Lebanon needs to live free of corruption to ensure prosperity, says Sabbouri

“There are three main problems … corruption, corruption and corruption. We are a very corrupt country.” Dr Lara Macaron Sabbouri

“We are classified below Zimbabwe for corporate governance … the World Bank said that our financial and economic crisis is the third worst in 150 years.” Dr Lara Sabbouri

“We need a capital injection as fast as possible.” Dr Sabbouri

Lebanon needs corruption-free society to ensure prosperity, says Dr Sabbouri
Sydney - M E Times Int’l: The Australian Lebanese Chamber of Commerce held a virtual corporate business seminar based on banking and the economy in Lebanon. The webinar’s chief speaker is the founder of Visions for Business Consultancy in Lebanon, Dr Lara Macaron Sabbouri. She is a business consultant and an associate professor of finance at several universities in Lebanon. Her experience includes working at Lebanese banks. The MC for the webinar was Michael Rizk, the ALCC’s head of Intl trade relations. The seminar was supported by abal banking/Arab Bank Australia.
Excerpt of speech by Dr Lara Macaron Sabbouri
I will address a few issues about banking and the economy here in Lebanon, as well as the banking atmosphere.
So, where do we get our inflow of dollars? From four main resources: exports, and we don’t export a lot; from you people, the Diaspora, who send their remittances back to Lebanon; from direct foreign investment by people or corporations or government who would like to invest in Lebanon, and from tourism (because, you know, we have so many tourists coming in Lebanon and spend their dollars here).
These are the four main resources for the inflow of dollars into Lebanon.
However, since 2010, this inflow has been decreasing. Why? Because of geopolitical tension, or, especially with the Syrian crisis, where there are lots of sanctions on government and corporations who used to send their money to Lebanon.
So the money started circulating outside the pipelines into the banking sector and, in 2016 and 2017, because of the political tensions in Lebanon. So we have a scarcity of dollars. Then the Central Bank made a decision to increase the interest rate in order to capture as much as they can dollars.
So they started to increase the interest rate. The Central Bank has to increase rates in order to attract fresh dollars. We cannot take the exchange rate for granted; that’s why we have an unproductive economy in Lebanon.
Why? Because our mindset is used to saving money because we get high interest rates in the bank. Instead of borrowing and making investments, it’s more profitable to make savings rather than be productive.
So that’s why when we say we are not a productive country, it’s because of the interest rate policy. Before the crisis, most of the people of Lebanon living aboard were talking about two controversial subjects. They asked themselves: “Could the Central Bank could have fixed the exchange rate?” You know, the Central Bank has the means. “And is the government able to settle their debt in dollars?”
What were the consequences even before the outbreak of the revolution? Before 2017, 2018, a lot of people start withdrawing their money from Lebanon to access them in their home country where they are living.
So we faced four shocks in the last two years  The first was the revolution in October 2019. The second was in March 2020 when the government ceased payments on Eurobonds (bonds that are issued in currency other than Lebanese pounds; it means the bonds are issued in dollars). The third one was COVID-19 outbreak and lockdown (like in all countries) and the  fourth one, which was the most dramatic, was the Beirut Port blast.
Like all countries, we have three policies: economic, financial and monetary.
The economic policy is determined and governed by government; the financial policy is determined and managed by the Ministry of Finance and monetary policy is determined and  managed by the Central Bank.
Let’s start with the economic and monetary policies that are independent but the Central Bank should be collaborating all the time with the government so they cannot work independently, they had, there is a high degree of collaboration between them. For example, if the government wants growth, the Central Bank would not increase interest rates but decrease it so they can make an impact on the economy.
Going to the economic policy, so let’s share some figures: let me show you what we have.
So our GDP by the end of 2020 was about $25 billion. Of course, it’s true. Now we will adjust in effect in 2021. Our public debt is about $97 billion. It’s huge. And our debt to GDP is very huge. We have a deficit in our budget and in our trade balance because we export less than we import. And it’s a very good indicator very important indicator to share it with you that if you want to count the expenses of the government since 2005 till 2019. The government spent around 147% as expenses. However, if you want to see the gross at October 2020 -- before October 2020, Lebanon registered a growth only of 0.4%.
What does it mean? On reflection, it means that the government was spending money non-productively; how could we spend all this money and have only a growth rate of 0.4%? So let’s make a comparison between the expenses of Lebanon and of the other Gulf countries.
In Lebanon, we expend 32% of our GDP. In UAE, they expend 30% of their GDP. In Egypt, which is the biggest Arab country, they expend around 30% of their GDP. In Qatar, they expend around 29% of their GDP. It means Lebanon expends more than other countries.
It means the International Monetary Fund have had a negative perception of revenues and expenses since 2001. We spend 30-35% of our expenses on salaries and retirements; 35% to cover or pay interest and 11% to finance electricity -- and we don’t have electricity.
Only 9% is spent on investment that is a very good indicator that we don’t spend on productive issues.

