Lebanon is in crisis. 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. “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 crisis has been caused by poor shape of the economy and sectarian divide reflected in political bickering and uncertainty marked by ineffective governance, often mixed with institutional corruption. The economic situation in Lebanon has pushed tens of thousands people into poverty and triggered large anti-government protests. The Lebanon government was compelled to resign on August 03, 2020. Announcing the move the outgoing Prime Minister Hassan Diab said his government was taking “a step back… to stand with the people, in order to wage the battle of change with them”.
Causes of Lebanon crisis
Discontent in Lebanon has been brewing for years. In late 2019, a plan to tax Whatsapp calls spilled over into mass protests against economic turmoil and corruption, which eventually led to the then government’s resignation. Coronavirus had curbed the protests, but the financial situation continued to worsen and last week’s deadly explosion was seen by many as the deadly result of years of corruption and mismanagement. People have taken to the streets again, and there have been clashes between protesters and police.
The immediate igniting factor was last week’s deadly explosion causing huge loss of life and property. The government’s plans to investigate the cause of the explosion were not enough for most people, who have lost all faith in the political elite. Before the cabinet’s resignation, a number of ministers had offered to step down. Although the government has resigned now, butt the end of this government does not necessarily mean an end to the anger. Last year’s protests led to the formation of the government which has now been forced to step down over the same accusations of corruption. In his strongly worded speech, Mr Diab blamed “a system of corruption… deeply-rooted in all the functions of the state. One of the many examples of corruption exploded in the port of Beirut, and the calamity befell Lebanon.” He added that corruption cases are widespread in the country’s political and administrative landscape; other calamities hiding in many minds and warehouses, and which pose a great threat, are protected by the class that controls the fate of the country.
Lockdowns following the Covid pandemic and intermittent power cuts even before that led to an economic crisis resulting in remarkable decline in Lebanon’s gross domestic product from about $55 billion the previous year to about $44 billion this year. The crisis became worse when the COVID-19 pandemic affected the Lebanese economy. The already battered economy of Lebanon suffered fresh blow with the port blast on August 7, 2020.
The economic collapse of Lebanon 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 reforms and outside scrutiny that would unlock international aid. Talks with the International Monetary Fund to secure a $10 billion loan have stalled.
Even before the coronavirus pandemic at the start of this year, Lebanon seemed to be headed for a crash. Its public debt-to-gross domestic product (what a country owes compared to what it produces) was the third highest in the world; unemployment stood at 25%; and nearly a third of the population was living below the poverty line. Late last year also saw the unraveling of what analysts said was effectively a state-sponsored pyramid, or Ponzi, scheme run by the central bank, which was borrowing from commercial banks at above-market interest rates to pay back its debts and maintain the Lebanese pound’s fixed exchange rate with the US dollar.
With a 152% debt to GDP ratio, Lebanon is the third most indebted country in the world after Japan and Greece. Interest payments consume almost half of government revenues, crippling public finances. A public sector wage increase in 2017 and higher interest rates have added to the budget deficit.
Lebanon has witnessed in the past few months a shortage in the U.S. dollars caused by economic slowdown and the drop in cash injections from Lebanese abroad, reducing the central bank’s foreign currency reserves and leading to a shortage in dollar for businesses and individuals.
At the start of October 2019, a shortage of foreign currency led to the Lebanese pound losing value against the dollar on a newly emerged black market for the first time in two decades. When importers of wheat and fuel demanded to be paid in dollars, unions called strikes. At the start of October 2019, a shortage of foreign currency led to the Lebanese pound losing value against the dollar on a newly emerged black market for the first time in two decades. When importers of wheat and fuel demanded to be paid in dollars, unions called strikes. Then, unprecedented wildfires in the country’s western mountains highlighted how underfunded and underequipped the fire service was. In mid-October, the government proposed new taxes on tobacco, petrol, and voice calls via messaging services such as WhatsApp to drum up more revenue, but a backlash forced it to cancel the plans.
People suffering amid rampant corruption
Lebanon ranked 137th out of 180 countries (180 being the worst) on Transparency International’s 2019 Corruption Perceptions Index. The watchdog says corruption “permeates all levels of society” in Lebanon, with political parties, parliament and the police perceived as “the most corrupt institutions of the country”. It says it is the very system of sectarian power-sharing which is fuelling these patronage networks and hindering Lebanon’s system of governance.
People Lebanon were getting increasingly angry and frustrated about the government’s failure to provide even basic services for quite some time. They were having to deal with daily power cuts, a lack of safe drinking water, limited public healthcare, and some of the world’s worst internet connections. Many blamed the ruling elite who have dominated politics for years and amassed their own wealth while failing to carry out the sweeping reforms necessary to solve the country’s problems.
