On August 4, 2020, a massive explosion shook Beirut, Lebanon. Viral videos of the blast circulated around the world, triggering a global outpouring of sympathy and solidarity. Seven months on, international media attention has long since faded away, but the nation’s political and economic crises have remained. The Lebanese pound has seen catastrophic inflation, leading to unemployment and poverty. The entire cabinet resigned following the explosion, and the country’s leading political figures, President Michel Aoun and Prime Minister-designate Saad Hariri, have still failed to form a new government. [1] Beyond these challenges, the COVID-19 pandemic continues to take its toll on the country and compound its other woes.
In America’s increasingly social media-centered news ecosystem, only news of the explosion was widely shared. Yet focusing disproportionately on sensational and tragic events is both unfair and uninformative. A more accurate and less harmful practice is to place such tragic events in the context of larger societal problems or trends, and coverage to this end is quite common for domestic issues. Mass shootings, for instance, will provoke coverage not only of the event but of related issues like gun control or institutional racism. However, when it comes to the rest of the world, which all too often feels too distant and unimportant, the temptation is often to know the headline and nothing more.
It is fitting, then, to return to Lebanon after most of the world has forgotten about it and ask the more important questions. What led to these twin economic and social crises in the first place? What historical roots do they have? And what, if any, role did the explosion play in exacerbating them?
The Makings of Lebanon’s Financial Crisis
Lebanon imports much of its food and other necessities but has relatively few exports to balance them out. [2] Since it needs foreign currency to pay for these imports, and gets little from selling products of its own, the nation relies heavily on the foreign currency reserves of its central bank, the Banque du Liban (BdL), to exchange currencies. [3] The Lebanese pound, also known as the lira, has been pegged to the dollar at a rate of 1,500 to 1 since 1997. As long as the central bank had enough reserves, it was possible for companies and individuals to buy their goods abroad in dollars, sell them at home in lira, then exchange the lira back for dollars to pay for more imports. [4]
For twenty years after 1990, when Lebanon’s 15-year civil war finally ended, the BdL had few problems keeping enough dollars on hand to keep the economy running. Tourism, foreign aid, and remittances, sent home from millions of Lebanese working abroad, kept a steady flow of dollars into the country. [5] Even the financial crisis of 2008 saw a marked increase in dollars flowing into the country, as Lebanese savers sent dollars to banks back home when interest rates dropped elsewhere to combat the crisis. [6] But each of these supports slowly fell away as political tensions both within the country and the region as a whole escalated during the 2010s. [7]
In an attempt to save its falling reserves, the central bank introduced a controversial set of “financial engineering” policies in 2016, which journalists from the New York Times and Reuters have described as akin to a “state-sponsored Ponzi scheme.” [8] [9] The BdL offered enormous interest rates to other banks on dollar deposits, which encouraged commercial banks to give the central bank their dollars. However, the central bank could only pay this tremendous interest by taking out yet more loans, starting a vicious cycle. Investors eventually caught on to this fiscally risky strategy in 2019. [10] To make matters worse, the Lebanese government was spending irresponsibly itself. The government had had a debt/GDP ratio of around 150% since at least 2000, and it had repeatedly failed to meet necessary reforms to unlock conditional foreign aid packages. [11] [12] With large debts across the board and an unsustainable fiscal policy, Lebanon was teetering on the brink.
Then in November 2017, then-Prime Minister Hariri suddenly resigned and disappeared to Saudi Arabia, which had become increasingly frustrated with the Lebanese government’s handling of Hezbollah, the Iranian-backed military and political power in Lebanon. [13] While he eventually returned and re-assumed his position, many investors, fearing instability, had already withdrawn their funds and fled Lebanese banks, taking valuable foreign currency with them. [14] Critically short on dollars, the Lebanese economy was in dire straits.
Spillover to Political Crisis
Meanwhile, political grievances had been building throughout the country for some time. Ordinary citizens, especially young people, became increasingly frustrated with the government’s ineptitude. They saw the elite political class as corrupt and self-centered, standing by or bickering while the country deteriorated. [15] [16]
All of these factors came to a head in late 2019. As part of a variety of proposals to raise revenue, the government proposed a tax on WhatsApp calls which lit a fire under the already pent-up population. Many Lebanese citizens have family members who work overseas, those same people whose remittances helped keep Lebanon’s economy running for so many years, and WhatsApp is a cheap and reliable way to stay in touch. Against the backdrop of a society that is largely perceived as unfairly benefiting the rich and powerful, the tax felt like a step too far. [17]
Protests broke out across the country, with tens of thousands taking to the streets, and many were brutally repressed by state security forces. [18] This was the final straw for foreign currency holders, and the BdL’s dollar supply collapsed. [19] While the lira was technically still pegged to the dollar at 1,500 to 1, it was impossible to obtain at this rate. [20] Since dollars were scarce relative to lira, inflation skyrocketed, with lira trading at 15,000 to one against the dollar on the black market. [21]
Prime Minister Hariri resigned in late 2019, and the country floundered through the beginning of 2020. The nation defaulted on its debt for the first time ever, inflation accelerated, driving up poverty and prices, the COVID-19 pandemic hit, and the now-infamous blast at Beirut drove yet another government to resign. [22]
Today
Today, Lebanon is struggling to overcome its various crises. Sectarian divisions, mostly on religious lines, have made it almost impossible to form a new government. Historically, the Lebanese government has split power between its most influential religious groups, specifically between the Maronite Christian, Shia Muslim, and Sunni Muslim communities. Yet today, despite pressure from forces as disparate as France and Hezbollah, the leaders representing the groups have been unable to agree on a balance of power moving forward, and the country has thus been operating under a caretaker regime since the explosion. [23] [24] [25] Hyperinflation is making the everyday lives of ordinary citizens exceedingly difficult. Grocery store owners report changing prices as often as three times a day, and consumers often leave with only the basic necessities, and sometimes not even that. [26] Half of the population is projected to fall into poverty in the next year. [27] Angry protesters, frustrated with the inaction of their political leaders, routinely block streets with piles of burning tires. [28]
Thus, Lebanon’s challenges stem from causes far beyond the explosion. The Beirut explosion last summer was merely one point of conflict among many in a country divided by issues of race and class. However, these are not reasons to look down on the country, as is often the impulse for countries in the Middle East. Rather, it is important to recognize that often problems in other nations are as complex and deserving of the serious attention given to those at home.
