The economic crisis: An analysis of Lebanon's subsidy system and proposals for reformation

October 2019 brought about impending financial dark skies over the surmised prospering Lebanon, as the once proud Lebanese pound post the Lebanese civil war in October 1990 started to lose its value again against the US dollar. As the country faced increasing shortages in foreign currency, the Lebanese pound reached a skyrocketing horrific number up to LBP 15,000 against 1 USD compared to LBP 1,500 prior to 2019 – an increase of 900% in just 17 months. Any belief in a stable Lebanese pound or a prospering Lebanon started to plummet in the 3rd quarter of 2019, causing dread, unemployment and poverty. Drastic measures had to be taken and basic necessities needed to be catered to the poor as most of the middle class entered the impoverished segment. One of the ways to counteract the crisis was to subsidize basic necessities such as flour, fuel and medicine, yet even this solution had its own challenges.

The Lebanese government kept subsidizing products such as flour, fuel, medicine and to also distribute food baskets to impoverished families. “Lebanon can no longer continue subsidizing these goods at the same pace and plan to lift subsidies,” Ghazi Wazni former Minister of Finance and caretaker said. “It costs $500 million a month to $6 billion a year to do that. With that said, the government made the decision to rationalize subsidies and reduce them on some items.”

Considering that most of the basic subsidized products such as wheat are used to make non-basic items (wheat is also used to make cakes, dough products such as pizzas, pastries and croissants), that means part of the subsidized wheat to make bread might not be reaching impoverished locals who could not even benefit from these non-basic items even if they wanted to. Fuel is considered an essential item to all classes and could remain subsidized.

From a business angle, given that most Lebanese consumables are imported, through subsidizing wheat, medicine and fuel prices, the Lebanese Central Bank has managed to facilitate imports by:
• Stabilizing the official rate of 1,507 per dollar (a massively defuncted rate) in hard currency;
• Permitting importers to purchase dollars at the official bank rate of LBP 3,900 to around 300 basic food and household products, instead of the heavily inflated black-market rate.

Needless to say, this has created an opportunity for importers to take advantage of these subsidized products and smuggle them outside Lebanese borders, for larger profits. Until the IRS proposes a solution, exploiters are capitalizing in the subsidy system in an attempt to survive and thrive during the financial and economic crisis. Subsidized Lebanese products are said to have been found and are being enjoyed internationally in some countries in Europe, Africa and the Middle East. Enough said, popular belief refuses this burgeoning advantage and calls for critical evaluation and educated business solutions to tackle the same.

In my opinion, and contrary to the beliefs of some market experts, the subsidized schemes should be kept but reformed because they offer the basic needs of the growing poorer class in Lebanon, which has grown with a disappearing middle class. Removing subsidized goods entirely from the market will create a shock that will reflect the real value of the Lebanese pound in the market and more importantly, it will deprive the poorest from the basic needs of a human being. This shock will reflect in the streets with a raise in the percentage of crime due to poverty, such as theft and homicides that Lebanon has already started experiencing, in parallel with importers exploiting the system to also survive. In simple terms, people will increasingly start stealing and combating each other for these essential needs. Resulting in a catastrophic and weak critical evaluation and scenario analysis.

This raises the question; how can we make sure these products are not smuggled past Lebanon’s borders and are reaching the local people who need it the most? Plenty of ways can safeguard these goods to be used by their intended consumers. Smart artificially intelligent methods could be exercised by embossing food stamps on subsidized products in addition to implementing a full Track and Trace system by SCOPSIS.

The Lebanese government would be able to limit these subsidized products in real time; and monitor not only who they are reaching at a retail level but also how they are being distributed. The food stamp and track and trace system will make it nearly impossible for those exploiting the system to export or mislabel the goods, thereby protecting and supporting the greatly impoverished Lebanese population in moments they need it most.

On a final note, although the proposed prepaid cards to be given to needy families may solve an immediate short-term need, we know our system cannot function on short-term strategies alone as they have been the reason Lebanon keeps facing issues. What could pose as a medium to long-term sustainable solution in addition to providing prepaid cards to the poor is critically evaluating the situation based on robust, valid data in place, tracking down exploiters and implementing laws and regulations that would greatly minimize infringement.

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