The ships moved slowly off the coast of Lebanon, waiting for their turn to dock at Beirut’s ruined port to unload their cargo so they can set sail once more.
With Lebanon’s ongoing economic crisis, it has become hard to import goods, with costs continuing to rise and subsidies lifted by the government, but a continuous stream of ships persists.
This is one of Lebanon’s few remaining connections to the outside world.
However, this, too, could soon be in jeopardy, as the Lebanese news network Al-Jadeed reported that Lebanon had its membership to the World Customs Organization, which is in charge of customs-related issues like valuation, collection of customs revenue and international trade facilitation, frozen after the Mediterranean country did not pay its dues.
Although Lebanon is working with the WCO to have its membership restored, experts argue that even just a temporary freeze could have disastrous consequences for Lebanon’s image when it comes to global trading.
“Now that Lebanon is out of it, Lebanon is already known for being a corrupted country, it’s going to get even worse and this will not facilitate any trade activity between Lebanon and other countries and this will isolate Lebanon even more than it is already isolated,” Danielle Hatem, a financial advisor, told NOW. “Of course, this is not something good and it will affect even the reputation of the country that is already in deep trouble.”
Lebanon’s image to the rest of the world has been anything but glamorous.
Sure, there are the beaches and the nightlife, but the country has also held a reputation for rampant corruption and, with the economic crisis, a severe inability to manage the country due to conflicting interests related to this corruption.
The WCO’s freezing of Lebanon’s membership exacerbates this image.
This will affect Lebanon’s ability to trade globally, as some companies might feel uneasy about doing business with a country that was removed from the global organization for customs.
“We’re known for being a corrupted and mismanaged country that is, unfortunately, in one of the worst unprecedented crises that the world has ever seen in the last 130 years,” Hatem stated.
“Now we are talking about getting kicked out of the WCO at a time where we need to export. We need trade activity because we need to put a lot of effort on everything that is related to export productivity in the country in order to export our products because we need hard currency. This will affect our economic goals and our economic recovery.”
It wouldn’t help that much at this point as long as we don’t do the reforms that are recommended and required. To start with, we need to control our borders, we need to start with the IMF program, restructure the banking sector as a whole, have a clear budget and unify the exchange rate.
Walid Marrouch, the assistant dean of graduate studies and research at the Lebanese American University, agreed with Hatem, adding that this kind of situation is something that Lebanon cannot afford to deal with right now as it continues to grapple with the economic collapse.
“We cannot afford this at the current moment,” Marrouch told NOW. “We are facing an economic depression and we don’t need any cups, especially with international trade because that’s the only thing linking Lebanon with the rest of the world.”
Lebanon is reportedly in contact with the WCO about unfreezing its membership, but the WCO, when asked for comment about where Lebanon’s membership currently stands, said that they “do not wish to comment on the status of our members.”
The Lebanese Customs Authority did not respond when asked for comment.
However, even if their membership is unfrozen, Hatem says that this is likely to do little to nothing to curb the problems Lebanon is facing when it comes to its customs sector.
“It wouldn’t help that much at this point as long as we don’t do the reforms that are recommended and required. To start with, we need to control our borders, we need to start with the IMF program, restructure the banking sector as a whole, have a clear budget and unify the exchange rate,” Hatem said.
As Lebanon’s official trade position falters, alternative, less legitimate, avenues thrive.
Failure to act
Smuggling goods in and out of Lebanon has long been a problem.
Even prior to the start of the economic crisis in 2019, the country was losing upwards of $1 billion per year due to products being stolen and smuggled to be sold on the black market.
With the economic crisis, this has only worsened, with smugglers capitalizing on the profits that they are able to make with subsidized goods.
“The Central Bank was subsidizing at 1,500 for a long period of time for like two years, spending more and more of the [foreign] reserves, and most of these items were smuggled to neighboring countries because there is no control of borders or anything,” Hatem explained.
According to Marrouch, much of Lebanon’s economy now falls under the category of an “informal” economy, which means it is virtually unregulated by the government because of the impact made by the ongoing economic crisis.
This, he argues, is because Lebanon has essentially become a “pure cash economy.”
“We had a banking sector that was functioning and now it is no longer functional and it was replaced by a pure cash system,” Marrouch stated. “In a pure cash system in the 21st century, it is very easy to smuggle and not declare economic activities because it is all cash-based.”
This cash-based system also has further reaching consequences as it makes it harder for traders to pay for the goods that they import.
“You have to get the cash, you have to send it to the bank, if the bank is closed you cannot make the wire transfer and then they have to count it and they have to check or if you’re dealing with the Sayrafa platform, if the Central Bank closed, there is no Sayrafa and you have to go to the black market,” Marrouch said. “All of these things did not happen when you had a functional economy, functional banking sector. Credit cards were working, lines of credit were fully functional. It’s not like that anymore. This is creating lots of hiccups.”