References
[1] “Lebanon Crisis Escalates as Last-Ditch Cabinet Talks Fail to Form New Govt,” France 24, March 22, 2021, 24, https://www.france24.com/en/middle-east/20210322-lebanon-crisis-escalates-as-last-ditch-cabinet-talks-fail-to-form-new-govt.
[2] Chloe Cornish, “Currency Crisis Leaves Lebanese Cupboards Bare,” Financial Times, February 21, 2021, https://www.ft.com/content/69e1e040-d8d7-494e-9a90-6f02f68f0bf7.
[3] Ben Hubbard, “Lebanon’s Economic Crisis Explodes, Threatening Decades of Prosperity,” The New York Times, May 10, 2020, sec. World, https://www.nytimes.com/2020/05/10/world/middleeast/lebanon-economic-crisis.html.
[4] Ben Hubbard and Hwaida Saad, “Lebanon’s Financial Collapse Hits Where It Hurts: The Grocery Store,” The New York Times, March 22, 2021, sec. World, https://www.nytimes.com/2021/03/22/world/middleeast/lebanon-currency-groceries.html.
[5] Edmund Blair, “Explainer: Lebanon’s Financial Meltdown and How It Happened,” Reuters, September 17, 2020, https://www.reuters.com/article/uk-lebanon-crisis-financial-explainer-idUKKBN268223.
[6] Ugo Panizza and Fadi Hassan, “Understanding the Lebanese Financial Crisis,” Financial Times, December 20, 2019, https://www.ft.com/content/282eba28-9ed9-4b8f-8cc8-50d2096a400a.
[7] Blair, “Explainer.”
[8] Hubbard, “Lebanon’s Economic Crisis Explodes, Threatening Decades of Prosperity.”
[9] Blair, “Explainer.”
[10] Hubbard, “Lebanon’s Economic Crisis Explodes, Threatening Decades of Prosperity.”
[11] Panizza and Hassan, “Understanding the Lebanese Financial Crisis.”
[12] Hubbard and Saad, “Lebanon’s Financial Collapse Hits Where It Hurts.”
[13] Reuters Staff, “Timeline: Lebanon’s Ordeal from Civil War to Port Blast,” Reuters, December 24, 2020, https://www.reuters.com/article/us-lebanon-crisis-turmoil-timeline-idUSKBN28Y0S1.
[14] Panizza and Hassan, “Understanding the Lebanese Financial Crisis.”
[15] “Lebanon: Why the Country Is in Crisis,” BBC News, August 5, 2020, sec. Middle East, https://www.bbc.com/news/world-middle-east-53390108.
[16] Hubbard and Saad, “Lebanon’s Financial Collapse Hits Where It Hurts.”
[17] Blair, “Explainer.”
[18] “The Unprecedented Mass Protests in Lebanon Explained,” Amnesty International, accessed March 31, 2021, https://www.amnesty.org/en/latest/news/2019/11/lebanon-protests-explained/.
[19] Blair, “Explainer.”
[20] Cornish, “Currency Crisis Leaves Lebanese Cupboards Bare.”
[21] Hubbard and Saad, “Lebanon’s Financial Collapse Hits Where It Hurts.”
[22] Reuters Staff, “Timeline.”
[23] “Lebanon.”
[24] “France Heightens Pressure on Lebanon to Form Government,” Aljazeera, accessed March 31, 2021, https://www.aljazeera.com/news/2021/3/29/france-heightens-pressure-on-lebanon-to-form-government.
[25] Reuters Staff, “Hezbollah: Time to Allow Formation of New Lebanon Government,” Reuters, March 31, 2021, https://www.reuters.com/article/lebanon-crisis-hezbollah-int-idUSKBN2BN2NE.
[26] Hubbard, “Lebanon’s Economic Crisis Explodes, Threatening Decades of Prosperity.”
[27] Hubbard and Saad, “Lebanon’s Financial Collapse Hits Where It Hurts.”
[28] “Protesters in Lebanon Block Roads over Worsening Poverty,” France 24, March 9, 2021, 24, https://www.france24.com/en/middle-east/20210309-protesters-in-lebanon-block-roads-over-worsening-poverty.