HIROKAZU MIYAZAKI: --like to welcome you all to the Global Finance Initiative Speaker Series. And the Global Finance Initiative, GFI, is one of seven or eight working groups inside Einaudi Center. And it is a very broad and interdisciplinary group, dedicated to unconventional approaches to the study of finance.
And for the last two years, our group has focused on central banking as a focus of our study and, particularly, the politics of central banking. And then we have to examine issues related to the important problem of independence and the legitimacy of a central bank And central bank's public relations communication strategies in different countries.
We actually love central bankers. And we have had a number of interesting conversations with them. Many of them are very thoughtful and intellectually broad people. And it's important to note that central bankers everywhere speak with one another. And they, at times, coordinate monetary policy with one another. And some have noted that they actually share not only monetary policy tools but also a mode of thinking or even a central banking culture.
But it's also important to note that we need a kind of comparative perspective on central banking. Issues at stake, for say, the Fed, the Bank of Japan, or the European Central Bank are quite different. And so issues are different in different countries. For example, the central bank independence issue is an important issue for everyone.
But what that means, what it means to be independent from politics, is different from one political context to another. And that is something GFI is hoping to explore further. And our guest today is a perfect person to address that issue.
Raed Charafeddine is a central banker with the Central Bank of Lebanon and is a broad thinker who has written and spoken about a really wide range of issues, from monetary to religion. And he has been the first vice-governor at Banque du Liban, Lebanon Central Bank since 2009. And prior to this appointment, he spent 20 years in commercial banks in Lebanon and in UAA.
And Mr. Charafeddine is Alternate Governor for Lebanon at the International Monetary Fund and also at the Arab Monetary Fund's Board of Governance. He's also the Alternate Chairman of the Capital Markets Authority in Lebanon. He holds masters and bachelors degrees in business administration from the University of North Carolina, Charlotte.
Today's lecture is titled "The macro and socioeconomic impact of the Syrian crisis on Lebanon." Please join me in welcoming Mr. Raed Charafeddine.
RAED H. CHARAFEDDINE: Thank you, Hiro, for the introduction. Great to be here at Cornell. I start with a quote by IMF Report, dated January 2017. "About 13 million, almost half the population, have had to leave their homes. And around 5 million have been forced to leave the country altogether. This makes Lebanon the brother-neighbor of the country that has been suffering one of the largest displacement crises in the past 40 years and one of the most daunting humanitarian crises since the Second World War," unquote.
Given the longstanding social and economic ties between Lebanon and Syria and having the blazing Syrian territories as the only and longest accessible borders to Lebanon, the crisis has had a direct and significant impact on Lebanon's social and economic growth. It has intensified poverty and humanitarian needs and aggravated preexisting development constraints in the country.
Since data shortcomings in Lebanon make it difficult to precisely assess the economic impact of the crisis, much of the analysis of Lebanon's post-crisis economy relies on detailed investigation of high-frequency indicators. Thus, it's imperative to mention that identifying the economic implications of the Syrian conflict in a systematic and objective manner, featuring actual accurate statistics, are unavailable from the Lebanese public authorities and international bodies.
In light of those constraints, I will try to present a holistic and systematic view of the Lebanese macro and socioeconomic challenges in the wake of the Syrian crisis, through discussing both macro-economic and socioeconomic perspectives of the challenge and then shifting into highlighting the local and international stances as to the impact of the crisis on Lebanese economy and, finally, shedding some light on the challenges and potential.
A caveat-- in this talk, I'm presenting my own [INAUDIBLE] and analysis. Although I'm a vice-governor of the Central Bank, it does not represent those of any of the Lebanese official authorities.
Macroeconomic scene-- the Syrian crisis has significantly disrupted Lebanon's trade and impacted both consumer and business confidence, thus reducing its GDP from 8% to 10%, prior to the crisis, to an average rate of 1% to 2%, since the outburst of the Syrian crisis. These certainly are not the only reasons. There are several other factors that also shaped Lebanon's growth prospects over the past six years. We don't want to blame it all on the Syrian crisis.
