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Jerusalem Center for Public Affairs
Strategic Alliances for a Secure, Connected, and Prosperous Region

Lebanon’s Economy Is in Tatters, and Financial Aid Is Not Forthcoming without Reform

Filed under: Lebanon

Lebanon’s Economy Is in Tatters, and Financial Aid Is Not Forthcoming without Reform
The economic coup de grâce? The aftermath of the Beirut Port bomb, August 9, 2020 (Wikimedia, Mehr News)

“Lebanon is the Titanic without the orchestra,” French Foreign Minister Jean-Yves Le Drian stated on December 13, 2020. “The Lebanese are in complete denial as they sink, and there isn’t even the music.”1

Lebanon’s economy faces an “arduous and prolonged depression,” according to the World Bank.2 The government is in paralysis. In August, Hassan Diab resigned following the Beirut port blast and was replaced by Mustafa Adib, the former ambassador to Germany, who quit a few weeks later following his inability to form a government because of the political obstruction by Hizbullah and Amal movements, described in Lebanon as the “Shiite twins.” Saad Hariri, who served twice as Prime Minister, has been trying unsuccessfully since October 2020 to form a government amid political bickering. If and when a government is created, it is expected to initiate a series of reforms demanded by international donors who have vowed to assist Lebanon financially once a government is formed and significant reforms are implemented to fight decades of widespread corruption and mismanagement – a demand that would mean asking the present political elite to commit suicide.

Adding insult to injury, the latest blow to receiving aid occurred in November when the New York-based firm, Alvares & Marsal, commissioned by the Lebanese government to conduct an audit of Lebanon’s Central Bank, Banque du Liban (BDL), withdrew from the deal because it was not provided with the needed information and documents.3 The Governor of the Central Bank, Riad Salameh, a former Merrill Lynch banker, claimed that bank secrecy in Lebanon did not allow him to divulge information about the activities of the domestic banks in Lebanon, and to do so, parliament would have to enact specific laws, which, in the present political situation in Lebanon, are out of reach.4

In a videoconference between the United Nations and France on December 2, 2020, President Emmanuel Macron warned that the promised aid “won’t replace the commitment of Lebanese political forces and institutions to form a government as quickly as possible and implement a roadmap for reforms without which the (long-term) international economic help won’t be released.”5

The meltdown of the Lebanese pound by nearly 80% since October 2019 had led to triple-digit inflation (120.3% year-on-year in August), paralyzed banks, sent inflation soaring, and is expected to drag more than half of the population into poverty. Already in May 2020, the UN estimated that 55% of the population was living in poverty on less than $14 per day, and within that group, those who were in extreme poverty represented nearly a quarter of the population.6

Huge Debt and a National Ponzi Scheme

Lebanon’s foreign debt reached $90 billion or 170% of the GDP, making it one of the highest in the world.7 Lebanon had been a living economic miracle for decades. The central bank encouraged deposits in Lebanon and offered lavish interest (sometimes higher than 20%) on monies put in circulation. Counting on this flow, the bank could allow itself to spend to such an extent that observers described Lebanon’s financial system as a nationally-regulated Ponzi scheme,8 where new money was borrowed to pay existing lenders. Improved dollar flows showed up in rising foreign reserves, but there was a rise of liabilities in parallel. In fact, the banks’ assets could have been wiped out by what was owed to the depositors. It was sitting on huge losses. Servicing Lebanon’s debt surged, which translated to about 50% of budget spending. Moreover, instead of containing the spending, politicians spent wastefully on a public sector pay raise before the 2018 elections. Political parties and politicians jumped on the cash cow, each appropriating a sector in the economy with the explicit goal of servicing their constituents, amassing their own fortune, and subordinating the state’s need to their own enrichment.9

It worked well until new money stopped coming. The straw that broke the camel’s back was the abysmal decision to tax WhatsApp calls in October 2019. Mass protests erupted, and instability once again engulfed the Lebanese system. Dollar inflows stopped, and mountains of dollars exited Lebanon. Banks had no more currency to pay depositors; they shut their doors, triggering a currency collapse and generating chaos.

