Lebanon’s Looming Economic Collapse

Although the pandemic has contributed to the weakening of the Lebanese economy, the financial problems are long overdue and derive from the peculiar political structure developed in Lebanon. Lebanon is now facing an economic crisis unprecedented, some say it has already crashed. “Lebanon is not on the brink of collapse. The economy of Lebanon has collapsed,” Said Fawaz Gerges, Professor of international relations at the London School of Economics.

Lebanon has recently entered its worst economic crisis after the Civil war ended in 1990, pushing thousands if not millions of people into poverty, and creating the most massive anti-government protests the country has seen in more than a decade. 

By October of last year (2019), nearly 30 percent of Lebanon’s population was living under the poverty line. By this year’s end, this percentage is expected to pass the 50 percent mark. 

What went wrong? 

According to experts, Lebanon’s problems are due to a state pyramid scheme. For years, The central bank spent more than it collected in taxes, resulting in deficits. To solve this problem, they attracted dollar deposits through immensely high-interest rates on their issued debt, and after using these deposits to pay the unsustainable expenditure. This House of glass continued growing until it couldn’t support itself anymore and crashed. (BBC,2020)

The crash of the unsustainable approach to debt paying made the amount of debt so significant that Lebanon went into default for the first time in history, unable to pay the international or domestic debt. Lebanon had no other choice but to devalue its currency, the Lebanese pound, is in free fall, losing more than 82 percent of its value during this year. People’s savings, locked up in banks, are now nothing but smoke.

Source: tradingeconomics.com

This month, the country entered the books of a country going through hyperinflation, the first one from the Middle East and North Africa, with a substantial yearly inflation rate of 462 percent, only behind Venezuela, where the annual rate is 2219 percent.

The coronavirus pandemic has caused an increase in the speed of the freefall of the Lebanese economy, but it is not the cause for it. With businesses closing or laying off staff, the shortage of products increased, increasing prices, and widening the income gap, to the point where families are unable to acquire even essential products.

The crisis has pushed the population to the extreme. The devaluation and high inflation have affected the low-income class more severely, who have seen the little they had, vanish into nothing. From constant power outages, Lebanon seems closer to hit rock bottom every day that passes.

Responsibility issues

Still, according to experts, the fall of the Lebanese economy can be attributed to political sectarianism and corruption as the main factors in the authorities’ inaction. 

In Lebanon, the three main political offices (president, speaker of parliament, and prime minister) are divided among the three most prominent communities (Maronite Christian. Shia Muslim, and Sunni Muslim) respectively, Each of them looking after their own interests. 

The religious diversity also makes the country an easy target for external interference, as seen with Iran supporting the Hezbollah Shia movement (BBC, 2020) and the US denying support to the country until efforts to eliminate the same movement are made. 

A way out

There is no clear way out of such a catastrophic collapse, and if one is found, it will not happen after night. One recommendation made by the economist Steve H. Hanke, is to design a currency board system, which would issue domestic currency anchored to a foreign currency. Therefore the local currency backed a hundred percent by the anchor currency reserves, would establish and maintain confidence and stability while the economy recovers.

Some Lebanese activists point to a solution that lies within the existing legal system. Which if activated, they claim the policy would drive a transition to a more cooperative non-sectarian state. All said and done, Lebanon needs healthy long term economic measures that should lead to a fair and equitable economy.

 

 

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Sources

BBC. 2020. Lebanon: Why the country is in crisis. BBC: https://www.bbc.com/news/world-middle-east-53390108

Bidawi H. (2020) Large devaluation and inequality: The case of Lebanon (note). BSI Economics. http://www.bsi-economics.org/1130-large-develuation-inquality-case-of-lebanon

Hanke S. 2020 Lebanon hyperinflates. National Review: https://www.nationalreview.com/corner/lebanon-hyperinflates/?taid=5f1a95b531fdfb00014475e5&utm_campaign=trueanthem&utm_medium=social&utm_source=twitter

Hubbard B. 2020. Lebanon’s Economic Crisis Explodes Threatening decades of prosperity. NYTimes: https://www.nytimes.com/2020/05/10/world/middleeast/lebanon-economic-crisis.html

https://tradingeconomics.com/lebanon/currency

Qiblawi T. 2020. Dumpster diving, blackouts and suicides. Lebanon’s woes bare as crisis deepens. CNN: https://edition.cnn.com/2020/07/08/middleeast/lebanon-economy-crisis-intl/index.html

Sly L. 2020 The lights go out on Lebanon’s economy as financial collapse accelerates. The Washington Post: https://www.washingtonpost.com/world/middle_east/the-lights-go-out-on-lebanons-economy-as-financial-collapse-accelerates/2020/07/19/3acfc33e-bb97-11ea-97c1-6cf116ffe26c_story.html