They include an extended political deadlock, global financial volatility, and a considerable terms-of-trade shock for some of Lebanon's key oil-exporting trade partners. Taking this as a basis, the conflict has thus cost Lebanon more than $14.4 billion so far, equivalent to a cumulative loss of almost 30% of its GDP. reducing the GDP by $6 billion as opportunity costs.
There's a distinction between the broader costs of the regional conflicts versus the more specific costs of hosting the displaced Syrians. Separating the two empirically is rather challenging. Public finance-- the fiscal impact of the crisis reflects both a downturn and overall growth, as well as an increase in specific-- I don't call them refugees, by the way. I hate to call them refugees.
To us, for you to know, the historic relationships and ties with Syria, we call them displaced. We consider as if they are displaced internally. And even within Lebanon, they are displaced. This is why, from my perspective, I call them displaced. But sometimes, I call the term "refugees," because there are conventions that I talk about. So from my perspective, there are displaced.
The average loss in government revenues between 2012 and the beginning of 2016 is estimated $0.56 billion annually, as a result of the slowdown in economic activity. Sudden sharp rise in demand for public services generating an increase in public expenditures, due to higher operating costs over 2011, 2015-- around $2 billion. That's about $400 million each year. The decline in revenue and increase in expenditure adding a burden of $2.6 billion to the annual deficit in Lebanon's public finance between 2012 and 2016.
Monetary policy and financial stability-- this is something that I will be talking about later on, maybe in the question and answer session, about what is the monetary authorities-- what we as regulators have done. I'll keep it for the Q and Answer session. And by the way, this whole paper will be available, will be availed to you later on. I will be posting it on my website. And it will be accessible to everybody.
Pre- and post-crisis comparative analysis-- conducting a quick comparative analysis between the pre-crisis period of 2006-2011 and the period that followed the eruption of the Syrian crisis clearly manifests the deeply engraved impact of the Syrian war on the Lebanese macro and socioeconomic realities. The general economic scene-- average growth in the pre-crisis years, that is 1995 to 2011, reached around 4.7% and dropped to around 1.9% during the post-crisis of 2011-2015.
Public finance and fiscal policy-- the debt-to-GDP ratio mounted to 137% in 2010, while it recorded 147% in 2016. That sustainability ratio-- and by that, we mean the ratio of change in debt to the change in GDP-- valued at 75% in 2010 and 195% in 2016. The ratio of government revenues to expenditures dropped from 80% in 2010 to 67% in 2016.
On the contrary, the ratio of budget deficit to GDP marked a slightly positive indication, due to the decrease in government oil expenditures, as a result of the drop in oil prices. That is from negative 9.3% to negative 8%. And the ratio of the primary balance to GDP decreased from 2.6% to 1.3%. The ratio of tax revenues to GDP decreased from 17.4% to 13.6%.
Monetary policy and fiscal stability, this little thing that I would talk about now-- the total banks' assets kept their increasing tendency, moving from $129 billion in 2010 to $204 billion in 2016. The rate of bank loans to public sector versus private sector diminished considerably from 84% to 60%, indicating the vibrancy of financial inclusion in Lebanon.
In a relatively negative indication, the deposits growth decelerated from 13.8% in the first period to 7.7% in the second period. Similarly, banks' profit growth decelerated from 18.8% to 3.4%. Balance of payments-- indicators of balance of payments all deteriorated between the first and second periods, including trade balance of negative $14 billion to negative $15.7 billion.
Current accounts-- negative $4.4 billion to negative $9.26 billion. Capital inflows from $7.6 billion to $6.72 billion. And net foreign assets-- $19.04 billion to negative-- negative-- $7.71 billion.
Socioeconomic scene-- a status of displaced Syrians in Lebanon. The global refugee regime comprises a set of norms that are based on international cooperation and reciprocity, as they were rooted in the 1951 Convention relating to the status of refugees. Particularly, it centers around two sets of obligations-- asylum, which determines states' obligations towards refugees who reach their territory, and burden-sharing, which covers their obligations towards refugees in the territory of other states, including financial support or resettlement in their own territory.
