Explained | Lebanon’s economic meltdown and why people are robbing banks for their own money

The Lebanese financial system has been paralyzed since 2019 as the Lebanese pound lost almost 95% of its value

The Lebanese financial system has been paralyzed since 2019 as the Lebanese pound lost almost 95% of its value

The story so far: As of Friday, September 16, five instances of attempted bank robberies were reported in Lebanon, not the first of this kind. One of the incidents involved a gunman, identified as Abed Soubra, demanding $300,000 in cash from BLOM bank in take off from the capital Beirut. Soubra later turned his gun over to security but remained locked in the bank until the evening.

However, attempts like this have been made by individuals seeking access to their own savings. Several such incidents, often involving armed individuals, have been reported since the beginning of this year and reflect Lebanon’s ongoing economic crisis that began in 2019. The economic downturn in the already politically unstable country was compounded by the COVID-19 pandemic and the 2020 blast at the port of the Lebanese capital Beirut.

How bad is the economic crisis in Lebanon?

The World Bank has described the Lebanon crisis as one of the “top 10, possibly top 3, worst economic collapses worldwide since the 1850s”.

Since the crisis began in 2019, dollar accounts, along with blanket withdrawals by Lebanese depositors in the country’s banks, have been virtually frozen, with banks imposing so-called “draconian” controls on withdrawals. According to the depositors can only withdraw the equivalent of $400 in a month financial times. And when depositors withdraw money in local currency, the exchange rate takes away 95% of its value. On various occasions this year, the Lebanese pound has been valued at 25,000 and even 35,000 per dollar on the black market.

The country’s gross domestic product plunged from nearly $52 billion in 2019 to about $21.8 billion in 2021, down 58.1%. According to the World Bank, such a contraction is associated with drastic events such as wars.

In contrast, Lebanon recorded real GDP growth of 9.1% as several countries suffered the effects of the 2008 global financial crisis. Its economy was booming and its banks resilient, with the International Monetary Fund praising the efforts of Riad Salameh, the governor of its central bank, Banque Du Liban (BDL). Meanwhile, the country recorded negative GDP growth of -19.2% last year.

The World Bank had estimated that government revenue would halve in 2021, reaching 6.6% of GDP. Debt rose to a whopping 150% of GDP in 2019 and rose to 170% the next year, one of the highest debt burdens in the world. In March this year, the government said losses in the financial system could amount to $73 billion.

Poverty has increased dramatically, and the United Nations estimates that 80% of the country’s 6.5 million people qualify as poor. Inflation, on the other hand, rose to 154.8% last year and is forecast by Fitch to reach 178% in 2022.

Basic food and meat prices are high enough to be unaffordable for most Lebanese citizens. As Lebanon imports most of its fuel, prices have risen and power outages often leave homes with just an hour of electricity per day Reuters.

Also Read: Lebanon’s Patients Suffer as Crisis Leads to Brain Drain

The crisis has prompted people to move out of Lebanon in what has been called the most significant exodus since the country’s 1975-1990 civil war.

Many of those who have left are doctors and healthcare professionals – an estimated 40% of doctors (most of them medical specialists) have moved permanently or work part-time abroad. According to the World Health Organization, the country’s hospitals are at 50% capacity.

How did Lebanon get here?

Once known as the Switzerland of the Middle East, the country has been credited with rebuilding after a 15-year civil war sparked by bitterness between the country’s various religious factions. The Lebanese government and its central bank have been accused of misusing and mis-spending the savings of the country’s citizens over a 30-year period. The World Bank has called it a “willful depression” orchestrated by the country’s elite, who have “long conquered the state and lived on its economic rents.”

Experts say Lebanon’s financial system is similar to a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors, which only works until the new money runs out.

Debt accumulation under sectarian elite administration

After the civil war, Lebanon introduced a system of “sectarian government,” or a sectarian political system, in which key positions are awarded to various Christian and Muslim sects in the country. According to Lebanon’s post-civil war constitution, the country’s president was to be a Maronite Christian, the prime minister a Sunni Muslim, and the speaker of the parliament a Shia Muslim.

This meant that the political elite in each sect gained considerable power, often spending too much money on ostentatious skyscrapers and shopping malls and less on building basic public services such as water, electricity, transport, health, education and social protection. According to a Reuters Analysis, the government also maintained a low-tax regime in favor of the rich.

