The Lebanese economy watchdog aims to unpack economic issues most critical to Lebanese citizens, from their vantage point, and in accessible terms.
- How the Lebanese economy cannibalizes itself
- The fabric of Lebanese resilience
- Monetising Syrian refugees
- Lebanon's taxation smokescreen
- The contortionist middle-class
- Lebanon's toxic loans gamble
- The digital path to real citizenship in Lebanon
- Illustration credits
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How the Lebanese economy cannibalizes itself
14 August 2018
Conventional wisdom holds that Lebanese are born entrepreneurs—and it’s generally true, everywhere but in Lebanon itself. They’ll succeed in Silicon Valley, carve out their own space in Nigeria and manage multimillion dollar projects in Saudi Arabia. But a core reason for all this activity abroad is, precisely, how difficult it is to break through back home, in an economy that preys on small and medium enterprises (SMEs) while continuously feeding corruption and clientelism.
The ideal of the Lebanese entrepreneur nonetheless pervades Lebanon’s economic landscape. The central bank has dedicated over 400 million USD to support investments in the digital sector. Western embassies bankroll incubators and mentoring programs expected to churn out the next generation of innovators. Politicians in Beirut speculate that Lebanese companies will rebuild Syria. And Lebanese elites recently attended a much-heralded conference in Paris, with the poorly defined goal of saving Lebanon’s economy through partnerships with the country’s private sector. Amid all this haphazard bustle, conspicuously absent is a clear understanding of what makes the country’s entrepreneurial environment so self-consuming, especially when it comes to small-scale, productive ventures.
Unease of doing business
At first glance, setting up shop in Lebanon seems easy. Creating a limited liability company takes a matter of days and requires modest capital–5,000,000 LBP, or slightly over 3,000 USD. Yet serious problems soon arise. As the owner of several high-end restaurants put it: “Being an entrepreneur in Lebanon is effortless… for the first 48 hours. After that, it becomes virtually impossible.” At a macro level, the World Bank’s “ease of doing business” indicator—which measures regulations and procedures to open and run a company—ranks Lebanon below the already dismal average for the Middle East and North Africa. From poor infrastructure to labyrinthine bureaucracy and a nonsensical regulatory environment, the challenges to successful business are myriad.
While no single issue in and of itself is necessarily prohibitive, problems pile up to the point where little gets done. Simply paying bills and taxes can be extraordinarily time-consuming, and therefore resource-intensive. Your phone? Set a reminder to go to the local branch of the national supplier once a month, where you will queue at the counter to avoid being disconnected for pending invoices. Electricity? Chase down both the owner of the neighborhood electricity generator and the representative of the public electricity provider, who have an uncanny tendency to show up outside office hours. A lucky business opportunity? Submit hard copies of your contract to the Ministry of Finance within five days of signature, or risk penalties. Taxes? Drive to the bank through heavy traffic, fill out forms, get a banker’s check, and bring it to the Ministry of Labor—each time a specific tax is due. Merely collecting a receipt conforming to state-imposed standards may entail waiting at a special counter to acquire a size A4 printout complete with various stamps and signatures.
Such rules are a nuisance made worse by the almost comedic lack of clarity regarding their application. In 2017, the country spent months wondering if the value added tax, or VAT, was 10 or 11%—while national politicians dithered on the matter. That same year, the government bumped up social security contributions retroactively and with no advance notice. In 2018, tax evaders enjoyed a sudden, sweeping amnesty.
In short, entrepreneurs simply cannot trust existing laws to provide consistency. Foreign investors or employees can be denied work or residency permits that they are formally entitled to, if they fail to play by the system’s informal rules—namely through kickbacks and commissions. “I have been waiting for visas for two Chinese nationals for three months,” grumbled the founder of a digital startup. “Now I am told that I can only get one and I have to choose whom to give it to—there is no logic to it.”
Moreover, essential aspects of a business-friendly legal framework are missing entirely. In particular, Lebanon does not enforce intellectual property rights. It also lacks, amazingly, a bankruptcy law. As a result, it is virtually impossible to shut down an existing company. “What we do is that we wait for five years, deliberately not doing anything,” explained a public accountant. “That’s how far back the Ministry of Finance can go to ask for documents in our archives. Then it’s over. The company continues to exist in perpetuity, but is considered dormant.”
On top of structural impediments to business, the Lebanese environment also throws up sporadic, petty obstacles—notably in the form of official negligence that sometimes borders on sabotage. The owner of a street food restaurant, having incurred a devastating sewage leak in front of his establishment, recounted: “I called the municipality and heard that they couldn’t come for the next two weeks. So, I had the road fixed myself. I pay taxes and also foot the bill for public works.” A trader in perishable goods shared another horror story: “I have to import my cargo in refrigerated containers, because the port administration delays my merchandise so much that it goes to waste. That would be expensive in itself if I didn’t have to send someone every day to check that they don’t unplug the air conditioning!”
The broker economy
In typical Lebanese fashion, SMEs have responded to this obstacle course not by lobbying for reforms, but through makeshift solutions that have become part of the system. The entrepreneurial spirit that exists is, unfortunately, predominantly invested in navigating the economy’s structural deficiencies, rather than investing in its potential.
As a result, a sector has flourished around intermediaries who position themselves between SMEs and the numerous public administrations they must contend with. Most companies retain at least one full-time employee whose sole function is to carry out the pesky, menial tasks that are essential to running a business in Lebanon—such as spending a day in traffic to pick up and deliver a banker’s check, for a service that could easily be done over the internet. Such errands multiply in ways that often seem absurd: Subscribing to the state electricity grid requires a rental contract that must be approved by the municipality, a formality which can take days without a dedicated middleman.
Banks themselves have turned this go-between function into a remarkably profitable service. They will settle a company’s internet, mobile phone and electricity bills for five dollars per invoice per month. That may sound expensive, and it is—but it is still appealing compared to the resources otherwise wasted in transportation, parking and queuing.
Another form of mediation consists in buffering SMEs against Lebanon’s convoluted fiscal and legal framework. Accountants and lawyers are essential allies in sustaining any enterprise, not so much by clarifying the rules, but by capitalizing on their inherent flexibility. Accountants often use personal connections and bookkeeping wizardry to find arrangements with the Ministry of Finance to circumvent penalties or minimize taxes. Lawyers tend to tap a higher-profile network to resolve more serious obstruction originating within specific public institutions.
Brokers help negotiate relations with the authorities at all levels. While red tape and inefficiencies are in no way unique to Lebanon, the amount of time, energy and money that Lebanese must spend to overcome them is indeed special. Business would prove literally impossible without such efforts. For instance, a digital startup operating outside of Beirut only gained decent access to the internet via an old friend at the Ministry of Communications.
Bigger problems require higher level brokers, leading many companies to operate under the umbrella of political patrons, or zuama. These public figures, who typically trade favors for electoral support, have the power to unlock seemingly hopeless situations. They are the ultimate brokers, to the point where their goodwill can become an existential issue. Compete with the wrong people and you may soon see ordinary problems multiply, to the point of putting you out of business.
This phenomenon is deeply entrenched, not least because it dates back generations. In his History of Beirut, Lebanese historian and journalist Samir Kassir refers to the handful of families who controlled the economy up to the mid-1970s as “the consortium.” They dominated imports from the US—then the country’s major trade partner—and economic pillars such as finance, services and industry. Members of the consortium were either directly involved in politics or enmeshed with the political elite.
Today’s system functions in similar fashion, with small groups of individuals running oligopolies in key fields of activity, where competition is minimal and returns inflated. Such profits provide the happy few with ample financial capacity to deal with all the problems mentioned above—by hiring a host of assistants and brokers, bribing bureaucrats, or giving kickbacks to the political patrons on whom their businesses depend.
Generally speaking, entrepreneurship in Lebanon is heavily constrained by a number of very high barriers to entering the market. Communication services are among the most expensive in the world. Basic postal services likewise: “Even with higher labor costs and taxes and stricter regulations, France and Germany have lower delivery costs than we do,” raged the CEO of a delivery company. Trivial banking operations are outrageously priced, and hourly rates for ordinary legal counsel can easily reach hundreds of dollars. Standard accounting fees are officially set at 5,000 USD per year, even when minimal work is required. The CEO of a social impact company described his astonishment upon the discovery: “I asked for a few quotes and they all gave me the same figure. I had no employees and little activity. I thought, ‘what a rip off!’”
