A Lebanese Sovereign Wealth Fund: Threat or Lifeline?

Policy Analysis by Zeina Dagher, Staff Writer

September 7th, 2020

With the economic crisis hitting Lebanon harder each passing day, talks of creating a Lebanese Sovereign Wealth Fund (SWF) are once again at the center of the table. President Michel Aoun has taken on the initiative of creating a sovereign fund to manage the Lebanese state’s assets, increase its revenues, its market value… aiming to compensate the losses resulting from the financial crisis, even though the project is still considered at its early stages – it is still unsure what assets will be added to it. At this stage, it seems like the idea of creating a SWF has already imposed itself as an unquestionable way out of the crisis, and Parliament members are actively discussing the project. However, the biggest discussion currently going on revolves around one question: who will be managing this fund? While the banking sector is adamant on having it put under the Central Bank’s direction, MP’s are more eager to hand it to an independent, third-party administration. This remains but one of the many questions that are attached to this project, and the answers to them will determine whether the (remaining) Lebanese people’s rights will be protected, or on the contrary trampled on. Being used to the corrupt Lebanese politicians’ sneaky projects and tricky policies, it comes as no surprise that such an important matter is getting minimal press coverage, although its impact could be extremely dangerous on the Lebanese citizens. Therefore, without further ado, let’s dive right into it.

Let’s talk first about where the idea of a SWF came from. According to Al Modon, in the very first drafts of the Government’s recovery plan, there were talks of a “recovery fund”, that would include some big deposits and “the looted money that will be recovered as well as some of the State’s assets”, that will compensate some depositors’ financial losses, and reduce the Central Bank and private banks’ budget deficit. Practically, the draft had put the biggest weight on the State’s assets, because the “recovered looted money” does not represent a serious and realistic source for the fund, knowing that the money may never be recovered, or at least not fully. However, the latest version of the Government’s plan does not include a “recovery fund”, but rather talks about a “company to manage the public assets”.  This company would have a 10-year timeframe during which it would manage the State’s main assets (with the exception of oil and gas), investing in them and restructuring them to increase their revenues. 

The Government was not the only one to suggest the creation of a SWF in its recovery plan. In fact, the banking sector’s plan included it as well, and detailed even further the way this fund should be managed: by the Central Bank. Their plan estimated these assets to be worth around $40 billion. Since the Lebanese state is debtor to the Central Bank, in turn debtor to private banks, in turn debtors to the depositors, therefore the assets of the State included in the fund will be used as guarantees of the banking sector’s obligations towards depositors. This was the reasoning used to give the idea some legitimacy. The banks will then either have the Lebanese state’s debt compensated through the revenues that the fund will generate, or in case it fails to generate any, through their appropriation of the assets. 

As we have already said, the idea of creating a SWF is being treated as a reality that can’t be ignored. Jean Riachi, CEO and Chairman of the board of FFA Private Bank, and member of the team tasked with studying the SWF’s project, has commented on it being “a great idea. It has been adopted in many countries in the world. Various recovery plans, including the Government’s and the Banks’, are relying on it to get Lebanon out of its crisis.” However, do we really need a SWF to get out of the crisis? Let’s evaluate first the other options that the Government’s recovery plan presents. The plan talked about recovering big deposits that were evacuated from Lebanese banks, excessive interests that the banks had made before, and looted public money. These cannot really be considered as serious options, because none of them are really guaranteed, and very little measures have been implemented to truly make them happen. The only other serious option was cancelling the capitals of the banking sector and recapitalizing, through changing some deposits to stocks in the banks. However, this idea was strongly opposed by various political and religious sides, as well as some ministers in the Government, because it seems to disturb some sectarian considerations and arrangements within the sector. These oppositions led to the idea being dismissed.

However, if the project is eagerly being endorsed by those in power and the banking sector, the Lebanese people (also depositors, and another head in the Government-Central Bank-banks team) are being completely disregarded in the talks and negotiations happening. Liqaa Teshrin (لقاء تشرين), a group of Lebanese citizens active in the October 17th uprisings, have criticized the sovereign fund as a plan to pillage and destroy Lebanon. It sees in it a plan to rob the current and future Lebanese generations from their property, at the profit of the same corrupt politicians and banks and “militias” who have wrongfully managed it in the first place. It also sees in it the danger of a total privatization of Lebanon by those in power, following the usual political/religious distribution principles, which forever shuts the door to Lebanon becoming one unified nation. 

