Comment: Lebanese economic crisis – lessons for Malaysia

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  • Sunday, 26 Jul 2020

Lebanese activists demonstrate along with former employees of the American University Medical Center outside the hospital in the capital Beirut after they were dismissed from their jobs last week as part of the university's sweeping layoffs to cope with a severe recession resulting from Lebanon's economic and financial crisis. – AFP

IN most countries today, many are concerned about the possibility of being infected Covid-19 virus. However, in Lebanon, its people are more worried about whether they and their family members will live in starvation. This is because the country is currently in a severe economic crisis where the income of many Lebanese people is not enough to meet their basic needs.

Lebanon imports a lot of the country’s food. Therefore, when the value of the Lebanese pound collapsed, food prices soared by around 150% in less than a year.

Among the common people and especially the poor, their income is no longer enough to buy food for the family. That is if they are lucky to have a steady income.

One report state that out of a total workforce of 1.8 million, 550,000 people or about one-third are unemployed. This figure is predicted to continue to increase.

The Lebanese government is no longer able to help the people because it itself is burdened with a large external debt of more than US$35bil (RM149.2bil). In fact, it was its debt burden that caused the collapse of the Lebanese pound.

Last March, the lack of interest among international financial institutions to continue lending money to Lebanon forced the Lebanese government to declare that it could not pay off part of its debt in the form of Eurobond worth US$1.2bil (RM1.5bil). As a result, the Lebanese currency depreciated and the cost of new loans also increased.

Lebanon is now desperate and is therefore appealing to the International Monetary Fund (IMF) for financial assistance. Of course, such assistance, if approved, will have strict conditions. Among others, the Lebanese government will be asked by the IMF to increase tax rates as well as interest rates, as well as reduce government spending including eliminating subsidies. This will of inevitably result in more hardship for the people. The possibility of riots by angry citizens is a real possibility if the strict conditions imposed by the IMF are implemented by the Lebanese government.

The question is how did Lebanon get caught up in this economic mess?

The two main causes of the Lebanese problem are the political system, which has rampant elements of corruption and nepotism, and the Lebanese government's strong dependence on debt, especially from foreign financial institutions.

The elements of corruption and abuse of power stem from the attitude of society that takes lightly the practice as well as the existence of sectarian politics. The Lebanese people are divided into groups, and they compete for influence and power.

Among the main groups in question are the Christian and secular factions (under the umbrella of the At-Tayyar al-Watani al-Horr party and the At-Tayyar Marada party), the Shiites (under the umbrella of Amal and Hezbollah parties) and the Sunnis (under the umbrella of Tayar Al Mutakbal, Jamaah Al Islamiya, Al Karama and Hizb Ittihad parties).

In their quest to gain political support, political party leaders from various groups tend to engage in corrupt practices and nepotism, leading to massive wastage of government funds. This is because some of the funds will be channelled by party leaders to their respective supporters to strengthen their political position.

It is, therefore, not surprising at all the Lebanese government has ended up in serious debt problem. In the list of the most indebted governments (compared to the size of their GDP – a measure of the size of a nation’s economy), Lebanon is in third place with a debt to GDP figure of 152%.

From the above, it can be seen that another major cause of the Lebanese economic problems is the high reliance on debt sources, especially from abroad. In the past, the situation was mitigated by the inflow of foreign currency (mostly in the form of US dollars) into Lebanon by Lebanese expatriates working abroad. However, this resource has dropped sharply from 25% compared to GDP in 2008 to only 14% in 2019.

Lebanon's economic unraveling is beginning to slip out of control as its currency declined, threatening to drag the nation into a hyperinflation spiral. – BloombergLebanon's economic unraveling is beginning to slip out of control as its currency declined, threatening to drag the nation into a hyperinflation spiral. – Bloomberg

The future of the Lebanese economy is very worrying. The misery faced by its people is likely to continue for a long time as the two main factors discussed above are not easy to solve as they are already part of the values ​​of Lebanese society.

It is hoped that economic problems will not be the cause of violent sectarian conflicts between warring factions such as those that took place in the 1980s that claimed thousands of lives.

What is more important for us is to learn from the serious problems that Lebanon is facing. How do we ensure that the same problem does not occur in this country?

The first lesson is that the practice of corruption and nepotism by political leaders should not be allowed to spread.

Although competition between politicians and between political parties is inevitable in a parliamentary democratic system, it must be healthy competition and not through abuse of power and nepotism.

The people should be wise not to be manipulated by leaders who will try to play on tribal and racial sentiments, when in fact they and their cronies are actively enriching each other.

Second, the society needs to work to ensure that government funds are not spent by leaders to support the practice of corruption and nepotism.

The principles of transparency and accountability in government expenditures must be strengthened to prevent overspending. Overspending is unlikely to happen if the country's financial resources are inadequate. Unfortunately, the state of a government’s financial capability is often falsified or manipulated. This is made possible due to the availability of borrowed funds.

Therefore, the third important lesson is that the people must be sensitive to the state of government indebtedness. In fact, if financial institutions from within and outside the country are still willing to give loans the government, then political leaders will always be able to say that the government’s financial situation is still sound. The fact that the government is in financial straits will only be realised when financial institutions refuse to lend to the government anymore. Unfortunately, by that time, the situation is already too late.

That is what has happened in Lebanon. The question is, do we want to wait for the same situation to take place in Malaysia or do we want to start taking steps from now to prevent it from happening?

Prof Mohd Nazari Ismail is from the Faculty of Business and Accounting, Universiti Malaya. The views expressed here are solely the writer’s own.

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