The Middle East still looking for a growth model

The Middle East still looking for a growth model

Posted on March 8, 2020, in The Arab Weekly, Six decades after independence, Middle East still looking for growth model by Rashmee Roshan Lall is an accurate survey of the region that faces, as we speak, prospects of harshest times. How is the Middle East still looking for a growth model? Investing in the human capital of children and young people as well as enhancing their prospects for productive employment and economic growth is little more complicated than relying on Crude Oil exports related revenues. These are the main if not the only source of earnings of the region now plummeting perhaps for good before even peaking. In effect, all petrodollar inspired and financed development that, put simply, was transposed from certain parts of the world, using not only imported materials but also management and all human resources can not result in anything different from that described in this article.


Though a large youthful population would normally be regarded an economic blessing, it’s become the bane of the MENA region.


The Middle East still looking for a growth model
Dramatic changes. Employees of Aramco oil company at Saudi Arabia’s Abqaiq oil processing plant. (AFP)

It’s been 75 years since World War II ended and the idea of decolonising the Middle East and North Africa began to gain ground but, while formal colonisation ended about six decades ago, the region seems unable to find a clear path to growth.

Rather than an “Arab spring,” what may be needed is a temperate autumn, a season of mellow fruitfulness to tackle the region’s biggest problems. These include finding a way to use the demographic bulge to advantage, reducing inequality of opportunity and outcome and boosting local opportunity.

Here are some of the region’s key issues:

Youth ‘explosion’

The MENA region’s population grew from around 100 million in 1950 to approximately 380 million in 2000, the Population Reference Bureau said. It is now about 420 million and half that population lives in four countries — Egypt, Sudan, Iraq and Yemen.

The 2016 Arab Human Development Report, which focused on youth, said most of the region’s population is under the age of 25.

The youth bulge is the result of declining mortality rates in the past 40 years as well as an average annual population growth rate of 1.8%, compared with 1% globally. The absolute number of young people is predicted to increase from 46 million in 2010 to 58 million in 2025.

Though a large youthful population would normally be regarded an economic blessing, it’s become the bane of the MENA region. The demographic trend suggests the region needs to create more than 300 million jobs by 2050, the World Bank said.

Jihad Azour, International Monetary Fund (IMF) director for the Middle East and Central Asia, said MENA countries’ growth rate “is lower that what is required to tackle unemployment. Youth unemployment in the region exceeds 25%-30%.” The average unemployment rate across the region is 11%, compared to 7% in other emerging and developing economies.

Unsurprisingly, said Harvard economist Ishac Diwan, a senior fellow at the Middle East Initiative, young Arabs are unhappier than their elders as well as their peers in countries at similar stages of development.

Last year’s Arab Youth Survey stated that 45% of young Arab respondents said they regard joblessness as one of the region’s main challenges, well ahead of the Syrian war (28%) and the threat of terrorism (26%).

The region’s population is expected to nearly double by 2030 and the IMF estimated that 27 million young Arabs will enter the labour market the next five years.

Poverty and inequality

Most Arab people do not live in oil-rich countries. Data from the UN Economic and Social Commission for Western Asia (ESCWA) stated that 116 million people across ten Arab countries (41% of the total population), are poor and another 25% were vulnerable to poverty. This translates to an estimated 250 million people who may be poor or vulnerable out of a population of 400 million.

The MENA region is also regarded as the most unequal in the world, with the top 10% of its people accounting for 64% of wealth, although the average masks enormous differences from one country to another.

The middle class in non-oil producing Arab countries has shrunk from 45% to 33% of the population, ESCWA economists said. In a report for the Carnegie Corporation last year, Palestinian-American author Rami G. Khouri described what he called “poverty’s new agony,” the fact that a poor family in the Middle East will remain poor for several generations.

Egypt is a case in point. In 2018, Cairo vowed to halve poverty by 2020 and eliminate it by 2030. However, Egypt’s national statistics agency released a report on household finances last year that said that 33% of Egypt’s 99 million people were classified as poor, up from 28% in 2015. The World Bank subsequently nearly doubled that figure, saying 60% of Egyptians were “either poor or vulnerable.”

Wealth gaps between countries are greater in the region than in others because it has some of the world’s richest economies as well as some of the poorest, such as Yemen.