The first set of obligations are relatively well-developed and imply general expectations that countries will keep their borders open to those in need of protection. However, the second set of obligations are less developed and are largely discretionary. Consequently, this positions countries like Lebanon in a difficult situation, facing the substantial cost of hosting displaced Syrians but without being able to sufficiently acquire the global support needed to manage this burden successfully.
In its latest report, published on June 30, 2017, the United Nations High Commission for Refugees, UNHCR, revealed that 1,100,51 displaced Syrians are currently registered with the agency in Lebanon, indicating a decrease from a peak number of 1,185,241 registered displaced Syrians recorded on April 10, 2015. However, statements by Lebanese officials estimate the number of displaced Syrians in Lebanon at 1.5 million, driven up in comparison to the UNHCR figures by the number of unregistered displaced Syrians. Hence, it is estimated that around 60% of displaced Syrians over 15 years are without legal residency.
Demographically, according to the UNHCR, 47.5% of displaced Syrians in Lebanon are males, while 52% are females. Moreover, 80.5% of them are women and children below the ages of 18. As for the distribution of displaced Syrians across the regions in Lebanon, the UNHCR estimated that 36% reside in Eastern Lebanon, 27% in Beirut and Mount Lebanon, 25% in Northern Lebanon, and 12% in the south of Lebanon.
Socio-economically, statistics indicate that 91% of displaced Syrians in Lebanon are in debt, averaging $857 as cumulative debts. Moreover, 41% live in inadequate shelters, with 12% ranked as being in dangerous conditions. As for food security, 94.5% of the displaced Syrians and 35.6% of the displaced Palestinians from Syria are moderately or severely insecure.
Academically, over 250,000 displaced Syrian children, between the ages of 3 and 17, remain out of school. Lebanese international officials concerned with the response to the Syrian crisis agreed that the number of displaced Syrians now makes up a third of the Lebanese population, incurring a huge burden on such a small country. And here, I'll be quoting Ross Mountain, who is the United Nations Resident and Humanitarian Coordinator.
Mr. Mountain-- talking about the ratio of 1.5 million to our 4 million inhabitants-- we are only 4 million. He says, "This is equivalent to 80 million Mexicans arriving into the United States over a span of 18 months," unquote. The majority of the displaced live in 225 of the poorest localities in Lebanon, which has exacerbated the sufferings of the Lebanese people as well.
Compared to the vast capacities of the EU, European Union, and the limited means of Lebanon, it appears that-- and I'm quoting Mr. Mountain again, "Europe, with a population of 512 million, 128 times greater than the Lebanese population, and an area of 4.4 million square kilometers-- that is to say, 440 times larger than the area of Lebanon-- had the massive debates over hosting 120,000 refugees. That is 12 to 15 times fewer than the number of displaced people in Lebanon."
Human and social development-- in this context, the 2012-2014 World Bank study on the impact of the Syrian conflict on the Lebanese economy remains, in its figures and estimates, so far, a major benchmark for researchers and officials. One, poverty-- the conflict in Syria, accompanied by the massive waves of displaced persons, has resulted in deepening poverty in Lebanon, pushing 170,000 more Lebanese nationals into the [? moles ?] of poverty, with the descent of the current 1 million poor into further destitution.
Labor market-- intense competition for jobs by new entrants raised unemployment and informal business activities by 10 percentage point, with 220,000 to 324,000 Lebanese nationals joining the ranks of unemployment. The regularization of Syrian access to labor markets has long been controversial, since proposals to give displaced population the right to work or become more self-reliant have sometimes been seen as opening the door to an indefinite stay.
Nonetheless, to ensure the broadest expansionary benefit, the Lebanese authorities committed to streamline regulations concerning labor market access for displaced Syrians to the job market in certain sectors, where they are not in direct competition with the Lebanese. Specifically, we're talking about services sector, agriculture, and construction.
Health-- the urgent health needs of displaced persons drove up the costs of the Lebanese health system, decreased the supply of medications, and made health care more inaccessible to Lebanese nationals. The displaced Syrians accounted for 40% of total primary health care visits.
