A Newly Created Multi-Donor Trust Fund Must Deal With Lebanon’s Broader Economic Problems
The Lebanese Center for Policy Studies (LCPS), in collaboration with the Konrad Adenauer Foundation (KAS), organized a roundtable discussion on the impact of the Syrian conflict on the Lebanese economy on December 6, 2013. This roundtable was moderated by Dr. Mary Kawar, senior employment specialist at the ILO (video). The key points made by the two featured speakers were:
- Mr. Samir El Daher: In order to combat the economic challenges Lebanon faces, mainly due to the influx of Syrian refugees, the government is setting up a multi-donor trust fund (video)
- Mr. Kamal Hamdan: This fund must adhere to eight objectives and parameters (see below) so it can deal with rising unemployment, social tension, and other structural problems (video)
Mr. Samir El Daher, Advisor to the Prime Minister for Economic Affairs and Development, outlined the challenges that the Lebanese government has faced as a result of the Syrian crisis and the steps it has taken to address them. Lebanon’s concern is no longer just how it can provide humanitarian assistance to the refugees, but how the Lebanese economy can be shielded from the crisis.
The scale and length of the Syrian conflict cannot be predicted. An issue the Lebanese government is struggling with is that while the financial impact of many disasters can be quantified, such as the 2006 war on Lebanon or the Haiti earthquake, the indeterminate nature of the Syrian conflict makes it very hard to assess the extent of the damage.
The wider economy is struggling with depressed investment and consumption levels as well as disrupted trade routes and tourism flows. Based on a recent World Bank study, Lebanon’s growth rates have been slashed from an expected 4.5% to 1.5% (over the period 2012-2014), with the latter being presented as an optimistic figure. Total GDP for 2012-2014 was expected to be $143 billion, but due to the crisis it is now expected to be $135.5 billion.
The refugee problem is putting major strains on Lebanon’s services and infrastructure. The number of Syrian children requiring school places is well beyond Lebanon’s capabilities to provide. A 25% population increase has also strained the already vulnerable national infrastructure and affected the government’s budget, due to subsidies on basic services such as electricity. Security responsibilities and costs have also increased and solid waste management is increasingly problematic. The estimated costs on the public treasury over the three-year period (2012-14) include
a. $1.1 billion due to surge in demand for public services.
b. $2.5 billion required for “stabilization”, that is to provide public services to both Lebanese and Syrians at their pre-conflict quality levels.
c. $1.5 billion in depressed revenue collection due to fall in GDP.
d. Total cost of $5.1 billion, further incurring cost by adding to the deficit and increasing public debt.
The huge pressure on the labor market due to the population increase has led to a spike in unemployment as competition for low skilled jobs in particular increases. This promotes underemployment and increased poverty, with 170,000 additional Lebanese citizens expected to fall below the national poverty line by the end of 2014.
To address these challenges, the Lebanese Government has created a coordination committee that cuts across all sectors to deal with the impact Syria is having on Lebanon. Headed by the Prime Minister, this committee has representatives from all concerned ministries – such as Finance, Health, Education, Social Affairs, Economy - Governor of the BDL, Governor of the CDR and other relevant bodies.
The Lebanese government has decided to set up a multi-donor trust fund managed by the World Bank to coordinate international aid. The creation of this fund should assuage donor distrust of the Lebanese government’s ability to effectively and transparently manage direct aid. The fund would finance pre-specified projects and would also allow for greater coordination of aid along defined priorities. The government proposes the creation of a directive committee headed by the Prime Minister and with representatives from the World Bank, UN agencies and other donors to oversee the fund. The role of the committee is to coordinate closely with the aforementioned Lebanese Government committee on Syria in order to define its strategy and priorities. While not all donors will choose to operate through the fund, Mr. Daher states it provides an essential avenue for many aid agencies.