Meanwhile, contracts, value added and profits all incur significant taxes, while social security contributions add at least a 20% overhead cost to salaries (despite providing staff with such poor services that many are forced to purchase private insurance anyway). In short, costs are often similar to those in developed economies with high-functioning infrastructure, services and regulatory frameworks.
The end result is a layered landscape that leaves little space for conventional business. At the bottom, a bulging informal economy accommodates most would-be entrepreneurs, who fail to create SMEs precisely because the entry costs are too high. At the top sit the large corporations, who are sufficiently well-connected and profitable to consider such expenditure trifling. Worse, they have a vested interest in keeping the economy as exclusionary as it currently is, to repress the healthy competition that could change the rules of the game. In between these extremes, small and medium-sized companies struggle. Typically, they end up being dependent on bigger fish, who patronize them by helping them survive but not thrive. Hence many SMEs remain in a grey area where it is impossible to sign contracts with public administrations for tenders or trade with foreign partners. Tripoli is a case in point, as home to several billionaires, a sprawling informal sector, and just a handful of SMEs—despite cheap labor, affordable industrial space and adequate infrastructure.
The great fortunes built on an otherwise thoroughly stagnant economy evoke the notion of “rentierism,” denoting economic systems where elites extract wealth from existing resources rather than generating it through productive activity. In Lebanon, numerous rents are derived from controlling niche markets in which oligopolies ramp up the prices—as customers enjoy no alternatives. A wine merchant acknowledged: “Lebanese wines are more expensive in Lebanon than abroad, amazingly. Here they can afford to be over-priced because imported wines are themselves kept artificially expensive.” In other words, the rent is “extracted” from the purchasing power of ordinary citizens, who find it increasingly hard to make ends meet.
Just as an oil state redistributes its riches through subsidies and cooptation into the state bureaucracy, Lebanon generates a plethora of unproductive jobs that implicitly serve a similar function. Banks are replete with people and functions that would not be necessary were absurdly archaic services to be automated. While companies hire poorly qualified staff to pick up banker’s checks and pay the bills, administrations do as much to process them. Across the board, inefficiencies go hand in hand with low-paying jobs meant to supplement them. In a sense, this system offers an essential social safety net by creating accessible employment. But the argument of solidarity only goes so far: The fact that Lebanon’s unproductive economy is geared toward oligopolistic accumulation is the reason why people struggle to find suitable jobs in the first place.
The government and its international partners are right in pinpointing the crucial role SMEs must play in generating and circulating more wealth. But that will only happen once local authorities and their external backers take steps to restrain the ferocious appetites of Lebanon’s oligarchs, by reaching an agreement on basic reforms in exchange for sustained investments. So far, all that talk about entrepreneurship has done little more than cover up lack of action.
The fabric of Lebanese resilience
19 March 2018
Lebanon’s famed “resilience” is a source of pride at home and wonder abroad, as an explanation for the country’s ability to cope in frequent times of crisis. For the most part, however, such discussions remain abstract, invoking factors of stability that are ambiguous at best: a strong banking sector based on an ever-increasing and unsustainable public debt; a survivalist, entrepreneurial spirit through which citizens get by despite a do-nothing political class; and patronage schemes whereby political factions help keep people afloat at the cost of sinking state services. In fact, the true secret of Lebanese resilience lies elsewhere: in small-scale expressions of solidarity that are so pervasive as to be seen, by those involved, as nothing out of the ordinary. In other words, many Lebanese hardly notice those systems on which they depend above all.
As a result, solidarity among Lebanese remains a largely unstudied subject. Academic work has tended to focus on formal charitable activities and top-down redistribution via political, typically sectarian channels. What is missing is arguably the most important piece of the puzzle: the massive, albeit intimate and invisible, forms of support Lebanese extend to each other informally and horizontally, providing the elasticity they need to weather the shocks to which Lebanon is so accustomed.
Unsurprisingly, solidarity in Lebanon emerges most clearly among people enjoying strong interpersonal connections. Many such linkages are predictable, rooted in the familial, religious and social circles that structure much of life in Lebanon. Lebanese often rely on money sent by their kin abroad to cover health, education or housing fees, and this routinely involves distant relatives. Such networks are augmented by friendship circles, in what a young resident of Beirut described as a tacit division of labor: “One of my cousins paid the school fees of another second-degree cousin of mine. When you need larger amounts, as in university fees, you’ll typically ask friends more than family. Relatives can be more suited to smaller donations, and friends to bigger loans.”
Yet friends, too, will sometimes give generously, anticipating little or nothing in return. An actuary from a humble background in Zahlé recalled his university years: “A friend of the family once gave me 600 dollars to pay tuition fees. We were especially close because both of us were also communists.” Tellingly, the actuary made a point of reciprocating this generosity, sending back, years later, a gift worth the same amount.
The supporting rationale is very clear in the minds of many Lebanese: caring starts with one’s nearest and dearest. A Lebanese sociologist recalled a telling discussion within a study group: “as we talked about their respective life projects, a young woman said she wanted to go to India to follow the steps of Mother Teresa and help the poor. Everyone else was astonished, asking her why she wanted to go that far when there were people to help right here in Lebanon.” Some are quick to invoke a religious foundation, such as the Christian commandment “love your neighbor as yourself,” echoed by the Muslim saying “grant priority to those closest to you.”
As a result, conventional wisdom would have it that solidarity is mostly confined within communal boundaries. This is true to the extent that Lebanon is a relatively segregated country, where any given district typically is dominated by one of the nation’s 18 religious sects. Families also tend, with some exceptions, to be more or less homogeneous, increasing the chances that Maronites help Maronites, Sunnis assist Sunnis, Shiites support Shiites, and so on.
At the same time, however, Lebanon’s diversity creates plenty of exceptions to this overall trend. Indeed, it often seems that literal closeness—that is, geographic proximity—overrides social and communal differences that are otherwise well-entrenched within a highly segmented and largely bigoted society. Many Lebanese thus feel entrusted to take care of people in need they coexist with in their building, neighborhood, or village. The elderly, the mentally ill or the economically deprived often benefit from small gestures made by surrounding residents that add up into a social safety net of sorts. A Christian from Beirut described the widespread habit of supporting the building’s concierge, or natour: “All tenants help our Egyptian natour. We offer him extras for [the Muslim celebration of] Eid and grant him free access to the building’s electricity generator during power cuts.”
Predictably, this type of familiarity depends not just on physical proximity, but on time-tested relationships. Thus, even as long-established Syrian workers may be fully integrated into a Lebanese community (regardless of religious background), unfamiliar refugees may be aggressively rejected by the same constituency. Some villages have gone as far as to set up Syrian-specific curfews, among other forms of xenophobia and discrimination.
Interpersonal bonds lead even faith-based charitable organizations to routinely coordinate. The head of a Muslim charity insisted that sectarianism didn’t impede aid from reaching those in need: “At some point, our orphanage received help from [the Christian organization] Caritas, and we returned the favor with in-kind support during the Iraqi refugee crisis.”
Solidarity thus brings out an unsuspected yet essential facet of Lebanese society, which stands in perfect contradiction to some of its more visible traits. On the one hand, Lebanese themselves readily admit how distant they can be from each other, driven apart by forms of prejudice and individualism that tend to lock them into narrow, like-minded circles. On the other hand, small but meaningful acts of generosity, empathy and openness are widespread, discretely skipping over the fault lines that seem to define Lebanon as incurably stratified and sectarian.
Beyond simply influencing who is most inclined to help whom, these various forms of closeness also serve highly practical functions. Proximity is essential in identifying needs, in a country where individuals are reluctant to advertise them at the expense of compromising their status or self-esteem. “I met a man who borrowed a large sum of money to throw his own wedding party, but wasn’t able to eat regularly,” recounted a member of a church-affiliated association. “You wouldn’t know he was poor unless you knew him well.” Meanwhile, Lebanon’s absentee state lacks capacity to accurately ascertain poverty.
