Lebanon Report – July and August 2019

Budget and Economic Situation

7 months into 2019, the parliament finally adopted the 2019 budget after 2 months of debate within the Finance and Budget Parliamentary Committee and the General Assembly. Simultaneously with army veterans’ demonstrations, the final version was approved by parliament including most of the amendments suggested by the committee.^[1] Some of these changes include amending some of the articles dealing with the military such as reducing the taxes on medical pensions from 3% to 1.5 after pressure from retired soldiers,^[2] increasing the Ministry of Social Affairs budget by an amount equal to 35 billion Lebanese Liras to finance social welfare institutions especially after several NGOs voiced warnings of financial struggles;^[3] and imposing an import tax to 3% for imported goods excluding gasoline, and industrial and agricultural raw materials.^[4] These changes affected the budget’s numbers.

With a budget deficit of at least 11% in 2018, the committee was able to lower the budget’s deficit-to-GDP ratio to 6.59%, an even better target than the initial 7.59% by the cabinet.^[5] In spite of the theoretical improvement in numbers, critics have voiced immense doubts over their accuracy. Lebanon has a history of overstating the amount of money it expects to collect which makes the deficit-to-GDP ratio look better.^[6] In fact, part of the reduction of deficit is the result of the non-payment of government obligations to local suppliers.^[7] The IMF also indicated that the projected deficit is likely to be well above the authorities’ stated target.^[8] Despite these drawbacks, the budget was passed and presented by the Prime Minister as a first step towards reform. Whether this reform track continues in a positive direction heavily depends on the government’s efforts to pass the 2020 draft budget in a timely manner, unlike the eight-month late 2019 one, and including more structural reforms rather than similar postponing payments and other minor juggling tactics.

There has been a lot of criticism about the development of the 2019 budget as an accounting exercise rather than part of an economic vision and a several year plan. All it did was set some basic principles for reforms that the government should continue to implement in the upcoming years. In spite of these concerns, some hope that it will encourage CEDRE donors to disburse the much-coveted $11 billion of support pledged to Lebanon. Beyond these limited changes, Lebanon is indeed in urgent need of a strong reform plan to rescue the economy: Poverty impacts around 36.3% of Lebanese;^[9] unemployment rates are estimated around 25% in general and 35% among the youth with President Aoun even stating that one in two Lebanese is unemployed;^[10] corruption pervades most state institutions; living costs are on the rise while purchasing power is declining; and many businesses are struggling or even shutting down with the figure reaching 2,200 companies in 2018 according to the Chamber of Commerce.^[11] Additionally, economic growth is near 0% as per the governor of the Central Bank, consumer confidence has declined, and public debt has reached $86.2 billion, around 150 per cent of the GDP in the first quarter of 2019.^[12]

On a different note, at the beginning of July, the IMF warned against Lebanon’s $7.3 Billion plan to cut debt costs through the Central Bank initiative and announced that budget reforms will not be able to reduce the debt on the medium run. As a result, the IMF suggested additional fiscal measures such as raising the VAT to 15%, combating tax evasion, and increasing fuel tariffs. The plan also called for fundamental structural reforms to boost growth and external competitiveness, starting with improving governance, implementing the electricity sector reform plan, and adopting recommendations of the Lebanon Economic Vision.^[13]

In line with the reservations over the effectiveness of the new budget and the comments of the IMF, Lebanon was cautiously waiting the credit agencies reports. Several intensive talks were held between senior officials such as the Minister of Finance and the Central Bank’s governor and both agencies to avoid the downgrade. Standard & Poor’s report affirmed its credit ratings at B-/B but stated that the country’s outlook remains negative.^[14] In comparison, Fitch ratings cut Lebanon’s sovereign credit rating to “CCC” from “B-“ citing the increasing risks to the government’s debt-servicing capacity amid a slowdown in the flows of deposits of the banking sector.^[15] On another note, the shortage of dollars raised concerns over the ability to import commodities and different goods.^[16] Conversions have also become difficult in August as private exchange offices were trading at 1,560 LBP on the dollar^[17] while the official rate, as set per the central bank, is at 1,515. On a more positive note, the Global Forum on Transparency and Exchange of Information for Tax Purposes rated Lebanon overall largely compliant.^[18] This is coupled with BDL’s foreign assets bouncing back in July following the budget ratification after six months of contraction.^[19]

In total, 83 MPs voted in favor of endorsing the budget while 17 were against. The Lebanese Forces Party, while a member of the cabinet, objected that the ratified version did not have the required articles to boost growth, and reforms were not as significant as they should be in times of crisis.^[20] The Kataeb party, MP Chamel Roukoz from the President’s block, and other independent MPs filed an appeal against the budget to the Constitutional Council for review, in regards to the articles related to the retired military personnel and other articles.^[21] The result of this appeal remain to be seen, but based on the 2018 Budget appeal, the Constitutional Council is very unlikely to derail the process in any significant way.

