case, the utility would large-sized plants contract the tanker trucks to deliver the • Surface water storage when feasible (for water for vulnerable household at a price example regional reservoirs to help manage around the municipal water rate. the pressure in the network) • Water from standpipe or from reservoirs for • Redundancies in the distribution system, emergency supply of water. so one area can be supplied from different sources. 88 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 9 . ELECTRICITY SECTOR A. PRE-CRISIS STATUS OF THE ELECTRICITY SECTOR 131. Lebanon’s electricity sector has long been electricity sector amounted to US$40 billion. At at the center of the country’s economic and fiscal the heart of this imbalance is EdL’s high operating challenges—often depicted as the epitome of costs and low revenue. As shown in Figure 52, EdL’s the failed state. Annual budgetary transfers to pre-pandemic billed revenues85 remained stagnant Electricité du Liban averaged 3.8 percent of GDP below US$1 billion, while its costs increased over the last decade, amounting to nearly half of the significantly from US$1.4 billion in 2016 to around country’s overall fiscal deficit. At its peak in 2012, US$2.3 billion in 2018-2019. Consequently, EdL’s the Government transferred US$2.2 billion to EdL, financial deficit grew rapidly from US$780 million equivalent to 5.1 percent of GDP. During the years in 2016 to almost double by 2018 at US$1.4 billion.86 2016-2019, Ministry of Finance (MoF) transfers to When collection losses are considered, EdL’s cash EdL ranged from US$924 million to US$1.66 billion. deficit was even larger, totaling US$944 million - As of 2020, the cumulative deficit caused by the US$1.5 billion during 2016-2019.87 Figure 52. MOF Transfer, Revenues, Costs and Deficit of EdL Pre-pandemic (2016-2019)88 Sources: WB calculation based on EDL data; NB Revenues data for 2016 and 2017 and Costs data for 2019 are based on WB projections; rest of the data are based on EDL/MEW input. 85 Billed revenues are the anticipated revenues if the issued electricity bills are paid in full by all customers; billed revenues are usually higher than collected revenues due to losses in the collection process (e.g., non-payment). 86 Financial Deficit equals Billed Revenues minus Total Costs, whereas Cash Deficit equals Collected Revenues minus Total Costs. 87 Data for 2017-19 are estimates based on 2015-16 data, which assume a collection rate of 95 percent (the share of issued bills being collected) starting in 2018. The collection losses in 2016 and 2017 were significant due to delays in bill issuance and collection effort, which were gradually addressed in 2018-19. 88 The calculations for all figures in this document use an exchange rate of 1510 LBP to US$, and an average electricity tariff at LBP138/ kWh (which is the average tariff for the year 2016, the only year for which full billing and consumption data from EDL is available). P ublic S ervice Non-D elivery 89 Figure 53. MoF Transfer, Revenues, Costs and Deficit of EdL Pre-pandemic (2016-2019)89 Sources: WB calculation; NB costs data for 2016-2018 are from EdL, whereas costs data for 2019 are WB projections. 132. The causes of EdL’s high operating costs are (a) 133. On the revenues side, EdL was hamstrung with its continued reliance on expensive, highly polluting non-cost-reflecting tariffs that have not changed imported liquid fuels for power generation and (in nominal terms) since 1994 (in real terms that (b) high network losses. Fuel expenses accounted have drastically shrank). EdL’s operating income for 60-74 percent of EdL’s total annual costs in the remained consistently negative over the years 2016 to 2019 period (see Figure 53). In 2018, for and is heavily reliant on the MoF’s fiscal transfers example, fuel expenditures accounted for US$1.7 for financial equilibrium. Given the prominence of billion of EdL’s total annual costs of US$2.3 billion. fuel expenditures in its total costs, EdL’s financial The majority of EdL’s generation assets can use the performance is also very sensitive to fluctuations cheaper and more environmentally friendly natural in international fuel prices. Additionally, the gas, but past attempts to set up gas import facilities current crisis has highlighted EdL’s vulnerability and related infrastructure failed. Network losses to fluctuations in foreign exchange as its costs are also compounded the utility’s financial challenges. predominantly in US dollars and its revenues are In 2016-2019, these losses accounted for a entirely in Lira. EdL’s average retail tariffs stand at staggering 38-56 percent of total energy generated. US¢8-9.5/kWh90 at the official exchange rate US$/ In 2018, for example, EdL’s losses accounted for 39 LBP of 1,507.5, but drops below US¢1/kWh at a percent, comprising 4 percent of technical losses market reflective rate (above LBP20,000 per US$), on the transmission network and 35 percent on the while average costs, taking 2018 as an example, distribution network (9 percent of technical losses amounted to US¢27/kWh without accounting for and 26 percent of non-technical losses, primarily collection losses. EdL’s billing for energy delivered theft). While these technical challenges are not to customers covered only 30-50 percent of its unique to Lebanon, the sector’s track record shows expenditures over the 2016-18 period and has that the country has been so far unable to mobilize fallen at an estimated 3 percent in 2021 using the political commitment and decisions needed to market reflective rate, due to the drop of the market take swift action to turn around the sector. Many of value of the Lira, and the drop of electricity outputs the past failures are linked to vested interest and (attributable to sector inability to secure hard political economy dynamics, reinforced by the lack currency for fuel purchase) – the actual collected of transparency, poor sector governance and weak revenues were even less. institutional oversight of the sector. 89 The calculations for all figures in this document use an exchange rate of 1510 LBP to US$, and an average electricity tariff at LBP138/kWh (which is the average tariff for the year 2016, the only year for which full billing and consumption data from EDL is available). 90 In this exercise, average tariffs are back-calculated for each year, which is equal to Billed Revenues divided by Billed Energy. NB full EDL data on billing and consumption is only available for the year 2016, and data for other years involve World Bank team’s projections. 90 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 54. Total Energy Generated vs. Collected by EdL (MWh) Sources: WB calculation based on EdL data for years 2016-2018; WB estimation for 2019. 134. Collection losses, which vary from year 135. Chronic lack of investments in additional to year, add another dimension to an already generation capacity and high network losses challenged financial environment in the sector constrained EdL from meeting electricity demand (see Figure 54). Until 2019, EdL was constrained in the country. To cope with the generation shortfall, by security and political reasons in terminating EdL historically used rolling blackouts to manage services or disconnecting customers for bill demand on its network, with customers enduring nonpayment, given that the largest collection losses daily shortages that usually varied based on region. resulted from nonpayment by public institutions and In 2019, for example, rolling blackouts ranged from Palestinian camps. In 2019, the Ministry of Energy three hours in Beirut to 13 hours in some rural and Water (MEW) and EdL enlisted the help of the areas. As a result, customers relied on privately Army, Police, and the Ministry of Justice to start owned diesel-fired generators to supplement dealing with this issue, which resulted in improving EdL’s supply to get 24 hours of electricity. The total residential collections and higher revenues for commercial (subscription-based) private generator EdL. MEW and MOF also agreed to coordinate in market size for 2018 is estimated at US$1.1 billion, dealing with arrears by public institutions, though serving 1.08 million customers whose electricity it is unclear whether this coordination materialized purchase is estimated at 4 TWh. In total, the (private) as the sector continued to be politicized. Moreover, market composed of fuel imports and distribution, a strike by EdL staff in 2016 and a temporary generator sales, and maintenance services is lapse in 2017 of distribution service providers’ estimated at around US$2 billion. The total size of (DSPs) contracts, which covered meter reading and the labor force linked to the operations of private collections, caused a 4- to 12-month lag in billing in diesel generators is estimated to be around 13,200 some areas. EdL has not yet been able to recover persons. Diesel generators are estimated to have from this, thus increasing its working capital needs. contributed around 39 percent of the total electricity Greenhouse Gases Inventory (GHI) in 2018, which is equivalent to 3400 Gg CO2eq or 11.4 percent of Lebanon’s total estimated GHI emissions.91 91 For more details about the private diesel generators market, see ESMAP. 2020. “Distributed Power Generation for Lebanon: Market Assessment and Policy Pathways. (May), World Bank, Washington, DC. License: Creative Commons Attribution CC BY 3.0 IGO. https://documents1.worldbank.org/curated/en/353531589865018948/pdf/Distributed-Power-Generation-for- Lebanon-Market-Assessment-and-Policy-Pathways.pdf P ublic S ervice Non-D elivery 91 Figure 55. EdL Energy Supply (MWh) Sources: EdL data. B. CRISIS IMPACT ON THE ELECTRICITY SECTOR 136. In 2020, the combination of the political supplies to compensate. Private generators were stalemate, the Beirut port explosion, a worsening not intended to provide supplies for long hours at a economic crisis, and the onslaught of the time. Further, generator owners started to run into COVID-19 pandemic made the sector’s conditions difficulty securing foreign exchange to import fuel. exponentially worse. EdL’s generation fell by an As a result, private generators started restricting estimated 17 percent year-on-year over the first supplies, leaving many families facing hours of 11 months (see Figure 55), causing widespread total blackout. In the Facebook survey performed in electricity blackouts. While data for 2020 and June 2021,92 surveyed residents indicated that they 2021 remains unavailable, anecdotal evidence and have on average 4.9 hours of electricity per day. information indicate that generation declined to Moreover, the rapid decline in the Lira’s value, as 60 percent in July 2021 with electricity blackouts the economic crisis deepened, also meant that the lasting up to 22 hours per day. This drop in tariff for private generator supplies, which is Lira- generation was mainly caused by fuel shortages that denominated, had to increase to compensate for the were badly disrupted by delays in importing new additional cost of fuel, which is dollar-denominated. shipments, receipt of supplies that did not conform In addition, the end of the FX subsidy on fuel led to to required specifications, and EdL’s inability to a sharp increase in fuel costs to private generators secure cash and foreign exchange for payment. The and invariably to customers. only silver lining was that the pandemic reduced electricity demand and the international cost of 138. Progress achieved in 2019 in reducing fuel as markets reacted to the sudden shock of a commercial losses on the distribution network global demand slump, which helped reduce EdL’s was largely reversed in 2020. Financial pressures fuel costs and extend use of budgetary support from the country’s economic crisis significantly provided by the MoF for 2020. raised the political price for disconnecting illegal connections or non-paying customers. Lockdowns, 137. EdL increased use of rolling blackouts to reduce social distancing requirements and the absence of its fuel costs, forcing customers to increasingly an online billing and payment platform essentially rely on private generators for supplemental suspended bill collection efforts from March 2020 92 See footnote 59 for specific information about the Facebook survey. 