Lebanon’s credit growth in 2008–10 has been concentrated in trade and services, household loans, and the construction sector. These sectors accounted for almost 80 percent of all new loans extended since 2008. Real estate lending in particular has been increased substantially. On the demand side, a renewal in confidence following an improved political environment in 2008 led to a rebound in economic activity that, together with a real estate boom, fueled credit demand.

Abstract

Lebanon’s credit growth in 2008–10 has been concentrated in trade and services, household loans, and the construction sector. These sectors accounted for almost 80 percent of all new loans extended since 2008. Real estate lending in particular has been increased substantially. On the demand side, a renewal in confidence following an improved political environment in 2008 led to a rebound in economic activity that, together with a real estate boom, fueled credit demand.

IV. Poverty, Social Safety Net, and Subsidies in Lebanon1

Poverty rates are high with significant regional disparities. Lebanon’s social safety net and subsidies are costly, badly-targeted, and fragmented. Focus should be on gradually replacing universal subsidies with cost-effective and well targeted ones, especially in the electricity sector. There is also room for narrowing the scope of some subsidies and integrating new programs with existing ones. Data gaps on social indicators should be addressed. A communication strategy would help shore up broad support for reforms.

1. Poverty incidence in Lebanon is high, showing significant regional and sectoral disparities. Nearly 20 percent of the population in 2004–05 could be considered as poor and 8 percent as extremely poor (UNDP, 2008).2 Poverty is concentrated in peripheral regions (i.e., outside Beirut, in the North and in the South), with 40–50 percent of the population in these regions considered as poor (Figure 1). The poor are mostly unskilled workers (e.g., in sectors such as agriculture and construction) and unemployed.

Figure 1.
Figure 1.

Distribution of Poverty and Extreme Poverty by Region, 2004

(In Percent of Population)

Citation: IMF Staff Country Reports 2012, 040; 10.5089/9781463940362.002.A004

Source: Ministry of Social Affairs and the United Nations Development Programme (2008).

2. Inequality measured by the Gini index is below that in other middle income countries but comparable to the median for MENA (Table 1). The share of consumption by the lowest quintile of the population, estimated at 7 percent of all consumption (UNDP, 2008), is higher than the median of upper middle income countries. It though is slightly below that of MENA countries with a similar (or slightly higher) Gini index (Jordan and Yemen).

Table 1.

Gini Index and Income Shares Held by the Poorest and Richest Quintiles (In Percent) in Selected MENA Countries, Various Years

article image
Source: World Bank (2011a); and UNDP (2008).

For Lebanon, data refer to consumption shares due to lack of data on income shares.

Based on the World Bank’s income group clasification, for which data are available from 2005 onwards. Years vary by country.

Refers to countries for which data are available from 2005 onwards. Years vary by country.

A. Lebanon’s Social Safety Net and Subsidies

3. The social safety net and subsidies amounted to about 4 percent of GDP in 2010 (Table 2). 3 The following sub-sections describe the various components of the safety net and subsidies and compare them to other countries in the region.

Table 2:

Cost of Social Safety Nets and Various Subsidy Schemes, 2010

(In percent of GDP)

article image
Sources: Lebanese authorities; World Bank estimates; and IMF staff calculations.

Data refer to 2010 budgetary allocations.

Preliminary estimate of about LL 46 billion.

Social safety net

4. The social safety net provided through official channels is small.4 Since the mid-2000s, social spending, including on health, education, and pensions ranged between 30–40 percent of primary spending (about 7½ percent of GDP) (Figure 2). For 2010, this would place Lebanon broadly within the average in other MENA countries. However, the share allocated to the social safety net (defined as non-contributory transfers targeted to the poor) is less than one percent of GDP. This is small by international standards, which are about 2 percent of GDP on average, with a median of about 1½ percent of GDP (Weigand and Grosh, 2008). Social safety net spending in Lebanon is also lower than the historical average in selected MENA countries, estimated at about 1.7 percent of GDP (Figure 3).

Figure 2.
Figure 2.

Evolution of Social Spending, and EdL Subsidies, 2004-10

(In Percent of Primary Expenditures) 1/

Citation: IMF Staff Country Reports 2012, 040; 10.5089/9781463940362.002.A004

Sources: Lebanese authorities and IMF staff calculations.1/ Historical data on other subsidies, including diesel, tobacco, bread, wheat, sugar beet, and agricultural exports subsidy is not available.
Figure 3.
Figure 3.

