With additional modifications, the caretaker government distributed the recovery plan to the MPs to enable them to review and discuss it. However, the plan, which was supposed to contain fundamental changes, included both negative and positive recommendations. In a quick economic reading, the positives were found in the main topics addressed, although they lacked details, especially concerning depositors' funds and the establishment of a "Deposit Recovery Fund," which may be more science fiction than realistic considering the stipulation regarding depositors' funds, which discusses the disbursement of deposits in Lebanese pounds at a Sayrafa price or at an unknown exchange rate determined by someone whose name is unclear and who will maintain its stability. On the other hand, it talked about restructuring banks but did not mention involving these banks in sharing part of the losses. The plan that discussed supporting industries did not specify how it would support local production or ensure comprehensive health coverage for citizens or where it would secure the necessary funding. How it would address social security subscriptions while considering them a burden on the private sector was also vague.
The plan mentions adding four points to the value-added tax, implying new taxes, and what it means by unifying pension systems—will there be a pension for all employees or will everyone be denied it? Importantly, the plan has been approved, but just like the budget, it will not be easy to ratify and approve due to the challenges in its implementation and the need for bold decisions that will be hard to pursue under a caretaker government and without political cover. Each item in the plan requires extensive explanation; otherwise, they are merely hollow promises.
The most notable elements included in the government’s recovery plan are:
- Strengthening the financial situation in the medium term with due regard for protecting social sectors and rehabilitating damaged infrastructure, fairly and equitably addressing losses incurred by the financial sector, restructuring the banking sector, refocusing monetary policy on its primary objective of maintaining price stability, reinstating social cohesion which has deteriorated due to rising poverty rates, and increasing income and wealth disparities, as well as improving governance and ensuring transparency and accountability in public affairs.
Regarding the financial policy, the plan identifies the "fundamental causes of Lebanon's current crisis," primarily a reliance on a lax financial policy coupled with a monetary policy aimed at maintaining the exchange rate at certain levels through a strict regime that stabilizes it with high-interest rates. These policies have resulted in a massive deficit over extended periods in the external current account and the public budget, leading to a build-up of unsustainable public debt, in addition to sudden drops in incoming capital flows that worsened after protests in October 2019, causing Lebanon to default on its debt servicing obligations in March 2020. The government seeks to reduce the budget deficit in the medium term while simultaneously protecting social spending, including in areas such as education and health, and alleviating poverty.
On the revenue side, the program proposes adjustments to income tax brackets, extending the application of some rules to customs tariffs, and opening up the possibility for leasing state-owned properties through auctions regulated by the public procurement law. It also necessitates applying a unified market exchange rate to customs fees and other taxes and improving customs collection effectiveness while combating manipulation in declaring the value of imported goods.
In the medium term, the government commits to maintaining the corporate tax rate despite its relatively low level compared to peer countries—17% versus a global average of 20%—given the necessity for Lebanon to increase foreign investment in the aftermath of the crisis, with a potential increase in the value-added tax currently set at 11%.
The plan emphasizes the pressing need for salary increases in the public sector in the short term to ensure the sustainability of public services and provide citizens with services, as employees have become unable to bear transportation burdens amid rising fuel prices. This should also coincide with a hiring freeze in the upcoming years across all public sectors and the redistribution of employees among departments to fill vacant positions where needed and address the surplus workforce.
Concurrently, there will be a comprehensive reassessment of the roles and achievements of state-owned enterprises and other public entities. Among the proposed measures in the medium term is reducing the number of contractors in the public sector by 50% over five years, while considering natural attrition, halting hiring, closing non-operational public sector establishments, redistributing employees to other departments, or incentivizing early retirement. Any salary increases for public sector employees would be linked to productivity gains, and there will be a unification of pension systems for all public sector employees.
Public Debt
Debt sustainability is a significant objective within the reform program. Debt servicing represented a third of total expenditures, marking the second-highest spending item in the budget after public sector wages before halting Eurobond repayments in March 2020. The government has engaged with foreign creditors to formally initiate negotiations aimed at restructuring its debt, with Lebanon nearing an agreement with the International Monetary Fund, aiming to gradually reduce the debt-to-GDP ratio, which is not impossible, given the reduced value of the debt in local currency due to the sharp decline in the exchange rate, alongside upcoming negotiations with creditors regarding the restructuring of Eurobond debt.
