Lebanon At a Crossroads … Again

Lebanon is not just dealing with the aftermath of the deadly Beirut explosion but also a full-blown economic and financial crisis

A woman holds a noose as she observes a minute of silence to mark one month since the massive explosion at the city’s port area, in Beirut,  Sept. 4, 2020. Mohamed Azakir/Reuters 

Lebanon is a tinderbox in more ways than one.

Indeed, the devastating August 4 explosion that wreaked havoc in Beirut has come on the back of an unprecedented economic and financial implosion. Both the economic conditions and the harrowing blast, deemed to be among the largest non-nuclear explosions ever, are a direct result of political and economic corruption and mismanagement.

The blast claimed nearly 200 lives, injured 5000, left 300,000 homeless, and resulted in at least $6.7 billion in direct damages and indirect losses. More than a month later, it is still unclear what started the fire that detonated the stash of ammonium nitrate that had been languishing in a port hangar for six years and how it ended up there in the first place. It is also unclear why nothing was done to remove the stockpile or at least evacuate the area after the fire started at least fifteen minutes before the blast.

The grave danger this cache posed was known to the current President Michel Aoun, who claimed he lacked jurisdiction over the port, the now caretaker prime minister, the security forces and countless other ministers and officials. It remains to be seen if the general prosecutor and the military judge leading the investigations, both close to the country’s political elites, will question higher level officials, including the prosecutor’s brother-in-law and then-minister of public works who was in office when the shipload was stowed in the hangar.

The anger at this criminal negligence and irreverence toward human life brought people briefly back to the streets, where effigies of Lebanese leaders including the powerful Hezbollah Secretary General were hung. This brief return to the street however was cut short by a violent clampdown by the security forces, COVID-19 contagion fears, and a general sense of fatigue and disillusionment. The Hassan Diab government also resigned a week after the blast, blaming endemic corruption and the political-sectarian system for the explosion, and for stalling talks with the IMF and blocking meaningful reforms.

Following intense pressure most notably from France, a new Prime Minister Mustapha Adib, supported by the traditional political and sectarian cartel, was appointed on August 31 in the hope that his cabinet, if and when it is formed, could enact serious structural reforms that would alleviate the dire economic, financial, and social crises.

The economic and financial crisis had spiralled out of control nearly a year ago forcing the government to default on a debt payment for the first time in its history in order to salvage the little foreign currency reserves it has on imported necessities such as fuel, wheat, and medicine, which they may soon no longer be able to subsidize. So how did Lebanon reach its nadir?

The Economic Implosion

During a lecture in 1946, a prescient civil servant in the newly formed republic, cautioned that“commerce is the engine of the economy not the economy itself.” That warning prodding stakeholders to invest in productive endeavours such as agriculture and industry had largely fallen on deaf ears, but is once again emerging as a necessary remedy to Lebanon’s economic woes.

However, Lebanon’s unsustainable import-dominated economy alone is not to blame for its current situation. Indeed, Lebanon’s political economy, which has allowed for rampant and systemic corruption, has further exacerbated matters. Add to this the economic impact of the COVID-19 pandemic and you have a perfect storm.

Indeed, Lebanon today is among the most indebted countries in the world relative to its GDP of $55 billion, which is in free fall and projected to contract by 25 percent in 2020 according to economist and former Minister of Economy Nasser Saidi. Its public debt continues to rise and before the default in March stood at160 percent of its GDP. This too shall rise as the country seeks more funds to steady the economy and rebuild the port as well as the area devastated from the explosion. Since late 2019, the country has also faced a currency crisis with the Lebanese pound losing almost 80 percent of its value. Inflation has also skyrocketed, reaching 100 percent early this summer. The COVID-19 pandemic, which has claimed 291 lives in Lebanon (1 percent of reported cases), has made matters harder. Indeed, the lockdown imposed has led to a further increase in unemployment with the poverty rate estimated by the World Bank to reach 45 percent this year.  This socioeconomic crisis has precipitated a flight of human capital as more disillusioned, unemployed, and skilled Lebanese look to emigrate. There has also been an increase in the number of desperate Lebanese attempting to reach Cyprus on overcrowded and unsafe boats.