Needs assessments rely, therefore, on intimate, case-by-case knowledge, which tends to be accessible only to those within a given community. Neighbors, nurses and teachers play a central role in spotting signs of deprivation, and then trigger a response either via dedicated organizations or, as is often the case, informal initiatives. A former NGO worker depicted how social networks take over where institutions fail: “While I was assessing the needs of Syrian refugees, I came across Iraqis who complained about feeling abandoned. So, I organized a clothes-collecting campaign. Donations quickly started pouring in: People around me had been storing them for ages, just waiting for an opportunity to give to the poor.”
Closeness serves another indispensable function: building the confidence necessary for solidarity mechanisms to kick in, in an environment where distrust and indifference appear to be the norm. In effect, people are far more willing to help when they are sure that what they are doing is useful. Thus, they routinely donate through familiar, informal channels rather than professional, impersonal ones. A member of the Lebanese Rotary Club pointed out: “I wanted to distribute food parcels outside greater Beirut, so I asked contacts of mine in different regions–a Catholic nun, a club member who is Druze, and a Maronite priest–to set up lists of recipients. They have the local knowledge.” Solidarity therefore operates a self-reinforcing loop, flowing from a strong social fabric it further fortifies.
H o r i z o n t a l i t y
Another characteristic of these solidarity networks is their tendency to be non-hierarchical. Donors frequently remain anonymous or at least discreet, belying a Lebanese penchant for ostentation. Moreover, givers often go the extra mile to ensure that their donations do not demean recipients—by using the pretext of religious celebrations, resorting to intermediaries, or framing their gesture as a good-deed they could easily, in different circumstances, benefit from themselves. “It is important not to offend those we try to help,” stressed a member of an Islamic charity. “Our clothes bank, for example, is open to anyone. Clothes are on shelves and those who want something choose for themselves, like in a real shop.”
Relatedly, it is striking to note how often Lebanese lend a hand not just to those less fortunate than themselves, but to people whose living conditions and hardships they share. Solidarity largely revolves around life’s common challenges, such as the passing of a family’s breadwinner, a costly life-saving surgery, or a handicapped child. Merrier occasions can qualify too. A social worker gave the example of a relatively poor village in the Bekaa, where “instead of buying the bride and groom presents for their wedding, everyone contributes to a collective fund to help the family organize the celebration.” Givers and receivers easily behave as if their positions were interchangeable, which alleviates potential awkwardness in a status-conscious society.
Of course, solidarity is not exclusively horizontal, restricted to people of comparable means. Notably, it permeates the traditional partition between the poor and the middle-class—due in large part to forced proximity. Real estate prices have pushed middle-income families into popular, peripheral neighborhoods, while the country’s failing economy has eroded the living conditions of the vast majority of Lebanese. Nonetheless, an organization like the Lebanese Food Bank mostly relies on in-kind donations from regular Lebanese, collected in supermarkets. One of its board members grumbled about how difficult it was, comparatively, to fundraise among the elites.
Such organic, more or less horizontal mechanisms of support represent a striking and indispensable contrast with more institutionalized, top-down channels of redistribution. The latter tend, by and large, to contradict the very notion of solidarity, rooted as they are in highly unequal patron-client relationships. While various billionaire businessmen turned politicians—Saad Hariri, Najib Mikati or Mohammad Safadi, to name but a few—have set up foundations to deliver charitable services, these serve above all as a conduit for political patronage. Ironically, they also channel money that is not always their own. A scholar maintained that “these institutions have become very good at fundraising abroad, enabling their founders to contribute little themselves.” Political factions such as Hizbollah operate in much the same fashion, providing jobs and other benefits, but in a transactional exchange where loyalty is demanded in return.
Many Lebanese thus draw a careful distinction between genuine solidarity and service provision, the latter having been largely tainted in the Lebanese context. A volunteer for the Lebanese Red Cross recounted: “Once we took a man to the hospital. His brother wanted to give us money. So, I told him: ‘Keep your money, and, if you feel like it, once you go back home, donate to your local Red Cross.’ To me it’s important people know they can rely on us no matter what.” Conversely, in the absence of satisfactory forms of state-driven redistribution of wealth, many Lebanese perceive the top-down political support as their fair share of the national economic resources upon which the elite prey. A Christian resident of the Ashrafiyeh neighborhood summed up this state of mind: “At Christmas I receive 150 dollars worth of goods, handed out by a local politician, in a food parcel. I don’t need it, but why shouldn’t I make the most of it? That’s a free lunch that lasts the whole month.”
A distinct but related phenomenon revolves around elitist conceptions of charity which, while not so calculated and transactional as partisan service provision, are nonetheless too detached and condescending to be considered solidarity per se. A wealthy Lebanese lamented: “I am part of this network of rich Armenian women who aspire to help poor children. Last time, they collected money to take them to the theme park ‘KidzMondo’… Seriously? These kids don’t have shoes for winter and you take them on a two-hour tour of what they will never get in life?” Privileged Lebanese frequently attend and champion high-profile charitable events, many of which are designed as places to be seen as generous, with little concern for how much ultimately trickles down. Meanwhile, skyrocketing inequality has seen the elites take off, concentrating an ever larger share of wealth in a bubble far removed from the daily struggles of ordinary people.
More than domestic elites, elements of the diaspora have shown a capacity to feed into the low-key, grassroots ethos described above. The Ghazal Foundation, for example, provides half a dozen annual scholarships to support students at Saint Joseph University. LIFE, for its part, connects financial executives abroad with young talent back home. An American association of Lebanese women in Miami raises money every year to help fund public schools. The list goes on, suggesting that successful expatriates may be better suited to providing genuine support than elites with a more direct stake in the country’s mostly predatory political economy.
E l a s t i c i t y
Solidarity networks provide an indispensable form of flexibility in a country where wealth is concentrated at the top, and where neither the national social security system nor taxation produce any meaningful correction through redistribution. The national social security fund (NSSF) offers a particularly counterintuitive and poignant illustration of the lack of genuine redistribution mechanisms, functioning solely as an individual bank account: employees enjoy the benefit of their pension scheme and medical coverage only to the extent that they contribute to the fund, thus eliminating any form of solidarity across generations or between the work force and the unemployed.
All told, at the national level, circulation of wealth from the rich to the poor is mostly anecdotal. The widespread understanding that Lebanese must depend on themselves, rather than expect help or change to come from above, is in part a consequence of Lebanon’s extremely rigid social stratification: mobility is so restricted that many youth feel compelled to try their luck abroad. The only alternative consists in pooling resources within ad hoc “communities of solidarity,” to recreate some level of economic elasticity.
Resilience, rather than some magical Lebanese attribute, therefore amounts to myriad, down-to-earth tactics deployed by Lebanese to make ends meet and pull through adverse circumstances. In 2016, an Oxfam study revealed, for instance, how local shops customarily keep tabs for their customers, who settle them on receipt of their salary. Such loans, usually interest free, are part of the plethora of mostly invisible means offering additional breathing space to families in need.
Through such contraptions, Lebanon manages to keep up the appearances of sporting a vibrant middle-class; look closer though, and you will see a collection of individuals running several jobs, chasing lines of credit, cutting back on essential expenses such as personal insurances, and relentlessly relying on improvised social safety nets. Only at the macro level does Lebanon appear to be a middle-income country.
That the middle-class is squeezed to breaking point is not a new idea. Arguably, this has been the case for decades. Yet it is being tested evermore. While the economy is stagnating at best, politicians are cutting back on state spending. Even patronage is shrinking, as the country’s factions find themselves running out of cash. “A decade ago, Hariri would cover your entire medical bill,” said an academic working on the city of Tripoli. “Today political patrons themselves face shortages of funding. What they can do is match-funding: ‘I pay half if you raise half.’ Local solidarity is filling the gap.”
* * *
Lebanon, in many ways, is a society built on extreme contradictions. True to form, it would seem that Lebanese can just as often be generous, sensitive, empathetic, humble and egalitarian in their social interactions as they can be self-centered, flamboyant, prejudiced and competitive. The political system is essentially built on the latter, with each faction playing on the insecurity of its base, at the expense of any nationwide interest.
