Financial crisis

How a World Bank loan to support Lebanon’s most vulnerable will also shore up a crumbling financial system

How a World Bank loan to support Lebanon’s most vulnerable will also shore up a crumbling financial system

The new aid program will give recipients electronic payment cards, similar to the ones the World Food Program has already been using. (Credit: Joseph Eid/AFP)

BEIRUT — After months of negotiations, the World Bank Group announced last week that its governing board had approved plans for a $246 million loan that would go toward setting up a stronger social safety net for Lebanon’s most vulnerable citizens.

The centerpiece of the program is a $204 million initiative that will provide 147,000 of Lebanon’s poorest households with monthly cash assistance of LL100,000 per person for one year via prepaid cards.

With about half of Lebanese households now below the poverty line, the relief is sorely needed, but the announcement quickly generated controversy.

The reason for the uproar: the World Bank funds would arrive in dollars but would be paid out to needy families in Lebanese lira at a rate about 30 percent lower than the market rate. The result, analysts pointed out, is that recipients will get only 70 percent of the value of the incoming dollars, while the rest will be captured by Lebanon’s financial system.

The issue is not new; since the collapse of Lebanon’s currency and financial system began in 2019, spawning multiple exchange rates, other international aid programs that bring hundreds of millions of dollars a year to the country have lost a far larger percentage of the value of their incoming dollars.

But the high profile of the World Bank program and the fact that it is a loan that will have to be paid back by the government in foreign currency has put a new spotlight on the issue.

How will the World Bank program work?

The planned cash assistance program is similar to existing cash transfer programs for Syrian refugees and some poor Lebanese families run by the World Food Program, which will also be contracted to implement the new World Bank-funded project.

Recipients will get prepaid bank cards that will be loaded with LL100,000 per family member per month. They can then use the cards either to withdraw cash at ATMs or to pay for purchases in a network of participating food shops.

The World Bank said in a statement that it had originally envisioned paying out the recipients in dollars, “in order to deliver maximum benefits to the extremely poor people who are the main beneficiaries of the project.” But the Lebanese government insisted the payouts should be in Lebanese lira “as they want to ensure alignment with existing government and humanitarian programs in the country,” the organization said. The World Bank negotiated an exchange rate of 1.6 times the current “bank rate” of LL3,900 per dollar — or LL6,240.

The resulting structure of the program is that the dollars will be transferred to the Ministry of Finance’s treasury account at the central bank, Banque du Liban, and from there to a special account set up at BDL for the project. BDL will then convert the dollars to lira and send the lira to the World Food Program’s account at Banque Libano-Française, which will make the payouts to recipients.

While it was initially unclear whether the dollars would be changed to lira at BDL or at the local bank, World Bank spokeswoman Zeina El Khalil told L’Orient Today, “The conversion to Lebanese lira at the agreed [rate] will be executed by BDL, which will provide the funds to the financial service provider in Lebanese lira.”

A BDL spokesperson referred questions about the matter to the Ministry of Finance, and a ministry spokesperson told L’Orient Today that “the contract has not yet been voted on by Parliament,” which must approve all loan agreements, “so we have to wait for the results to have details.”

Where do the dollars go?

“It’s not the LL100,000 per month that poor people are getting from the World Bank program that’s really the value, because the government can do that on its own — it doesn't need the World Bank to do that,” financial advisor and commentator Mike Azar told L’Orient Today. “It can just print or borrow from the central bank and give people cash [in Lebanese lira].”

But printing money would create more inflation. Azar said, “The real value of the World Bank program is the dollars and how they are going to be used.” If the dollars are wasted, he continued, “then actually this loan was pointless and had no effect, except that now the government borrowed $200 million that it has to repay.”

As the program is currently structured, the injection of foreign currency into the coffers of BDL might allow it to slightly prolong subsidies on imported fuel, medicine and staple food items that otherwise appear to be on the verge of ending. According to remarks earlier this month by BDL’s governor, Riad Salameh, the central bank has just half a billion dollars left before it would have to begin dipping into mandatory reserves in order to continue the subsidy program, something the governor has said he would not do.

Many analysts have criticized the across-the-board subsidies as regressive, saying that they mainly benefit the wealthy — who have more spending power than the poor — and have recommended a shift to targeted subsidies or direct aid to the poor.

But now, said Nasser Saidi, a Lebanese economist who formerly served terms as economy minister and as vice-governor of BDL, a significant portion of the World Bank funds intended to help the poor may instead go to prop up the subsidy program.

“This mistaken policy by the government … has effectively helped to deplete reserves and it has not gone to help the poor and needy; it has gone to help the rich, the traders, the wholesalers, and the smugglers,” Saidi said. “The central objective of helping the poor and needy becomes secondary and it becomes a victim of multiple exchange rate policies and restrictions on payments … so we’re paying again the price of bad policies.”

Saidi said that in his opinion, the best approach would have been to pay out in dollars, as originally planned. But others said that might bring its own issues.

