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2020 Outlook: Lebanon between the economic crisis and the aspirations of the October uprising

​Introducti​​on

The Issam Fares Institute for Public Policy and International Affairs (IFI) at the American University of Beirut (AUB) organized on Thursday, January 31, 2020 a panel discussion entitled: “2020 Outlook: Lebanon between the economic crisis and the aspirations of the October uprising". The panel was composed of IFI's experts Jamal Saghir, Professor of Practice McGill University and Affiliated Scholar at IFI, Hana A. El Ghali, Director of the Education and Youth Program, Nadim Farajalla, Director of the Climate Change and Environment Program, Ali Ahmad, Director of the Energy Policy and Security Program, Mona Fawaz, Director of the Social Justice and the City Program at IFI and Lina Abu Habib, Senior Policy Fellow at IFI. Based on their experience, speakers presented, an overview of the current situation in Lebanon in light of the ongoing economic crisis and the October uprising.  The session was moderated by Albert Kostanian, economist and host of the “Vision 2030" talk show.


Dr. Nasser Yassin, IFI's Interim Director, opened the event stating that this session serves to reflect on the current situation and learn from the experience of other countries who have been through similar experiences yet again acknowledging the specificity of each. In his introductory remarks, he briefed the audience on the perpetual crisis that first and foremost requires a complete transparency and serious state reforms, he stated that Lebanon's predicament is that of the rule of law and not of governance as there is a serious need for uprooting and revamping the whole governing body and everything it entails. On a more positive note, he highlighted the unprecedented awareness of the Lebanese people who are demanding a state with independent judiciary that helps fight corruption and return stolen funds. He also touched on the need to establish a productive economy, as well as a rights-based approach to governance that promotes gender equality and environmental welfare. Lastly, he stressed on the significance of October 17 as the date that marked an implosion of accumulated concerns and the need for an intelligible political project that can only gain legitimacy by way of firsthand efforts carried out by groups and individuals across the country.


The discussion is summarized below in the form of Q&A.

Q: Is it poss​​ible to avoid the economic and financial crisis in 2020 taking into consideration the inability of the banks to serve their clients and the failure of the state to pay its dues? And is it likely that the Lebanese economy would undergo drastic change?

Jamal Saghir:
Lebanon's economy is now in a situation of sudden stop. A sudden stop in capital flows is defined as an abrupt slowdown in private capital inflows into the economy. Sudden stops are usually followed by a sharp decrease in output, private spending and credit to the private sector, and real exchange rate depreciation. This is exactly what we've been witnessing for the past three months, as Lebanon is facing a deep accumulation of interrelated political, social, economic, financial, and environmental crises, mutually feeding off of each other at different levels creating a perfect storm. The import/export imbalance is creating current account deficits of around 25% of GDP. Lebanon macroeconomic fundamentals are the worst among previous crises-stricken countries. It is the third most indebted country in the world, after Japan and Greece, with a Debt-to-Gross Domestic Product (GDP) ratio in 2018 of 150% and currently at 156% according to the International Monetary Fund and a gross public debt of US$ 87 billion. The banking system is completely paralyzed. The banks are no longer able to serve their clients as they relied mostly on the deposits of wealthy Lebanese and especially the diaspora, but this has also stopped.  Instead of helping the country get out of this financial mess, the banks are stuck right in the middle of this crisis and instead of offering the solutions. The consequences of these crises individually, and even more so combined, for Lebanon and all stakeholders involved (people, government, universities, civil society, private sector, NGOs, etc.) may be devastating unless urgent policy action decisions are taken, and structural reforms are implemented.

To stop this downfall, the economy will need an immediate injection of at least $25 billion in fresh capital. It is critical that Lebanon begins a process of significant fiscal and monetary adjustments and structural reforms to contain pubic debt and raise economic growth.

Q: What are the pros​​​pects of witnessing improvement in electricity supply in 2020? What is the role of the private sector? And is it possible for Lebanon to generate 50% of its electricity from renewable energy by 2030?

Ali ​​Ahmad:
The 2020 budget proposed before the October uprising included a substantial reduction of transfers to EDL. Since more than 95% of electricity generation is produced by thermal power plants (i.e. uses petroleum products such as heavy fuel oil and diesel as fuel), such a reduction is twofold: either EDL would lower its supply to match the available financial resources, raise the tariff in an attempt to boost revenues or a combination of both options.