What grassroots solidarity mechanisms tell us, however, is that with such distortion comes a counterweight—namely society’s ability to organize itself, to a surprising extent, according to the exact opposite values. As such, what holds the country together isn’t the fragile truce that unites the country’s aging warlords-turned-politicians, but how much Lebanese hold on to each other, one family, circle of friends or neighborhood at a time.
Monetising Syrian refugees
11 December 2017
Syrian refugees are, perhaps now more than ever, a vital component of Lebanon’s fragile economy. Critics should thus be careful what they wish for: a large-scale departure of Syrian refugees might well do even more harm than good. It goes without saying that Lebanon, a small country with limited means, deserves both praise and material support for absorbing neighbouring Syrians in their moment of need, at high costs to its own society. This influx created additional stress on Lebanon’s resources in a whole range of areas, from security functions to administrative capacities, schooling and transport, all the way through to water consumption.
Nevertheless, in recent years Lebanese politicians have been quick to go the extra mile, scapegoating Syrians for all of Lebanon’s social and economic ills, notably a stagnant economy and decaying public infrastructure. For anyone who cares to look, however, this narrative suffers from two glaring defects. On one hand, the influx of more than 1 million refugees since 2011 has not so much created new problems as exacerbated old ones, which are in turn rooted in decades of defective governance and bad economic policy. On the other, politicians tend to exaggerate the negative impact of the Syrian influx while papering over its more positive side-effects.
The absence of precise data about refugees in Lebanon invites speculation and fear-mongering. Surprisingly, given the all-importance accorded to the issue, it is impossible to accurately determine the number of Syrians residing in Lebanon. Indeed, Lebanese authorities suspended, as of 6 May 2015, UNHCR’s registration process for new arrivals, rescinding their previous open-door policy; the formal count therefore stopped just over 1.2 million. The Syrian influx added to an existing, indeterminate number of Palestinian refugees, estimated anywhere between 150,000 and 500,000 (although an unprecedented census is expected to soon lift this ambiguity). Lebanese politicians routinely decry “refugees” in general, sometimes implicitly bundling Syrian newcomers with Palestinians who have lived in the country for up to 70 years, and whose long-standing presence has little discernible relationship to the country’s recent economic slump.
The chronology below illustrates how such speculation has underpinned populist rhetoric, heating up in the context of general elections scheduled in 2018.
- January 2014: then Prime Minister Najib Mikati claims that 900,000 “conflict refugees” have entered Lebanon, “approaching a quarter of the population.”
- April 2014: UNHCR states that Syrian refugees in Lebanon have passed the 1-million mark.
- May 2015: UNHCR suspends the registration of new refugees and asylum seekers. The peak number of 1.2 million subsequently decreased to 1 million by 2017, as a portion of officially registered individuals were resettled, departed or passed away.
- September 2015: Minister of Foreign Affairs Gibran Bassil, referring to refugees as a burden, argues that the 1-million figure doesn’t account for all concerned: “it’s 1.5 [million Syrians] plus 500,000 Palestinians so 45-50% of the population.”
- October 2017: UNHCR protection officer Esther Pinzari says Syrian refugees amount to 1 million in Lebanon. The Lebanese government, meanwhile, puts the number over 1.5 million, claiming that even that figure is underestimated.
- November 2017: the head of General Security, Major General Abbas Ibrahim, says that the total number of refugees exceeds 2.5 million, including all nationalities.
As elections approach, politicians have taken to calling for Syrians to leave the country in an attempt to rally their constituencies. In such a combustible climate, it has become both increasingly difficult and increasingly vital to pursue a level-headed view on what has become the “economy of refugees.”
Delineating the Syrian spillover
In fairness, Syria’s civil war has indeed dealt a considerable blow to Lebanon’s economy: at the end of 2015, the World Bank estimated that the Syrian crisis had cost Lebanon some $18 billion. Much of this damage, however, has nothing to do with refugees, and everything to do with the war’s broader economic implications.
Most obviously, the conflict dramatically undermined Lebanese exports, which dropped by half—from about $5 billion to 2.4 billion—between 2010 and 2015. A large chunk of this decrease followed the 2014 closure of Syria’s southern border with Jordan, which in turn shut off the land route through which Lebanon had long shipped goods to the Arabian Peninsula.
Somewhat more subtly, the conflict disrupted various value chains that linked Syrian and Lebanese markets. For example, the import of cheap Syrian industrial supplies declined drastically after 2011, forcing Lebanese manufacturers to rely on alternative sources of raw material. Lebanese processing of Syrian agricultural output similarly plummeted. The war also eroded tourism, with travelers either fearing violence, or put off by the fact that they could no longer combine Lebanon with Syria—a two-in-one formula that represented a big chunk of the market prior to 2011. Importantly, none of these shortfalls will be redressed by the repatriation of Syrian refugees; progress will mostly be contingent on a credible resolution to the conflict itself, and ensuing revival of the Syrian economy.
The job market fallacy
Aside from the general tendency to associate economic malaise with refugees, a more specific set of complaints holds that Syrians are driving down wages and robbing Lebanese jobseekers of much needed opportunities. On one hand, these grievances surely hold some measure of truth: an upsurge in primarily low-skilled, low-priced Syrian labor has doubtless introduced new labor market competition in certain sectors and geographic regions, with inevitable knock-on effects for Lebanese. Although data scarcity and high levels of informality preclude realistic calculations, the International Labor Organization (ILO) suggested in 2013 that competition from Syrian refugees had—in the most severely affected regions of Lebanon—driven down wages for unskilled Lebanese workers by up to 50%.
On the other hand, however, both existing data and anecdotal evidence cast serious doubt on the notion that Syrian refugees have fundamentally transformed the labor market. The World Bank, for example, reports only a marginal increase in both overall and youth unemployment in Lebanon between 2011 and 2017, with the overall rate rising from 6.2 to 7.0% and the youth rate from 20.7 to 21.8%—increases which themselves cannot be plausibly attributed to refugees per se, rather than broader economic woes. While these figures deserve as much skepticism as any in Lebanon, they nonetheless suggest a far more limited impact than most Lebanese would assume.
Just as important is the fact that Lebanon’s labor market was underperforming long before the Syrian crisis. The World Bank has estimated that even before 2011 Lebanon created each year, on average, a sixth of the jobs necessary to absorb new Lebanese entrants. At the time, national growth—which relied heavily on services, construction and trade—translated into minimal job creation, and what jobs did emerge were mostly low-skill. Meanwhile, Lebanon’s economy largely deterred foreign direct investments, enjoyed little meaningful public spending and suffered from overly cautious private capital, all of which hampered productive activities. Accomplished graduates were therefore encouraged to emigrate, in an economy dependent on them sending back remittances in foreign currency.
A second problem with the narrative of economic competition relates to the fact that Syrians usually fill positions that even unskilled Lebanese do not want. In reality, in fields like agriculture, construction, manufacturing or low-paid services, Syrians overwhelmingly vie for jobs with other migrant laborers, such as Bangladeshis, Ethiopians or Filipinos. A Lebanese farm manager in the Beqaa valley thus explained that Syrians were the natural candidates for work on under his direction: “Lebanese don’t work on someone else’s land. A Lebanese, at best, will supervise others farming a third-party’s land.” A Lebanese craftsman who currently employs Syrian staff in his workshop echoed this point: “if Syrians were to leave, I would have to get replacements from Bangladesh or India. It is impossible to find Lebanese who are adequately trained—and willing to take that kind of job even if they are.”
A related point is chronological: many Syrians already worked in Lebanon pre-2011, in sectors they continue to staff—primarily construction, agriculture, cleaning and janitorial work. Again, high levels of informality preclude reliable statistics, but some reports—for example by Amnesty International—placed the figure around half a million Syrian laborers in the mid-2000s. In other words, many of today’s refugees occupy positions they have long held. What has changed, in many cases, is that they have brought their wives and children with them.
