LCP Response to the Governmental Economic Reform Plan

  LCP Political Bureau
Introduction: The government published its economic reform plan describing it as a “rescue plan” claiming that it is the first time in Lebanon’s recent history that a comprehensive plan is put on the table. The plan quantifies the financial losses in the country’s treasury which was produced by tri-sided entities composed of the sectarian parties who enjoy a strong alliance with the financial oligarchy, commercial banks, and the Central Bank.

The Lebanese Communist Party considers the current government- despite the professional and personal qualifications of the new ministers in it- as a continuation of the past governments in its approaches toward the problems found in the country. This government was not handed special prerogatives that would allow it to legislate as was the demand of October 17 protestors. The entire political system which the government is considered as its product is no longer able to sustain the needs of Lebanese people. Therefore, LCP sees that the only way to hold politicians accountable is through escalating the popular uprising. To that end, the party calls all groups who actively took part in October 17 uprising to join their forces to continue the struggle aiming to ensure a civic and democratic state. Such a desired state would base its principles and foundations on just and equal economic development, abolishing sectarianism, and ensuring social justice.

The party considers that any solutions undertaken to address the socio-economic problems in the country should originate from a political rationale. Economic policies are changed only when political options are radically altered or changed.

Several measures stated in the plan will not be transformed into concrete actions either because of the decision-making process being centered in the legislative authority, or the nature of the country’s political forces which might hinder the implementation of these actions. However, LCP considers that some forces are opposing the plan just because they are not involved in this government, and they tend to have a long- standing alliance with the country’s bourgeoisie who is mainly composed of commercial banks. A harsh critic of this plan by these forces serve the interest of the US administration whose support for the country’s political establishment and their strong ties with the banks is not a secret- at least since 1992. Even if the government succeeded in some of plan’s suggested actions (such as the ability to stand against the powerful lobbying effect of the banks and BDL, recovery of stolen public assets, ensuring the independence of the judiciary, fighting corruption, etc), then this would be as one of the results of the popular uprising and the effects it had on the political scheme.
On the True Reasons of the National Economic Crisis

LCP considers the governmental plan to be firmly based on accounting basis, therefore, lacking any economic vision. So, the government seems to address the problem as if resulting from monetary policies not from economic ones. This is clearly evident when the government announces its willingness to approach the International Monetary Fund (IMF)- the entity responsible to ensure access to international financial assistance and creditors in foreign currency whom the state ceased to pay their debts along with all their heavy interest rates since the 5th of March. The economic plan should have prioritized addressing the real reasons underlying the economic recession which started years before the current financial crisis and COVID- 19 outbreak. The recession was inevitable when tracking several indicators during the past years. Some of these indicators are low rates of economic growth, worsening financial debts, heavy imbalance in the country’s external accounts and balance of payments. All of these indicators came hand in hand with increased levels of poverty, unemployment, and a continuous reduction in the salaries. Instead of the government promoting austerity measures as it is the case in its plan, the government should have provided funds to private sector entities whose profits are diminished as a result of the Coronavirus outbreak. This mechanism, if applied, would eventually stabilize the purchasing power of the wages, along with the values of the minimum wage and the retirement pensions. This is extremely important at a time when estimates show that the inflation rate could go up to 53 % in the upcoming year. The mechanisms of these measures were detailed in the “Rescue Plan for Economic Recovery in the aftermath of COVID 19” which was announced by our party last April. According to the plan, there needs to be serious attempts to decrease the ratio of debt to GDP from 175 % as it is now to 103 % by the end of 2021. LCP welcomes such a measure because reducing the interest rate would lead to a decrease in the public debt of the country. In fact, public debt financing contributes to 10 % of Lebanon’s GDP. With that in mind, this could help the government to increase its expenditures on vital sectors and improve its efficiency. However, the plan did not mention how will it use the money restored from decreasing the debt to GDP ratio and in what context they will be used. Our party sees that this could be an opportunity for the government to fight unemployment and provide incentives that can eventually lead to fostering economic growth. In case a clear strategy on how to re-structure the debt is developed, positive effects will be foreseen on the national economy instead of resorting to more and more austerity measures.