92 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 56. Billed Electricity Consumption to Be Collected by DSP (GWh) Sources: EdL data. through May 2020. Moreover, the August 4 explosion the barge-mounted generators, and the O&M in the Port of Beirut caused severe damage to contractor that manages EdL’s two largest public the distribution network within the blast radius power plants at Zahrani and Deir Amar) continued and significantly damaged EdL’s headquarters, to increase. As of the end of 2020, EdL’s arrears including its national control center that manages to these contractors are estimated to be US$320 the transmission network and the main data million. As EdL’s condition continued to get worse center for billing. This further slowed billing and in 2021 and 2022, it is likely that these contractors collections, thus reducing EdL’s revenues until will eventually stop work. billing commenced a month later using a backup data center. As a result, EdL’s Lira-denominated 140. In March 2021, Parliament approved around revenue plummeted in 2020. As illustrated in LBP300 billion (US$200 million at the official Figure 56, billing for electricity consumption to be exchange rate) in an emergency loan to finance collected by DSPs dropped by 16 percent in 2020 fuel imports for EdL. The approved amount is compared to 2019, which itself was 36 percent actually one third of what the Government had lower than 2018. asked Parliament for. In May 2021, MoF approved only LBP100 billion in transfers to EdL under 139. Along with Lebanon’s economy, EdL’s situation four installments, equivalent to US$62 million is estimated to have further worsened in 2021. The at the official exchange rate. However, this did crisis and its associated unemployment rate and not guarantee actual access to US dollars. The sharp erosion in purchasing power will continue conversion to US$ was blocked by BdL, which was to challenge customers’ ability to pay for EdL’s heavily rationing its stock of FX reserves. In April electricity supplies. EdL’s contract with the Algerian 2022, the Council of Ministers approved a US$60 company, Sonatrach, for fuel supply expired at the million from SDR to EDL to start settling payment end of 2020 and MEW has been buying fuels on the arrears to contractors and suppliers and granted spot market. Although this seems to have generated EdL access to US$ from its collected revenues in small savings for EdL due to lower fuel benchmark Lira at BdL (est. LBP 400 billion) at the Sayrafa prices over the early phase of the pandemic (these rate (for an estimated US$18 million), that is many have reversed significantly in 2021 and especially multiples the official exchange rate that EdL’s in 2022 since the war in Ukraine), it also increased tariffs are based on. Due to lack of fuel, Zahrani and EdL’s exposure to market fluctuations. EdL’s Deir Amar power plants, which together provide 38 arrears to its major private service providers (such percent of Lebanon’s electricity (870 MW out of total as the DSPs that manage the distribution network, national generation capacity of 2,200 MW), have P ublic S ervice Non-D elivery 93 temporarily ceased their operation multiple times 380 MW of EdL’s generation capacity, suspended (the latest on April 19, 2022). On May 14, 2021, its operations, claiming arrears of US$100 million the barge-mounted generator, which accounts for over the past 18 months. C. POLICY ACTIONS TO ENSURE CONTINUITY OF SERVICE DELIVERY 141. Lebanon has little choice but to undertake on a Sustainable Growth Path.”93 The 5-year plan comprehensive reforms of the sector to reverse conveys to the public and international community the financial drain and decades of neglect and the Government’s roadmap to fix the power poor performance. In the immediate terms, some sector and put into context the short-term actions quick actions include (a) engaging in regional considered. The plan includes the following: reforms energy trade to urgently obtain fuel for power to the sector’s governance; strategies to increase plants and reduce generation costs (e.g., gas import security of supply in a least cost manner (launching from Egypt and possibly electricity import from bids for renewable energy and gas fired power Jordan); (b) scaling up renewable energy especially plants); the procurement of gas supply through solar, through distributed schemes; (c) reducing floating storage and regasification units (FSRU) and commercial losses, shortening billing cycles and to move away from diesel and heavy fuel oil (HFO); improving collection activities through enhanced and continued improvements in loss reduction DSP Contract execution; (d) upgrading transmission and revenue collection. The plan has a timeline and distribution systems to reduce technical losses and a financing plan, and articulates the steps to and investing in measures to reduce commercial implement the long-stalled vision of Law 462 for losses on the distribution network and improve bill more private sector participation in the distribution collection; and (e) with improvements in service, and generation sub-sectors, strengthening EdL’s gradually adjusting electricity tariffs toward internal and external governance and modernizing cost recovery. its core business areas and administrative processes, and establish the Electricity Regulatory 142. While addressing crisis-specific implications, Authority.94 These reforms will take time to it is vitally important that the Government implement, thus need to be started urgently to put pursues continued efforts to implement the vision the sector on a path toward financial viability and for sector turnaround articulated into the policy reliability of supply. statement “Setting Lebanon’s Electricity Sector 93 Adopted by the Council of Ministers on March 16 and disclosed on April 1, 2022. https://energyandwater.gov.lb/ar/ details/100777/setting-lebanon-s-electricity-sector-on-a-sustainable-growth-path-policy-statement-march-2022 94 For a comprehensive account of existing challenges of the sector as well as actions to be taken, see: World Bank. 2020. Lebanon Power Sector Emergency Action Plan 2020. Washington, DC. World Bank. 94 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 1 0 . TRANSPORT SECTOR A. PRE-CRISIS STATUS OF THE TRANSPORT SECTOR 143. Annual revenues from the transport sector 144. Taxes and fees in the transport sector include to the Ministry of Finance have more of less been driving license fees, vehicle registration fees, stable over the 2017-2019 period. As shown in vehicle control fees and passenger departure Figure 57, annual revenues to MoF from Beirut taxes, with the least revenues emanating from International Airport, Port of Beirut (PoB) and driving license fees, as shown in Figure 58. Unlike transport taxes and fees have averaged LBP235 other sectors (like electricity, water and telecom), billion (equivalent to US$155 million at the official there are no operational revenues from direct user exchange rate), LBP168 billion (US$112 million) charges in the transport sector. and LBP780 billion (US$520 million), respectively. The analysis of revenues in this section is based on 145. The breakdown of expenditures, as received limited data received from MoF for the purpose of from MoF, only includes dues to municipalities, this PFR and only reflects MoF’s share of revenues with no data on operational costs or investments. from the transport sector. For example, PoB’s However, it is common knowledge that Lebanon’s revenues in 2017 amounted to US$313 million, transport sector has long been suffering from years including US$128 million from port dues, US$57 of underinvestment and poor planning/budgeting. million from handling, US$34 million from storage Sector financing has primarily been focused on road and US$95 million from other revenues,95 while maintenance, which has hindered the development MoF’s reported revenues from PoB amounted of sustainable, high-quality, affordable and reliable to LBP175 billion (US$116 million at the official transport systems and infrastructure. Lebanon’s exchange rate) in the same year. The analysis is decaying infrastructure and poor public transport also a partial picture of the pre-crisis status of the represent major drags to its economy and growth. transport sector as the data received from MoF is incomplete, with no information on staffing costs, 146. Road transport in Lebanon was costly even revenues and expenditures from the Railways and before the crises, with no reliable alternatives to Public Transport Authority’s (RPTA) bus operation, private vehicles. Surveys show that transport costs expenditures on the Council for Development and before the crises accounted for about 13 percent of Reconstruction’s (CDR) transport projects, PoB and total household expenditures,96 among the highest Beirut International Airport’s operating costs and of all categories, surpassed only by housing and revenues per source of revenue, etc. health expenditures. Despite this, most users rely on private vehicles to meet their transportation 95 From Port of Beirut’s website. 96 2012 Household Expenditure from the Central Administration of Statistics, 2012 P ublic S ervice Non-D elivery 95 Figure 57. Extract of Revenues from the Transport Sector to the Ministry of Finance Source: Data received from MoF for the purpose of this PFR . Figure 58. Extract of Revenues from the Transport Sector to the Ministry of Finance Source: Data received from MoF for the purpose of this PFR needs, and the average vehicle occupancy rate, 147. Public transport in Lebanon is largely at about 1.3, is very low.97 It is estimated in the unregulated, which has contributed to the lack Capital Investment Plan (CEDRE 2018) that about of proper, reliable, safe and affordable public 68 percent of motorized trips, in Beirut and Tripoli, transport. The RPTA is a state-owned enterprise were undertaken using private passenger car, under the guardianship of the Ministry of Public while the share of public transport was 32 percent, Works and Transport and is the public operator who including 16 percent for ‘service’ and taxi vehicles,98 had a monopoly on railway and public transport 14 percent for private sector buses and 2 percent operation in Lebanon; however, its role largely eroded for buses operated by the Railways and Public over time due to the disappearance of the railways, Transport Authority. the old tramway, and most of its bus operations (only about 35 small buses remain). To serve the demand, 97 Council for Development and Reconstruction, 2015 98 The term service is used to describe a taxi service shared by multiple passengers, who are charged a pre-known tariff along standardized routes. This is distinct from the traditional Taxi, that is charged based on length of route. 96 LEBA NON PU B L IC FIN A N C E RE VIE W the public transport sector in Lebanon counts 2,200 148. Poor transport connectivity and high transport privately operated buses as well as about 4,000 legal costs represent a major drag on the Lebanese and 10,000 illegal minibuses and vans. In addition, economy. Lebanon’s endemic traffic congestion is there are about 33,000 legal and 20,000 illegal estimated to cost the economy 8 percent of GDP,100 private taxis in Lebanon that operate on a chartered while the cost of road crash fatalities and injuries or shared-basis-service.99 The trucking industry amounted to 5.4 percent of the country’s GDP in is also largely fragmented, with road transport 2016.101 Transport contributes to 24.4 percent of companies privately owned. CO2 emissions in Lebanon.102 B. CRISIS IMPACT ON THE TRANSPORT SECTOR (2020 AND BEYOND) 149. The COVID-19 pandemic caused main borders travel demand to make a living. Therefore, with crossings, the airport and seaports, as well as public and private institutions incorporating home- some public-sector institutions to shut down for based-work schemes or rotating shifts to minimize almost 3 months, resulting in trade disruptions close interactions between employees, transport and losses of government revenues. Revenues demand reduced and caused, in turn, losses of from Beirut International Airport (to the MoF) income to public transport service providers. and from passenger departure tax have indeed decreased from LBP249 billion in 2019 to LBP162 151. The explosion of August 4th at the Port of billion in 2020, and from LBP218 billion to LBP68 Beirut added to the multiple crises Lebanon billion, respectively. Meanwhile revenues from PoB had already been facing, namely the COVID-19 have increased from LBP220 billion to LBP266 pandemic and the economic and financial billion between 2019 and 2020, which could be crises.104 According to the Rapid Damage and explained by the exchange rate collapse in 2020 as Needs Assessment (RDNA) prepared by the World some PoB revenues are in US$. Bank in cooperation with the United Nations, the European Union and other partners, the explosion 150. Though the COVID-19-related lockdowns and caused damages to the transport sector ranging mobility restrictions have been crucial to limit between US$280–345 million. The explosion the spread of the virus, they have also disrupted caused many fatalities and injuries at PoB, as well travel patterns and have caused losses of income as seven shipwrecks and significant damages to to public transport service providers, threatening the general cargo terminal, including damage to the livelihoods of the most vulnerable. Public the 120,000-ton silo that contained 15,000 tons of transport service providers have been particularly grains at the time of the explosion. The silos were hit by the crisis, with buses and vans banned used to store grain reserves and their destruction from circulating and some private taxi companies resulted in increased food security risks, which experiencing only 6 percent of their usual business.103 were already significant given the protracted While leasing obligations and subscriptions have economic and financial crises. The explosion also been lifted by some taxi companies, drivers still caused damage to the container terminal as well earn their livelihoods on a daily basis and rely on as to assets and facilities related to RPTA including 99 From the Directorate General of Land and Maritime Transport 100 Greater Beirut Public Transport Project, Project Appraisal Document, World Bank, 2018. 