Stimulating Lebanese consumption
While the negative impact of the Syrian influx tends to be overstated, the refugees’ positive effects are often overlooked entirely. One such silver lining is a boost to Lebanese consumption: as Syrian families settled in Lebanon in large numbers, they stimulated the economy in ways that Syrian seasonal laborers did not pre-2011. In just one striking example, Lebanon’s telecom sector benefitted from a threefold increase in broadband subscriptions between 2011 and 2015—a particularly important point given that income taxes on ICT companies form a pillar of municipal budgets.
A recurring argument faults this increased consumption for widening the trade deficit; as 80% of what Lebanese consume is imported, additional consumption means additional imports, increasing the pressure on the country’s balance of payment. However, available figures show only a slight increase in the volume of imports between 2010 and 2015—at an average yearly rate of around +0.9%, consistent with the trend that prevailed between 2004 and 2010. So, the weight of Syrians on the trade deficit is clearly overstated, when the problem mostly derives from the collapse of exports.
In addition, a large share of whatever Syrians consume is funded by external money, providing Lebanon with foreign currency it desperately needs to purchase imports and service its massive, largely USD-denominated public debt. Indeed, cash or in-kind donations by international organizations make up approximately 40% of refugees’ budget, complemented by personal savings (20% of the total, per ILO’s 2013 estimate) and remittances from the Syrian diaspora. Since 2013, through credit cards distributed by the World Food Program, refugees spent $900 million at Lebanese shops involved in this UN-funded scheme. Critically, then, Syrians have an untold positive impact on foreign currency inflows necessary to stabilize the Lebanese economy.
This is not to say that increased Syrian consumption exerts a strictly positive impact at all levels of Lebanese society, but rather that economic strain coexists with various unheralded benefits. This ambiguity is on full display in Lebanon’s real estate sector. On one hand, Lebanese frequently lament that Syrian families’ need for accommodation has increased rents, adversely impacting middle- and lower-class nationals. At the same time, however, Syrian demand has sustained an overvalued real estate market, which happens to be another essential pillar of Lebanon’s economic stability—and which has been showing growing signs of fragility for reasons entirely unrelated to refugees. Thus, an important distinction must be made between individual grievances related to the presence of Syrians, and various collective benefits that have helped Lebanon stave off a macroeconomic crisis.
The booming economy of development
As noted above, humanitarian and development funding has provided a major injection of foreign currency into Lebanon’s economy. In 2016, UN agencies spent an equivalent of 3% of Lebanon’s GDP, according to a senior UN official. While not all of this funding is exclusively related to refugees, the UN’s overall envelop has skyrocketed as a direct result of the crisis. As one senior official with the UN Development Program put it: “Without refugees, our programming would be much smaller. To give you an idea, we spent $26 million in 2012, and in 2016 had reached almost three times that.” Meanwhile, various bilateral donors—such as the US, EU and individual European states—have likewise ramped up their budgets for Lebanon as part of their response to the Syrian crisis. For instance, the United Kingdom spent about £2.5 million in aid in Lebanon in 2010 against £99 million in 2015.
Beyond providing a major cash injection, the international response has often directly benefited the Lebanese host population. Most large-scale humanitarian and development initiatives are careful to incorporate Lebanese beneficiaries, either through direct assistance or by developing public goods such as infrastructure. The EU, for instance, pledged €35 million in 2014-2015 to develop solid waste management programs targeting almost 3 million beneficiaries, the majority of whom would ultimately be Lebanese.
Such investments are particularly striking given the Lebanese government’s own failure to repair decaying infrastructure: the country’s water and sanitation system was in crisis long before 2011, and the government continues to spend only one percent of GDP on productive investments. Herein lies another element of ambiguity: while refugees have indeed strained Lebanese infrastructure, they have also triggered investment in areas long neglected by the Lebanese state.
A further set of indirect benefits relates to the employment generated by the aid economy. On one hand, the period since 2011 has seen growing numbers of Lebanese nationals employed by aid programs that would not have existed were it not for the refugee influx. On the other, foreigners working for international organizations have high spending potential in services and real estate. Here again, effects are ambiguous and multilayered: while the influx of expatriate labor indeed drives up prices in trendy neighborhoods like Beirut’s Mar Mikhael, it also has broader, salubrious benefits for a stagnant macro-economy in dire need of foreign currency.
* * *
Modest Lebanese have experienced first-hand a massive transformation of their daily lives with the large inflow of refugees. The latter indeed weigh on them in very tangible ways: some Lebanese have seen their electricity bills rise steeply as Syrians surreptitiously divert power to light their own apartments, because they cannot legally connect to the grid. Others have seen their children’s classes overcrowded with young pupils unequipped for bi-lingual national education.
Real though these grievances are, they nonetheless form only part of the picture. With Syrians today thoroughly embedded in Lebanon’s delicate economic equilibrium, politicians exploit the refugee presence at their own risk. Chasing Syrians out en masse would, in the final estimation, deprive Lebanon of much-needed support at a time when the country faces a precarious situation of its own making. Donor money, and related services, will go wherever Syrians are, and a rapid outflow would threaten the country’s flimsy budgetary balance. Their departure would likewise deal a major shock to the real estate market, raising the specter of a meltdown whose knock-on effects would in turn rock the financial sector. Against that backdrop, Lebanon would do well to suppress the growing, collective temptation to push Syrians out, at the risk of provoking a far more serious economic crisis than the one they are said to have caused.
Special thanks to Aya Chamseddine, Georges Haddad and Ranine Awwad for contributing outstanding fieldwork
Lebanon's taxation smokescreen
4 November 2017
On 9 October, after seven months of chatter, Lebanese parliamentarians finally voted in a new tax law, presented as a vital measure to address the country’s economic woes. Extensive debates have not clarified, however, what exactly the reform will do, at what cost, and to whom. Indeed, the duration and complexity of the process have obfuscated the fundamental problems with Lebanon’s taxation system and broader macro-economy. These problems will undoubtedly remain when the smoke clears, and may even be worse than they were to begin with.
As often in Lebanon, legislative proceedings turned into something of a saga. Parliament first tabled a draft law in March 2017, including 22 changes to the existing law—notably a one point increase to the value added tax (or VAT), from 10 to 11%, which became the legislation’s hallmark. The proposal drew condemnation from a handful of politicians and gave rise to short-lived protests in Beirut among citizens who viewed the measure as a way of redressing Lebanon’s economic problems at the expense of average Lebanese.
On 20 July, parliament nonetheless passed the law, which came into force a month after—until the Constitutional Council froze the law on 31 August and annulled it on 20 September, only to have MPs then pass a cosmetically updated new text on 9 October. An advisor to the Kataeb, the party most virulently opposed to the move, griped: “What politicians did was change the title and remove redundant taxes” [i.e. repeated taxes on the same items]. They also redressed the procedural shortcomings that had ultimately undercut the July legislation. Meanwhile, ordinary Lebanese grew tired of the whole matter, and seemingly resigned themselves to whatever outcome.
The main argument behind the tax hikes is a widening public deficit, which various Lebanese and international bodies estimated at up to 10% of GDP in 2016—and which appeared set to widen following the introduction in August of a new salary scale for civil servants at an estimated cost of $917 million annually. Against that backdrop, Beirut has sought to raise additional revenues from taxation.
Proposed changes, however, suffer obvious shortcomings. Most obvious is the endemic tax evasion at all levels of Lebanese society, which will constrain any efforts to narrow the deficit through higher taxation—and may indeed incentivize creative new forms of dodging. Moreover, tax hikes will do nothing to redress the inefficient public spending that has long fueled Lebanon’s economic malaise. On the contrary, they may well provide Beirut with latitude to continue indulging its worst macroeconomic habits. Balancing the budget, ultimately, should derive from smarter spending and improved tax collection, not higher tax rates.
Particularly disingenuous was the argument—notably advanced by the Ministry of Finance—maintaining that the new system would bear primarily on the wealthier Lebanese, and spare the more vulnerable. True, the VAT excludes basic goods such as bread, rice or dairy products–but it also exempts precious stones, yachts and sailboats. More fundamentally, the new law doesn’t redress, and may indeed exacerbate, the regressive nature of Lebanese taxation—that is, the fact that Lebanon’s tax code places a heavier burden on lower income Lebanese than on their wealthier counterparts.