Inequality is not the only problem in the region. Former World Bank economist Branko Milanovic said the uneven picture means that last year’s protests in Lebanon, Algeria, Sudan and Iraq cannot be explained by “a blanket story of inequality.”

Indeed, Algeria, a relatively egalitarian country, was roiled by protests, first against a long-serving president and then against the wider political system.

French economist Thomas Piketty, who wrote the bestselling book on income inequality, “Capital in the Twenty-First Century,” said Arab countries must come up with a way to share the region’s vast and unequally distrib­uted wealth.

Lost decades of growth

In the decade from 2009, the region’s average economic growth was one-third slower than in the previous decade. The IMF said per capita incomes have been “near stagnant” and youth unemployment has “worsened significantly.”

The state is the largest employer in many Arab countries and over-regulation of the private sector left it underdeveloped and unable to overcome the significant barriers to trade and economic cooperation across regional borders. Meanwhile, inflexible labour laws stifled job creation and cronyism allowed inefficiency to stay unchallenged. In 2018, the average rank of Arab countries on the World Bank’s Doing Business survey was 115th out of 190 countries.

Along with structural factors, conflict has had a debilitating effect on economic growth. Three years ago, the World Bank noted that the Syrian war had killed approximately 500,000 people, displaced half the population — more than 10 million people — and reduced more than two-thirds of Syrians to poverty.

By 2017, conflict in Yemen and Libya had displaced more than 15% and 10% of their respective populations of 4 million and 6 million. Taken together, the Syrian, Yemen and Libyan civil wars have affected more than 60 million people, about one-fifth of the MENA population.

Infrastructural damage runs into the billions of dollars but it is the loss — or outright collapse, as in Yemen — of economic activity that has affected real GDP growth.

Countries in the region affected by conflict lost $614 billion cumulatively in GDP from 2010-15 — 6% of the regional GDP, ESCWA’s 2018 report on institutional development in post-conflict settings stated.

New thinking needed

This is the year when, for the first time, an Arab country holds the chairmanship of the Group of 20 of the world’s largest economies. It could be an opportunity to consider existing trends within the region, what needs to be changed and how.

In the words of Oxford development macroeconomist Adeel Malik, “the Arab developmental model… seems to have passed its expiration date.” In a 2014 paper for the Journal of International Affairs, Malik said “failure of the Arab state to deliver social justice is ultimately rooted in the failure of a development model based on heavy state intervention in the economy and increasingly unsustainable buyouts of local populations through generous welfare entitlements.”

It’s a good point, for the region’s richest countries just as much as its poorest. Oil-rich states are affected by dramatic changes in oil prices and the increasingly urgent suggestion that the world is at “peak oil.” An IMF report warned that, by 2034, declining oil demand could erode the $2 trillion in financial wealth amassed by Gulf Cooperation Council members. The IMF said “faster progress with economic diversification and private sector development will be critical to ensure sustainable growth.”

Creativity and courage will be needed if the Arab world is to meet the expectations of its youthful population and the challenges posed by its increasing inequality.

UAE remains least corrupt country in MENA region

UAE remains least corrupt country in MENA region

Khaleej Times of the UAE in an article by Waheed Abbas/Dubai dated January 23, 2020, informs that the UAE remains least corrupt country in MENA region per the latest Corruption Perceptions Index by Transparency International in its CPI 2019: Middle East and North Africa.

It shows a score of 39, the same as last year. There seems to be little progress in improving control of corruption in the Middle East and North Africa region generally but the massive protests currently thronging the streets in mostly the republics types of states of the MENA could be taken as seeking for improvement. Excerpts of the Khaleej Times follow.


With a score of 71, the United Arab Emirates is the best regional performer, followed by Qatar (62). At the bottom of the region, Syria scores 13, followed by Yemen with a score of 15. Both countries are significant decliners on the CPI, with Yemen dropping eight points since 2012 and Syria dropping 13 points during the same period.

Lack of political integrity

The region faces significant corruption challenges that highlight a lack of political integrity. According to our recent report, Global Corruption Barometer — Middle East and North Africa, nearly one in two people in Lebanon is offered bribes in exchange for their votes, while more than one in four receives threats if they don’t vote a certain way.

In a region where fair and democratic elections are the exception, state capture is commonplace. Powerful individuals routinely divert public funds to their own pockets at the expense of ordinary citizens. Separation of powers is another challenge: independent judiciaries with the potential to act as a check on the executive branch are rare or non-existent.

