On Wednesday, Harvard's Growth Lab, a multi-disciplinary research department in the American university, published a report addressing the economic and financial crisis in Lebanon. The country has been without a president for over a year and has been led by a government that resigned in May 2022.
The 30-page document outlines a "comprehensive" recovery plan, listing four key areas of focus that would enable Lebanon to overcome the crisis. Many Lebanese experts and officials have already undertaken the suggestions.
1. Dollarize the economy
The first recommendation is to dollarize the Lebanese economy completely. "In a context of weak policy credibility and recognizing that the economy and the financial system are already highly de facto dollarized, we deem official dollarization the superior alternative," stated the report.
It argues that maintaining a floating exchange rate alongside an economic policy that perpetuates specific inflation levels, in an already heavily dollarized economy, would prolong instability in the macroeconomic environment and “slow down” economic recovery.
However, despite its appeal, the total dollarization of a country like Lebanon is not without its limitations. The economy would still need to attract a stable flow of foreign currency to avoid collapse, as Jean-François Ponsot, a professor at Grenoble Alpes University, explained to L'Orient-Le Jour in an article published last April.
The report acknowledges this risk, among others, including the potential loss of “monetary autonomy.” However, it maintains that this solution is the only viable alternative for Lebanon given the financial and institutional circumstances.
2. Resolve banking insolvency
The second key aspect of the Growth Lab plan is to address the solvency of the Banque du Liban (BDL) and the country's banks. The report proposes transferring $76 billion of debts from BDL and the banks to the state “as soon as practical,” while protecting deposits worth between $100,000 and $150,000.
The first stage of this mechanism is to issue "interim restructuring certificates" to the banks, in exchange for them agreeing to waive part of their claims on BDL. Subsequently, the banks would exchange part of these certificates with their largest depositors, who could then turn to the state for the gradual recovery of their deposits. Some experts in Lebanon have already proposed this type of solution.
3. Restructure Lebanon’s public debt
Thirdly, the Growth Lab researchers recommend restructuring Lebanon's public debt as part of an agreement with the International Monetary Fund (IMF), from which Lebanon has been seeking financial assistance since 2020. The suggested “haircut” imposed on creditors for the amounts borrowed from them by the state would vary between 82% and 90%. This formula would enable the Lebanese authorities to approve and implement budgets that could achieve a primary surplus of 3% between now and 2030, while at the same time providing for around $8 billion in “additional financing” requirements.
The primary surplus is equal to government revenue minus government expenditure but excludes funds allocated to debt repayment. Lebanon failed to repay the dollar-denominated portion of its public debt in 2020, which accounted for a good third of the total when the former official exchange rate (1,507.5 Lebanese pounds to the dollar) was in force.
4. Develop new areas of economic growth
The final element of Harvard's plan is to develop new areas of economic growth, such as agricultural products, natural gas and knowledge services, especially given the increase of remote working in the wake of the COVID-19 pandemic. The report also recommends investing in modernizing and enhancing the country's tourism sector.
This article was originally published in French in L'Orient-Le Jour.