This is the transcript of Dr. Atieh on Loubnan Al Yawm with Nawal Al Achkar Salman speaking on Eurobonds and Economic Matters. You can find the video below the transcript.
Welcome to a new episode of Loubnan al Yawm. Today, we continue to read the developments on the local scene through discussions with specialists in all financial, economic, monetary as well as political fields. I am pleased to host Dr. Atieh Al Moallem to talk about Eurobonds and other economic matters. Welcome Dr., let’s mention at the beginning that all the Lebanese have been concerned about the bonds and the payment due on the 9th of March. The government has requested the advice of the International Monetary Fund, and the delegates are expected to arrive tonight to hold meetings with Lebanese officials to develop an accurate assessment of the current situation. How do you see this situation unravelling? Towards settling the payments, postponing them, or restructuring?
Nawal, allow me to return the question to you. Why did we wait until now? This is the question that everyone should be asking. Why did the state and the previous governments wait until the payment’s due date?
The government asked McKinsey for a plan, and McKinsey had offered the plan, but it was not carried out.
Indeed, our government did not begin implementation and simply waited until now. We’re always consulting McKinsey as well as other national experts. And what’s striking is that if we look more closely at these companies, we’d notice that they are all led by Lebanese individuals whose expertise we never benefited from.
True, like the Ex-Minister Jihad Azour.
Exactly. So we notice that we’re simply consulting these companies and paying money for foreign endorsement in order to feel credible. However, we were unable to execute because of various political and economic tensions.
If we look back at the recent economic tensions, we notice that they don’t seem entirely innocent. Suddenly, a huge party begins pushing towards settling the March payments, forgetting that the government still has payments due in April and June.
Why are they insisting on the March payment? No one is asking this question.
Is it a form of intimidation in your opinion?
On the contrary, this is a scheme because if we look back to what happened regarding March, the percentages were 70% to 30%; 70% of the Eurobond payments (one billion two hundred million dollars) were owed to local banks and 30% of them were owed to external creditors. Then suddenly these numbers were reversed. How was it reversed?
The local banks sold these bonds abroad…
Exactly, they did so on the pretext that the banks needed liquidity. They sold the dollar at 70 or 74 cents, yet the payment is due on March 9th. Then, out of nowhere, you notice that many people started to demand that this payment be made. I’d like to ask who bought these bonds abroad? The profit will be made if the government decides to make the payment on the 9th. But it’s not the banks that will make the profit. Let me break this down.
The banks faced a direct loss when they sold the dollar for 75 cents; on the short term, they lost around 25 cents- more or less depending on the rate they sold at.
As banks, they lost. But the question we need to ask is; who are the private family offices that have bought these bonds at this very convenient rate? In order to find out, we need to ask for the Euroclear from the CFA in London, so we can see who is the holder of these bonds and ultimately who is the Ultimate Beneficiary Owners and then they will have to give out the names.
Allow me to illustrate the situation. Theoretically, as a bank, I’ve sold these bonds and by doing so I have made the group incur the losses. However, when I send my private office to purchase these same bonds at this very low rate, I will be making a profit as an individual. Even now, we are being subjected to a very organized scheme.
Is it possible that people would, even with this crisis, capitalize on the situation as such?
It is possible, and they are already doing it. And this is why they are exerting pressure on the Lebanese government to pay the Eurobonds of the 9th of March. What is even more dangerous is that this transaction will take place outside the country. Who sold them and who will receive them? This is a form of state looting at the expense of the country’s liquidity, the livelihood of an entire population, and the depositors’ money.
To what extent is there a risk to depositors ’money?
Indeed, a great risk – especially if the state resolves to pay. The danger will not just affect the depositors’ money; it will affect the entire purchasing power of the government and impede its attempts to provide the basic needs for its people. Things like fuel, wheat, medicine, etc.
Economically we’re now going through something we call stagflation, and we’re arriving at the hyperinflation stage. We’ve started to see some banks taking extreme measures. For example, one particular bank made a statement expressing that depositors won’t be able to make any withdrawals from new checks being deposited in their accounts after the beginning of the new year. How will people survive after this stage?
