‘Catastrophe’ warning as Lebanese officials lift fuel subsidies

Authorities say $3bn fuel subsidies unsustainable, but critics fear petrol prices nearly doubling could further ignite social tensions.

A man rests in his car as he waits in a long queue for fuel at a petrol station in Beirut on June 14 [Mohamed Azakir/Reuters]

Beirut, Lebanon –  Caretaker Prime Minister Hasan Diab approved a plan to decrease crucial fuel subsidies, a move observers warned could unleash a “social catastrophe” as the economy continues to crumble.

Diab said in a statement the decree on Friday to finance fuel imports at a rate higher than the official exchange rate aimed to secure a supply of fuel to last the next three months.

“Especially as we approach the summer season, that will increase the value of hard currencies coming into Lebanon with tourists and expats arriving,” said Diab.

The cash-strapped country would now import fuel at 3,900 Lebanese pounds to the dollar, as opposed to 1,500. A ministerial source told Al Jazeera the price of a tank of petrol could increase by almost twofold.

The decision was made following a meeting last week between President Michel Aoun, central bank Governor Riad Salameh, caretaker Energy Minister Raymond Ghajar, and caretaker Finance Minister Ghazi Wazni at Baabda Palace.

Economist and American University of Beirut professor Jad Chaaban told Al Jazeera that rolling back on subsidies at this point in time is a huge risk. Not only are livelihoods worsening, but also protesters have blocked roads across the country more frequently, as they fear having to live in even more dire economic conditions.

“If you double the price [of gasoline and fuel] then you double the price in all products and services that require them,” the economist said, fearing further tensions. “It’s a national security issue now.”

Cash card programme

Diab, who has opposed lifting subsidies without an alternative programme in place, was not at the meeting in Baabda Palace.

Government sources told Al Jazeera that he initially opposed the subsidy rollback policy, but changed his mind after a joint parliamentary committee endorsed a draft law for a targeted cash card programme on Thursday. The cash cards would replace the country’s expensive subsidies on wheat, fuel, and medicine.

Parliament is set to vote on the law later this week. The cash cards would replace the country’s subsidies, and provide up to $137 monthly to about 500,000 financially vulnerable families. The government says this will be more economically efficient, and will guarantee the poor are the sole beneficiaries.

The value of the Lebanese pound’s ongoing decline has hit an all-time low at about 18,000 to the US dollar.

Lebanon has been without a full-fledged government for almost 11 months, and continues to reel from an economic crisis that has dragged half its population into poverty.

Energy Minister Ghajar hinted recently that fuel subsidies could soon be ushered out.

“Those who can’t pay 200,000 Lebanese pounds for a tank should stop using a car and use something else,” he said after a parliamentary meeting. A government source said petrol prices would not increase as significantly as what the minister claimed.

Lebanon’s handful of importers and distributors rely on central bank subsidies to import fuel in US currency, which costs roughly $3bn annually.

The crisis-hit country also subsidises wheat, medicine, and some food items, which in total cost another $3bn every year. Officials have hinted that this programme is no longer sustainable, with an estimated $14bn left in foreign reserves in the central bank.

However, rising global oil prices have caused fuel shortages and price increases.

Lebanon allocates $250m every month for fuel imports. Ghajar has blamed the shortage on smugglers who sell subsidized fuel in Syria for triple the price.

Panicking drivers wait in long lines for hours to have their cars partially filled, as refuelling stations are rationing whatever supply they have. The Lebanese army and security forces often intervened to break up scuffles and at times even armed confrontations.

Demonstrators burn tyres to block Martyrs’ Square in the centre of Lebanon’s capital Beirut on Saturday [File: Anwar Amro/AFP]

Lebanon has also suffered from increased power outages, as the government tries to maintain an expensive energy system that costs at least $1.6bn annually and struggles to cover fuel imports.

Private generators that many households rely on have become even more expensive because of the currency slide. The government secured a $200m advance, but policy experts told Al Jazeera this is an unsustainable solution to policies that need significant restructuring.

While government officials say partially lifting fuel subsidies would increase supply into the country, Mohamad Faour, a postdoctoral research fellow in finance at University College Dublin, has doubts over the plan.

“The incentive to smuggle still holds, and the gap between the 3,900 rate and the market exchange rate of 18,000 pounds is huge,” Faour told Al Jazeera. “Setting smuggling aside, supply might increase a little bit but it’s very difficult to talk about this as sustainable solution.”

‘Social catastrophe’

International organisations and economists have criticised the programme’s effectiveness.

The International Labour Organization and UNICEF estimate 80 percent of subsidies benefit the country’s wealthiest 50 percent, as they have greater buying power. Smugglers have also benefitted from the programme by selling subsidised goods for a greater profit outside of the country instead, notably in neighbouring Syria.

But at the same time, the United Nations warned that lifting the subsidies could cause a “social catastrophe”, as Lebanon does not have viable social security networks and effective public services. The country is already experiencing medicine shortages and can barely keep the lights on.

Faour said both subsidies and targeted cash assistance are unsustainable long-term, and are typically used as temporary measures in the middle of an economic recovery programme.

“But we don’t have a plan being implemented, so as a result we don’t know what that temporary phase is,” he explained. “We don’t know what it would cost – not for one month, two months, or one year, but for the whole time period so we could plan accordingly.”

Talks with the International Monetary Fund broke down in July 2020, and have not picked up since. Without an IMF-approved recovery plan in place, the international community continues to withhold billions of dollars in economic aid it has pledged for Lebanon.

At the same time, the Lebanese authorities have not put an economic recovery plan into effect, and have tried to maintain things as they are without structural reforms.

A worker fills up a car with fuel at a petrol station in Beirut on Thursday [Mohamed Azakir/Reuters]

Faour said this really dilutes whatever measures are taken, including rolling back subsidies and replacing them with targeted cash cards. “As long as we’re in that current status quo where nothing is implemented and policy inaction is prevalent, then it’s just an attempt to buy time,” he said.

Chaaban goes as far as saying the cash card programme benefits the country’s rulers.

“The ruling cartel has an interest to keep on giving some small pills so they don’t do the drastic reforms and changes that are needed,” Chaaban said.

The American University of Beirut professor is also sceptical of how accurate and effective the targeting process will be for the cards. Many families in need will be left out, he said.

Bickering political leaders need to break the political impasse, and a full-fledged independent government must be formed, should the country stand a chance of becoming economically viable again, said Chaaban.

And until then, despite its ineffectiveness, and even with cash running dry, Chaaban said the subsidies programme for fuel and other subsidized primary goods cannot be lifted, because “we don’t have any option”.

Source: Al Jazeera