A fuel truck drives out of a distribution company in Beirut, on February 24, 2021. (Photo by JOSEPH EID/AFP via Getty Images)
Analysis

The Weight of Lebanon’s Unsustainable Subsidies Program

Lebanons economy continues to spiral, 18 months after a currency crisis sparked a popular uprising and the unraveling of its fragile, service-based economy. 

The countrys central bank, Banque du Liban, subsidizes fuel, wheat, medicine, and —as of last summer—basic food items. These subsidized products remain at the countrys pegged currency rate of 1,507 Lebanese lira to the U.S. dollar. 

However, this costly blanket subsidy program is reportedly on its last legs, at a time when unemployment and poverty have skyrocketed and the value of the currency has declined by about 85 percent. The cash-strapped Lebanese government and Central Bank are running out of resources to keep the subsidies, but fully lifting them would compound the countrys already alarming hyperinflation. 

Lebanon imports 80 percent of its products, and much of the country relies on subsidized goods to survive. According to Lebanons caretaker Finance Minister Ghazi Wazni, the subsidies program costs $500 million every month—a whopping $6 billion annually. Wazni stated that Lebanon is no longer able to continue with the same pace of subsidies and has no choice but to roll back on some subsidized food items and hike gasoline prices to reduce fuel subsidies by 5 percent.

The Central Bank originally maintained a mandatory minimum foreign reserve threshold of $17.5 billion; with Lebanon cash-strapped, its only a matter of time before the Central Bank reaches that threshold as it continues its subsidies program.

Though inevitable, it is not entirely clear how long Lebanon has before it has to lift its subsidies. In late August 2020, weeks after the Beirut Port explosion tore through the heart of the Lebanese capital, it appeared that the Central Bank only had enough reserves to continue subsidizing for three months. One week later, Central Bank Governor Riad Salameh set those reserves at $19.5 billion. 

Three months later in November, however, the subsidies program did not come to a screeching halt. In fact, it appeared that officials and Salemeh had met to discuss potentially lowering the mandatory reserve ratio by three to five percent, which would allow the authorities to spend more of the country’s reserves on the subsidies program.  In December 2020, some officials said the country had two months worth of reserves left, whereas caretaker Prime Minister Hasan Diab said the country had up to half a year, should they ration subsidized goods.

It appears that the mandatory reserve ratio was indeed lowered. In mid-March, Wazni stated that the Central Bank still has roughly $16 billion in its reserves with only $1 to $1.5 billion allocated for subsidies.

The situation is bleak. Lebanon is already rationing fuel, and in late March it shut down one of its key power plants in the southern town of Zahrani for a week . Fuel rationing has led to longer power outages across the country, with many pharmacy and bakery owners fearing they soon will have to close up shop. Customers in grocery stores are fighting over whats left of subsidized food and basic staples, and stocking up on whatever they could find, as they fear additional price hikes.

The subsidies program, both in theory and practice, has proven to be unsuccessful. 

Subsidies for the rich, paid for by the poor

Lebanons subsidies program is not just expensive, but also regressive; the richest benefit from blanket subsidies far more than those economically marginalized. This is because the wealthiest have the greatest and most consistent access to subsidized goods with their purchasing power. Even households that have moderate purchasing power are limited as a result of the devaluation of the Lebanese lira. Given Lebanons overreliance on private for-profit social services and the lack of viable social safety nets or public social services, their economic burden is now even greater. 

An analysis by UNICEF and the International Labour Organization (ILO) revealed that only 20 percent of subsidies benefit the poorer half of Lebanons population.

This is especially concerning considering Lebanons widespread economic inequality. Based on tax records from 2005-2014, 25 percent of the countrys national income goes to the richest one percent, a share greater than in countries like the United States and France. The wealthiest 0.1 percent earns as much as the bottom 50 percent. Yet, much has changed since 2014, with the currency crisis that has continued to spiral since September 2019, the Beirut Port explosion, and economic impact of the COVID-19 pandemic. 

