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Since 2019, Lebanon has been undergoing the worst economic crisis it has not witnessed since the civil war during the period from 1975 to 1990, until Beirut went from being a tourist city that catered to spectators to an inhabited disaster and bombing zone. for the terror.
There are 5 main reasons that summarize the scene of the financial collapse in Lebanon and explain how Beirut came to this difficult state, and in chronological order, we find that the first reason is that the reconstruction after the civil war was stalled by corrupt elites, and therefore it was necessary to attract banks to the children of Lebanon who worked abroad to save their money. On the shores of Lebanon.
The Central Bank of Lebanon followed a new “financial engineering”, but depositors’ money quickly ran out due to the government’s addiction to borrowing to pay the bills of sectarian elites, the third reason for the collapse.
Perhaps the fourth reason was the disruption of support from the Gulf states with Iran’s growing influence in Lebanon and the fifth and final reason was the unaccounted for spending by politicians that completely hampered the country and ultimately collapsed the currency, pushing a large part of the population towards poverty.
Switzerland devastated the Middle East
Lebanon was previously dubbed “the Switzerland of the Middle East” in reference to the country’s tourism and natural resources and the global demand for them. However, due to sectarian conflicts, the star of this economically ailing country has waned, after sectarian elites borrowed without significant restrictions on that one.
In the center of Beirut, which was devastated by the civil war, you will find skyscrapers designed by international architects and luxurious shopping malls full of stores displaying the products of the most famous designers, which are paid for in dollars.
But Lebanon has little else to deal with a mountain of debt equivalent to 150% of GDP, one of the highest debt rates in the world. Power plants cannot continue to light the country and the only exports Lebanon can count on are its human capital.
Borrowing addiction
Some economists describe Lebanon’s financial system as a Ponzi hierarchy with national rules, where new money is borrowed to pay off existing creditors.
This system works until you run out of new money. But how did a country of six million people come to this?
After the civil war, Lebanon controlled its books with income from tourism, foreign aid, profits from its financial sector and subsidies to the Gulf countries, thus supporting the country by increasing the Central Bank’s reserves.
But one of the most reliable sources of dollars was remittances from millions of Lebanese who went abroad to look for work. Even during the 2008 global financial crisis, they were sending money home.
However, remittances from expatriates began to slow as of 2011, as sectarian rivalry led to political hardening and most of the Middle East, especially neighboring Syria, plunged into chaos.
And Sunni Muslim countries in the Gulf have distanced themselves from Iran’s growing influence in Lebanon through the heavily armed group Hezbollah and their political power has grown.
The budget deficit intensified and the balance of payments deepened into negative territory as remittances failed to match imports that include everything from basic goods to luxury cars.
This continued until 2016, when banks began offering exceptional interest rates for new dollar deposits and even more exceptional interest rates for Lebanese pound deposits. The dollar is an officially accepted currency in the global economy.
And savers were getting weak returns elsewhere.
Given that the Lebanese pound has been pegged to the dollar at 1,500 pounds for more than two decades, and can be freely exchanged at the bank or merchants’ purchasing account machine, what is the loss?
Dollars came back in and banks continued to fund the spending wave.
Financial engineering
Lebanon continued to suffer from political problems. Rival parties left the country without a president for most of 2016.
But the Central Bank of Lebanon, led by Riad Salameh, a former Merrill Lynch banker, who has served as the bank governor since 1993, has introduced “financial engineering” processes, a set of mechanisms that lead to the visualization of large bank returns. for new dollars.
The improvement in dollar flows was reflected in the increase in foreign exchange reserves. Less obvious, and now a point of contention, higher commitments. According to some accounts, the central bank’s assets were wiped out and increased by what it owes, so it may have suffered heavy losses.
At the same time, the cost of servicing Lebanon’s debt has risen to about a third or more of budget spending.
Freefall
When the government needed to curb spending, politicians bragged about raising public sector salaries before the 2018 elections, resulting in the government failing to implement reforms and foreign donors reluctant to provide billions of dollars. promised to help.
The latest spark of unrest was ignited in October 2019 by a plan to impose a tax on WhatsApp calls.
And with large expats and a low tax system favoring the wealthy, imposing fees on the way many Lebanese keep in touch with their families has been disastrous.
Massive protests broke out, led by frustrated youth demanding radical change, against the political elite that included many warlords who prospered while others suffered.
The inflows of foreign currency were exhausted and the dollars left Lebanon. Banks no longer had enough dollars to reimburse depositors queuing outside of them, causing them to close their doors.
The currency tumbled from 1,500 pounds to the dollar at an exchange rate of 8,000 pounds on the black market.
The problems were exacerbated by an explosion in the port of Beirut on August 4, which killed about 190 people and caused billions of dollars in damage.
Current situation
France is leading international efforts to pressure Lebanon to fight corruption and implement other reforms demanded by donors. Lebanon should resolutely resume stalled talks with the International Monetary Fund, as Lebanon was requesting $ 10 billion from the fund, but negotiations were halted after popular rejection of the government reform plan, and then there was news of cutting the Fund support bill to nearly half.
But politicians and bankers must agree on the size of the huge losses and the mistake that occurred, so that Lebanon can turn around and stop spending beyond its capabilities.
