World Bank: Lebanon has Lost Precious Time, Urgent Action Needed Now

In a report published on May 30, 2022 by the World Bank, it maintained that “the World Bank Group’s Board of Executive Directors approved on May 20 the Performance and Learning Review (PLR) of the Lebanon’s Country Partnership Framework (CPF) which summarizes implementation progress under the CPF over fiscal years 2017-2022 and refines its objectives at a time when the country is experiencing one of the most catastrophic economic and financial crises in recent history. The PLR also extends the CPF period by one additional year (through fiscal year 2023) to advance urgently needed socioeconomic recovery programs targeting the poor and most vulnerable and support urgently needed macroeconomic and structural reforms”.

The report added, “over the CPF period, Lebanon has been assailed by compounded and overlapping crises: a severe economic and financial crisis, the COVID-19 pandemic, the Port of Beirut explosion and most recently a food security crisis as a result of the war in Ukraine. According to World Bank analysis, nominal GDP plummeted from close to US$52 billion in 2019 to a projected US$21.8 billion in 2021, marking a 58.1 percent contraction. The exchange rate continued to deteriorate sharply, keeping inflation rates in triple digits. The crises have exacerbated social hardships, disproportionately impacting poor and vulnerable households and reinforcing inequality.  Faced with political inaction, the unresolved crises have created long-lasting scars on the Lebanese economy and society: basic public services are failing, unemployment is rising unabatedly, and human capital is severely depleted”.

However, the report admitted that “progress in achieving the CPF objectives has been modest on several fronts given the prevailing governance challenges and deliberate policy inaction by the political class. In response to emerging priorities and needs, the World Bank has restructured and reprogramed its portfolio by cancelling underperforming projects and proactively allocating resources to newly identified priorities through a response focused on relief, recovery, and resilience. This included: COVID-19 emergency support to equip hospitals for urgent care and COVID-19 vaccine roll out; targeted cash transfer program to support extremely poor and vulnerable households; support to small and medium businesses impacted by COVID-19 and Port of Beirut explosion; vouchers support to small scale farmers to sustain agricultural production; and emergency food security project to ensure availability and access to food grains for the poor and vulnerable including refugees”.

As to what hindered progress, the report says that the “overarching constraints to development in Lebanon identified in the Systematic Country Diagnostics remain: elite capture behind the veil of confessionalism; and the exposition to conflict and violence. They have created a fragile and dysfunctional political system as well as a state that has not been able to insulate political conflict from its capacities to govern and exercise authority. The management of the crises exemplifies the extent to which governance capacities have eroded as well as the political paralysis elite capture has brought. In this context, the PLR draws on three potential scenarios in which a new political settlement can evolve—political gridlock, minimal consensus, and political shift. Each scenario imposes a different set of constraints and opportunities for World Bank engagement”.

In terms of what is needed going forward, the report calls for “the adoption of a credible, comprehensive and equitable macro-financial stabilization and recovery plan and accelerate its implementation if it is to avoid a complete destruction of its social and economic networks and immediately stop irreversible loss of human capital. As detailed in previous issues of the LEM, this strategy would be based on: (i) a new monetary policy framework that would regain confidence and stability in the exchange rate; (ii) a debt restructuring program that would achieve short-term fiscal space and medium-term debt sustainability; (iii) a comprehensive restructuring of the financial sector to regain solvency of the banking sector; (iv) a phased, equitable, fiscal adjustment to regain confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection”.

In terms of governance, the report adds “while Lebanon’s governance continued to deteriorate during CPF implementation, certain institutional bright spots were able to provide a level of transparency and accountability to government services and inspire citizen trust.  Examples include the Rafik Hariri University Hospital and IMPACT, the information technology platform of the Central Inspection.  Going forward, building and strengthening institutional capacity is critical and requires investments in time, training, and financial support to strengthen public administrations and ensure sustainable development. Substantial efforts are needed to push the governance reform agenda forward. This is all the more critical in order to renew the social contract and mend the broken citizen-state trust relationship particularly at this delicate juncture.  Procurement reform, public financial management reform, strengthening parliamentary financial oversight, and the independence of the judiciary are some of the key areas on this front”.

We conclude with what Saroj Kumar Jha, World Bank Mashreq Regional Director, said: “Despite early warnings, Lebanon has lost precious time and numerous opportunities to adopt a path to reform its economic and financial system. The cost of inaction is collosal not only on daily lives of citizens, but also on the future of the Lebanese people.Two years and a half into the crisis, Lebanon has yet to embark on a comprehensive reform and recovery program to stop the country from further sinking. Continued deliberate delay in addressing drivers of the crisis represents a threat not only at the socio-economic level but also a risk of a systemic failing of state institutions and pressure on an already fragile social peace.

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