Knowing that this is not being applied to everyone; only perhaps to the small accounts and definitely not to the politicians and the wealthy businessmen, and these discrepancies are causing the citizens alone to pay the price of this economic crisis.
Exactly, especially since we live in a country where small depositors make up 85% of all depositors.
Do you expect the government to postpone this payment and negotiate with the creditors?
It’s too late to do this now. We could have asked for a moratorium earlier in which case the country wouldn’t fall behind on a payment, neither would it ask to reschedule the payments. It would simply freeze operations while it negotiates with the creditors.
I’d like to ask you, we used to say that the central bank has thirty-three billion dollars in reserve. Shouldn’t it be easy for the government to pay one of these?
The central bank definitely doesn’t have this amount now. We used to hear plenty of talk about how the Lebanese Pound is stable. And then 17th of February happened, and everything changed overnight because the government was operating like Madoff. The monetary and economic policies were not correlated. We were living in debt without any political strategies to promote productivity. Following a rentier economy has also led to our demise. They say there are one hundred eighty billion dollars, but yet this amount is nowhere to be found. There are at least eighty billion dollars which have vanished, and we know that not even ten out of these eighty billion were used to launch any projects. In fact, seventy billion dollars were wasted. Perhaps waste is a euphemism because the truth is these amounts were stolen from the public as commissions among other things. You’re going to tell me we still have the hundred billion dollars. Around nine billion belongs to the banks and they are deposited outside the country, another sixty billion is in the form of loans within the country – whose value has currently dropped to almost forty-five billion, and finally, we have the national reserve which is being constantly drained. How much is being spent and how is a question no one has an answer to.
Dr. do you think that there has been intentional lack of transparency regarding the financial reality, or was it that the speed at which things deteriorated, or perhaps some US sanctions that have contributed to the fluctuation of the price of the Lebanese pound in relation to the US dollar?
I would like to clarify one thing. When we discuss such large-scale consequences, we cannot exclude any of these factors. We’ve been following the wrong policies in all fields. After the Tae’f agreement onwards, there has been no auditing. We had a consensual government where parties can do what they want without any supervision. We were taking loans without having any agricultural or industrial policies to help us to pay back these amounts. We were not exporting any products to obtain dollar bills. We, as a government, were counting on the expats who would deposit their US money in our banks. At the end of the day, we destroyed the economy, harmed the expats and lost credibility in the eyes of our own people. How will a Lebanese expat trust the Lebanese banks anymore?
Let me give you an example of the wrong policies we’ve been adopting. On one hand, we import (let’s say) 3 billion dollars in pharmaceuticals, and on the other hand, we have local drug companies that are not being endorsed by the government. Had we offered them a subsidy, they would be able to export few medicaments which would help decrease the cost of our imports- knowing that today 70% of pharmaceutical drugs are quite easy to manufacture.
Even with agriculture, instead of aiding the local farmers, we import the same products from abroad, kill their competitiveness, and force them to sometimes throw away their harvest.
You’re absolutely right, and this applies to all fields from consumer protection to protecting local businesses. And what’s worse is that the laws are applied to some and not to others.
You mentioned earlier that the root of the problem lies in an unproductive, rentier economy and that we didn’t put the Lebanese producer at the centre of our policies. But we know that economies cannot flourish overnight, and given that we are on the verge of bankruptcy and crisis, where are we headed to, and are we really obligated to follow the propositions and action plans of the International Monetary Fund – knowing its negative repercussions on the Lebanese citizens.
In my opinion, we’re definitely not obligated by it.
Are there still other solutions we can adopt?
The IMF will probably advise the government to increase the value-added tax, then to eliminate all support on fuel, wheat and others. This will result in the complete collapse of the middle and low classes bringing them both below the poverty line. After that, they will ask the government to sell its assets which are worse than privatization.