On the Possibility of Requesting Assistance from IMF

The government plan considered the IMF assistance to be the only resort to the crisis, and this is no by no means acceptable to us. Requesting IMF’s assistance will undermine Lebanon’s national sovereignty because it will intervene in its economic and monetary policies. With all similar experiences in countries that witnessed IMF intervention programs, we can say that its conditions would not be suitable for Lebanon, but it will strengthen and reinforce foreign interventions. LCP consider that approaching IMF does not meet the demands of the Lebanese protestors who filled the streets since October 17. Thus, the government’s persistence to seek IMF assistance would lead to the same economic problems that initially resulted from a continuous borrowing strategy. Historically speaking, the IMF role was to help countries whose liquidity is threatened especially in light of deficit in the Balance of Payment (BOP) as the case in Lebanon. This is by theory, but, in practice this had led to drastic and negative consequences on the national economies of these countries. Needless to say, that IMF is one of the financial instruments used by the US administrations to intervene in the political affairs of world countries, especially third war countries. Latest proof of this claim was the US refusal to proceed with a special fund for addressing global economic problems resulting from COVID-19. LCP warns that IMF intervention in Lebanon’s affairs comes in conjunction with political pressures that the US administration is exerting on policymakers. These pressures can be summarized as serving the interests of both the USA and the Israeli enemy in 1- the delineation of the eastern borders with Syria, 2- the demarcation of maritime border with Israel, and 3- intervening in affairs related to the country’s monetary policies and controlling the public utilities.

In order to avoid a total collapse of the economy, the Lebanese government requests a total of 28 billion dollars. In its plan, the government will request a 10 billion dollar IMF assistance, and another 11 billion dollars from loans granted under CEDRE umbrella. Even if Lebanon need to inject foreign currency in its market, then this should not be an excuse for ignoring what the party had previously put forward. LCP called to use money recovered from the interest differences which were paid to the public debt service cost and these are along estimated to be $ 27 billion USD (For more details on this issue, please refer to the press conference held by the party’s Security General on April 15). In brief, we refuse to continue with the borrowing strategies that were adopted throughout the past 30 years without holding accountable those responsible of the huge public debt. The “liberalization “of capital restrictions, as of 2021 as mentioned in the governmental plan, will lead to capital being transferred abroad, as Argentina’s case showed after joining an IMF programs in 2018.

LCP considers the bargaining power of this government to be weak in light of the structural problems that the governance system suffers from. The measures which might be imposed by IMF were previously announced by the past governments, especially in its regard to increasing taxes on fuel, removing subsidies on essential commodities, privatizing vital sectors of the economy, reducing the public-sector personnel, and reducing the retirement funds allocated to public servants. Our biggest fears, in this case, lie in the fact that the current government will proceed with the above-mentioned points and neglect the very few positive elements found in the plan, such as restructuring the debt, restructuring the banking sector, increasing taxation on profits, and some progressive taxes mentioned in the plan.

History shows that countries had a very bad experience with IMF, starting in the 1980’s and not ending with the current crisis in many European countries. It is to note that Latin American countries suffered a lot from IMF programs and their strict conditions which were mostly based on putting more taxes on consumptions, adopting austerity measures, and removing governmental subsidies. Furthermore, IMF was and still used as a tool to destruct the values and notions of the “welfare state” and socialism-based systems. Few years before the Arab Uprising started, Egypt and Tunisia both started to suffer from negative economic consequences resulting from IMF intervention. Based on these facts, a lot of dangers and threats will result from any partnership with the IMF, especially on the lives of the poor and the middle class. There are political groups who are not represented in this government, yet who adopt a neo-liberal rhetoric can score points over the government because their interests require that. However, the masses who support leaders of the two political camps (March 8 and March 14) will suffer equally from the economic repercussions.

Nevertheless, the experience of Portugal with IMF was quite different than other countries and we take the opportunity of this statement to highlight on this experience. The Troika (composed of IMF, the European Commission, and the Central European Bank) imposed austerity measures on Portugal’s economy as of 2011. Even with the country being provided with a $ 78 Billion Dollar, as loans from the IMF, but this did not prevent Portugal from entering into the biggest economic recession. And, this fact refutes the popular saying of IMF being a magical formula to the problems of the economy, as many contend. However, and only after the Leftist parties agreed to face the austerity measures through a national programme in 2015 that the country begin to witness economic growth. Following that, Portugal was able to increase the minimum wage, stopped plans to decrease retirement funds, and cancelled all privatization plans.

