Economic collapse in Lebanon: how once prosperous state falling into the abyss

Lebanon has found itself in a deep financial crisis, its Central Bank has exhausted all its resources. The state has been unable to purchase fuel and medicines from foreign partners for several months. The International Monetary Fund intends to allocate $1,135 billion to Lebanon, while most of the country's population is below the poverty line. Against the background of the next wave of the coronavirus pandemic and the events in Afghanistan, the Lebanese crisis has remained somewhat unnoticed by the world community, although it is already called historic for the country by its scale. Artur Safiulin, a columnist for Realnoe Vremya, economist with many years of banking experience, tries to understand what is happening in Lebanon and why in the article for our publication.

The scale of the crisis

For almost two decades, Lebanon has been a safe haven for the entire Middle East, engulfed by wars and instability. Investments were going to the Lebanese economy from the countries of the region where political crises were raging, the country's banks were especially valued — prosperous and profitable (Lebanon had a reputation as a Middle Eastern Switzerland), the tourism sector was developing rapidly. The situation has changed dramatically.

According to the World Bank (UN's structure), the acute and prolonged economic downturn in Lebanon will be among the three most serious crises that have hit the economies of the world since the middle of the 19th century. In 2020, the country's GDP fell by 20,3%, a year earlier the drop was 6,7%. The forecast for 2021 is a further drop of 9-10%. That is, we see a 40% reduction in the economy over 3 years, which led to the depreciation of the Lebanese pound and an increase in inflation to 84% per annum by the results of 2020. Half of the population is living below the poverty line, a sharp drop in the purchasing power of the local currency has hit all segments of society. For example, a soldier of the Lebanese army earns about 1,25 million Lebanese pounds a month, which is approximately 800 US dollars at the official exchange rate. But the shadow exchange rate is such that this amount is now equivalent to 80 US dollars. As they say, everything is obvious.

There is no currency in the exchange offices of Beirut, Byblos, Tripoli (the second largest city in Lebanon — ed.), there are not enough goods in shops, banks operate with serious restrictions, the streets of Beirut are without lighting at night, the lights are not lit in houses — people do not have the means to pay for electricity, there are abandoned cars along the roads — there is no fuel at gas stations (where conflicts break out in queues). The army, which is always neutral, remains the only player who ensures security on the streets. In June 2021, the army leadership appealed to the international community with a request for humanitarian assistance for soldiers — there are not enough funds for provisions and medicines.

There is no other government, since the government is paralysed by a political crisis (which will be discussed later). In fact, the country can fall into a civil war at any moment, when people will simply take to the streets and go robbing wealthy fellow citizens. Against this background, international rating agencies constantly reduce the credit rating of Lebanon. The volume of the Lebanese state debt is 150% of GDP, gold and foreign exchange reserves are running out, in fact, this is a bankrupt country. This year, Lebanon has to pay $ 6,5 billion on loans. It is clear that there are no such funds in the budget and there will not be. Among the creditors, there are other Arab countries, international investors, the World Bank, their own citizens (through government loans). There is a clear crisis of confidence in the authorities in the country.

Reasons for the decline

It should be noted that the economic downturn did not occur in one day and not in one year, it has been going on for the last decade. The reasons are both internal and external. Among the internal reasons, this is widespread corruption, paralysis of power — since the fall of 2019, three governments in a row have resigned and at this time a new one has not been formed.

The crisis in the country's governance system has its roots in the country's past, when in 1943, when Lebanon declared independence, a compromise option was adopted in the form of equal access to power for all communities, in particular, a Maronite Christian was always elected as the president, and a Sunni Muslim was always elected as the prime minister. After the tourist and banking boom of the 1960s, a civil war broke out between all the communities of the country — Christians, Sunnis, Shiites, Druze, which was joined by Israelis and Palestinians (who were sheltered by Lebanon and who waged war with Israel from its territory).

The war lasted for 15 years and ended in 1989 with the signing of the Taif Agreements. The modern political system of Lebanon has developed its shape. Along with the access to power of various religious movements, a channel was opened for lobbying from their patron countries — Syria, Iran, Saudi Arabia, to which France joined, whose colony this territory was. The Taif Agreements were supposed to ensure the country's transition to civil society, removing the so-called “sectarian” representation in parliament. All groups laid down their arms, except for the Shiite pro-Iranian movement Hezbollah, which argued that the refusal was necessary to continue the fight against Israel. This gave rise to the emergence of two armies in the country — the Lebanese national army and the unofficial Hezbollah army, and in fact, marked the creation of “a state within a state”. You can imagine how dense a tangle of problems and intricacies is in one small country, which is simply unable to resist external influence, since it does not have a monolithic, strong power.