To improve citizens’ trust in government, countries must build transparent and accountable institutions and prosecute wrongdoing. They should also hold free and fair elections and allow for citizen engagement and participation in decision-making.

Image: Shutterstock / Hiba Al Kallas

For any press enquiries please contact press@transparency.org

UAE remains least corrupt country in MENA region

(Supplied)

The UAE has been rated least corrupt country, yet again, in the Middle East and North Africa by the Berlin-based Transparency International’s Corruption Perception Index (CPI) 2019.

Globally also, the country retained its 21st ranking, scoring 71 points.

At the bottom of the region, Syria scores 13, followed by Yemen with a score of 15. Both countries are significant decliners on the CPI, with Yemen dropping eight points since 2012 and Syria dropping 13 points during the same period.

“The region faces significant corruption challenges that highlight a lack of political integrity. According to our recent report, Global Corruption Barometer – Middle East and North Africa, nearly one in two people in Lebanon is offered bribes in exchange for their votes, while more than one in four receives threats if they don’t vote a certain way,” said Transparency International said in the report released on Thursday.

“To improve citizens’ trust in government, countries must build transparent and accountable institutions and prosecute wrongdoing. They should also hold free and fair elections and allow for citizen engagement and participation in decision-making,” it said.

With a score of 53, Saudi Arabia improved by four points since last year. In 2017, the Saudi Crown Prince Mohammad Bin Salman carried out an “anti-corruption” purge as part of his reform of the country.

Regionally, the UAE is followed by Qatar, Saudi Arabia, Oman, Jordan, Bahrain and Kuwait.

Globally, the top countries are New Zealand and Denmark, with scores of 87 each, followed by Finland (86), Singapore (85), Sweden (85) and Switzerland (85).

More than two-thirds of countries score below 50 on this year’s CPI, with an average score of just 43. Similar to previous years, the data shows that despite some progress, a majority of countries are still failing to tackle public sector corruption effectively.

“Governments must urgently address the corrupting role of big money in political party financing and the undue influence it exerts on our political systems,” said Delia Ferreira Rubio Chair Transparency International.

waheedabbas@khaleejtimes.com

Corruption costs developing countries $1.26 trillion

Corruption costs developing countries $1.26 trillion


The World Economic Forum ( WEF) in this article by Sean Fleming finds that Corruption costs developing countries $1.26 trillion every year – yet half of EMEA think it’s acceptable.

Costs of Corruption running deep in the MENA (refer to the above chart) are not clearly indicated whereas these seem to be fairly high.


Corruption leaves many people far worse off and feeling marginalized.
Corruption leaves many people far worse off and feeling marginalized. Image: Unsplash/Vitaly Taranov
  • Corruption is a global problem.
  • It costs both money and lives.
  • International collaboration is the only way to defeat it.

Corruption takes many forms. It is often thought of as a problem that mostly affects developing countries. But while the harm it does is magnified in poorer nations, corruption does not concern itself with national boundaries – it can be unearthed anywhere.

Have you read?

At the 50th World Economic Forum Annual Meeting in Davos next month, Founder and Executive Chairman Klaus Schwab will launch the Forum’s Davos Manifesto. It will state the need to adopt a new economic model, “stakeholder capitalism”. And at its heart is a call to fight corruption. That fight has been central to the World Economic Forum’s work for many years, and in 2004 it established the Partnering Against Corruption Initiative (PACI).

Corruption costs developing countries $1.26 trillion
Corruption takes a toll all over the world

To mark International Anti-Corruption Day 2019, here are seven shocking and damaging recent examples of corruption around the world, as identified by Transparency International.

1. Across the EMEA region (that’s Europe, the Middle East, and Africa) and India almost half of all workers think bribery and corruption are acceptable if there is an economic downturn.

2. Corruption, bribery, theft and tax evasion, and other illicit financial flows cost developing countries $1.26 trillion per year. That’s roughly the combined size of the economies of Switzerland, South Africa and Belgium, and enough money to lift the 1.4 billion people who get by on less than $1.25 a day above the poverty threshold and keep them there for at least six years.

3. The Transparency International Corruption Perceptions Index scores 178 countries on their degree of corruption – 10 is the cleanest possible, and 0 indicates endemic corruption. In 2010, around three-quarters of all 178 scored lower than five.

4. As much as $132 billion is lost to corruption every year throughout the European Union’s member states, according to the EU Commissioner for Home Affairs.

