More difficult times to come for Lebanon when food, fuel subsidies lifted

24 November 2020 14:58:33

Lebanon is expected to lift its oil, flour, and medicine subsidies soon as reserves at the central bank diminish, and the prices of goods, already inflated, will rise further as a result. Meanwhile, the stalemate in cabinet formation only aggravates the situation. And if the new cabinet, when established, does not gain confidence from the international community and financial donors, particularly the International Monetary Fund (IMF), the situation will continue to rapidly deteriorate.

Each day, an estimated amount of $12.2 million is spent by the Central Bank to subsidize flour, fuel and medicine which equals almost $4.5 million annually. Experts say that only $2.4 million of these amounts actually help the needy people whereas the rest of the amount which reaches almost $9.8 million goes to the benefit of traders, mediators, and those smuggling goods across the border to Syria.

It is well-known that goods, including fuel and flour, make their way from Lebanon to Syria, and yet, the ruling elite has done little to curb the activity that diminishes Lebanon’s central bank’s reserves.

A recent study by Lebanese experts stipulated that only 20 percent of the subsidized products reach the needy Lebanese citizens, whereas almost 30 percent benefit people in Syria from smuggling those products from Lebanon, whereas another 10 percent are exploited by Lebanese merchants and traders, and the remaining 40 percent benefit the Lebanese citizens who are well to do and are not in need of this support.

Nearly all goods in Lebanon have been subject to sharp inflation. Only fuel prices have remained steady, but they are expected to rise dramatically when the subsidy is lifted. When lifted, the country's small industrial sector will also be hard hit.

The study also showed that every day the state delays reviewing the subsidy policy, $9.8 million is lost.

While cabinet formation is the first step, Lebanon desperately needs a plan to address its dwindling reserves, while gradually boosting confidence in its financial systems, paving the way for cash flow to increase. Cash flow is needed to stop the quick devaluation of the Lebanese pound and give the local currency's purchasing power a chance to recover.

Experts have proposed alternative suggestions, such as extending direct support for the impoverished families. This program is not expected to cost more than $1.5 million annually, and these funds could be disbursed through ATMs or through direct purchases of commodities in stores.

Instead of allowing the remaining reserves to be squandered through smuggling subsidized goods across the border to Syria, this proposed mechanism would support the families who need it the most, and it is the best way to guarantee that the allocated support reaches those really in need.

This week, the Progressive Socialist Party (PSP) which has a parliamentary bloc of eight members, proposed similar suggestions to rationalize subsidy policies by reducing the high costs and reorienting aid toward needy families, which the party estimated to be around 313,500 families.

The PSP estimated that subsidizing commodities should cost around $150 million annually, rather than the $2.67 billion it currently costs, as it announced in a press conference held at its headquarters last week.

The party also called for substituting subsidized medicine with less expensive alternatives, which would reduce costs by almost $350 million.

However, adopting this plan seems far-fetched because the network of beneficiaries under the current subsidy policy is widespread, and that network will likely block any proposed review.

Even if a cabinet is formed soon, it’s not a guarantee that the cabinet will be able to pull the country back from the brink. The mandatory path toward salvation is through striking a deal with the IMF, which requires a trustworthy cabinet that conforms to the requisites of the French Initiative, which French President Emmanuel Macron proposed shortly after the August 4 Beirut port explosion.

Paris has sent an envoy to push Lebanese politicians to revive their doomed initiative using carrots and sticks, announcing that it will postpone the donor conferences that it previously announced and that any upcoming conference will extend aid straight to NGOs and the Lebanese authorities.

Meanwhile, Lebanon continues on its steady decline, and an urgent revision of the subsidy policy needs to be done as quickly as possible to extend aid to the most impoverished families and to reduce the squandering of reserves of the Central Bank, which are, at the end of the day, the people’s deposits.