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Lebanon’s economic quicksand

The country must stabilize its political system and implement reforms—the alternative is an open civil war over basic resources that only Hezbollah and Iran will benefit from.

The day after the Aug. 4, 2020 explosions at the Port of Beirut in Lebanon. Credit: Freimut Bahlo via Wikimedia Commons.
The day after the Aug. 4, 2020 explosions at the Port of Beirut in Lebanon. Credit: Freimut Bahlo via Wikimedia Commons.
Jacques Neriah. Credit: Twitter.
Jacques Neriah
Col. (ret.) Dr. Jacques Neriah, a special analyst for the Middle East at the Jerusalem Center for Public Affairs, was formerly a foreign-policy adviser to Prime Minister Yitzhak Rabin and the deputy head for assessment of Israeli Military Intelligence.

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

Lebanon’s economy faces an “arduous and prolonged depression,” according to the World Bank. Its government is in paralysis. In August, Lebanese Prime Minister 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 Hezbollah and Amal movements, described in Lebanon as the “Shi’ite 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. These reforms are 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, in November the New York-based firm Alvares & Marsal, commissioned by the Lebanese government to conduct an audit of Lebanon’s central bank, withdrew from the deal because it had not been provided with the needed information. The bank’s governor, 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 country’s domestic banks. According to Salameh, parliament would have to enact specific laws to enable the release of such information, which, in the present political situation in Lebanon, is impossible.

In a video conference between the United Nations and France on Dec. 2, French 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.”

The meltdown of the Lebanese pound by nearly 80 percent since October 2019 led to triple-digit inflation (120.3 percent 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, the United Nations estimated that 55 percent 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.

Huge debt and a national Ponzi scheme

Lebanon’s foreign debt has reached $90 billion or 170 percent of GDP, making it one of the highest in the world. Lebanon had been an economic miracle for decades. The central bank encouraged deposits in Lebanon and offered lavish interest (sometimes higher than 20 percent) 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, where new money was borrowed to pay existing lenders.

Improved dollar flows showed up in rising foreign reserves, but there was a parallel rise of liabilities. 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 percent 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 needs to their own enrichment.

It worked well until new money stopped coming in. The straw that broke the camel’s back was the abysmal decision in October 2019 to tax WhatsApp calls. 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 percent of the entire labor force of 1.8 million. The Aug. 4 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.

COVID-19 worsened the situation, and one of the primary sources of revenue, tourism, collapsed. Gulf State investors decided to boycott Lebanon’s financial structure when they saw the Lebanese political system taken hostage and paralyzed by Hezbollah, 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, more than 400 physicians of all specialties, and an unknown number of skilled workers left Lebanon, precisely as their forefathers did at the end of the 19th century, joining the 15 million-strong Lebanese diaspora. The less lucky ones are left struggling with 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. 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, 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 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 those 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, representing almost 25 percent of its population. The economic crisis has shattered the refugees’ fragile situation and provoked a sharp increase in severe crime, accompanied by harsh Lebanese repression of 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 percent, far from the 55 percent of a year ago. Human trafficking and prostitution are 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 the bank could provide subsidies for basics for only two more months since the inflow of dollars had almost stopped. He had been using the dwindling reserves to provide foreign currency for the import 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 percent by the end of February 2021 prompted a rush by depositors. The move was believed to be the governor’s way of warning the U.S. administration against interfering with Iran and Hezbollah’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 money.

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

The ‘have littles’ vs. the ‘have nots’?

Lebanon finds itself in economic quicksand. The implications 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 over basic resources.

In the event of civil disorder, Hezbollah 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 Shi’ite party in the Lebanese political system would go a long way to turning Lebanon into an Islamic Republic, part of the Iranian empire.

Col. (ret.) Dr. Jacques Neriah, a special analyst for the Middle East at the Jerusalem Center for Public Affairs, was formerly a foreign-policy adviser to Prime Minister Yitzhak Rabin and the deputy head for assessment of Israeli Military Intelligence.

This article first appeared on the website of the Jerusalem Center for Public Affairs.

The opinions and facts presented in this article are those of the author, and neither JNS nor its partners assume any responsibility for them.

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