Several influential family clans divided the country in the economic sphere, working with cartel methods and entangling the government and ministers with corruption networks. The same names have been running banks for many years, are appointed ministers, and distribute humanitarian aid in the right direction for themselves. Hezbollah created its own shadow economy, which is based on aid from Iran, drug trafficking, and smuggling.

In this case, the role of the savior could be played by the government of “technocrats” who are not connected with the political elites. But such governments in other countries of the region quickly fell under the influence of old groups or turned out to be too weak to pursue a tough political and economic course. As a result, the same surnames appear in the electoral lists from year to year. As an example, the Hariri family — Saad Hariri has been Prime Minister for the last few years and is the main contender for this post at the moment. His father, Rafik Hariri, led the country after the end of the civil war, and it was largely thanks to him that Beirut was rebuilt and the post-war revival of Lebanon began. His son faces an even more serious task — to restore citizens' trust in the system, to curb armed groups (including Hezbollah), to end corruption (it comes to the point that half of the aid coming to the country is simply stolen). In my opinion, Lebanon needs a new political system, but its emergence may lead to a new civil war. In this respect, the country is not to be envied.

Now a little bit about the external causes of the crisis. The current state of the economy can be linked to the political crisis of 2008, when the country was without a government for about a year, since the parties could not agree on its composition. At that time, the armed forces of Hezbollah, taking advantage of the Government's decision to eliminate the telephone network belonging to the movement, seized West Beirut. Only with the mediation of the League of Arab States (LAS) was it possible to extinguish this conflict and reconcile the parties. In fact, even then the country was falling into a civil war.

After such a strong strengthening of the Shiite part of the Lebanese political spectrum, Saudi Arabia significantly cut its funding to the country. For information, after the end of the civil war in 1990, the Saudis paid 7% of the costs of rebuilding Lebanon. The subsequent global economic and oil crises led to a decrease in investment by the countries of the region in the country's banking sector. Saudi Arabia suffered from the fall in oil prices and the financial crisis, and, having lost influence on the Lebanese authorities, practically blocked the aid channel to Lebanon. The final break was the appointment of six Hezbollah representatives to ministerial positions in 2016.

As a result, the country was forced to borrow on foreign markets — the IMF came to the rescue, but traditionally, IMF loans require budget cuts (in order to balance the budget, there is nothing wrong with this, it's simple math). Most often, socially-oriented budget items are cut. It is clear that such measures worsen the situation of the population, undermine its purchasing power, and generally lead to a slowdown in economic activity.

In 2011, a new one was added to the financial problems — the need to support Syrian refugees. It should be reminded that together with the Palestinians, the total number of refugees in the country is about two million people. This is with a population of six million. The burden on the budget turned out to be enormous, plus most of the international economic aid was deposited on the accounts of people who managed the distribution of aid — banal theft and corruption.

To cover the budget deficit, the Lebanese government increased external borrowing, eventually driving them under the bar of 150% of the country's GDP. It is not surprising that now no one in the world wants to lend to Lebanon — the country is, in fact, bankrupt and has a sky-high level of corruption. Many of us probably remember the saltpeter explosion in the port of Beirut in 2020, when many people were killed and almost half of the city was destroyed, so strong was the explosion. The need to re-deposit saltpeter was mentioned many times, funds were even allocated, but they went to fill the pockets of officials and the port management without eliminating the problem.

The US anti-Syrian sanctions — so-called “Caesar Act” — also exert enormous pressure on the country's financial sphere. For many years, companies from Lebanon have provided assistance to Syria in circumventing restrictions on the supply of sanctioned goods and making cash payments. The US put pressure on the IMF to stop helping Lebanon until the country's government and business stop cooperating with Syria.

In conclusion, I would like to note that the fate of the country is in the hands of the Lebanese themselves, they have experience in overcoming political crises. But, given the debt burden and the total collapse of the country's economy, there is a feeling that it is already too late and the train has left, relatively speaking. All of the above facts and factors of external influence create favourable conditions for conflicts and clashes in the country, which will result in a new civil war, with an escalation of violence and the collapse of the country. Lebanon is an artificial entity, a typical failed state (unable to exist in its present form). Again, trying to make friends with 17 communities of countries seems not the best idea. If the country does not find a “new balance” (to quote one opposition politician from the Druze community) in the near future and does not get out of the economic peak, then the prospects for this once relatively prosperous country are sad. The banking sector and tourism love peace and quiet, but Lebanon does not know how to earn money on something else.

Artur Safiulin

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.