All other issues are not productive, even electricity. We spent around $35 billion and more, and we don’t have electricity now.
So what are the problems of these bad economic indicators? There are three main problems.
First one is corruption. Second is corruption. And the third is corruption. We are a very corrupt country.
In addition, we have, because of the unethical behaviour, made lots of promises without implementation. Because of bad management, we don’t have corporate governance; because of tax evasion, because of smuggling across borders, because of financing money.
Without knowing where we are standing, we are spending lots of money on electricity; we have rivers and we don’t have electricity. We have a huge number of people working in the public sector but we even don’t know their numbers; some of them don’t go to work and do not have a job description but the government pays their salaries and benefits etc.
So, what are the consequences?
The consequences as classified by international organisations is that we are classified at the bottom of tables. For example, for GDP per capita, we are classified at the bottom of the list with only Venezuela below us. We are below Syria, Sudan and Zimbabwe.
We are classified below Zimbabwe in corporate governance, below Guatemala; the World Bank has said that our financial and economic crisis is the third worst such crisis in the last 150 years.
Rating agencies Moody’s, Standard and Poor’s and Fitch rated us as a default country with a negative perspective or negative outlook and so the consequences were reflected in our currency devaluation. So we don’t have dollars; we have a scarcity of dollars.
That’s why we created a black market. Our black market today is 23,000; on any day $1 is equal to 23,000 Lira so we had a devaluation which means we lost around 90% of our purchasing power because most people in Lebanon earn their salaries in Lira. ‘
Because we defaulted on our loan, we are not paying our debtors so that there is zero trust in Lebanon; nobody will lend to Lebanon.
And our macro-economic indicators are very negative; we will have a recession of 36%, based on these numbers. Of course, now the number is going down, we can’t call this a recession anymore -- it’s an economic depression; the inflation rate is greater than 150%.
With inflation and hyperinflation, an unemployment rate greater than 50% and a poverty rate greater than 70%, according to World Bank statistics, this situation is called an economic stagflation; the most severe economic condition that a country can go through.
Why? Because whenever you have a recession, it means that you don’t have growth, or it’s declining.
Usually in a recession, the effect on the economy will be reflected by decreasing prices; because people are not working, they don’t have money so they don’t buy products so demand for the products will decrease.
This is the normal reaction when we have a recession. However, in Lebanon, we have a recession and a depression. At the same time, we have an increase in the prices of goods and services.
Why? Not because of high demand but because of the currency devaluation. We are importing this product from abroad and paying in dollars.
So we have two contradictory issues coming together so that’s why it’s a little hard to solve. It could be solved but it needs time. In addition to that, we have a higher rate of unemployment and a recession. You all remember those 13 months without a government; it was like a vacuum.
So how to solve this stagflation?
For the financial policy, it means everything is related to how the government gets into debt and how to finance their operation, other than bonds, whether in Lebanese lira (treasury bonds) or dollars (Eurobonds).
How is this debt distributed? 65% of this debt is in dollars, and 35%. Sorry 65% in Lebanese Lira and 35% is in dollars
65% of this debt in Lira and 35% in dollars; With 65% in Lira, that is very good; it means we have about $63.3 billion in lira, held internally and by the Central Bank, commercial banks and others.
So non-residents are not buying our Lebanese treasury bonds ... okay.
So the good news s that if we get fresh dollars at the rate of 20,000 Lira for $1, we will have  $4.7 billion to cover these debts. Don’t forget that the Central Bank has the right to print money and to pay off this debt.
It will feed inflation but in the end, with everything related to the Lebanese pound, we don’t have a problem.
What is the problem? The problem is dollars because the resources of the government are not in dollars.
So we have around $33.7 billion. And here is the problem; 44% of this debt is held externally like, for example, if you had bought those Eurobonds,  and 66% internally.  It’s around $15 billion that is held externally, by non residents, and other internal holders.
The main problem is that we don’t print dollars; it is not our currency. And how government used to pay their Eurobond once it reaches maturity is that they issue new forms; they get new dollars from the fresh series of bonds, they get new dollars from the fresh series, and pay the previous one.
This is a Ponzi scheme. When you pay a debt with another debt, this is what is called a Ponzi scheme. So, it’s not about productivity issues.
So what’s the problem?
The problem is that the dollar debt, and commercial banks, have a high exposure to sovereign risk. If 32% of this debt is held directly by commercial banks and 50% of the debt is held directly by the bank, this means 82% of this debt is held by the Central Bank also with the commercial bank. So at 82% it’s a really great exposure to sovereign debt. That’s what we call the concentration risk.
The consequence is that government couldn’t issue bonds in 2019 which is when the problem started. When the government had to pay its matured bonds in April, May and November 2019, it couldn’t issue new bonds to get fresh dollars because there’s no trust in Lebanon; it couldn’t issue new bonds.