The solutions are in front of us; they just need to be applied. We all know that electricity is one of the largest burdens. Let’s be honest and admit that this cannot be blamed on one person; it is the fault of all the parties. We should stop the electricity at this moment, connect everyone to electric generators and powerboats in a proper way, create power plants with a PPA, and start producing electricity. The only real condition for this to occur is a genuine decision from all the parties to stop the losses.
I personally still receive electric bills to my house in Lebanon that are dated back to 2018. In the very modern nation of UAE, and in any other country all over the world, I would pay monthly. If the government has failed to collect millions of bills and cut off other illegal electricity lines, then, of course, the government will be bankrupt. If we just work on rectifying these two, then at least the electricity outputs and overall productivity would increase by a minimum of 30%. Why is this not being done? – you will ask. It’s because the root of the problem is corruption and not lack of solutions. Other politicians also claimed that they came up with a plan, and I am familiar with the electricity files. However, the plan won’t be put into because different parties want to keep their supporters in business and other parties want to claim ownership of certain Petrol deals …
Part of the plan, as we know, is to give this project to an investor through BOT. How will we earn credibility again to be able to attract such investors?
Exactly, this takes us back to talk about intentions. Let’s assume that we got foreign companies likes Siemens, General Electric, China Railway—
We refused their offers.
Technically, we just drove them away because the government didn’t want to pay. Any company would view such a project as a business opportunity especially that the electricity as an industry is quite lucrative and profitable. As long as proper laws govern this business contract between government and investor, the latter should not fear for its interests.
It will be financially and environmentally better especially that we might be using gas instead of petrol. There’s pressure to keep importing petrol perhaps by companies who are profiting from these transactions.
I’d like to highlight a relatively recent study that I’ve read which indicates that during the first ten months of 2019, we’ve imported 300% more fuel for the Electricity of Lebanon than we have been importing during the past years without any development with the electric supply. And yet, if we ask to see where that money went, we are not met with an answer or any judiciary action.
I was very similarly reading an article last night which made me laugh. Supposedly in Deir Amar, they found fuel oil on the ground and realized that someone had been extracting oil from the ground for the past ten years. The same has been happening in all other sectors for the past thirty years. You also asked me about the judiciary system; I have to tell you my heart goes out to every judge with integrity that has tried to avoid political pressure. We should push as much as we can towards the independence of the judiciary.
True, because the current delegations do not allow the judiciary system to be independent.
And which is more, to separate religion from the state.
As we said earlier, the delegates from the IMF will arrive tomorrow and begin a round of consultations while we have experts like the minister of finance. Do you think the current government is unable to push for these reforms alone, so it is requesting assistance from an international body so that through this body it can impose certain reforms?
In my humble opinion, objectively speaking, the Prime Minister Hassan Diab is quite reputed for his credibility and diligence and not in vain— He’s also cleverly trying to include the creditors in the consultations perhaps as a way to try to find an alternative to letting go of all these dollar bills because he knows just how much the country needs this liquidity at this stage. Again, in my opinion, I think this will be a consultation, but the final decision would still be that of the Lebanese government because otherwise, the repercussions would be too harsh, and I trust that PM Diab is well aware of that.
Because investing is always better than selling, especially when we discuss government assets. Let’s say we sold the port of Beirut for one billion US dollars; if we had brought in a specialized body to operate it, we’d be continuously profiting from it. The best way is through mechanization and automation. The government’s payoff would be huge if it only it pursued such opportunities, and the best example to that is a telecommunication and how much return on investment it had back at President Emile Lahoud’s term in office. There are a million ways to increase our government’s returns through PPPs and BOTs.
Allow me to clarify; the public-private partnership law approved by the parliament more than a year ago and which, to this day, has not been executed.
This law has some terrifying loopholes. Let me be clear about this, some laws, we can say are tailor-made to serve the benefit of certain companies. We cannot condition the government to favour one agency over another based on favouritism or other similar mindsets.
Dr., we’ve witnessed a sharp devaluation of the Lebanese pound and people are questioning whether this is a direct result of supply and demand and the Eurobonds due or because of perhaps some other factors that have aggravated the situation?
