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The Scramble for a Lifeline: On the Three Government Sources of Revenue and the Lebanese Political Elites

With the country entering new levels of its accentuating crisis, Lebanon’s way out depends on the resolution of its current political impasse. A healthy and progressive economic recovery plan remains beyond the priorities of the current ruling elites, despite the current government running out of revenue-raising options. 

The reliance on unsustainable social policy, a politico-administrative culture centered around hollowing out the state’s assets in favor of patronage networks and corruption schemes, and deteriorating revenue-raising plans for the government are leading to the demise of the country’s political elites, who in turn are further dragging the country into unprecedented catastrophes.

Sources of income for political authorities in today’s world generally fall under three categories: broad general taxation (in its various types), foreign aid, and the control over the extraction and export of oil, natural gas and/or minerals. Lebanon currently suffers from varying shortages on all three levels, we explore them below.

Foreign Aid

On the level of foreign aid, the country’s list of donors has increasingly decreased throughout the last decade. The total contributions fell from around $8 billion between 2011 and 2016 to around $1 billion after 2019, leaving only international organizations providing what remains of aid funds. 

Even on that level, the IMF’s recent package – which includes conditionalities of fiscal reforms, banking sector reconfigurations, relevant capital control laws, debt restructuring measures, transparency guarantees, anti-corruption mechanisms and other measures – has been stalled as these conditionalities go against political elites’ interests.

This leaves the current ruling elites with few sources to ensure the inflow of aid which serves two purposes. First, this aid should serve to improve the foreign currency deficit currently present in the country. Second, aid can be diverted, as usual, to political constituencies and patronage networks, further increasing the cycle of dependency of underprivileged communities on their patrons and strengthening clientelist networks.

Strict monitoring on the dispersion of aid has been a promising sign in that regard, with the latest cash transfer aid program by the World Bank escaping many elite hijacking opportunities. The replicability of such aid programs and bigger future programs’ insulation from political interference, however, remains extremely challenging

Throughout the last decade, the country’s political elites exploited the presence of a high number of refugees as a blackmailing card for foreign donors, especially the EU, to send foreign aid. 

With donors not buying the legitimacy and credibility of such cries for aid and the blackmailing card losing its diplomatic value, Lebanon has witnessed an exponential rise in inciteful and violent campaigns against refugees due to escalating campaigns by prominent right-wing political groups and most of the traditional political elites.

On the composition of the donor landscape, the country’s old primary donors included the Gulf Cooperation Council, especially Saudi Arabia, who in turn decided to pull back their aid during the last decade. This decision took place as the country’s establishment and political class moved closer to Hezbollah, especially after the election of ex-president Michel Aoun in 2016.

However, new endeavors of Saudi-Iranian rapprochement represented most prominently by the recent Chinese-mediated agreement, Saudi Ambassador to Lebanon Walid Bukhari’s increasing activities and meetings with Lebanese politicians, and increasing regional normalizations with the Syrian regime by Arab countries, could mean changing geopolitical dynamics and consequently changing interests in Lebanon’s politico-economic landscape. 

Such changing dynamics could be central to the country’s foreign aid reception prospects.

Even with foreign aid prospects possibly increasing in the near future, such inflow of aid will not necessarily translate to a trickling down to the majority of the population, especially the poorest and politically unconnected communities.

Taxation and Domestic Revenue

The government’s domestically-raised revenue, represented by the country’s tax system, has also been suffering from several shortcomings. On a formal level, revenue collection mechanisms remain highly regressive and contain lots of untapped revenue. On a monetary level, the currency crisis, the proliferation of multiple exchange rates and a series of schemes by the country’s Central Bank governor and authorities have left a major gap leading to massive amounts of foregone revenue.

First, the nature of the tax system remains highly regressive as more than half of taxes are collected via Value-Added Taxes (VAT), highly known for negatively impacting the worst off and the general population as opposed to high-income earners. The lack of wealth taxes, high-income taxes and a myriad of tax exemptions for corporations leave millions in uncollected potential government revenue from the country’s highest earners, a large portion of whom are or are connected to political elites.