101 Lebanon’s Road Safety Country Profile, Global Road Safety Facility, World Bank. 102 CO2 emissions from transport (percent of total fuel combustion), IEA Statistics, World Bank, 2014, https://data.worldbank.org/ indicator/EN.CO2.TRAN.ZS 103 From a meeting with a well-established taxi company in Lebanon. 104 Beirut Rapid Damage and Needs Assessment (RDNA), August 2020, World Bank Group http://documents1.worldbank.org/ curated/en/650091598854062180/pdf/Beirut-Rapid-Damage-and-Needs-Assessment.pdf P ublic S ervice Non-D elivery 97 40 of the 50 buses operated by them and 16,000 2021 to LBP520,000 in April 2022.105 These figures square meters of RPTA warehouses and hangars, show the scale of the crisis, especially if compared preventing the access of buses to fuel and spare with the minimum wage of LBP2 million.106 Hence, parts. An additional 430 public and private vehicles a minimum wage salary would be equivalent to were also damaged inside and outside the port, the price of 90 liters of gasoline. According to the along with 1.5 kilometers of roads. Facebook survey conducted in July 2021,107 54 percent of the respondents already spend more than 152. More recently, the financial crisis has LBP450,000 on a monthly basis for fuel, insurance, affected the trucking industry with truck drivers maintenance, etc., which is the equivalent 67 percent going on strike at the PoB, disrupting work in of the (then) minimum wage. the port, and leading to financial losses for the government. With wages not exceeding LBP1.3 155. Gasoline and diesel scarcity and their price million, truck drivers have seen their livelihoods increases have also affected taxi and public affected by the exorbitant inflation rate and were transport fares; with the unofficial fare reaching therefore demanding wage corrections for better LBP30,000 as of August 12, 2021, and a 10-kilometer living conditions. Similarly, truck owners have ride costing around LBP175,000 by private taxi seen their businesses affected by the increase in and around LBP100,000 by Uber.108 With lack of maintenance costs, with the prices of spare parts regulation and enforcement, and the predominant set at the banknote exchange rate; and were informality in the public transport sector, users have therefore demanding being paid in US$, especially seen fares varying from one operator to the other and since their clients are paid in this currency. The often worry about operators’ strikes and cessation strikes led to supply chain disruptions, with of service. The dramatic increase in public transport essential goods including foodstuffs not reaching cost is problematic, as the Facebook survey shows traders and consumers. that the main barrier to the use of public transport for the non-Lebanese as well as students (intermediate 153. Crisis-related fuel shortages have also level or less), and part-time or daily employees is the affected both private and public transport service fare. According to the survey, 46.5, 38 and 34 percent provision. The sharp devaluation in the Lebanese (respectively) of the non-Lebanese respondents, Lira, combined with the inefficiencies of the FX intermediate-level students and part-time or daily subsidy on fuel imports, resulted in raised prices employees who do not use public transport would for gasoline and diesel, leading to smuggling and consider using public transport if the fares were lower. hoarding. This, in turn, resulted in scarcities at gas stations and therefore endless queues and 156. The fuel subsidy removal is also estimated rising tension among drivers waiting in line to fill to have reduced car usage and encouraged the their tanks, with disputes sometimes escalating uptake of more sustainable travel alternatives into shooting. (e.g., public transport, carpooling, etc.), leading to reductions in the negative externalities resulting 154. The collapse of the FX subsidy on fuel is from the transport sector. In Lebanon, the total estimated to have increased the price of gasoline transportation-related externalities for gasoline and diesel by a factor of 16-27. Prices for 20 liters of and diesel oil in 2015 amounted to US$1.10/ gasoline and diesel have jumped, respectively, from liter and US¢38.10/liter, respectively, and include about LBP28,000 in January 2021 to LBP454,000 in congestion, accidents, pollution, and greenhouse April 2022, and from about LBP19,000 in January gas emissions.109 105 https://www.thefuelprice.com/Flb/en 106 The minimum wage was increased from LBP675,000 to LBP2,000,000 by virtue of Decree 9129/2022 signed by the President of the Republic on May 12th, 2022. 107 See footnote 59 for specific information about the Facebook survey. 108 Private taxi and Uber fares for a trip from Hazmieh to Hamra on May 20th, 2022 109 MoE/UNDP (2015). Fossil Fuel Subsidies in Lebanon: Fiscal, Equity, Economic and Environmental Impacts. Beirut, Lebanon. 98 LEBA NON PU B L IC FIN A N C E RE VIE W 157. These issues added to the country’s long- are a means to a series of wider ends and do play term shortfalls in transport service provision a vital role in facilitating the movement of goods, and structural vulnerabilities, which include ensuring connectivity, and providing access to low-grade infrastructure, weak governance, essential services (including schools, universities, and poor public financial management. While hospitals, etc.) and employment for businesses and the services provided by transport facilities and individuals, thereby contributing to human capital infrastructure are not an end in themselves, they as well as economic development and growth. C. POLICY ACTIONS AND SCENARIOS TO ENSURE CONTINUITY OF SERVICE DELIVERY 158. Port of Beirut: Nearly two years after the transport subsidies in Lebanon are received by the explosion of August 4, 2020, there is still an poorest quartile (income level lower than US$5,200 opportunity to “build back better” the ports system per year), while the richest quartile (income level of Lebanon, and support trade and economic higher than US$19,200 per year) receives 55 growth. The reconstruction of the PoB should have percent of the total. four key foundation stones: (i) a new governance structure based on the landlord port model; (ii) 160. Investments in public transport, as part efficient and modern Customs, border agency, of a National Transport Strategy, are crucial to and trade processes that have an essential role in sustainable response to the financial crisis and addressing transparency, predictability and security to the lifting of fuel subsidies. Enhancing existing issues; (iii) open and transparent bidding processes public transport and providing a reliable, affordable, for selecting operators or concessionaires; and accessible, efficient and viable alternative to (iv) quality infrastructure that is contingent on a private transport modes is all the more important countrywide vision for the port sector and a revised today, in the context of increasing poverty rates and masterplan for the PoB. A crucial pre-requisite rising vehicle purchase and maintenance costs. to the rebuilding of PoB is the establishment of a This should involve creating a sound legal and robust institutional framework for the port sector institutional framework for good sector governance, that would restore the trust of the Lebanese society addressing the informality and fragmentation and economic operators.110 of service providers, organizing the system into lines, investing in infrastructure such as stations, 159. Land transportation: Targeted cash transfer depots, and pedestrian access infrastructure in programs would help channel the assistance Beirut, supporting a bus fleet renewal scheme, towards the most vulnerable and provide direct and other best practices. These steps would help support to citizens to sustain their livelihoods. provide a well-organized, safe and reliable public Fuel subsidies are generally introduced to protect transport system for all, particularly the most consumers from increases in oil prices; however, vulnerable, thereby reducing households’ transport when non-targeted, these subsidies tend to expenditures, improving transport connectivity, disproportionately benefit higher-income groups as and enhancing access to services and employment they have greater consumption trends. According for all. Additionally, these actions are essential to to a 2015 study by the Lebanese Ministry of restoring trust of the private sector, which, in turn, Environment and the United Nations Development is essential to the development in later stages of Programme (UNDP), only 6 percent of total mass transit systems in the country. 110 World Bank (2020). Reforming and Rebuilding Lebanon’s Port Sector: Lessons from Global Best Practices. P ublic S ervice Non-D elivery 99 C hapter 11 . HEALTH SECTOR A. PRE-CRISES HEALTH SECTOR STATUS AND OUTCOMES 161. Lebanon registered positive trends in key PHCCs have an average catchment population health care outcomes in the last decade (2010- of about 25,000 inhabitants.116 Under a unique 2019). The country had the lowest maternal mortality model of public-private partnerships developed ratio and infant mortality rate compared to its peers over the past few decades, the MoPH has been in the region. Life expectancy increased from 63.2 in supporting the primary health care network by 1960 to 78.9 in 2019; infant mortality ratio dropped providing essential medicines, vaccines, and from 56 per 1000 live births to 6 per 1000 live births. capacity-building, enabling the PHCCs to provide a Mortality rates for infants under five have reduced comprehensive package of services. The expansion from 10.3 deaths per 1,000 live births in 2010 to 7.2 of primary health care services through this in 2019.111 (Figure 59 and Figure 60). network effectively increased health care access in vulnerable communities. (PHCCs offer treatment to 162. Enhanced service delivery helped drive both Lebanese and non-Lebanese populations; with improvements in health outcomes. The Lebanese Syrian refugees accounting for at least 35 percent health system offered high level of quality, of the PHCC beneficiaries). efficiency and access to both hospital and primary care services. (Lebanon ranked 33 out of 195 163. Non-communicable diseases (NCDs) have countries in the Healthcare Access and Quality become the most significant cause of mortality index).112 Inpatient care is provided by a network of and morbidity. In 2019, ischemic heart disease, private and public hospitals, with public hospitals stroke, lung cancer and hypertensive heart disease accounting for 18 percent of the available beds in were the top four causes of mortality in the country. the country.113 The MoPH also oversees a national The prevalence of the main NCD risks remains network of about 245 Primary Health Care high with tobacco use, high blood pressure, high Centers (PHCCs). Sixty-eight percent of the PHCCs body mass index, high fasting plasma glucose and belong to NGOs,114 13 percent are government dietary risks being the top 5 risks contributing to PHCCs, and the rest belong to the municipalities.115 the total number of disability-adjusted  years life  111 The World Bank. HealthStats. https://datatopics.worldbank.org/health/ 112 Fullman et al. 2018; Ibrahim & Daneshvar 2018 113 Lerberghe et al. 2018 114 MoPH 115 WHO. 2017. Primary health care systems-Case study from Lebanon 116 World Bank staff calculation 100 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 59. Infant Mortality Rate per 1,000 Live Births Sources: MoF and WB staff calculations. Figure 60. Maternal Mortality Ratio (national estimate, per 100,000 live births) Sources: MoF and WB staff calculations. (DALYs) in 2019.117 The burden from NCD diseases from 4.9 million to 6.6 million. As of 2020, 16.5 is expected to grow, as Lebanon’s health system percent (914,648) of the registered displaced Syrian has traditionally been skewed towards curative population are in Lebanon, and the GoL estimates care with less focus on preventive care services, that there are approximately half a million more which are more important for chronic, preventable, unregistered displaced Syrians. The Syrian refugee and costly-to-treat NCDs. influx has resulted in an unprecedented increase in demand for health services, putting considerable 164. Another chronic challenge for the health strain on the country’s resources and public sector is the influx of displaced Syrians in Lebanon services. Poor access and utilization of maternal since 2011, which led to one of the world’s highest health services among Syrian refugees has likely concentrations of displaced people in any country. contributed to an increase in Lebanon’s maternal The total population of Lebanon increased by more mortality ratio from 23 deaths per 100,000 live than 38 percent between 2010 and 2019, rising births in 2010 to 29 in 2019.118 (See Figure 60). 