Since October 2019, tens of thousands of Lebanese have lost their jobs. A third of all private-sector jobs have vanished. The total number of unemployed was estimated in June 2020 at almost 600,000, or 30% of the entire labor force of 1.8 million. The Beirut port blast hit hundreds of businesses and slashed at least 100,000 jobs in the tourism sector, one of the big employers of the Lebanese economy.10 Covid-19 worsened the situation, and one of the primary sources of revenue, tourism, collapsed because of the absence of tourists, mainly from the Gulf countries. Gulf State investors decided to boycott Lebanon’s financial structure when they saw the Lebanese political system taken hostage and paralyzed by Hizbullah, whose troops were fighting in Syria, Iraq, and Yemen, instead of “confronting” Israel as supposed “liberation fighters.”

The lucky ones who can afford to pay for passage to Europe, Africa, and the Americas are leaving the country at an incredible pace. In October 2020, more than 400 physicians of all specialties and skilled workers of an unknown number left Lebanon seeking a new haven, precisely as their forefathers did at the end of the 19th century, joining the huge 15 million members of the Lebanese diaspora. The less lucky ones are left struggling with their rising poverty and must lean heavily on their families outside of Lebanon, who have been extending financial aid for decades.

Indeed, one of the most reliable sources of dollars was the remittances from the Lebanese abroad, who kept sending money even in times of international crisis.11 However, since 2011, disbursements slowed as Lebanon’s sectarian schism led to more political chaos. After the widespread outbreak in 2019, the central bank put limits on the withdrawal of transfers in order to stop the bleeding of dollars. Moreover, the central bank set the exchange rate for the incoming dollars at 3,900 Lebanese liras to the dollar,12 while the free-market rate was around 9,000. This was enough to signal to all contributors that they had to find new ways to provide money to Lebanon independent of the actual banking system. The flow of monies from the ex-pat Lebanese communities became a trickle.

The Lebanese Ire Turns on Syrian Refugees

This dire situation has exacerbated the hostility the Lebanese have always felt towards Syrians who came to Lebanon to find jobs. Almost a decade after the outbreak of the civil war in Syria, Lebanon is still hosting nearly one million Syrian refugees who represent almost 25% of its population. For the refugees, the economic crisis has shattered their fragile situation and provoked a sharp increase in severe crime and harsh repression by the Lebanese authorities against the whole refugee population. It is estimated that the proportion of Syrian refugees in Lebanon living in extreme poverty (living on less than $3 a day) has reached 88%, far from the 55% a year ago.13 Human trafficking and prostitution is reported to be rife.

Facing this grim prospect and parallel to the spiraling of the financial crisis, the governor of Lebanon’s central bank announced in late November that his bank could provide subsidies for basics for only two more months14 since the inflow of dollars had almost stopped. He had been using the dwindling reserves to provide foreign currency for the imports of fuel, medicine, and other basic goods. The governor’s mention of ending subsidies triggered panic buying and concerns over food security. Moreover, the governor’s statement threatening the sale of banks that fail to raise capital by 20% by the end of February 2021,15 prompted a rush by depositors who held accounts and sought to retrieve what remained of their savings and deposits. The move was believed to be the governor’s way to warn the American administration against interfering with Iran and Hizbullah’s money trail, which had been using the intricate network of the Lebanese banking system to finance their activities, pay their workers and clients in Lebanon and elsewhere, and launder drug-linked money.

Bearing this situation in mind, the alert expressed by a UK minister on December 3, 2020, that Lebanon is on the verge of not being able to feed itself as it plunges into poverty16 and hyperinflation is genuine. As described by Reuters,17 scenes of desperate people searching for food in dumpsters or selling their belongings for food are common.

Lebanese protests
Iran’s interpretation of Lebanese protests: “The Lebanese society and government are in crises of ‘continuous erosion, retreat, and surrender’ due to their tribal structure and mismanagement.” (Islamic Republic News Agency)18

The Haves-a-Little Versus the Haves Not?

Lebanon finds itself in economic quicksand. The implications of such a situation on the Lebanese scene are clear: all parties must come to their senses and stop bickering and promoting sectarianism and tribalism. The Lebanese body politic must stabilize the political system, allow structural reforms to be introduced and implemented; self-destruction by corruption must be halted, even though it has been eating away at Lebanon since the beginning of the 21st century.

Lebanon’s other option could lead to a state of hunger and despair, which could provoke the resurgence of sectarian conflagration and the spiraling into an open civil war between the haves-a-little and the have-nots over basic resources.

In the event of civil disorder, Hizbullah would most likely be the dominant party and strongest militia – enjoying as it does Iranian military and financial support. A more dominating presence of the Iranian Shiite party in the Lebanese political system would go a long way to turning Lebanon into an Islamic Republic, part of the Iranian Empire.

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