Side note: the same regressive nature applies to the country’s social protection schemes, which have depleted government resources and benefitted the most well-off, the most prominent of which are subsidies on fuel, although recently suspended. In addition to benefitting mostly the well-off, fuel was extensively smuggled across the border throughout the crisis by connected political elites and had depleted the country’s resources.

Second, and more relevant to the worsening currency crisis, exchange rate mis-valuations have allowed for an estimated 4.8% of GDP loss of revenue from customs, excises and VAT at the border according to a Technical Assistance Report by the IMF. The report also highlights revenue foregone due to the failure of correcting for high inflation. This is reflected in the absence of a reset of specific excises (a loss of 5.6% of GDP) and the reconfiguration of employment income tax brackets, making the current brackets highly inequitable.

In other words, the schemes of political elites for generating revenue, and especially those of financial authorities, have led to the shortening of their own lifelines.

Oil and Natural Gas

Despite the newly found chance to extract oil and gas proceeds from the country’s maritime territory, operational, administrative and political procedures are not expected to be completed anytime soon. With regard to the extraction and export of oil and gas, nothing is to be expected on a Lebanese level in the short-to-medium term.

The country’s public institutions are bloated and plagued with nepotism and patronage-induced employment. This has significantly impacted the presence of bureaucratic competency and meritocracy, the facilitation of diverting public funds to informal political networks and the huge mismanagement of public assets.

These patronage networks also impact appointments within the country’s Lebanese Petroleum Administration (LPA), which is mandated to “supervise and manage the upstream petroleum sector in Lebanon’s offshore across the petroleum activities’ value chain”. Such political interference leaves any prospects for the country’s population benefitting from its resources grim. Also related to public administrations’ capacities, the LPA in specific suffered from the loss of a majority of its staff and of a huge portion of individuals trained in gas exploration and production.

More recently, Qatar Energy has replaced a Russian company in Lebanon’s gas exploration endeavor. The new consortium in that regard, focused on block No. 9 of the maritime area, will include Qatar Energy controlling 30% of the blocs, the French TotalEnergies controlling 35% and the Italian ENI controlling 35%.

The authorities could find a lifeline for increasing resources through oil and gas revenues, but this too isn’t expected to trickle down and benefit the majority of the population, especially the most marginalized.

A final note in that regard: ex-ante applications of “resource curse” perspectives on the availability of natural resources allude to even worse governance prospects for the country. The discovery of a large treasure of natural resources often has negative consequences on governance structures and the democratic prospects of political systems. A system such as the Lebanese one that is already extremely authoritarian and escalating in violent and repressive measures, is likely to witness even more quarrel with the discovery of a new lump of exploitable resources. The LPA itself is governed by caretakers, as political disputes have lead to the failure in the appointment of a new governing body. So despite many optimistic claims that such a new discovery could aid the cash-stripped country in its economic revival, governance worries and the potential mismanagement of such funds remain central issues.

The Way Forward

Political elites’ financial, fiscal and monetary schemes are shortening these elites’ own lifeline. Borrowing from Italian philosopher Antonio Gramsci’s assertion that as “the old world is dying, and the new world struggles to be born: now is the time of monsters”, the crisis plunges into unprecedented territory.

The way out remains political in essence, and while the protest movement has dwindled throughout the last period, it’s up for alternative and progressive political groups to shift the balance of power. Without such a shift, political will has hitherto remained increasingly authoritarian and opportunistic, and a social just economic recovery plan has remained missing from any government or traditional party strategy.

Sustainable sources of revenue for government should be a central theme for any attempts to structurally improve the country’s socioeconomic state of affairs and mitigate the current crisis, and complementarity here is essential: a progressive taxing system, the establishment of sustainable and progressive social protection structures, the protection of small depositors and the most vulnerable, and the control of tax evasion (and avoidance) schemes and illicit diversions of public funds.

Ultimately, a move away from the existing social contract and the political uses of funds could help revitalize all three sources of revenue, who could hopefully rest in the hand of competent and socially just administers: restoring the trust of foreign donors (or moving away from the current cycle of dependency), the establishment of a progressive, socially just and sustainable source of domestic revenue represented in a new taxation system, and the use of newly discovered gas/natural resources for the benefit of the entirety of the population and especially the most marginalized communities.