Lebanon Report – September 2019

Economy and 2020 Budget

A few days after international ratings agency Fitch downgraded Lebanon’s rating, heads of Lebanese parties met in Baabda and called for “sacrifices” to rescue the economy.[1] Standard and Poor’s also issued a new report warning the Central Bank of a decline in foreign reserves, which according to the rating agency, are enough for just one year.[2] In that line, MP Saad El Hariri reassured that the Lebanese pound will remain pegged to the US dollar at the current exchange rate.[3]

Resulting from the Baabda meeting was the declaration of an economic state of emergency[4]; which, as of yet, has not seen the implementation of any urgent changes. The meeting also discussed the 2020 budget which is part of a three-year plan to rejuvenate the economy.[5] Some of the proposed measures include raising the VAT on non-essential items from 11% to 15%, as well as the tax on bank deposit from 10 to 11 percent, setting a floor and ceiling price for fuel,[6] imposing 500 LBP per packet of nationally produced cigarettes and 1000 LBP on imported brands, and freezing public sector salaries for three years.[7] This went hand in hand with vows to tackle corruption, illegal smuggling and tax evasion;[8] in addition to reducing the deficit of the state-run Electricité du Liban especially that it costs around $2 billion in annual subsidies. The same slogans echoed those stated over the past years but did not actually materialize into proper reforms.[9]

On a more positive note, the 2020 budget draft was for the first time sent to the cabinet within the constitutional deadlines.[10] Yet it remains to be seen if the concerned parties are serious enough and if the budget that will be adopted in the council of ministers will include enough serious structural reforms to stop the downfall.

Lebanon is currently experiencing a shortage of dollars in the market, stoppages of online currency exchange and a rising number of merchants refusing Lira payments. [11]The ‘dollar crisis’ or more accurately the ‘lira crisis’[12] is now at levels unheard of since the civil war, mainly caused by the capital flight and deposits that are sent abroad[13] adding to that, an incline in foreign investment inflows [14]and the high trade deficit.[15] In response to threats of strike by gas station owners and public fears over the stability of the Lira, the Central Bank Governor adopted new measures which provides key importers of wheat, petroleum, and medicine access to US dollars at the official fixed exchange rate.[16]

On another hand, the Central bank approved the request of Jammal Trust Bank, targeted by the US treasury nomination, to ‘self-liquidate’;[17] after authorities’ pressures to prevent endangering the whole banking system.

Hezbollah-Israeli Tensions

Building on the latest limited confrontations between Hezbollah and Israel, Hezbollah followed through on Nasrallah’s threat to down future Israeli drones breaking into Lebanon’s airspace. The group shot down and confiscated an Israeli drone over the border village of Ramieh in Bint Jbeil.[18] This falls squarely within the party’s attempt to reestablish deterrence in Lebanon contrary to the manner through which Israel acts with impunity in neighboring Syria.[19] Shortly after, Nasrallah declared during the commemoration of Ashoura absolute allegiance to Iran’s leader Ayatollah Khamenei and that Hezbollah will not remain neutral in case of a regional conflict[20] all without any official reaction form Lebanese political or military authorities. The skirmishes between Hezbollah and Israel have remained limited and controlled since 2006 through tit for tat attacks as neither side wants to risk a slide into an all-out war at the moment. Whether the new Israeli government will adopt a different policy towards Lebanon remains to be seen.

US Sanctions Escalation

During his visit to Lebanon, newly assigned US Assistant Secretary of State David Schenker hinted at the possibility of new US sanctions against individuals supportive of Hezbollah, regardless of religion or political affiliation.[21] The statement echoed the stance of Assistant Secretary of the Treasury for Terrorist Financing Marshall Billingslea visiting Lebanon days after. Billignslea went further as he accused Hezbollah’s political allies of covering the party’s insertion into the daily politics of Lebanon and undermining its democracy. This again fueled speculation that close Christian allies to Hezbollah might be targeted.[22] In conjunction, it was reported that three Lebanese banks might be targeted in the upcoming wave of sanctions due to links to Hezbollah.[23]  Jammal Trust Bank (JTB) was targeted last month as it was classified as a “Specially Designated Global Terrorist” for “assisting, sponsoring, or providing financial, material, or technological support for Hezbollah”. Thus, it is prohibited to engage in transaction with this entity or any of its subsidiaries.[24] JTB is the second Lebanese bank to be targeted following the 2011 accusation of the Treasury Department to the Lebanese Canadian Bank (LCB) of being involved in money-laundering and drug-trafficking operations with ties to Hezbollah. Consequently, LCB was then sold to another Lebanese bank, Société Générale de Banque au Liban (SGBL).[25] Other sectors are also under the radar such as pharmaceuticals, free trade zones, and ports.[26]

In an apparent show of force and support for anti-Hezbollah parties in Lebanon amid regional tensions with Iran, a US Navy destroyer docked in the Port of Beirut for a short period of time. In spite of being framed as a “goodwill visit” and “partnership between the US and Lebanese militaries”,[27] this was the first time in over 30 years that a US military vessel docked in Beirut. A further political message was also sent as a reception was held aboard the ship for members from all parliamentary blocs except Hezbollah.[28]

Southern Border Negotiations – Continued

The newly assigned US Assistant Secretary of State David Schenker paid his first official visit to Lebanon as he met with President Aoun, PM Hariri, and Speaker of Parliament Berri. Among many other files, Schenker is following through on the efforts to start negotiations, and US mediation previously led by his predecessor Satterfield. The disputed 860km² area in the Mediterranean Sea, along with 13 disputed points on the land border, have been the subject of US shuttle diplomacy for the past months; however, Schenker does not seem to have the negotiation very high on his priority list, knowing that the framework of the negotiations is almost ready, and after, there will be nothing left for him to do until the two parties decide to go ahead. The meetings were held amid critical comments from Nasrallah towards Schenker, a “friend of Israel”, while stressing the ability to negotiate from a “position of strength”.[29] Previous advancements were effectively put on hold in May following Netanyahu’s failure to form a government in Israel and amid an escalating rhetoric before the snap elections. The manner through which the negotiation will develop in the coming months will heavily depend on the type of government that emerges after the Israeli elections.[30] “We consider the process to be viable and will continue to support constitutional next steps leading up to a final decision in the coming months, hopefully September,” Hariri said in a statement to the press after meetings with Pompeo.[31] However, Hezbollah exclusively calling the shots on this issue in Lebanon through Speaker Berri[32] makes the hopes of any serious advancement a very dim potential, or at best yet another card controlled by Iran in its confrontation with the US.