117 https://www.healthdata.org/lebanon, IHME. Global Burden of Disease. Accessed on 27 Jan 2022 118 El-Kak et al. 2020 P ublic S ervice Non-D elivery 101 Figure 61. Health Expenditure (as percent GDP) Regional Comparison. Sources: MoF and WB staff calculations. Figure 62. Out-of-Pocket Expenditure per capita (current US$). Sources: MoF and WB staff calculations. 165. As of 2018, Lebanon spent 8.3 of its GDP on the Civil Servants Cooperative (CSC) 5.9 percent; health, higher than other comparable countries in respectively, while 15.3 percent were covered either the MENA region. Health expenditures per capita through private insurance (10.5 percent) or mutual increased over the last decade from US$515 in 2009 funds (4.8 percent).119 The Ministry of Public Health to US$686 in 2018, representing 6.99 percent and (MoPH) acts as the insurer of last resort for hospital 8.35 percent of GDP, respectively (Figure 61). Only care for all those who lack formal coverage. 55.6 percent of the population residing in Lebanon were covered by any type of health insurance. Of 166. The health sector is skewed towards curative these, the National Social Security Fund (NSSF) care, with the MoPH spending 73.3 percent of its covered 45.5 percent; the Army and the Internal budget on hospital care.120 The MoPH subsidizes Security Forces 20.1 percent; the United Nations High hospital costs billed by both private and public Commissioner for Refugees (UNHCR) 11.5 percent; providers for the uninsured citizens: in 2019, 119 http://www.cas.gov.lb/images/Publications/Labour%20Force%20and%20Household%20Living%20Conditions%20 Survey%202018-2019.pdf 120 MoPH Statistical Bulletin 2021 102 LEBA NON PU B L IC FIN A N C E RE VIE W 225,115 admissions were subsidized. (63 percent the region. Pharmaceuticals made up an even larger were treated in private hospitals, 37 percent in share of out-of-pocket expenditures on health, public hospitals). The largest number of private 53 percent in 2017, mainly because most of the hospitals admissions subsidized were located in items are either not covered by insurance or are Mount Lebanon, which is also the region with the not subsidized by the BdL. The country imported highest percentage of the poor. approximately 95 percent of its pharmaceutical products, while BdL subsidized the importation of 167. Pharmaceutical spending has been a medicines with a value estimated at up to US$200 disproportionately large driver of the high million annually, before the crisis.121 This high healthcare costs undermining the health system’s financial burden can be attributed to many factors, ability to offer financial protection. Pharmaceuticals notably the lack of a medicine regulatory authority, accounted for 45 percent of total healthcare lack of national medicine policy legislation, absence expenditures (US$1.8 billion) in 2018, representing of price-setting mechanism for prescription drugs 3.5 percent of the GDP—one of the highest rates in and reliance on imported and branded drugs.122 B. EFFECTS OF THE CRISES ON THE HEALTH SECTOR 168. Three compounded crises – COVID-19, the Port care system and a sharp decline in the availability of of Beirut explosion, and the financial meltdown - medicines and medical supplies. have afflicted the health sector and its resources. The Beirut explosion in 2020 damaged 292 of the 169. Children and vulnerable populations have country’s 813 health facilities valued at US$95-115 suffered most, even though the full extent of million. As a result, access to care was significantly the crises’ harm is not yet known. Due to the reduced, especially for the vulnerable.123 In addition, disruption in health care and the greater need for the economic crisis has also severely affected the assistance, the compounded crises pose a high operations of hospitals and health care centers. risk of reversing the positive trends on outcomes.124 The collapse of the local currency and ensuing Significant reductions in coverage of routine child foreign exchange (FX) shortages in the economy led immunizations have been reported, with 43 and to triple-digit price increases and acute shortages 31 percent decreases in private clinics and at the of important medical supplies and ancillary national level, respectively. Meanwhile, 30 percent of services, since Lebanese hospitals rely heavily on children are not receiving basic primary health care imported products. Specifically, the withdrawal of services.125 Acute malnutrition cases are expected fuel subsidies led to surging cost of transportation to increase; UNICEF reported that 30 percent of for medical personnel as well as of power supply families had at least one child who skipped a meal for hospitals. The inability of the government to or went to bed hungry. Access to clean water is continue subsidizing the imports of drugs at pre- also another compounding factor, with 20 percent crisis levels led to spiraling drug costs. An increase of households reporting insufficient drinking in unemployment rates has led to an increase in the water. Similar effects have been reported in other number of uninsured citizens requiring government vulnerable populations, such as refugees, women, assistance to pay for health services. The overall and the elderly.126 People with NCDs faced the dual effect has been a huge financial burden on the health challenge of having a higher risk of contracting 121 International Trade Administration, 2021. 122 World Health Organization, 2010. 123 Ibid 92 124 Roberton et al., 2020 125 Mansour et al., 2021 126 Abouzeid et al., 2021; UNICEF, 2021 P ublic S ervice Non-D elivery 103 severe COVID-19 disease, and being more likely 73 percent increase in the number of beneficiaries to die from COVID-19, while also having to forego for basic services in the MoPH network without preventive NCD health services. Additionally, the a corresponding increase in funding.129 Health pandemic also exposed the huge unmet need for facilities resorted increasingly to balance billing,130 mental health services due to disruptions in mental increasing prices, or prioritizing cash-paying health services and an increase in mental health patients. These coping mechanisms have increased conditions.127 OOP expenditures, creating financial barriers for the vulnerable population.131 170. When the crises struck the financially fragile health care sector, the increased costs of care 171. The crisis has led to shortages in the health were largely passed on to patients, reducing workforce. As a result of the crisis, health care access and further impoverishing families. When workers, like their fellow residents, have suffered COVID-19 emerged, Lebanese hospitals lacked sharp decreases in their purchasing power, causing risk management plans and were not prepared to an exodus of skilled medical personnel; the WHO operate under emergency conditions. Consequently, estimates at least 30-40 percent of medical doctors to mount a COVID-19 response, MoPH had to and nurses have left the country either permanently contract with private hospitals to establish costly or temporarily.132 It is likely that the crisis has also COVID-19 care centers, diverting government funds affected the primary health care workforce as away from public hospitals and PHCCs. Elective PHCCs in particular, are known to face barriers in surgeries had to be put on hold.128 Additionally, recruiting and retaining staff because most depend from 2020 to 2021 the compounded crises fueled a on NGOs rather than the government for funding. C. RECOMMENDATIONS Short Term 173. The government can introduce incentives 172. Additional emergency resources can be to attract and retain healthcare workers in the urgently deployed across private and public country. Some measures include offering cash health facilities (hospitals and PHCCs) to restore subsidies and non-monetary benefits to the and preserve essential services. Hospitals and workforce, fast-track accreditation of nursing PHCCs are overwhelmed and supporting their schools, and active campus recruitment in schools capacity to treat patients is critical. Immediate to fill vacancies in health care facilities. In-kind support to ensure continuation of services may incentives may include preferential access to include adoption of energy-efficient solutions like training programs abroad, which can be achieved solar energy to reduce the dependence on the with agreements between international centers unreliable power grid, priority access to fuel subject and local hospitals, and which can be facilitated by to reasonable conditions, procurement of urgently international development partners. All benefits needed maintenance equipment, and streamlined should include requirements to practice in Lebanon channels for distribution of medical supplies. a minimum number of years, under penalty of repayment of benefits previously received. 127 https://pubmed.ncbi.nlm.nih.gov/33587678/ 128 Mjaess et al., 2021 129 NHSWG, 2022 130 Balance billing is the term that describes a provider billing the patient for the difference between the provider’s charges for treatment and the MoPH allowed amount. This is expected to happen in Lebanon because of the high inflation levels coupled with outdated tariffs used by the MoPH for reimbursement of healthcare services provided by contracted hospitals. 131 Deeb, 2020 132 Joint statement by Dr. Tedros Adhanom Ghebreyesus, WHO Director General, and Dr. Ahmed Al Mandhari, Regional Director for the Eastern Mediterranean, On Lebanon. World Health Organization. September 2021. 104 LEBA NON PU B L IC FIN A N C E RE VIE W 174. Emergency regulations and systems Long Term can be introduced to guarantee timely and 177. A strategy can be adopted to contain overall sufficient procurement of medicines. A first step health care expenditures and improve financial is to collect accurate information of medicine sustainability of the health system, focusing on the inventories at health facilities and storage centers pharmaceutical sector. In addition to the greater to prioritize emergency distribution, by quickly emphasis on PHC services (since they are usually deploying and applying rapid information tools. cost-effective), the government should consider Alternative sources of funds such as donations and mechanisms of prospective budgeting, centralized international aid should be identified. Simplified procurement of high-cost medicines, cost- procedures to import and distribute medicines containment strategies for drug procurement and for catastrophic conditions and NCD management distribution, an updated framework of management, should be enacted. Public hospitals and PHCCs and stakeholder oversight mechanisms. A strategy facing shortages or areas with high concentrations to improve local pharmaceutical manufacturing, of vulnerable populations could be prioritized focusing on essential medicines without patents, for support. should also be encouraged, in coordination with the Ministry of Economy and Trade. Medium-Long Term 175. The government can initiate a reform process 178. The fragmentation of the health system to rebalance the health system towards preventive can be reduced to accelerate progress towards and primary care. As a first step, concerned Universal Health Coverage (UHC). Adoption of authorities can propose for discussion a national a national model of care and unified rules for comprehensive model of health care, which states stakeholders will ensure that key populations a vision based on the principles of care applicable and services do not fall through the cracks. The to all public, semi-public and private providers model should include updated regulations for receiving public funds. This model, which should the private insurance market and reduction of have preventive and primary care at its core, should multi-coverage insurance, as well as strategies also identify and delineate the technical, financial, to improve financial protection. Such a model and other resources required for scalability and should prioritize the most vulnerable population, sustainability of services. It should also eventually through the adoption of targeting policies based set clear paths of referral, continuity, and integration on demand subsidies and risk- sharing schemes, of services identifying clear financing sources adopt nation-wide interventions such as resource and a yearly allocation from the national budget, pooling, improve benefit plans (positive or negative as most current PHC services are funded by the lists), implement a pro-poor policy of co-payments donor community and depend on the availability of and coinsurance and establish capacity for periodic such resources. health technology assessments for procedures, medicines and devices. 