Last May Lebanon held parliamentary elections, but since then the prime minister-designate, Saad al-Hariri, has been unable to form a government. At a time when the Lebanese economy is facing a severe crisis, many rightly argue that the country cannot afford to delay much longer.
But at the heart of this reasoning is a fallacy, namely that a new government will improve the economic situation. Last July, Mohammed Choucair, the chairman of the Federations of Chambers of Commerce, Industry, and Agriculture in Lebanon, echoed this view when he remarked: “If we have a government right now, we will see thousands of Arab Gulf tourists coming to Lebanon to spend summer vacation. The government brings assurances for tourists, investors, and everybody.” President Michel Aoun and Hariri have also expressed such views, affirming that a new government would halt Lebanon’s economic downturn.
However, there are reasons to doubt that the government’s formation will be enough to make a difference. To begin with, the deteriorating economic situation did not begin with the government vacuum. For instance, in the first half of 2018 there was a decline in the growth rate of tourists coming to Lebanon, as well as in loans to small- and medium-sized enterprises, compared to the same period last year, even though there was a government in place. Indeed, factors beyond the government’s control have contributed to the economic downturn, including a decrease in remittances from expatriate Lebanese, rising global interest rates, and a drop in Lebanese land exports to the Gulf countries due to the conflict in Syria.
That is not to say that the government’s policies do not have an impact on the economy. The outgoing government approved new taxes that were ratified by parliament. Increases in the value-added tax and corporate tax were proposed by the government, despite their negative impact on consumption and investment in an already sluggish economy. However, the government has also failed to come up with a cheaper, sustainable approach to electricity production, a major factor in Lebanon’s fiscal deficit. Instead, it has opted to continue supplying electricity by leasing Turkish powerships, which is more costly in the long run than land-based power plants.
The Lebanese government’s inability to pass reforms could deny Lebanon access to loans pledged at an economic conference held in Paris last April to assist Lebanon, known as CEDRE. The World Bank, the largest donor at CEDRE, has warned that the loans might be redirected to other countries should Lebanon remain without a government. However, even if the money does come, several things need to be considered when evaluating its likely impact.
First, the Capital Investment Plan envisaged at CEDRE would not start being implemented before September 2019, so that any economic stimulus provided by the loans would not be immediate. Second, and more important, the International Monetary Fund has cautioned that the Capital Investment Plan would only spur temporary and limited economic growth, while exacerbating the public debt should the government not undertake structural reforms.
Judging by the outgoing government’s record, Lebanon is still far from pursuing such a path. The conditions placed on the country in Paris were that the state cease hiring public sector workers and reduce the fiscal deficit to GDP ratio by 1 percent annually over the next five years. Despite this, both public sector employment and the fiscal deficit to GDP ratio have risen since then.
This brings to light a more profound problem. Many leading politicians have no interest in introducing reforms because they benefit financially from the current situation. Take the debacle in the electricity sector, where a perfect circle of corruption is in place. A major source of patronage for some politicians has been placing their political clients in the already saturated national electricity company, Electricité du Liban. Others are said to be taking a cut out of the powership contracts. Yet others profit from the networks of private neighborhood generators that compensate for the absence of state-provided electricity. And others make money by providing fuel to the powerships and generators.
Nor has the government tried to ameliorate the situation. It recently compelled generator owners to introduce meters to charge clients rather than impose a fixed fee. While this looked as if the government were intervening on behalf of citizens, the more significant message was that the state was normalizing the use of neighborhood generators at the expense of electricity provided by the state. Rather than indicating a willingness to reform, this implied the contrary.
While many members of the political class may be of one mind on electricity, political disagreements mar decisionmaking in many other economic domains, because reform could undermine the political interests of specific politicians. Lebanese governments tend to be national unity governments, so that most decisions on critical issues are the result of a consensus. Yet reaching such a consensus can delay decisions interminably, while failing to do so can lead to discord that, on occasion, undermines security and stability.
For example, a year ago President Michel Aoun signed a decree that promoted army officers, without securing the signature of the finance minister, a member of the Amal Movement. Amal supporters took to the streets and almost clashed with supporters of Aoun’s Free Patriotic Movement after comments were directed against the Amal leader by Aoun’s son in law, Gebran Bassil. When the situation threatened to escalate dangerously, the army had to intervene. Such outcomes can only worry potential investors.
The next government will have a similar composition of political parties as the current one. That is why there is a serious question whether a new government would be any more willing to implement reforms than the one in place. It is also expected that Hariri will be less able to mediate between the parties in the government. In the parliamentary elections, his bloc lost seats to his political rivals, meaning he will have less latitude to resolve issues than he did before.
One can claim that the outgoing government has done more harm than good to Lebanon’s economy, so the presence of a government is not on its own a guarantee of better times. However, the potential costs of failing to seriously address Lebanon’s economic crisis could have very serious implications. The next government will not have the luxury of repeating the ineptitude of the past.