Despite excitement over exploration of Lebanon's hydrocarbons, the creation of a sovereign wealth fund, which was included in legislation, has yet to take place. The country faces several obstacles in its path to creating and properly managing a fund.

The debate over the potential exploration of hydrocarbon resources has been a hot topic in Lebanon for the past six years. The implementation of the Offshore Petroleum Resources Law (OPRL) in 2010, the creation of the Lebanese Petroleum Administration (LPA) in 2012, and the preliminary 3D seismic mapping of the country's potential reserves spurred a promising future for the development of the sector. These discoveries offer a glimpse of the end of the energy dependency tunnel that Lebanon has found itself in for decades and encouraged a much-needed source of income in a country with one of the worst debt-to-GDP ratios in the world.

Despite the initial excitement stirred by creation of the LPA—and the first pre-qualification round for bids in 2013, which attracted 52 market titans such as Shell, ExxonMobil, Chevron, Repsol, Statoil, and Total—the second requirement of the OPRL calling for the creation of a sovereign wealth fund has been left in the air. If the prospects of hydrocarbon exploration are to become a reality, the creation of a fund to manage revenues coming from this industry is much needed.

A Lebanese sovereign wealth fund would guarantee the long-term economic functionality of finite natural resources by adequately placing savings for their correct use over time once they are transformed into diversified financial assets. This has been the case in Abu Dhabi, where the Investment Authority has allocated the benefits of its savings fund into equities and investments, as well as in Chile, where the Economic and Social Stabilization Fund has applied policies to insulate the copper industry from international shocks and price falls.

In Lebanon's case, creating a fund would guarantee long-term investment objectives with a significant impact on public finances and balance sheets, two segments in which the country is flat lining. If the fund is properly fitted to the country's policy framework, it will serve to reduce the distortions the current commodity would cause to Lebanon's fiscal accounts if the exploration process is meant to occur before this negative cycle ends. It would also imply larger fiscal inflows coming from excess revenues that will directly impact monetary policy, leveraging the ongoing role of Banque du Liban as a capital injector for initiatives ranging from IT and entrepreneurship to real estate and energy efficiency. Setting up a fund would minimize the potential financial pressures that mid-term capital inflows would cause in aggregate local demand and over-appreciation of the real exchange rate, which would shield Lebanon from the Dutch disease. This final aspect is particularly important for a service-based economy with little experience exporting commodities.

This path, however, will not be exempt from obstacles, and at this early stage, the main challenge for a sovereign wealth fund lays in Lebanon's weak institutions and lack of transparency. For a fund to be successful in any corner of the world, there has to be a fair level of governance and transparent practices in its operations. Cross-country studies reveal that the major risk from the discovery of a resource windfall is the lack of governance, which can bring about negative counter effects in the economy and severely affect the level of government expenditures.

However, as resilient and ever-hopeful as the Lebanese spirit proves to be, there are good opportunities to secure a good level of governance for Lebanon's potential wealth fund if the IMF and World Bank's recommendations for establishing an independent regulating body for the fund are put in place. There is also evidence of well-functioning funds in Azerbaijan and East Timor, countries with similar transparency deficiencies to those of Lebanon.

With pending decrees to license the first round of the tender currently being discussed in Parliament, it is only a matter of time before the LPA and the Ministry of Energy and Water Resources decide on the type of fund that will be more appropriate for the future of the country. On that note, Wissam Zahabi, Chairman of the LPA, told TBY, “We expect to have a dimension of the money that will enter the country as oil and gas revenue to draft the law for a sovereign wealth fund." Now, it is up to political actors to play their parts and accelerate the process.