Chronicle of the Middle East and North Africa

How a Sectarian Oligarchy Destroyed Lebanon’s Economy

traffick in Beirut
Vehicles queue-up for fuel at a petrol station amidst severe fuel shortages in Beirut. June 2021, / AFP

Mat Nashed

Lebanon is coping with an unprecedented banking crisis that has plunged more than half of the population into poverty. Those responsible are sectarian political elites who have plundered the economy since Lebanon’s civil war ended in 1990.

Besides a glitchy downtown quarter reserved for the rich and powerful, Lebanon has little to show for a debt that amounts to 150 percent of its national output – one of the highest in the world.

Corruption was always evident in Lebanon. In what could now be described as the good old days, the country’s affluent neighborhoods lost electricity for three hours a day before the banking crisis. All the while, the country exported almost nothing of substantial value besides human capital.

In hindsight, the implosion was predictable. Some economists have tried to explain Lebanon’s mismanagement and corruption as a nationally regulated Ponzi scheme, whereby the central bank borrows U.S dollars from national banks to pay outstanding debts. That scheme was underpinned by a fixed exchange rate between the Lebanese lira and U.S dollar. Pegged at a rate of $1.00 to 1,500 lira, the currencies were used interchangeably in the Lebanese economy for decades.

The strong currency prompted millions of Lebanese living abroad to deposit remittances into national banks, which were considered the safest sector in Lebanon before 2019. The post-civil war economy was also propped up by the aid sector, tourism, and Gulf states who poured billions of dollars into the central bank. The incentive for Gulf leaders was to counter Iran’s influence via the Lebanese Shiite militant group Hezbollah.

But as Hezbollah grew stronger both politically and militarily amid the Syrian war, Saudi Arabia and its allies began to significantly scale down aid to Lebanon – a country they increasingly perceived as an Iranian outpost.

Traditionally, Saudi Arabia used its oil wealth to do exactly the opposite: bankroll the army and central bank to resist Iranian influence. But with global oil prices down in 2016, Riyadh believed that their money would go to waste in Lebanon. Hezbollah, after all, had secured a foothold in the army and security forces and wielded a veto when it came to cabinet appointments. Remittances from abroad also declined, prompting national banks to incentive dollar deposits by providing remarkably favorable interest rates. These rates lured many Lebanese and foreign nationals to deposit their money into banks, enabling the central bank to continue borrowing dollars to pay for vital imports.

The arrangement was unsustainable. The banks, which are run by a cohort of influential Christian and Sunni families, went bankrupt after lending three-quarters of deposits to the government, which either stole the cash or paid off its inflated public sector employees that are connected to political factions.

By 2019, the entire country knew that Lebanon was on the brink of collapse. The ruling elite attempted to tax tobacco, petrol, and messaging apps such as WhatsApp to address the steep deficit. Such apps were the only recourse for many Lebanese to stay in touch with relatives abroad, prompting country wide protests that toppled the government.

The political elites still clung to power, and quickly formed a new government. Meanwhile, national banks-imposed capital controls that effectively locked the population out of their dollar accounts. However, those controls didn’t apply to the rich and powerful. International observers estimate that about $17 billion left Lebanon in 2020, while Lebanese officials say roughly $16 billion left the year earlier. What’s more, the covid-19 pandemic and Beirut port explosion devastated families and livelihoods when people were already struggling to survive. Following the tragedy of the port blast, the government resigned again.

The political paralysis hasn’t helped to mitigate the damage. The lira has now lost 90 percent of its value since the October protests, effectively swallowing up the hard-earned savings of Lebanese citizens that can no longer withdraw US dollars.

International financial institutions, and most notably the International Monetary Fund, have tried to cooperate with Lebanon’s stubborn political elites to rescue the country.

In April 2020, the IMF put forth a plan that would have safeguarded the funds of 90 percent of depositors. However, the plan was rejected by politicians, bankers, and the central bank governor Riyad Salameh. Some politicians even claimed that the country wasn’t really bankrupt. Others demanded that the IMF shrink its estimation of Lebanon’s losses.

The IMF has said that Lebanon has a debt of $90 billion, yet a parliamentary fact-finding committee claimed that Lebanon’s losses are less than half of that amount. Compounding the issue, neither shareholders, foreign bondholders, nor the state has agreed on how to share the steep losses.

Shocked at the intransigence of the political class, the World Bank described Lebanon’s crisis as a “deliberate depression” and possibly the third worst financial crisis since the mid-19th century due to the inaction of political elites.

The political crisis has also had a devastating effect for the aid sector, both in Lebanon and across the region. An investigation by Reuters found that more than $250 million worth of aid was lost to Lebanese banks due to unfavorable dollar exchange rates. Refugees and Lebanon’s poorest citizens were hit the hardest, due to their inability to afford soaring food prices.

Oligarchs from Yemen, Syria, and Iraq also have hundreds of millions of dollars suspended in Lebanese banks. Most recently, a Yemeni delegation met Riyad Salameh in June to discuss retrieving $200 million. An Iraqi official also told The New Arab that millions of dollars stored in Lebanon from ‘corrupt activities’ is still inaccessible to depositors.

However, it’s the poorest that are bearing the brunt of the spiralling crisis. Fuel is in short supply, causing gas stations to close down and food prices to spike due in part to transportation costs. Medicine too is scarce, while doctors are leaving the country to find stability elsewhere. The exodus is putting additional strain on an already crippling health sector.

Despite the dire situation, experts believe that the worst is yet to come. A forecast by Synaps, a non-profit providing in-depth analysis on Syria and Lebanon, predicts that basic goods will be unaffordable for most Lebanese next year.

Even importers – dominated by cartels close to political elites – will have access to a limited amount of dollars from the central bank. The lack of fuel, Synaps writes, will also affect 3G internet connection due to the lack of electricity to power the antennas for mobile communication.

In short, most Lebanese will be dependent on aid, yet the political class could attempt to manipulate NGOs into propping up status quo. For instance, they may require aid groups to funnel all U.S dollars through their own financial institutions in order to raise revenue by taxing international transactions. They could also push aid groups to do business with cartels that are close to political factions.

Violent street crime and civil strife could ensue as social cohesion breaks down due to widespread abject poverty. Desperate to survive, the population may become even more dependent on the piecemeal support handed out by sectarian factions. With the political class entrenched in power, it’s hard to imagine a scenario where Lebanon doesn’t descend into hell.

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written by
Mattia Yaghmai
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