Social Safety Nets Expenditures in Selected MENA Countries, various years

(In Percent of GDP)

Citation: IMF Staff Country Reports 2012, 040; 10.5089/9781463940362.002.A004

Source: Weigand and Grosh (2008). Years vary across countries: Lebanon (2010), Yemen (1999), Jordan (2002), Egypt (2000), Morocco (1998), Tunisia and Iran (2000).

5. The official social safety net is provided through three channels. These are (i) social services to specific vulnerable groups, such as delinquents, disabled persons, orphans, and school dropouts, run by the Ministry of Social Affairs through welfare institutions and NGOs; (ii) fee waivers for hospitalizations, which provide for 85 percent of the fee for using private hospital services for those who do not have any insurance coverage; this program is managed by the Ministry of Public Health; and (iii) price subsidies for diesel, tobacco,5 and bread (Box 1). More than half of the funds go to fee waivers for hospitalization and the rest is about equally split between the Ministry of Social Affairs’ services and price subsidies.

Subsidies for energy and selected agricultural products

6. There are price subsidies for energy. The subsidy provided to Electricité du Liban (EdL) mainly pays for the difference between the cost of electricity production at the actual oil price and the “subsidized” price of $21 per barrel (set in 1996), but also for EdL’s operation and maintenance costs and nontechnical losses. Through this, the government indirectly subsidizes electricity consumption by keeping tariffs below cost recovery.6 Transfers to EdL amounted to about 3 percent of GDP in 2010, which is higher than the average of about 2 percent of GDP in oil importing MENA countries (Figure 4). Residents of Beirut, which has the lowest poverty rate in the country, are its main beneficiaries.7

Figure 4.
Figure 4.

Fuel/Energy Subsidies in Selected MENA Oil Importing Countries, 2010

(In Percent of GDP)

Citation: IMF Staff Country Reports 2012, 040; 10.5089/9781463940362.002.A004

Sources: IMF country team estimates; and Lebanese Authorities.1/ Data for Egypt refer to FY2010/11.

Price Subsidy Schemes

Consumers subsidies

Diesel fuel subsidy (also “mazout” or “winter fuel” subsidy). Direct beneficiaries are large petroleum stations that are supposed to pass it on to consumers. This subsidy reduces the price of diesel for heating houses during December–March. The price of a 20 liter tank of diesel is subsidized by a fixed amount provided that the subsidized price remains above a certain floor.

Bread subsidy. This subsidy was introduced in July 2007 in response to food price increases. It was provided to millers to purchase imported wheat for milling and Arabic bread making. It caps the price of bread at a certain level per pack. The program was stopped in 2008 when international wheat prices fell, but was re-introduced in 2010.

Producer subsidies

Wheat (producer) subsidy. This subsidy is provided to farmers to encourage local wheat production. The government purchases wheat from farmers at guaranteed prices and sells it at a lower price. All wheat farmers are eligible to participate but the size of the subsidy per farmer is capped in relation to the size of the cultivated area to limit subsidies on smuggled wheat. The subsidy has been used on and off. For instance, when wheat prices increased in 2007, most farmers sold their production directly to millers, not necessitating the subsidy.

Tobacco subsidy. Beneficiaries are tobacco farmers. The public monopoly, Régie de Tabac (RdT), purchases all tobacco production at subsidized prices from local farmers, who can only sell the amount demanded by RdT and are not allowed to sell more than their quota. The subsidy is recouped by RdT through tobacco taxes and other charges paid by foreign tobacco producers.

Sugar beet subsidy. Beneficiaries are sugar beet farmers (about 200 in 2008). The subsidy is based on an assumed cultivation area. All beets are sold on the domestic market. The subsidy was phased out in 2008, but a retroactive payment was made in 2009 for the subsidy provided in 2006.

Agricultural exports subsidy. The government introduced the “Export Plus” program in 2001, under which it subsidizes the export of specific agricultural products, including fruits, vegetables, flowers, olive oil, and honey. Beneficiaries are agricultural exporters who buy products from farmers. The subsidy amount depends on the product, the export destination, and mode of transportation. The program was supposed to be phased out gradually starting in 2006 and expire by end 2010, but was extended to October 2011. A Ministerial Committee is currently revising the program (changes are expected to be broadly cost neutral compared with 2010).

7. Electricity sector subsidies are supplemented by other measures. There is a history of changing the pricing structure of gasoline to reduce the impact of rising fuel prices by cutting the excise tax.8 Moreover, on October 5, 2011, Parliament approved one-off cash support to taxi drivers equivalent to the value of 250 liter of gasoline per month and conditional on the price of a tank exceeding a specific threshold. The support is for three months (subject to a possible renewal for another three months) with an estimated cost of 0.1 percent of GDP; its implementation is pending.