Economic woes and Sectarian divide: A legacy from the past
Tens of thousands of Lebanese took to the streets, leading to the resignation of Western-backed Prime Minister Saad Hariri and his unity government. The debacle unleashed a surge of discontent that had been simmering in Lebanon for years. Protests cut across sectarian lines – a rare phenomenon since the country’s devastating 1975-1989 civil war ended – and brought the country to a virtual standstill. Newly appointed Prime Minister Hassan Diab subsequently announced that Lebanon would default on its foreign debt for the first time in its history, saying its foreign currency reserves had hit a “critical and dangerous” level and that those remaining were needed to pay for vital imports.
Huge costs in Lebanon’s post-war reconstruction were a leading precursor to today’s financial problems. Achievements evidently favoured the country’s rich and mostly focused on gleaming property developments in the capital, Beirut.
Lockdown to contain Covid-19 aggravates the Crisis
In the wake of the first Covid-19 deaths and a surge in infections, a lockdown was imposed in mid-March to curb the spread of the disease. On the one hand, it forced anti-government protesters off the streets, but on the other, it made the economic crisis much worse and exposed the inadequacies of Lebanon’s social welfare system. As prices rose further, many families were unable to buy even basic necessities. Growing economic hardship triggered fresh unrest. In April a young man was shot dead by soldiers during a violent protest in Tripoli and several banks were set ablaze. The government, meanwhile, finally approved a recovery plan that it hoped would end the economic crisis and win support from the International Monetary Fund (IMF) for a bailout package worth $10bn.
By the time the coronavirus restrictions began to be lifted in May, the prices of some foodstuffs had doubled and the opposition leader Mr Diab warned that Lebanon was at risk of a “major food crisis”. “Many Lebanese have already stopped buying meat, fruits and vegetables, and may soon find it difficult to afford even bread.
Lebanon’s sectarian divide prohibits solution to the crisis
Most analysts point to one key factor: political sectarianism, or groups looking after their own interests. Lebanon officially recognises 18 religious communities – four Muslim, 12 Christian, the Druze sect and Judaism. The three main political offices – president, speaker of parliament and prime minister – are divided among the three biggest communities (Maronite Christian; Shia Muslim; and Sunni Muslim, respectively) under an agreement dating back to 1943. Parliament’s 128 seats are also divided evenly between Christians and Muslims (including Druze). It is this religious diversity that makes the country an easy target for interference by external powers, as seen with Iran’s backing of the Shia Hezbollah movement, widely seen as the most powerful military and political group in Lebanon
Since the end of the civil war, political leaders from each sect have maintained their power and influence through a system of patronage networks – protecting the interests of the religious communities they represent, and offering – both legal and illegal – financial incentives.
In Lebanon the sectors such as transport and energy need urgent overhauling – especially its infamous electricity infrastructure. With the country unable to meet local demand for decades now and resorting to rationing electricity, most citizens use back-up generators for several hours during daily national blackouts. After eight years of civil war and massive destruction of its own infrastructure, Syria sold electricity intermittently to Lebanon in 2017 and 2018, while at the same time blocking efforts by Jordan, a country which enjoys a surplus in electricity production, from selling power to Lebanon.
On 8 April, after a round of highly publicised meetings, the Lebanese government unanimously approved an electricity reform plan. Steps towards fixing the power sector are viewed as a critical test of the government’s will to forge ahead with long-delayed reforms that would help Lebanon unlock $11bn (£8.5bn) in funding pledged by donors last year at a key investment conference in Paris.
Also the country needs political stability and government of the country needs people’s trust. A deep mistrust of politicians, an absence of a functioning government for long periods of time and ongoing geopolitical disputes have hampered the reform efforts.
The Syrian crisis has also played its role in the Lebanon Crisis and it would be better for the latter if the Syrian crisis ends. War in Syria has aggravated weaknesses in the Lebanese economy. Nearly 1.5 million Syrian refugees were displaced to Lebanon at the height of the war according to Lebanese government statistics – nearly one quarter of the population. The additional strain further compounded existing issues in public services such as education, healthcare and the national grid. Financing Lebanon’s deficit also depends heavily on critical transfers it receives from its large diaspora. In October 2018, the Carnegie Endowment for International Peace reported that the marked drop in remittances from Lebanese nationals in the Gulf had pushed the country further into debt. Worsening prospects in the Gulf region and lower oil prices have affected significant numbers of Lebanese expatriates in oil-producing Gulf states.