Crisis following a series of catastrophes
“To hell, of course,” Lebanese President Michel Aoun responded to a reporter’s question about where the country is heading during his September 2020 speech on the challenges of forming a government. The previous one retired due to the explosion in the port of Beirut. Two years later, it became finally clear: this is the only promise of the Lebanese government, which it has kept.
By 2022, the man-made crisis, which can be confidently blamed on the Lebanese authorities, has only worsened. Economic indicators show only one side of the collapse: inflation is expected to hit 178% in 2022, on top of about 155% the previous year. The poverty rate in Lebanon has doubled from 42% in 2019 to 82% in 2021. Prices for consumers have increased several times, the official exchange rate and the exchange rate on the black market differ by 20 times. The price of bread, already subsidized by the state, has more than doubled in half a year since March 2022 due to the situation in the wheat market caused by the Russian invasion of Ukraine. The state is able to provide no more than a few hours of electricity per day or per month, depending on the region of the country. Fuel prices in Lebanon, which is completely dependent on imports, have skyrocketed: if before the crisis a minibus ride cost 2,000 Lebanese pounds, today it costs 40,000 pounds.
By 2022, the man-made crisis, which can be confidently blamed on the Lebanese authorities, has only worsened
Lebanon has been hit by the biggest wave of emigration since the civil war of 1975-1990. Among those leaving the country – all any demanded specialties, including professionals in the field of medicine. According to WHO, about 40% of doctors have left permanently or temporarily work abroad. But the total collapse of the state prevents even emigration: it is impossible to get a new identity document in the country, because the passports simply ran out.
On October 17, 2019, anticipating a crisis and furious at the absolute inaction of the authorities, hundreds of thousands of people took to the streets in all cities of Lebanon and demanded radical changes. Many observers had high hopes for the protest, which was taking place at the same time as rallies elsewhere in the Middle East. Their flamboyant feminist and anti-capitalist nature, anti-sectarian unity of protesters against the Lebanese establishment inspired many hope for the emergence of new independent political forces and leaders of civil society. The Lebanese, calling their movement a revolution, demanded a revision of the existing political system, the departure of old leaders, and total economic and social reforms. After 12 days of protests, Prime Minister Saad Hariri resigned. But the revolution never materialized. The leaderless protest did not create an alternative structure that could replace the current government. The army resorted to excessive disproportionate brutality in order to disperse the protesters.
During the protests, which involved a quarter of the Lebanese, the usual economic activity came to a halt. Investors, fearing losses due to instability, withdrew funds, and the entire financial system, against which the depressing state of the protesters, collapsed under a mountain of debt accumulated by decades of corruption and nepotism. The banks literally ran out of dollars. During the protests, they closed for several weeks, and when they reopened, the Lebanese found that their deposits were frozen without any legal basis. The attempt to prevent a banking panic fatally hit the confidence in the banking sector: as a rule, banks or authorities can restrict cash withdrawals and transfers abroad to stop the outflow of money from the country, but this did not happen here. For example, only Nadi Salameh, the son of the head of the Central Bank of Lebanon, withdrew $6.5 million from his accounts abroad. Lebanese have every reason to believe that their savings have disappeared and are not ready to give money back. The amount of funds “stuck” in Lebanese banks is estimated at more than $100 billion. The black market for the currency emerged simultaneously with the rapid depreciation of the Lebanese pound.
Lebanon's financial system has collapsed under a mountain of debt built up from decades of corruption and nepotism
On top of that, in March 2020, the COVID-19 pandemic began, further worsening the socio-economic situation. A few months later, one of the most powerful non-nuclear explosions in history occurred , destroying a third of central Beirut. It was the corruption, nepotism and negligence of the government that resulted in a disaster that none of them could imagine. On the evening of August 4, a fire broke out in one of the warehouses in the port of Beirut, and a few minutes later there was an explosion. He caused great destruction to the capital: the port is located in the heart of Beirut, just a few kilometers from densely populated residential areas. More than 200 people died, several thousand were injured, 300 thousand people were left homeless.
