Lebanon Report – January 2020

Formation of Government

Approximately one month after Diab’s nomination as Prime Minister through parliamentary consultations, a new cabinet was announced on January 21. The new ministers were carefully chosen in an attempt to tick all the boxes required by the street and the international community by including: the highest number of women ministers so far (6/20 ~ 30%); the highest percentage of PhD and Doctorate holders (almost half); no party members or deputies/ministers (with the exception of one Amal-affiliated minister of Agriculture & Culture); and the highest number of USA and French nationals.

However, all this does not deny the fact that although paraded as a technocratic cabinet downsized to 20 ministers, many ministers got portfolios which couldn’t be further away from their field of expertise, and the large majority of them were chosen by political parties. The same political parties represented in this cabinet were part of the former cabinet (forced to resign under pressure of the October 17 uprising) and were main partners in the corruption and mismanagement that led the country to its current stage. The Future Movement (FM), Lebanese Forces (LF), and Progressive Socialist Party (PSP) refused to nominate Diab and to be represented in his cabinet. Thus, the new cabinet is practically a one-sided one, a majority government including Hezbollah, Amal, FPM, and allies.[1] On the other hand, and for the first time in years, Lebanon now has a parliamentary opposition in contrast to previous national unity governments. This is coupled with a new emerging opposition movement from outside parliament active on the streets and creating significant pressure. While several political parties and several protest groups oppose the government, the reasons behind their opposition diverge significantly to the extent of making the formation of a united opposition front difficult.

Despite Diab’s promises of meeting protesters’ expectations, return of stolen public funds, independent judiciary, new electoral law, and rescuing the country from the economic crisis, high skepticism remains.[2] Thousands took to the streets to oppose the new government; however, the mass mobilization was limited compared to the first period of the uprising. A large segment of the Lebanese population, worn down by more than 3 months of instability and a deepening economic crisis, are clinging on to the hope that the new cabinet can begin reforms, protect the lower classes, stabilize the devaluing currency, receive international aid, and move the country out of crisis.[3]

Of the many hurdles the government has to face, a glaring one is the ability to obtain international confidence from Western and Arab donors.[4] France urged the new government to adopt measures that enable it to receive foreign support thus indicating a willingness to work with Diab’s cabinet in spite of its domination by Hezbollah and its allies.[5] The same applies to other Western donors who are willing to “unlock” international assistance based on the government’s performance.[6] The International Support Group for Lebanon appears to be taking a similar stance as they urged Diab’s cabinet to adopt substantial reforms “that meet the demands of the Lebanese people”.[7] On the other hand, even though no official position has been issued from Gulf States about the new government, reports point to a refusal by Saudi Arabia and the UAE to provide financial aid at the moment and even to receiving Diab on an official visit. The US welcomed the formation of a cabinet yet passed clear messages that they are continuing with sanctions on Hezbollah and facilitators, and that the support programs for Lebanon is dependent on the cabinet’s work. The struggle against Iranian influence in the region, Hezbollah in the case of Lebanon, appears to be taking priority in setting the stance from Diab’s cabinet.[8]

In terms of international financial institutions, the World Bank regional director met with Diab and Finance Minister Ghazi Wazni to discuss the economic crisis and expressed willingness to assist Lebanon. This coincided with a meeting between Wazni and the Alternative Executive Director of the International Monetary Fund (IMF) with no further details provided of whether the new cabinet will seek assistance from the IMF.[9] In contrast, Hezbollah has been very critical and vocal against seeking IMF assistance as it considers this step to be an infringement on Lebanese sovereignty and a subjugation to foreign political will. If this materializes into a rejection of an IMF bailout amid lack of Gulf support, then economic salvation will undoubtedly be a difficult task.