176. The MoPH pricing list and payment mechanisms to hospitals can be reviewed and 179. Investments in the health sector can prioritize updated to improve financial protection. Updating the scale up of a package of essential health care the price list will help reduce balance billing services. Preliminary estimates of the cost of a practices for insured and vulnerable patients, universal package, complementary to the current improving the relationship between the hospitals coverage provided by MoPH to the uninsured and the MoPH, which will in turn help sustain health population, were conducted for this review (See services delivery. Reviewing payment mechanisms Box 7). The projected costs of a universal essential will help improve efficiency and reduce costs for care package are estimated to be 1.37 percent of the MoPH thereby increasing sustainability while GDP, with a growing yearly trend as population achieving acceptable healthcare outcomes for grow older. The breakdown of these costs by age the population. group and type of service are presented in Figure 63 and Figure 64. P ublic S ervice Non-D elivery 105 Box 7. Estimating the Cost of an Essential Universal Health Care Package for Lebanon This simulation was conducted estimating the cost 2. Non-Communicable Disease Package: NCD of essential health care packages that would cover health packages covering hypertension, diabetes the following services: immunization, screening and mellitus, chronic obstructive pulmonary disease diagnostic tests, follow-up tests (in case of chronic (COPD) and coronary artery disease (CAD). These diseases), health care providers’ consultations packages cover secondary preventive services and (doctors, others), pertinent counseling and health ensure better control of and management of these education, and medications when applicable as a chronic diseases to prevent future complications. complement of the coverage for inpatient service The NCD package is a yearly package. estimated offered by the MoPH. target population is 30 percent of individuals 15+ (Annual Premium est: $68.16). 1. Wellness package: These packages would cover primary and secondary preventive services that 3. Safe Motherhood/ Maternal Health Package: should be provided to any individual depending on This package covers antenatal services to be his/her age and gender and based on the following provided to pregnant women in addition to one target groups (along the estimated per capita postpartum visit. It is also a cross-cutting package value): with elements appearing under the Adult Wellness 1.1. Wellness health package for children and packages. These include family planning services, adolescents (both genders) from birth till age modern contraceptive methods, and gender-based of 18 years inclusive (Annual Premium est: violence screening and referral for both sexes. $1.37). Target population is 4 percent of women 15+ 1.2. Wellness health package for adult females (Annual Premium est: $151.02). (aged 19-64 years) (Annual Premium est: $0.95). This exercise was sourced from the costing 1.3. Wellness health package for adult males (aged analysis conducted during the preparation of the 19-64 years) Annual Premium est: ($0.69). WB Lebanon Health Resilience Project in 2019. 1.4. Wellness health package for elderly (aged 65+) Values have been adjusted to 2022 prices. (Annual Premium est: $15.52). Figure 63. Cost of Universalization with Essential Figure 64. Cost of Universalization with Essential Package by Age Group (Percent of GDP). Package by Service (Percent of GDP). Sources: MoF and WB staff calculations Sources: MoF and WB staff calculations 106 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 1 2 . EDUCATION SECTOR A. PRE-CRISIS STRUCTURAL EDUCATION SECTOR CHALLENGES AND OUTCOMES 180. Education in Lebanon further entrenched the minimum international benchmarks for public conditions for a hollowing of the state by being education financing set out in the Education 2030 organized under a fragmented provision system Incheon Declaration,134 which calls for countries to and a complex financing scheme, resulting provide an allocation to education of at least 4 to in a high prevalence of private education— 6 percent of GDP and/or at least 15 to 20 percent subsidized, in part, through allowances to civil of total public expenditures in order to achieve the servant caregivers and private (family) payments. Sustainable Development Goal 4 (SDG4) of inclusive Therefore, what is considered as “private education” and equitable quality education. in Lebanon is neither a private nor a public service, given that both fee private and free private schools 182. Education sector financing in Lebanon are financed through both public and private is heavily reliant on donor financing, which funds. Overall, this can at least in part explain the makes up one-fourth of financing. Overall public disproportionately socioeconomic segregation. In financing from the Ministry of Education and 2020, around 54 percent of students in KG-12 were Higher Education (MEHE) is topped up by a further enrolled in private education. 24.3 percent through international donor funding, channeled mostly through UNICEF and World 181. In Lebanon,education sector public financing133 Bank.135 Moreover, education allowances paid by amounted to only 2 percent of GDP (2020), other ministries to support civil servants to enroll which is among the lowest in MENA and below their children in private schools also make up 11 to international standards. Spending has been fairly 14 percent of total education sector funding. Table constant over the last 15 years, ranging between 2 8 displays the structure of financing by school and 3 percent of GDP and close to 10 percent of total network and financing source. expenditures (9.4 percent in 2020). This is below 133 Education sector spending or execution rates were not available at the time of this report. Therefore, the analysis uses budget allocated to the education sector as a proxy for education sector spending for the years 2020 onwards. 134 Agreed upon at the World Education Forum 2015 in Incheon, South Korea. 135 Moreover, education allowances paid by other ministries to support civil servants to enroll their children in private schools also make up 14 percent of funding. P ublic S ervice Non-D elivery 107 Table 8. Education Total Financing, By Financing Sources and School Type (LBP, Billion). 2017 2018 2019 2020 Public Schools (Subtotal) 1831.5 2350.1 2301.5 2009.0 % of Total 79.9% 84.0% 85.2% 84.3% MEHE* 1592.7 1991.6 1995.2 1863.1 World Bank 68.7 73.3 91.2 25.2 UNICEF 114.3 229.1 166.5 66.5 Ministry Allowances (Public)** 55.7 56.1 48.6 44.0 Private-Free Schools (Subtotal) 125.6 110.7 99.4 100.5 % of Total 5.5% 4.0% 3.7% 4.2% MEHE Transfers* 115.0 100.0 90.0 90.0 Ministry Allowances (Private-Free)** 10.6 10.7 9.4 8.6 Private School Fees (Subtotal) 333.7 336.1 301.2 335.4 % of Total 14.6% 12.0% 11.1% 11.5% Ministry Allowances (Private-Fees)** 333.7 336.1 301.2 272.9 Total 2290.8 2796.8 2702.1 2370.3 Sources: World Bank team based on Ministry of Finance budget allocation, except: MEHE, MoF and UNICEF data. *MEHE budget data. **Allowances for school attendance from MEHE and other Ministries (total) paid to civil servants 183. Better education sector outcomes could be to 89 percent between 2011 and 2018.136 This achieved, even with the current budget allocation dynamic affected more starkly the poorest wealth to the Education sector. While countries, such as quintiles; enrollment rates in Q1- and Q2- wealth Morocco, achieve similar outcomes with similar households fell from 87 to 74 percent and from 95 levels of financing, other countries, such as Egypt to 91 percent, respectively. While enrollment rates or Jordan achieve better education outcomes, as for girls are higher than for boys in both primary measured by standardized learning assessments, and secondary education, they have also dropped with even less per student financing. However, more than they have for boys over the 2011-18 when looking only at public financing that goes to period.137 In 2018, around 60 percent of the 1.2 public schools, which accounts for 83 percent of million students in Lebanon (KG to grade 12) were public funding and supports 46 percent of students enrolled in private schools (excluding UNWRA); in in Lebanon, this picture becomes even bleaker 2020 this proportion decreased to 54 percent. The for Lebanon – relaying a much more inefficient onset of the economic crisis in end-2019, drove education sector financing (see Figure 65 below). many private school Lebanese students to public schools as families were no longer able to pay 184. Recent years (school year 2017/2018 to tuition fees at private schools. 2020/2021) have seen a decline in enrollment, mostly affecting lower grades, lower income 185. Lebanon has one of the highest repetition groups, girls and private schools. However, even rates by international comparison, which not before enrollment declined, Net Enrollment Rate only hinders learning, but also is associated with in primary education decreased from 93 percent high costs. According to PISA 2018, 34.5 percent 136 Household Budget Survey from 2011-2012 and Labor Force Survey from 2018-19.  137 Gross enrollment rates have declined more for girls (decrease from 92 percent to 81 percent) compared to boys (75 percent to 73 percent) over the 2011-18 period. 108 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 65. Learning-Adjusted Years of School vs. Expenditure on Education per Student Sources: WB Human Capital Project, WB EdStats database, Lebanon Ministry of Finance, CERD. of 15-year-old students in Lebanon had repeated decade, even before the Syrian crisis – pointing at least one grade138. Not only has grade repetition at long-running systemic issues at all levels of proven to be ineffective and inequitable in promoting education. Lebanon ranked 73 out of 76 countries on learning, it also results in high costs, estimated the PISA 2018 reading test for 15-year-old students. around 83 billion LBP every year, or around 4.2 While both public and private school students score percent of the total budget of MEHE, to the country below international averages, the differences in and thus high inefficiency of spending139. score between public and private schools is more pronounced than in other countries, pointing at 186. Learning outcomes have consistently large inequities in the Lebanese education system. declined over the last decade across all levels In the poorest-performing schools, many 15-year- and types of school. Lebanon’s performance in old students perform so low, that they can be international learning assessments, such as PISA considered functionally illiterate140. and TIMSS has consistently declined over the last B. CRISIS IMPACT ON THE EDUCATION SECTOR 187. While the education budget in 2022 increased nominal terms in 2022, largely through a social in nominal terms, given high inflation, the real assistance package, was however not able to offset value of the projected education budget in 2022 large inflationary pressures, which reached 150 is 26 percent less than in 2020. Education sector percent in 2021. (See Figure 66). financing as a share of government expenditures in nominal terms grew steadily during the period 188. The crisis has resulted in a dramatic drop in 2011-2020. However, with inflation levels reaching student enrollment in public schools, and a halt 84.3 percent, the education budget decreased in in the trend of students from private to public real terms by 45 percent between 2020 and 2021. schools which was apparent at the onset and The large increase of 180 percent in the budget in before the crisis. While in previous years, the 138 OECD, PISA 2021 139 OECD 2018 140 Gajderowicz and Jakubowski. Forthcoming P ublic S ervice Non-D elivery 109 Figure 66. MEHE Budget in Billion LBP, Nominal and Real Sources: WB team based on MEHE data and WB (2021b). drop in private school enrollment was somehow budget includes a large social assistance package offset by increases in public enrollment, the latest for teachers that effectively increased nominal transition numbers only point to around 3 percent wages by 163 percent. However, this does not offset of students transitioning. More worryingly, newest inflationary pressures. Teachers have lost around data of student enrollment in public schools, show 42 percent of their purchasing power compared to a decrease between 2020/2021 and 2021/2022 2020 (see Figure 67), while around 10,000 teachers of around 66,600 students. This is a 12 percent (10 percent) left the profession since 2018143. This decrease in public school enrollment in only one is in stark contrast to largely increased commodity school year. This drop is affecting Lebanese and and transportation (gas), which put a strain on the Non-Lebanese students alike141. The full picture daily functioning of schools, as well as school’s might even be more dire when private sector personnel purchasing power and, specifically, enrollment numbers are officially released. ability to pay for transportation to school. 