Washington needs to find a new way of dealing with Lebanon

Author : Mircea Birca | Monday, May 11, 2020
Posted in category Eurasia, Middle Orient
Comments Off on Washington needs to find a new way of dealing with Lebanon

For too long, Washington has been an accomplice of the rampant corruption in Lebanon, choosing to look the other way as it deals with officials known to be implicated in various corrupt schemes. Over the years, Lebanon has continued to run up unsustainable debts, only to be bailed out by the West via the Gulf countries and international donor conferences.

Today the Lebanese economy is in “free fall,” according to the financial recovery plan recently approved by Beirut’s government. The government said that “an international financial rescue package is urgently needed to backstop the recession and create the conditions for a rebound,” and admitted that reforms must be implemented to restore confidence in the country.

Washington should proceed with caution. Even though it was Hezbollah and its main Christian ally, the Free Patriotic Movement (FPM), that formed Prime Minister Hassan Diab’s government, the U.S. has refrained from taking a position, waiting to see how it will act.

As the government commits to reforms, the new economic plan places most of the blame on the banking sector, one of the country’s two pillars of stability. The other is the Lebanese Army. Having previously attempted to penetrate the latter, Hezbollah and the FPM are now turning their eyes to the former. The two parties have used the governor of the central bank as a scapegoat and blamed Lebanon’s growing economic crisis on the policies pursued by U.S. allies dating back to the early 1990s, a time when neither Hezbollah nor the FPM were in government. They are using this to their advantage and turning a blind eye to the corruption that has only increased in the post-2005 era.

Lessons from the past

In 2001, then-Prime Minister Rafik Hariri garnered international support for the Paris I donor conference dedicated to Lebanon’s economic development: 500 million euros in aid was pledged. One year later, Paris II was held and a further 4.2 billion euros was pledged, with the IMF applauding plans to reduce the public debt. Even though Lebanon failed to implement the economic reforms promised at the first two conferences, the international powers convened for a third time in 2007 and pledged close to $8 billion for the rundown Lebanese economy. The international group of countries and institutions saw the aid as a way of helping the country stand on its two feet after Rafik Hariri’s assassination in 2005 and a devastating monthlong war between Hezbollah and Israel in July 2006.

For the majority of the last 20 years, Lebanon’s government has been formed and headed by those the West has publicly supported and worked with. For even longer still, Riad Salameh has been at the helm of Banque du Liban (BDL), the country’s central bank, after being brought in by Rafik Hariri in 1993.

After a lengthy career at Merrill Lynch, Salameh used his skills and connections to benefit his motherland. He was able to employ so-called financial engineering tactics to buy successive governments time to create a productive and growing economy. This involved luring foreign investors into Lebanon’s Eurobond market while attracting Lebanese expats to deposit foreign currency savings in Lebanon at exorbitant interest rates not seen in other countries.

Changing regional powers

Lebanon’s economic model began to run into problems following the onset of the Syrian civil war in 2011, when its exports could no longer easily travel by land to the Gulf, Iraq, Turkey, and other markets. The expansion of economic sanctions on Lebanon due to Hezbollah’s growing influence presented yet another challenge to a country with the world’s third-highest debt-to-GDP ratio.

Despite the high level of government spending, where the money went and what it actually achieved wasn’t always clear. Even though government subsidies to the state-run electricity company account for about one-quarter of the annual budget deficit, totaling around $1.5 billion a year, electricity is still not available 24 hours a day.

Further exacerbating fears and scaring off potential investors was the kidnapping of then-Prime Minister Saad Hariri in Saudi Arabia in 2017. This was part of Riyadh’s effort to push back against Iran and its proxies in the region given its frustration with the Yemen war, the Syrian conflict, and Saad Hariri’s compromise with Hezbollah that brought him back to power under a Hezbollah-backed president.

Shortly thereafter, and in an apparent sign of its disapproval of the kidnapping, Paris hosted another donor conference in an attempt to shore up what was left of Lebanon’s sinking economy. In April 2018, the international community pledged an eye-watering $11 billion in soft loans and grants.

But this time around, the money would have to be earned by first implementing reforms, such as to the electricity sector, controlled by Hezbollah and its allies, the FPM, since 2005. The IMF says about 40 percent of Lebanon’s entire debt has come from subsidizing the state-run electricity company.

Despite the record amount of aid pledged in Paris in 2018, Saad Hariri’s government was unable to pass the necessary reforms to unlock it, and donors threatened to divert the funding elsewhere.

Pointing fingers

After failing to agree on the needed reforms, Lebanese officials found themselves at loggerheads in October 2019. Scrambling for ways to generate revenue, the government imposed the now-infamous “WhatsApp tax,” sparking unprecedented nationwide protests calling for the fall of Saad Hariri’s government and early parliamentary elections to replace the ruling elite.