How Did It Get So Bad?

The systematic sidelining of productive industries and the privileging of faltering foreign direct investment and revenue from tourism and remittances has led to sizable budget deficits. Most of government expenditure today in fact goes to servicing loans, covering salaries in a bloated and inefficient public sector, and financing the costly publicly-owned Electricité du Liban, which even thirty years after the end of the civil war, is still unable to provide uninterrupted power to Lebanon’s nearly five million inhabitants and incurs yearly financial losses of about $1.5 billion. Meanwhile, public services, from healthcare, education to public transport, are dismal, if they exist at all. The railway authority, one example of several “ghost entities,” continues to receive state funds, despite the absence of train services.

The budget deficit has also been exacerbated by the now-defunct pegging of the Lebanese pound to the dollar, which was first introduced in 1997 ($1 was fixed at 1,507.5 LBP). The peg was originally placed to restore confidence in the Lebanese Pound during the reconstruction years following the near fifteen-year civil war. Although it has allowed the average Lebanese a higher standard of living (the World Bank classifies Lebanon as an upper middle-income country), the 22-year-lasting peg has also harmed productive industries as well as tourism as the expenses have priced out tourists and investors alike. It was also costly to maintain as it relied on remittances predominantly from expats as well as other depositors.

To ensure the flow of remittances into the country, Lebanese commercial banks promised exorbitant interest rates reaching in some extreme cases as high as 12 to 17 percent. These interest rates further discouraged investments and business as depositors could get a better return by merely depositing their capital in banks. This grim reality has further compounded the unemployment rate, which is estimated to reach just under 50 percent by the end of the year. The Economist reported in February 2018 that 2, 200 firms closed in 2017 alone.  That number has risen exponentially in light of the economic and currency crisis and the COVID-19 lockdown. Indeed, the Beirut Traders Association has claimed that 25 percent of Beirut businesses have closed so far this year warning that that number could double by the year’s end.

Remittances also dried up once this Ponzi scheme , as commentators including the formidable NERDS economic bloggers have termed it, unravelled. The Ponzi scheme in Lebanon refers to the unsustainable intersection of commercial banks, the central bank Banque du Liban (BDL) and the state. As the service-based economy slowed down and remittances dwindled, bringing in less dollars into the country, BDL, which loans the state, could no longer incentivize banks with high interest rates to deposit their dollars in the BDL thereby causing a liquidity crisis. While banks had profited tremendously under this pyramid scheme, the scheme has now gone bust heralding a reorganization of the Lebanese banking sector.

Once people came to this realization and attempted to withdraw their savings, unofficial capital controls were introduced by commercial banks to limit capital flight. The well-connected would still manage to remove some of their capital with experts claiming $800 million transferred out of  the country in the weeks between mid-October and November 7, 2019, when the banks were closed and ordinary Lebanese were allowed to withdraw eye-drop amounts of their hard-earned dollar deposits. In recent months, Lebaneses’ access to their Lebanese Dollars or “Lollars,” as former banker and commentator Dan Azzi referred to them, have come with a “haircut”. Lebanese are allowed to withdraw a limited amount of their Lollars in Lebanese Pounds, not at the official rate, which continues to exist, but at a much lower rate. It remains to be seen who would cover the immense losses incurred—depositors, the commercial banks or the state by selling some of its assets.

Meanwhile the Lebanese pound, whose costly peg was supported by the BDL and continues to exist officially, has lost much of its value and now hovers around 8,000 LP to the dollar on the black market, threatening the import of goods as well as the livelihoods of many Lebanese whose salaries, in Lebanese pounds, are a fraction of what they once were.