So, what they do? They asked the Central Bank to pay the debt for bondholders. It was about $2.65 billion in principal and $2.11m as coupon.  That was paid by the Central Bank to debt holders. In March 2020, another series of Eurobonds reached maturity. So another decision was referred to cabinet and government took another decision.
So they said ‘no, we will not use the excess reserve or foreign reserve’. ‘What we have to do is cease the payments’, they said to bond holders. ‘Look, we don’t have to pay anything, we don’t have the money, so we don’t have to pay you.”
They didn’t negotiate. They didn’t say they wanted to postpone or decrease payment so they didn’t mention anything. They didn’t negotiate with any party. They decided to use the extra cash in the foreign reserves with the Central Bank subsidising food and medicine at a rate of 1500 Lira. This policy ends up using all foreign reserves for subsidies and most of the people  didn’t benefit from it. I think other countries benefited from it, like Syria. On top of that, we didn’t pay our debt.
As for investors, local or international: they ask ‘who will lend to the government if the government said that they will not pay back the money?’. Nobody will trust them and it was reflected in the market price of the Eurobond.
So we have different series of Eurobonds. The last one ends in 2027 and the price now is  around $12. So if someone trusts that the future of Lebanon is a good reason to buy bonds in the secondary market, they can buy it at a very low price. If the future of Lebanon brightens, we’ll get it at $100.  Hope that we will have this bright future sooner.
For the monetary policy, that is determined by the Central Bank. Before going to the monetary policy. Let me explain to you how the bank works in a very quick way.
The bank is a financial middleman between people who have excessive cash and those who have a shortage of cash. If I want to use my money, instead of giving it directly to the borrower and take all the risk which I don’t know how to manage, I give it to the bank.
The bank will give me a credit interest rate on my money as it uses this money in a very safe way to give it to the borrower who will pay it back to the bank. The bank will generate its profit from the difference between the debit interest and credit interest.
The bank, as a financial intermediary, is a for-profit, registered company. They are in it for profit -- and they are not an NGO. If you don’t trust the bank to return your money, you will not give your money to the bank, who will not be able to lend the money. So this relationship between the depositor’s bank and the borrower is based on trust; if I didn’t give my money to the bank, it will be paralysed and you cannot work.
How do banks work? The main is that depositors usually open small bank accounts. For example, in Lebanon 70% of accounts are less than $50,000.When I say short term, that is is less than one year; long term means more than one year.
Usually, when we open our deposit account, we ask the bank to put in one, three or six months or a year (the maximum). Most of them are one or two three months.
Usually we’re looking for low risk because we want our money back; however, those who borrow money, and most of you are businessmen, from banks usually ask for a larger amount. Usually, you ask for a long period -- three to five years -- and you run a risk of not returning the money; maybe your project is not feasible or not profitable. There is always the risk of not paying the bank back.
 A bank has depositors and borrowers with two different objectives and incompatible needs. So what do they do? The main function of the bank is to provide a transformation between deposit and loan; maturity transformation and risk management test transformation.
Banks are commercial companies looking for profits. Banks are trusted companies. If we don’t have trust, banks would be paralysed. We don’t have trust so the banks are not working now.
I want to mention that banks are not insurance companies so when you open an account in a bank, you will not get an insurance policy. That’s why we have what we call deposit insurance companies.
So, how do things work? What are the resources of the banks? The big bulk of a bank’s resources are depositors; sometimes the bank needs liquidity or they have some shortages in their liquidity so they get a loan from the Central Bank or other local or international bank.,
Banks use the money to buy fixed assets, provide loans to the private sector and government. They provide loans to governments through bonds and they can invest in stock or capital markets by buying stocks or bonds abroad, and kept as a required reserve, as liquidity, to respond to the customer demands.
If they want to invest their money in the central bank or government, through bonds, they all have the right to do it without restriction. However, if banks decide to invest abroad, in the stock market, or buying government bonds, or other government, there are restrictions.
However, there is a limitation on the amount they can invest; up to 10% of your own equity, for example, and you cannot invest in any entities if the risk is below B plus; it should be B plus and above it which means it should be a low-risk entity.