189. A sharp reduction in the number of private 191. Learning outcomes have further deteriorated schools is fueled by the crisis, with school closures during the recent crisis, with less than 10 percent foreshadowing an alarming trend. Around 198 of students in Grades 2 and 3 reading above basic private schools (5 percent of all private schools) proficiency level. This is due to inadequate and closed between 2018 and 2021, comprising mostly inequitable provision of distant learning provisions, KGs, primary and middle schools, while there is exacerbated by infrastructure impediments, and only a small increase in public schools (38 schools), limited in-school resources to recover learning loss mostly in middle and secondary school. The (catch up classes, etc.). Data from the Early Grade closures affected around 27.000 KG students (12 Reading Assessment (EGRA) for Lebanon shows percent) and 8.000 (1 percent) primary education that the share of grade 2 students reading at least students142. at an intermediate level or above almost halved between 2018 (16 percent of students) and 2021 (9 190. The crisis puts a strain on day-to-day school percent of students).144 functioning and education continuity. The 2022 141 MEHE 2022 142 CERD Statistical Bulletin 143 CERD 2021 144 USAID 2021 110 LEBA NON PU B L IC FIN A N C E RE VIE W Figure 67. Teacher Compensation in Real and Nominal Terms (Civil Servants and Contract Teachers) Sources: MEHE and WB staff calculations. Box 8. Higher Education Financing and the Lebanese University Lebanon has one public university – the Lebanese are devoted to salaries. Approximately 20 percent University (LU) – which enrolls around 36 percent of the MEHE budget is allocated to the Lebanese of tertiary students. In 2020 enrolment in the University through transfers. Despite triple-digit Lebanese University has for the first time in inflation rates, budget allocations to the Lebanese years dropped, although marginally, possibly University have been stable in MEHE budget. foreshadowing a dropout trend among families Funding of the Lebanese University is heavily reliant from poor backgrounds. on Government (approximately 94 percent of its own financing in 2020). This makes the institution Higher Education financing is highly skewed, and more susceptible to future fiscal and economic input driven. Government funding is the primary challenges. Financing at LU is input-based (per source of funding, and most budget allocations student based), instead of results/output based. C. RECOMMENDATIONS 192. The education sector is facing unprecedented short term responses to address immediate needs challenges and changes, which will necessitate and ensure education service delivery continuation a new set up of education service provision. given the worsening socioeconomic crisis. As well Financing of the sector must fundamentally adapt as secondly, medium to long term reforms needed to ensure more adequate, efficient and equitable to align education sector financing with the GoL’s education for all children in Lebanon. The following focus on providing a more sustainable and equitable chart presents preliminary recommendations. education system for all children in Lebanon. These recommendations are structured as firstly, P ublic S ervice Non-D elivery 111 Recommendations to Realign Education Sector Financing with Learning Short-term response to address the Other measures to prepare for medium- and long-term crisis and avoid another lost year of reforms learning Short term response must include a Realigning education sector financing to outcomes, taking focus on school reopening & learning into account changes in the education sector set up, while continuation: ensuring equitable access to education: • Continue performance-based • Shift from input-based to programmatic budgeting and adapt teacher incentives next school the per student funding formula to the changed set up of the year to counteract further teacher education sector, taking into account higher enrollment in departure and reduced purchasing public schools; creating a funding formula for both first and power. This needs to include second shift students, teacher allocation and school size, ensuring their presence and among other factors. delivery of lessons at school. • Relatedly, develop a framework for better teacher • Ramp up support to schools for deployment based on the changing education sector needs continued operations, including • Consider eliminations of inefficient and inequitable education electricity and heating costs, sector practices such as grade repetition. school supplies, as well as learning materials for students at all levels • Create a joint accountability framework for public funds spent in public, free-private and private education, and • Provide catch-up and remedial establish transparent criteria for student selection into free- interventions to counteract drop in private schools. enrolment and learning losses • Re-evaluate and consider elimination of the subsidy to civil • Lastly, provide safety net programs servants for private schooling. These savings could be used for extremely poor students (in to improve the quality of both public schools and low-cost coordination with relevant other private schools. ministries), especially to upper secondary students and students at • Focus additional resources on lowest performing schools to high risk of school dropout. close the stark equity gaps in the education system Strengthen education financing governance: Higher Education financing should • Strengthen system governance by creating a single database focus on: (SIMS) with a unique student ID and unique teacher ID • Revisit the budget allocation to LU in to ensure reliable and transparent data entry, analysis, light of very high inflation rates. reporting and decision making. • Ensure that university premises are • This improved SIMS should be used for more refined analysis well maintained and operational in of basic indicators such as Student/Teacher Ratios, drop out order for students to go back to in- and transition rates person learning. • Provide emergency measures to Higher Education financing should focus on: support the basic running of the • Seek means to diversify the revenue sources for the LU and university and ensuring the return move out of the exclusive reliance on government financing, to in-person learning) including changing the law 75/67 and law 6/70 and giving financial autonomy to the institution. • Develop a strategy for the LU to support improved institutional governance and a shift from input-based financing to performance-based financing. Establish a quality assurance and accountability mechanism for performance- based financing. • Align financing with national priorities, including economic development and labor market demands. 112 LEBA NON PU B L IC FIN A N C E RE VIE W C hapter 1 3 . SOCIAL PROTECTION A. THE STATE OF SOCIAL PROTECTION PROGRAMS IN LEBANON 193. Government spending on social protection insurance compared to only 4 percent on social is high relative to countries in the region, but assistance (Figure 68). When considering spending primarily benefits the non-poor. In 2019, the based on beneficiary groups, only 3 percent of all SP Government of Lebanon spent 6 percent of its GDP145 spending was targeted to the poor and vulnerable on social protection programs.146 This is higher compared to 93 percent spent on formal workers than the average social protection (SP) spending in the public sector (Figure 69). This demonstrates for Arab countries at 4.6 percent (ILO database). that despite having a relatively high budget, social However, the bulk of Lebanon’s social protection protection in Lebanon is highly regressive, and has spending—93 percent in 2019—has been on social little effect on poverty. Figure 68. Distribution of SP Spending by Pillars, Figure 69. Distribution of SP Spending by Beneficiary 2019. Group, 2019. Source: WB staff calculations. Source: WB staff calculations. 145 GDP is at current market prices, in LBP. GDP data has been taken from the World Development Indicators. 146 This includes social protection programs that are classified under the Social Protection function (Function 10) in the budget. For more details on the programs included, see: http://www.institutdesfinances.gov.lb/publication/social-protection-spending-in- lebanon-a-dive-into-the-state-financing-of-social-protection/ P ublic S ervice Non-D elivery 113 Figure 70. SSN Spending in MENA, as a % of GDP. Figure 71. SSN spending in Lebanon as a % of GDP. Source: ASPIRE Database and WB staff calculations. Source: WB staff calculations. 194. Current spending on social safety nets an ASP system are a social registry with substantial (SSN) does not meet the needs of the poor and coverage and the underlying infrastructure that can vulnerable. The Government of Lebanon budgeted enable vertical and horizontal expansion of safety to spend 0.11 percent of GDP on social assistance147 net programs as needed (Bowen et al. 2020). In in 2020 and had spent a mere 0.02 percent of GDP on Lebanon, until the implementation of the ESSN, social assistance in 2017 and 2018 (Figure 70 and there was no social registry, or information on Figure 71).148 These figures are significantly lower current household needs and welfare. As a result, than the average for the MENA region at 1 percent, implementation of social assistance programs face as well as the global average at 1.54 percent.149 In multiple inefficiencies and may not reach those comparison, the government budgeted to spend 1 most in need. The pandemic has highlighted the percent of GDP in 2020 on regressive fuel subsidies, critical need to invest in a foundational, integrated as transfers to EdL. The universal fuel subsidy social protection information system for Lebanon disproportionately benefits the wealthy. Only 13 that serves as a gateway for people seeking social percent of social assistance spending was targeted assistance. Such a system would reduce transaction to the poor and the vulnerable in 2020, while 87 costs and increase access for citizens, produce percent was generalized. Meanwhile, up until cost-savings and efficiency of user programs (by 2021/22, spending on poverty targeted assistance reducing duplication), and serve as a powerful remained consistently low with limited coverage of platform to coordinate social policy the Lebanese population.150 196. Social insurance represents the highest 195. Weak social protection information systems share of SP expenditures in Lebanon (around 85 hinder the government’s ability to respond to percent of total spending on SP in 2019). Pensions crises. An adaptive social protection system (ASP) is alone absorbed around 3 percent of GDP in 2020,151 key to a government’s ability to respond to crisis and despite its only benefiting around 2 percent of the support the poor and vulnerable to prepare for, cope population.152 Even though pensions spending in with, and adapt to shocks. Two critical elements of the military scheme decreased from LBP2.4 trillion 147 This does not include the Emergency Crisis and COVID-19 Response Social Safety Net (ESSN) program 148 The sharp increase in the 2019 figure to 0.27 percent indicates a one-off increase in subsidized housing loan scheme. 149 World Bank 2018 150 The NPTP, currently the main SSN program in Lebanon, covers only 1.5 percent of the Lebanese population 151 Per the Spring 2021 estimations, NGDP for 2020 is LBP 118,677 billion, and total pension spending was LBP 3.2 trillion. 