Undoubtedly, geopolitics has also worsened the situation. The Syrian civil war, ongoing since 2011, saw the influx of nearly 1.5 million refugees, further straining public services and natural resources. Lebanon currently has the highest number of refugees per capita in the world, where in addition to Syrian refugees, some half a million Palestinian refugees are registered with the United Nations Relief and Works Agency or  UNRWA, and a much smaller number of Iraqi refugees. The Syrian conflict also served as a hurdle for trade, further restricting the already limited goods exports to Syria and the Gulf markets. The war also impacted the tourism sector. In the years following the start of the Syrian civil war, the number of tourists arriving to Lebanon dropped significantly—nearly one million fewer tourists visited Lebanon between 2010 and 2013.

Meanwhile, the United States and Saudi–Iranian proxy conflict has also played out in the geopolitical rentier state that is Lebanon, where rents are exchanged for political influence. The two political poles in Lebanon since the assassination of former Prime Minister  Rafik Al-Hariri in 2005 have been the West- and Gulf-backed March 14 bloc on the one hand, and the Iran and Syria-backed March 8 bloc, on the other, which consists predominantly of the Amal movement, Hezbollah, as well as the Free Patriotic Movement (FPM), which enjoys the largest Christian support.

Since 2016 and following more than a two-year failure to fill the position of president due to political squabbling, a settlement between Saad Hariri and the FPM resulted in the election of Michel Aoun as president and the return of the former as prime minister. The ascendancy of the Iran-backed Hezbollah has seen the ebbing of affluent tourists from the Gulf, whose numbers have plummeted at times due to political rather than security concerns. Real-estate and foreign investments have also dropped due to political considerations.

Furthermore, the United States has introduced sanctions on banks, businessmen, companies and parliamentarians linked to Hezbollah, a powerful player which the United States deems a terrorist organization. In September 2019, the United States placed a Lebanese bank on a Specially Designated Global Terrorist list for its alleged ties to Hezbollah. The bank self-liquidated shortly thereafter. In September 2020, two former ministers and companies were also sanctioned by the United States. The Caesar Act, passed in June of this year and which imposes sanctions on foreign actors conducting transactions with the Syrian government and its allies, is also expected to impact Lebanese cooperating with Syria’s Al-Assad regime. Hezbollah had been actively backing Syria’s Bashar Al-Assad during the Syrian civil war. Lebanon has been an outlet for beleaguered Syria and a source of subsidized fuel and medicine as well as dollars that are smuggled across the border.

Adding to the already dire situation is the system of patronage that is entrenched in the political system. The pluralism that exists in society is represented in government in an often-dysfunctional power-sharing system, which has left top state jobs such as the presidency and the formation of cabinet as well as judiciary appointments vacant for months and even years. The 2013 parliamentary elections were postponed purportedly for security reasons linked to the war in Syria. When elections were finally held in 2018, it took nine months to form a cabinet. Moreover, political impasse has also slowed down the drilling of offshore hydrocarbon reserves, despite the country’s desperate need for this additional revenue. Eventually the drilling in the first of Lebanon’s ten offshore blocks, Block 4, was a disappointment as insignificant amounts of gas were discovered. Despite the direness of the situation and intense pressure by France, cabinet formation has also reached an impasse as political players tussle over ministries.

Furthermore, the political and sectarian cartel buttresses its support by providing state jobs as well as other kickbacks to its clients in exchange for political loyalty. Les Fromagistes, as former president Fuad Chehab referred to the sectarian-political class, have indeed benefitted from the system of patronage and from the weakening of the state to ensure their persistence at the expense of a strong state. This has further drained the treasury and left public services inefficient and divided.

The Protest Movement

In addition to the corruption, the political class has also proven to be myopic. For instance, rather than enact much-needed reforms, limit wastage, improve tax collection or even introduce progressive income taxation targeting the wealthiest at least to satisfy donors’ wishes and unlock just over $11 billion in loans and grants pledged to Lebanon in April 2018 at the CEDRE donor conference held in Paris, the Lebanese president issued a statement on September 30, 2019, threatening prison sentences and fines for anyone who “undermines confidence in the state’s robust liquidity and bonds”. In early October and following The Economist’s publishing of an article on Lebanon’s economic crisis, which addressed the liquidity crisis and the pyramid scheme, four lawyers decided to sue the magazine.