What’s the World Economic Forum doing about corruption?

It hosts the Partnering Against Corruption Initiative (PACI), the largest global CEO-led anti-corruption initiative.

Realizing that corruption hampers growth and innovation, and increases social inequality, PACI aims to shape the global anti-corruption agenda.

Founded in 2004, it brings together top CEOs, governments and international organizations who develop collective action on corruption, transparency and emerging-marking risks.

PACI uses technology to boost transparency and accountability through its platform, Tech for Integrity. Show

5. Bangladesh is one of the world’s poorer countries. Around one-third of the population say they have been the victims of corruption, and an astonishing 84% of those households who had interacted with different public and private service institutions have been victims of corruption.

6. In war-torn Afghanistan, of the $8 billion donated in recent years, as much as $1 billion has been lost to corruption. Integrity Watch Afghanistan estimates bribe payments — for everything from enrolling in elementary school to getting a permit — exceed $1 billion a year.

7. In one Russian province, if you want to become a police officer you will probably have to pay around $3,000. To get a place in medical school, you will need to part with around $10,000. One consequence of this, according to the International Crisis Group, has been that some people have grown so disaffected that they have become drawn to Islamic extremism.

Arab leaders: Fix the economy, stem corruption, create jobs

Arab leaders: Fix the economy, stem corruption, create jobs

ZAWYA’s ECONOMY on December 9, 2019, posted this Message for Arab leaders: Fix the economy, stem corruption, create jobs by Chris Doyle.

Religion is not seen as some great threat, but what clearly keeps people awake is the state of the economy.


Arab leaders: Fix the economy, stem corruption, create jobs

Opinion polls that contribute meaningfully to our collective understanding of the Middle East and opinions of Arabs across the region are vital. For too long, commentators and analysts, many in the West but elsewhere too, have presumed to know what Arabs think, to discuss the mind of the Arabs, or to buy into the group-think mirage of the region. It is ludicrous, of course, and as the latest Arab News poll highlights, opinions and views vary widely.

Just how significant a role religion does and should play in the lives and politics of the region is one of the great debates of the day. It matters in particular in two of the countries engulfed in serious protests at present: Iraq and Lebanon.

The headlines from this poll back up previous studies indicating that more people in the Arab world, whilst still seeing religion as an essential part of their lives, want to see a greater separation of religion and politics. They are less willing to support any extremist agenda.

Younger people are also veering away from religion more than previous generations. A BBC poll in 2018 indicated that Arabs were perhaps less religious than before, borne out by comparing it to a 2013 poll. This applies to many other areas of the world. Polls show that American Christians are also becoming less religious.

Such views figure highly in Iraq and Lebanon, where protesters over the last two months have been pushing for an end to sectarian models of government in an attempt to weaken divisive and counterproductive identity-driven politics.

Iraqis and Lebanese agree by 74 percent and 63 percent respectively that religion affects political decision-making by their government. And more than two-thirds of those polled in both countries do not dispute the statement that separation of religion and politics would lead to fewer wars.

Will they get their wish to rewrite their political systems? At present, despite the widespread and powerful nature of these protests, it would appear not. The existing elites in Iraq and Lebanon do not appear to be budging, and neither country looks like it is heading to a post- sectarian future anytime soon.

Strangely, however, the only politically significant leader in Iraq to be backing the protesters is Ayatollah Ali Al-Sistani, the pre-eminent Shiite cleric from Najaf, but many other clerics do not back this position. In Lebanon, Hezbollah has unambiguously opposed the protests. Its leader Hassan Nasrallah has accused the protesters of being foreign agents.

None of these polls will make much impact perhaps in Europe and North America. How many will take note and believe that the Arab world is changing and becoming more opposed to extremism? It runs counter to the well-oiled narrative common in the media.

Yet the Arab News poll is also revealing of what other challenges Arabs see as relevant to their future. Religion is not seen as some great threat, but what clearly keeps people awake is the state of the economy. Iraqis and Lebanese strongly agree (57 percent and 61 percent, respectively) that the future would be better if economic matters were prioritized above everything else.

It has been a core feature of the protests, of which corruption — seen as the top problem in both countries, where it is endemic — and youth unemployment have been among the primary drivers. One wonders why the figures are not even higher when you consider how resource-rich Iraq is, but how poor public services are, and how frequently useless the flabby institutions of state are.