Back in 1999, may God bless him, one of the noblest ministers of finance that were ever in the office Dr. George Korn wanted to try to pass a bill to prohibit using the US dollar. The fact that we deal with foreign currency on a daily basis is also not innocent. Needless to say, Dr. George’s law was never passed, and he was subsequently later removed from office.
In order for the judiciary system to be mindful, it needs to also apply anti-corruption laws in retrospect by lifting the immunity of all former public sector employees of all ranks and holding them accountable to any previous acts mismanagement or corruption.
So many questions are left unanswered… How did we get to this point of complete collapse? Why were we taking loans with 43% interest rate when we should’ve been taking them at a rate of 5 – 6%?
If you ask me about the factors that aided in this devaluation, I’ll give you a few. First, there’s the amount of US dollars that were moved to Syria. Then, other amounts were withdrawn and kept as security paper money. Thirdly, there’s an application which many people have installed that displays the value of currencies in a timely manner. Who is controlling these values? And based on what is it changing these values? Then you have other currency exchange offices operating freely and pricing the dollar the way they want. Judiciary measures should be taken to control these discrepancies.
There’s something else we forgot. Recently, the central bank has printed three billion Lebanese pounds. This will probably intensify the hyperinflation that we are already going through. Then naturally, the Lebanese pound will be devaluated.
Do you really expect it to get to 3000LBP to the dollar or is the public—?
I sure hope it remains that way and not more.
Do you expect this to happen anytime in the near future?
It does look like it, and it will become more than that. They are also doing this through stages, they want to make people used to these new rates gradually. Soon, the citizens will start getting used to the 2500LBP/USD and so forth. People are still talking and worrying about the haircut; the haircut has been done- more than 40% in fact.
But the dangerous part is that the benefits of this haircut are not going to the treasury of the government, they are divided unto some banks, currency exchange offices, etc…
If the parliament sat down on the first day that the conflict surfaced and passed a law that regulated this haircut and specified its areas of application, it’s consequences would have been easier for citizens. However, the banks were forced to act the way they did because there’s no bank in the world that can endure this amount of withdrawals in such a short period of time of course because they don’t have all their assets liquefied in monetary form.
And then again you have accusations and rumours that claim that bank owners have transferred all of their money to banks abroad whilst only allowing their clients to withdraw a hundred or two in USD.
This might be another factor that needs to be investigated. I personally cannot accuse anyone because I don’t know. There’s an intentional blackout on these matters.
As we know, they can reveal the identities of these individuals through the private investigative body of the Central Bank.
Unfortunately, we live in a country where the predominant policy is “scratch my back and I’ll scratch yours”.
Do you personally believe that, regardless of who is represented within the current government, it could be capable – knowing that it was elected at a time where the country is facing bankruptcy, still be able to pull it out of its turmoil?
Capable? – Debatable. But it is definitely trying to. What it is doing is so unprecedented that you can describe it as a suicidal government. All the ministers, including the Premier, are working day and night, and no one can expect any results because it was (figuratively) assigned to a body without a pulse. To revive this economy, it should really get the support of all the different parties and bodies surrounding it.
As long as the opposition keeps hindering it, and the pro-government parties keep supporting it until it tries to execute a project that they don’t like, it won’t be able to pull us out. There are certain measures that are crucial to the well-being of the country which not all parties might agree to; they should be carried out all the same.
Dr. I’d like to consult your expertise today there are plenty of people asking whether they should utilize their monetary assets to invest in real-estate.
There’s a popular saying in English which goes as follows: “Real estate suffers, but never dies”. But we also know that real estate is being sold at a premium. As a buyer, I am seizing this asset to secure the value of my money, but later, when I want to sell it again- after the market becomes stable in say 2 -5 years, I won’t be able to sell it at the same rate that I had bought it with. In this case, it is an indirect form of haircut.
In short, it is not wrong at all, but it will not entirely save the buyer from the inflation taking place.
Dr. Atieh, I’d like to thank you for being with us tonight, for your valuable insights, and for your analysis of the economic and financial situation.
Thank you for your time.