Then on October 17, 2019, the national unity government at the time unanimously agreed to introduce the infamous “WhatsApp Tax” intended to levy $6 a month on all users of the free messaging and VoIP service, which had offered many Lebanese respite from expensive mobile phone services. This brazen proposal was the straw that broke the camel’s back unleashing months of protests, which resulted in the resignation of the coalition cabinet.

The WhatsApp tax had also come a mere few days after devastating forest fires, which three Sikorsky helicopters purchased by private citizens and donated to the government in 2009 were unable to extinguish due to lack of maintenance. Anger at the government’s incompetence and the worsening economic conditions led to spontaneous protests which snowballed and soon engulfed the length of the tiny nation.

What followed for several months on end were heartening scenes of national and inter-sectarian unity punctuated by a few instances of violence, which claimed the lives of two protesters and left many injured. Despite the government’s almost instant withdrawal of the WhatsApp Tax and promise of a series of reforms proposed by PM Hariri, the protests continued unabated. The now-forgotten reform paper included a promise to halve the salaries of ministers and parliamentarians, scrap of the ministry of information and other wasteful governmental bodies put in place to keep the fromagistes satiated. Protesters refused these promises, which they argued came too little and too late from a government that lacked any credibility.

What followed the resignation was months of political tussling over a new prime minister and ministries further attesting to the negligence of the political class. The prime minister designate would eventually take another month to form a cabinet after making several concessions to the so-called Syria and Iran-backed March 8 coalition, which named him and gave his cabinet the confidence vote. The resulting cabinet dubbed “the cabinet of consultants” because it selected technocrats who were close to the traditional cartel was also far from what the protesters demanded and only lasted six months with little to no accomplishments to its name. It remains to be seen if the new PM designate will be successful in his mission to form a new cabinet, as the political class once again battle over ministries seemingly oblivious to the extent of the crisis.

Meanwhile, as French President Emmanuel Macron drawing on Antonio Gramsci put it, the protest movement is struggling to emerge and is yet to organize and adequately challenge the “persevering old”.

More of the Same Thing?

Under immense international pressure and the risk of collapse, Lebanon’s odium of politicians named a new prime minister late last month. The appointment of Mustapha Adib is certainly a disappointment to many Lebanese who desire real change that would deliver them from the string of calamities brought upon them by those very leaders now expected to save them. However, in light of the extent of the crisis and the absence of a cohesive alternative, a cabinet supported by the established powers, egged on by the threat of sanctions, may indeed be the only force capable of enacting painful measures and extracting Lebanon from this mess.

It remains to be seen, however, if the new prime minister and his cabinet, if and when it is formed, would be able to pass reforms that would satisfy donors and the International Monetary Fund and slow down or even halt the economic collapse. Pressing issues include the forensic auditing of the central bank, which has begun, the passing of a capital control law, cracking down on smuggling, improving taxation, and reforming the electricity sector. Politically, there is also a demand for a new and reformed electoral law. However, many are skeptical that a national unity government, if and when it is formed, would enact decisions that would harm the oligarchy and their cronies.

Whatever the near future will bring, Lebanon now finds itself at a crossroads yet again. Years of rampant corruption, budget deficits, a flawed economic model, and internal and external deep political fissures have caught up with the nation. While the decentralized protest movement carried hopes that it could actually bring about deep and much-needed change, “the pessimism of the intellect” and harsh reality point to more of the same thing, if not worse.

Sarah El-Richani is Assistant Professor of Mass Communications at The American University in Cairo. Her work has appeared with BBC Media Action, MICT Berlin and the London-based Article 19, among others. Her monograph, Lebanon: Anatomy of a Media System in Perpetual Crisis was published in 2016. On Twitter: @srichani.

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