Diab’s caretaker Cabinet to introduce subsidy card bill to Parliament

The idea is to cut the subsidies by 40 to 60% especially since the subsidy program is costing the Central Bank around $6bln a year

Caretaker Prime Minister Hassan Diab is pictured during an interview with Reuters in Beirut, Lebanon December 29, 2020. Dalati Nohra/Handout via REUTERS Image used for illustrative purpose

Caretaker Prime Minister Hassan Diab is pictured during an interview with Reuters in Beirut, Lebanon December 29, 2020. Dalati Nohra/Handout via REUTERS Image used for illustrative purpose

BEIRUT: The caretaker government is set to introduce a bill to Parliament in a few days calling for the creation of a subsidy card to nearly 750,000 families in a bid to alleviate the negative impact of the gradual lifting of subsidies at the end of May, officials and experts said.

But the pressing question experts keep asking is how much this subsidy card will cost, who will finance it and above all will it have an inflationary impact on the prices of basic goods.

The idea is to cut the subsidies by 40 to 60 percent especially since the subsidy program is costing the Central Bank around $6 billion a year.

“The Ministerial Committee is planning to submit a unified proposal to Parliament in the coming few days to introduce a subsidy card or a prepaid card for the needy families. The committee has not yet agreed on the amount of cash for each card. The card needs the approval of Parliament and I don’t think the lawmakers have an interest in blocking this bill because no one wants to see the citizens suffer in case the subsidies were totally lifted in May,” caretaker Industry Minister Imad Hobballah told The Daily Star.

He admitted that there is no guarantee that this card will not cause the dollar to climb over LL20,000 or more if the Central Bank printed massive amount of Lebanese pounds.

Caretaker Prime Minister Hassan Diab has repeatedly warned against any hasty decision to lift the subsidies in one shot as this move could lead to grave consequences on the livelihood of 4 million Lebanese.

Diab stressed that he would not accept lifting the subsidies before starting the implementation of the rationing card, highlighting the fact that any measure aiming at lifting subsidies would have serious repercussions on most segments of the Lebanese society.

In a meeting held at the Grand Serail two weeks ago with ministers and economic advisers, Diab revealed a practical plan for the rationing card, including the number of targeted families and the relevant cost, adding that preparations were underway to complete the nominal lists for the families that will benefit from it.

“We are still deliberating on how to cover the cost of the card, and we are working to secure the funds. In this framework, I visited Qatar, where we briefed the Emir Sheikh Tamim, the prime minister and the concerned ministers, about the social and living situation in Lebanon, as well as the government's plan for the card and the rationalization of subsidies,” Diab told the committee.

He added that the file is currently under examination by Qatari officials.

Central Bank Governor Riad Salameh informed Caretaker Finance Minister Ghazi Wazni that he can no longer continue to subsidize products in the same manner, urging the government to come up with a new plan to ration subsidies and end waste.

Salameh also asked Ghazi Wazni in a letter to adopt a new policy to cut waste, warning that BDL can no longer afford to use its remaining dwindling foreign currency reserves for the subsidy program.

He added that the lawyers syndicate has threatened to take BDL to court in case the remaining foreign currency reserves, which belong to commercial banks, were used.

Salameh said that BDL’s subsidy program has allowed keeping the inflation in recent months at 84 percent, noting that inflation would have exceeded 275 percent if it weren’t for the support program.

Marwan Barakat, group chief economist and head of Research of Bank Audi told The Daily Star that there are advantages and disadvantages for this proposed card.

“There are pros and cons for the prepaid subsidy cards for needy households ... On the positive side, given that the subsidy cards are in Lebanese pounds and not in foreign currencies, they will not contribute in depleting the remaining BDL liquid Foreign exchange (FX) reserves. BDL has today liquid reserves of $16 billion ($22 billion of BDL foreign assets less BDL Eurobond portfolio of $5 billion less remaining BDL FX facilities to Lebanese banks of $1 billion),” Barakat explained.

He added that the liquid FX reserves are equivalent to the banks required deposits at BDL (15 percent of an FX customer deposit base of $110 billion), which suggests that there is no more room for BDL to continue its subsidy policy in FX.

“This raises the importance of rationalizing the subsidy policy and shifting to a subsidy policy that targets only needy Lebanese households and avoids cross border smuggling of subsidized products and extraordinary profits to concerned traders,” Barakat said.

“But on the negative side however, given that the subsidy cards are in Lebanese pounds, they will contribute to excessive LL money creation and increase currency in circulation (that has already increased by 200 percent over the past year to reach LL35 trillion), which would have adverse inflationary effects and create further pressure on the black exchange market. “

Barakat stressed that the only exit from such a conundrum is to get international assistance following the formation of a credible Cabinet that would enact a program with the IMF and launch long awaited structural and fiscal reforms.

Roy Ferneini, a leading financial analyst, said the subsidy card will replace the subsidies currently provided and will be based on the principle of printing cash, just as the state currently relies on this principle to finance all aspects of its spending.

“As for the result, it will inevitably be a further decline in the value of the local currency, and higher inflation, to the extent that this card is allowed to be described as a new collective impoverishment project that will overthrow the value of the Lebanese wages and purchasing power, and will lead to the opposite of the purpose being marketed today,” he cautioned.

According to Ferneini, the new subsidy card project is based on the idea of granting this card to more than 750,000 families, that is, about 75 percent of Lebanon's families today.

“Out of this figure, the state will bear the cost of financing cards for about 535,000 families entirely in Lebanese pounds. It is financing up to LL1,330,000 per family, as for the remaining 215,000 families, the World Bank loan (in US dollars) will finance part of the support allocated to them. In a simple calculation process, it becomes clear that the cost of the support that the state will provide to these families in Lebanese pounds amounts to LL800 billion per month, which is approximately LL9,600 billion on an annual basis,” Ferneini said.

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