Iraq and Lebanon face multiple challenges, but the study’s message is clear: Fixing the economy, stemming corruption and creating jobs should be the primary focus. How that will be done, particularly in a country as indebted as Lebanon, is at the heart of the current crisis.

The poll does reveal a perhaps surprisingly optimistic outlook. Most of those polled foresaw that extremism in the region was in decline, envisaging a drop in terrorism in the coming years. Only 28 percent saw radical Islam as having a negative impact on society in the Arab world, and just 15 percent saw extremism as the main cause of conflict in the region.

Western policymakers and media moguls should take note. Everyone must hope that they are right, even if the risks remain high. Increasingly, polling shows — as this one does — rising support for inclusiveness (especially women’s rights) and less aversion to women having a prominent role in political life. Both Iraq and Lebanon have a poor record on female involvement at the upper echelons of their politics.

Arabs polled also seem to be clear on the way forward. That matters. The economy must come first. To achieve that, they desire improved governance, with systems they can trust and where religion plays a part in daily life but less so in politics.

• Chris Doyle is director of the London-based Council for Arab-British Understanding (CAABU). He has worked with the council since 1993 after graduating with a first-class honors degree in Arabic and Islamic Studies at Exeter University. He has organized and accompanied numerous British parliamentary delegations to Arab countries. Twitter: @DoylechDisclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News’ point-of-view

Iraq’s discontent – its roots and how to begin fixing it

Iraq’s discontent – its roots and how to begin fixing it

The lecture below could be reused many a time in many situations in the MENA region. It is about Iraq’s discontent – its roots and how to begin fixing it by Bamo Nouri, City, University of London.


Iraq’s recent wave of protests against poverty, a lack of basic services, unemployment, and the interference of Iran in the country’s domestic affairs showed a country at the end of its tether. Official figures put the number killed in the violent crackdown of protesters at 157.

Since 2011, protests and popular movements that challenged elite dominance or questioned the government have been violently repressed. The presence of Iran has increased as the Shiite-dominated government in Iraq has become dependent on the Iranian Popular Mobilisation Forces (PMF) to maintain order in Iraq. Indeed, there have been reports that snipers were deployed by Iranian-backed militias in the latest round of protests in October.

The problems for Iraq are deep-rooted and institutional, and if not addressed may yet escalate into a full-scale revolution. What’s needed is reform of the country’s 2005 constitution, which was written during a period of political instability after a war and occupation ridden by conflict. The only way for Iraq to have a chance at prosperity and peace is by addressing its flawed foundations which were heavily influenced by the occupiers.

Iraq’s 2005 constitution, which was influenced by the US, failed to create a unified, representative government. Ambiguities within the document have been abused by those in power and it has exacerbated sectarian divisions within Iraq’s politics. The constitution created a system in which public sector and government roles are allocated based on sect and ethnicity.


Read more: Iraq’s rushed and divisive constitution was always doomed to fail


Unrepresentative elites

Iraq has become a nation that is for the few and not the many, as unrepresentative Iraqi political elites bid to share out its resources. Millions of Iraqis are left unrepresented and without prospects.

While the majority of citizens are discontented and struggling, Iraq’s elites remain fortified and continue to govern through a system known as “wasta”, which involves serving those you favour and hold close, such as friends and family. Divides along ethnic and sectarian lines remain a key theme when identifying the causes of disagreement between competing sects who unite to form political blocs in Iraq’s government.

The lengthy government formation process that takes place after elections is dependent on the division of key state institutions based on ethnic and sectarian identities. To achieve this, political parties form blocs with and against each other to achieve their goals, with the biggest becoming the governing bloc. Although Iraqi elites are divided based on ethnicity, sect and religion, this race for power – and with it the ability to distribute and share the country’s resources – creates a unity between elites.

For example, in three separate parliamentary elections since 2003, the winning candidate has not become prime minister. In the 2014 elections, Nouri al-Maliki, as the head of the State of Law coalition, won the largest number of seats in parliament, yet due to disagreements over government formation and the fight against Islamic State, he was replaced by Haider al-Abadi. In the 2018 elections, Muqtada al-Sadr’s Saairun coalition won a majority, but it was eventually Adil Abdul-Mahdi, an independent, who was chosen as prime minister.

