WB on Lebanon: Ponzi Finance Instead of Public Finance?

In a report published on August 3^rd, 2022, and titled “Lebanon Public Finance Review: Ponzi Finance?, the World Bank (WB) purports that “public finance in post-civil war Lebanon has been an instrument for systematic capture of the country’s resources, as it served the interests of an entrenched political economy. Excessive debt accumulation was used to give the illusion of stability and reinforce confidence in the macro-financial system for deposits to continue to flow in.  Lebanon’s depression —deliberate in the making over the past 30 years — has hollowed out the state of the provision of basic services to its citizens”.

Perhaps more interesting, the report “questions to what extent this was Ponzi Finance instead of Public Finance. We show how the Government consistently and acutely departed from orderly and disciplined fiscal policy to serve the larger purpose of cementing political economy interests. It did this by: (i) Accumulating debt—beyond fiscal needs—to maintain deposit inflows under a fixed exchange rate, the overvaluation of which permitted excessive consumption, generating an illusion of wealth; and (ii) Acting as distribution channels for subsidies and transfers—centralized around public services—to further entrench the power-sharing confessional system”.

Also, the report argues, that the “Deliberate Depression was also deliberate in the way the State was hollowed out of the provision of basic services to its citizens. This hollowing of the State was a desired/deliberate outcome intended to cement public-private privilege for principal economic benefactors of the Second Republic. Elite capture of State’s resources for private gains necessitated weakening of public service delivery so that: (1) it allowed lucrative and dollar-inflated private sector contracts (such as oil import business, generators, waste collection, but also private schools, hospitals etc.); and (2) confessional groups could tighten their grip on citizens by supplanting the State in these service provisions”.

More structurally, the report “analyzes Lebanon’s public finances over the post-civil-war period to understand the roots of the system’s eventual — and widely expected — insolvency. It focuses particularly on three main elements: Fiscal Policy in the Second Republic; Macro-Financial Restructuring; and Public Service “Non-Delivery”. The findings identify: (i) a systematic and acute departure from orderly and disciplined fiscal policy; (ii) missed opportunities to protect most depositors, in dollars; and (iii) a collapse in already weakened basic public services, putting in danger the social contract”.

Moreover, the report “analyzes the impact of Lebanon’s erratic macro and structural policies on the “failed” provision of key basic services to the population. The current crisis aggravated long prevailing and serious gaps in the financing of those basic public services: Water, Electricity, Transport, Health, Education and Social Protection. The successive shocks that hit Lebanon since 2019, affected both the supply and demand sides in critical sectors. The crises revealed the fragility of Lebanon’s service provision model, itself a product of elite capture of State’s resources for private gains. The weakening of public service delivery was therefore a conscious effort made to benefit the very few at the expense of the Lebanese people. Citizens end-up double paying and receiving low quality product or service. The impact is also highly regressive as it affects middle- and lower-income groups much more significantly”.

In response, the report “proposes a series of macro and sector-specific measures and policies to address the immediate needs of the population while engaging in medium-long-term reforms to improve the performance, sustainability and resilience of public service provision. The proposed measures focus on three main objectives: (1) Ensuring sustainability and affordability of basic services; (2) Enhancing equity in public spending; and (3) Improving efficiency in government spending throughout the sectors”.

Lastly, the report concludes that “Lebanon must critically adopt -now- and efficiently implement a comprehensive program of macro-economic, financial, and sector reforms that prioritize governance, accountability and inclusiveness. The earlier these reforms will be initiated, the less painful the cost of recovery will be on the Lebanese people”.