In August 2020, the United Nations Economic and Social Commission for Western Asia (UN ESCWA) reported that Lebanons poverty rate almost doubled, with over half the population living below the poverty line. The deterioration in the quality of life for the poor and the erosion of the middle class indicates that the purchasing power has become even more limited for most of the population. Almost half the population is now concerned about access to food, and almost a quarter of Lebanese are food insecure, while a third of Palestinian refugees and half of Syrian refugees struggle to afford food.

In addition to the ineffectiveness of the subsidies program, the worsening economic crisis along with fears of lifting subsidies have led to panic buying, hoarding, and even smuggling. 

Most recently, access to medicine has been extremely limited, with more than half of brand drugs unavailable. The security forces have routinely foiled attempts to smuggle subsidized medicine from Lebanon to countries like Egypt and Iraq. Meanwhile, in addition to panic buying, suppliers have been stockpiling medicine, and pharmacies have been unable to afford them. 

Between a rock and a hard place

Lebanon’s government has only been functioning at a limited caretaker capacity since Prime Minister Hasan Diab’s resignation on August 10, 2020; and the international community is withholding developmental aid and loans until authorities agree on an economic rescue plan and successfully negotiate an International Monetary Fund bailout. The caretaker government can only keep things functioning as they are until a new government is formed to replace them.

The shakiness of the subsidies program is already apparent. Last June, the price of bread increased by 33 percent, after bakeries threatened to stop distributing because of financial losses. In February, that price was further hiked by 20 percent. 

However, lifting the expensive and ineffective subsidies program will be economically detrimental. Food inflation alone in Lebanon is among the highest worldwide. In addition, Lebanons public social services are underfunded or virtually nonexistent and over 80 percent of the countrys hospitals is private. Its main social security program has implemented budget cuts in recent years and owed unpaid government dues.

Lebanon is leaning towards gradually moving from blanket to targeted subsidies, using a three-year $246 million World Bank loan to help soften the impact through its Emergency Social Safety Net Project (ESSN). This program primarily provides vulnerable families with cash assistance, but in other components aims to help access to education, improve capacity at the countrys poorly managed Social Affairs Ministry, and support the creation and strengthening of social safety net delivery systems.” Parliament voted to approve the loan in March.

Though this program isnt being promoted as a long-term policy alternative, it faces challenges to execute even as a limited mitigation strategy. The ESSN will rely on the Social Affairs Ministrys National Poverty Targeting Program (NPTP), which has been critiqued as financially wasteful and ineffective. 

Allocating assistance to vulnerable Lebanese has routinely been a challenge for the Lebanese state. It took months for the government to provide one-time cash assistance to vulnerable families last spring to mitigate the economic impact of the countrys COVID-19 lockdown, after the Social Affairs Ministry said the lists contained discrepancies. The lists were provided by other international NGOs, that fill in a huge gap left by the Lebanese state, as well as the NPTP. Back then, one year ago, about 75 percent of the population required aid, according to the social affairs minister.

In addition, the countrys currency crisis and the Central Banks policy hinder the efficacy of the program. Over 160,000 families—about 800,000 people—will benefit from a cash payment of 800,000 Lebanese lira per month for a year. The World Bank and Central Bank agreed that the currency exchange rate would be 6,240 Lebanese lira to the U.S. dollar. However, the black market rate, which dominates the Lebanese market, currently values the dollar at double that rate. This move has been criticized as an effort for the cash-strapped central bank to refinance itself through a loan aimed to help the countrys poorest.

Finally, and most significantly, the subsidies program is one of many examples of wasteful and unjust policy that ultimately causes more harm for the social good. Following the end of Lebanons civil war in 1990, the authorities wasted decades relying on non-governmental organizations and the private sector to magically fill a gap, when they instead should have built the framework for strong social welfare programs and a strong public healthcare system.

 The economic recovery plan that Lebanon will eventually put into effect will need to have the restructuring and expansion of its brittle social security and social services as a priority. For now, there doesnt appear to be a quick solution to a problem that stretches back decades. Even if the subsidies are gradually lifted with a targeted mitigation program, there will be a negative impact for a large swath of the population that has already experienced a stark decline in its purchasing power and overall living conditions.