Cabinet Standstill Draws to a Close

The blowback of the June clashes between Jumblatt and Arslan supporters in Aley which left two dead paralyzed cabinet meetings for around two months in very tricky times when the Cabinet needed to be working full speed to counter the economic crisis. Arslan, backed by the Free Patriotic Movement and Hezbollah, demanded the referral of the case to the politically susceptible Judicial Council. Jumblatt, backed by Hariri and the Lebanese Forces, refused the referral while calling for a proper judicial investigation. The political deadlock prevented the cabinet from meeting because of fears of transferring the problem into government and complicating a possible compromise; knowing that both sides had enough power to stop the cabinet meeting from having quorum if they wished. Weeks-long mediating efforts led by the Director of General Security Abbas Ibrahim with the involvement of Berri[22] were not able to break the polarization as evidenced by both Arslan and the PSP’s high-toned rhetoric which continued until the day right before the sudden compromise was reached. Many observers linked the surprising meeting held in the Presidential Palace between Arslan and Jumblatt to the statement issued by the US Embassy warning against political interference in the judicial proceedings and the use of the shoot-out for political gains.

Upon the reconciliation meeting, the cabinet met for the first time after six weeks since the clashes and did not discuss the incident. Compared to the previous deadlocks which ensued in the country between pro and anti-Hezbollah camps, this was the first “win” for the latter camp in quite some time. Solidarity among what was previously known as the March 14 alliance, along with noticeable Western diplomatic support, was able to, in a rare scene, match and even limit Hezbollah’s influence on the political scene.[23]

In the upcoming sessions, the cabinet is expected to discuss the country’s developing problems such as the tensions over the Ministry of Labor’s decision regarding foreign workers, the re-emerging trash crisis, state appointments, CEDRE reforms, the 2020 budget, and the declining economic situation.[24]

Drones in Dahiya Reignite Tensions with Israel

The first clear breach of the 2006 ceasefire between Hezbollah and Israel occurred following the capture of a drone and explosion of another in the southern suburb of Beirut.[25] This coincided with an Israeli air raid which killed two Hezbollah operatives in Syria, Nasrallah characterized the incidents as “very, very dangerous”. He continued to state Hezbollah’s intent of striking back in Israeli territory as well as pledging to shoot down future Israeli drones flown into Lebanese airspace. Nasrallah also likened the drone attack in dahiya to the series of drone strikes in Iraq and indicated that they will not allow that scenario to happen in Lebanon. Both of the attacks occurred shortly after Israeli drone strikes in Iraq against Iran-backed factions of the Popular Mobilization Forces.[26] The same night after Nasrallah’s threats, Israeli drones hit the base of the Popular Front for the Liberation of Palestine in Lebanon’s eastern mountains.[27] While the target was not Hezbollah, the attack was conducted by drones within Lebanese territory. Some have likened this as a low-key challenge and test to the validity of the Secretary General’s statements.

The official Lebanese response was voiced by President Aoun and PM Hariri who condemned Israeli violations of Lebanon’s sovereignty and UNSC Resolution 1701.[28] Some questions have been raised regarding the launch location of the drone as several technicalities such as its battery life, carry load, and remote control range all eliminate the possibility of it being launched from Israel. Another scenario is a possible launch from the sea, but the Lebanese Army did not detect any activity from the Israeli navy. The third scenario is its launch from within Lebanon close to Beirut. This however raises the possibility of Israeli agents deep within Lebanese territory or another narrative yet to be clarified.[29] In a development which could be related to the last scenario, several sources have reported that Hezbollah carried out a wide campaign of arrests in dahiya against possible collaborators with the latest drone attacks.[30] Even though Hezbollah stated that its media office was the subject of the attack, it has been reported by the British Times newspaper that the targets were two crates which contained materials capable of adding precision guidance to the armed group’s missiles. The materials are a specialized industrial mixer and a computerized control unit. The mixer is supposedly used for the production of solid fuel used in long-range missiles and was the only one of its kind within Lebanese territories.[31] Nasrallah denied these claims a few hours before a retaliation was launched. Hezbollah fired two anti-tank cornet missiles at an Israeli tank on the Israeli side of the border. Conflicting reports arose about any possible casualties, but the escalation was contained after a few hours. Mutual deterrence won the day as both parties did not want to drastically alter the status quo.[32]

