The story so far: On Friday, September 16, five incidents of bank robbery attempts, not the first of their kind, were reported in Lebanon. One of the incidents involved an armed man, identified as Abed Soubra, demanding to withdraw $300,000 cash from BLOM bank in the capital Beirut. Soubra later handed his gun to security but stayed locked in the bank till evening.
Attempts such as this one, however, were by individuals seeking access to their own savings. Multiple such incidents, often involving armed individuals, have been reported since the start of this year and are a manifestation of Lebanon’s unrelenting economic crisis that began in 2019. The economic downturn in the already politically unstable country has been compounded by the COVID-19 pandemic and the 2020 blast at the port of the Lebanese capital Beirut.
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How bad is the economic crisis in Lebanon?
The World Bank has described Lebanon’s crisis as one of the “top 10, possibly top three most severe economic collapses worldwide since the 1850s”.
The dollar accounts along with blanket withdrawals of Lebanese depositors have virtually been frozen in the country’s banks since the onset of the crisis in 2019, with banks introducing what have been called “draconian” controls on withdrawals. Depositors can only withdraw the equivalent of $400 dollars in a month, according to the Financial Times. And when depositors withdraw in local currency, the exchange rate takes away 95% of its value. At different occasions this year, the Lebanese Pound has been valued at 25,000 and even 35,000 to the dollar on the black market.
The country’s Gross Domestic Product plummeted to around $21.8 billion in 2021 from nearly $52 billion in 2019, marking a 58.1% contraction. Such a contraction, according to the World Bank, is associated with drastic events such as wars.
In contrast, when several countries were reeling from the effects of the 2008 global financial crisis, Lebanon clocked a 9.1% growth in real GDP. Its economy was booming, and its banks were resilient, with the International Monetary Fund commending the efforts of Riad Salameh, the governor of its Central Bank, Banque Du Liban (BDL). Meanwhile, last year, the country marked a negative growth of -19.2% in its GDP.
The World Bank had estimated the government's revenues to halve in 2021 to reach 6.6% of the GDP. Debt mounted to a whopping 150% of its GDP in 2019 and climbed to 170% the next year, one of the world’s highest debt burdens. In March this year, the government said that losses in the financial system could amount to $73 billion.
Poverty has spiked dramatically, and the United Nations estimates that 80% of the country’s 6.5 million people can be classified as poor. Inflation, meanwhile, skyrocketed to reach 154.8% last year and is forecasted by Fitch to climb to 178% in 2022.
Prices of basic food items and meat are high enough to be out of reach for most Lebanese citizens. Since Lebanon imports most of its fuel, prices have risen and power cuts often leave homes with just an hour’s electricity a day, according to Reuters.
Also read: Lebanon’s patients suffer as crisis causes health worker exodus
The crisis has led to people moving out of Lebanon in an exodus described as the most significant since the country’s civil war from 1975-1990.
Many who have migrated are doctors and medical professionals— an estimated 40% of doctors (most of them specialists) have permanently moved out or are working abroad part-time. According to the World Health Organisation,hospitals in the country operating at 50% capacity.
How did Lebanon get here?
Once known as the Switzerland of the Middle East, the country was credited for building back after a 15-year-long civil war brought on by acrimony between the country’s various religious factions. The Lebanese administration and its Central Bank have been blamed for misusing and misspending the savings of the country’s citizens over a period of 30 years. The World Bank has called it a “deliberate depression” orchestrated by the country’s elite who have “long captured the state and lived off its economic rents”.
Experts say Lebanon’s financial system is akin to a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors, which only works till new money runs out.
Debt accumulation under the sectarian elite administration
Post-civil war Lebanon adopted a system of “confessional government” or sectarian political system in which key positions are allocated for different Christian and Muslim sects in the country.According to Lebanon’s post-civil war Constitution, the country’s President should be a Maronite Christian, the Prime Minister a Sunni Muslim and the Parliament Speaker a Shia Muslim.
This meant that the political elite in each sect captured substantial power, often overspending on swanky skyscrapers and malls and less on building the foundation of basic public services like water, electricity, transport, health, education and social protection. As per a Reuters analysis, the government also maintained a low-tax regime skewed in favour of the rich.
After the war, the government relied on foreign aid, large loans from friendly Gulf countries, earnings from its financial markets, and tourism in a service-heavy economy.