Exchange Rate and Monetary Policy
The government aims to unify exchange rates as soon as possible, preferably alongside the implementation of all necessary reforms, particularly the establishment of legislation defining exceptional and temporary measures regarding banking transactions and cash withdrawals or "capital control," within a comprehensive reform program, ideally supported by the IMF and the international community.
Financial Sector Reform
According to recent estimates, the banking sector gap (or financial losses) amounts to about $72 billion, primarily centered in Lebanese banks. This gap has resulted from three shocks: restructuring debts, currency depreciation, and an increase in non-performing loans (NPLs). The volume of the gap indicates that Lebanese banks cannot return depositors' total deposits in foreign currencies at this stage nor can they remit most of their deposits to those requesting them in the same currency. Dealing with the financial sector losses requires a careful balance that aims to protect depositors to the fullest extent possible given their minimal level of responsibility in the dire circumstances, especially small and medium depositors. At the same time, it's guaranteed that Lebanon's banking sector remains sound and capable of lending to the private sector and stimulating growth.
The agreement with the International Monetary Fund regarding "the strategy for rehabilitating the financial sector" (FSRS) and its incorporation into the "memorandum of economic and financial policies" (MEFP) attached to this document is crucial. This strategy is based on the following pillars: (1) linking the accounts of commercial banks, the central bank of Lebanon, and the budget; (2) restoring the financial viability of the central bank and improving its financial reporting and disclosure system to rebuild trust; (3) restructuring and reorganizing commercial banks deemed capable of sustainability while absorbing existing losses.
The strategic principles focus on the following: (1) ensuring full transparency in implementing the proposed strategy and protecting small depositors; (2) the state's maximum possible contribution to restoring the central bank's financial viability, benefiting all depositors, provided their share is within their capacity to bear debts and sustain them while preserving all Lebanese citizens' rights, depositors and non-depositors, benefit from state assets; (3) respecting the legal order to minimize losses through exhausting the capital of shareholders first and then debt securities and claims of related parties; (4) resolving non-sustainable commercial banks; (5) protecting all accounts up to $100,000, conditional on the adequacy of each bank's assets, noting that this provision does not apply to increases in depositors' balances after March 31, 2022; (6) converting part of deposits exceeding $100,000 into Lebanese pounds and another portion into shares to recapitalize banks as part of the management of each bank.
Immediate steps that must be implemented now include:
- Continuing efforts to implement the agreement with the International Monetary Fund regarding the employees.
- Enacting the banking secrecy law and the restructuring law for banks as well as other related laws and procedures, whether concerning the general budget or those related to capital control, to demonstrate Lebanese authorities' commitment to the ongoing reforms, which will facilitate dialogue with the international community.
- Completing the audit of the central bank's assets, including gold reserves, and launching a quality assurance audit of bank assets (AQRs).
- Unifying multiple exchange rates through transforming the Sayrafa platform into a unified central platform for receiving supply and demand and determining the exchange rate based on market requirements.
- Working on preparing a scientific and accurate approach for the identification of "non-qualified" deposits and "excess gains" from the central bank and the banking regulatory committee.
- Maintaining constant communication with bondholders of Eurobond debt to facilitate the restructuring process of public debt.
- Reforming the energy sector.
The Council of Ministers has approved the energy and water ministry's plan, "the national plan for sustainable recovery in the electricity sector," to address the prolonged shortages in electricity, ensuring the financial viability of the plan. The plan tackles short, medium, and long-term challenges to secure 24/7 electricity solutions by early 2026. There is an urgent need to appoint a regulatory authority promptly, which, in addition to raising tariffs, is among the measures required by the World Bank to provide a loan to finance the import of Egyptian gas and Jordanian electricity.
All of these promises require political consensus and sincerity of intention from everyone to convert them into reality; otherwise, they are mere plans to simulate the IMF and stand by its desires while everything mentioned requires legislations and laws for approval following thorough parliamentary discussions and encountering countless obstacles.
