Will Lebanon catch a break?
One year ago, Lebanon’s main port was damaged by one of the largest non-nuclear explosions the world has ever seen. This on top of the currency crisis and pandemic has been a huge blow to the Lebanese economy. A year since the incident, another gas tank explosion has killed 28 people over the weekend. The country’s economy has been spiraling out of control since 2019 when the banking sectors failed. Now, there is a dire fuel and electricity shortage in the country, and the hospitals declared that they have only enough fuel to power through the next few days. Citizens report that the current situation is much worse than the quarter century-long civil war that wreaked havoc in Lebanon, and the people have taken to the streets to protest.
The Lebanese army had taken a hidden fuel storage tank and was passing out gasoline to the residents. According to various eyewitnesses, there are two possible causes for the explosion. One claims that the rush of people caused an argument and gunfire hit the tank. Others claim that a lighter was the cause. 79 people were injured in the Akkar explosion
Last Wednesday, Lebanon’s Minister of Electricity said that the country needs 3000 megawatts of power, but has enough fuel for 750. The Government conflicts with the Central Bank over its decision to not subsidize fuel anymore as it drained currency reserves. Importers of fuel have not received clarification on the matter. A year ago, the Central Bank had informed the Government that new legislation would be needed to move the mandatory reserve. The Government blamed the Central Bank Governor for acting unilaterally.
The Central Bank says it has spent 800 million USD in the last month and has spent 3 billion USD a year on fuel subsidies.
Getting 1-2 hours of electricity a day is considered lucky now, and due to the fuel shortage, people are not able to run their generators. Key businesses have stopped and factories are stopping for the first time in 50 years. With major food producers shutting down, essential goods are in scarcer supply than before.
Lebanon was once as prosperous as Dubai, the banking center for rich middle easterners. Surrounded by wartorn neighbors, dictators, and corruption, the country became the most prominent banking nation due to its secrecy. Much like Switzerland, the law protected the clients’ source of income. Despite Lebanon’s political instability, the country managed to attract funds from far and wide that kept their economy going.
The Lebanese pound, Lira, became pegged to the US dollar in 1997 following a civil war that lasted from 1975- 90. When the Middle East was under colonial rule, a multitude of religions and different ethnic groups were enforced into the same borders. Lebanon is an exorbitant example with Sunni, Shia, Jews, Greek Orthodox, Arabs, and Armenians, and was under the French mandate to top it all off. The Christians became a majority in politics through the 1930s and 40s. In 1943, the Battle of Curse took place and Lebanon declared independence, and despite French opposition, the Muslims and Christians joined forces and gained complete freedom.
Via the 1932 consensus, a pact was made where the government was divided amongst Christians and the Sunni and Shia Muslims and that very idea is still in action today.
The sectarian government is composed of 50 percent Christian, and 50 percent Muslim parliament members. The president has to be a Maronite Christian, the prime minister a Sunni Muslim, and the Speaker of Parliament a Shia Muslim. This system was put in place due to backlash among the community regarding unequal religious-political representations.
The currency crisis - Series of unfortunate events
Though the currency crisis started in 2019, it had been building up since the conflict in the Middle East. In addition, the Lebanese pound has a vast history of instability as it was linked to four different currencies throughout the 1900s; Syrian Pound, French Franc, British Pound, USD & gold. After the end of the French rule, Lebanon adhered to the Bretton Woods Monetary System from 1944-71. Before the Civil War, 1 USD was worth 3 Lebanese Pounds. In 1992, after the war, 1 USD was worth 2500 Lebanese pounds. The capital city of Beirut was rebuilt, and the Lebanese pound got pegged at a fixed rate of 1 USD being equal to 1500 Lebanese pounds.
The peg allowed for some stability in Lebanon and the banking sector thrived. Syria was the biggest borrower from Lebanese banks. When the Syrian Civil War broke out much investment, and loans given out to Syria were blown into the wind. To top it off, the Lebanese Government took in over a million Syrian refugees which put much pressure on the country’s economy.
Although the current fixed rate helped the pillar banking sector of Lebanon, this got in the way of Lebanon developing its exports.
Imports and Exports of Lebanon 2018
- The total value of exports (FOB) is US$ 2,953 million
- The total value of imports (CIF) is US$ 19,983 million
Source: World Bank
Lebanon imported way more than it exported. The pegged currency rate was the cause, and there was no competitiveness in exports for the same reason. There was always downward pressure on the Lebanese pound, as is usually the case with outsized banking sectors. The influx of money circulating to Lebanon from the vast banking sector often made up for this. If there was political stability in the country, this system would have proven to be extremely sustainable
In 2018, Riad Salame, Governor of the Central Bank explained that Lebanon is not a normal country, the banking sector is extremely resilient, and that this will not change in the future. He also spoke about the economic situation confidently in early 2019, but by October of the same year, the banking sector was in complete ruins.
The Lebanese Central Bank reserve stood at 40 billion USD and had diminished to 15 billion USD by the first quarter of 2021.
Foreign investors began withdrawing their money at a rapid rate and the foundation of the currency peg was removed in October 2019. Amid the turmoil, the whole country went into lockdown due to Covid-19. The doom loop worsened as the tension between the Government and Central Banks was high. This meant that the Government was not able to pay the banks back which in return made it harder for the banks to fund the government. To bandage the bleeding, the banks cut back on lending to the Lebanese economy, and this all eventually led to a recession. As with recessions, the Government had a smaller budget as tax incomes decreased, and social security payments increased.