After initially participating in the protests, Hezbollah’s supporters quickly withdrew and began using violence to sabotage them after the party’s leaders were included in chants against those needing to go.

Attention quickly turned to a small number of protests against BDL Governor Riad Salameh and the Lebanese banks. Banks were forced to close for safety reasons, and the markets and economy began to tank. There were calls for Salameh to go, and he admitted that stepping down could further undermine confidence in the country.

This was one of the first times Salameh had responded to criticism. He said after the protests kicked off that “mobilizing by identifying capital and money as the enemy is not the way forward. We need to build the state and build an economy that has growth.”

The BDL governor was seen as the one who provided funding to the government using the people’s money — money that was now nowhere to be found when they tried to withdraw it.

This is true, and Salameh shoulders part of the responsibility because he neither dared to publicly speak out against corrupt politicians nor step down if and when they failed to heed his demands.

But it not as though Salameh hadn’t spoken out about profligate government spending before. He warned against approving a raise for civil servants that tacked on another $1-2 billion per year to the state budget in 2017 — at a time when the country’s debt was increasing and state revenue was not. Parliament Speaker Nabih Berri was adamant about passing the law, which was perceived as an effort to placate voters before the 2018 parliamentary elections. Berri is widely seen as a poster child for Lebanon’s rampant corruption and is one of the world’s longest-serving Parliament speakers, in the post since 1992.

And it wasn’t Salameh who illegally employed over 5,000 public workers during a freeze enacted in August 2017 that was designed to preserve state funds. According to Nassib Ghobril of Byblos Bank, public sector spending went from $6.5 billion in 2005 to $16 billion in 2016.

Lebanon’s infamous trash crisis, which began in 2015 and landed the country on the front pages of international media for all the wrong reasons, wasn’t his responsibility either. Five years on, and the problem still hasn’t been resolved. On May 5, with trash piling up once again, officials agreed to increase coastal landfill capacity after it reached its limit. Hezbollah and the FPM — and the other political parties — were nowhere to be seen.

All of these problems were the fault of the ruling elite, which has been in power since the end of the 1975-90 Civil War. All sides are responsible, and this includes Hezbollah and its allies, but also pro-Western officials as well.

Moving forward, with or without Salameh

Public smear campaigns against Salameh have increased in recent weeks. This culminated in Prime Minister Hassan Diab — who was nominated and backed by Hezbollah and the FPM — launching a scathing attack against the BDL governor, blaming him for the freefall of the Lebanese pound.

After the second round of nationwide protests kicked off in April as demonstrators ignored lockdown rules amid the COVID-19 pandemic, Hezbollah and the prime minister it nominated quickly turned to making Salameh the scapegoat. Echoing Diab, Hezbollah slammed Salameh for the currency crash and the BDL’s “negative performance.”

President Michel Aoun, a Hezbollah ally, raised the possibility of replacing Salameh during a cabinet session — even though the constitutionality of such a move was unclear — but was warned against it. Salameh, a Maronite Christian just shy of his 70th birthday, also poses a threat to the presidency, which is up for election in less than two years. One of Salameh’s most vocal supporters was, in fact, Hezbollah’s Shi’a ally, Nabih Berri, head of the Amal Movement.

Changing Lebanon’s current free-market economic model is seen as fitting with Hezbollah’s goal of nationalizing part of the banking sector. The current system prevents the Lebanese state, which Hezbollah and its allies exercise significant influence over, from having much of a say in banking matters. Economic and banking officials, speaking on condition of anonymity, estimate that the Shi’a community holds 40 percent of deposits in Lebanese banks. Shi’a businessmen are a key source of funding for Hezbollah’s institutions and projects, meaning problems with the banks have a direct effect on its finances. The Diab government’s plan would see the capital of Lebanese banks “written off with a full bail-in of shareholders.”

Salameh and the banking sector also have to comply with economic sanctions, which recently forced the closing of a Lebanese bank, a move experts say expedited the country’s inevitable financial collapse.

Replacing Salameh with someone approved and appointed by Hezbollah and its allies could enable it to change such cooperation, although it would be difficult. For example, in his most recent speech, Hezbollah Secretary-General Hassan Nasrallah admitted the BDL was helpless and had to cooperate to a certain extent with U.S. sanctions. But banks were being “unjust” in implementing sanctions against Hezbollah, he claimed. Nevertheless, he denied that his group wanted to “control” the banking sector.

At a time when pro-Hezbollah media outlets attack Salameh as “America’s man” and blame him for Lebanon’s current economic crisis, replacing him would fall to the advantage of their narrative of “fighting corruption.”