8. There are also producer subsidies, but these are small. These subsidies are for wheat, sugar beets, and agricultural exports (Box 1 and Table 2). Total cost was 0.11 percent of GDP in 2010, ranging from almost negligible (the sugar beet subsidy which was phased out in 2008) to about 0.08 percent of GDP (the agricultural export subsidies).

B. Weaknesses in the Social Safety Net and Subsidies

9. Targeting is generally weak with limited benefits for poor households. Lebanon relies largely on generalized subsidies, which are relatively easy to administer, but tend to benefit the well-off, while targeted subsidies are less costly and can be very effective in fighting extreme poverty (see Box 2 for an example). Only the white (Arabic) bread subsidy, which was eliminated in 2008 following the fall in international wheat prices but re-introduced in 2010, appears relatively efficient in terms of targeting: The poorest 40 percent of the Lebanese population receive about half of total spending on the subsidy (Figure 5)—a result that could largely be explained by the fact that low income households allocate a larger share of their total consumption to this type of bread.

Figure 5.
Figure 5.

Distribution of Subsidies Across Income Groups

Citation: IMF Staff Country Reports 2012, 040; 10.5089/9781463940362.002.A004

Source: IMF (2011).

Brazil’s Bolsa Família Program

The Bolsa Familia is Brazil’s conditional cash transfer program launched in 2003 in support of the Brazilian “Zero Hunger Initiative” (World Bank, 2011b). Similar schemes are used in other countries, including Indonesia, Morocco, South Africa, and Turkey. The program directly transfers about US$35 dollars per month to poor families with children conditional on education and health targets, mainly regular school attendance and medical check-ups.

The Bolsa Familia is well targeted. It targets people that did not benefit from social programs. The poorest 40 percent of the population receives 94 percent of the funds which are mostly used to buy food, clothes and school supplies.

Bolsa Familia has been very effective. It contributed to the decline in extreme poverty from 22 percent in 2003 to 7 percent of the population in 2009. At least 12.7 million families, or some 50 million people, benefited from the program. The second phase of the program started in September 2010 and is expected to last for five years. The expected outcomes are that at least three quarters of families in the 20 percent poorest group get Bolsa transfers toward achieving school attendance of at least 90 percent of primary-age school children in extremely poor families and substantial improvements in health indicators.

Three factors contributed to the success of the program: strong political support, a robust monitoring and evaluation system, and capacity to innovate. Bolsa Familia developed a strong monitoring and evaluation system even though it was coordinated by three ministries and implemented through more than five thousand municipalities. A major innovation in this system was the introduction of performance-based incentives for municipalities.

10. Services are provided by different agencies with little coordination. Social components are included in various sectoral strategies, but with little harmonization among the sectors, ministries, and providers, possibly reflecting a sectarian balance. For instance, most of the social services that are financed through the Ministry of Social Affairs are provided by a range of welfare institutions and NGOs contracted by the ministry, resulting in overlaps and administrative inefficiency.

11. Some elements give rise to waste and distortions.

  • The hospitalization program is subject to leakages and weaknesses. The Ministry of Public Health performs the role of “insurer of last resort” for individuals who are not covered by any insurance scheme (estimated at half of the population). Weaknesses largely stem from poor supply and demand incentives, which resulted in increasing reliance on specialists and expensive health technologies and procedures at the expense of more cost-effective primary health care services and health prevention interventions. On the supply side, the Fee for Service system, which is the basis for reimbursing health providers, is geared to produce more (and expensive) services than needed, leading to abuse and higher costs. As a result, actual costs exceed budget allocations. Some of the reimbursements to hospitals are thus delayed, resulting in reluctance to admit Ministry of Public Health patients. This in turn results in delay of care, eventual hospitalization with more severe illness, and ultimately higher costs. On the demand side, demand for primary health care is low because patients tend to visit specialists instead of family physicians as a first recourse (Ministry of Social Affairs, 2011).

  • There is abuse of some subsidies. Because the diesel subsidy is provided only during the winter, anecdotal evidence suggests that petroleum stations buy large quantities of subsidized diesel and stock them to be sold at higher prices during April–November when the subsidy is not provided. Smuggled wheat from neighboring countries could benefit from the wheat subsidy. Also, there are indications that the subsidized flour is used for products that are not in the consumption basket of the poor (e.g., pizza bread, pasta, and French pastry).

