What if we let the economy bounce back on its own?

Lebanon Economy
2023-01-04 | 17:44
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What if we let the economy bounce back on its own?
What if we let the economy bounce back on its own?
Those who appear on television as "new economists" have recently raised the following question: "what is the importance of the financial recovery plan and reform package that the understanding with the International Monetary Fund was based on, as long as the economy began to repair itself automatically?"

Before or after asking this question, these people don't fail to share any remarks that support their question: Full restaurants, quick rise in consumption rates, market prices based on full "dollarization," which deals with the basic commodities' shortages, and statements by Central Bank governor or the caretaker prime minister indicating that Lebanon's economy grew by 2 percent in 2022.

This article was originally published in, and translated from, Lebanese online news outlet Al Modon.

An ambiguous yet important question

The question may first seem absurd, especially given that the askers express confusing and complex interests.

These interests are the same ones shared by the financial elite and the political system, which have hindered the initiation of any comprehensive financial recovery plan and the serious implementation of any staff-level agreement with the IMF over the past three years.

They are interests that oppose a declared and transparent distribution of bank losses to protect the ownership and capital of bank owners.

These interests have opposed Capital Control, the serious lifting of banking secrecy, auditing the financial sector's budgets, and other fundamental requirements for a solution.

These interests have rejected the announced plan for a comprehensive solution in favor of a basic plan that redistributes the collapse's losses by issuing circulars from here and decisions from there.

When the purpose of the question is to downplay the significance of the comprehensive plan or to defend the interests of those who do not want a comprehensive solution, there can be no doubt about the intentions of those who ask the question and their background.

However, there is no absurdity in seeking to find a satisfactory answer after rewording the question: "What will happen if we let the economy correct itself? What kind of society and types of lifestyles would its citizens have as a result of such a correction? Thus, the key question of this research is: Who will foot the bill for this kind of correction?

Finding the answer is crucial since the chaotic correction scenario, which defies any official plan for a solution, has already come to pass, and the political parties appear to have agreed to refer the IMF plan to retirement. So, it is now essential to consider the question of the cost and quality of the course the country is taking.

The observations that the supporters of this theory are referring to, with the exception of the "story" of economic growth of 2 percent in 2022, can be said to be true, which begs the question of what the other side of this scenario is and what costs to society today this harsh and random correction conceals.

Increasing class disparities and societal fragmentation
In light of the monetary chaos in Lebanon, the crisis has divided the society into three different categories:

The first category represents a limited circle of residents who benefit from dollar wages, including employees in non-governmental institutions, branches of foreign companies, and some who practice advisory services. By the nature of its jobs, this small group could overcome the monetary meltdown as long as the value of their wages automatically adapted to any deterioration in the local currency.

The second category consists of self-employed individuals, who are able to adjust their incomes accordingly to the exchange rate deterioration, but in a limited way compared to the rapid depreciation of the local currency. This category also consists of owners of small and limited-sized enterprises who have some flexibility in determining the value of their income. However, this group has experienced declining revenues due to falling purchasing power and reduced demand for its services and goods.

The third category represents the overwhelming majority of residents. It consists of those with limited incomes who cannot determine their wages, such as public sector employees and workers in medium and small companies. Although a part of this category benefits from expats' aid, this reality does not change much in their limited ability to cope with the decline in their salaries.

Given this reality, it is normal for some markets and parts of the city to experience an optimistic commercial flow since some people can still make purchases despite the crisis.

However, the size of this economic activity is still minimal compared to the pre-crisis stage.

The quality of the societal division brought on by the financial crisis and the differences in the value of income and quality of life are thus critical issues in this situation.

With each wave of the Lebanese pound's value collapse, it is natural for this societal sorting to continue in severe ways against the most vulnerable people.

From the perspective of social categorization and widening class gaps, it is easy to see why the proportion of low-income families increased from 25 percent in 2010 to more than 60 percent after the collapse, in contrast to the middle class's shrinking from 70 percent to 35 percent between both periods, while the wealthy population's proportion remained constant at 5 percent.

Lack of investments and social protection networks

With the decrease in the public budget's revenues, the size of this budget has shrunk today to less than 5 percent of its size before the collapse (according to the 2022 budget law).

Accordingly, the shrinking of the budget in this way will mean the total absence of the role of social protection networks, when society is in dire need of the role the government is supposed to play.

However, the absence of social protection networks includes:
- Most basic and apparent services.
- Quality of school and university education.
- Medical services.
- Aid.
These were supposed to replace import subsidies after lifting them.

This reality also entails the lack of government investment, which is necessary for economic sectors, especially those that offer public services like power, water, and sanitation, to advance their infrastructure.

Additionally, without investments from the private sector, the decline in all these public institutions will only continue.

Thus, once more, the only people who can survive are those who can adjust to this new reality, including those who can spend money to secure electricity by buying solar energy equipment, paying for a private generator, or regularly obtaining water.

Again, the residents' quality of life fluctuates considerably in accordance with the quality of their jobs and salaries.

Living without a financial sector… is it possible? 

In such a scenario, people will see what it is like to go years without a functioning financial sector and banks that only offer the option to deposit and withdraw "fresh dollars."

Lack of activity in the financial sector will result in a loss of the ability to provide credit, savings, trade financing, and commercial facilities services.

Thus, the final blow that eliminates any chance of any economic sector, regardless of its type, rising in the future will come in such an economic environment.

Due to the dread of dealing with a monetary economy that serves as a shelter for all types of money laundering activities, Lebanon will continue to be financially cut off from the rest of the world's financial system, as is currently the case.

What will occur if we let the economy recover on its own? It has been happening for the past three years, and it will undoubtedly continue to do so.

However, what matters most in this situation is to ask, "how much this would cost society and how losses will be distributed after this adjustment?"

Moreover, while the absence of the state's role in social welfare is a tragedy in any economy, its lack becomes a crime in the case of a financial catastrophe like the one Lebanon is facing.

For all these reasons, whoever suggests "automatic recovery" as a possible substitute for the comprehensive plan must be aware of the ruin it invites us to in exchange for defending the interests of those impacted by "the organized corrective path."

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