How things went from bad to unbearable in Lebanon
Currency has lost 90% of its value; food prices are up 400%; country is in free fall
Damascus: Lebanon is in the throes of an accelerating political, economic, and financial meltdown. As the country sinks from one low to another, hungry people are on the streets, burning tires, blocking roads, and demanding an overhaul of the entire political system.
Over the past week, the Lebanese pound sunk to its lowest point in history, tottering on the verge of 15,000 LP to the US dollar. Eighteen months ago, it stood at just 1,500 LP to the dollar. The writing has been on the wall since the October 2019, when angry demonstrators fist took to the streets, demanding political reforms.
October Revolution
That event, now romanticised as the October Revolution, revealed just how razor-thin Lebanon’s banking sector had become. Once the pride and joy of the tiny Mediterranean country, it collapsed in late 2019, sending entire households into financial ruin.
Citing security concerns, banks shut down and the minute they re-opened, were unable to accommodate depositors frantically trying to withdraw their savings. There were no more dollars in the country, and the state could not come up with logical answers as to where the money had vanished.
The lion’s share had been consumed by the Central Bank of Lebanon, which insisted on an overvalued pegged exchange rate, says Nasser Saidi, an economist, former economy minister, and ex-deputy governor of the Central Bank.
The vast majority of the population gets paid in Lebanese pounds, meaning their incomes decline further while prices shoot up and pensions evaporate. The crisis has also depleted foreign reserves, prompting stark warnings the Central Bank can no longer finance subsidies of some basic commodities, including fuel.
Speaking to Gulf News, he explained: “To protect an overvalued Lebanese pound, the Central Bank started borrowing at high interest rates to pay maturing debt and debt service.” The result, he added was “confidence evaporated, reserves [were] exhausted, with the Central Bank unable to honour its foreign currency obligations and Lebanon defaulting on its March 2019 Eurobond.”
But that was not the only reason, he added. Another was the steady economic collapse in neighbouring Syria, to where Lebanese dollars were smuggled daily since mid-2019, also at highly inflated prices. Last April, Prime Minister Hassan Diab gave an additional reason for the downward trajectory, saying that $5.7 billion in deposits had been smuggled out of the country during the first two months of the year, further adding to the liquidity crunch.
“To protect an overvalued Lebanese pound, the Central Bank started borrowing at high interest rates to pay maturing debt and debt service. [The result he added was] confidence evaporated, reserves [were] exhausted, with the Central Bank unable to honour its foreign currency obligations and Lebanon defaulting on its March 2019 Eurobond.”
Finger pointing
Hezbollah is blaming the crisis on governor of the central bank of Lebanon Riad Salameh, whom it unsuccessfully tried to unseat last year. The Aounists are blaming the economic collapse on Prime Minister-designate Saad Hariri’s failure to form a government, while Hariri is saying President Michel Aoun and his son-in-law, Gibran Basil, take full blame for what is happening in the country, since they have been perched on the seat of power since 2016.
Its been over six months since Hariri was tasked with forming a government after the resignation of Prime Minister Diab in August 2020. Diab was actively involved in talks with the International Monetary Fund (IMF) aimed at securing a $9 to 10 billion loan for Lebanon. He needed that money to pay salaries, which cost $6 billion annually, wheat importation ($110 million annually), medicine ($1 billion annually) and petroleum ($3.7 billion).
The country had heavily relied on revenue from tourism and banking, two sectors that due to political instability have been in steady decline for over a decade. An earlier amount of $11 billion had been pledged to Lebanon by international donors meeting in France in 2018. But that too was put on hold awaiting a curb on Hezbollah influence in Lebanon, something that none of the country’s consecutive prime ministers have dared to undertake.
Political gridlock
The IMF talks were temporarily frozen by Diab’s resignation after the Beirut port explosion killed over 200 innocents and destroyed half the city. Diab remains at his post as caretaker premier, constitutionally incapable, however, of signing such a deal with the IMF.
Meanwhile, the cabinet formation process is going nowhere, due to political bickering between Aoun and Prime Minister-designate Hariri. Aoun insists on an expanded cabinet, with the right to name all its Christian ministers. That is only logical, he claims, given that his party, the Free Patriotic Movement (FPM) controls the largest bloc in Parliament, with a total of 29 seats.
He claims that he is entitled to name all Christian ministers just like Hezbollah and Amal were given the right to name all Shiite ministers. He is also making claim to strategic portfolios like interior, which has historically been in the hands of Hariri’s Future Movement.
Hariri refuses to relinquish the post of interior and to give Aoun a blocking majority. He also refuses to deal with his son-in-law Gibran Basil, whose corruption and nepotism triggered much of the popular outpouring in October 2019. Basil has his eyes trained on replacing his father-in-law when Aoun’s term expires in October 2022, an ambition that Hariri opposes vigorously.
As soon as her visa is approved, she will join hundreds of doctors who are fleeing Lebanon’s political and economic crises, even during a pandemic.
Doctors warn a country once dubbed “the hospital of the Arab world” is haemorrhaging its best and brightest.
Hair tied back into a floral surgeon’s cap, the 32-year-old medic rushes around the bustling emergency department at the American University of Beirut Medical Center.
Her white coat streaked with blood from treating one patient’s gunshot wounds, she holds up an X-ray to understand the pain of another visiting from a nearby Arab country.
COVID-19
As a result, there is no government in Lebanon to deal with the security threats resulting from the economic meltdown. That is topped with soaring infections from COVID-19, currently standing at 434,000. The pandemic has eroded the country’s health sector (currently controlled by a Hezbollah proxy), resulting in greatly understaffed hospitals. Ventilators are in sharp demand, selling at an inflated black market rate of $1,500.
Earlier this year, Lebanon imposed a strict lockdown, after infections reached new heights over the Christmas holidays due to lack government measures. Not only did the lockdown fail at curbing the pandemic, but it also added to the grim economic conditions of Lebanon. Entire establishments have closed down and thousands have been laid off.
The salary of those who remained at their jobs dropped to comically low levels, due to the currency devaluation. A monthly salary of $500 used to mean LP750,000 in 2019. Today, LP750,000 is a mere $50.
Food prices have gone up by 400% and more than half the population now lives in poverty, according to the World Bank, making less than $3.84 a day. Subsidised bread has risen by nearly 100 per cent since mid-2020, while the price of meat has increased by 110 per cent.
These numbers are “unprecedented” says Saidi, comparing them to the famine of World War I. Others are saying that times are tougher than the darkest days of the country’s civil war, where despite the death toll, there was plenty of money in the country, coming in cash from regional players bankrolling their proxy militias.
War in Syria
Yet even regional players are no longer financing their proxies in the country. Iran used to pay its allies in foreign currency, but it is facing its own economic crisis, stretched thin by the war in Syria and renewed US sanctions under the Trump Administration.
Saudi Arabia, the traditional patron of Hariri, is also refusing to pay its allies, feeling that Hariri has been too soft on Hezbollah.
“There is no anchor for expectations of the future value of the Lebanese Pound” added Saidi. To put it simply: “The Central Bank no longer has the reserves to support the pound.”
Lebanon simply has to look elsewhere for money, and with a region up in flames, there is little room for hope.