After the war, the government relied on foreign aid, large loans from friendly Gulf countries, revenues from their financial markets, and tourism in a service-heavy economy.

After the end of the civil war in 1990, Lebanon saw its currency depreciate by two-thirds against the dollar, along with a 100% rise in inflation. In 1997, to stabilize the economy, Lebanon decided to maintain a fixed exchange rate and peg the Lebanese pound to the dollar at around 1,500. However, a Yale analysis indicates that while this proved to be a stabilizing measure after the war, the fixed exchange rate led to the creation of parallel markets with a fixed rate and a black market rate, with large differences between the two.

Foreign aid and investment from Middle Eastern countries during successive governments kept the country’s foreign exchange reserves high, but the debt continued to pile up in the background, as did liabilities and the cost of debt servicing. As the World Bank’s August report points out: “Excessive debt accumulation has been used to create the illusion of stability and boost confidence in the macrofinancial system to keep deposits flowing.”

In 2020, debt service, or interest payments, accounted for nearly half of government spending, and in March this year Lebanon defaulted on its government debt for the first time, missing a $1.2 billion Eurobond payment. In April, the government said the country’s economy was in free fall.

Dependence on referrals

According to some estimates, 8 to 20 million Lebanese – far more than the country’s 6.5 million residents – live outside Lebanon. Consequently, human resources were the most important exports of the import-heavy country. The large diaspora meant that remittances from people living outside the country became a large source of income

Remittances were once considered one of Lebanon’s most reliable sources of income, so much so that millions of Lebanese working abroad sent money home even during the 2008 global crisis.

However, remittances began to slow from 2011, when Lebanon’s sectarian political system began to destabilize and a larger part of the Middle East, including Syria, entered a crisis.

In addition, friendly Gulf states turned their attention away from Lebanon due to Iran’s increasing influence through the Shia armed group Hezbollah. In addition, countries that previously provided foreign aid are now imposing conditions on the government over the failure of reforms.

The central bank’s financial engineering policy

In 2016, instead of reining in debt, Banque Du Liban governor Riyadh Salameh stitched together a policy called “financial engineering” to attract new dollar deposits from the country’s banks.

BDL’s policies gave the banks lucrative yields (nearly 15%) on new dollar deposits to increase the government’s dollar reserves, and the means to give the banks such high yields came from finance selling foreign debt or Eurobonds ministry.

As financial engineering increased the government’s dollar reserves, it also increased its liabilities, meaning that what it owed virtually wiped out its reserves. In addition, as the banks were more interested in parking their dollars with the BDL, the policy reduced liquidity in the actual economy.

2019 protests, pandemic and explosion in Beirut

The sectarian system of government brought decision paralysis, corruption and unsustainable fiscal policies to the Lebanese polity. There were no parliamentary elections in Lebanon between 2013 and 2018 as they were postponed three times by the government. In 2018, despite mounting debt, politicians spent heavily on raising public sector salaries. After the 2018 election, it took the government nine months to approve the budget.

Public frustration over a combination of governance factors eventually culminated in widespread protests in 2019, when the government planned a $6 monthly tax on WhatsApp calls used by Lebanese in a bid to boost revenue was used to keep in touch with relatives working abroad.

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Popular protests prompted the resignation of the country’s Sunni Prime Minister, Saad al-Hariri. The demonstrators called for an end to corruption, the resignation of the country’s powerful elite and a reform of the political system.

Public anger continued to mount as the country coped with the pandemic and a devastating explosion at the port of Beirut in August 2020, one of the largest non-nuclear blasts in history, killing more than 200 people and injuring about 7,000 others. Damage was estimated at $15 billion.

What’s happening now?

Lebanon has not had a stable administration since the 2019 protests and three consecutive prime ministers-elect have failed to form governments. Billionaire and telecommunications magnate Najib Mikati became the country’s prime minister in mid-2021.

Parliamentary elections were held in May 2022 and Mr Mikati was put in charge of forming the new government; However, this has not yet happened as results have further fragmented the sectarian parliament into several camps, none of which has a majority.

Easing the economic crisis depends on the formation of a stable government, which is one of the prerequisites for an IMF bailout. Talks over $3 billion in funding from the IMF, along with an economic reform plan to pull the country out of the crisis, have stalled as political leaders are not on the same side in acknowledging the true extent of the loss, or who responsible for it.

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