Lately, Lebanon has been overwhelmed by hyperinflation: the value of the Lebanese Pound is plummeting as compared to the United States Dollar. More and more Lebanese Pounds are needed to purchase a dollar. The devaluation is partially caused by the fact that outflows of foreign currency from Lebanon are greater than inflows of foreign currency. Part of the problem is that for decades, Lebanon has been operating with a trade deficit, which means that it is paying more foreign currency for its imports than it earns from its exports. This means that there is a leakage of foreign currency from the Lebanese economy. So how can we improve the net trade balance to prevent leakages of foreign currency that result in further devaluation of the Lebanese Pound?
Well, the government can manage trade policies to interfere with foreign trade activities. Two potential instruments that a government can use are subsidies and tariffs.
When a government subsidies a locally produced product, the supply curve related to this product shifts from S0 to S1. This results in the price of this product decreasing from P0 to P1 which then leads to an increase in the quantity demanded from Q0 to Q1. By doing this, governments can incentivize their local producers to increase their output at lower prices which then makes the locally produced product more attractive to consumers than a more expensive imported alternative. If the local suppliers are able to fully satisfy local demand for their product, they could go on to produce excess amounts that could then be exported to other countries.
When a government introduces a tariff on an imported product, the supply curve related to the imported product shifts from S0 to S1. This results in the price of this imported product increasing from P0 to P1 which then leads to a decrease in the quantity demanded from Q0 to Q1. The tariff applied by the local government sets a markup to the price of the import product making it more expensive and thus less attractive to consumers as compared to locally produced products. This encourages consumers to buy local products instead of imported ones.
At an aggregate level, if local production levels across more and more product types increases to satisfy a bigger proportion of demand, the need for imports will decrease. Suppliers could even begin to export products. Increased production levels can also increase employment opportunities. At the same time, if at an aggregate level, consumers are willing to switch from imported products to locally produced products, the aggregate demand for imports will decrease which means fewer quantities of these products will be imported. The decrease in total import levels and or the increase in total export levels will result in a higher net trade position, or in other words a decrease the trade deficit or even result in a trade surplus if the total import level is lower than the total export level.
It’s worth mentioning that tariffs and subsidies should not be used as long term solution. Imposing tariffs on imports can result in retaliation from other countries in which they impose tariffs on Lebanon’s exports. Also, constantly subsidizing local production, requires funds that the government may not always have available. However, doing so on the short run motivates local suppliers to increase production which can help improve employment and development of domestic industries for future sustainability.
You may be thinking that this sounds like a lot of theory. Let’s take a look at an example of a country that used these policies. The Brazilian government imposes tariffs on imports and subsidizes local production. Additionally, the Brazilian government entered into several trade agreements with other countries to facilitate its exports. By doing so, Brazil was able to overcome its trade deficit and even operate at a trade surplus for many years.
The Lebanese Ministry of Finance, Ministry of Economy and Trade, and Ministry of Foreign Affairs should work together to enter into trade agreements with other countries to promote Lebanese exports, impose tariffs on imported products to shift local demand away from imported products toward domestic products and subsidize the production of local goods and services. By decreasing the net outflow of foreign currency from Lebanon, the Lebanese government can better manage the exchange rate and reduce inflation levels. This leads to more sustainable economic growth and more productive employment.
While one might expect to see better development outcomes after countries discover natural resources, resource-rich countries tend to have higher rates of conflict and authoritarianism, and lower rates of economic stability and economic growth, compared to their non-resource-rich neighbors. This is what has become known as the Resource Curse. Countries like Venezuela in Latin America, Angola in Africa, and Saudi Arabia and the United Arab Emirates in the Middle East have all exhibited varying degrees of this problem. Countries suffering from the resource curse also have significantly higher rates of pollution, and those with higher GDP per capita rely less on renewable energy sources. Because those countries are also mostly authoritarian, taxes are not collected from the people and government expenditures are not monitored.
In Lebanon, the prospect of commercial gas fields has excited the people and has led the government to sign contractual agreements with drilling companies to start exploring and producing commercial gas. Many believe that this project would enrich and stabilize Lebanon, but the history of resource-rich countries predicts otherwise.
Problem Evidence
Economic Instability (related to SDG 8, 8.2): Below, we can see each country’s oil rents share of GDP, that is, the share of resource sales and exports out of total GDP. We can clearly observe that Gulf Countries and some resource-rich African countries like Libya, Angola, Democratic Republic of Congo and others, have oil rents account for 25 to 45% of their GDPon average for the past 30 years.
We can also see how Oil Rents move exactly in tandem with GDP Growth for Saudi Arabia and the UAE, which means that their economic growth is highly dependent on oil prices and sales volume, rendering it non-sustainable.
As for economic instability, severe inflationary periods have been recorded for these countries with the Gulf’s Oil Crisis in the 1970s through 1980s and the 1990 Oil Shock which impacted the Arab World greatly, and then Venezuela’s insane inflation rate which since 2016 has increased to 53,798,500%. These trends can be observed below for Saudi Arabia, the UAE, Iraq and Venezuela. The inflation rate is more volatile in these countries and the consumer price indices are in a steep upward trend.
Conflict and Government Expenditures: We can see in the representation below how countries which were perceived to be most reliant on Oil Rents are also more likely to have a higher share of their GDP be dedicated to MilitaryExpenditure (SDG 16, 16.4). This indicates they are more prone to conflict, wars and social instability. Also, the lack of monitoring for governmental expenditures means that important sectors can be de-prioritized. For example, the research and development expenditures’ share of GDP is much lower in Arab countries than in Europe (SDG 9, 9.5, 16, 16.6).
The number of journal articles produced by each area of the world clearly shows the Middle East and Africa’s lower priority for innovation and scientific or scholarly research. High technology exports also have a low share of GDP in comparison with European, North American and East Asian countries.
Pollution and Environmental Impact (related to SDGs 3, 7, 7.2, 8, 8.4): The mapchart below clearly shows the high exposure to PM2.5 molecules in resource-rich countries. Despite having lower population rates and less condensed cities, the Gulf Countries are amongst the most air polluted countries. Saudi Arabia uses only oil as an energy source and has a renewable energy sources rate close to 0% (out of total consumption). The UAE also uses only natural gas to power the country and no renewable energy sources.
Solutions and Reforms: Example of Saudi Arabia
Eventually, Saudi Arabia took serious steps to diversify its economy and to become less reliant on its natural resources. It took counsel with the IMF during the early 2010s and then announced its Vision 2030 which aims for sustainable development and diversification of the economy. The data shows improvements on many levels. First of all, we can see that the GDP’s composition is shifting from being purely reliant on Oil Rents to including more activities done in the Transportation and Tourism (SDG 8, 8.9) sectors. We can also see that more Foreign Direct Investments are being made.The Military expenditures’ share of GDP is also regressing over time.
The number of journal articles published is also increasing rapidly with more and more Saudi Arabians focusing on scientific research and on new technologies (SDG 9, 9.5).
Recommendations for Lebanon
It is important to be aware of the consequences that a resource rich country may face by relying on its resource. Lebanon already has weak governance and is prone to economic instability and conflict, this is why it is especially important to learn about the reosurce curse and to keep encouraging the Lebanese people to be productive and to ensure that the governmental institutions are diversifying the economy, maintaining price stability, and producing energy from renewable resources even with natural gas being available as a resource; these concepts are especially relevant to the UN’s sustainable development goals which call for sustainable economic development, good governance, and environmental health. The data shows that proper public policy and budget controls can truly be impactful.
Lebanon is suffering from an economical and financial crisis since 2019. The world bank has classified this crisis as one of the worst 3 crises since mid-nineteenth century. One main reason behind this crisis is the high external debt and its services which have led eventually to a great negative impact on Lebanon’s GDP. One way to control the increase of this debt is working on the development of the agricultural sector.
Problem:
The external dept as well as its services have increased dramatically over years. This increase was highly sharp between the years 2019 and 2020. At the same time, this high increase in the debt was associated with a decrease in GDP growth, specifically between the years 2016 and 2020.
Solution:
The contribution of agriculture in the GDP of Lebanon was decreasing over years. So, supporting the agricultural sector would be one of the solutions that can help freezing the increase in debt. In fact, Lebanon has the required elements to do that, i.e., a cultivatable land and water resources. According to the World Bank collection of development indicators, Lebanon has 64.32% of its land cultivatable.
Supporting the agricultural sector means that the government is requested to work on a plan that can improve the agricultural sector. This is important as a development in the agricultural sector would be reflected as an increase in the agricultural production. Therefore, this will lead to a decrease in the imports and an increase in the exports of agricultural products. Finally, all of this would cause a higher contribution of agriculture in GDP and a decrease in borrowing and debt levels.
This proposed solution has been adopted by many other countries to support their economy. According to the World Bank, agriculture has accounted for more than 25% of GDP in developing countries in the year 2018.
Findings:
Developing agricultural sector is essential for the development of the Lebanese economy.
Improving the agricultural sector will help Lebanon in getting out of the economic and financial crisis.
Recommendation:
The government should construct and implement a plan that can enhance the agricultural sector in Lebanon.
“It is the devil’s excrement. We are drowning in the devil’s excrement. —Juan Pablo Pérez Alfonso, former Venezuelan oil minister”
The narrative fifty years ago A country discovers vast amounts of oil reserves. Leaders across the world are green with envy.
The underlying assumption Profits generated from exporting this natural resource, commonly referred to as black gold, transforms a nation from rags to riches.
The narrative today Rentier states are war-torn, corrupt, and led by dictators whose power is fueled by the sale of this precious commodity.
I invite you to read Michael Lewin Ross’ “The Oil Curse”. An excellent resource for those who want to understand why such a valuable commodity leaves its owners worse off than their counterparts.
Take Iraq and the United Arab Emirates. Two neighboring countries. Both rich in natural resources. One destroyed by war and conflict. Another a model for quality of life, political stability, and investment. Why are they so different?
The dependencies oil creates on an economy can be catastrophic in the sense that they create patronage systems between the state and its citizens, making it increasingly more difficult to create sustainable economies over time.
How? The notion that a state is responsible for extracting and selling oil to benefit the country is flawed. Upon exporting oil, Iraq has employed more and more government employees to “pay” its citizens what it owes. The creation of these governmental positions, most of which are redundant in nature, has caused high levels of bureaucracy within each governmental body, making it increasingly more difficult for businesses and start-ups to get their businesses off the ground. Iraq ranks 172nd in the World Bank “Ease of Business” scale. It takes 51 days to register property. It also takes 167 days to deal with construction paperwork and permits. This has had detrimental effects on other industries in Iraq. Iraq’s predominant reliance on oil revenue, coined with electricity shortages, a suffering educational and healthcare system, and an unstable geopolitical climate, makes it increasingly more difficult to wean the average citizen off governmental positions and rations and encourage them to work in the private sector.
In comparison, the UAE ranks 16th on the “Ease of Business” scale, and it takes 1.5 days on average to register property. It also takes 47.5 days to get construction permits, nearly a third of how long it takes in Iraq. Their government expenditure levels are half of what Iraq’s are, whereas the average worker’s productivity value is nearly double.
Where do we go from here? For starters, digitalizing the public sector, something that is already underway in the Kurdistan Region, albeit off to a slow start, can help lower redundant employment positions, all while increasing productivity levels. A digital transformation will also pave the way for a simpler business start-up registration process, making it easier for entrepreneurs and businesses to take off, attract foreign investment, and grow the private sector.
Another solution, which in my opinion is a byproduct of digital transformation of government processes, is the expansion of the private sector. Unless the average citizen acknowledges the dependency oil creates on the economy, and the finite (and frankly, volatile) nature of this resource, Iraq will not be better off than it is today.
Lebanon’s financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints.
The Lebanon financial and economic crisis is likely to rank in the top 10, possibly top three, most severe crises episodes globally since the mid-nineteenth century.
The Debt mountain reached 150% of national output, the GDP per capita fell by 40%, while the bank loans had fallen by 25% year on year.
Banking Non-performing Loans to total gross loans (%) world development indicator in Lebanon.
According to the World Development Indicators, a nonperforming loan (NPL) is a loan in which the borrower is default and hasn’t made any scheduled payments of principal or interest for some time
The increasing drift of NPLs will affect the banking efficiency resulting in banking crises.
The increase in NPL was 50% year by year starting 2018.
Commercial banks and other lending (PPG + PNG) (NFL, current US$) World Development Indicator in Lebanon.
This increase in NPLs was reflected sharply on the monetary value from commercial banks as they stopped issuing transactions deposits and forced a sharp limit on loans.
2019 and 2020 recorded high negative loss in PPG and PNG.
Any effort to control the growth must, therefore, start by strengthening or adjusting the balance of payments; a reduction in borrowing without an accompanying adjustment of the balance of payments will simply result in payments arrears.
