Lights go out on Lebanon’s economy as financial collapse accelerates

Beirut: Most parts of Lebanon are receiving no more than two or three hours of electricity a day. An incoming flight at Beirut’s airport had to abort a landing this month because the lights on the runway went out. The traffic signals in the capital have stopped working, adding to the congestion on Beirut’s already chaotic streets.

These are among the latest symptoms of an economic implosion that is accelerating at an alarming pace in Lebanon as its government, its banks and its citizens run out of foreign currency simultaneously.

The collapse is the result of decades of economic mismanagement, corruption and overspending. Hopes for a rescue are fading as the country’s ruling elites balk at the kind of policy changes and outside scrutiny that would unlock international aid. Talks with the International Monetary Fund to secure a $10 billion loan have stalled.

Known as an oasis of prosperity and relative stability during the past decade of Middle East turmoil, Lebanon is descending into poverty, despair and, potentially, chaos. Economists are now predicting a Venezuela-style collapse, with acute shortages of essential products and services, runaway inflation and rising lawlessness in a country at the heart of an already unstable region.

The Lebanese pound has lost more than 60 per cent of its value in the past month, and 80 per cent of its value since October. Prices are soaring, goods disappearing.

Bread, a staple of the Lebanese diet, is in short supply because the government cannot fund imports of wheat. Essential medicines are disappearing from pharmacies. Hospitals are laying off staff members because the government is not paying its portion, and cancelling surgeries because they don’t have electricity or the fuel to operate generators.

Newly impoverished people are taking to Facebook to offer to trade household items for milk. Crime is on the rise. In one widely circulated video, a man wearing a coronavirus mask and wielding a pistol holds up a drugstore and demands that the pharmacist hand over diapers.

“Lebanon is no longer on the brink of collapse. The economy of Lebanon has collapsed,” said Fawaz Gerges, professor of international relations at the London School of Economics. “The Lebanese model established since the end of the civil war in 1990 has failed. It was a house of glass, and it has shattered beyond any hope of return.”

The implications are worrying, he said. Lebanon occupies a uniquely fragile position as a country in a state of war with one of its neighbours (Israel), located next door to another war (Syria’s) and in the crosshairs of the conflict between the United States and Iran.

The country has served in the past as a battleground for regional and international rivalries, such as during the country’s 15-year civil war, and in 2006 when Israel fought a brief war with Hezbollah, the Iranian-backed militia that now plays an important role in Lebanese politics. The region is on edge again, with Iran blaming Israel for mysterious explosions at sensitive sites inside Iran and the Trump administration doubling down on a range of sanctions against Iran, Hezbollah and Syria.

The sectarian tensions that fueled the civil war are rising, too, as the country’s political leaders, along with their followers, trade blame for the crisis.

The politicians today are drawn from the same sectarian dynasties that fought the war and turned their militias into political parties. They include leaders of the Christian, Sunni, Shiite and Druze communities who took government positions and bought stakes in banks that then lent money for official projects carried out by firms owned by the officials or their friends or relatives. The elites were enriched at the expense of the poor, and the foundations of the current collapse were laid.

No one is anticipating another war soon, Gerges said. But there are expectations of deepening social and political unrest that would risk a wider conflict and perhaps draw in regional powers, as has happened in recent years in Syria, Libya and Yemen - and in Lebanon in the past.

“This isn’t your average small-country collapse,” said Mike Azar, a Beirut-based financial analyst.

Of the 6.8 million people living in the country, about 20 per cent are refugees, most of them Syrians, giving Lebanon the highest per-capita refugee population in the world, according to UN and World Bank figures. They will be the hardest-hit as prices soar beyond their meager means and as the work in the informal sector they rely upon dries up, said Nicolas Oberlin, deputy regional director of the UN’s World Food Programme.

Hundreds of thousands of Lebanese are now expected to join them in poverty, he said. The WFP already feeds 750,000 Syrian refugees in Lebanon. Now, for the first time since the 2006 war with Israel, the organisation plans to start distributing food to hungry Lebanese with the expectation of reaching an equivalent number by the end of the year.

The Lebanese themselves could become refugees as those with the ability to do so seek to flee the country, said Nasser Saidi, a former Lebanese economy minister who is now a financial consultant in Dubai. “There could be a massive refugee crisis,” he said. “Is this what Lebanon and the rest of the world want? Do they want another failed state on the Mediterranean?”

Yet there is no sign that the world is prepared to step in to help. Six weeks of talks between the government and the IMF have hit a dead end, stalled by arguments among members of the Lebanese delegation over how much money has been lost and how to distribute the losses, according to three people familiar with the talks.

“It has been really difficult,” Kristalina Georgieva, the IMF’s managing director, told reporters late last month. “The core of the issue is whether there can be unity of purpose in the country.”

Lebanon’s Western allies long ago made it clear that they won’t help out until the government undertakes to fix the corrupt and bloated public sector. An $11 billion package of loans and investments has been on offer since 2018 - on condition that the government undertake some limited changes. It has not.

Gulf states, which piled in to help rebuild after the 2006 war, have said they will not offer any more assistance to a country in which Hezbollah, backed by Iran, is a dominant force.

Whether Lebanon’s powerful political elites will ever consent to the kind of changes that would unlock international assistance is perhaps the biggest question now. They are the chief beneficiaries of the system that bankrupted the country, and it is widely suspected that much of the missing money wound up in their pockets or in overseas bank accounts, said Dan Azzi, a Beirut-based financial analyst.

The coronavirus pandemic has contributed to the sharp downturn in the economy, but it is not the cause of the huge hole that emerged late last year in the country’s finances, Azzi said. Lebanon produces almost nothing and has relied for years on an inflow of dollars from the sizable number of Lebanese working overseas.

Those dollars fuelled an arrangement that Azzi and other analysts say amounted to a Ponzi scheme, under which banks offered high interest rates to lure US dollar deposits and then lent the money to the government - until the deposits ran out.

Staggering amounts are now missing from the banking system - perhaps as much as $100 billion, according to government figures.

Three-quarters of the deposits in the entire banking system were denominated in US dollars, and many ordinary Lebanese may have lost most or all of their savings, said Jad Chaaban, an economist at the American University of Beirut.

The elites are now teaming up to resist measures proposed by the government that would open the door to aid but also undermine the system that benefited them, he said. An estimated 1 per cent of the population controls more than 80 per cent of the country’s deposits, and the wealthy are reluctant to countenance any proposals that would impose a haircut on their holdings.

Financial analyst Henri Chaoul said one measure that is urgently needed and would be required as part of any IMF deal is a capital-control law to prevent the flight of money from the country. Yet politicians are resisting such a law amid indications that the wealthy have continued to shift their assets offshore, according to Chaoul, who resigned last month as an adviser to Lebanon’s IMF negotiating team, citing the government’s foot-dragging. Ordinary people, meanwhile, are restricted by their banks on how much they can withdraw.

Another typical IMF requirement, endorsed by the government’s recovery program, is for a forensic audit of the central bank’s accounts to determine where the missing money has gone. The politicians have balked at that, too, according to the people familiar with the talks.

An audit that revealed where the money went would probably implicate the political establishment, said Simon Neaime, a professor of economics at the American University of Beirut.

“God knows where we are heading and what will happen, but I fear the worst,” he said. “We are heading for the full collapse of everything, and there is no will for those in power to fix the situation because they are complicit.”