  • Other subsidies distort production. The tobacco subsidy hampers the development of the sector, because farmers have no incentive to increase their production and/or raise quality to international standards. Agricultural export subsidies encourage producers to increase their production toward exports markets, which could result in higher prices for domestic consumers possibly affecting the lowest income quintile most severely.

12. Governance is weak. There is a lack of reliable poverty indicators and thus outcomes of interventions, including ex-post evaluations. There also is a lack of service standards. Experience from other countries suggests that a strong monitoring and evaluation system is critical to the success of targeting programs (Box 2).

C. Ongoing Reforms

13. The government developed a Social Action Plan in 2007. As part of the Paris III donor conference, the Plan aims at reducing poverty, improving social indicators, and achieving the Millennium Development Goals by 2015. It also includes a medium-term strategy to introduce safety net programs, such as cash transfers to the very poor households; school meals and books, stationary, and transportation facilities to students living in poor households; and free hospitalization for all households under the poverty line (Republic of Lebanon, 2007). Evolving from this Plan through a participatory process, the National Social Development Strategy was launched in 2011. The Strategy identified five key objectives toward poverty reduction: achieving better health; strengthening social protection; providing quality education; improving opportunities for equitable and safe employment; and revitalizing communities and developing the social capital.

14. As part of the Social Action Plan, the National Poverty Targeting Program (NPTP) was launched in 2010. It started with a pilot in 2009 with the objective of establishing a targeting mechanism that could be used to deliver social transfers and services to the poor and vulnerable using a proxy means testing (PMT) targeting system. The pilot covered some 25,000 people and assisted in developing applications and questionnaires as well as manuals. Work is in progress to use the PMT to establish a program of direct cash assistance for the extreme poor. According to simulations by the Bank, such assistance, if well-implemented, is cost-effective,9 and has a large impact on alleviating poverty.10

15. Preparations are in their final stages to launch a rollout of the pilot. A public relations campaign has been recently launched to ensure that eligible households, estimated to reach 300,000, will visit some ninety Social Development Centers that have already been set up. The Central Administration of Statistics is conducting a survey to update the Living Conditions of Households. This will help in updating the scores of the PMT for the NPTP and serve as a baseline for reporting the impact of the program on poverty reduction. The government plans to distribute the first payments to eligible beneficiaries by mid-2012.

D. Conclusion

16. Reforms should focus on:

  • Developing the social safety net, while gradually replacing universal subsidies with cost-effective and well-targeted ones. The EdL subsidy is by far the largest and deserves the most attention. Changes in the subsidy must be preceded by reforms and investment in the electricity sector, with a view to improving the quality and reliability of the service, while gradually increasing electricity tariffs to cost recovery levels. Reducing the EdL subsidy would create fiscal space for the NPTP (possibly offsetting some of the adverse impact of the tariff increase on the poor), other social and infrastructure spending, and a reduction in debt.

  • Narrowing the scope of existing subsidies to those that are most important for the poor (e.g., bread subsidy), and gradually replacing subsidies that are associated with negative externalities (e.g., tobacco subsidy) for more cost-effective and less distortionary ones.

  • Integrating new programs with existing ones. The NPTP could be integrated with labor market programs, such as those run by the Ministry of Social Affairs and NGOs, as a way to encouraging graduation from social assistance toward access to income generating activities, micro-credit and banking services. The NPTP could also be linked to other social interventions (e.g., health and education) in the form of a conditional cash transfer to improve social outcomes and break the cycle of intergenerational poverty transmission (as was the case in the Bolsa Familia). In this regard, one could consider linking cash transfers to education targets—particularly to reduce high dropout rates—and health conditionalities—particularly to provide access to health care services for uninsured individuals who cannot afford to buy insurance.

  • Garnering public support and buy-in for reforms through a public awareness campaign. This would require collecting and disseminating information about costs and benefits of subsidies. Vulnerable segments of the population affected by reforms may have to be compensated during a transition phase, especially because the social safety net is small, though such compensation would ultimately have to be rolled into targeted subsidies.

  • Improving data availability and timeliness for social indicators, including among others, on poverty rates, income and consumption shares, and inequality indices. These efforts would greatly facilitate policy-making in well targeting the safety net.

References

  • International Monetary Fund, (2011) “Moving from Subsidizing Products to Protecting People,” In Regional Economic Outlook: Middle East and Central Asia Department, Chapter 3, Section 2, April 2011.