Education-- the enrollment of non-Lebanese children in public education increased almost 3/4, from 27,000 in the 2011-2012 academic year to 103,000 in the 2013-2014 academic year. With the support from the international community, approximately 40%-- only 40%-- of eligible Syrian children were enrolled in formal public education programs in 2015 and 2016 academic year, mounting to around 210,000 students.
Infrastructure-- there's an added strain on Lebanon's already stretched public infrastructure, resulting in a decline in service quality from existing Lebanese users. And we were talking earlier that, unfortunately, we have a bad infrastructure.
Not much has happened over the past 10 years, because of the political deadlock, because we haven't had a budget since the past 12 years. As a result of that, most of the budget, if not all of the budget, goes to salaries and wages and others. Unfortunately, not much is happening on the infrastructure. So this load has added much more burden to it.
Water and sanitation-- the water and sanitation network in Lebanon experienced a sudden and massive rise in the overall demand, accompanied by a rise in the cost to public finance, as you would expect. Solid waste-- that has also doubled as well, contributing to the pollution of water resources and the spread of disease.
Electricity-- we have enough problems with our own electricity. The sudden and considerable rise in demand on the electricity grid drove up costs by $313 million in 2016, causing overall losses to Lebanon's energy sector of $333 million per year, or $1.33 billion until 2020.
Transportation-- you would certainly expect that the transportation has increased considerably as well. But at the same time, there's a positive dimension, that our airport has become much more busier. Our roads became much busier. But our airport has become busier, because Damascus airport hasn't been active quite for some time.
Now, while the World Bank report-- and I'm done with quoting some of those figures of the World Bank. While the World Bank report focused on the disadvantages of the conflict and the rising cost to the economy, it did not account for the positive economic aspects of the Syrian displacement crisis on the Lebanese economy.
The major ones are, one, reducing the labor wages and cost of production. Syrians are active in several productive sectors, with over 60% working in low-skilled occupations, as I've mentioned, in agriculture, construction, and services. Although there are no labor statistics in Lebanon, an official statement confirmed that over 500,000 Syrian laborers were already working in the construction and agriculture sector in Lebanon prior to the crisis.
The Syrian labor has benefited Lebanese employers and businesses, which were able to pay cheaper wages and save disbursing benefits and compensations by avoiding to register the Syrian workers at the Social Security Administration. This is something they have to do with the Lebanese workers.
Spending on house rent-- the UNHCR estimated that there's about injection of $33 million to Lebanese property owners, in terms of rent. Consumer spending-- actually, if we think about it, many wealthy and middle-income, middle-class Syrians and their families may be considered as permanent tourists, as a result of their long stay in Lebanon. They spend on maintaining their lifestyle, children's schooling, including universities, apartments, communication, and what have you.
The influx of funds from donor countries, despite the data limitations related to this particular effect, a UNDP, United Nations Development Program, and UNHCR, High Commission for Refugees study in 2015 suggests that the impact of humanitarian aid on the Lebanese economy has a multiplier effect of 1.6 for every $1 spent in Lebanon.
Now, going on to the Lebanese official position. The most recent official Lebanese stance pertaining to the displaced Syrians were presented by President Michel Aoun, the President of the Republic, at the United Nations General Assembly during September of 2017. That's almost two weeks ago tomorrow.
And he expressed a balanced tone towards this issue. Because unfortunately, in Lebanon, this issue is highly politicized, just like everything else. But the President of the Republic had expressed a balanced tone, where he stated that any refugee to Syria should be voluntary and safe.
However, President Aoun added that the displaced people in Lebanon are currently living in poor conditions and that-- and I quote here-- "there is no doubt that it would be better for the United Nations to assist them to return to their homeland, rather than help them to remain in camps, lacking the basic standards of a decent living," unquote, noting that the burden of refugee crisis in Lebanon in combination with the economic crisis is becoming unbearable.
In line with the multi-faceted impact of the refugee presence, the Lebanese authorities outlined a comprehensive proposal at the London Conference held in February 2016. This proposal comprises an ambitious, wide-ranging, medium-term plan, covering the country's extended refugee-related needs over 2016 until 2020. What this means is that our friends and our brothers are staying in for at least three more years.
The plan requires over $11 billion in support from donor countries, ranging from grants dedicated to support refugee needs to loans for development projects. And what's interesting, loans-- we don't need any more loans. We need the grants.