The new government has inherited the 2020 budget and maintained commitments to reduce transfers to EDL. As you can imagine, the political and social context is not suitable for any tariff increase in the short term. This means only one thing, EDL's supply will decrease in 2020 between 20 to 30%, compared to 2019, if we assume that demand and oil price levels remain the same as in 2019.

Ultimately, this would bring EDL into a vicious cycle. As EDL's supply decreases so would its affordability because the alternative, i.e. electricity produced by diesel generators, is priced much higher than that of EDL, and its fuel is paid in (so far subsidized) US dollars. At the same time, with the diminishing purchasing power and raising inflation, this would result in people paying higher percentage of their income on energy, exacerbating energy poverty concerns in the most vulnerable populations. This is likely to lead to an increase in illegal grid connections, deepening EDL's already high (technical and non-technical losses), which currently stand at around 35%.

Regarding the role of the private sector, I believe that it has a big role to play, but in the energy sector, private sector participation can take many forms. One of them is shifting towards the self-consumption model by employing renewables. Decentralization of power generation is a global trend, and now is the time to think seriously about this option. The second level of private sector participation is the third-party ownership model and selling of electricity, which can come in very handy given that the government has no money to invest in energy infrastructure. However, for this to materialize, some of the obstacles must be removed. The most important of which is the lack of a coherent legal framework and an independent regulatory body, which serves to balance the interest of private developers and the government while protecting the consumers.

As for the role of renewables, I strongly believe that achieving 50% renewables penetration by 2030 is achievable in Lebanon, especially with the knowledge we have right now on land availability and mapping of resources. However, I propose a different approach: instead of setting percentages, let's design an efficient market that decides which energy source to dispatch, where, and when. This will automatically take care of all the variables such as technology costs, grid readiness and integration, etc. Many countries make auctions to open the playing field. I am sure renewables will eventually be a first choice without any artificial subsidy or support by anybody.

Q: How is the economic​ crisis impacting the education sector? What are we expecting in terms of the quality and access to education?

Hana A. El Ghali:
Studies show that in times of economic crisis, households tend to control their expenditure through reducing or ceasing expenditure on education among other basic needs. Additionally, we need to recognize that we have an education crisis in Lebanon. Across the years, the dropout rate levels have increased particularly in grade 7 (mostly 13 years old boys). This trend continues in secondary school and at tertiary education. According to the Central Administration of Statistics (CAS) household survey results of 2011/12, enrollment rates drops dramatically for children from the poorest quintile of the population after reaching age of 13. In addition, according to the World Bank's Human Capital Index (HCI), a child born in Lebanon today is 54% as productive when s/he grows up as s/he could be if s/he enjoyed complete education and full health. Additionally, the recent 2018 PISA results, where 2/3 of the children in both public and private schools are considered functionally illiterate. 

Nevertheless, it is essential to keep in mind that the education system in Lebanon was already strained and challenged before the recent events in light of this crisis, multiple schools shut down; yet the association of schools in Lebanon has been very supportive of the families and have issued a decision to support those struggling to pay private schools' tuition fees for this academic year. It will be interesting to observe what will happen in September 2020, when families start to question their decision on whether they can still afford to enroll their children in private schools, or in some cases even have them work support the family.

In conclusion, I think Lebanon should use this crisis as an insight into the gaps in its education system in the aim to find solutions. It is also important to establish a partnership between the public and private sectors in order to overcome these gaps as some of the challenges in education are also found in private schools as well.

Q: How do you explain the high numbers of participants in the uprising and the quasi unified demand for change that we have seen in the last three months acro​​ss Lebanon? Is the wall of fear broken for good, and can we consider these social movements as emerging pressure groups? And how do you describe the role of women in the ongoing uprising?

Lina Abu Habib:
The social movements are not the result of the revolution that has taken place. They have been present since the civil war, they might have been through ups and downs, yet they were always omnipresent and active on several social, economic and political fronts. Feminist movements have been increasingly active over the past 30 years. However, since October 17th, we have been witnessing a moment of maturity where we come to realize that these movements are at the heart of the revolution.

For the past 30 years, women and feminists have been an integral part of social movements and have continuously manifested for equal rights in the private and public sphere, for freedom from violence, for a long awaited reform of religious family laws, for equal citizenship rights as well as for equal opportunities in political representation and participation as well as LGBTQI rights and the inclusion of all women and girls.  These demands are omnipresent since October 17th and made even prevalent by the emergence of new and young feminist voices who are strongly shaping the discourse and demands of social movements. There is no going back at this stage. The number of women participating in the uprising is unprecedented and they have been more vocal than ever of their demands and rights. The recent events showed us that these movements have reached a high level of maturity and that these causes are being supported by large groups of Lebanese.

