A new Lebanese government has just been formed. It faces an uphill battle in addressing significant economic and political challenges, and its success will be critical for Lebanon’s revival and sustainability.
Lebanon is going through a perfect storm that is gaining intensity. The country is in the midst of an economic collapse, compounded by political deadlock, all wrapped in a broader crisis of legitimacy because a significant portion of the population has lost confidence in its political leadership. The Lebanese system is no longer operating effectively. Unless a new social contract is agreed between citizens and the state, the country may descend into chaos.
The priority of the new government of Prime Minister Hassan Diab is to slow Lebanon’s economic and financial freefall. To do so, it must address several simultaneous crises. With the public debt estimated at 150 percent of GDP, the government must bring spending under control and find ways of reimbursing what it owes. This will not be easy as the balance of payments deficit, driven by a perennial trade deficit, is expected to be $8 billion at the end of 2020. Exacerbating this is the fact that the deepening recession in the country has eaten into government revenues, so that in 2020 economists anticipate a budget deficit of some $3 billion, excluding interest payments.
In parallel to this, a crisis in the banking system has further impacted on public finances. For the last 27 years U.S. dollars and Lebanese pounds have been used interchangeably in the economy. But today, with almost half of bank assets invested in the country’s sovereign debt and with the central bank, and with another quarter representing risky private-sector claims, banks are effectively illiquid and some are possibly insolvent. They have ceased most normal banking activity, therefore are banks only in name. Though chaotic and inefficient capital and banking controls were recently put in place, the sector is experiencing a run on deposits. Normally, the central bank would provide liquidity to the banks. However, today it is constrained by a limited supply of U.S. dollars and by fears that if it compensates by injecting Lebanese pounds into the economy, this will further depreciate the domestic currency.
The result has been devastating for the Lebanese. Since the beginning of the protests last October 17 and the resignation of former prime minister Sa‘d al-Hariri on October 29, socioeconomic conditions have only worsened. Informal capital controls and restrictions on cash withdrawals are triggering panic as people try to get to their hard-earned deposits. A slash in credit lines has brought the economy to a standstill, with projections of negative growth in the range of 5–10 percent for 2020. Businesses are closing and unemployment is rising rapidly. Thousands of Lebanese are said to have lost their jobs in the past few months. On the parallel market the pound has lost 30–40 percent of its value and Lebanon is fast becoming a cash economy.
Bankruptcies, expanding poverty, and a general decline in living standards have become hallmarks of life for many Lebanese. Around 760,000 are considered extremely poor today, meaning that they live on less than $4 a day and cannot afford the basic caloric intake per day. Shortages in basic goods as well as fuel and medicine are becoming more apparent, while financial inflows have declined dramatically. Seven individuals are reported to have taken their lives in the last month as a direct result of the economic crisis.
The toolbox for addressing this calamitous economic and financial situation exists. An independent group of Lebanese development specialists, economists, and finance specialists recently outlined a plan to help overcome the crises in a way that would ensure equitable burden-sharing and protection of the most vulnerable. One hundred and fifty-one countries have gone through a financial crisis of sorts since the 1970s. Of these a mere 2 percent faced the simultaneous public finance, currency, and banking shocks that Lebanon is facing. And of the countries that restructured their debt, most gained sufficient international support to go out and borrow again.
How policymakers address this challenge matters. A comprehensive approach is needed, in which different policies are implemented in parallel as part of a larger strategy. Yet last week parliament passed a budget for 2020 that assumed a significant reduction in debt servicing, without a clear road map for how to achieve this or an assessment of its impact on devaluation and inflation.
This is in line with current patterns of political behavior in the country. Despite the protests and the acute economic crisis, politicians have continued to fiddle, privileging their personal and political agendas over Lebanon’s interests. It took them three months to form a new government, and even then one that would preserve their representation in the system and protect their privileges.
However, this tragedy is not just about the present. It is also about the future and what it means for younger generations of Lebanese. Short-term measures on the economic front will only make the adjustment that much harder to deal with and will burden generations of unborn Lebanese with debt. Action on the economic and fiscal fronts, though badly needed, will remain insufficient. What months of protests by a broad cross-section of society have shown is that Lebanon is in need of a new social contract and a new political process.