On the Deposits Recovery Fund

The government calculated the financial losses of the banking sector to be 145 trillion dollars. This number was calculated based on the aggregation of three dimensions which are losses incurred by the Central Bank, individual and corporate loans default, and writing off public debt. Since these losses will have a direct impact on the deposits currently available in the banks, the plan proposes a “Deposits Recovery Fund” whereby the private sector deposits targeted for bail-in will be transferred to this fund. According to the plan, one of the revenue streams of such a fund would be generated from state assets. This opens the door for privatizing public institutions for a long period of time, and consequently, a number of wealthy people will be making huge profits in return for the administration and management of public utilities. This fund can be instead used to ensure a much bigger governmental expenditure than what the reality is. Moreover, our party sees this measure as a “camouflage” that is used in this context to exclude any haircut measure. LCP consider that enforcing haircut on the large depositors is the ultimate solution instead of buying the state institutions.

Moreover, the plan uses the term “depositors “throughout all sections without really differentiating between the different categories of bank depositors. In fact, 1 % of depositors own more than 50 % of the bank deposits, and this category had heavily benefited from huge interest rates accrued from public borrowing. In this context, our party highlights the need to have an exceptional progressive tax, specifically targeting deposits containing more than half a million dollars. If this tax is imposed, social justice among different society members will be achieved. Poor and marginalized people will not need to pay the cost of the economic crisis which they did not create from the first place.

On the Need to Reforming the State instead of the Current Destruction Mechanisms

LCP aspires to build a secular and democratic state and this is what the party continuously calls for. The current factions of the political system proved their inability to find suitable and radical solutions for the sake of our country. No faith and no confidence can people put in this political class. Ever since the uprising started, our party called for a transitional government that would undertake two major responsibilities: develop an economic reform plan that ensures social justice and equality, in addition to putting the political reform elements into the agenda of such a government. LCP considers legislating a new electoral law would be the priority of this agenda and would be an entry point to the desired change. The new electoral law should not be based on sectarian criteria. At different times, the Lebanese people showed national and humanitarian solidarity especially when they helped each other’s during the fires that hit different Lebanese territories, or when they stood up against the political system in the October uprising. During these two occasions, Lebanese people proved to themselves and to the others that they are one nation demanding a free, democratic, and secular state.

LCP warns from privatizing public-sector institutions whether on the short term or on the long term. Public institutions would be more efficient if administered by the public sector since their rationale would be based on the collective good principles, while the private sector need to generate profits over anything else. For instance, the UK’s Labor Party proposed the nationalization of the broadband, since this technique will benefit all segments of the British society. Based on the above facts, there is no need for privatization knowing that Chile experienced negative results as per the privatization process it adopted.

The plan still treats the electricity sector by using old approaches focusing only on numbers and figures, instead of having a vision for such a vital sector. The deficit in this sector should not be the reason of arguing the role of the public sector because experience shows that if the public sector is strengthened, then sectors of the economy will be managed successfully. Proving this would be the profits earned by the telecom sector. In brief, the state should fully allocate all its resources in order to make public investment a priority. It is only through public investments that the state can put forward stable and long-term strategies’; on top of which should be the provision of free and fair health coverage to all citizens.

On the Taxation Policies

Even though the plan contained some positive elements in the area of tax reformation, however, these measures are not enough. The Lebanese economy need to have a different taxation policy whose tax burden should be applied in an equal manner. The current taxation system is not fair because it relies on indirect taxations, and does not include taxes on the assets and profits made by the capitalists and their companies. If tax revenues are collected on a fair basis, this would allow the state to control the local markets instead of monopolizing these markets to some crony capitalists who have the upper hand of setting the pricing strategy of almost all goods and services. LCP warns of the possibility of privatizing public utilities either directly or through the so-called PPP” Public- Private Partnership.” To that end and to ensure a fair taxation system, LCP proposes the following taxes:

