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June 09, 2020
Lebanon caught between a rock and a hard place: The free fall of the economy and the lockdown implications

Interview with Kawthar Dara
 
The aggregate shocks resulting from the economic crisis and the COVID-19 pandemic added heavy strain to the socio-economic conditions of Lebanese residents. As the Lebanese government eases the lockdown, the economic activity remains slow, with businesses struggling to reopen and unemployment levels continuing to rise.
 
 
What should the government do to mitigate the welfare losses caused by these aggregate shocks?
 
The spread of the pandemic, happening within the context of a fragile and weakened economy, is critically affecting the livelihood of the Lebanese population. The imposed lockdowns exacerbated the implications of the deepened fiscal and economic crisis, both horizontally and vertically. Horizontally, vulnerability is fast expanding to reach wider segments of the population; vertically, the depth and extent of vulnerability are intensified.
 
This bitter reality is leaving the government with hard options to follow, in order to mitigate the impact of the multi-layered crisis. Any response plan to the crisis should simply focus on two major tracks: i) Providing vulnerable households with what they need most during the crisis to sustain their livelihood and support their resilience; and ii) prevent the economic aftereffects and consequences of the lockdown from becoming deep-rooted.
 
For the first track to be effective, the government should build on the existing mechanisms and institutions making up its social protection system. The scope of social protection covers—based on the internationally agreed definition—social assistance, which includes in-cash and in-kind non-contributory transfers to support and maintain the standard of living. It includes also social insurance programs which usually provide benefits against contributions and typically cover various contingencies such as old-age pension, disability, and unemployment compensations. A third important arm of the social protection system is labor market policies that aim to improve employability and employment through various interventions such as wage subsidies, training, mentoring, and coaching. In most countries of the world, social protection programs are being activated, scaled up, and widely used in response to the crisis.
 
But the real question is whether Lebanon has appropriate mechanisms and systems to identify vulnerabilities, develop responses depending on these vulnerabilities, efficiently deliver on any response package/plan, and reach out to all while minimizing leakage and exclusion. The challenge in this context is substantial, given the weak capacity of the institutions, systems, and policies that are supposed to actively respond to the crisis and mitigate its implications. The main pillars of social protection that could have been used are completely absent, mainly social assistance and non-contributory programs, pension, unemployment benefits, and disability benefits. These are the main systems widely used by countries to act on the economic fragilities created by the COVID-19 lockdowns. 
 
The impact of the economic crisis has not been properly assessed yet, mainly in terms of the number of people affected, to what extent they have been affected, what kind of impact it had on the different segments of the population. The latest figures released by the World Bank estimate that people living in poverty drastically increased and more than 50% of the Lebanese population lives in poverty now. Unemployment—which was already substantial before the crisis mostly among the youth—is also on the rise. Given the structural inability of the Lebanese economy to create enough opportunities to meet emerging demand, many job seekers used to rely on the regional market to find opportunities. Border closing and travel restrictions are creating a blockade limiting labor outflow and potentially surging unemployment rates.
 
Despite its structural weaknesses, however, Lebanon can still act within its limited institutional capacity. The most adequate option is to distribute either in-cash or in-kind assistance to people in need. Cash transfers might seem a more plausible and fast option, to give people the freedom to buy what they need and to avoid market distortions. The National Poverty Targeting Program (NPTP) can be used as a platform—as the system is acceptably functioning and can serve the purpose during the time of the crisis. It should however be further developed to improve its outreach and efficiency. Yet, the packages’ delivery channels remain a challenge, the banking system—which is a possible channel—is facing serious confidence issues due to the financial crisis. Lebanon is not an exception, as the delivery system is a major challenge in several countries that opt for cash assistance as a response. Other potential delivery channels could be the existing UN agencies that are used for this purpose in other countries (such as UNICEF, WFP, and others). Some of these mechanisms are being used in response to the Syrian refugees crisis such as the WFP programs providing in-cash and in-kind transfers to refugees. The existing programs currently reach out to around 50% of the vulnerable Syrian households and to around 15,000 Lebanese households identified as the poorest of the poor through the NPTP.  
 
For the second track, policy measures should be put in place to prevent the crisis’ implications from becoming deep-rooted into the economy. Several sectors have been affected by the lockdown, which came as an additional layer to the existing economic contraction. What is unique about this global crisis is that it is affecting both supply and demand—Lebanon is no exception. On the contrary the situation in Lebanon is further amplified given the structural fragility of the economy: i) Being highly dependent on services and trade as main contributors to output—which are very volatile and susceptible to similar crises; ii) being import-dependent and vulnerable to disruption in international supply chains; and iii) vastly relying on the flow of remittances to fund local consumption which are highly unpredictable and subject to disruption.
 