When you want to invest with low risk, the return is low. So that’s why banks sat in their comfort zone and said, ‘why invest abroad with low risk and low return and so much restrictions? Why not invest in the government or the central bank with a high return?’
This is why, in the 2008 global financial credit crisis, Europe, Asia, Australia and America were hit but Lebanon wasn’t. At that time, we said, ‘oh, the banking sector is extremely good in Lebanon’.
It’s not because we’re good but because we didn’t invest abroad; banks didn’t have any investment abroad.
Most of the deposits are short term; it means that the deposit is less than one year. We gave our deposits to banks who use dollars in order to finance the balance of payments.
The commercial banks in Lebanon were all hit by risks with their money; liquidity risk, credit risk or solvency risk.
As I mentioned earlier, we were rated as a default country with a negative outlook.
Lebanon has the banking sector; we have a code of commerce, legal obligations and contracts, secrecy laws, and anti-laundering and terrorism funding. We also have supervisory authorities but the problem is that most of them are headed by one person and it’s concentrated at the supervisory authority level.
The most important thing that you have to know when it comes to money creation is that the main goal is to increase or decrease money supply in the market; they have four main tools to supply money, further increasing it or decreasing it with the interest rate.
All four tools are paralysed now. They cannot do anything so nobody will give them the money. If they decrease the interest rate they cannot lend money because they don’t have the liquidity. What also you have to remember is that decisions taken in the Central Bank are not made by one person; it’s about the governor, four assistant governors, Minister of Finance and Minister of Economy. The monetary policy is not determined by one person but by collaboration.
2022 is going to be a very challenging year because the certificate of deposit issued by the Central Bank, and bought by commercial banks, will start to reach maturity in 2022.
We are losing trust. We need a capital injection.
Our banks are now called zombie banks; it means we are going to a cash economy. Nobody’s opening an account, and there’s no loans.
The debt executor is paralysed; you cannot open an account; you cannot take a credit; all productive sectors are paralysed.
When banks are not working, they’re not providing loans. There is no economy because all sectors rely on borrowed money for their projects, especially in Lebanon.
That’s why most people rely on credit lines given by the banks. And now it’s not there. That’s why we have this recession in our growth. Our economic indicators are very low, it’s below $35 billion. Our unemployment is greater than 50%. And you have a hyper-inflation.
So, what’s the solution?
So the banks could start their lending activities. By starting their lending activities, I think the sectors will have the necessary money in order to implement that project and to expand and to recruit people at a minimum. Of course, it takes time but it’s true to start as soon as possible and to stop the sliding day after day.
We need the dollar. We need to restore trust, to be able to go to the IMF to get the money and start repaying the extended loans and start reforms.
We need a capital injection as fast as possible. So whatever inflow of dollars is coming to Lebanon, especially through the pipelines of the banking sector, we at least we will have the dollars and then we have to start stabilizing the currency.
So, the first step is stabilizing the currency. The banks could also start lending. By lending again. I think the sectors will have the necessary money to recruit people at a minimum. Of course, it takes money but we need to start as soon as possible and to stop the sliding.
The second thing also to do is to talk with debt holders; the people who money we took and we tell them ‘No, we will not give you back the money’. So they have to talk with them and tell them how they will return it. We have to start this negotiation. In Lebanon, we have a problem with cash; we have an economy based on cash deficiency and not on property. The Lebanese government, central bank; they own huge properties in Lebanon.
They have to knock the door of the IMF and take their money; they have to restructure.
To stop smuggling because tax evasion decreases the revenue of government.
We have to go into digitization, it’s an opportunity to stop the paperwork. We need to boost  a start-up ecosystem and empower youth because they are very innovative, they are very creative, just help them build start-ups to solve the social problems in Lebanon.
So what’s needed to stop the terror of the county sliding into a full blown crisis is for people to implement the steps towards pulling the country out of its economic crisis. We need to produce and implement aggressive economic reforms to unlock international donor aid. And to benefit, of course, from the IMF reform plan.
In my opinion, what we need is an exceptional leader to allow the country to flourish.
You are going through hard times but these times will create a stronger generation that will help us to solve our problems. So thank you so much.
I invite you to reflect on this, to believe in the future of Lebanon and in our strong generation, especially with the election that we’ll have in a few months.


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