Just when it looked like things couldn’t get any worse, the massive explosion took place on Lebanese port and 218 people died. The property damage as a result of the August 15 explosion exceeds 15 billion USD, and it left 300,000 people homeless. 70 percent of the country’s total imports came in through the port and subsequently, the price of essential goods skyrocketed.
To this day, the rubble from the explosion has still not been cleaned up properly.
The Lebanese pound has lost 90 percent of its value since October 2019. In May 2021, Lebanese protests held a funeral for their currency. Masked men carried a coffin with the Lebanese pound inside it. As of today, Lebanon has three exchange rates, and nobody knows what it is worth anymore. There is the Central Bank official rate, Ministry of Economy and Trade rate, and the black market rate. The Central Bank and Government rates are used for imports. As of August 17, the black market rate is 1 USD for 19,000 LBP, and the bank rates are at 1,514.56 LBP.
Corruption and mismanaged funds
The very banking secrecy law that brought Lebanon to its former glory is also the one that allowed for corruption. Last March, Lebanon defaulted on the Eurobond. This was the first-ever default of the Lebanese Government. Risks involved with defaults are that they are excluded from further credit, and the currency value plummets. Likewise, when a government defaults once, the international governments regard them as not able to pay all debts.
In an attempt to rid the nation of corruption, the banking secrecy law was removed in late 2020.
Alongside it, there were several proposals to get Lebanon back on track, but the political elites shut it down. It is not possible to fix the Lebanese Lira without fixing the economy, and politics. Unfortunately, whenever proposals to fix the economy come up, the agenda is shot down by corrupt politicians. Furthermore, the Government of Lebanon has been consistently spending more money than they earn. The deficit reached up to 10 percent of its GDP, yet it is not being put into any sustainable means. Economic growth in Lebanon is not possible without government financing. Outraged citizens say that at the very least, basic government services should have been present.
Due to political patronage, people vote for religious politics rather than the parties that prioritize their interests. Moreover, the political elites of each faction have access to government money. The reason for this, and religious politics is to prevent another civil war in Lebanon. Though living within the same border, the population is heavily divided and sees other religious groups as threats. The politicians make the separation worse by constantly spreading propaganda amongst the people of their respective religions. For instance, Hezbollah, Lebanese Shia Islamist political party, and militant group are regarded as terrorists in the West.
The explosion in Beirut is blamed on Hezbollah, the angry public claiming that it was caused by their weapons storage even though the cause is still unclear.
Rather than spending money on direct discrimination, and satisfying the religious heads, the Lebanese government should have been spending on basic infrastructural maintenance. Even after the large explosion, the Government did nothing which infuriated the people further. The government resigned last year due to the backlash and President Michel Aoun hopes for a new government within the next few days.
Diaspora and the Lebanese people
Fed up with the Government’s irresponsibility, the Lebanese people are leaving by the masses. Now, over half of the population lives below the poverty line, and over 60 percent of the population is unemployed. There are over 12 million Lebanese who migrated out of the country and only 4.7 Lebanese remain.
The current net migration rate for Lebanon;
- 2021 is -16.538 per 1000 population, a 32.06% increase from 2020.
- 2020 was -12.523 per 1000 population, a 47.19% increase from 2019.
- 2019 was -8.508 per 1000 population, an 89.36% increase from 2018.
Emergency aid that is given to Lebanon also goes to the pockets of the political elites. During foreign visits from international leaders, the people rally in the streets with the sign “Don’t bail them out!”. The protestors have also followed the politicians to fine dining restaurants and don't want to give them a moment's peace. Rubble from the explosion was also dumped outside their houses.
There are volunteers and protestors determined to take matters into their own hands by distributing food and resources, and showing medical aid. The protestors are demanding the Government to take accountability, end corruption, and calling for all political representatives to resign.
Possibility of reform - Amnesties
The Lebanese economic state has reached the point where the elites can no longer block reform. First and foremost, debt restructuring needs to take place and if the newly elected government can prioritize assistance to the public, and manage to stop money flow towards corruption, the international community will be more favorable to grants, and assistance. International financing is cut short due to the amount of corruption in the country.
There is also the possibility that nothing will be done by political elites as their chance of survival is much higher than the public. The different exchange rates have not only been extremely confusing, but it has worked in the favor of the rich and well connected. Ultimately, it is best that the exchange rate of the Lira be determined by the market, and have one set rate.
Since the peg is already removed, Lebanon is presented with the opportunity to increase its international competitiveness in exports if the economy is boosted.
However, time is ticking and a large majority of the skilled labor force able to make such changes happen is leaving Lebanon at a rapid rate. Some international experts think amnesties are the key to the problem. In recent years, the world has seen many examples of getting rid of corruption by promising not to prosecute for previous corruption, as such was the case with Tunisia. This in unison with attempts to block future corruption from occurring may sway the political elites to accept the reform.
Visibly, this is unjust, but waiting for the political system to change on its own will take a long time. Lebanon cannot afford this time. Amnesties have prevented a total collapse in recent history among numerous nations. With the wind of the revolution and the new government, now is a crucial time in determining whether Lebanon will not only catch a break but whether the economy will sink or swim.