Lynn Zovighian, a former banker and co-founder of social investment platform The Zovighian Partnership, noted that since poor households tend to pay most of their expenses in Lebanese lira, dollars paid out to struggling families would likely go to exchange houses and might or might not get back into circulation on the market.

“It could be that the best thing to do is to disperse it in Lebanese lira, but then it has to be at a rate that doesn't provoke arbitrage and is fair value,” she said.

An ongoing issue

Cash transfer programs are an increasingly popular way to provide aid, because they are logistically easier to manage than distributing physical goods and because cash is seen as more empowering for the recipients. In Lebanon alone, between $400 million and $500 million a year in humanitarian aid comes in the form of cash transfers, according to one recent analysis.

The largest such program in the country currently is the monthly assistance paid out by the World Food Program to some 825,000 Syrian refugees via cards like the ones that will be issued under the World Bank program. The WFP also provides similar assistance to 15,000 poor Lebanese families and is planning to increase that number to 50,000 over the next few months. Before the currency crisis, recipients in those programs got $27 per person per month.

When the crisis hit in late 2019, WFP country director Abdallah Alwardat told L’Orient Today, “Given the situation in the country, the economic situation, the lack of availability of dollars, at that time we decided and agreed with donors and with the partners [including UNICEF and UNHCR] that we will disperse in Lebanese lira.”

Initially, the programs were paying out at the official rate of around LL1,500 per dollar. Several months into the crisis, Alwardat said, they were able to negotiate higher exchange rates with the bank and gradually increase the payout. Currently, most of the programs are paying LL100,000 a month, similar to what is proposed by the World Bank, but in this case, at an exchange rate of LL3,900.

Unlike in the proposed World Bank program, since the government of Lebanon is not involved in the refugee aid programs, the WFP funds are transferred directly from their account abroad to their Lebanese bank, BLF, meaning that the dollars go into the coffers of the local bank rather than to BDL.

Now, Alwardat said, the UN agencies are in negotiations with BDL to get the same LL6,240 rate being given to the World Bank, and it appears likely that they will succeed.

Even at the higher rate, a substantial portion of the incoming aid’s value will stay with the bank.

“But at least the 6,240 [rate] is good news,” Alwardat said. “It’s making up for the losses that we have been really not happy about, and this extra money or this difference in the exchange rate would go to the beneficiaries that we are serving” both by adding more recipients and increasing the monthly payment.

Smaller NGOs without the clout of international organizations behind them have often had even more difficulties.

Fadi Hallisso, co-founder and CEO of Basmeh & Zeitooneh, a Lebanese NGO that helps Syrian refugees and other vulnerable groups, said that when the crisis hit, one of the banks the group uses refused to pay out so-called fresh dollars sent from abroad after October 2019, although such dollars are supposed to be exempt from restrictions on withdrawing foreign currency.

As a result, he said, the organization lost the equivalent of about $700,000 and had to take it out of staff salaries over the course of several months to avoid cutting programs.

“I know a lot of NGOs that are smaller and couldn’t absorb it, and now more than a year later they are still suffering from the losses,” Hallisso said.

Meanwhile, the NGO recently ran into a new currency issue with its second bank, which had previously been allowing withdrawal of “fresh money” in dollars.

Recently, when the organization was making cash payments to help vulnerable Lebanese and Syrian families, the bank refused to pay the Syrian recipients in dollars, citing US sanctions. Instead, it paid them in Lebanese lira at an exchange rate of LL6,000.

Making the best of a bad situation

Azar said that from his perspective, the best approach “would be to give people Lebanese lira at the black market rate and then make sure that those dollars are going to be used to fund [essential] imports and are used for their proper purpose.”

But he added that doing so would also be difficult under the current circumstances.

“With the black market rate, firstly, the government doesn’t acknowledge it and, secondly, there’s no place to refer to if you want to refer to the black market rate — it just depends on which exchange house you go to or which guy you meet on the street,” Azar said.

Jamal Saghir, an economist and former director with the World Bank, told L’Orient Today that he believes the institution had made the best of a bad situation.

“In my opinion, given what Lebanon is facing, this was the best way to address the issue of multiple exchange rates in the project, and I am not surprised with the approach,” he said. “We have seen it in other places.”

In a statement, the World Bank acknowledged that the program as currently structured produces a “transfer of value to the financial system,” but said there were few options under the circumstances.

“Ultimately, the only way to address this issue is for Lebanon to adopt a macro-stabilization framework or to switch to payments to beneficiaries in US dollars,” the statement said. “Until such time, the World Bank is working with the most optimal ways and means to help the poorest households who are in urgent need of such assistance.”

BEIRUT — After months of negotiations, the World Bank Group announced last week that its governing board had approved plans for a $246 million loan that would go toward setting up a stronger social safety net for Lebanon’s most vulnerable citizens.The centerpiece of the program is a $204 million initiative that will provide 147,000 of Lebanon’s poorest households with monthly cash...