These include-- this is the figures that I'll be quoting here-- $2.5 billion for 2016 Lebanon Crisis Response Plan; almost $1.5 billion for the education sector, through the Reach All Children with Education Race II Program; around $0.75 billion dollars, which is $750 million dollars, allocated to municipalities; over $0.25-- which is $250,000-- million for an employment program, to stimulate the economy through the Subsidized Temporary Employment Program, STEP; $2 billion in direct budget support, to be used to subsidize future eurobonds issues; around $4.25 billion in concessional financing for over 130 priority infrastructure investments.
The international supports-- on April 5, 2017, the Supporting the Future of Syria and the Region Brussels Conference brought together representatives of over 70 countries, international organizations, and civil society to confirm commitments made in the London Conference and raise new funding to meet immediate and longer-term needs of people whose lives are being distressed by the conflict.
In the wake of the Brussels Conference, at the end of May, 2017, committed resources to Lebanon amounted to $1.41 billion, which includes $1.1 billion in donor assistance and $309 million carried over from 2016 by partners and pooled funds. For 2018 and beyond, donors have so far committed $350 million in support of Lebanon.
A total of $236.3 million have been provided, in the first quarter of 2017, to UN agencies and NGOs in support of activities on the Lebanon Crisis Response Plan highlighted in this section, which is less than half the assistance reported last year during exactly the same period. In total, donor funding since 2013 averaged around 50% of the appeal requirements. So between the pledged amounts and between the dispersed amount, the gap is 50%.
Funding received began in 2011, passing through the Fifth Regional Response Plan, RRP-5; the Sixth Regional Response Plan, RRP-6; and LCRP 2015; and ending with LCRP 2016, amounting to only $4.9 billion dollars. And we are talking about $11 billion.
The Lebanon Crisis Response Plan 2017-2020-- LCRP, the Lebanon Crisis Response Plan, was launched in February 2017 as part of the RRP, with $2.7 billion appeal as required funding. The LCRP, which is the Lebanon Crisis Response Plan, gathers more than 104 partners to assist 2.8 million highly vulnerable people in Lebanon. So we're not only talking about displaced Syrians of 1.5. We're talking about 2.8 people who are impacted by that crisis.
And we call them highly vulnerable people living in Lebanon. Here, we're not making any distinctions between Syrians and Lebanese and Palestinians, for that matter. It aims to provide protection and immediate assistance to 1.5 million displaced Syrians, 103 million vulnerable Lebanese, and 257,000 Palestinian refugees in Lebanon, and 31,502 displaced Palestinians from Syria, and deliver basic services to 2.26 million people.
The sectors targeted by appeal partners include protection, social stability, livelihood, health, basic assistance, water, education, food security, shelter, and energy, as you'll see here, with the numbers and the people targeted and how much money pledged for each one of those projects.
I will end up here with challenges and opportunities. I'll talk a bit about the challenges and then the opportunities. First, with the challenges, Lebanon's investment climate has serious shortcoming, irrespective of the Syrian crisis. Access to finance is generally easy-going. But poor infrastructure, red tape, and political uncertainty have long hindered Lebanese firms from investing in new products.
In addition, the surging regional tensions, specifically the war in Syria, have undermined local confidence and weakened the growth outlook, reducing investment incentives even further. Secondly, the nature of Lebanon's market-- specifically, labor market-- worsens the impact of displaced Syrians. Though data is limited, estimates prove that the Lebanese market is less accommodating, whereby almost half of the Lebanese workforce is employed in informal sectors.
Thirdly, current studies of the positive impacts of the displaced population may not be applicable to Lebanon, given the grand scale of displaced Syrian influx. Such scale has generated a shock that outstripped the Lebanese economy's ability to respond smoothly or even to mitigate some of its short-term costs. And this is particularly true, due to the fact that the refugee shock has not been spread equally across Lebanese territory, but has been concentrated in those regions of Lebanon where poverty and social vulnerability are already overwhelming and where competition for unskilled jobs may be more acute.
