Sanctions and aid can ease Lebanon's economic woes one year after Beirut blast

'Carrot-and-stick' approach must focus on the banking sector, the centre of the ruling class' political and economic clout, policy research paper finds

Any sanctions imposed by western countries on Lebanon must be aimed at individuals with banking sector clout and those responsible for the damage inflicted on the livelihood of Lebanese people, according to Beirut-based think tank Triangle.

This will result in real change as the country's economic deterioration continues one year after the Beirut port explosion that devastated parts of the capital.

Sanctions must direct Lebanese bankers towards an equitable, transparent and accountable economic recovery plan while also making sure that independently monitored parliamentary elections are held as planned in May 2022, the think tank said in a policy research paper.

"To be truly effective, sanctions must target banking elites while aid should be protected from elite capture and manipulation," said Triangle.

The EU's proposed sanctions regime for Lebanon lays out the legal criteria for long-threatened measures including asset freezes and travels bans.

The nomination of Najib Mikati as prime minister-designate last week has done little to slow the push for sanctions in certain corners of the EU.

Mr Mikati has served as prime minister twice before his latest nomination, the last time being in 2011. He is also the third prime minister-designate in less than a year seeking to form a new government.

Lebanon’s economic collapse ranks it among the world’s top 10 crises – possibly even the top three – since the mid-19th century, according to the World Bank.

The country is in the grip of its largest peacetime economic and financial crisis, compounded by the Covid-19 pandemic, the effects of the Beirut port explosion in August 2020 and inadequate policy responses amid long-drawn out political infighting.

The "carrot-and-stick" approach of aid and sanctions needs to be as precise, traceable and measurable as possible to chart the country's path out its economic and political quagmire, said Triangle.

"That means that aid and sanctions need to follow a strict timeline, close administrative loopholes and provide incentives for co-operation from targeted individuals," said Alexander Ray, author of the Triangle policy paper.

The sanctions and aid must be tied to more than the formation of a new government.

Additional conditions should include clear timetables for audits of the central bank, also known as Banque du Liban, an agreement on an economic recovery plan, the resumption of formal negotiations for a $10 billion International Monetary Fund financial aid package, electoral law reforms and the holding of legislative elections in May 2022 as planned, said Mr Ray.

The US should join the EU and impose a wider sanctions framework that affects individuals in the banking sector while keeping the option open for a sector-wide sanctions regime, according to the policy paper's recommendations.

The US is considering a broad set of options to respond to the crisis in Lebanon, including sanctions on corrupt figures, sending cash and non-perishable aid to the Lebanese Army and directing humanitarian assistance to non-government organisations, according to a July 30 joint statement by the US Secretaries of State and Treasury, Antony Blinken and Janet Yellen.

Triangle's policy research paper recommends the expansion of the sanctions framework to focus on individuals in the central bank and the management and shareholders of commercial bank, based on charges that they have allegedly breached Lebanese and international financial misconduct laws.

"The delivery of humanitarian aid will be an important complementary measure to sanctions, given the increasingly desperate needs of Lebanese and refugee populations," said Mr Ray.

More than 75 per cent of Lebanese households are now running short on food supplies due to rising poverty levels, necessitating an international aid package to provide basic social protections for most of the population.

"As a 'carrot' alongside the 'stick' of sanctions, the promise of aid will incentivise the political class to stave off a complete collapse in access to basic goods and services," said Mr Ray.

"A co-operative balance in aid delivery mechanisms must exist between state and civil society bureaucracies," he said. "Aid should be distributed in the currency it is provided, a core component of principled aid."

Rigorous and independent procurement processes should be established, which are capable of conducting individual shareholder investigations, according to the policy paper.

Humanitarian aid organisations should retain their independence by preventing government from imposing local staff and partner organisations.

Humanitarian workers should be guaranteed full access to carry out field visits, needs assessments, operations and independent monitoring and evaluation.

Aid delivery projects should include an independent verification mechanism for security access approvals, according to Triangle'srecommendations.

“This 'carrot-and-stick' approach stands the best chance of bringing Lebanon’s intransigent political and banking class to the table, so that a realistic solution to the economic crisis can finally be agreed," said Mr Ray.

Updated: August 3rd 2021, 10:40 AM