BEIRUT (Reuters) – Lebanon is in the throes of a deep economic crisis after successive governments racked up debt after the 1975-1990 civil war with little to show for their spending spree.
Banks, at the heart of the service economy, are crippled. Savers have been stuck in dollar accounts or told that the funds they can access are worth less. The currency collapsed, plunging part of the population into poverty.
WHERE IS IT WRONG?
Lebanon’s financial collapse since 2019 tells how a vision of rebuilding a nation once known as the Switzerland of the Middle East has been derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints .
Beirut’s city center, razed to the ground by civil war, soared with skyscrapers built by international architects and swanky malls filled with designer boutiques that accepted dollar payments.
But Lebanon had little else to show for a mountain of debt equivalent to 150% of national production, one of the highest burdens in the world. Its power plants cannot keep the lights on, and Lebanon’s only reliable export is its human capital.
HOW DID HE BORROW SO MUCH?
Some economists have described the Lebanese financial system as a nationally regulated Ponzi scheme, in which new money is borrowed to pay existing creditors. It works until the new money is exhausted. But how did the nation of about 6 million people get there?
After the civil war, Lebanon balanced its books with tourism receipts, foreign aid, income from its financial industry and largesse from the Arab Gulf States, which financed the state by boosting central bank reserves. .
Yet one of its most reliable sources of dollars was the remittances of millions of Lebanese who went abroad to find work. Even during the 2008 global financial crash, they sent money home.
But remittances began to slow from 2011, as sectarian feuds in Lebanon led to more political sclerosis and much of the Middle East, including neighboring Syria, fell into chaos. .
The Sunni Muslim Gulf states have turned away with growing influence in Lebanon from Iran, via Hezbollah, a heavily armed Lebanese Shiite group whose political power has grown.
The budget deficit skyrocketed and the balance of payments sank further into the red, with transfers falling short of imports of everything from basic foods to flashy cars.
That was until 2016, when banks started offering remarkable interest rates for new deposits of dollars – a currency officially accepted in the dollarized economy – and even more extraordinary rates for deposits in Lebanese pounds. .
Elsewhere in the world, savers have received minimal returns.
Given that the Lebanese pound had been pegged to the dollar at 1,500 for over two decades and could be freely traded in a bank or by a supermarket teller, what was there to lose?
Dollars poured in again and the banks were able to continue to fund the spending frenzy.
HOW CAN BANKS DELIVER SUCH HIGH RETURNS?
Lebanon was still politically dysfunctional. Rivalries left him without a president for most of 2016.
But the central bank, Banque du Liban, led by former Merrill Lynch banker Riad Salameh since 1993, introduced “financial engineering,” a range of mechanisms that amounted to offering banks lavish returns for new dollars. .
Improved dollar flows resulted in increased foreign exchange reserves. What was less obvious – and is now a point of contention – was an increase in liabilities. According to some, the central bank’s assets are more than wiped out by what it owes, so it may be sitting on big losses.
Meanwhile, the cost of servicing the Lebanese debt has soared to about a third or more of budgetary outlays.
WHAT STARTED THE COLLAPSE?
When the state had to curb spending, politicians splurged on raising public sector wages ahead of the 2018 election. And the government’s failure to implement reforms meant that foreign donors withheld funds. billion dollars in aid they promised.
The latest spark of unrest came in October 2019 with a plan to tax WhatsApp calls. With a large diaspora and Lebanon’s weak tax regime in favor of the wealthy, imposing a fee on how many Lebanese kept in touch with their loved ones was disastrous.
Mass protests, led by disillusioned youth demanding global change, erupted against a political elite, many of whom were aging warlords who thrived while others struggled.
Foreign currency inflows dried up and dollars left Lebanon. The banks did not have enough dollars to pay the depositors who were queuing outside, so they closed their doors.
The currency collapsed from 1,500 to the dollar to a public rate of up to 8,000.
Compounding the problems, an explosion on August 4 in the port of Beirut killed around 190 people and caused billions of dollars in damage.
WHAT HAPPENS NOW?
France is leading international efforts to push Lebanon to fight corruption and implement other reforms requested by donors. Above all, Lebanon must resume the blocked talks with the International Monetary Fund.
But politicians and bankers need to agree on the scale of the huge losses and what went wrong, so that Lebanon can change direction and stop living beyond its means.
Written by Edmund Blair, edited by Timothy Heritage