Capital Control Law A Self Inflicted Wound

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Capital Control Law for Lebanon is not a solution, rather a problem. The current economic downturn starting 2019 and extending to 2023 has resulted in GDP declining from USD 55 billion in 2018 to an estimated USD 18 billion in 2021. The main cause of the economic problem in Lebanon is an inflated public sector which has led to large budget deficits over the past three decades. Lebanon has very weak economic strength as economic growth has declined from 3.8 % in 2013 to 0.8% in 2017 and turned negative in 2018,2019, and 2020 with negative growth rates of (1.7%, 7.3% and 25% respectively). In the 1990-2010 period Lebanon has enjoyed stronger economic growth from 4 to 10%, though it incurred budget deficits in that period too. The problem in the fiscal arena is the shift from productive investment spending in the period following the end of the civil war in 1990 to an enlargement of the public sector that took the form of additions of ten of thousands of employees which has ballooned the public sector to a size of 300 to 400 thousand employees. In the first two decades’ economic growth has benefited from productive investment spending, while in the third decade a shift towards a large employee base was a burden that slowed economic growth as the public employees were less efficient than the private sector. ?

The budget deficits of the government were financed by borrowing from the central bank which issued Euro bonds that were purchased by the banks and international investors and at a later stage the CB subscribed to the bonds using funds deposited by the banks as certificate of deposits. The C.B has continued to finance the government deficit which has led to a dent estimated in the amount of USD 40 to 55 billion.

·????????The solution for Lebanon is to restructure the public sector returning to the normal size comparable to the 1990-2000 period which is expected to reduce the large wage bill.

·????????Secondly the large transfers to Electricity Du Liban must be eliminated via privatization, installation of gas generators, a shift from diesel to gas, solar and wind energy. In addition to repricing of the public utility bill to make it possible for EDL to break even and eliminate transfer payments. ?

·????????Construct a real estate portfolio of USD 20-30 billion from the public sector lands to pay the central bank debt and plugging the majority of the government debt there.

·????????Restructuring the banks and make them liquid by asking them to sell International operations and to use the proceeds to increase capital by 40% before December 2021 and by 100% by 2023. The central bank can ask the banks to liquidate their real estate portfolio acquired from clients in return for nonperforming loans in addition to Head office building in less than one year to subscribe to the capital increase. Moreover, banks can decrease the number of branches under operation to??improve cost to income ratio and overall profitability.

Banks can only return to growth and profits by regaining the confidence of the private sector. This is done by better serving the private sector and paying back the depositors at a much faster pace than what is being practiced now. Banks must open up to the private sector rather than seek capital control refuge, to gain confidence of the depositors. Closing the doors via capital control will only lead to deposit withdrawals and no new deposits tapped from clients. Gerry Rice, spokesperson for the IMF, said a capital control law that Parliament is nearly done drafting should be part of a broader package of reforms and appropriate fiscal monetary measures. “We don’t see the need to implement a capital control law. No, especially without the support of appropriate fiscal monetary and exchange rate policies,” he said.

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Confidence can be regained by communicating to the private sector that the banks have been recapitalized in addition to releasing a new set of unqualified financial statements. ?Moreover, the settlement of the certificate of deposits of the banks held with the central bank in the form of real estate assets discussed above will help to improve the liquidity of banks.

The above reforms are the way to a new era of the banks in Lebanon that will lead to success, growth and profitability. Any capital control law is a self-inflicted wound on the financial sector and economic plan in Lebanon which will result in a down sized untrusted financial sector that will lead to a migration to the cash economy and the demise of the banking sector characterized by deposit withdrawals and dwindling loan portfolio.???

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The recipe for Lebanon is to open up and improve its ties with Arab World, IMF, World Bank and navigate the troubled water with great diligence. Now nominal GDP has declined to an estimated USD 18 billion which is slightly above the 1970 GDP of 15 billion, down from the peak of USD 55 billion in 2018. Closing up the economy with a capital control law is not an option as it shuts the economy with very low reserves of USD 14 billion at the Central Bank. Few years back, reserves were 35 billion and thinking about it that time was more feasible. Lebanon does not have fiscal balance and relies on USD 4-6 billion in inward international transfers per annum which will be greatly affected when Lebanon departs free capital markets.

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Lebanon does not require USD 10 billion Cedere donor plan over a 5 years plan averaging 2 billion a year, but requires an investment of USD 20-30 billion in the Central Bank backed up by the Arab and International Community which will facilitate a quick rebound from the current bottom rock.

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The downside risk is a plunge to a civil war with GDP declining to 7-8 billion similar to 1976 war, which is out of question. Think positive and push towards a brighter future. ??????????