Mr. Kamal Hamdan, Executive Director of the Consultation and Research Institute, highlighted some of his concerns over the socio-economic challenges Lebanon is facing, which were as follows:
- In light of the current political vacuum, there is a fear that government procedures are incapable of dealing with the increasing refugee problem.
- Assessing the economic repercussions of the Syrian crisis on Lebanon is difficult because the length of the conflict is uncertain, and therefore the full extent of the consequences unknown.
- The average growth over the years 2007-2010 was 8.5% which dropped to 4% in 2011 and then to an estimated 1.5% over 2012-2014. We cannot attribute all the depressed growth to spillovers from the Syrian crisis nor can we tell how much of it is attributed to the Syrian crisis or to other cyclical factors.
- Mr. Hamdan also voiced concern regarding the accuracy and credibility of the estimated number of refugees in Lebanon as the number itself has become politicized. Does this number include the pre-conflict Syrian immigrant population or only the newcomers? How many informal refugees are there? Accurately estimating this number is very important because the estimated costs of the crisis on the Lebanese economy highly depend on it.
Unemployment is a serious challenge. In just two years, the number of people inhabiting Lebanon increased by 25% due to the influx of Syrian refugees. As a consequence, the labor supply has also experienced an alarming increase in these two years. Since Lebanon already suffered from a high unemployment rate before the influx, the effects of this on the labor market could be especially dire. Before the crisis, the Lebanese economy witnessed around 45,000 to 50,000 new entrants to the labor market annually. In contrast, this is accompanied by a negligible increase in demand for labor from both private and public sectors. Mr. Hamdan argues strongly that the Lebanese economy is witnessing an annual gap of 50% to 60% between the supply and demand for labor. Coupled with a 30% increase in labor supply from Syrian refugees, the potential consequences of such a situation are disastrous.
Social cohesion is in jeopardy. In addition to the labor market problem, difficulties related to social cohesion are emerging, especially in the regions that at first showed the highest levels of compassion for the Syrians. Mr. Hamdan stressed the importance of social cohesion and warned that any threats to it could have as big a destructive influence as underemployment.
Money is being injected into the economy. Finally, he also mentioned the positive impact of the influx of refugees: they are injecting cash into the economy, they are economically active, and their skills are complementary to the Lebanese labor force.
With regards to the trust fund, Mr. Hamdan has no doubt that Lebanon is in dire need of support and he very much welcomes the establishment of the fund, but has some critical comments and suggestions:
1) The fund must be financed through donations and grants rather than through loans.
2) The fund should target Lebanese and Syrians alike, especially paying attention to the most disadvantaged groups. Subsequently, the challenge of determining the eligibility criteria arises.
3) The fund should have an important investment emphasis. The rationale behind the fund should be development instead of stabilization. The goal should not be, as once was the idea, to bring the macro and micro indicators back to their 2010 levels, as even in 2010 the country faced major infrastructural problems. Mr. Hamdan strongly advocates for spending the greater share of the fund on investing, encouraging production and creating employment opportunities. Subsidizing services should accompany these strategies and complement them rather than be the fund’s core aim.
4) The biggest part of the fund’s money should be assigned to local development projects: more than half of the municipal unions have developed visions and action plans for their development, but they lack financing. The first priority should be to revive these plans especially in the areas witnessing the highest levels of refugees.
5) Within these development projects, one of the greatest priorities should be to invest in labor-intensive projects to create employment opportunities especially for the more disadvantaged Lebanese and Syrians.
6) It is essential for the Lebanese government to build good relationships with donor nations and agencies. The proposed directive committee is a good first step to that end, but Mr. Hamdan cautions against past negative experiences in similar situations and stresses the need to learn from these mistakes.
7) The investment of the fund’s money should be accompanied by a modernization and subsequently implementation of the existing economic visions and social development strategies.
8) The money should be used in a way to also maintain and stimulate social cohesion as failure of the latter could result in drastic and uncontrollable repercussions.