Lebanon Report – April and May 2019

Budget Adoption amid Popular Unrest

Similar to the statements made prior to the passage of the 2018 budget, Prime Minster Hariri again has called for reforms and cuts in spending in this year’s budget, crucial to receiving CEDRE funds and loans. The previous budget was hardly respected and “exceptional costs” were spent from outside budget lines, especially amid parliamentary elections last year. Indicative is that while the deficit was previously around 8.5% and was expected to decrease by 1% every year, it rose to more than 11% in 2018. Donors are now demanding a cut of at least 2 percent in the budget to reduce the GDP-debt deficit, or even reaching the 7.5% commitment. Unwarranted NGO subsidies, overinflated and clientalist public sector, large inefficiency in tax collection, border trafficking, and losses from the electricity sector are several of many reasons for the current situation.[1]

According to the Minister of Finance, the budget is divided in the following fashion: 35% for public sector salaries and benefits, 35% for covering the public debt, 11% state subsidies to EDL, and 19% for investment and state affairs.[2] Five months into the formation of the new government, and after 20 cabinet sessions, a budget for 2019 was finally passed on May 27. It allegedly brings down the deficit from 11.5% to around 7.6%[3] as some of the reforms include “a tax increase from 7 to 10% on earned interest, increase in income tax rate on individual incomes and corporate profits from 20 to 25%, revoking exemptions in car import fees for government officials, imposition of a 2% custom fee on imports except hybrid vehicles, machinery, and raw material, 20% protection custom fees on a list of 20-25 industrial products, annual fees for tinted windows and weapons licenses, income tax imposition on pensions of civil servants, a 1,000LBP tax on shishas at restaurants, increase in hotel and flight reservation fees, three year freeze on public sector employment and on early retirement for both civil and military personnel, and limitations on public sector salaries.[4]

On the other hand, suggestions presented by several parties, notably the Lebanese Forces and the Progressive Socialist Party, were partially or fully disregarded. They included, among other things:  partial privatization of the Telecom sector and the introduction of one or more additional licenses;  full review and restructuring of the Beirut Port Authority whose mandate has been “temporarily renewed” for more than 20 years;  significant effort to control air, sea and land border trafficking and increase the customs income; better tax and fees collection system that deals with the large percentage of evasion; and higher and continuous fines for occupying beaches and public properties…

Discussions will be held in parliament and are expected to last another month (till mid-July), while the budget proposal for 2020 should be finalized by September and presented to the government for discussion. In spite of its adoption by the government, the unnecessary and unjustified procrastination six months into the fiscal year, along with the absence of any significant structural reforms, raised concerns about the seriousness of government in pursuing real change. Parties are attempting to play the fine line of balancing between international donors, clientalist networks, and business elites which is a far cry from what the country needs and is unlikely to be a realistic long-term strategy. In line with this, the investigation of the Parliament’s Finance and Budget Committee found that around 37,000 public sector employees are hired illegally and do not abide by public employment laws. In addition, around 5,000 of these were hired during a period of public hiring freeze[5].

International reactions towards the new budget draft law ranged from cautious optimism to skepticism. French Ambassador to Lebanon stated that it is a good step forward while stressing the importance of implementation[6], credit rating agency Moody’s stated that it is unlikely that the draft budget will deliver a “significant shift in the country’s debt trajectory”[7], and credit rating agency S&P Global stated that the draft budget “may not be sufficient to improve the confidence of non-resident depositors and investors, which has waned in recent months”[8].

While the parties in government were able to escape adopting serious slashes to public sector and military personnel benefits, the wide-ranging strikes by labor unions and former military personnel against rumored budgetary measures reflect a conflict between influential political parties and their clientalist base that has benefited from the public sector for the past decades. The clash was contained for the moment, but further deficit reductions in next year’s budget will likely reignite tensions. It also indicates that harsh cuts and reform measures require a high level of political solidarity and public support which this does not seem to be the case amid very low levels of inter-governmental and public trust.

Electricity Plan

Dysfunctional since the civil war, the electricity sector has become one of the key reasons for the budget deficit and a major contributor to the rise of public debt. Meeting the recommendation of international donor institutions, a new plan to reform the sector was passed by the cabinet and parliament. The plan comprises both short-term and long-term solutions such as raising production to 24 hours per day, building new plants, shutting down current inefficient plants, introducing renewable energy such as wind and solar, installing smart meters, increasing prices as production goes up, and limiting technical and non-technical waste.[9] Prior to the approval, a ministerial committee was formed from all political parties in government to review and accordingly amend to the original plan. The Lebanese Forces was noticeably active in pushing for amendments, and, backed by other parties, was able to introduce the following the key changes: shifting responsibility of conducting tenders from the Minister to the Tenders Department, lowering costs of expropriation for plants, unifying the short and long term plan tenders based on a fixed price, linking tariff increases to increases in production, improving bill collection through smart meters, cracking down on illegal consumption, and formation of a new Board of Directors for Electricite du Liban (EDL)…