Ministerial fiefdoms where political parties are given ministries in exchange for support to form governing blocs have created a dysfunctional government. It means there is no clear governmental strategy, which in turn severely impedes development.

Iraq's discontent – its roots and how to begin fixing it
Supporters of Shiite cleric Muqtada-al Sadr protest against corruption and poor public services on October 19 in Karbala, southern Iraq. Furqan Al-Aaraji/EPA

The mechanics of this power-sharing system are illustrated by coalitions of oligarchs who use public institutions to distribute favours to clients. Political parties control government procurement and reconstruction contracts, who either auction them off or set up shell companies to award contracts to themselves. These contracts are then sub-contracted, or simply never fulfilled, with funds ending up being drained in the process, ultimately benefiting a narrow Iraqi elite. Iraq was ranked 168 out of 180 countries in Transparency International’s 2018 corruption perception index.

Democracy in theory only

Freedom of speech is non-existent and those who speak out against the government are targeted and often killed, as are protesters. On the whole, democracy in Iraq only exists in theory.

In order for Iraq to ever be able to meet the growing demands of its people and the challenges of prospering on the global stage, immediate political reform is needed. The reform process must directly address the rushed and divisive constitution. This needs to be followed by the democratisation of Iraq’s institutions and the re-creation of Iraq’s national identity so the country can escape the worst of its sectarianism and become more unified as a nation.

Without all of these issues addressed with equal importance, the cycle of adversity will continue as Iraq will remain a reactive as opposed to proactive nation.

Bamo Nouri, Lecturer, City, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Allies, Investors, Protesters press for Change in Lebanon

Allies, Investors, Protesters press for Change in Lebanon

Lebanon pushed to the brink, faces reckoning over graft after allies, investors, protesters press for change in the country as per Jonathan Spicer, Tom Perry and Samia Nakhoul, Reuters News in this ECONOMY‘s article dated 21 October 2019.

Demonstrators hold Lebanese flags as they gather during a protest over deteriorating economic situation, in Beirut, Lebanon October 18, 2019.
Demonstrators hold Lebanese flags as they gather during a protest over deteriorating economic situation, in Beirut, Lebanon October 18, 2019. REUTERS/Mohamed Azakir

BEIRUT – Lebanon is closer to a financial crisis than at any time since at least the war-torn 1980s as allies, investors and this week nationwide protests pile pressure on the government to tackle a corrupt system and enact long-promised reforms.

Prime Minister Saad al-Hariri‘s government on Thursday hastily reversed a plan, announced hours earlier, to tax WhatsApp voice calls in the face of the biggest public protests in years, with people burning tyres and blocking roads.

The country – among the world’s most indebted and quickly running out of dollar reserves – urgently needs to convince regional allies and Western donors it is finally serious about tackling entrenched problems such as its unreliable and wasteful electricity sector.

Without a foreign funding boost, Lebanon risks a currency devaluation or even defaulting on debts within months, according to interviews with nearly 20 government officials, politicians, bankers and investors.

Foreign Minister Gebran Bassil said in a televised speech on Friday that he gave a paper at an economic crisis meeting in September saying Lebanon needed “an electric shock”.

“I also said that what little remains of the financial balance might not last us longer than the end of the year if we do not adopt the necessary policies,” he said, without describing what he meant by financial balance.

Beirut has repeatedly vowed to maintain the value of the dollar-pegged Lebanese pound and honour its debts on time.

But countries that in the past reliably financed bailouts have run out of patience with its mismanagement and graft, and they are using the deepening economic and social crisis to press for change, the sources told Reuters.

These include Arab Gulf states whose enthusiasm to help Lebanon has been undermined by the growing clout in Beirut of Tehran-backed Hezbollah, and what they see as a need to check Iran’s growing influence across the Middle East.

Western countries have also provided funds that allowed Lebanon to defy gravity for years. But for the first time, they have said no new money would flow until the government takes clear steps toward reforms it has long only promised.

Their hope is to see it move towards fixing a system that sectarian politicians have used to deploy state resources to their own advantage through patronage networks instead of building a functional state.

A crisis could stoke further unrest in a country hosting some 1 million refugees from neighbouring Syria, where a Turkish incursion in the northeast this month has opened a new front in an eight-year war.

“If the situation remains, and there are no radical reforms, a devaluation of the currency is inevitable,” said Toufic Gaspard, a former adviser to Lebanon’s finance ministry and former economist at its central bank and the International Monetary Fund.

