At the beginning of October, the Lebanese cabinet was holding meetings to discuss the 2020 budget and the members were scraping around for financial resources to finance the payments needed to be able to meet the -7.5% budget deficit only. As usual and using the same usual tools and applying the same limited knowledge and instead of looking for ways to boost the various economic sectors that can bring in more funds to the economy – sectors like Industry and agriculture- they resorted to the most idiotic of all solutions and imposed some further taxes on the Lebanese people. Among the suggested ideas was a $6 imposed tax on using WhatsApp call, an app that is free for all in the first place.
So instead of working with the telephone companies to come with more competitive rates and offer attractive packages so that people would go back to traditional calls the government decided to do just the opposite and impose taxes. Needless to say, it was the drop the overflowed the cup and in a few hours the people were on the streets and the protests quickly escalated from small sporadic groups to sweeping masses all over Lebanon.
To make a long story short and not to go through events that everyone is already aware of the protests soon evolved and branched out to teams applying pressure on various economic and governmental sectors. Ironically for Lebanon, the only worthy economic sector is the banking sector so naturally the biggest pressure was there.
About a year earlier the Lebanese banks started feeling the pressure on their liquidity and accordingly started quietly implementing some restrictive measures to protect the cash in their vaults and started to offer high interest rates (up t0 17% in some cases) in return for freezing accounts. On the Prophets’ day 2018 a public holiday in Lebanon and some of the countries in the region but not in the global markets, the dollar versus the pound briefly shot up to 3,000 LL and then went back to the normal rates. Back then there was a brief noise about it however everyone downplayed it and soon it was all forgotten; yet a few months ago that came back to bite us with serious liquidity issues.
It was only normal that against the banks’ stringent regulations and extreme measures taken against money withdrawal that the people will have a negative reaction towards the banking system and start pointing fingers at it and at the Central Bank’s Governor blaming them both for the financial situation of the country and blaming the governor himself for faulty financial planning that has led us to this predicament and for giving special favors to the banks, big investors and politicians at the expense of regular and small time depositors.
All the above is true to a certain extent, the Governor’s policies may have not been the soundest or the wisest, but the man did what he could to protect his sector which happened to be the country’s only productive sector and while Mr. Salameh was busy protecting his bank and the commercial banks in Lebanon the government failed time and time again in doing anything to improve the industrial or agricultural sector the meant one thing: money leaving the country to buy food and products in much much bigger amounts than the money entering the country. In addition, coming out of the civil war with a totally destroyed country and a Lebanese pound that was floating freely with no signs that it will stop increasing at any point, the governor had 2 main concerns: 1- to stop the devaluation of the currency to avoid becoming like Argentina and Turkey. 2- Attract foreign capital.
In order to stop the devaluation, he resorted to pegging the currency at the rate of 1500 Lebanese Pounds to the dollar which is already very high given that our currency is the Pound and not the Thousand Pound. Of course, this came at the cost and of course it was not supposed to go on for 30 years. The economy was supposed to improve, we were supposed to have a flourishing industry and strong exports that can support a stronger currency and removing the peg all of which never happened.
Regarding the 2nd point, there are 2 ways to attract foreign capital to a country:
- Through FDI (foreign direct investments) which means foreign companies or individuals investing in Lebanon in various economic sectors (industry, agriculture, services, etc….)
- Through attracting big depositors to keep their money in Lebanese banks.
The problem with Lebanon is that since its inception and thanks to Michel Chiha’s vision of Lebanon, all – and I mean all – the consecutive governments shied away from investing in Industry and agriculture and they all believed that Lebanon’s future lied in the services industries and this is why since early on we were the country that continuously partied with world class festivals, had the first casino in the middle east and in addition we gave all the possible facilities for the banking industry which has cost us dearly a few times so far (intra bank crisis in the 60’s and Al Madina bank crisis in our more recent history). Therefore, it should come as no surprise that the banking sector is still the strongest in the country and has the supper hand.
So, and in order to attract capital the banking sector had always given higher interest rates than the average market rate, has always offered secrecy second to no country except Switzerland and has always supported the concept of capital free flow in and out with no real restrictions. It is worthy to note here that the higher than market average rates were one of the main reasons that led to the demise of Intra Bank, so it is not something new.
And because FDI in Lebanon was irrelevant and was limited to a few hotel ventures here and there and some trading companies at best, that meant that there was no real money coming into the country or at least we were not generating any international sales to bring in money.
For banks to make profit from the depositors’ money they have the below main options:
- Loans to various business sectors to generate profits from the interest rates charged
- Loans to individuals (personal, housing, cars, etc…)
- Foreign bonds and stocks
- Local bonds and stocks
- A fifth dimension which is almost unique to Lebanon is the Lebanese expat’s deposits in the Lebanese banks.
Going to the previous point about Lebanon’s financial model, banks were not able to generate worthy gains from loans to the business sectors. While there were loans to individuals, the amounts coming out of those were not enough so it was normal that the banks would resort to local government bonds to generate substantial profits. What we failed to ignore were the governor’s subtle messages about this situation; we always bragged about the capital available in the banks and how much money was there but as well we always failed to notice that this capital sitting idly in the banks was a problem. Every now and then the governor would go on TV to inform the public that the government has issued “government bonds” in order to absorb the “liquidity surplus” in the banks and unfortunately we never understood what that meant and how that will come back to bite us one day. This surplus was supposed to be invested in revenue generating segments other than the bonds segments like (and going back to my main point) the industrial segment.
So now we are running in an endless circle; the government owes money to the banks and to other businesses in the country but the government can’t pay those dues because it can’t borrow money from the banks anymore and it has no other revenue sources except taxes which has reached a point that the people can’t afford to pay anymore.
Given the current dilemma we are at, I find it to be the biggest mistake to attack the banks – not because they do not deserve it but because if we do and this industry fails the whole country goes bust. When you have a headache do you cut your head off or you take ibuprofen? Now we do have a headache, mind you a very strong one almost a migraine but it can still be treated but it has to be done urgently. In order to fight that huge monster, we need to create another monster able to fight with it. The government should take immediate measures to protect whatever few remaining industries in the country and set the ground for new industrial and agricultural investments. In Lebanon, the government is the biggest real estate owner so those plots can be rented out to companies at very small rates in order to attract job creation, give free electricity till it can provide 24-hour electricity services. Removing taxes on all raw material needed for manufacturing is another option to boost the economy.
A few days ago, someone suggested a “hair cut” theory to redistribute the fortunes amassed by some of the elites through the central banks’ “financial engineering” and unrealistic interest rates given in order to inject the country with the much-needed liquidity. Despite the fact that this looks like a socialistic approach that defies the very essence of capitalism – the concept on which our economy is based – even if we do so it will be like taking a baton to a fight of giants while what you actually need is a nuclear weapon! This suggestion – if taken seriously – is at best a temporary fix the might delay the crash just a few months further. What is needed instead of collecting the money is to force those people to invest it in agriculture and manufacturing in order to create more jobs and to boost exports which is the healthiest way to bring in the much-needed dollars to the country.
If you take a haircut, sooner or later that hair is going to grow all over again; what is actually needed is a shake up to move all this country’s foundations.