Lebanon’s financial woes: Rumors, panic, rage and finger pointing

By Hani Bathish

In Mary Poppins, George Banks’ son demanded his tupence back from the miserly decrepit bank chairman, that was enough to spark a rather improbable but comical run on the bank. In March 2014, Reuters reported  a three-day bank run on a Chinese bank in the city Yancheng after it was rumored that the bank refused a customer’s request to withdraw 200,000 Yuan ($32,000). The bank denied this incident ever happened, but it was too late. Despite assurances from the central bank and regulators, the rumors continued to circulate among customers and even bank employees. In the end, bank managers had to open branches 24 hours and truck in cash to meet demand from nervous customers, many simple rural villagers risked taking piles of cash in baskets home with them late at night than keep it in the bank. In our own country, Lebanon, we had a famous case of a bank being brought down by rumors, Intrabank, and this was back in the economic boom days of pre-civil war Lebanon. Rumors around banks can and have destroyed livelihoods and lives, imagine how destructive such rumors are when they swirl around a country’s financial and monetary stability.

Today, the rumor mill is supercharged. On Twitter, Facebook and WhatsApp, experts and laypeople alike, morons and sober realists, the naïve and the financially savvy, all compete for attention. It’s hard to know who to believe or trust. Today, our government teeters on the edge of bankruptcy, not yet going over the edge, but not on firm ground either. This is bad news for local banks who hold most of the government’s substantial debt in the form of treasury bills and euro bonds, debt they sell on to their customers, mostly Lebanese depositors, who lap up such debt eagerly for the simple reason that they earn a very high return on their money compared to other similar debt instruments elsewhere in the world. 

A government default or bankruptcy would simply be an end-of-life-as-we-know-it scenario in Lebanon, we do not want to arrive at that eventuality. Those in government, the 30-member cabinet, the 128-member parliament, all know this and understand the weight of responsibility on their shoulders… one hopes! Of course, in a country used to sudden shocks and distrustful of power and those who wield it, people tend to take a lot more convincing. In a country like ours, whose people enjoy spreading rumors about each other in the cacophonic salons across the Lebanon, people tend to be creative at generating and spreading rumors, whether for malicious purposes or just for fun. Its despicable, I know, but it’s a fact.

Already, people are talking about and asking how safe their deposits are. At a recent wake, I heard at least two ‘dramatic’ rumors, which turned out to be premature guesses and the product of overactive imaginations. The best rumors have to illicit a deep sense of horror and panic. I shall not repeat these rumors here, but many of my country men and women must have heard their fair share of them and probably repeated quite a few! Don’t!

The fact is, we are all in trouble. Our debt is mostly internal. The people of Lebanon are heavily invested in their government’s financial survival, hundreds of thousands have entrusted their life savings to local banks, many elderly retirees live of the interest earned from investing in government debt. 

Our gross public debt exceeded $85 billion in January this year. In a year, from 2017 to 2018, our fiscal deficit more than doubled from $2 billion to 4.5 billion. In that same period government spending increased by more than 26%, much of it on the bloated public sector which continues to be a major source of waste and a drain on the economy. This is why so many distrust government, it is because of such irresponsible behaviors as excessive spending.

I hate to be heartless, but drastic measures are needed including the jettisoning of excess dead weight, i.e. public sector employees and public corporations such as the power company EDL, which the government can ill afford to keep subsidizing. Several proposed measures, ostensibly taken from a draft austerity budget have been reported by the Press, among these a 15% salary cut for public sector employees, which seems to have already elicited indignant rage among said employees who filled the streets and blocked roads. Other measures being floated in the news is an increase in tax on the interest earned on deposits, from 7% to 10%. The fact is, a whole host of similar measures to increase revenue and decrease public expenditure will be needed before long if we are to meet the terms of CEDRE and receive the promised funds. 

What is not needed or helpful at this time are recriminations and finger pointing. The mess we are in is the end result of decades of irresponsible spending and deeply engrained corrupt practices. There is barely a household in the country not tainted by corruption, every citizen has had business with government ministries, paying fees and taxes for services, and every citizen has a story to tell about paying a little on the side to so-and-so to get thing done faster or cheaper. Not paying your fair share in tax is a deeply ingrained tradition in Lebanon, sadly one that many are proud of, the Lebanese call it Shatara. This stems from a belief that taxation is unfair and it began in the days of the Ottoman and French occupation. Not paying your taxes to foreign rulers was considered a patriotic gesture a two-fingered salute of sorts. 

In fact, the Turkish word for salt Toz is a well known term in Lebanon often used to express indignation, the origin of its use stems from Ottoman days in Lebanon when goods being transported across provincial lines were subject to taxation, all goods that is except salt. So if a cart driver is stopped and asked what goods he is carrying he would reply Toz, even if he was carrying other goods. If a customs official were lax in enforcing the rules, he would let the cart pass without paying tax. But there is nothing today that justifies not paying our fair share in a democratic society.

The Cabinet is wary of upsetting certain interests and worried about the public’s reaction to the proposed austerity measures. But such fears need to be put to one side. We need courageous decisions to be taken and painful measures to be put in place by a decisive leader unafraid of street protests and unpopularity, a head of government who will do the needful no matter the sacrifices. 

The fact is, we are all being asked to make sacrifices. There are no more options, no more second chances, austerity will not be fun but it will be the bitter medicine that could just save us from worse to come.