“Since September a new era has begun,” he added. “The red flags are large and everywhere, especially with the central bank paying up to 13% to borrow dollars.”

The first reform on Beirut’s agenda is one of the most intractable: fixing chronic power outages that make private generators a costly necessity, a problem many see as the main symbol of corruption that has left services unreliable and infrastructure crumbling.

Hariri, in a televised speech to the nation, said he had been struggling to reform the electricity sector ever since taking office. After “meeting after meeting, committee after committee, proposal after proposal, I got at last to the final step and someone came and said ‘it doesn’t work’,” he said.

Presenting the difficulties of implementing reform more widely, Hariri said every committee required a minimum of nine ministers to keep everyone happy.

“A national unity government OK, we understand that. But committees of national unity The result is that nothing works.”

Underscoring the pressure from abroad, Pierre Duquesne, a French ambassador handling so-called CEDRE funding, is traveling to Lebanon next week to press the government on the use of offshore power barges, a banker familiar with the plan said.

Duquesne wants the barges included in the electricity overhaul plan, the person said, requesting anonymity.

Duquesne could not immediately be reached for comment.

The contents of the 2020 budget will be key to helping unlock some $11 billion conditionally pledged by international donors under last year’s CEDRE conference. But a cabinet meeting on the budget set for Friday was cancelled amid the protests.

‘TAX INTIFADA’

Hariri’s government, which includes nearly all of Lebanon’s main parties, had proposed a tax of 20 cents per day on calls via voice-over-internet protocol (VoIP) used by applications including WhatsApp, Facebook FB.O and FaceTime.

In a country fractured along sectarian lines, the protests’ unusually wide geographic reach may be a sign of deepening anger with politicians who have jointly led Lebanon into crisis.

Fires were smoldering in central Beirut, where streets were scattered with glass of several smashed shop-fronts. Tear gas was fired on some demonstrators.

The newspaper an-Nahar described it as “a tax intifada”, or uprising. Another daily, al-Akhbar, declared it “the WhatsApp revolution”.

“With this corrupt authority, our kids have no future,” said protestor Fadi Issa, 51. “We don’t just want a resignation, we want accountability. They should return all the money they stole. We want change.”

As confidence has faded and dollars have grown scarce, new cracks have emerged between Lebanon’s government and its private lenders, according to several of the bankers, investors and officials who spoke to Reuters.

After years of funding the government with the promise of ever higher rates of return, the banks – sensing the country is approaching collapse – are pressing for it to finally deliver reforms to win over donors.

Most said Lebanon would likely feel more economic and financial strain in the months ahead but avoid haircuts on deposits or a worst-case sovereign default.

Yet Beirut’s years of failure to deliver reforms and the new determination among its traditional donors to press for them has left even top officials, bankers and investors divided over whether a devaluation is in store for the Lebanese pound.

“You need a positive shock. But unfortunately the government thinks reforms can happen without touching the structure that benefits them,” said Nassib Ghobril, head of economic research and analysis at Byblos Bank.

Lebanon must promote reforms to increase capital inflows, he said.

“We can’t keep going to the Emirates and Saudis. We need to help ourselves in order for others to help us.”

CLOCK TICKING

This month, Moody’s put Lebanon’s Caa1 credit rating under review for a downgrade and estimated the central bank, which has stepped in to cover government debt payments, had only $6 billion-$10 billion in useable dollars left to maintain stability.

That compares with some $6.5 billion in debt maturing by the end of next year.

The central bank says its foreign assets stood at $38.1 billion as of Oct. 15.

An official told Reuters Lebanon has only $10 billion in real reserves. “It is a very dire situation that has five months to correct itself or there will be a collapse, around February,” he said.

Hariri’s government may have only a few months to deliver fiscal reforms to convince France, the World Bank and other parties to the CEDRE agreement to unlock $11 billion in conditional funding.

The head of regional investments for a large U.S. asset manager said Lebanese officials are privately saying a plan that addresses short- and long-term electricity shortages will be announced before year-end, after which the government will raise tariffs.

But critics say no concrete steps have been taken despite energy ministry statements that the plan is on track.

Hariri left Paris last month with no immediate cash commitment after visiting French President Emmanuel Macron. Likewise this month he left Abu Dhabi empty-handed after meeting Crown Prince Sheikh Mohammed bin Zayed al-Nahyan.