• Increase the tax on financial services companies to 30 %.
• Introduce progressive taxation on bank deposits, ranging between 7 % and 20%.
• Introduce a 2 % tax on individuals whose net wealth is above one million dollars.
• Modify the transfer tax to have a flat rate of 45 %, with the margin of exemption being one million dollars. Currently, the ratio of this tax is a standard unit across all households which discriminate against middle and lower- middle classes, especially those residing in rural areas.
• Introduce taxes on the profits generated from real estate services.
• Introduce taxes on citizens working abroad.
• Subject all territories and institutions affiliated to religious authorities to taxation. Currently, these entities are exempted from paying any kind of tax.
• Cancel tax exemptions for Holding companies, and to “ Solidere “ specifically.
• Cancel tax exemptions and rental exemptions granted to state property users and the cessation of tax evasions channels through holding companies and other mechanisms.

Such a tax reform policy will generate tens of billions of dollars as revenues. This revenue stream will allow the state to invest in modernizing infrastructure networks which are in large malfunctioned. Moreover, these amounts of moneys will not have a negative impact on the economy, as it is carried out at the expense of the high levels of incomes and wealth accumulated or spent on imported luxury consumption, and therefore, withholding and then using it in public investment will have a multiplier effect in activating the economy, creating jobs and raising productivity, and will certainly have a positive effect on private investment.

On the Need to Transform the Economy to a Productive-Oriented one

The Lebanese economy has become an economically paralyzed economy. To solve this dilemma, neither the "improving the business environment" nor the free market forces can be relied on because these same forces are the ones that reproduce the same economy year after year without any change in its structure. What is required today if a "tool" enters from outside the markets to transfer part of the surplus in the economy that goes today to the financial, services, and commercial sectors and to amass wealth among the few, towards rebuilding the infrastructure of electricity, roads, water and communications in addition to preserving the natural environment and to support productive sectors and supporting companies that employ highly skilled job seekers and university graduates.

This must be done through a modern industrial policy funded through “Exploiting" rentier sectors by using the tax system and setting taxes with high rates on banks, interest and real estate rents, and on the income of the Lebanese abroad, as well as introducing new taxes on wealth as well as on inheriting great wealth. In this context, the tax on wealth will not only infuse the current economic system with “elements usually found in socialist system”, but will help boost the innovation of such a model if carried out. For example, and in the advanced capitalist countries, concentration of wealth has curbed productivity growth and innovation. The more equality the society will achieve, the more innovation and productivity will the economy attain. Therefore, we are faced with the urgent need for new policies that reinforce the trend towards building and mobilizing the economic surplus and directing it towards the construction of a new economic structure. In parallel to this gradual transformation, policymakers should lay down the foundation of more structural changes in which modifying the economic structure and adjusting it to serve the needs of the people.

These transformations can be the only mechanism to build and sustain dynamic, productive, and modern economic model- three elements which are currently absent from the economic structures of Lebanon.

Concluding Note

The government plan almost misses any approach to the fundamentals of the overall social issue, except for the anti-poverty program (carried out by the World Bank) and some general and vague proposals that are repeated in all ministerial statements without any actual commitment to implement them. This absence implies significant and unprecedented risks, at a time when the Lebanese have not only lost their savings and bank deposits, but have also lost or are about to lose their source of income from work due to the repercussions of the economic recession meltdown that the Corona crisis has made it worse. More specific, the government plan lacks any specific, concrete and viable mechanisms related to how to protect work permanency, wage system, minimum wages, retirement pensions, end-of-service benefits, social security benefits, a universal health coverage plan, solutions for an expected increasing unemployment levels, as well as curbing expected migrations, at a time when the Lira’s exchange rate against the US dollar is falling day after day.

The current crisis is composed of multiple layers but its deep roots lie in two interconnected layers: the failure of the “Lebanese” capitalism, along with the failure of the sectarian political system. To end this double crisis, we need radical political and economic change that leads to dismantling the old economic model and setting it aside and building a dynamic, modern, and productive economy that pulls Lebanon out of its structural crises. In conclusion, the linkage between the rentier capital and the state should be eliminated. This should be a pre-requisite for establishing a progressive democratic state that will eventually put the country on the path of development, democracy, and modernization.


LCP Political Bureau

May 14, 2020