This trend is largely attributable to the outsized importance, in the Lebanese context, of so-called “indirect taxes” levied on goods and services—as opposed to direct taxes, such as income tax, that citizens pay directly to the state. Such taxes constitute more than half of the Lebanese state’s budget, and disproportionately affect middle and lower income Lebanese households that spend a large part of their incomes–if not their entire budgets–on such goods and services. By contrast, higher earners are inclined to save or invest, thus decreasing the percentage of their wealth that goes into consumption. The new tax law, instead of correcting the great imbalance between indirect and direct taxes, mostly reinforces this trend by ramping up VAT and other indirect fees that weigh down on poorer citizens.
Moreover, the opaque and convoluted process of tweaking Lebanon’s tax code creates various distortions in an economy already fraught with uncertainty and informality; these distortions, in turn, primarily affect the middle and lower classes. For months, Lebanese have expected prices to increase, leading economic actors—from local supermarkets to private schools—to plan adjustments regardless of the precise nature of government policies. A young Lebanese described a surreal situation at her usual corner shop: “The owner increased phone credit by LBP 5,000. He said that VAT had increased, when the law had in fact been frozen.” In a largely informal economy, many small businesses neither pay nor collect VAT, but are nonetheless keen to use the opportunity to raise their prices, if only because they are suffering from an ailing economy themselves.
Ultimately—and although Lebanon’s tax code indeed needs an overhaul—the measures described above do precious little to redress the structural flaws in a system fueling some of the world’s worst inequality. The past two decades have seen a fraction of the population accumulate wealth while a majority suffered deteriorating living conditions. Even as the overall economic output, or GDP per capita, more than doubled between 2000 and 2014, the bottom half of the population incurred a significant decrease in individual wealth over the same period—from a yearly maximum of $6,519 per adult in 2000 to $6,175 in 2014. The tax law may or may not enable the government to balance its budget; but it certainly won’t help most households do so.
A palpable (and justifiable) trepidation exists within the political class at the prospect of a deepening economic crisis—and the popular anger it would likely trigger. Aside from pinning the blame on the large numbers of Syrian refugees Lebanon has hosted, the government’s response has centered on the taxation saga—although the linkage between these tax hikes and the economy’s deep structural flaws is tenuous at best. Prime Minister Saad Hariri went as far as to claim that, had the law not been passed, “six months later the [Lebanese] lira would have collapsed.” The Lebanese pound may well be in a precarious equilibrium, for reasons that Synaps has explored at length; but Lebanon’s monetary conundrum, serious as it is, calls for fundamental structural reform—not half-hearted fiddling with taxation.
In the final analysis, it seems plausible that Beirut chose to focus on taxes not because they are particularly relevant to the country’s economic shortcomings, but because these hikes happened to be the only thing Lebanese politicians could agree upon—in a system where more meaningful reforms raise all sorts of unseemly conflicts of interests. Unable to articulate any coherent economic policy, the government filled the void with a news-grabbing process designed to create the impression of movement. If movement there was, it ended up being in the wrong direction.
The contortionist middle-class
14 August 2017
In most ways, Lebanon’s middle-class looks like any other. It dresses in the latest Western fashion, lives a consumerist lifestyle, buys mostly imported goods, and occasionally goes out—to the cinema, the restaurant or the beach. Taken collectively, it helps shape the image of a middle-income country with a bustling services sector, which serves and is served by an educated workforce. Yet as is often the case in Lebanon, appearances can be deceiving. In this particular context, the image of a reliable middle-class is underpinned by a convoluted array of contortions on which citizens rely to maintain their standard of living—and which will quickly prove insufficient in the event of an economic shock.
The Lebanese middle-class has for years been struggling to get by, despite an eroding economy characterized by minimal growth (1% or less in 2016) and high unemployment rates, especially among its youth. Many households end up twisting themselves in knots. On one side, they count on multiple sources of income. To provide for themselves and their families, young men frequently combine a full-time job with a second occupation, resulting in hours that may climb upwards of 100 per week. Reliance on social support networks is widespread, with many depending on remittances from relatives abroad, intergenerational cash handouts, and borrowing money from friends. Personal loans are frequently used to plug income gaps, rather than fund exceptional projects; they are in such demand that banks casually advertise 15% interest rates.
On the other side of the balance sheet, many middle-class Lebanese square their budgets by finding loopholes and cutting corners. Some dodge electricity bills through the absence of a meter or by connecting illegally to the national grid. Others benefit from starkly under-priced lodgings due to the so-called “old rent” system, based on a law enacted at the end of the Second World War and extended in 1992: leases signed prior to that year have been frozen ever since, resulting in annual rents lower than what most people pay every month on the open market. Still others turn to political patrons to cover their hospital bills or grant scholarships to their children. Such distortions are rife, knocking off a household’s expenses just enough to maintain that middle-class standard.
Official statistics are, in this field as in any other in Lebanon, impressionistic. Available figures suggest that one Lebanese employed in the private sector out of two earns less than 15 million Lebanese pounds, or $10,000, a year. That said, approximately 50% of the active workforce operates within the hazy boundaries of the informal sector, for which no reliable data exists. Likewise, statistics are elusive when it comes to civil servants, who are said to represent 15% of the total workforce.
If zooming out doesn’t help bring the picture into focus, zooming in does, however. To this end, Synaps spoke with a variety of middle-class Lebanese, pulling out several (real and nonetheless) archetypical profiles that will be recognizable to anyone living in Lebanon.
Fadi (all names have been changed) works a total of 65 hours per week, between his factory job and his second, part-time occupation as building receptionist or natur. With an aggregate monthly income of $1,500, he manages to provide for himself and both his parents, who reached retirement age without being able to claim a pension. “We live in a recent building about 20 minutes from Beirut, so there is no electricity or water meter,” he explains. “But I already pay a lot for the generator,” which is an essential supplement for power cuts. Fadi is in his late 30s, although he says he likely will not get married. “I can’t afford a Lebanese wife. She would expect higher living conditions than I can bear. I was thinking I might marry a Syrian woman. She won’t be as demanding as a Lebanese one.”
Alya lives with her sister in the Southern suburbs of Beirut, or Dahiyeh. The two women bring in combined salaries amounting to $1,100 per month. Their brother pays their rent, which totals 2 million Lebanese pounds—or about $1,300—per four months. On top of their yearly $1,390 health insurance plan, they spend an average monthly $247 on non-reimbursable health expenses. They consider themselves lucky, because their brother also sends regular remittances to close the gap between a total income of $1,433 and their estimated $1,680 expenses.
Rim’s son works in a private company: his monthly pay of $1,000 is the only salary in a household of five. But Rim can count on an additional $1,500, received from two of her children settled abroad. She enjoys the benefit of an old rent that allows the family to live in Beirut for only $800 a year. They also cash in on her husband’s insurance plan, paid for by his last employer, a large multinational company, before he retired. There is little breathing space between a $2,500 monthly income and the family’s $2,309 expenses, so whenever Rim plans on a larger investment, such as new curtains for her living room, she uses a credit card her son gave her.
Paul is relieved to have found a better second job. He used to be a bartender in the Mar Mikhael neighborhood; after a couple of months working without being paid, he quit. Today, Paul works as a waiter in a café in the daytime, and at night in a fancy nightclub. He spends a combined 100 hours per week on the job, for a total salary of $1,700 per month. To support his parents, who live with him, his brother sends $300 every month from the Gulf. Currently, the household breaks even, but until recently Paul regularly borrowed money. Most often, he would go to friends for a few hundred dollars here and there. Once he turned to a bank to cover his father’s hospital fees, and he still pays a monthly installment for that personal loan. “That was a bad decision,” he feels, “because a $7,500 medical bill turned into a $12,000 reimbursement, with interests and banking fees.”
Unsurprisingly, these and other respondents all know the detail of their own budgets well. Indeed, they display a fine-tuned budgetary discipline that reflects their nonexistent room for maneuver, imposing constant trade-offs between the different kinds of consumption associated with the middle class. Beyond the obvious impact on these individuals’ lives, this dynamic also has immediate political consequences.
