Will Saad Hariri be able to pull Lebanon out of its crisis? Most probably not

Will Saad Hariri be able to pull Lebanon out of its crisis? Most probably not

Saad Hariri was appointed last week to form a new government. (AFP/Anwar Amro)

“Insanity is doing the same thing over and over again, but expecting different results.” This quote, supposedly from Albert Einstein, sums up the desperate gamble on Saad Hariri’s appointment as the new prime minister last Thursday. We could go back a long time to review how the Lebanese political class is going around in circles, but a short step back is far enough.

Almost exactly one year ago, on Oct. 18, 2019, when thousands of Lebanese came out en masse to protest against the ruling elite, Hariri gave his political “partners” 72 hours to implement the “economic road map” announced the year prior at the CEDRE investment conference to avoid an imminent crisis — something all the political parties had agreed to in principle.

On the ground, however, nothing was implemented: not the measures that were announced when the crisis was looming, nor those announced when the crisis was full throttle in the wake of the mass protests.

This was yet another failure, which, amid a strong popular mobilization, forced the prime minister to step down on Oct. 28.

His successor Hassan Diab and the latter’s cabinet of “technocrats” were not any better. While Diab offered a diagnosis to what was happening, he did not make any progress toward improving the situation.

The outcome: 12 months later, the lira has lost more than 80 percent of its value against the dollar, GDP has collapsed, inflation has soared, the state has defaulted on its obligations, the banking sector is totally paralyzed and many Lebanese are looking to pack their bags and leave the country.

It is against this grim backdrop that the “natural candidate” Hariri is making his comeback, vowing to “stop the collapse.”

His recipe? A “last chance” government, made up of “specialists independent of political parties,” whose mission would be to implement “the economic, financial and administrative reforms provided for in the French initiative, which the main parliamentary blocs are committed to support.”

As if the Lebanese political class’ commitments to a road map that is even more challenging to implement than the previous ones hold the least bit of credibility.

The international community, however, is pretending to buy it. It wants to avoid, at all costs, another new source of regional instability.

France’s “legitimist” position, especially after Mustapha Adib’s failed venture, requires it now to fall back on its traditional ally. This is particularly true since it had already invested in Hariri back in 2017 when it got him out of Riyadh.

The US, on the other hand, seems to be trying to cool things down in the run-up to the American elections, paving the way for negotiations on the maritime borders with Israel.

Saudi Arabia’s position remains unclear, but it appears to have withdrawn its veto on the return to power of its citizen and former protégé.

But should we believe in international aid that would revive a political system brought to its knees by the drying up of capital flows?

“Certainly not,” assures a Western diplomat. “If the political ruling elites think they can get away with some cosmetic reforms yet again, they are sorely mistaken. The road map is clear and entails signing a deal with the IMF.”

IMF requirements

Signing a deal with the International Monetary Fund is no easy feat, as the tour of Hariri’s advisers to sectarian leaders suggests.

In addition to long-required reforms to governance, key sectors and public finances, a program with the IMF implies a fair distribution of losses in the financial system, with contributions from banks and large depositors — a hurdle that the previous government had stumbled over.

Saad Hariri is one of the main shareholders of BankMed (and his former interior minister, Raya El Hassan was just appointed its CEO). Is he able to arbitrate between his personal interests and those of the Lebanese? What about Parliament Speaker Nabih Berri and the head of the parliamentary Finance Committee, the Free Patriotic Movement’s Ibrahim Kanaan, who also opposed a bail-in from the banks?

Not to mention the reforms to the civil service and electricity, border control or even anti-corruption measures that would affect the interests of an entire political class, including Hezbollah, which feeds on clientelism and the capture of public resources?

“The French initiative banks on a mission government that would only take economic measures, pretending to be unaware of their political implications,” the aforementioned diplomat admits.

For Marcel Cassard, a former research director at Deutsche Bank and manager of a family office, “it is difficult at this stage to imagine the outline of a compromise between the different local players.”

He continues, “I don’t see which sacrifices they weren’t prepared to make but would be willing to consent to today. The IMF, for its part, will surely not give up the conditions necessary to put the Lebanese debt on a sustainable path. It will also not give up basic principles such as a minimum contribution from banks and depositors.”

Cassard, also a former IMF economist, believes that “in the short term, the state could commit to lifting some subsidies in exchange for aid for the poorest, and reforming the electricity sector to reduce its deficit.”

“But how to clean up public finances when the economy is down? And how to re-boost growth without restructuring the financial sector?” he asks. “The IMF could be flexible in the sequencing of reforms and the pertinent timetable, but the disbursement of funds will be gradual and conditional on the implementation of the expected measures.”

But the reform package, if it is launched, risks being derailed very quickly, especially since Hariri was nominated by a narrow majority.

“We should not underestimate the blocking capacity of the system, including in an administration that is infiltrated by political parties,” says one observer, citing the electricity sector, which has been the FPM’s file for years.

In order to move the reform agenda forward, sectarian leaders will have to continually bargain, and, assuming that they are willing to sacrifice some of their interests, they will seek to ensure that other parties do not make any gains. This would be a grand bargain that not only encompasses economic interests but would culminate in the “new political pact” mentioned by French President Emmanuel Macron during his visit to Beirut in the aftermath of the Aug. 4 port explosion.

None of the players, however, are willing to negotiate this political pact before the regional situation becomes clearer, pending the results of the American elections and the possibility of talks between the US and Iran.

Stabilizing the economy

But with a crisis that is profoundly altering the social fabric, Lebanon does not have the luxury of time. Thus the idea of a government that would ultimately delay the debate to gain a little time.

“It is difficult to see what the alternative is today,” says Amer Bisat, an economist and the head of sovereign and emerging market investments at BlackRock.

“While waiting for a possible regional settlement and a change in the political system, it is better in the meantime to stabilize the economy than keeping a political vacuum, which is extremely costly for the country.”

But how to stabilize an economy facing simultaneous crises without comprehensive reforms?

“Although he is part of the political system, Saad Hariri has certain strengths: a political apparatus, international support and the ability to mobilize high-level experts to form the government,” Bisat explains. “In a matter of months, such a team could develop a budget for 2021 with a minimal primary deficit to limit money creation and slow down the collapse of the lira.

“At the same time, this team will have to organize an international conference to obtain aid on the order of $3 to $4 billion, which would allow monetary tightening by sterilizing monetary creation. It will also be necessary to present a clear plan for restructuring the banking sector and the public debt.”

What will happen when this plan has to be carried out? “The likelihood of implementation is low,” admits Bisat. “But [the chances] are not zero, especially if the government obtains exceptional legislative powers."

At the moment, Hariri has not placed the option of exceptional powers on the table, given that if he does, he wouldn’t be able to claim in a few months’ time, like all the heads of government before him, that “the others” did not let him do it or denounce “the corrupt” and “irresponsible” people who plunged the country into the crisis.

This scenario comes with such a sense of déjà vu that an international civil servant wonders if it would be better for the country not to get any international aid at all.

“What is the point of further drowning Lebanon in debt if the problems that resulted in uncontrollable debt accumulation remain unaddressed?” he asks.

This article was originally published in French in Le Commerce du Levant. Translation by Sahar Ghoussoub.

“Insanity is doing the same thing over and over again, but expecting different results.” This quote, supposedly from Albert Einstein, sums up the desperate gamble on Saad Hariri’s appointment as the new prime minister last Thursday. We could go back a long time to review how the Lebanese political class is going around in circles, but a short step back is far enough.Almost exactly one year...