The idea could in fact be extremely dangerous for the Lebanese people and Lebanon as a nation. It is widely recognized that with corruption running deep in the State’s institutions, it is not capable of successfully managing this fund outside of political and religious distributions and considerations, which would eventually lead to the downfall of the fund and gives the State no choice but to sell the assets, which are rightfully supposed to be the property of all Lebanese. This by itself is already unimaginable, as generations of Lebanese have paid for these assets through work and taxes... An example of the Lebanese state’s failure to create a sovereign fund was with the oil and gas sovereign fund. Ever since the first oil-related legislation in Lebanon in 2010, talks of creating such a fund were taking place, but to this day have borne no fruits because of conflicting political interests and distribution principles.

 If the (presumably independent) banking sector managed the fund, and it did not generate the money needed to compensate the losses (maybe even purposely), the banks would seize the State’s assets. It would be extremely unfair to have the Lebanese lose the assets that they publicly own, to compensate losses resulting from unwise investing decisions that private banks made… It’s also important to keep in mind that the same corrupt politicians who are in the Lebanese state’s institutions, are on the boards and have important stocks in most private Lebanese banks. Which means that the assets that Lebanese paid for would legally become the power-hungry politicians’ private property, or would be eventually sold by banks to private owners, to compensate the losses of depositors. In a discussion with Nidaa Al Watan, Salim Sfeir, head of the Association of banks in Lebanon, said that the banks’ suggestion of creating a SWF does not aim to seize the State’s assets, but to reestablish balance and trust and reassure investors that their money still exists. He found it unlikely that the banks, political parties and politicians take part in the fund’s management. As for the way the lost money will be compensated, he estimates that the revenue generated from the fund will compensate the losses of the Central Bank, that is investors’ deposits. If there was to be any privatization, its revenues would also serve to compensate what the State squandered. He considers that the money should rightfully go to the Central Bank and private banks, because the Ministry of Finance squandered the depositors’ money and therefore has to compensate it in one way or another. 

If a third-party company managed the fund, it will be the one responsible of distributing the charges and benefits between the State, the Central Bank, the banks and the depositors. It will also be in charge of investing and increasing the revenues of the State’s assets. Considering that the company in question has politicians and people in the corruption system on its board, we fall again into the pit of selling and privatizing public assets. 

To resume it all, if those in the corruption system will have a part in managing the SWF, it doesn’t really matter who does it because it will most likely eventually fail. In all cases, the Lebanese (and other) depositors will be faced with a big dilemma: either give up the public assets that you and other generations of citizens paid for, or lose your deposit, also known as the fruits of a lifetime of work. In all cases, the Lebanese people are the ones losing. 

The creation of a Lebanese SWF is also faced with various other problems than “who will manage it”. Creating such a fund requires, first and foremost, to specify which are the State’s assets, be it companies, land… The problem is that many of the State’s grounds are illegally seized by private parties, or being exploited without its knowledge, or are subject to conflict. These assets can certainly guarantee an important revenue to the State if they were removed from the corrupt distribution and clientelist system, and were managed correctly. Riachi believes that “the fund will definitely clash with the interests of the politicians, who receive from public institutions and the State’s grounds and assets guarantees that secure them political funding, electoral employment, and clientelist utility”. Removing the assets from their claws will not be easy, Riachi says. 

Another problem is that this fund is created solely to “liquidate” accumulated debts and losses, but doesn’t try to increase the State’s production and earnings for the future, for it to fully pay back its creditors, from banks to others. In fact, we had previously said that the banks estimated the State’s assets to be worth $40 billion, which only covers a portion of the Lebanese state’s debt. Former minister Adel Afiouni has stated that the first aim of this fund should be to manage the State’s assets in a better and more fruitful way, to increase its revenues, no matter what they will be used for. He also insisted that the managing head be independent and away from political interventions aiming to increase the assets’ stock value. Afiouni added that the revenues of the SWF can’t be solely used to pay off the public debt and compensate creditors’ losses, because the assets are the property of all the Lebanese people and not just a fraction of it (the creditors’), maintaining that some of the revenues can be used to that aim, because the State is responsible of what it couldn’t pay back. 

A third problem comes in relation with foreign creditors. Using the State’s assets as guarantees of the State’s debt towards the Central Bank/the local private banks, will definitely not sit right with foreign creditors. First, if the State renounces its assets, this will reduce its creditworthiness at the profit of guarantees for local banks, which will also be an obstacle in the way of negotiating any restructuring of the Eurobond debts with foreign creditors. This also reduces the chances of the Government getting any help from the IMF, which it was determined to obtain, having lost most of the guarantees the IMF could use. 

In the end, following all the problems we have mentioned above, it appears that one of the main conditions for a SWF to work in Lebanon, would be to have all political sides stay the farthest away from it. Otherwise, the same domination that they exerted on the State’s assets and institutions through corruption, mismanagement, looting and squandering public funds, will be exerted on the sovereign fund and its contents. Many experts have therefore concluded one thing: there can be no change and improvement in Lebanon before replacing the political class and the prevailing mindset with better ones.