Passage of 2020 Budget

In a highly controversial parliamentary session, which was labeled as unconstitutional by many, and boycotted by 58 deputies out of 128, the parliament passed the 2020 budget proposal with 49 votes of support, 13 rejections, and 8 abstentions.[10] Lebanon’s economy is in a perilous position and on the verge collapse. The situation is deteriorating by the day, leaving thousands of locals unemployed. The World Bank (WB) is expecting the poverty rate to rise from a third to half of the population.[11] The crisis that is, at core, a governance crisis, is likely to deepen after the 2020 budget approval. ‘Desperate times call for drastic measures’; however, the budget did not address the needs of the people in these exceptional times.[12] The budget’s revenue projection was considered unrealistic by many experts who expected a severe economic contraction in 2020.  Moreover, the budget anticipates a 6 percent deficit, far from a goal set by the former government to bring it close to zero percent, yet even this percentage is seen as optimistic. The budget set inflation at 3 percent while it already reached 6 percent last month.[13] While no new taxes on lower classes were imposed in the budget, it also did not increase taxes on bank and corporate profits, or take any serious measure to cut the public spending notably on electricity and public employment salaries.

Lebanon also faces a $1.2 billion Eurobond payment due in March. After helping the government repay its $1.5 billion last November, the Central Bank is seeking a voluntary swap on the coming Eurobonds held by local holders.[14] There is no official decision until now, and some are demanding that remaining foreign reserves be strictly used to secure basic necessities from abroad.[15] As the crisis deepens and resources dwindle, an IMF package is increasingly looking like the expected scenario. In such case, measures such as tax increases, elimination of subsidies, and currency floating top the list.[16] An austerity plan in a country that barely spends any funds on social welfare, as most expenditures are on salaries and pensions, electricity subsidies, and paying interest on public debt, is likely to cause widespread unrest.[17] Such measures, if not coupled with a heavy social safety net, will exacerbate economic inequality and only affect society’s more vulnerable and most impoverished people.

More importantly, the structural reforms that can help Lebanon depend less on a IMF package or at least can help it negotiate a better deal, will mostly put the government in confrontation with its only political backers: Controlling the legal and illegal border paths used for smuggling and trafficking will not be an easy thing to get Hezbollah’s support on; Cutting the size of public employment and decreasing the cost of public sector salaries will not be accepted by the parties that have filled government institutions with supporters and loyalists through nepotism and clientalism (notably Amal); also privatizing (partially or fully) the Electricity and the Telecom sectors will be strongly opposed by those who benefit from the current corruption and side deals going on in the two sectors (notably FPM and the Future Movement). Such reforms if implemented can provide Lebanon with an immediate injection of funds estimated between $4 and 6 billion in less than a year, and will reduce the budget deficit significantly for several years to come.

In short, the new cabinet has found itself within a very difficult situation between public anger, poor socioeconomic conditions, large interest groups, international pressure, immense public debt, a deep economic and monetary crisis, lack of real political support beyond lip service, and a popular uprising ready to pounce.

Protests Turn Violent

Prior to the formation of the new government, protesters called for a “week of rage” against growing social and economic pressure. A shift in the behavior of protesters was quickly noticed as violence had begun to take root. The main targets of the clashes were parliament, the Central Bank, and commercial banks: three components perceived by protesters as deeply interlinked in the cause of the current crisis.[18] From the shattering of bank fronts to clashes with riot police, the view was different from the largely peaceful demonstrations of the past months. At least 520 were injured in the escalation that peaked during that weekend.[19] Whilst clashes are expected to calm down in the coming weeks as the cabinet assumes its responsibilities, political authorities should heed the early warning signs of the past weeks. The grace period for the new government is a short one whereby the failure to adopt proper policies to improve the livelihood of the population risks plunging the country into chaos and a spiral of violence.

International Pressure against Hezbollah

Latin American allies of the US, specifically Guatemala, Columbia, and Honduras designated Hezbollah as a terrorist organization. The decision carries some weight as Hezbollah operates a sophisticated financial network in the continent to support its core funding from Tehran.[20] Similarly, building on the decision of the German parliament last month, Britain’s finance ministry also designated the whole of Hezbollah as a terrorist organization subject to asset freezing. This marks an additional step in moving away from the previous distinction between the political and military wings of the organization, initially started by the UK in March 2019.[21]