Beyond declining economic conditions, a profound crisis of legitimacy is driving people into the streets to denounce their ruling class and the government it has formed. Protestors have called for early parliamentary elections and a new president. At face value, these demands are driven by mistrust of most state institutions and institutions of associational life, public or private, including the government, parliament, political parties, banks, the security services, media outlets, syndicates, and labor unions.
Opinion polls illustrate this mood. In 2018, a Pew poll found that 77 percent of Lebanese said they did not trust their government to do what was right for Lebanon, while 84 percent believed the economic situation was bad. A majority of 80–85 percent expressed a lack of trust in institutions, including parliament, political parties, and government. Confidence in the banking sector has plummeted while people are polarized with regard to the security services. Most media outlets are directly owned by politicians, while professional syndicates and labor unions have mostly been coopted by them.
The roots of the problem lie in a political and economic model that has characterized Lebanon since its independence in 1943. Politically, a national accord enshrined a power-sharing system based on sectarian identity. At the same time, Lebanon was billed as a merchant republic whose economy was primarily service oriented and rested on the twin pillars of banking secrecy and tourism.
This model was reaffirmed in the 1990s, after Lebanon’s civil war, during the phase of reconstruction. The political settlement that ended the war further institutionalized the sectarian power-sharing model. The dominant role of wartime sectarian politicians in the postwar period virtually ensured that they would share national wealth among themselves to fuel their patronage networks.
In parallel, the prominent role given to Hezbollah by Syria, the leading power in Lebanon between 1990 and 2005, transformed the country into a hub for the party’s “resistance” against Israel and its allies. While Beirut’s rebuilt downtown area was reconfigured as a center for leisure, a few kilometers away Hezbollah was building up its military. Today the party has become a vital defender of the corrupt sectarian order against the changes demanded by protestors, because the system effectively protects the party and its weapons.
These two sides of Lebanon’s schizophrenic character—the merchant republic alongside a militarized organization pursuing an agenda of resistance—reflected the uneasy regional balance that existed in the early years of the postwar period. Lebanon as a business hub open to the Arab world and the West embodied the interests of one of the sponsors of the postwar settlement, Saudi Arabia, and the kingdom’s main representative in Lebanon, the late prime minister Rafiq al-Hariri. Lebanon as a “resistance” hub mirrored the interests of Iran and Syria, the second regional sponsor of the agreement to end the war, who each for reasons of its own gained from the pursuit of conflict against Israel. Today, that implicit understanding no longer exists amid the Saudi rift with Iran and Syria.
Lebanon’s economic collapse is a further indication that the postwar model has reached its end. Capital inflows, particularly those from the Gulf, that sustained state spending have dropped. In part this is because of lower oil prices, which have impacted on the revenues of Lebanese expatriates living in the Gulf, but also a generalized feeling there that Lebanon has become an Iranian outpost.
What has also become apparent to the Lebanese is that their economic woes are at heart the consequences of a governance crisis. The dysfunctional sectarian system encouraged a culture of corruption and waste, allowing the political class to plunder the country. The system created an environment of equal opportunity abuse by the country’s elite at the expense of a majority of citizens. No single community has gained as a result of the system as the living standards of all Lebanese have declined. Meanwhile, the politicians are still focused on scoring political points while the country sinks into the abyss, keen to protect their vested interests in a political and economic order that can no longer sustain such behavior.
A financial crisis as profound as the one that Lebanon is facing today requires long-term solutions supported by a political process that reestablishes trust in the system. This must begin with early elections, based on a credible electoral law, that reestablishes parliamentary legitimacy. In parallel, a national process to rethink Lebanon’s political framework has to be launched. This must be one in which all Lebanese, especially those who have taken to the streets or who see themselves as politically marginalized, feel that their concerns are addressed. Without this, the Lebanese will simply not be willing to silently bear the pain of necessary economic adjustments while their political leaders reap the benefits of a discredited political system.
