ByTheEast: A few weeks ago, Beirut hosted the Arab Economic and Social Development Summit which turned out to be a fiasco. Economic commentators pointed to the humiliation faced by Lebanon because of it. Do you share their point of view?
Fouad Zmokhol: First and foremost, we have missed a golden opportunity to unify our fractious Arab world. Issues that were purely Lebanese in nature, and of our making, has had a direct impact on the summit; the fault lines that divide our country, including relations with Libya, the Syrian war, has come into the fore… Once again, our divisions have hampered the country’s brand image and although we had hoped to place Lebanon on the regional map using the summit as a platform, we ended up sending the wrong message to the Arab world.
BTE: To what extent Lebanese economy is still dependent on the regional context?
Zmokhol: There are a couple of complex issues here with geo-political and geo-economic consequences. Lebanon’s economy is significantly dependent on maintaining good relationships with the Arab countries. The political uncertainty and turmoil, before the formation of the Cabinet on January 31, posed major systemic challenges to diplomatic relations with our neighbors as well as for our economy.
The lack of clarity and uncertainty in government formation has resulted in a sharp slowdown of Arab investment in Lebanon. Hezbollah’s clout in the political theater has cast a deep shadow on the tourism as well as the financial sector. Further, in the last few years, Lebanon was not able to play its role in the socio-economic platform. Given the dynamics of such a context, we could not have expected miracles to happen in terms of investment during the last Arab summit.
On the bright side however, Lebanon had the opportunity to highlight and underscore the social and economic impact Syrian refugees have had on our country’s economy; we were also able to specify the terms of their return to their respective countries. Although on the humanitarian or trade level, we’ve always been eager to sign agreements, we need to be more structured, systematic and efficient in implementing them.
BTE: During the Arab summit, announcements have been made about an Arab investment bank, about a Bank for Reconstruction and Development… Do you support those projects?
Zmokhol: I do, but let us be very clear on an aspect: this summit was an Arab summit, and not a donors conference for assisting Lebanon. The Arab investment bank that President Aoun suggested will be financed with a total of USD200 million (out of the USD500 million given by Qatar). These suggestions go in the right direction, but let us not count our chickens before they hatch. All of the existing Arab funds have been dysfunctional for the past ten years. Even foreign direct investments in Lebanon has dried up, from USD4.85 billion in 2010 to USD2.45 billion in 2018. It would be surprising if this sees an improvement in the near future.
Every figure mentioned during the last Arab summit are promises of investment, or debt and not direct investment.
We need a medium-term plan; we need to establish this Arab investment bank from scratch. The likelihood of this happening however is marginal given that similar projects in the past are yet to be implemented.
Given the current global economic scenario, countries are more interested into investing in their economy so as to create more jobs; investing in the economy of other countries, including that of Lebanon, either comes with strings attached or is not a priority anymore.
“Government formation after an election is a minimum right, it shouldn’t be considered as a miracle!”
BTE: The country has been plunged in a severe economic crisis since 2011. How much longer can Lebanese businesses persist in these harsh conditions?
Zmokhol: Indeed, we are facing a deep economic and social crisis for the last eight years in a row. In pure economic terms, Lebanon’s economy enters into a crisis if its GDP does not grow by 1.5% annually. In actual terms, since Lebanon is a tiny country with a USD50 billion GDP, a 1% to 2% growth amounts to zero.
We are neither being able to create jobs or attract investments. But we do create social dramas: unemployment is estimated at 26.4% of the labor force, 38% among women and 36.5% among recent graduates.
BTE: What has been done against unemployment?
Zmokhol: Frankly, nothing at all. Unemployment has steadily increased every year. Lebanon’s economic crisis has a cascading effect and has led to a social crisis: the lack of job creation has led to diminishing income levels and a steady rise in the cost-of-living. Lebanon is in a state in the agony… SMEs are primarily at risk, as they gather 84 per cent of our wealth creation. In Lebanon and elsewhere, SMEs are the growth engine of the economy, and it is critical that we support them.
BTE: Yes, but public debt has become a major issue…
Zmokhol: Everyone is talking about public debt, but what about private debt? In 2018, Lebanese private debt touched USD55 billion for a USD50 billion GDP. In other words, 110% of Lebanon’s GDP are debts. Most of them are owed to SMEs owners who have already used all of their guarantees in order to generate cash flow to develop their business.
We have reached a point where indebtedness cannot grow any longer. As a result, we are now facing severe cash flow issues, and the problem is compounded due to high interest rates. Financing costs remains as high as 10% to 15%. As a result, Lebanese SMEs are unable to hire, they have no significant growth and they can not sustain their own growth. Lebanon’s economy is being struggling hard and under deep pressure in order to survive.
BTE: And what about bigger companies?
Zmokhol: They are going through challenging times as well; they are also waiting for the dark clouds hovering above to pass; they don’t invest much in the Lebanese economy; they prefer to invest in countries which provide a faster Return on Investments (ROI).
During the Lebanese Civil War, the R.O.I. exceeded 30%, it now varies between 0% to 5%. The vast majority of Lebanese companies we know nowadays were created and developed during the War: it was a difficult and unstable period but we attracted significant investments and liquid assets. For now, large firms prefer either to freeze their investments or to invest in countries other than Lebanon, including in Africa, where security risks are high.
BTE: What are your expectations of the new Cabinet?