The hard part would be to protect both employers and employees at the same time. During the lockdown, businesses have incurred huge losses due to the shutdown, disruption in the supply chain, limited access to credits, and deteriorating markets. Business continuity will be at risk given the extended downtime. The challenges facing businesses might drive employers to take inappropriate measures to cut down on operational cost; the easiest being through massive layoffs, cuts on wages, and imposing indecent work conditions. To mitigate these risks, relief packages can be designed to address business vulnerabilities. Such measures could include:
  • Providing highly subsidized loans or grants to support the most affected business (for instance hospitality and tourism).
  • Easing tax compliance measure, extending dealing for filing and payment.
  • Relaxing contractual deadlines and suspending penalties for companies experiencing delays in completing public contracts.
  • Subsidizing wages by a certain fraction. These subsidies should be conditional on preserving jobs and limiting dividends’ distribution, and could apply for large corporations.
  • Providing support to the self-employed (such as taxi drivers, actors, and informal businesses). The identification of some groups could be hard mainly for those working in the informal sector. For others, the government could rely on reports of the relevant syndicates and professional associations to evaluate the situation in each sector.
  • Excluding from the benefit schemes the sectors whose turnovers were boosted as a result of the crisis.
 
How should the government's interventions be funded given significant cuts in social spending in the 2020 budget and the dire fiscal and financial situation?
 
Looking at the global experience in addressing the crisis implication, governments and central banks all over the world have introduced prudent discretionary fiscal and monetary measures to offset the impact of the crisis and to prevent economic fallout. These include economic stabilizers such as taxes, unemployment, and household transfers. To what extent Lebanon can have the same agile response taken to scale in several economies without further contributing to its severe economic contraction?
 
The answer is not a straightforward one and very challenging within the gloomy context. Relief packages to household and businesses are highly costly, depending on the expected magnitude of support, and finding the needed funding is an extreme challenge, given the present fiscal constraints. Local resources are tight and the opportunity to create fiscal space to cover these packages is hard, but not impossible.
 
The government is already seeking to have an exceptional parliamentary approval for a supplementary budget of LL 1,200 billion, as a rules-based fiscal stimulus package to mitigate the impact of the lockdown. Part of the package will be channeled as a cash transfer to the poorest households. Another portion will be used to mitigate the disruption in supply chain and provide support to specific sectors such as agriculture, SMEs, and manufacturing. The questions remain on how this package will be funded and what mechanisms will be followed to make it work.
 
One of the resources could be in the savings on transfers to Electricité du Liban, given the plunging international oil prices, which is an opportunity that should be explored. Part of the generated savings could be channeled to finance the suggested relief packages. Another marginal fiscal space was naturally created during the lockdown and can be used for the relief effort. For instance, public sector enterprises and government administration have been in almost complete shutdown for the past couple of months, and most employees are not reporting to their workplace. The related operational expenses can be reallocated to fund the relief packages. These include transportation benefits, overtime, bonuses, supplies, travel expenses, and other operational expenses that are linked to the daily work of the governmental administration. These saving could range between LBP 50-170 billion and could cover more than 15 % of the stimulus package that was lately approved by the parliament.
 
In addition to potential fiscal space generated by this, the government can tap into other resources as well. One of these resources is the flexible and concessional donor financing which has been provided to the government by several multi-lateral donors including the World Bank. These provide a preferential interest rate compared to the market, long repayment and grace periods, and are considered as foreign currency injection. During the past decades, Lebanon was considered as an upper middle-income country and was not eligible to development grant financing. The World Bank’s International Development Agency (IDA) considers low-income countries with around $1,175 annual level of per-capita GDP as eligible to benefit from IDA’s financing. Given the emerging circumstances and the drastic decline in the living standards of the Lebanese population, Lebanon can re-evaluate its positioning in this regard and negotiate to become eligible for better financing conditions with multilateral and bilateral donors. The per capita GDP will be severely affected by the multiple shocks of local currency depreciation and economic contraction and will be reduced to around half its pre-crisis level, decreasing from around $8,200 in 2019 to merely $4,300. The calculation is based on an estimated GDP of $49 billion in 2019 and $26 billion in 2020, based on the government’ economic recovery plan. This will slowly move the ranking for Lebanon from an upper middle-income country to a borderline lower-middle income country in less than one year. This is an economic and social shock that would call for unorthodox way of providing financing to support Lebanon.
 
A key factor remains in the ability of Lebanon to re-establish confidence in its own institutions and to draw on the lessons to move toward a more sustainable, productive, and crisis-resilient economy.  







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