Labor Ministry Crackdown

Due to the increasing rates of unemployment among Lebanese and soon after he took office in February, the new Minister of Labor announced a campaign to implement Lebanese labor laws and combat the illegal employment of foreign workers and provided a month grace period to business to resolve their situation.[33] The grace period was coupled with a public awareness campaign (ads and billboards) stressing on the importance of giving priority to Lebanese employees. Furthermore, an agreement with the syndicate of restaurant and hotel owners was reached foreseeing the replacement of up to 30,000 foreign workers in the sector by Lebanese. More than 18,000 CVs were received on the designated website, and ads requesting Lebanese employees started to be widely visible all around the market in this and other sectors. Upon the end of the grace period, the inspector of the ministry started to enforce the implementation of Lebanese law. Decisions against violators ranged from closure of foreign-run shops (mostly by Syrians), violation fines, and warnings.^[34] The Minister announced that approximately 1,500 jobs were made available for Lebanese in the first month of the law enforcement efforts.^[35]

However, these efforts to regulate illegal foreign employment raised objections from business owners who claimed to be unable to afford the high financial cost of employing a Lebanese or legally employing a foreign worker. An estimate of these fees, including medical checks, work permit, insurance, social security, residency, work permit, notarized contract, and bank guarantee, amounts to around $2000 per year.[36] Such high fee cannot be covered neither by small businesses struggling to survive nor by underpaid Syrian workers. Furthermore, studies have also shown that a clear majority of the jobs occupied by Syrians are not in direct competition with Lebanese. Reports from UNHCR, UNICEF, and the World Food Program indicate that 50% of Syrian refugees work in agriculture and construction. Only 14% of Lebanese work in these two fields. In terms of low-skilled jobs, 32% of them are occupied by Lebanese compared to 60% by Syrians. This goes along with housekeeping and grocery shops which are not attractive to Lebanese workers but rather other foreign ones. This prevalence of Syrians in these low-skilled and low-paid jobs have enable Lebanese companies to lower their costs amid the economic downturn during the past years.

One cannot deny that Syrian refugees have driven wages down in these jobs, but the rest of the job market has been relatively unaffected due to the low educational level of refugees and legal limitations.[37] While high unemployment and unregistered shops need to be remedied and Lebanese labor law is overdue to be applied, the ministry’s plan lacks a wholesome approach to the issue incorporating all the different sectors and ministries (economy, industry, agriculture, interior & municipalities, etc…) without which it could result in undesired effects. Because of the contradictory nature of claims regarding the impact of refugees on the Lebanese economy and workforce, a comprehensive study of the socioeconomic situation in Lebanon is desperately needed to objectively determine the realities on the ground and the needed measures to be taken. In its current form, the decision is making it harder for Lebanese small business owners as well as Palestinian and Syrian workers to survive in an already deteriorating economy. Not to mention that the increased pressure on already marginalized refugees carries the risk of instigating a social clash whose consequences cannot be controlled.

While the campaign has caused public discontent among the majority of the Syrian population as well as a segment of Lebanese business owners, the main blowback came from the Palestinian camps. The Lebanese law recognizes the Palestinians as Refugees and thus exempts them from several procedures and fees that any other foreigner needs to pay, including the cost of the work permit, and allows them to benefit from “End of Service” indemnity from the Social Security. Palestinians still have to register owned businesses. The key objections raised were the inability to work in 39 professions, the difficulty in obtaining a work contract required for the work permit, and the pre-emptive firing of Palestinian workers due to employer anxiety of the ministry checks.[38] The Labor Minister has repeatedly stressed that he is only applying the law and that he is flexible in the implementation, but the decision continued to cause intense protests from Palestinians in Lebanon who reiterated that the decision will increase the hardships of already impoverished people.[39]

Even though the main spark for the protests was the latest decision by the minister of labor, the root causes are the denial of civil and social rights, in spite of being in the country for over 70 years, as well as the deprived living and social conditions in the camps.[40] On the other hand, the latest protests as well as the whole situation of Palestinian refugees in Lebanon has been strongly politicized and militarized due to the fact that the camps remain outside the sovereignty of the Lebanese state, Palestinians within and outside camps continue to possess weapons in large quantities, and the strong division within the Palestinian community between the Palestinian Authority (Fateh), Hamas, and other Islamist groups.

After the pressure to force the Labor Minister to stop his campaign failed, the latest Cabinet meeting, on the 22^nd of August took a decision to form a committee that discusses the entirety of the Palestinian situation in Lebanon and present recommendations.[41] Whether this will be an entry point to a proper discussion on the granting of rights and disarmament within the camps remains to be seen, albeit a long shot.

