Will Lebanon Truly Overcome its Banking Crisis?

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“They want us to fight with the army? We are the army!” Hundreds of Lebanese veterans stormed the parliament, protesting for higher pensions. Lebanese security forces became increasingly rough with the retired soldiers as lawmakers met to pass a controversial austerity budget. This was not the first time civilians had retaliated in protest to the unfair economic impositions from the Lebanese government. On September 16th, armed customers stormed various Lebanese banks to demand their frozen funds, all of which had been trapped in these banks due to Lebanon’s worsening economic crisis. On October 3rd, 2022, an individual forcefully withdrew $11,750 from their account. Since 2019, Lebanon has been experiencing an economic crisis which the World Bank has called “the worst globally since the mid-19th century.” The government has refused to give their citizens their money in US dollars and instead required them to exchange it at the lira rate, even though the lira has now lost more than 95% of its value since 2019.2 With the persistent decline of its economy, there is risk for Lebanon to become a failed state. Issues continue to arise as banks partially reopened throughout the first week of October. This affair has been labeled as Lebanon’s “deliberate depression,”3 an economic crisis orchestrated by Lebanon’s incompetent and corrupt elite class. As tensions continue to rise and more protestors take drastic means to access their funds, will it ever be possible for the Lebanese economy to rebuild itself?

The Final Straw

To understand the severity of this financial crisis, one must first understand the origin of the issue. Reconstruction in the wake of the Lebanese Civil War (1975-1990) led the country to pile up a tremendous amount of debt. State corruption and unsustainable financial practices only exacerbated the problem. Many wonder how government officials overlooked the debt for so long-how Lebanon was able to borrow that much money. Economists have described Lebanon’s financial system as a regulated Ponzi scheme4– a repetitive cycle of paying existing investors with the funds collected from brand new investors. In an attempt to hide the true severity of the debt accumulated, Lebanon began to balance the debt with tourism, foreign aid, and other methods. Additionally, those who had already left the country were sending a steady stream income back to family members, allowing them to live a comfortable life. By 2011, sectarian squabbles began to crack this facade of the Lebanese government. Because of this, banks then began offering interest rates for new deposits of the dollar.5 On the surface, it appeared that money was flowing in Underneath, however, Lebanon was experiencing severe political dysfunction. A steady rise in liabilities coupled with the surging costs of debt laid the groundwork for calamity. The final straw occurred in October 2019, when the government attempted to tax WhatsApp calls. Political unrest erupted. The lira rapidly collapsed. Lebanon’s GDP fell from $52 billion in 2019 to a mere $21.8 billion by 2021. This has been viewed as the largest economic contraction out of all 193 countries in 20216.  This drastic economic contraction only scratches the surface of the crisis’ monumental impact. Calamity after calamity – economic collapse, COVID-19, the Beirut explosion – seemingly assail Lebanon with no respite.

Consequences on Different Classes 

In most instances of economic injustice and instability, the lower class faces the harshest consequences from these events. The destructive actions of the nation’s elites, including politicians and former militia leaders, have the most drastic impacts due to their exploitative grip on the Lebanese working class. In March 2021, it was reported that four out of five Lebanese people live under the global poverty line.7 The political establishment during 2019 understood the looming threat of economic collapse yet did nothing to stop it from happening. According to Saroj Kumar Jha, World Bank Mashreq Regional Director, “Over two years into the financial crisis, Lebanon has yet to identify, least of all embark upon, a credible path toward economic and financial recovery.” Since the government lifting of subsidies in November 2021, the government has enacted a partial removal of essential medicines, leaving essential medicines in shortage and a community of individuals who now pay double for their doses.8 Corrupt leaders were once able to extract fees from the country’s private sector, severely limiting competition, job creations, and economic growth. Hundreds of thousands of children are out of school as a result of the government’s reallocation of funding from public education to private schools. This high inequality and disparity among the 82% population living in poverty9 continue to be overlooked by the Lebanese government. Although this unprecedented socioeconomic crisis affects population groups at the highest and lowest levels, those living in poverty continue to be disproportionately affected and the middle class has been decimated.10 

A Poor Parliament

Protestors took their concerns to the streets on October 17th, 2019 and demanded that corrupt political individuals step down from their positions. Though the cabinet subsequently resigned, many ruling figures who have dominated the Lebanese political scene for decades remained in power.11 The Lebanese governmentwas unable to organize a government: politicians loosely advocated for reform and instead prioritized how much income they could distribute amongst their respective population sects, whether they be Sunnis, Shias, Maronites, or Druzes. After two years of suffering at the hands of an unstable government, the Lebanese parliamentary elections finally took place in May 2022. At the time, these elections were a glimmer of hope amidst harsh conditions. Thirteen new independent candidates received seats in the parliament,12 a crucial first step towards political reform. However, major challenges continue to lie ahead as forming a cabinet and electing a president become critical to rebuilding the nation. Lebanon’s former president, Michel Aoun, recently ended his term on October 31st, 2022. With the approaching deadline, countries such as Saudi Arabia, France, and the US have called upon Lebanese rulers to urgently elect a new president. These countries have voiced their support for Lebanon’s “sovereignty, security, and stability.”13 Without election of a new President, fear persists that Lebanon will once again enter a period of complacent officials and a vacant presidency. Pressure remains on parliamentary officials to elect a new president who will impose transparency and effectively work towards rebuilding Lebanon’s economy.