After the civil war ended in 1990, Lebanon saw the value of its currency depreciate to two-thirds against the dollar along with a 100% rise in inflation. In order to stabilise the economy, Lebanon in 1997 decided to maintain a fixed exchange rate, pegging the Lebanese pound at around 1,500 to the dollar. A Yale analysis points out, however, that while this proved a stabilising measure after the war, the fixed exchange rate led to the creation of parallel markets with a fixed rate and a black market rate, with a huge disparity between the two.
The foreign aid and investment from middle eastern countries during successive governments kept the foriegn exchange reserves of the country high, but debt kept accumulating in the background and so did the liabilities and the cost of servicing the debt. The World Bank’s August report points out: “Excessive debt accumulation was used to give the illusion of stability and reinforce confidence in the macro-financial system for deposits to continue to flow in.”
In 2020, debt-servicing or interest payments accounted for nearly half of the government’s expenditure and in March that year, for the first time, Lebanon defaulted on its sovereign debt, missing a payment on a $1.2 billion Eurobond. In April, the government declared that the country’s economy was in free-fall.
Reliance on remittances
According to some estimates, 8 to 20 million Lebanese people— much more than the country's 6.5 million population— live outside Lebanon. Consequently, the import-heavy country’s most significant exports were human resources. The large diaspora meant that remittances from those living outside the country became a large source of revenue
Remittances were once considered one of the most reliable sources of revenue for Lebanon, so much so, that millions of Lebanese people working abroad sent money home even during the 2008 global crisis.
However, remittances began to slow down starting in 2011, as the sectarian political system of Lebanon began to destabilise and a larger part of the middle east, including Syria, plunged into crisis.
To compound this, friendly Gulf states turned their attention away from Lebanon due to the increased influence of Iran through the Shi’ite armed group Hezbollah. Further, countries that previously provided foreign aid now put conditions on the government over its failure to reform.
Central Bank’s ‘financial engineering’ policy
In 2016, instead of reining in debt, Banque Du Liban’s governor Riad Salameh, stitched up a policy called “financial engineering” to attract new dollar deposits from the country’s banks.
BDL’s policy gave lucrative returns (almost as high as 15%) to banks on new dollar deposits in order to increase the government's dollar reserves, and the funds to provide banks with such high returns came from the sale of external debt or Eurobonds by the Finance Ministry.
While financial engineering increased the government’s dollar reserves, it also compounded its liabilities, meaning its reserves were virtually wiped out by what it owed. Moreover, because banks were more interested in parking their dollars with the BDL, the policy reduced liquidity in the actual economy.
2019 protests, pandemic and Beirut explosion
The sectarian governance system infused decision-making paralysis, corruption, and unsustainable financial policies into the Lebanese polity. Lebanon did not have general elections between 2013 and 2018 as they were postponed three times by the government. In 2018, despite the rising debt, politicians spent massively on a raise in public sector salaries. After the election in 2018, it took the government nine months to approve the budget.
Public frustration over a combination of governance factors eventually culminated in widespread protests in 2019, when, in a bid to increase revenue, the government planned a $6 monthly tax on Whatsapp calls, used by Lebanese people to stay connected with kin working abroad.
Popular protests triggered the resignation of the country’s Sunni Prime Minister Saad-al-Hariri. The protesters demanded an end to corruption, the resignation of the country’s powerful elite, and an overhaul of the political system.
Public anger continued to mount, as the country dealt with the pandemic and a devastating blast at the Beirut port in August 2020, one of the biggest non-nuclear explosions in history that killed more than 200 people and injured about 7,000 others. It was estimated to have caused damage worth $15 billion.
What happens now?
Lebanon has not had a stable administration since the 2019 protests and three successive Prime Ministers designates were unable to form governments. Billionaire and telecom tycoon Najib Mikati became the Prime Minister of the country in mid-2021.
General elections took place in May 2022, and Mr. Mikati was tasked with forming the new government; this, however, has not happened yet, as owing to results that left the sectarian Parliament further fragmented into several camps, none of which have a majority.
The alleviation of the economic crisis depends on the formation of a stable government, which is one of the pre-conditions for an IMF bailout.The talks about the $3 billion IMF funding along with an economic reform plan to pull the country out of the crisis, have stalled as political leaders are not on the same page about acknowledging the real scale of loss or who is responsible for it.
- The economic downturn in the already politically unstable country has been compounded by the COVID-19 pandemic and the 2020 blast at the port of the Lebanese capital Beirut.
- The World Bank has described Lebanon’s crisis as one of the “top 10, possibly top three most severe economic collapses worldwide since the 1850s”.
- Poverty has spiked dramatically, and the United Nations estimates that 80% of the country’s 6.5 million people can be classified as poor.
Published - September 18, 2022 07:31 pm IST