Opportunities and solutions-- first, though funding for infrastructure would not only provide immediate job opportunities for both Lebanese and Syrians, it would also lay the foundation for all-inclusive improvement in productivity, growth, employment, and development. Second, similarly, stabilization support for host communities would enhance internal demand and help Lebanon mitigate some of the short-term costs of the refugee presence by matching those authorities' capacity to offer government services with increased demand.
Third, funding for initiating foreign, direct, as well as local investments in projects that enhance the productivity and industrialization of the real sector, so as to capitalize on Lebanon's competitive advantage in knowledge, health, and academics. Fourth, funding for establishing economic and business platforms, such as border zones employing Syrian labor under Lebanese management, which serves as a hub that embraces logistics and construction services for entering the reconstruction phase in post-war Syria.
Fifth, distributing displaced persons across neighboring countries. Well, how about sending them over to Europe, if the thing will linger? The solution to resettle displaced Syrians in third countries was proposed, by the way, by the European officials themselves, including ex-French President Francois Holland.
Six, establishing the International Trust Fund to Support Lebanon. This trust fund was founded, actually, to support Lebanon in addressing the implications of the Syrian conflict but hasn't taken its toll yet. Seventh, creating industrial investment zones with international funding, including funds allocated by the United Nations to support sectors in countries hosting displaced Syrians and in collaboration with municipalities, which play a key role by providing land and low or nominal rates.
Eighth, acquiring soft loans from the World Bank. Interest-free soft loans were proposed in two main initiatives, the first entitled the Soft Funding Facilities Program and the second entitled the Guaranteed Facilities Program, during the financial and economic challenges in the Middle East Conference held in Washington, DC, on April 15, 2016, and organized by the World Bank Group with the United Nations and the Islamic Development Bank associations.
Even though the potential impact on repatriation in centers is unclear, international experience suggests that self-reliant refugees who have been able to enhance their skills while in exile are often able to return to their original country more rapidly. Moreover, proposed solutions require political decisions to convert them from mere ideas to practical applications, in an attempt to diminish the effects of the crisis and restore political and economic stability in Lebanon and the region.
To conclude, I would like to do that with an expressive passage from the 2017 IMF country report concerning Lebanon. It says-- and I'm quoting-- "In an uncertain world with fragile and failed states, people are sometimes forced to leave their countries of origin, whether temporarily or permanently. And in these circumstances, it is the general interest of the international community that they have somewhere safe to go, without fueling or spreading the instability they are fleeing from.
The widespread availability of the refugee protection then is a global public good that benefits all states, regardless of their individual circumstances. As with all public goods, however, adequate provision must overcome an immediate co-ordination problem, given the incentives for each country to shift the burden onto others. Typically, the cost of maintaining the refugee regime are borne, by necessity, by those countries adjacent to the conflict in question. But this is widely acknowledged as an unfair and fragile outcome, not least because these economies often have limited resources and are, perhaps, the least well-suited to bear this burden," unquote.
Lebanon's case with the tragic Syrian crisis is still, therefore, a cause, a cause for achieving fairness and righteousness now, as a country that is enduring, with ultimate integrity, multiples of its capacity, offering global good. Thank you very much.
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The Mario Einaudi Center for International Studies hosted Mr. Raed H. Charafeddine, the first vice-governor of Lebanon’s central bank, at Rhodes-Rawlings Auditorium on October 4 2017. Mr. Charafeddine presented his analysis of the macro- and socioeconomic impact of the Syrian crisis on Lebanon.
Raed H. Charafeddine has been the first vice-governor at Banque du Liban, Lebanon’s central bank, since April 2009. Prior to this, he spent twenty years in the banking sector, where he held senior executive positions at leading commercial banks in Lebanon and in the UAE.
Charafeddine has lectured at universities around the world on topics related to central banking and Arab countries in transition. He is an activist in the areas of social justice, women’s empowerment, interfaith dialogue, and institutional, human, and economic development. He holds a master’s and a bachelor’s degree in business administration from the University of North Carolina, Charlotte.
This event was organized by the Mario Einaudi Center for International Studies as part of its Global Finance Initiative and was cosponsored by the Department of Near Eastern Studies.