152 In 2020 only 120,730 people (old-age and survivor pensioners) received some type of regular pension out of a total population of 6,825,445. 114 LEBA NON PU B L IC FIN A N C E RE VIE W Table 9. Civil and Military Pension Schemes (2019 2020) in 2019 to LBP2.1 trillion in 2020153 (Table 9), after and projected Government spending. The policies a short period, total pensions spending (for both followed so far have meant that the real value military and civil service scheme) is projected to of pensions in payment has followed a ‘roller- keep increasing from around 3 percent to more than coaster’ ride: declining slowly in the absence of pay 5 percent of GDP, unless reforms are implemented. increases and then jumping suddenly. There has been a highly unpredictable path for the pensions’ 197. The pension system in Lebanon covers purchasing power. Without regular adjustments, only public sector and military employees, less the purchasing power of pensions for many retirees than 10 percent of the active population. System has been eroded and the living standards of many dependency ratios (beneficiaries—including old of them (particularly from the civil service scheme) age, and survivors—divided by contributors) are have considerably decreased. expected to considerably increase.154 On the other hand, private sector employees contribute to a 199. Eligibility to survivor benefits is wide and separate system and are, at retirement, eligible their generosity high. First, there is a large range only for a lump sum benefit. Lebanon is the only of people eligible for these payments, in addition to country in the MENA region without a legislated spouses. This includes single, widowed or divorced regular lifetime pension insurance for private daughters (regardless of age), students up to the sector employees. Coverage within the private age of 25, parents and single sisters. This range sector does not exceed 20 percent of the employed. of beneficiaries greatly extends the duration for which benefits are paid to multiple decades. Such 198. Pensions in payment in Lebanon are not entitlements are common in the MENA region, but protected and increases are arbitrary results in Europe and North America benefits are almost of political decisions or negotiations. Sporadic wholly limited to surviving spouses. Pensions paid provisions of “high cost-of-living” allowances are to spouses of working age tend to be limited (in not the right mechanisms to protect pensions, and value, duration or both). Account is also usually they represent high uncertainty for both pensioners, taken of the value of the surviving spouses own 153 Early retirement is frozen until the end of July 2022, and some payments have been delayed. 154 System dependency ratio in the military scheme is expected to worsen substantially. The number of beneficiaries in the civil service will grow for the next decade and saturate thereafter. The number of contributors prior to Covid-19 crisis was assumed to grow steadily over the period. As a result of the crisis the system dependency ratio’s peak may be prolonged for several years. The picture for the military service is one of continual and rapid growth in the number of beneficiaries, expected to reach 100,000 in 2024. The system dependency ratio for the military is forecasted to grow so rapidly. In 2028 beneficiaries would outnumber contributors. P ublic S ervice Non-D elivery 115 pension entitlement. Furthermore, in Lebanon, impose a serious challenge of the country as an the survivor’s pension is worth 100 percent of the aging society, particularly considering that only deceased’s entitlement. This is significantly higher a few benefit from pensions. Elderly in Lebanon than the norm in Europe (for example, of 50-70 (60+) comprise more than 14.6 percent of the total percent) and is set at that level to disincentivize resident population,155 but their share is projected female labor participation as little as possible. to grow to more than 17 percent by 2030, and 32 percent by 2060. However, only 9.5 percent of 200. Most of the old age population in Lebanon households with elderly rely on revenues from need to rely on family and/or other types of retirement as a source of income. Furthermore, informal care or state transfers. Benefit coverage there are no specific social assistance or pension of the elderly population is indeed very low. Fast instruments, such as social pensions, to support demographic change in Lebanon, resulting from older adults with sufficient income. Reliance decreasing of fertility rates, longer life expectancies, on family ties and other informal support is not and high emigration of the working age population, sustainable for the elderly in the long run. B. THE IMPACT OF THE CRISES ON SOCIAL PROTECTION 201. Poverty and vulnerability have increased of poorer households. Phone surveys conducted significantly, with severe implications for by the World Food Program (WFP) in May and July Lebanon’s human capital. Poverty was already 2021 found that 46 percent of households reported increasing before the crisis, from 25.6 percent in challenges in accessing food and other basic 2012 to 37 percent in 2019. Tentative projections needs. The unemployment rate also rose among from the World Bank suggest that well over 50 the respondents, from 32 percent in January 2021 percent of the population is likely to be under to 43 percent in the March-April period (World the national poverty line in 2020.156 The 2019 Food Programme, 2021). The pandemic has further Multidimensional Poverty Index (MPI)157 for heightened the vulnerability of the poor whose Lebanon reveals that 53.1 percent of the residents living, working and health conditions places them in Lebanon are multi-dimensionally poor, with the at greater risk compared to wealthier segments of highest incidence among children, ages 0-4 years, the population. at 66.8 percent. Average annual inflation ballooned to 85 percent in 2020, while average food inflation 202. Issues around coverage and adequacy of alone grew by a record 250 percent during 2019 transfers limit the poverty impact of social safety (see Figure 72). From January 2021 to January net spending. Until 2019, the National Poverty 2022, the average year-over-year (yoy) inflation Targeting Mechanism (NPTP) was the only SSN rate reached 157 percent with a corresponding food program in Lebanon that is targeted to the poor inflation rate of 328 percent. Since the removal of FX but covered only 1.5 percent of the Lebanese subsidies, yoy food inflation has increased sharply, population with cash assistance. The program is reaching 483 percent in January 2022. This has dire being expanded with the Emergency Crisis and consequences on the poor as food consumption COVID-19 Response Social Safety Net (ESSN) and forms a larger proportion of household expenses coverage is expected to increase to 27 percent as the 155 Central Administration of Statistics, International Labour Organization and the European Union, Labour Force and Household Living Conditions Survey 2018-2019 (LFHLCS), Lebanon, preliminary results. 156 World Bank, 2021 157 The Central Administration for Statistics (CAS) together with the World Bank has developed the first official multidimensional poverty index for Lebanon using the nationally representative 2018-2019 Labor Force and Housing Living Conditions Survey. The index is derived from 19 indicators across five dimensions which are education, health, financial security/well-being, basic infrastructure and living standards. See forthcoming “Lebanon Multidimensional Poverty Index 2019”, CAS and World Bank, March 2022. 116 LEBA NON PU B L IC FIN A N C E RE VIE W ESSN is rolled-out. While this will be a substantial who need support to meet their basic needs. At the improvement on the coverage of SSNs in Lebanon, it same time, the adequacy of transfers are severely will not reach the high numbers of households that affected by the high inflation facing the country. In have gone into poverty during the crisis. Poverty is this case, the real value of existing cash transfers estimated to have increased to over 50 percent in has decreased rapidly, and with it their ability to 2020, indicating a significant number of new poor adequately support the poor. Figure 72. Lebanon Year on Year Monthly Inflation Rate from Jan 2020 – March 2022. Sources: CAS and WB staff calculations. C. THE WAY FORWARD Social Safety Nets may be necessary to support the poor. This should 203. Three critical areas of reform are required to be in the range of 1.5-2.7 percent of GDP (compared maximize the impact of SSN spending in Lebanon. to pre-crisis level of 0.11 percent). In addition, First, it is imperative that spending on progressive the adequacy of SSN transfer values should be SSNs, targeted to the poor and vulnerable, is considered in light of high inflation. Global evidence increased. Second, developing a robust social suggests that coverage, in combination with benefit protection information system (SPIS) for Lebanon size and adequacy, is very often related to the impact is necessary, both to effectively implement SSNs of SSNs.158 Fiscal sustainability of financing safety net during the ongoing crises, as well as build resilience programs is also critical. This can be achieved through for the future. Third, implementing subsidy reforms a combination of approaches. In the short term, to move away from generalized subsidies to poverty savings from the subsidy reform can be reallocated targeted cash transfers is critical for maximizing towards SSNs. Similar measures have been poverty impact while ensuring fiscal sustainability. successfully implemented in Jordan recently, where These recommendations are discussed in more a bread subsidy compensation was discontinued detail in the following paragraphs. in 2021 while Takaful, the country’s main poverty targeted cash transfer program, was scaled up. In 204. Increase government spending on progressive the medium term, tax reforms that increase revenue SSNs. Given the scale of the crisis and its impact on through progressive taxation can sustainably finance household welfare, further expansions of coverage government spending on social protection. 158 World Bank 2018. P ublic S ervice Non-D elivery 117 205. Strengthen Lebanon’s social protection number of reform measures. Given the current infrastructure through a social protection crisis, it is advisable, however, to apply such pension information system (SPIS). The current crisis reform measures in a gradual manner (to reduce has highlighted the need for strong underlying promises into the medium and long term) and use social protection infrastructure that enables the pension indexation measure to increase fairness governments to expand support to households to among different beneficiaries mostly because of cope with shocks. There are significant gaps in the multiplier effect160 (and reduce expenditures Lebanon’s current SP system, including the lack into the near future). Promises should indeed be of a comprehensive social registry (that relies on different for forthcoming and younger generations a unique identification number for each citizen), in public sector schemes in order to guarantee weak IT infrastructure, and capacity issues. In order future sustainability. Also, as almost 30 percent of to increase the efficiency of current SSN programs beneficiaries are survivors (not old age pensioners), and to prepare for future crisis, the government some measures could tackle future benefits for needs to invest in a robust and adaptive SP delivery survivors, particularly women. Today many of them system, such as the SPIS. are young, mostly receiving benefits from the military scheme instead of being in the labor market. Finally, 206. Implement subsidy reform to transition from a more holistic approach to protect people in old age, generalized subsidies to poverty targeted cash and other relevant aspects of population aging in transfers. The foreign currency subsidy scheme Lebanon, could make the necessary pension system was distortionary, expensive (costing an estimated reform measures less painful and more acceptable US$287 million per month), and regressive. The if presented all together as a national strategy. The depleting foreign currency reserve rendered its 2019 pension reform package would not reverse the termination inevitable. The government introduced long-term outlook. A more decisive package may a complementary cash transfer program (BCCT) provide a step further. Setting a goal of a “National to support households. These are important first Pension System” serving as many Lebanese as steps of subsidy reform and should be part of a possible would increase public support and ease comprehensive and consistent macroeconomic reform implementation for the Government. The stabilization plan addressing all subsidy scheme. following points could be considered: The coverage of BCCT should be phased out over a defined time period, excluding a greater percentage a. Specific recommended reform measures of the of the wealthy in each phase, until coverage is in public pension system include: line with a sustainable, government financed SSN program as the current crisis lessens.159 • Abolishing the multiplier into the future. Military employees could be rewarded Social Insurance and Pensions during their active years, instead of using the 207. Some recommendations to correct some of the multiplier at retirement. structural and fundamental problems of the public pension system in the medium and long-term • Abolishing the lump sum payments (above should be urgently considered given that the current regular payments) for civil servants and system benefits only a few people but represents a military. Although it is estimated that a large and growing financial burden on the national relatively small share of new retirees opts for finances and so on the country’s taxpayers. In lumpsum payout instead of life-time pension, line with international best practices, the pension such option raises poverty risk for the insured system in Lebanon would require a considerable individual and his/her dependents. Lumpsum 159 World Bank, 2020 160 Some beneficiaries of the military service and their dependents benefit disproportionally much more than the beneficiaries of the civil service scheme, mostly because of the effect of the multiplier. The military ‘multiplier’ increases the actual years of contributions (of an individual retiring from the military) into a higher, fictional number of years of contributions. The multiplier varies over time, depending on official summary of the scale of the security threat. It is a minimum of 1.5 and a maximum of 3.0. 