What we are witnessing today is the result of the wide disparity between the monetary and economic policies which are the root cause of our current situation, and the biggest disaster is the deficit and huge accumulation of debt we are facing, which may be the worst in the history of Lebanon’s economy.
30 years ago, after the horrors of the civil war ended, the Lebanese had to deal with another nightmare when the warlords and militia chiefs took off their battle dress, replaced them with civilian suits and ties, and agreed between each other to assume power on the basis of the Taif Agreement which to this day has still not been fully implemented. They overturned the concept of democracy which is based on the principle of a ruling party and an opposition which monitors and holds accountable. Instead, an arrangement was reached which served the interests of the politicians and community leaders. This arrangement began with the overthrow of the government of Prime Minister al Hoss who was known for his integrity and transparency. From 1993 onwards, it was replaced by the governments of the late Prime Minister Rafiq al Hariri whom people thought would be the country’s saviour. Unfortunately, the opposite was true as his policies harmed the country up until the day he died and the negative repercussions of these policies continue to this day, with the growing corruption among his partisans that include ministers, directors and employees in all the sectors of the state, most of whom have become rich and prominent, thus whetting the appetite of a large number of state employees eager to follow in their footsteps and become subservient, and “kowtow to the boss”!
Lebanon’s Economy – The Dollar Supply
As is the case for any country emerging from a devastating war, without any infrastructure, economy, tourism or industries and without natural or petroleum resources, Lebanon was forced to rely almost entirely on imports with the resulting depletion of hard currencies that are very hard to obtain! When Prime Minister Hariri first came into power, large amounts of funds poured in from the Gulf countries for investment in Solidere, a project for which serious reservations were expressed – the appropriation of the centre of Lebanon’s capital where approximately 60 thousand Beiruti families were dispossessed of their properties and livelihoods. The “loot” only lasted for 4 years, after which Lebanon embarked on a borrowing spree with Paris 1, 2 and 3 which plunged the country into record debts with all the resulting burdens and foreign debts servicing and issued treasury bonds in Lebanese pounds the yields of which reached 35 and 40% causing the state to suffer massive losses. The main problem was that we were borrowing these funds, not for production but to cover the budget deficits, without having any strategy or plan for increasing the growth rate sufficiently to pay off the debts and their massive interests that today have reached approximately 3 billion dollars per year, making the country hostage to international powers. At the time, the situation nearly turned into a financial catastrophe were it not for the inflow of funds destined for reconstruction after the July 2006 war, in addition to approximately 24 billion dollars in expatriate and Arab deposits that were transferred to Lebanon during the global financial crisis of 2008, a case of one man’s loss being another man’s gain.
Lebanon’s Economy – The beginning of the end!
The turning point came in 2011 when the regional situation became explosive with the war in Syria which resulted in the blockage of Lebanese exports, particularly agricultural products en route to Iraq, the UAE, Saudi Arabia and other countries, and with the economic slowdown in the Gulf countries that led to the decline of the income of the Lebanese expatriates working in these countries and of their transfers to Lebanon, not to mention the economic recession in the country. All these factors negatively impacted the country particularly as they came on top of the floundering fiscal, monetary and economic policies, where the sources of hard currency were and still are restricted to servicing the public debt and the deficit in the balance of trade and balance of payments. As of 2016, the problem was exacerbated particularly as some of the major Lebanese banks were facing difficulties, causing the Governor of the Central Bank of Lebanon to conduct financial engineering operations that increased interest rates with the aim of attracting deposits. This encouraged investments in a rentier economy rather than in development and production, up until last year when new financial engineering operations were adopted that realized high interests and lucrative profits for banks which increased the public debt burden and contributed to a large extent to the tragic situation we are currently witnessing.
Stabilization at High Costs
Despite the quarter of a century’s worth of the above financial disasters, the policy of pegging the exchange rate of Lebanese pounds into dollars continued at high costs, in a measure that could have been effective were it not for the absence of an economic development plan combined with infrastructure development, even though it would have been better to float the exchange rate on the basis of supply and demand. This was done in complete collusion with the government with the aim of putting the country in a deficit situation to the satisfaction of donor countries and placing Lebanon under siege, similar to what occurred in Venezuela, with rising prices, stagflation, falling incomes and companies declaring bankruptcy, in a vicious circle leading to further breakdown.
Where is the Banking Sector Headed?
In the midst of this economic and financial tragedy, the banking sector which is the cornerstone of the Lebanese economy was taking the easy road with high-interest loans to the government taken from people’s deposits instead of financing productive projects that drive the economy and provide employment opportunities on the mistaken gamble that the state would not declare bankruptcy. This was all at the expense of the resident and expatriate depositors who put their faith in their country, knowing that 85% of the 2 million 200 thousand deposit accounts belong to small depositors. The state is now in a situation where it is unable to settle its debts, with the banking sector reaping profits which skyrocketed in 2018 to 2 billion 800 million dollars when these profits had not exceeded 14 million dollars in previous years.
The Truth Will Be Out
Now that all the dollar sources have dried out, all bets are finally on the conference in support of Lebanon development and reforms CEDRE, which is still under consideration! The country is struggling with its crises… The truth will be out, the country has been laid bare, the uprising of 17 October erupted, and with it, confidence in the future of the country was lost, deposits were withdrawn from the banks and placed in the homes in a bank run for the 4 billion dollars in deposits which no bank in the world can meet as the deposits are usually not available but are employed in the form of loans. The situation was further ignited by the local and western media campaigns that targeted confidence which resulted in the downgrade of Lebanon’s sovereign credit rating and of some banks which in spite of everything are still holding up and trying to meet the requirements of the people as much as possible even though deposits have reached minimum levels. Any capital control process is aimed at protecting the banks from bankruptcy and therefore protecting the depositors.
Lebanon’s Economy – Meanwhile, as we wait for a miracle
All eyes are on the new cabinet of specialists and on an innovative economic plan to be implemented in less than 3 years with controls for overseas transfers for a specific period. Brazil carried out these measures after rejecting the proposals of the International Monetary Fund to float its currency, stop subsidies for a number of basic commodities and privatize its government institutions. It focused on the production and carried out rescue measures that made it the sixth industrial country in the world. If the Lebanese government does not carry out the necessary reforms, it may have to convert the dollar deposits into Lebanese pounds, which will inevitably lead to galloping inflation and to the ruin of the country forever and ever.