Once known as the ‘Switzerland of the Middle East’, Lebanon has faced an adverse economic crisis last year. The Lebanese economy has been struggling since late 2019 in an economic meltdown described by the World Bank as the “top 10, possibly top three most severe economic collapses worldwide since the 1850s”. This socioeconomic humanitarian crisis is driven by the Lebanese pound devaluation, inflation, limited access to foreign exchange, decreased foreign remittances, increased unemployment, and business closures. Every eight in ten persons are lacking even the basic life necessities.
This economic mess has its roots deep in the political system, economic policies, and history. The article will investigate and discuss the reasons behind the unrelenting economic crisis.
Sectarian Political System:
Lebanon is a multi-faith country having 18 different religious communities. According to Statistics Lebanon, 67.6 percent of the total population is comprised of Muslims. Out of which, 31.9 percent are Sunni Muslims and 31 percent are Shia Muslims. On the other hand, 32.4 percent of the population consists of Christians. Under the Lebanese National Pact, the prime minister will always be a Sunni Muslim, the president a Maronite Christian, and the speaker of the National Assembly a Shiʿi Muslim. The proposed amendments to the Ṭāʾif Accord transferred much of the presidential powers to a cabinet divided equally between Muslims and Christians. Apparently, this structure seems to be an effort to ensure equal representation in government but practically failed as the system has many shortcomings.
In reality, it was merely a division of power betwixt the elites of the time rather than a system focused to ensure good governance of a nation-state. Interestingly, the Sunni leadership got Saudi Arabia’s support and on the other hand, Iran supported Shia leadership which further makes the sectarian political system weak.
Furthermore, it resulted in a corrupt, fragile, patronage-based system, where instead of merit influential men distribute government jobs to receive loyalty and favor from employees. Existing divisions are further rooted in the system, which encourages the competition between sects for high positions in government departments.
According to the UN report, “Political leadership is completely out of touch with reality, including with the desperation they’ve created by destroying people’s lives. Lebanon is also one of the most unequal countries in the world, yet leadership seems unaware of this at best and comfortable with it at worst.”
Many social scientists have named the relationship between political instability and the economy a two-way relationship. Same in the case of Lebanon, it has been witnessed that the economic crisis is closely related to its political crisis.
In 2019, the planned taxes on gasoline, tobacco, and VoIP calls on applications such as WhatsApp brought hundreds of thousands of protesters to the streets which made then-Prime Minister Saad Hariri submit his resignation. This uprising is known as October Revolution. In Aug 2020, the government had to face the public’s anger and outrage after the worst Beirut explosion. They believed that the tragic blast was proof of the government’s laziness and mismanagement. Consequently, then Prime Minister Hassan Diab decided to resign from his post. Najib Mikati is the current PM, who took charge on 10 September 2021. He took office 13 months after Diab resigned. In the meantime, Lebanon was under a caretaker government. Mikati one of the country’s richest men became Prime Minister for the third time. The resignations after every economic mess signify that no leader is having the capacity to take the country out of the crisis. Moreover, in this way they do not want to be held responsible and accountable for the financial instability.
In the eyes of the Lebanese people, the alliance between the country’s ruling elite and the banking industry is the primary cause of the crisis.
The Lebanese pound was fixed to the dollar in the late 1990s. A fixed exchange rate of 1500 pounds to 1 dollar was used. The issue was that the economy of Lebanon was not robust enough to support the value. The government and banks were able to prop up the currency for a very long time in order to keep that peg. However, remittances that were protected from the global financial crisis in 2008 began to decline in 2011. This was a result of the Arab Spring escalating tensions in the rest of west Asia and war in neighboring Syria. The devastating war forced the Lebanese government to take in more than a million refugees, placing an enormous burden on the country’s resources. In addition, a significant portion of Lebanese banking loans and assets were destroyed. Prior to the financial crisis, Lebanon’s central bank Banque du Liban adopted a “financial engineering” operation in 2016. This turned out to be one of the main causes of Lebanon’s economic downfall. To draw foreign investors, finance government spending, and maintain the peg, the BDL literally invented FX reserves blacked by excessively high-interest rates.
Amendments in the Bank Secrecy Law
Lebanon banks were known for their remarkable secrecy laws. Consequently, it attracted large sums of money from dictators and corrupt officials from all over the globe, especially Middle East. Even in the 2019 October Revolution, the protesters demanded the restoration of stolen public funds from the corrupt ruling elite. In the original bill passed in 2020, banking secrecy could have been lifted to investigate “all financial crimes,” but parliament decided to remove that language thus restricting the law’s scope. As per a state-run National News Agency, this step has opened the door of investigation on current and former officials such as Cabinet ministers, civil servants, and legislators. IMF officials issued a letter to Lebanese officials stating that the law marked “a substantial reform … but few key deficiencies remain.” These amendments affected the amount of trust the Lebanese banks once had and thus lowered the money deposits.
The COVID-19 outbreak
Citizens’ rights have been compromised as a result of the financial crisis brought on by the pandemic since they cannot obtain the fundamental essentials of life, such as food, clothes, healthcare, and shelter.
In May 2020, the Lebanese government began talks with the International Monetary Fund (IMF) during the height of the pandemic, asking the latter for around $10 billion of financial assistance to overcome the crisis. Both parties also discussed a plan to rescue the Lebanese economy from the crisis, but the talks were delayed as politicians could not agree on the precise extent of the financial losses. This economic crisis proved to be a destabilizing factor for the healthcare system responding to COVID-19.
Despite the alarming increase in COVID-19 cases, the government decided not to impose a lockdown during Christmas and New Year holidays. As a result, there was a sharp increase in positive tests which surged to almost 6000 cases by mid-January 2021. Additionally, the primary healthcare centers’ resources have been depleted by the diversion of government funds, compromising the maintenance of their basic services. Even the hospitals had no emergency risk management plans for crises like epidemics. The devastation caused by the pandemic further worsened the already crumbling economy.
A horrific explosion on August 4, 2020, in the Beirut Port, ripped through the capital, leaving 218 people dead, 7,000 injured, and 300,000 displaced. Furthermore, with damaging 77,000 apartments and causing an estimated $3.8-4.6bn material damage, it is considered one of the worst non-nuclear explosions ever recorded.
Beyond the port, the blast destroyed houses, hospitals, schools, streets, and many businesses came to an end. This led to an economic loss estimated between $2.9 bn and $3.5 bn. The port which handles 60% of the country’s imports has for a long time been a crucial link in Lebanon’s supply chain of products and goods. This incident also contributed to the collapse of the Lebanese pound.
It has been analyzed that the country’s sectarian political system formed the basis of majority instabilities. Furthermore, events such as the Covid-19 pandemic break out and the Beirut explosion intensified the drastic economic and political situation of the country. Furthermore, it has been found there is a strong two-way relationship between economic and political crises in Lebanon. All the above-discussed factors gave rise to poverty and inflation in the country. To improve the economic situation, Lebanon needs to enhance transparency and accountability by working on anti-corruption and anti-money frameworks. Moreover, it needs to establish a reliable and fair monetary and exchange rate system.
The author is a Scholar of International Relations at the International Islamic University Islamabad. Her areas of interest are theories of IR and US relations with other states. Currently working as Research Officer at the Institute of Strategic Studies Islamabad (ISSI).