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  • Kyobe, A. Nakhle, N. and Sadikov, A., (2012) “Private Sector Credit Growth in Lebanon—Supply or Demand Driven?,” Lebanon—Selected Issues, Chapter 1.

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  • Ministry of Social Affairs, (2011) “National Social Development Strategy of Lebanon.”

  • Ministry of Social Affairs and the United Nations Development Programme, (2008) “Mapping of Human Poverty and Living Conditions in Lebanon 2004,” available in Arabic at: http://www.undp.org.lb/communication/publications/index.cfm

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  • Republic of Lebanon, (2007) “Republic of Lebanon: Social Action Plan – Toward Strengthening Social Safety Nets, and Access to Basic Social Services,” available at: http://www.rebuildlebanon.gov.lb/images_Gallery/SocialActionPlanEnglishEn220107.pdf

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  • The World Bank, (2011a) “World Bank Development Indicators Database.”

  • The World Bank, (2011b) “Bolsa Família: Changing the Lives of Millions in Brazil,” (downloaded in June 2011) available at: http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/LACEXT/BRAZILEXTN/0,,contentMDK:21447054~pagePK:141137~piPK:141127~theSitePK:322341,00.html

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  • The World Bank, (2009) “Lebanon: Social Impact Analysis - Electricity and Water Sectors,” Social and Economic Development Group, Middle East and North Africa Region, Report No. 48993-LB.

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  • The World Bank, (2008) “Republic of Lebanon: Electricity Sector Public Expenditure Review,” Sustainable Development Department, Middle East and North Africa Region, Report No. 41421-LB.

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  • United Nations Development Programme, (2008) “Poverty, Growth, and Income Distribution in Lebanon,” International Poverty Center, Country Study, Number 13.

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  • Weigand, C. and Grosh, M., (2008) “Levels and Patterns of Safety Net Spending in Developing and Transition Countries,” SP Discussion Paper, No. 0817, Social Protection and Labor, The World Bank.

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1

Asmaa El-Ganainy and Najla Nakhle.

2

The dollar equivalent for the poverty line (when converted at the official exchange rate) is US$4 per capita per day, and for the extreme poverty line is US$2.40 per capita per day.

3

This excludes programs funded through contributions, such as the ones run by the National Social Security Fund, including health insurance and the family allowance programs. It also excludes an interest subsidy, which amounted to 0.2 percent of GDP in 2010 and is administered by the Banque du Liban (Kyobe, Nakhle and Sadikov, 2012).

4

The informal social safety net provided by civil society and non-governmental organizations (NGOs) is substantial. They provide various forms of social services, including in basic health care, education, training, and microfinance.

5

The tobacco subsidy is considered part of the social safety net because the tobacco industry is a major source of income for many people in rural areas where poverty is widespread. The Bank estimates that over 45,000 Lebanese at least partially depend on tobacco cultivation for their livelihood.

6

In 2006, EdL’s average tariff was 9.4 US cents/kWh, a level which is at the higher end for the region, but comparable to that of countries which rely on imported fuel for power generation (such as 10 US cents/kWh in Morocco and 7 US cents/kWh in Jordan) (World Bank, 2008).

7

EdL expenditure is far higher in Beirut than in other regions, reflecting both higher consumption because of higher incomes of Beirut households and the lower electricity rationing in the city (World Bank, 2009).

8

The government cut excise taxes on gasoline in May 2004. Revenue losses in 2006-08 were estimated at 2 percent of GDP. The cut was reversed in 2009, but in February 2011 the government cut excises again, this time in half, with budgetary costs of up to one percent of GDP annually.

9

International experience with the PMT targeting system suggests that these programs could increase the proportion of transfers accruing to the bottom two income quintiles to over 60 percent.

10

The World Bank estimates that to reduce extreme poverty by half by 2015, about 0.3 percent of GDP would be needed annually. The benefits would reach about 330,000 people, with an average benefit size of about LL 448 thousands per beneficiary.

Lebanon: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Distribution of Poverty and Extreme Poverty by Region, 2004

    (In Percent of Population)

  • View in gallery

    Evolution of Social Spending, and EdL Subsidies, 2004-10

    (In Percent of Primary Expenditures) 1/

  • View in gallery

    Social Safety Nets Expenditures in Selected MENA Countries, various years

    (In Percent of GDP)

  • View in gallery

    Fuel/Energy Subsidies in Selected MENA Oil Importing Countries, 2010

    (In Percent of GDP)

  • View in gallery

    Distribution of Subsidies Across Income Groups