Q:  The construction and real estate sector has been one of the main pillars to our economy. How did it contribute to establishing a rentier economy which en​ded up exacerbating the economic situation we are witnessing today? What are the chances of the Lebanese youth to own property with the absence of support policies and with the new rent law? Is it possible for these people to move away from the idea of owning and opt for renting instead?

Mona Fawaz:
Competition has been shaping all our economic ventures assuming that it seeks to establish a productive economy. Yet, the last 20 or 30 years show that the banking sector and the monetary policies go hand in hand with the real estate and construction sectors. The featured map (we will add link) shows that the higher the balance of payments is, the higher the number of permits granted are. This is manifested in the general policy that is trying to bring in money to Lebanon and subsidize the real estate sector in a way that those who are not claiming their bank interest would redirect the money to the real estate sector. There were incentives by the Central Bank to motivate people to invest their money in real estate by giving banks the permission to offer house loans that were eventually halted in 2018.

Loans could reach up to $800 k benefiting only the oligarchy in a country were minimum wage is $450 and where landowning by foreigners has been clearly facilitated. The chaos imbuing the construction sector is a result of a law set by those who are partnered up with both the banks and the political elite. This of course is a matter of rule and not of individual naivety. Beirut turned from being a city where one can work and live, to becoming a safety deposit boxes where these purchased apartments are mostly empty as studies show that 23% of the newly built apartments are vacant. The city lost its role from being a place where people live and produce and became an extension of the rentier economy.  To come out of this crisis, we need to flip this equation so that the city becomes once again, a place for production.

As for the question regarding buying versus renting apartments, I first need to shed light on why people seek to buy rather than rent. Due to the lack of a senior citizen social security law, people are keener on purchasing property to guarantee some sort of a safety net when they reach the age of retirement. This law ranked on top of the youth's concern which was depicted in a study conducted before the 2018 parliamentary elections.

On the other hand, there is no country in the world that bases its residential policy on loans. This stresses the importance of needing to reinvent the city by remodeling its transportation system and expanding it, creating a transit-oriented development, implementing a fair rental law, create incentives to revamp how and where apartments are built. The cessation of loans was beneficial as it prevented people form paying three times more the real value of the house they are buying. These loans are considered to be a demand side support, which operates in a way that keeps the prices very high while competition is at the core of the real estate market and end up working against those who need to secure residence.

Q: To what extent can we reverse the damages perpetrated to the environment in Lebanon during the last years? How can we make use of the water sector i​​n a sustainable wat?

Nadim Farajalla:
Even though we are currently going through a hard time we have been there before and we can make our way out of it. This environmental problem has been lurking for a while. Since the end of war, the political elite ruling the country embarked on actions that have caused destruction and tremendous damage to the environment. From quarries to poor management of water resources to ignoring the problem of solid waste and not finding solutions for it.

A study IFI conducted with Sao Paolo University, showed that a decrease of 3% to 10% in agricultural production can result in lowering the country's GDP by 3.5% to 7.5%. Also, the total cost in terms of direct cost and foregone GDP that Lebanon will experience from climate change is estimated to be around $2 billion in 2020 and rising to nearly $140 Billion in 2080.

Here are some examples of environmental problems that we are facing and actions that may be taken:

The first issue to be raised is the one pertaining to air pollution which is mainly the result of two main factors: The transportation sector and the energy sector. For the latter, we can rely on renewables to reduce emissions and subsequently improve air quality. As for the former, we should start depending more on public transportation to reduce the amount of pollutants emitted from cars.

Second, is the solid waste management crisis which should be looked at as an opportunity where waste is a potential source of income from recycling material such as paper, plastics, metals, and other.

A third example is water pollution. This is a bit tricky, as it needs investment to improve while this this option us currently intangible. Nevertheless, establishing water treatment plants could improve the water quality of our rivers and sea which would enhance tourism and consequently generate a greater income. Finally, the fires that burned our forests in October, reflect clearly the lack of political will in the implementation of laws and strategies in Lebanon.

I don't like the view that we need to convert the water sector to a strategic sector. Water is a prerequisite for life and any development so it is inherently strategic. In the 1950s, the available freshwater water per capita in Lebanon was above the 1700m3 benchmark of water stress – Lebanon was not experiencing water stress. However, due to an increase in population, mismanagement and influx of refugees, especially since 2011, this number decreased and reached 440 m3.​


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