Zmokhol: We have over-emphasized the Cabinet formation process during the last months. Government formation after an election is a minimum right, it shouldn’t be considered as a miracle! It reminds me of the garbage crisis: citizens had their nose rubbed into it because of the tricks played by politicians. They expected people to applaud the day they fixed the problem.
Essentially, we have lost an entire year. 2018 has been a lost year. We spent 5 months to fight and to prepare for the elections after a gap of 9 years, after which we congratulated the winner; and then we waited for another 8 months to form the government. It makes me smile and cry at the same time.
Now that we have formed a government we cannot rest on our laurels. The problems facing Lebanon and its people have not disappeared, they are still on the table. While earlier we fought outside the government, now we will have to fight within it. For the past year, we attended to an arm-wrestling contest opposing personalities and political parties, never to a peaceful clash of ideas nor a presentation of any political plan of action. Therefore I am not really positive or I should say cautiously optimistic.
BTE: What should be the new government’s priority?
Zmokhol: The first thing to do is to have a socio-economic action plan, such as the McKinsey plan. We have paid millions to get this plan drafted which essentially is a rephrased version of what we have been asking for the last 15 years. It’s now time to act.
BTE: Can you specify some practical measures of reform?
Zmokhol: We know we can rely on the private sector which still keeps Lebanon’s economy above water. We should be proud of it especially since our public sector enterprises are in the red. Case in point: the Code of Commerce goes back to the French Mandate. This should be updated every single year. Clearly, we can’t rely on the public sector.
As entrepreneurs however, we consider that regulations should be revised, that corruption must be combated, that companies’ growth should be supported… We have to apply the CEDRE (Conférence économique pour le développement par les réformes et avec les entreprises) recommendations.
It’s now obvious that Lebanon must not be governed the way it was before, when corruption, mismanagement of public finances and lack of governance prevailed. It’s not an option anymore.
“We don’t need new taxes, we need a better tax collection rate than the current rate of 50%”
BTE: What should be the key reform?
Zmokhol: The previous economic reforms in the normalization of wage scale has had a sledgehammer effect on the Lebanese economy. Increasing the salaries of non-productive people, or paying employees for positions they do not occupy, is an exercise in futility and makes no sense to me. As a result, there is no money to pay wages. Although to a large extent direct costs are known, however, there is a lack of data on indirect costs including retirement and early retirement. To give a context to these sums, we are talking in terms of billions of US dollars. Can the Lebanese State meet these needs expenses? Unlikely.
While the Banque du Liban and RDCL World among others, have sounded the alarm for some time now, we don’t know how much these dispositions will cost given the lack of clarity in indirect costs.
We are looking forward to a reduction in the wage burden in the Budget deficit, which continues to grow from 3 to 4 billion year on year.
The State Budget makes no sense at all: first of all, we always vote on the Budget two or three years after we have spent it. Secondly, one third of the Budget is used to finance EDL (Electricité du Liban) which is the poorest infrastructure in the country; thirdly, one third goes to paying-off the public debt, and the last tranche goes to paying the wages of civil servants. None of the three elements are productive. We need more investments, rather than widen our deficits every day. Prices keep rising while revenues keep treading downwards. We don’t need new taxes, we need a better tax collection rate than the current rate of 50%.
BTE: Issues with electricity supply system are well-known. What could be done about it? Are renewable energies part of the solution?
Zmokhol: Promoting new and clean energies could give a boost to the Lebanese economy. Reforms planed during the CEDRE conference were similar to reforms advocated by the Paris I and Paris II agreements (2001, 2002). But I fear that the new recommendations won’t be considered as well. I urge Lebanese political and economic leaders to unite behind a common program, the most important one: reforming EDL. It’s time to prove to the world that we can achieve one essential reform.
BTE: More specifically?
Zmokhol: We have no choice: we need to either privatize Electricité du Liban or to implement a PPP project (private public partnership). The State can not run it anymore: it has neither the means nor the technical capacity to manage this institution.
I’m leaning toward the PPP option, as some major foreign companies have shown interest, including the French (EDF who has the knowledge of the issue), the Canadians and the Chinese,… The selected partner will have his task cut out. He will have to develop and implement renewable energies in the form of either solar, wind power, geothermal energy, and biomass.
According to recent studies, Lebanon’s northern windy region of Akkar could benefit from wind power. Already some companies are eager to produce electricity there, however with the implementing of a legal framework lagging behind, projects are taking a toll.
At least everybody is on the same page on the need to build a new model in the renewable energies space without incurring huge investment. Thankfully, the legal framework is operational, a new PPP law is awaiting the Parliament’s approval, while another is queued in relation to renewable energies. Everything is in place other than the political commitment.
Our lawmakers need to act in unison rather than act divisively. Our political establishment has to evolve. It has not changed since decades because of our votes.
BTE: You seem to a fatalist?
Zmokhol: Precariously optimistic, I would say. Let’s hope the new government will quickly implement all the reforms that have been announced during the CEDRE conference as companies are part of the equation. Success will depend on the future PPP projects application. International conferences as CEDRE can force us to reform ministries as money won’t flow without any control, and as funds will be allocated to selected projects, and step by step. External and internal audits are also foreseen. We won’t accept any other reform; we don’t want international assistance if this money flows through our political personnel.
It is to be noted that despite regional tension, despite four wars around us (Syria, Yemen, Iraq, Libya), despite the severe economic crisis, Lebanese firms have persisted and are resilient. We, as entrepreneurs, persevere because we still believe in the Lebanese miracle.