Lawmakers in Beirut struggled to explain what happened in Abu Dhabi after Hariri claimed the United Arab Emirates had promised investments following “positive” talks.

EYES ON HEZBOLLAH

Investors, bankers and economists say at least $10 billion is needed to renew confidence among the Lebanese diaspora whom for decades have underpinned the economy by maintaining accounts back home.

But so far this year, deposits have shrunk by about 0.4%.

The government has sought a smaller cushion from Sunni Muslim allies to buy some time. But to secure funding from the UAE or Saudi Arabia, Beirut would likely have to meet conditions meant to weaken Shi’ite Hezbollah’s hand in Lebanon’s government, said several sources.

Hezbollah, which faces U.S. sanctions, is seen to be gaining more control over state resources by naming the health minister in January after last year’s elections brought more of its allies into the legislature.

Some say Saudi Arabia, UAE and the United States are motivated to hold out on Beirut as part of their wider policy seeking to weaken Iran and its allies which have been fighting proxy wars with Gulf Arab states on several fronts.

“Their tolerance of Iran and Hezbollah has lowered significantly. The ‘Lebanese exception’ is gone,” said Sami Nader, Beirut-based director of the Levant Institute for Strategic Affairs.

“The balance has tilted and we are now at odds with our former friends because Hezbollah now has the upper hand politically.”

The former regional head at a major Western bank put it bluntly: “People have lost patience with the corruption in which a frozen Parliament with no authority is simply divvying up the pie among politicians.”

“But at the end of the day the Lebanese political class usually succeeds in convincing allies that they should not let the system collapse and bring civil war again,” he added.

WANING TRUST

Lebanon, straddling the Middle East’s main sectarian lines, was historically the region’s foreign-exchange hub into which deposits flowed, especially since 1997 when its currency was pegged to the dollar at 1,507.5 pounds.

But after a reckoning in August and September in which the cost of insuring Lebanon’s sovereign debt surged https://tmsnrt.rs/2MORZfM to a record high, things have changed.

Depositors, including the diaspora drawn by rates much higher than in Europe or the United States, are pulling funds in the face of Lebanon’s swelling twin deficits, inability to secure foreign funding, and unorthodox central bank efforts to attract dollar inflows.

Among Lebanon’s 6 million citizens, trust has worn thin.

Depositors can no longer easily withdraw dollars, and most ATMs no longer provide them, forcing people to turn to so-called parallel FX markets where $1 is worth more than the official peg.

“I am with the protesters,” said Walid al-Badawi, 43. “I have three children, I am a taxi driver, I work all day to get food for my kids and I can’t get it.”

Gaspard, the central bank’s former research head, said foreign exchange was easy even through Lebanon’s 15-year civil war. There was also always a balance of payments surplus – until 2011 when deficits began to grow, reaching $12 billion last year.

LOST RESOLVE AT BANKS

Three events precipitated the crisis of confidence that for years seemed inevitable: a series of central bank efforts since 2016 to keep growing deposits with rates of more than 11% on large deposits; a public sector pay hike last year that raised the budget deficit to more than 11% of GDP; low oil prices in recent years that have weakened Gulf allies.

In a report on Thursday, the IMF described Lebanon’s position as “very difficult,” adding “substantial new measures” are needed to protect it and reduce large deficits.

As dollars have dried up, banks have effectively stopped lending and can no longer make basic foreign-exchange transactions for clients, one banker said.

“The whole role of banks is to pour money into the central bank to finance the government and protect the currency,” he said. “Nothing is being done on the fiscal deficit because doing something will disrupt the systems of corruption.”

The resistance from banks has been subtle but telling given their central role in financing the government.

When Beirut proposed a $660 million reduction in debt service costs in its 2019 budget, banks never signed up to the idea. They have also been less enthusiastic about subscribing to Eurobonds including a planned $2-billion issuance later this month, officials said.

Without reform, “banks agree we can no longer support the public sector,” said Byblos Bank’s Ghobril.

(Reporting by Jonathan SpicerTom Perry and Samia Nakhoul; Additional reporting by Yara Abi Nader and Ellen Francis in Beirut and John Irish in Paris; Editing by Hugh Lawson) ((jonathan.spicer@reuters.com; Reuters Messaging: jonathan.spicer.thomsonreuters.com@reuters.net @jonathanspicer))

%d bloggers like this: