Fixing infrastructure, economy a high-stakes job for winner of Lebanon election

In Lebanon, households can pay for electricity three times.

One payment goes to Electricité du Liban, the national electricity company. But since its system is so laughably unreliable — getting stuck in elevators when the juice goes off is part of everyday life — diesel generators are ubiquitous. So the second payment goes to the owner of the generator that is connected to the apartment building. Since the backup system doesn’t always work, some individual apartments have their own generators. Voilà — third payment.

Lebanon’s crippled electricity system is just the most obvious example of the small Mediterranean country’s ailing infrastructure and economy. The May 6 parliamentary election, the first in Lebanon since 2009, will aim to form a government that can take the fix-it job seriously.

There’s a lot of stake — US$11-billion-plus, actually — if the new government fails to make progress on repairing the infrastructure and the country’s finances. That’s the amount that was pledged last month to Lebanon at the international CEDRE economic-development conference in Paris, an event attended by French President Emmanuel Macron and Lebanese Prime Minister Saad Hariri, who, as leader of Future Movement, Lebanon’s main Sunni party, is campaigning hard to keep his job.

The catch is that the financial package — largely in the form of low-interest loans and guarantees, with a splash of grants — is conditional on projects whose progress can be measured by the World Bank and other donors; on fiscal adjustment to rein in the country’s horrendous debt and budget deficit; and on reforming the economy to make it more competitive and diverse.

The launch of the package, which Donald Trump praised as a big step towards “a more secure Lebanon,” matters not just to Lebanon but to Europe and to North America. Governments in those regions fear that economic and political instability in Lebanon could lead to a destabilizing crisis, one that would sweep the little country into war once again.

Lebanon was devastated by a civil war that went from 1975 to 1990 and another war, in 2006, between Israel and Lebanon’s Iranian-backed Hezbollah militia in southern Lebanon. Today, Lebanon is being pulled in all directions by outside powers — Iran, Syria and Saudi Arabia — while it tries to keep its fragile economy and democracy intact. At the same time, it is bearing a lot of the cost of hosting some 1.5-million Syrian refugees.

The wonder is that Lebanon is not the next Greece, though “it could be,” says Nadim Munla, adviser to Mr. Hariri on the economy and refugees.

Lebanon’s debt to gross domestic produce, at 150 per cent, is one of the highest in the world (Greece’s is 180 per cent). Its budget deficit is 9 per cent of GDP, an entirely unsustainable figure. The unemployment rate has steadily climbed since the start of the Syrian civil war in 2011 – it’s thought to be about 20 per cent — and growth has tumbled to 1-2 per cent from the 8 per cent recorded before the war. Foreign direct investment is plummeting.

To be sure, Lebanon is its own worst enemy. Transparency International ranks it as one of the most corrupt countries in the world.

Lebanon ranked a lowly 143^th in the 2017 survey, equal with Bangladesh, Guatemala and Kenya (Canada ranked 8^th). These stories of kickbacks, nepotism, fraud and bribery at every level of government and industry are rife, to the point that the average Lebanese shrugs when confronted with another example of sleaze.

What keeps Lebanon from imploding is a healthy banking system and a strong central bank, which allowed the country to buck the 2008 financial crisis. The banks hold deposits equivalent to three times GDP. They prop up the government by holding most of the government’s sovereign debt.

The downside is that servicing the debt absorbs about a third of the state budget. Bloated state payrolls and electricity subsidies eat up much of the rest, leaving little for investment after corruption is factored in. Beirut has no public transportation system. The entire country suffers from a garbage crisis. Water systems, schools and hospitals are falling apart. The electricity grid is decrepit (the state electricity company was an energy exporter at one time). Lebanese businesses and families survive by becoming experts in the débrouillard system — the French word for “resourceful.” Hence the backup generators, the private water deliveries and the private heath clinics.

To its credit, the government admits Lebanon is a mess. In a document prepared ahead of the CEDRE conference, it highlighted the need to boost growth, fix infrastructure, reduce the jobless rate and cut the debt burden, otherwise the “time bomb is likely to explode.”

The loan package that emerged from the conference provides a glimmer of hope, but only if Lebanon behaves itself. While the international loans are so cheap that they effectively amount to money for nothing, they won’t be doled out unless Lebanon makes good on its promise to make fiscal and economic reforms and build infrastructure, from generating plants and waste-treatment systems to communications networks and roads.

Mr. Munla says the World Bank and its lending partners, including Qatar, will monitor every project. “The World Bank will do its due diligence,” he says. “We’re getting project funding, not budget support.”

The problem is that no one in Lebanon believes government promises. In 2010, the energy minister pledged a “comprehensive” overhaul of the electricity system, one that would cost almost US$5-billion and double capacity. Today, electricity rationing is still in effect and diesel-generator sales remain brisk.