Indeed, in terms of economic policy, Lebanon has placed itself in a catch-22. Its current model, based on spiraling public debt, is dangerously unsustainable, as elaborated elsewhere. Current dynamics will, in all likelihood, eventually provoke a devaluation of the Lebanese pound, with dire ensuing effects on the purchasing power of a population that consumes primarily imported goods—not least foodstuffs and medicine. Whatever reforms are being tabled, such as increasing VAT or suppressing the “old rent” system, will do little to stave off a structural crisis, while increasing pressure on those Lebanese who genuinely need every hard-earned dollar. More ambitious changes, such as ramping up tax collection, or turning the electricity sector from a wasteful and corrupt patronage mechanism to a streamlined service provider, would also ratchet up—at least in the early stages of a transition—the already intense economic stress many are subjected to.
In sum, the middle-class workforce that fuels Lebanon’s economy is stretched dangerously thin, to the point where any major shock could cause disastrous consequences. Many talented young people looking for opportunities abroad claim they would stay if only they could make a living; by the same token, many employees who remain assert that they will be forced to leave if things get even marginally worse. Any successful policy-making must factor in, therefore, its impact on standards of living, and devise accompanying measures to cushion the blow.
Lebanon is fortunately endowed with international partners who collectively invest hundreds of millions of dollars in development programs—some of which could be rewired to provide such accompanying measures. As things currently stand, the impact of these programs is in any event dulled by Lebanon’s desperate need for structural economic reforms. Linking development work to economic progress offers a sensible way forward, removing some of the concerns of the ruling elite—afraid of a backlash within their popular base—and presenting donors with better returns on investment. “Making ends meet” is Lebanon’s challenge for the period to come. But it can’t rest solely on individuals twisting themselves into the most extraordinary positions.
Lebanon’s toxic loans gamble
12 June 2017
Lebanon’s financial sector, a mainstay of the country’s economic stability, is critically exposing itself to an unnecessary risk of its own making. Indeed Lebanese bankers, who take pride in having shunned the speculative investments that caused the global financial meltdown less than a decade ago, are now embracing the exact same practices.
The financial crisis of 2008 started with the US mortgage crisis the year before. The collapse of the housing bubble in 2007 forced over-indebted American households to default on a large scale. It triggered a sharp decline in the value of real estate-related financial products, such as mortgage-backed securities—namely investments in the anticipated interests generated by a bundle of mortgages. The crash resulted from a massive bulge in toxic loans made to households that could not seriously be expected to repay, but whose mortgages could nonetheless be profitably sold off packaged into financial products. Eventually, the crisis spilled into the rest of the economy, as owners abandoned their homes, banks incurred massive losses and lending froze up, leading by contagion to the global 2008 recession.
Lebanon was mostly spared, not least because local banks had not been caught up in the securities frenzy. The banking sector even benefited from the 2008 crisis: non-resident deposits increased by 23% that year, as local banks appeared more reliable than many foreign ones. It defies logic, therefore, that these same banks would now wager on a home-grown toxic loans bazaar, with potentially disastrous consequences for the local real estate sector and broader economy.
For several years, Lebanon’s real estate market has been under stress. Demand dropped as wealthy clients–notably Gulf investors and diaspora Lebanese—became scarce. Their purchasing power decreased with falling oil prices and slowing economies worldwide; meanwhile, Lebanon grew less attractive for foreigners. “If you are a Gulf citizen today, you can buy estates in Marbella or Cyprus, go there without a visa and eventually apply for residency or even a passport,” explains a Lebanese investor who himself jumped on the deal. “For the same price here, you can get one apartment, almost impossible to rent, and that won’t get you any additional benefit.” Yet prices remain inexplicably high. “Today in fancy downtown Beirut, you pay $7,000 per square meter,” estimates a Lebanese broker, quick to challenge what he sees as an outrageous claim. “That’s the price in a European capital!”
Lebanon’s real estate market could and should have adjusted to correct the mismatch between supply and demand. Instead, the sector focused on maintaining high prices. Among other things, it artificially ramped up demand, by tapping into an under-exploited pool of buyers: low-income if not insolvent households. Such households are usually not granted a loan at all, given the higher risk of default. Worse still, they are given “toxic loans,” defined by the absence of an initial down payment designed to exclude borrowers with no savings to speak of—an obvious liability.
Regulations circulated by the central bank, or Banque du Liban (hereafter BdL), require banks to verify that a down payment of at least 25% of the total value of the estate has been made. This guarantees, as a matter of principle, that the borrower is in a reasonably sound economic situation and has a vested interest, having committed money of his own, in repaying the loan.
To bypass such regulations, borrowers have increasingly been given access to “under-cover” toxic loans. “Someone wants to buy an apartment worth $75,000. He just loves it, but has no money for the down payment,” explains the jaded real estate broker. “He can make arrangements with the seller to get a paper certifying that he made a $25,000 down payment on a $100,000 apartment. The bank can then legally lend $75,000, which is actually the whole sum.” Bankers, who are fully aware of going rates on the market and could therefore easily detect overvalued goods, usually turn a blind eye to such practices.
Toxic loans are not new in Lebanon, but what is worrying is the growth and normalization of such deals. Stakeholders provide anecdotal evidence of this increase; more telling still, developers now publicize such practices in plain daylight, as in this ad on Facebook.
Toxic loans carry many risks, which financial and real-estate operatives, not to mention BdL regulators, can hardly ignore since the 2007 meltdown. Lebanon is vulnerable more specifically to two liabilities: the over-evaluation of bank portfolios and the contagious nature of household mortgage defaults.
On one hand, the housing bubble means that bank assets likely are themselves significantly overvalued. In Lebanon, according to the International Monetary Fund, 90% of all loans made by the financial sector are directly or indirectly connected to real estate—through mortgages, loans to developers or the routine use of real estate as collateral. In numerical terms, the banks’ balance sheets contain approximately $50 billion in assets, which could actually be worth $35 billion if market prices were, as some actors suggest would be more realistic, 30% lower than their current valuation. In this context, toxic loans exert nefarious, negative leverage: if a bank lends $75,000 for an apartment officially priced $100,000 and unofficially valued $60,000, its asset goes down in its balance sheet at a rate of 66% over its real value.
Were banks to acknowledge the reality of a declining market, they would be compelled to recapitalise, to respect international regulations on the ratio between capital and liabilities. This explains why financial players are keen to prop up prices at all costs, through mostly artificial measures. BdL’s circular 135 of 2015 allows banks to sit on properties they acquired as collateral for up to 20 years, when previously they were forced to put them back on the market within 24 months. In today’s stagnant environment, this scheme helps curtail supply while banks and developers struggle to reenergize demand. In particular, toxic loans serve to expand the market’s natural base of buyers to people who should not be investing in the first place while doing nothing to improve their actual economic situation: housing has not become more affordable, struggling households have simply grown more indebted.
Meanwhile, sellers collectively keep up the pretence of high prices, while adjusting covertly to downward pressures. The real estate broker referenced above points out that most owners are willing to offer significant discounts prior to any negotiation. In the absence of systematic data collection, current guesstimates put actual selling prices at 20 to 30% lower than public offerings. The website ‘Real Estate in Lebanon’ regularly displays evidence of spectacular mark-downs, packaged as exceptional deals that somehow do not affect the market’s official overall pricing.
On the other hand, toxic loans are almost designed to cause snowballing mortgage defaults and a consequent crash of the market. They concern lower income buyers, at greater risk of default, which in turn means that banks will acquire more property as collateral. Having lent large amounts of money generating fewer repayments, banks will inevitably sell more property to make up for their losses. And as supply increases, prices at some point inescapably will go down. This is what triggers a chain reaction among toxic loan holders: the person who borrowed $75,000 with no down-payment has no incentives to repay the sum in full, with interest, if the apartment’s actual value drops sharply, especially if he or she is still in the early stages of agreed instalments; best forsake the $5,000 or $10,000 already paid to the bank than continue to struggle for years to acquire a good suddenly made absurdly expensive by the market’s new pricing. A downturn affects solvent buyers too, following the same calculus. Depending on how far along they are in repayments, buyers may be tempted to default on a loan and abandon the related property, if only to get a better deal in a deflated environment.
