A Critical Look at Lebanon’s Subsidized Imports: Q1 2019-Q1 2021

Source: Lebanese Customs

The Lebanese crisis is considered one of the three worst economic crises that have hit the world economy since the mid-19^th century. Naturally, it has occasioned tremendous hardships, especially on lower-income groups, to the extent that ESCWA has recently observed that almost 77% of Lebanese households have been subject to multi-dimensional poverty[1]. Of course, poverty would have been even worse had BDL not subsidized essential products (primarily imports of pharma and minerals) since Q1 2020 till Q3 2021[2]. But complaints against the subsidies were frequently raised, mostly because they have resulted in considerable corruption and smuggling, but as importantly because they have wasted precious foreign exchange at a time when poverty would have been better tackled with direct assistance to the poor through cash support programs.

In this economic digest, we would like to present a brief critical look at the two main subsidized products – pharma and minerals. The analysis will be quarterly, focusing on the Q1 2019-Q1 2021 period because the latest available data on imports is for Q1 2021; and will assign income and prices as the two main determinants of demand for the subsidized imports[3].

 Concentrating firstly on minerals, as we can see from the table above, imports of minerals fell by 37.2% from $1,586.7 million to $996.2 million between Q1 2019 and Q1 2020; however, during that period GDP fell (on an annual basis) by 36.5% from $52 billion to $33 billion[4]; whereas the price of 20 liters of gasoline at the market exchange rate fell by 33.9% from $16.2 to $10.7[5]. So during that period the income effect dominated, and the reduction in minerals imports would have been a lot larger had it not been for the subsidies and lower prices — in addition, of course, for smuggling[6].

Moving on to the Q1 2020-Q1 2021 period, we see that minerals imports went down by 15.9% only from $996.2 million to $837.7 million; whereas GDP fell by 33.3% from $33 billion to $22 billion; and the dollar price of 20 liters of gasoline (at the market exchange rate) dropped by 61.7% from $10.7 to $4.1[7]. So, alternatively, during the Q1 2020-Q1 2021 period a strong price effect made itself felt (making Lebanon the cheapest country for gasoline prices in the world), almost nullifying the income effect, as the lower price was too good not to indulge in further imports, consumption, and smuggling of minerals.

What about pharma? Theoretically, pharma should be even less responsive (or elastic) to changes in income and prices because it is more of a necessity than minerals (unfortunately, we do not have a representative price for pharma products, so we will do without its quantitative changes). As such, we see that between Q1 2019 and Q1 2020, pharma imports decreased by 20.4% from $324.1 million to $257.9 million. So as in the case with minerals, the income effect dominates here, though as expected the effect is smaller. However, the picture changes noticeably when we move to the Q1 2020-Q1 2021 period. As we can see, during that period, pharma imports increased by 29.9% from $257.9 million to $335.1 million, indicating a very strong price effect that more than nullified the negative income effect. One can partly explain the increase in pharma products by the spread of the Covid-19 virus and the need to contain it; however, there were less benign reasons behind it. Prime among these is the fact that pharma products are much easier to store (and smuggle), so more of them were imported and stored for speculative purposes in order to sell them at the much higher prices if and when subsidies are removed.

To a large extent, the implications of subsidizing Pharma and mineral products on public welfare have been more sinister in the case of pharma. The long waits that people experienced at gas stations, though very frustrating, were ultimately fulfilled by buying gas after long enough patience and wasted time. But people were utterly disappointed – if not downright sick – when their requests for some subsidized pharma products were denied on the premise that they were not available, when all the while these products were stored and kept hidden, sometimes even after their expiry date!

Two conclusions arise from the above discussions that agree with what economic and social science theories have always said about the implications of subsidies. First, they incentivize corruption and waste.  Second, they are far better replaced by direct cash transfers to the poor and sick.

[1] ESCWA, “Multidimensional Poverty in Lebanon’, September 2021.

[2] The subsidy involved covering 85% of the cost initially at the exchange rate of 1515 LBP per USD and then at 3900 LBP per USD. Post Q3 2021 only subsidies on medicines for terminal illnesses have been retained.

[3] With demand, as economic theory postulates, positively related to income and negatively related to prices.

[4] GDP estimates are from the World Bank.

[5] The equivalent prices in LBP were 24,600 to 26,000 at average market exchange rates of 1,511 and 2,418 respectively (information International).

[6] Estimates put smuggling at about 37%. See Blominvest Blog, “Lebanon in Crisis: A Note on Some Economic Issues, Part 2”, Spotlights, October 23, 2020.

[7] For Q1 2021, the price in LBP was 39,700 at the average market exchange rate of 9,869.