Nevertheless, several shortcomings about transparency were also criticized such as granting the authority of licensing to the council of ministers and delaying the appointment of the regulatory authority members which undermines the development of a proper governance structure of the energy sector and grants more power to the Minister of Energy and Water. This is compounded by fears of the politicization of the tender process because of the short proposed timeline and authority of the ministerial committee over any arising disputes between the Ministry and the Tenders Department. Some technical requirements are also missing from the plan such as addressing the lack of infrastructure for efficiently distributing natural gas and fixing the structural and capacity challenges facing EDL which go beyond the appointment of a board.[10]

The fact that a National Electricity Regulatory Authority was not part of the electricity plan did not go unnoticed especially since it violates the conditions set by the CEDRE reforms. EU Ambassador to Lebanon Christina Lassen, while acknowledging the positive step of passing the electricity plan, was critical of the absence of the regulatory authority and explicitly stated that it was one of Lebanon’s pledges at CEDRE. Lassen reiterated the hopes for concrete anti-corruption measures.[11] Similar sentiments were voiced by Goldman Sachs, an international investment bank, which also praised the plan as an optimistic sign but also stressed on the need for wide reforms.[12] These international reactions were met with an appeal filed by MP Samy Gemayel and the Kataeb Party as well as figures such as Marwan Hamadeh, Paula Yaacoubian, Oussama Saad, and Faisal Karami to the Constitutional Council citing violations in the parliamentary voting process, absence of a tendering process mechanism, and lack of a set time period for companies to transfer plants to the state.[13] As a result, the Constitutional Council ruled that parts of the plan need to be halted because of the unclear relationship between the cabinet and the Ministry of Energy over the tendering process. The decision is based on the desire to halt possible corruption practices, but it might also delay the implementation of the plan.[14]

Satterfield and the Southern Border

Building up on the meeting between President Aoun and US Ambassador in Lebanon Elizabeth Richard, Acting US Assistant Secretary of State for Near Eastern Affairs David Satterfield conducted a couple of visits to Beirut to further discuss the southern border dispute. Satterfield has been shuttling between Lebanon and Israel as part of the US mediation regarding a triangular sea area of around 860 square km in dispute between the two countries. Meetings were held with President Aoun, Prime Minister Hariri, Speaker of Parliament Berri, and Foreign Minister Bassil.[15]

Reports indicate that Lebanon’s initiative included the formation of a military committee to conduct negotiations under UN supervision and US mediation. It also called for including both land and sea disputes[16]. In return, Israel leans towards restricting negotiations to the maritime border only while also calling for expanding the committee to include diplomats, a move that seeks to normalize bilateral talks between the two hostile countries. Another contested issue is whether a six-month deadline is set or negotiations are kept open-ended, with Lebanon preferring the latter. The talks will take place at the UNIFIL headquarters in Naqoura and are expected to begin in the coming weeks. Some have linked this breakthrough to the threat of US sanctions against Berri (discussed below), the lifting of Hezbollah’s veto over moving forward with negotiations, US pressure over Lebanon, fear of a unilateral Israeli declaration of the borders, and the shifting of the negotiation portfolio from Israeli Minster of Defense Lieberman to the Minister of Energy Steinitz. This also comes at a time of a push by the Lebanese government for beginning offshore gas and oil exploration starting from the end of this year,[17] as consecutive large scale discoveries of gas fields are achieved in nearby Israel, Egypt & Cyprus, and as an East Mediterranean Gas Forum is being established[18].

Possible obstacles that might arise in the near future and delay the process include Netanyahu’s preparation for the snap parliamentary elections in September, internal political tensions in Lebanon which could weaken the unified official position as of yet, replacement of Satterfield by David Schenker who was confirmed by the Senate as the new Assistant Secretary of State for Near Eastern Affairs, and developing US-Iran tensions.[19]

Looming Threat of US Sanctions as Berri Visits Sistani

Shortly after US Secretary of State Pompeo’s statements of possibly sanctioning political figures linked to Hezbollah, reports circulated indicating upcoming US sanctions against key Hezbollah ally, Nabih Berri, and his financial backers. This coincided with unconfirmed leaks that Pompeo warned Berri and President Aoun of personal sanctions during his visit to Beirut last month. In reaction, political figures from the Amal Movement and Free Patriotic Movement lobbied behind closed doors during the 2019 Spring Meetings of the World Bank and International Monetary Fund in Washington against such sanctions. They met with Assistant Secretary of the US Treasury Department Marshall Billingslea and US Assistant Secretary of State for Near Eastern Affairs David Satterfield. Arguments used included the inability of Berri or Aoun to contain the influence of Hezbollah and that these sanctions would have negative consequences on the Lebanese economy as a whole.[20]