And it is not just the smugglers who are able to evade paying customs fees that are harming the economy.
There are still no reforms, nothing is being done on that front. They didn’t even vote on a budget yet. They are expected to vote on it in the upcoming weeks but, until now, there is nothing being done on that front.
Hatem also pointed to the people who bring in goods from abroad but claim that their country of origin was somewhere else entirely so that they can get away with paying cheaper fees.
“The biggest problem is that they smuggle, they get some products illegally, they don’t pay customs and, also, the fact that either you pay commission for an employee and he gets your products in, or let’s say that your product is from China instead of being from Europe,” she said.
“Automatically you pay less customs in terms of percentage of the customs. There are different ways to turn around the rules and regulations in Lebanon. They would say ‘Look I have a bill. I have already paid the customs’ when, in fact, they would be paying less because they would be disclosing that they got the item from China rather than Europe.”
The government’s failure to pass a budget and make a unified pricing system for customs is also something that has affected Lebanon’s ability to increase revenues.
For around two years, the Central Bank paid out subsidies at the 1,500 rate which forced it to spend a significant portion of its dwindling foreign reserves.
Now, after some subsidies were either lifted or partially lifted, customs are being paid out at the 8,000 rate set by the bank, but, given that the black market rate is at around 30,000 to $1, this is still significantly lower than what it should be.
Supposedly the government has been toying with the idea of tagging the customs fees to the Central Bank’s Sayrafa rate, currently at 25,600 to $1, which would significantly increase profits, but this has been tied to the 2022 budget which has yet to be passed despite there only being five months left in the year.
“There are still no reforms, nothing is being done on that front,” Hatem stated. “They didn’t even vote on a budget yet. They are expected to vote on it in the upcoming weeks but, until now, there is nothing being done on that front.”
However, if customs fees are increased without first addressing issues like smuggling, then this will do little to alleviate Lebanon’s woes.
The hoarders and the smugglers
During the Summer of 2021, Lebanon began lifting subsidies on certain goods, particularly medicine and fuel, leading to pharmacies and gas stations hoarding or limiting the amounts that they sold as they waited for customs costs to increase so that they could charge higher prices.
In the event that the government signals that it is going to raise customs fees once again, Hatem says that something similar is likely to happen once again.
“What is being done is that people are keeping aside and stocking the products in order to be able to put them at a higher price later on when they increase the customs,” the financial advisor explained. “So, they get [the product] now and they hide them and when the customs increase, they can get them at a higher price.”
However, even those who hoard products and sell them at a higher price could still be at a disadvantage to those who smuggle their goods into Lebanon without paying any fees.
We need to do all of them at the same time in order to see real change because, at that point, it wouldn’t change much. We need to be reinstated because what we want is to get some dollars into the country so we need this trade activity to work well in order for the economic activity of the country to restart.
Since they are not paying the import fees, they are able to sell their products at a lower price than other retailers. Given how hard the economic crisis has impacted the population, customers are more likely to buy from someone selling at a low price, not caring whether or not it was smuggled into the country.
“Those who can bring through different routes, they can bring in some items, let’s say headphones, without paying the customs and those who will have to price it with the high customs will not be able to sell their product,” Hatem stated. “Everyone is going to be going to the people who are not paying the customs and are being sold at a lower price. A lot of merchants will lose if there is no control of the borders.”
In order to truly reform the system, Hatem argues, only changing one aspect will not be enough, and that multiple fixes need to be enacted at once if anything is to actually change.
“We need to do all of them at the same time in order to see real change because, at that point, it wouldn’t change much,” she said. “We need to be reinstated because what we want is to get some dollars into the country so we need this trade activity to work well in order for the economic activity of the country to restart.”
Even this may not be enough, though, as for Lebanon to be competitive when it comes to trade, the country needs to solve its internal issues, with Hatem pointing specifically at the energy sector which has been in constant crisis since the start of the economic crisis.
“This is affecting our trade activity since just producing in Lebanon costs double what it costs abroad because you have to pay two electricity bills at the moment,” Hatem stated.
While a deal signed by Lebanon, Syria and Egypt for Lebanon to import natural gas from Egypt would help provide more electricity from the government, it remains unclear if the deal will actually be implemented.
Currently, there is unlikely to be any major changes when it comes to reforming customs in Lebanon and with the instability caused by the economic crisis, Marrouch says it is impossible to predict what is likely to happen if things continue as they are.
“We’re living daily crisis management,” he said.