The irony with toxic loans is that they make market adjustments infinitely more difficult: as housing becomes affordable, reflecting the economic reality of the lower rungs of society, the potential customers that could make their entry into the market, push up demand and stabilise prices, happen to be those who were conned into buying above their means, and are left broke and traumatized. This hollow bottom pulls the entire market further down, increasingly the likelihood of a crash where mere correction was needed.
Lebanon’s looming real estate crisis has been evident to the more discerning players for at least three years—a realization made palpable by their intense efforts to patch things up rather than tackle them head on. This attitude will almost inevitably backfire. Cynically, smart Lebanese investors make no secret of their intensions to bet against the market, by withholding any purchases until prices collapse. Of course, such actors have much to gain from a crash, which makes for profitable opportunities to buy, even at the cost of bank failures, a generalised economic slowdown and, of course, large-scale foreclosures durably impairing the most vulnerable Lebanese.
A wiser course of action would entail BdL stringently enforcing its legislation on down payments; the sector agreeing to gradually deflate official prices rather than risk the bubble bursting; and banks seeking the help they may need to restructure and sanitize existing toxic loans. Rich Lebanese can do without the extra boon; Lebanon, on the other hand, simply cannot afford an avoidable social crisis.
The detail not to miss
In the 24 May edition of The Daily star, Alain Bifani, Director General at the Ministry of Finance, stressed that capital inflows have reached their pre-Syrian crisis level, at $2 billion over the first four months of the year, averaging $500 million per month. Lebanon, however, currently needs an estimated monthly inflow of $1,5 billion, to cover for its trade deficit (approximately $14 billion in 2016) and repayments of its dollar-denominated debt (about $4 billion a year). Such a figure does not even take into account the unknown amount of dollars required to maintain the Lebanese pound’s peg to the US dollar. Rather than worrying about catching up with the past, the government should consider catching up with the present.
The digital path to real citizenship in Lebanon
17 June 2016
As they busy themselves with sorting out a profitable model, Lebanese digital entrepreneurs are doing much more that we are less aware of: Keen to live by their own rules, they challenge the prevailing patronage system based on ingrained sectarianism, nepotism and corruption. The meritocratic, egalitarian, secular and self-sufficient work ethos that transpires from their endeavors carves out a space distinct from the country’s failing economy. Startups enabling cooks to share recipes over the internet, banks to manage their data, or Arab audiences to access video material certainly will not solve the issue of rampant unemployment, let alone revolutionize the dysfunctional Lebanese polity. But the “digital ecosystem” is doing something bigger, albeit on a small scale: Allowing young professionals to express, through their work, an inspirational sense of citizenship.
Lebanon is an outlandish place to start a digital business. Unlike the successful ecosystems of the Silicon Valley and Israel, the winning combination of higher education geared toward innovation, a tradition of venture capitalism and powerful national security interests is entirely absent. Communications-related infrastructure, to include access to the internet, is both unreliable and expensive. The kind of conference calls most startups wouldn’t think twice about must in Lebanon be carefully scheduled according to available bandwidth.
The beauty of this sector is that talented, footloose Lebanese anchor their business, against all odds, in a place they call home. While others fuel the brain drain, they doggedly insist on using skills that happen to be in high demand elsewhere in Lebanon, where social norms would encourage them to opt either for the security of conventional salaried jobs or seek fortune abroad. Their ambition is not just to create money-making businesses, but to invest in a country they want to believe in and help define, even if that vision must be built virtually from scratch.
Indeed, economic opportunities all too often demand that one surrenders to communal fealties, patriarchal relationships, and the consequent ethos of ineffectiveness, dependence and dishonesty. Internet-based companies offer a counterpoint, with small teams hired for their technical savvy and focusing on virtual products that can scale up overseas while eluding red tape at home. There is no compulsion to secure anyone’s protection, to seek anyone’s favors, or to recruit anyone’s cousin. Nor is it necessary, many recruiters point out, to know anything about a candidate’s communal background before deciding to make the hire.
However small, the digital sector enjoys much publicity, as traditional elites tap into the aura of creativity, dynamism and growth associated with startups worldwide. Flamboyant symposiums are held to celebrate tech-based entrepreneurship. Brand-new facilities have been built to host budding companies and their support structures, glowing with catchwords of “innovation,” “empowerment” and “changing the world.” Investment funds are multiplying, since the Central Bank put up $400 million in 2013 to cover for 75 percent of their losses – virtually annulling the risk inherent to “venture capitalism.” In a country paralyzed by petty rivalries and bereft of any clear, sustainable economic model, a digital future that would provide jobs and fulfillment to the youth is music to the ears of a ruling class otherwise incapable of constructive innovation.
If you talk to the entrepreneurs themselves, much of the glitz is irrelevant. Indeed, many note that the ecosystem is lopsided and top-heavy: there is all the capital one could dream of, but relatively few ventures to fund; massive wealth is waiting for mature companies when most are in dire need of seeding; and the obsession with “the next Facebook” and huge “exits” obscure the basic requirement for intensive, unrelenting investments in human capital. Symptomatically, the sector has already spawned dedicated think tanks and publications, while educating both the workforce and the public has desperately been lagging. Universities, an obvious place to start, have yet to connect to the corporate world.
Entrepreneurs establish their own rules from the bottom up. Rather than complain about the context, they seek solutions of their own, from shared working spaces to pool the cost of a private generator to ad hoc training programs to compensate for an inappropriate education sector. But that can only go so far: for the ecosystem to fulfill the hopes of its institutional and financial stakeholders, turning Lebanon into an innovation hub of which they dream, it will take more than fancy open spaces with plasma screens and bean bags underwritten by the Central Bank. This top-down approach risks replicating the patronage system of old, if traditional elites, part and parcel of the banking sector, remain core decision-makers; access to equipment requires political intervention; and personal connections influence funding.
Truly supporting startups puts the state and ruling class squarely back in front of their more fundamental responsibilities: focusing on the grass-roots level, through improved education, infrastructure and funding for SMEs. Of course Lebanese elites are gridlocked in many ways, and no radical change is to be expected. But the point is that small and meaningful experiments are taking place in the gaps that are appearing as the overarching system stalls and erodes.
The startup culture that allows people to break the mold and live their lives outside the traditional rules of the game, is also a microcosm of broader dynamics, visible in a pattern of civic initiatives that similarly seek, tentatively, to articulate alternatives. Examples range from a joint initiative bringing together civil society activists and private sector operators to collect recyclable waste in response to the trash crisis resulting from political corruption, to the independent Beirut Madinati list running in the 2016 municipal elections. All have in common a desire to define a way of life that is both engaged and self-respecting. In that sense, digital empowerment is but the economic versant of a transformation occurring within fringes of society at large. Thus the ecosystem is incubating more than startups. What is hatching is a much-needed “imagined Lebanon.”
Originally published, with Peter Harling, in The Daily Star, 17 June 2016.
- Cover: Bayeux tapestry by unknown weaver / public domain.
- How Lebanon's economy cannibalises itself: HodariNundu Carnotaurus on the hunt by Deviant Art; T Rex fossil by Pixabay / licensed by CC.
- The fabric of Lebanese resilience: rubber band ball by Wikipedia; Bill Ebbesen rubber bands by Flickr / licensed by CC.
- Monetising Syrian refugees: Cândido Aragonez de Faria Poule aux oeufs d'or by Wikipedia, Golden egg by Pizabay, Feather by ImgagesPNG / licensed by CC.
- Lebanon's taxation smokescreen: Houses of Parliament in the Fog by Claude Monet, oil on canvas, 1903, High Museum of Art / public domain; Smoke incense spirals swirls, A smoke on a black background by Reekado, Smoke screen 01 by Alexander W / licensed by CC.
- The contortionist middle-class: Victorian contortionist, unknown artist / public domain.
- Lebanon's toxic loans gamble: Jack and the beanstalk by Aida McKenzie / public domain.
- The digital path to real citizenship in Lebanon: Daft Punk Never Ever Land by Wikipedia / licensed by CC.