While the sanctions didn’t go through yet, some believe that the US aimed to pressure Berri into accepting the demarcation of the Southern border based on the Hoff line.[21] Others believe that this falls within the US policy makers’ recent push for besieging Hezbollah as seen with the second round of the Hezbollah International Financing Prevention Act (HIFPA) that clearly hinted towards Hezbollah’s allies in Lebanon. Thus, the US wants Hezbollah’s allies to know that there is a price to pay for their alliance, common business interests, and political clout they provide to the party. While the threat of sanctions remained rhetorical thus far, the situation is open to change especially if Trump wins another term in 2020.[22]

Coinciding with these reports, Berri held a meeting with Grand Ayatollah Ali Sistani in Iraq. Sistani heads the Najaf school of Shia Islamic thought and is notably more moderate than the religious authorities in neighboring Iran. The meeting is symbolically important as Sistani has repeatedly rejected to meet with Shia hardliners such as former Iranian President Mahmoud Ahmadinejad and Houthi rebels. Coming off the visit of Pompeo and the threats outlined above, Berri could be portraying himself as a moderate alternative to Hezbollah and maintaining a safe distance as the US increases pressure on Iran and its allies.[23]

Hezbollah Hits Back at the US

In line with the widening scope of US sanctions targeting Hezbollah, the US Treasury announced sanctioning several exchange dealers for their alleged involvement in money laundering and “funding illicit Hezbollah operations abroad”.[24] In return, Hezbollah’s Secretary General Hassan Nasrallah clearly stated that the intensifying US sanctions will be responded to “at the right time” citing that Iran and its allies have “many strong cards”.[25] At the current moment, it appears that Hezbollah will not take any actions as it is playing the time game in the hopes of a Presidential change in the US in 2020. If the Trump administration wins another term, then the tactics of Iran and Hezbollah might change accordingly; however, whether Hezbollah is willing to take the risk of directly damaging US interests, remains unlikely.

Amid rising US-Iranian tensions in the Gulf and US threats against Tehran, Hezbollah did not stay on the sidelines in the increasingly heated rhetoric as it declared that it would intervene in support of Iran in case of any US aggression. This echoes previous statements made by Nasrallah about multiple fronts being ignited in case Iran was attacked by the US or Israel. While it is unlikely that current tensions escalate into open warfare between Washington and Tehran, in the case that it does, the Lebanese front will not be immune.[26]

Death of former Patriarch Sfeir

Former Maronite Patriarch Mar Nasrallah Boutros Sfeir passed away on May 12, 2019. Known for his leading role in providing a “Christian greenlight” for the Taif Agreement, opposing the Syrian occupation of Lebanon after the end of the civil war in 1990, and conducting the Christian-Druze reconciliation of the Mountains in 2000, statements of mourning poured in from local and international figures such as Pope Francis, Grand Mufti of Lebanon, delegation from the Higher Islamic Shiite Council, Druze spiritual leader, Iranian ambassador, Saudi King Salman, and many others. Sfeif was hailed as “a staunch defender of his country’s sovereignty and independence” in Pope Francis’ statement.[27]

The funeral was attended by the President, Prime Minister, Speaker of Parliament, parliamentary members, and party leaders.[28] Thousands were also mobilized by the Lebanese Forces and Progressive Socialist Party. The former’s supporters hold Sfeir in high regard for his political stances whereas the latter wanted pay tribute to Sfeir’s role in the 2000 Mountain reconciliation.

Tripoli By-Elections

Based on the appeal of rival candidate Taha Naji, and following the Constitutional Court’s annulment of the election of MP Dima Jamali from the Future Movement in the 2018 parliamentary elections in Tripoli, the Ministry of Interior held elections for the contested seat.[29]

It must be noted that Electoral experts criticized the council’s for a variety of reasons namely: the long time taken to rule on the appeal especially after 1/5^th of the term had already passed, dismissing 17 other claims which were at least as serious, the effect of any changes in the number of votes reflects on the entire list in a proportional system thus any reelection should cover all the district seats rather than only an isolated one, and adopting the majority system for only one seat practically guarantees Jamali’s reelection rendering the entire process not worthwhile.

In a turnout reflective of the general apathy and objection of the voters in Tripoli, and even though 8 candidates were running, only 12% cast their vote. Nevertheless, Jamali gained 68% of the vote and was reelected into parliament. On the other hand, the group of parties supporting Naji boycotted the elections in protest of the council’s decision while all major figures in Tripoli, such as Mikati, Rifi, and Safadi, backed Jamali’s candidacy.[30]

Notable observations include the increase in earned votes of the independent candidate from 1000 to 3000 and the candidacy of Nizar Zaka, a Lebanese detainee in Iran, who garnered 500 votes.