Moving Forward

Regardless of the shape a new government takes, it is crucial that Lebanon develops a strategy to ensure stabilization and prevent a continuous cycle of economic despair. It is also critical to enforce rules that will reduce the likelihood of future economic collapse. Lebanese authorities and the International Monetary Fund agreed in April 2022 on a reform plan to rebuild the economy and strengthen governance.14 This comprehensive plan includes strengthening governance and transparency, increasing social and reconstruction planning, and more. It is now important for parliamentary groups to collaborate in implementing this plan. Independent parliamentarians must also work together to push for reform, putting their sectarian differences aside for the greater good. Inefficient institutions must be rebuilt to serve the people rather than corrupt politicians. The people’s needs must be provided for with full clarity. The government should resist resorting to violence during unrest and shift their focus on economic improvement. This could be accomplished by enabling human capital development, improving core economic infrastructure, outsourcing certain public services, and more.15  Financial stabilization is needed alongside ambition and determination. Only then will the Lebanese people’s confidence in the government be restored. Should stagnation persist, the Lebanese people have demonstrated to the world that protest can be turned into viable political action with genuine impact. This country has gained the nickname of “The Pearl of the Middle East.” Like a pearl, its beauty has been shaped under severe duress. From the 1958 Crisis to the 2020 Beirut Explosion, Lebanon has time and time again demonstrated a profound resilience to rebuild itself from the ground up. 


 References

[1] Reuters,Thomson. “Factbox: Just How Bad Is Lebanon’s Economic Crisis?” September 14, 2022. https://www.reuters.com/world/middle-east/just-how-bad-is-lebanons-economic-crisis-2022-09-14/. 

[2] Saad, Hwaida, and Jane Arraf. “Desperate Clients Hold up Lebanese Banks to Get Their Own Cash.” The New York Times. The New York  Times, September 16, 2022. https://www.nytimes.com/2022/09/16/world/middleeast/lebanon-banks-economic-crisis.html. 

[3] World Bank Group. “Lebanon’s Crisis: Great Denial in the Deliberate Depression.” World Bank. World Bank Group, January 24, 2022. https://www.worldbank.org/en/news/press-release/2022/01/24/lebanon-s-crisis-great-denial-in-the-deliberate-depression. 

[4] Blair, Edmund. “Explainer: Lebanon’s Financial Crisis and How It Happened.” Reuters. Thomson Reuters, January 23, 2022. https://www.reuters.com/markets/rates-bonds/lebanons-financial-crisis-how-it-happened-2022-01-23/. 

[5] WorldBank, 2022.

[6] WorldBank, 2022.

[7] “Lebanon: Un Expert Warns of ‘Failing State’ amid Widespread Poverty.” OHCHR, May 11, 2022. https://www.ohchr.org/en/press-releases/2022/05/lebanon-un-expert-warns-failing-state-amid-widespread-poverty. 

[8] Fleifel, Mohamad, and Khaled Abi Farraj. “The Lebanese Healthcare Crisis: An Infinite Calamity.” Cureus. Cureus, May 26, 2022. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9235031/. 

[9] Dabaj, Kassem. “Lebanon: Almost Three-Quarters of the Population Living in Poverty | | 1UN News.” United Nations. United Nations. Accessed November 5, 2022. https://news.un.org/en/story/2021/09/1099102. 

[10] Kranz, Michal, 2022 Agence France-Presse | AFP | Nov 5, 2022 Jonathan SAWAYA | AFP | Nov 5, and 2022 by Clement Melki and Layal Abou Rahal | AFP | Nov 5. “Lebanon’s Economic Crisis Is Decimating Its Middle Class.” Al. Accessed November 5, 2022. https://www.al-monitor.com/originals/2020/05/lebanon-middle-class-poverty-economic-crisis.html. 

[11] “The Unprecedented Mass Protests in Lebanon Explained.” Amnesty International, August 13, 2021. https://www.amnesty.org/en/latest/news/2019/11/lebanon-protests-explained/.

[12] Gallagher, Adam. “Amid Historic Crisis, Has a New Hope Emerged in Lebanon?” United States Institute of Peace, June 23, 2022. https://www.usip.org/publications/2022/06/amid-historic-crisis-has-new-hope-emerged-lebanon. 

[13] Haboush, Joseph. “US, Saudi Arabia, France Call on Lebanese Officials to Elect President without Delay.” Al Arabiya English. Al Arabiya English, September 21, 2022. https://english.alarabiya.net/News/middle-east/2022/09/22/US-Saudi-Arabia-France-call-on-Lebanese-officials-to-elect-president-without-delay. 

[14] Gallagher,  “Amid Historic Crisis, Has a New Hope Emerged in Lebanon?” ,2022.

[15] Khallouf, Jad. “Resolving Lebanon’s Financial Crisis – Jad Khallouf *.” Commerce du Levant, January 22, 2020. https://www.lecommercedulevant.com/article/29577-resolving-lebanons-financial-crisis.

Author

layla.hedroug@yale.edu