New US Sanctions on Hezbollah

On July 9, 2019, the US Treasury Department announced new sanctions against Hezbollah, for the first time targeting members of the Lebanese Parliament. The three sanctioned are MP Mohammed Raad, head of the Hezbollah parliamentary bloc, MP Amin Sharri who allegedly threatened bank officials against applying sanctions on party members, and senior security official Wafiq Safa.[42] This effectively surpassed the grey area of Hezbollah’s involvement in the Lebanese state which until now has been untouched by US sanctions. It also signals to the EU that it does not differentiate between Hezbollah’s “political and military wings”[43] as the US continues to pressure European and other states to stop the distinction and classify Hezbollah as a terrorist organization. Paraguay and Argentina, Latin American countries where Hezbollah is known to operate, have recently adopted this terrorist classification.[44] Marshall Billingslea, US Assistant Secretary for Terrorist Financing, announced that further sanctions will follow in an effort to diminish Hezbollah’s sources of income.[45] The frequency of new sanctions remains to be seen. Along with the broader US-Iran confrontation, some have linked the new sanctions to three factors: the growing influence of Hezbollah within the Lebanese state, the refusal of Lebanon to participate in the Bahrain conference, and the failure of the Southern maritime border negotiations.[46]

Reports have pointed to the possibility of introducing US sanctions against allies of Hezbollah, notably the team of Nabih Berri or that of Gebran Bassil, but this is yet to materialize although such possibility might be edging closer. This is easier said than done though as Hezbollah has ministers in a unity government and represents a key sectarian community within Lebanon’s consociational system. Because of the sensitivity of the matter, most politicians were critical of the latest decision, notably Hariri,[47] as well as Minister of Finance Khalil, Speaker of Parliament Berri, and President Aoun.[48]

Following Hariri’s latest trip to Washington, reports surfaced that Washington is preparing new sanctions which will target allies and close figures to Hezbollah in Lebanon, including Christians.[49] This would constitute a first in the sanctions policy as it expands beyond Hezbollah’s immediate circle to allegedly include the Syrian Social Nationalist Party, the Marada Movement, and the Free Patriotic Movement. This escalating US policy towards Hezbollah and its allies in Lebanon is becoming more evident. The “Lebanese exception” of maintaining neutrality towards Hezbollah until a regional settlement is reached no longer resonates in the White House.[50] Shortly after Hariri’s return, the US Treasury Department announced sanctions against Jammal Trust Bank for allegedly supporting Hezbollah’s financial activities, notably through microloans. The Association of Lebanese Banks and the Central Bank Governor were quick to express regret for the decision but also assured the stability of the banking sector.[51] It remains unclear whether further Lebanese institutions or banks will be targeted but in case they are, this carries dangerous consequences for an already fragile economic situation.[52]

Southern Border Negotiations

In a surprising turn of events following June’s bleak outlook on the Southern border negotiations, Berri stated in July that the only remaining disputed issue is whether to discuss both land and maritime borders at once. No mention was made regarding the previous disagreements over the role of the UN and the timeframe.[53] It has been reported that the former has been solved as Israel accepted Lebanon’s demands of UN patronage. This came after a meeting between Berri and US Ambassador to Beirut.[54]

Further progress was made on the issue as Hariri’s trip to Washington covered the Southern border negotiations. Hariri and Pompeo both affirmed the commitment to settle the dispute with expectations that “substantive discussions” will occur in September[55]. Reaching a positive conclusion to the negotiations opens the door for Lebanon to begin the process of offshore oil and gas drilling and production as the economy continues to struggle. What was also noteworthy was Hariri’s statement of moving from a cessation of hostilities to a ceasefire with Israel.[56] A reaction from Hezbollah is yet to be released, but unconfirmed leaks have indicated that Hezbollah has facilitated the border negotiations because of an interest in a share of the oil and gas revenues – a significant step towards its increasing integration into the state in the hopes of covering some of its financial struggles following the sanctions on Iran.[57] On the other hand, Berri reaffirmed that he is the only assigned negotiator[58] in this file thus discrediting Hariri’s talks and potential commitments in Washington and monopolizing Hezbollah’s control over the negotiations through Berri and General Abbas Ibrahim.

Appointment of the Constitutional Council

Following the parliamentary appointment of 5 members of the Constitutional Council last June and the control of the FPM over the newly appointed Christian members,[59] it was expected that the cabinet share of the appointments would include a name proposed by the Lebanese Forces. This was not the case as the FPM again monopolized its control over Christian state appointments as the cabinet did not endorse the LF candidate. The PSP supported the LF in its opposition, but the decision went through.[60] The LF subsequently blamed Berri and Hariri for not respecting previously agreed upon commitments. This development again highlighted the heavy political influence over the appointment process of the highest judicial court in Lebanon and casts immense doubt over its ability to fulfill its crucial monitory role in the future.[61] It also reflects the highly flawed appointment process of state officials where the main criteria is political loyalty regardless of credentials, track record, or integrity. This does not bode well for a country in desperate need of rule of law, strong institutional oversight, accountability mechanisms, and balance of powers.