Trust in Lebanese state begins by giving people’s money back

Lebanon has a rare opportunity of restarting from scratch. The starting point is a failed state but with a strong society that is ready to rebuild after being damaged and bankrupted. The real challenge is not just economic recovery but also restoring confidence in the state itself. Every decision now is critical and will have consequences for the country’s future.
That is why the proposed gap law is so important. This recently drafted legislation aims to distribute the massive losses from Lebanon’s 2019 financial collapse between the state, central bank, commercial banks, and depositors, and allow depositors who have been frozen out of their savings to gradually recover their money. Generations of savings were wiped out in the collapse, and it is absurd to demand taxes from citizens whose savings the state has already swallowed. If the state can, as the gap law proposes, defer repayment of its debt over five to 10 years, it can also defer collecting taxes until it has honored its obligations and regained trust.
In any case, data from a 2003 study shows that the top 20 percent of households pays 77 percent of salary and wage taxes, and these are the ones more likely to have bank accounts and their savings trapped in them. That, combined with the inefficiency and costs of collecting taxes from the rest of the population, would make a good case for abolishing taxation altogether, at least for a limited time. In addition, a competitive corporation tax rate, say of 5 percent, would also attract many businesses back to the country.
Such a measure would be more than financial relief — it would be an admission of responsibility, a signal that the state is reforming and determined to earn back legitimacy. The impact of this gesture would outweigh the cost in lost revenue. It would be the state saying: “I won’t take your money until you know I will use it properly.”
State responsibility is at the heart of the debate. The governor of the central bank spelled this out clearly for the first time in a recent press conference. He asked for accountability for government spending, which is widely accepted as the main cause of the collapse. Central bank reserves were depleted through waste and corruption in the electricity and energy sectors and on subsidies for commodities that were smuggled out of the country. What is commonly called the “mafia and militia” control of the country is a political problem, not an economic one. The problem is also political in areas such as revenue collection, with politicians dividing the spoils, and with militia control of ports and airports.
Until the state gets its act together people should keep their money and spend it themselves, to rebuild their lives. No amount of tax collection will resolve the political elements that led to the financial crisis. Only after there is trust that taxes will be collected fairly and spent efficiently will taxation be considered an asset. 

There are many reasons for optimism.

Nadim Shehadi

Two hard questions follow. First: How do we pin down state responsibility and separate it from the political class and the militia? Second: How can a bankrupt state revive itself without the income from taxation? The state, after all, relies on the taxes we pay and the power we give to politicians and bureaucrats, while we trust them to spend it wisely to protect us and make our lives better. This debate over taxes leads directly to the deeper question of what the state is, and how it can finance itself.
The answer to the first question is that we cannot separate the state from the political process. There is the dilemma between an idealized version of the state, one that people aspire to, and the reality of a dysfunctional process that leads to the catastrophic results we are living with. Simply put, the debate revolves around building that ideal state as a priority and at the expense of sacrificing depositors’ money. That would work if the problem was economic or financial. However, the real state we are talking about here is not separate from the political process and includes all its institutions, functions, and actors, good or bad. Regaining trust would also make a bailout a possibility.
The second question is easier to explore. The Lebanese state can raise significant income from other sources than taxation. The state is rich in assets that can be efficiently managed to produce enough income. We are talking of a government budget of less than $6 billion for what is now a relatively small economy. Think of all the talented ministers in our present government; they should be able to handle that. Lebanon is a state with the balance sheet of a mid‑tier tech firm, but the governance of a failed regime.
There are various estimates of the state’s assets, and these are also politically motivated. Some put state assets at $11 billion, while others go up to $70-100 billion. The estimates vary according to how much of the country’s gold reserves are to be used and how, and according to predictions of future oil and gas revenues. Lebanon owns land, utilities, and infrastructure that could finance the state. Instead, mismanagement turns these assets into drains on the economy.
The state owns about 22 percent of the real estate in the country and none of it is exploited. Almost half of this is prime land with substantial investment opportunities. More state income can be raised by efficient management of resources and services like electricity, water, telecom, real estate, the airport and the ports, foreign economic relations and other measures that will help the economy. If the government manages to take the country off the Financial Action Task Force gray list for example, or make the judiciary and the bureaucracy more efficient, it will be a huge boost to business and the economy.
Resolving the question of Hezbollah’s arms is also a major problem that can only be resolved politically. No amount of aid or taxation can help with that; it is a huge challenge and resolving it would also help take the country off the FATF gray list and improve relations with economic partners in the region. That and making the judiciary and bureaucracy more efficient would be a huge boost to business. Now all these are a drain on the economy instead of being assets.
There are many reasons for optimism regarding the future of Lebanon and the Lebanese economy — if the main political problem is resolved. While the rest of the world is trying to cut down on government spending, all Lebanon has to do is avoid rebuilding dependency on the state and, instead, rely on the vibrant private sector and civil society institutions. Just acknowledge responsibility, build trust, and give them their money back.

• Nadim Shehadi is an economist and political adviser. X: @Confusezeus