Ii Due to the economic difficulties Lebanon is facing today, there are many who fear a situation similar to that of Turkey or Argentina may arise. Do you think the experience of those two nations can occur in Lebanon?

HP It is not helpful to compare because each is a situation in itself, with particular stylized macro-economic features that need to be addressed. In Lebanon’s case, the problem is an inability to continue defending the exchange-rate peg and this must be looked into in a structural economic context.

Ii Total debt in Lebanon represents 170% of GDP, the budget deficit is equal to almost $3 billion and total government revenues are almost equal to the debt service. Do you think the government’s attempts will be enough to avoid an economic crisis or just temporarily remedy the difficulties the country is going to face?

HP The importance of privatization is only part of the solution but there must be a long-term outlook for the economy as a whole to run better and to secure safe and steady consumer and investor interest in the country. This would include an independent regulatory system which is important for creating credibility, and structures of production to bring in more revenue.

A simple-minded focus on one measure at a time gets people caught up and they forget there are other measures that must be studied. The problem is not simply one of financing because if the economy does not become more productive and the state deficit is not controlled, you are simply buying time.

Ii The IMF and others continue to discuss one measure in particular - devaluing the Lebanese pound. Do you think this is a possible solution, knowing that it could be devastating to the economy, or just a part solution?

HP People in Lebanon see the World Bank as an international policeman that will impose its will and policies on them, but that is not true. Also, the IMF is an institution entrusted by member countries to help nations emerge from their difficulties. However, nations come to the IMF when the crisis is large.

Lebanon’s problem needs to be addressed on many levels, examining the effect a devaluation would have on exports, imports, capital flows and the debt. However, devaluation is a political decision and the World Bank doesn’t interfere where politicians have to decide, considering the results of such a move.

Lebanon’s export base is very small, so devaluation may not have the same effect as in other countries such as Mexico, where devaluation significantly increased exports. Imports are also high, so the consequences will be felt by the whole economy and can be negative.

Devaluation would write down the value of the debt, in nominal terms, but increase it in Lebanese pounds. In most areas, revenues are in Lebanese pounds and the social security system, for example, where assets are kept in Lebanese pounds, would face strong pressure from wage earners (especially in the public sector). So, the problem must be dealt with on several levels, rather than just a change in relative prices, which will not help.
 

Ii Can you address the taxation system and whether it should be revamped and include more direct taxation?

HP The difference before and after the war is that the Lebanese state is much more expensive, coming with a large and continuing debt service. Indirect taxes are regressive so direct taxation must be added, but it should not only be on the revenues side, such as on income, because if expenses are not controlled, you have the same problem. In this country, people are too scared to ask the wealthy and powerful to pay, and the poor find a patron. But without a natural resource, like oil, you cannot have a productive economy.

Ii How do you rate Hariri’s performance in managing the state of affairs in the economy?

HP He seems to be doing what he can, but again, Lebanon must enter a process of societal change. Many difficulties are traceable to one underlying problem, which is the lack of a clear definition and commitment to the public good versus one of group good.

Each individual may benefit by getting away with less taxes and getting more out of the state but the country as a whole loses. In terms of the environment for example, there is an aim to increase understanding but individuals and communities do not add up to the public good.

However, incentives can be put in place, such as giving back municipalities some of the taxes collected if they agree on certain measures. There are tried and tested conventional approaches to make incentives become real and reinforce good tendencies.

Ii So many of the less developed countries complain that solutions provided by the World Bank are too classical and have a slow response. Do you think the Bank can find more creative solutions to help solve problems faced by the less developed nations?

HP If governments are responsible, they should show creativity to so-called classical solutions. In terms of fiscal adjustments, an exchange rate adjustment problem occur when public revenues are insufficient. In Lebanon, the Bank cannot help to maintain the high standard of life for Lebanese who don’t want it to come down. Most importantly for Lebanon is to change the country’s institutions to make them work better, so they see more results from the public sector, in areas such as health, education, roads, vocational training and agriculture and irrigation projects. $50 million a year for a small nation is a lot and needs to be used more productively.