118 LEBA NON PU B L IC FIN A N C E RE VIE W payments in public pension systems fulfilling would be recommended that for the next few lifetime social protection objectives should years the highest pension benefits of old-age not be allowed. beneficiaries from the military scheme and their dependents not to be indexed (increased). • Widen progressively the calculation period for both military and civil servants (raise to 4 last b. Broader, system-wide recommendations include: years of service, then adding 1 year of service in the calculation every year). Last wage rule is • A broad reform package for the military that unfair and has been abandoned in most pension would include active labor-market policies systems in the world. The best international to help the move into civilian life and moving practice is widening the calculation period toward a lower, transition benefit for the period to full career. In many countries, calculation from leaving military service to the normal periods for military are still set lower than the pension age for the civil service of age 64. general rule but have been gradually widening towards general pension systems.161 • Opportunities for older adults to engage in more economic, volunteer and education • Reforming survivorship pensions by moving activities. Older adults in Lebanon are already from 100 percent to 94 percent share, and relatively active in the labor force, largely changing some of qualifying conditions driven by economic need. The latest labor force as well (for instance the required time survey reveals that 9.8 percent of the working of marriage, etc.). The survivor’s pension population are aged 60+ (4.7 percent are aged (100 percent of the deceased’s entitlement) 64+). Their productive potential should be is significantly higher than the norm. In maintained and encouraged, not only in the Europe, for example, it is set at 50-70 short-term recovery requirements but also as percent, to disincentivization of female labor a tool to mitigate long run demographic risk of participation is minimized. The large range of a fast-aging country like Lebanon. people eligible for these payments, in addition to spouses, extends the duration for which • Implement financial and governance benefits can be paid to multiple decades. reforms in NSSF to implement a new Pensions Law that would provide a regular • Ensure an automatic/regular (annual) pension. Current draft Private Pensions Law pensions indexation to inflation. Without (PPL) in Lebanon envisages a shift from End regular adjustment, the purchasing power of Service Indemnity lump sum payment at of benefits is eroded and living standards retirement towards a fully-fledged lifetime of retirees may fall behind the rest of the pension/annuity. Draft PPL will introduce population. Ad hoc indexation of pensions a new formula for the pension benefit and in Lebanon have brought uncertainty to shift the ultimate liability for its payment pensioners for many years. One of key onto public finances. The Lebanese state pension parameters assuring stable income will become responsible for social insurance replacement and poverty prevention is and social security of its elderly citizens, pension indexation, particularly adjustment which puts a strong requirement on proper of pensions to reflect the dynamics of management and supervision of the Pension consumer price changes. Given the fact that Reserve Fund (PRF) in the long run. With NDC the multiplier has created a huge inequity formula, Lebanese PRF would have a feature among pensioners from the military (and of a reserve fund with a role to partially or their dependents) and from the civil service, it fully prefund pension expenditures. 161 In 19 EU countries military pension parameters, including the calculation period, have been converging towards general pension parameters. F uture Work 119 FUTURE WORK In the process of completing the PFR, the team conference in Paris its Capital Investment Plan encountered numerous knowledge gaps that have (CIP). At the same conference, the Bank presented been either outstanding for a long time or made a Strategic Assessment of the CIP, which at the obvious and important by recent financial and time generally found that the choice of sectors economic conditions. The PFR adjusted for that in the GoL CIP was appropriate, and that many of by making assumptions and estimations, which the listed projects were relevant. Critically, the have been clearly explained in the report, in order Bank Assessment highlighted horizontal and to comprehensively analyze public finance in vertical reforms, including the reduction of the Lebanon. The following are knowledge gaps that fiscal impact, were essential to enable the CIP are key for identifying more targeted public finance and make the projects sustainable and attractive reform measures: to investors. However, in light of the financial and economic crisis, and the diminishing resources 1. Revenue Mobilization. GoL would need to available to both the public and private sectors, streamline tax administration based on a a re-assessment of a Lebanon CIP is in order. progressive revenue generating mechanism. Prior to the crisis, Lebanon’s revenue generation 3. Public Entities and State-Owned Enterprises was regressive in nature, and tax collection (PE-SOEs). The PFR highlighted both inefficient challenging. Over half of budget revenues were spending as well as forgone revenues from generated from taxes on goods and services the most fiscally critical PE-SOEs. Reform of (largely consisting of the Value Added Tax), these organizations is a significant factor in the taxes on international trade (customs, as well recovery process. An important caveat would as excises on gasoline, cars and tobacco) and be to avoid restructuring/using PE-SOEs for the administrative fees and charges applied on purpose of resolving balance sheet losses in the various governmental services offered to the financial sector. This will constitute a flagrant public. Meanwhile, direct taxation, property bailout of—and a transfer from taxpayers to— taxes and revenues from public institutions and financial sector shareholders. It is important to government properties accounted for a bit over also add that this will not regain neither solvency 40 percent of budget revenues. The country nor liquidity of the financial sector; it will merely ranked low on the Doing Business indicator make shareholders (as individuals) once again on Paying Taxes—113 out of 180 economies owners of profitable assets. Analyses based on globally in 2017. a more transparent access to information and data remains needed for Lebanon’s PE-SOEs. 2. Capital Investment Program. Infrastructural deficiencies have been and continue to be a We stress that the above assessments must be principal inhibitor of growth. As such, a well consistent with, and a derivative of, a growth vision thought out capital investment plan remains a for Lebanon, one which remains outstanding. In pillar of Lebanon’s growth perspective. In April fact, a new growth model for Lebanon should be the 2018, GoL presented to donors at the CEDRE basis of the country’s recovery prospects. 120 LEBA NON PU B L IC FIN A N C E RE VIE W ANNEX A. TAXATION - LEGAL REFERENCES 208. Legally, taxes can only be amended through year and is ratified through amendments of the budget laws. However, other amendments were legislative decree 144/1959. ratified through separate laws or decisions/decree. Also, with no budget laws between years 2006 and 209. The VAT (paragraph 16.( ‎ c)) was introduced 2016, the tax amendments were cross checked in through a separate law 379/2001. The 2017 taxes budget laws of years 1991-2005 and 2017-2019. increase (paragraph 16.‎ (d)) was ratified through The articles are mainly an update on the initial laws law 64/2017 and not through the budget. This law of income tax and built property tax. The income included amendments of the original VAT law number tax decrease of year 1994 mentioned in paragraph 379, the income tax law, as well as update of other C can be found in law 282/1993 published in the ‎ decrees and laws that specified fines or increased Gazette in year 1994. The tax increase of year 1999 fees for various activities and products (public (paragraph 16( ‎ b)) is found in the budget law of that domain occupation, airport transit, tobacco, etc.) A nnex 121 B. DONATIONS 210. Donations between years 1992 and 2000 were systematically collected. Note the increase of size and number of donations in year 2000. 122 LEBA NON PU B L IC FIN A N C E RE VIE W A nnex 123 124 LEBA NON PU B L IC FIN A N C E RE VIE W A nnex 125 211. Donations specific to reconstruction in years 2006 and 2007 are compiled below: 126 LEBA NON PU B L IC FIN A N C E RE VIE W C. SETTLEMENTS AND WAIVERS 212. Waivers take many forms and are applied to taxes, fines and/or fees. They can be settlements, exemptions, exceptions, or discounts. All budget laws include such articles. The most prominent is the article 11 of the law 64/2017, amended by law 132 in year 2019. The article proposed a multi-bracket formula and options to pay in installments to fine illegal occupation of the public maritime domain. 213. Another noteworthy waiver is article 60 of decree 2537/1992 that exempts Solidere from notary and registration fees as well as income tax for ten years. A nnex 127 D. DATA Table 10. Selected Economic Indicators for Scenario ScB. 128 LEBA NON PU B L IC FIN A N C E RE VIE W E. EUROBOND RESTRUCTURING 214. Edwards (2015)162 examines debt restructuring determinants and outcome using data on 180 sovereign defaults over the period 1978-2010. Haircuts ranged from 7 percent on Uruguayan bonds in 2003, to 75 percent for Argentinian bonds in 2005. The 2012 Greek restructuring agreement imposed a haircut of 65 percent on bond holders. The author provides the below summary statistics on haircuts for the study’s sample of sovereign defaults. Table 11. Summary statistics for haircuts over the period 1978-2010. Source: Edwards (2015). 215. In this note, we simulate the effects on the debt outlook of a Good Case and a Bad Case outcome for Lebanon’s discussions over the Eurobond restructuring. Important terms to be restructured include the Eurobonds’ face value, coupon rates and maturities, with the Net Present Value (NPV) being a metric to gauge the aggregate effect. For our purposes, we refer to IMF (2013, page 21):163 There may be cases where significant haircuts in NPV terms could be obtained without a face value haircut by lengthening the maturity of debt and applying below-market interest rates. However, in these cases the assessment of the achieved debt relief is very sensitive to the choice of the discount rate. Avoiding a face value haircut may not be appropriate when it is critical to address uncertainty about the member’s future viability. As such, in our haircut simulations, we apply a face value definition—a percentage cut in face value—taking effect immediately, i.e., in 2022. 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