Why is it too early to write the obituary for Lebanon?
In the Latin American city of Bogotá, a prosperous-looking lady goes to an ATM to withdraw cash and her card is declined. This is how, in the fall of 2019, the widow of a Lebanese immigrant in Colombia first learned of Lebanon’s financial collapse and the bankruptcy of its banking and public sector.
The financial collapse strikes like lightning. Those affected emerge confused and disoriented, hardly realizing what hit them. Financial problems can also have financial repercussions. Unsurprisingly, there is a chicken and egg debate on this among economists: Do real economic factors affect financial phenomena or are monetary and financial considerations affecting the real economy? Whatever the answer, the fact is that behind financial phenomena are real economic factors.
For example, the 2008 crash in the US was caused by a “real” economic factor: bad loans, known as “subprime.” Bankers created complex instruments to reduce their risk and spread them globally. When the crisis hit, it dragged everyone with it and people are still figuring out what hit them.
In Lebanon, the banking sector made loans to the central bank Banque du Liban (BDL), which in turn loaned the money to the government, which continued to increase its debt to pay interest. Bankers are easy to blame and probably deserve it; the other side of the story is what is happening in the economy and what is driving the crisis. This is in a country that has historically run a budget surplus and had sound monetary policy, with risk-averse bankers.
What the BDL did is no different than what the Federal Reserve and the Treasury Department are doing now in the US, with the trillions of dollars being printed and bought by their own bonds. In any other economy, what would follow would be a race between economic recovery and debt service for the latter to be sustainable. But in the United States, the government can print dollars as it pleases and fuel its own Ponzi scheme indefinitely, as long as the US dollar is the global reserve currency.
There is no banking system that can survive a run, and once it happens, it is unstoppable. A bank run is when depositors rush to withdraw their money at the same time. It is caused by a sudden loss of confidence. This is what happened in Lebanon after November 2017.
The Lebanese crisis actually started much earlier. As early as 2011, it was clear that Lebanon was holding a tiger by its tail and its debt was unsustainable. BDL tricks like “financial engineering,” or borrowing from Peter to pay Paul, could only buy time. But the time bought did not serve to fix things or regain confidence in the institutions. If unsuccessful, such measures worsen the crisis, and they did.
That, in a nutshell, was the financial side of the story. The controversy in Lebanon is mainly about blaming the banks and the BDL, with the emergence of instant experts who ignore the real economic costs and the political dimension, almost amounting to an annual bailout, a tax on the Lebanese economy for 15 years that left the country bankrupt. . What follows are attempts to restore balance.
Looking at the real economy, as opposed to finance, shows how the country became another Gaza. But with the right environment in the region, the potential is always there.
At first it was a 2004 UN resolution sponsored by France and the United States calling for Syria’s withdrawal from Lebanon and the disarmament of Lebanese and Palestinian organizations. Thus began the tug of war over Lebanon. At one end of the rope was Hariri’s vision of Beirut as the Monaco of the region, with the help of his Arab and Western allies. On the other hand, Hezbollah and company, the “axis of resistance”, with Syria, Iran and Russia, took hold more firmly. One side came loose and everything fell into the abyss.
Years of unrest followed, with an atmosphere of terror and a series of assassinations, beginning with former Prime Minister Rafik Hariri and continuing for the past 15 years. This was combined with a state of siege, through periods of political paralysis that paralyzed the country and the economy.
Downtown Beirut became a ghost town when it was occupied for 19 months between November 2006 and May 2008 in an effort to prevent the creation of the Special Tribunal for Lebanon. Then came a government crisis in early 2011 and another between 2013 and 2016 that created 29 months of limbo. This brought the economy to its knees, with no government, parliament or president until a compromise was accepted that gave Hezbollah absolute control.
A destructive war with Israel in 2006 destroyed the country’s infrastructure, but what affected the economy the most in the long run was the constant state of war maintained by Hezbollah through its regular declarations. The results were felt in the ruin of the summer tourist seasons, the projects suspended and the investments canceled. A generation that returned home full of hope in the early 1990s began making plans to emigrate again.
The coup de grace for the real economy was the crisis with the Gulf Cooperation Council (GCC). This affected the tourism industry, investment, bank deposits and the 350,000 Lebanese expatriates working in the Gulf.
The GCC states were also a major source of aid, accounting for about 40 percent of bank deposits. They contributed to international initiatives to help Lebanon. The conferences of Paris I, II and III and Cedre committed funds that never materialized because they were conditioned to reforms, which were constantly blocked.
Large real estate investments, shopping centers, franchises, and supermarket chains had significant GCC components. The creative sector, including engineering, consulting, advertising and design, also relied on GCC contracts, along with the entertainment industry and the cultural, educational and hotel sectors, along with information technology and innovation. . Even agricultural exports were negatively affected by the crisis with the GCC.
The failure to implement the reforms came at an enormous cost. Public sector employment became a massive drain on the economy in 2018, when wage increases and promotions were implemented without the necessary reforms. The electricity, telecommunications and ports sectors suffered from endemic corruption and a lack of reform.
The war in Syria had a direct cost on the economy thanks to Hezbollah’s involvement in the conflict. Thousands of young Lebanese who participated in the fighting were killed or injured, in addition to the psychological effects and the burden of hundreds of thousands of refugees arriving in Lebanon. There is also the smuggling of subsidized raw materials and foreign exchange into Syria, as well as the incorporation of Lebanon into the war economy there, with drugs, money laundering and terrorist activities. There may also be a connection to the Beirut port explosion that destroyed much of the city last August.
Under the gradual control of the Axis of Resistance, Lebanon became another Gaza: besieged, isolated, subjected to sanctions, impoverished and in a constant state of war.
The real economic impact of all these components is difficult to estimate, but some figures give an idea of the scale: the losses were in the region of $ 4 billion annually from the smuggling of subsidized fuel out of the country and $ 4 to $ 5 billion annually for tax evasion. The electricity sector-related corruption deficit alone accounts for more than a third of the $ 93 billion in debt. Public sector wage adjustments were estimated by the Finance Ministry at around $ 800 million, but turned out to be closer to $ 2.5 million and its director now preaches reform.
Despite all that, the Lebanese economy grew almost 20 times, from just under $ 3 billion at the end of the civil war in 1990 to almost $ 60 billion before the recent collapse, an indication that, with the right environment in the region, the potential is always there.
• Nadim Shehadi is Executive Director of LAU Headquarters and Academic Center in New York and associate member of Chatham House in London.
Disclaimer: The opinions expressed by the writers in this section are their own and do not necessarily reflect the views of Arab News.