Nasrallah attempted to downplay efforts to replace Salameh in his latest speech, amid growing concerns over Lebanon’s stability and security and the impact such a move could have.

In interviews conducted for this piece diplomats and international financial institutions called Salameh “untouchable” and “a red line,” but his replacement is becoming more likely and perhaps more necessary to change the path Lebanon is on.

For years Salameh was able to maintain the peg to the U.S. dollar, securing the necessary financing for Lebanon to import goods. He was able to shield the country from the repercussions of the 2008 global economic crisis and continued to come up with financial products that lured in investors.

The two main pillars on which Lebanon continues to stand today are the Lebanese Army and the banking sector. With the latter under fire and in need of a significant revamp, starting from the top may be necessary. The timing, however, needs to be carefully considered, and Washington should be prepared to back a strong candidate. Tying the country’s stability to one individual is no longer viable though. Instead, strengthening state institutions to undermine non-state actors should be the primary objective.

But Lebanon may still need Salameh, at least for now. With Beirut agreeing to seek IMF assistance, he may be just the person to help instill confidence and secure the needed funding. After this phase is over, however, Salameh will still be under attack, and clinging to an individual that has become controversial may only lead to greater volatility, rather than stability. Washington should be prepared for what follows, and it should no longer turn a blind eye to the corrupt leaders it is allied with.

Careful and cautious with Diab

If Lebanon can implement the stated reforms and complies with the IMF’s recommendations, which would be unprecedented for Beirut, there is no reason not to work with the Lebanese government.

In this case, Diab should be dealt with carefully and cautiously as recent actions have raised questions about his credibility and motives. During his public upbraiding of Salameh, Diab said he did not know how big the BDL’s U.S. dollar reserves were, contradicting his finance minister, Ghazi Wazni, who said they stood at $22 billion. Wazni also said on May 6 that accumulated losses at the BDL stand at about $63 billion, due to sovereign debt and deficits caused by the electricity sector. The level of BDL reserves was also questioned in a very closely worded speech by FPM leader Gebran Bassil.

For the U.S. and other partner nations and institutions, this only heightens concerns, adding to the view that Diab’s government is a de-facto Hezbollah one. And while Diab has questioned the scope of the independence granted to the BDL, it is this independence that has prevented the government from being able to rein in Salameh and his authority to issue circulars. One of the most recent circulars, released on April 16, said that all e-money transfers in foreign currency would be paid in local currency “at market rate.”

After Diab’s speech attacking Salameh, the governor said that requiring the BDL’s circulars to be signed off on by the Lebanese government was a “violation of the independence of the central bank.”

Banking experts and officials said the most recent circular was preventing Hezbollah from scooping up dollars that come into the country via money transfers or are tied to the money exchange dealers. “This is something the governor [Salameh] did,” one of the banking officials said.

Banks have voiced their frustration that the government’s new economic rescue plan was not discussed with them, describing it as “a takeover of the banking sector by the state.” The lenders are preparing their own proposal to be presented soon.

The current state of affairs

Since Diab’s self-styled “technocratic government” was formed and pledged to deal with the crisis, all of its actions and words have instead pointed to it being a political government. The narrative has been to attack one political side and scapegoat those deemed responsible for the problems that hundreds of thousands of Lebanese protesters are demonstrating against.

The government’s formation has also destroyed whatever minimal equilibrium was left in the Lebanese system vis-à-vis pro- and anti-Hezbollah factions. Today the three top political positions — president, prime minister, and speaker of Parliament — are all headed by close allies of Hezbollah. And while the group is facing major challenges on a number of fronts, from Iraq and Syria to Lebanon, as well as the impact of the COVID-19 pandemic, it will have to deal with the international community if it does not to want stand in the way of aid. Nevertheless, Hezbollah will continue to have a say when it comes to the decision-making positions at key institutions, such as the BDL and the Lebanese Army, if not all-out control over them.

Currently the lowest-hanging fruit is Salameh given the growing unrest as citizens face illegal capital controls, decreasing purchasing power, and exponentially rising inflation.

Lebanon finally agreed to negotiate with the IMF for financial assistance after a long hold-up due to Hezbollah’s opposition. The global pandemic will most certainly stretch the international lender as over half of all countries worldwide have asked the IMF for emergency funding, so Lebanon will need to wait and see how much money it can get.

In the meantime, attacks against Salameh will continue. Washington should prepare ways to increase cooperation with state institutions, like the Lebanese Army and Internal Security Forces, and condition aid accordingly. It must tread a fine line here. It is important to ensure that Lebanon’s security apparatus remains intact and has the support of the international community. This requires close cooperation and increased aid to these institutions — potentially doubling down — to ensure they are fully capable of carrying out their roles of maintaining security and stability, without looking to non-state actors for support.

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