The results of the explosion investigation are shocking with information about banal negligence. Dangerous cargo has been in the port since 2013, when the port authorities arrested the Rhosus ship due to technical problems and non-payment of port dues. The crew, left without salaries, left the ship. Correspondence documents between port officials and authorities examined by OCCRP showed that the port authorities were concerned about the explosive cargo and were trying to dispose of it. However, after unsuccessful attempts to do something with him, they simply forgot about him. Tons of saltpeter were stored along with fuel and fireworks. Not a single culprit has yet been punished, politicians in every way impeded the progress of the investigation. The Lebanese capital suffered destruction estimated at billions of dollars, and Lebanese and foreign volunteers and NGOs, and not the state, were involved in helping the inhabitants and rebuilding the city.
Robbery instead of recovery
The Collapse of Lebanon is the story of how a project to rebuild a country once considered an island of peace and prosperity in the region fell through due to the corruption and embezzlement of sectarian elites. The processes that created the crisis were launched decades ago and have roots in the very foundation of the Lebanese state structure. After the end of the civil war of 1975-1990, control over the resources of the state was seized by those who decided that it was more profitable for them to plunder the treasury together than to fight each other for control over it. This is exactly what they did in the framework of the projects for the post-war reconstruction of the country.
The standard of living of the Lebanese and the corresponding economic indicators grew in 1990-2000, and even the international crisis of 2008 did not affect the country's economy. But along with prosperity, public debt and economic inequality grew . By financing the recovery with loans, the authorities have accumulated one of the largest amounts of external debt relative to GDP in the world. The Lebanese banking sector worked according to the classic principle of a financial pyramid , which offers very favorable, but obviously impossible conditions, and the funds come from the constant attraction of new participants. Banks offered unprecedentedly high interest rates on foreign currency deposits. The central bank used citizens' deposits to fund the government's budget, which was full of corruption and embezzlement. The money simply ran out – and such a result was absolutely predictable. The public sector debt reached such levels that a default was inevitable and occurred in March 2020.
Lebanon's central bank used citizens' deposits to finance a government budget full of corruption schemes
Lebanon, as a country that imports 80% of its entire consumption, needs dollars to maintain its trade balance. The Lebanese economy is highly dollarized , but there are not many sources of dollars. There has been no growth in the real sector of the economy for ten years, and the only serious export is human capital. Lebanon received the dollars it needed through tourism, revenue from the port of Beirut, aid from other countries, but primarily from Lebanese abroad sending money to family back home. Over the past decade, remittances have averaged 15–20% of Lebanon's GDP.
Such a fragile system, relying on external funding from ordinary people, is subject to shocks due to random events. The outbreak of civil war in neighboring Syria, which is economically closely linked to Lebanon, was one such shock. The flow of capital into the country has decreased. The state was practically uncontrolled by anyone: in 2014-2016, Lebanon did not have a president, and the elections in 2018 were held five years late. The more the influence of Hezbollah and Iran increased, the less Saudi Arabia, which rivals Iran, provided financial assistance. Western countries provided grants for specific infrastructure development projects, but it often turned out that the money was stolen, and the announced projects never existed – they were invented in order to obtain funds.
As a result of the liquidity crisis, several different exchange rates have been established in the country: an official fixed rate of 1500 pounds to the dollar, " dollar " for 8000 pounds – a fixed rate at which Lebanese can convert their frozen foreign exchange deposits into the Lebanese pound, and "fresh dollar", the black market rate at which you can buy cash is between 23,000 and 34,000 pounds to the dollar this year. At this rate, apartments are rented and prices for goods are set.
As a result of the liquidity crisis in Lebanon, several different exchange rates have been established
Lebanon's unique system of political organization developed after independence in 1943, when political representation was organized on the basis of confessional groups, and took its current form after the civil war. The seats in parliament are equally divided between Muslims and Christians. The President of Lebanon, according to the constitution, can only be a Maronite Christian, the Prime Minister – a Sunni Muslim, and the head of Parliament – a Shiite Muslim. Each region is assigned a certain number of parliamentary seats for each of a variety of denominations, depending on demographics.
At first glance it seems that this system is built on equal political representation of all Lebanese, but in reality it is an attempt to divide the spheres of influence between the elites. The parties view state institutions as a source of profit and compete for control of resources rather than religious values. The most powerful and most armed of these parties, Hezbollah , is considered by many to be responsible for all of Lebanon's ills. Of course, the role of Hezbollah in the collapse of the country is undeniable: the organization has de facto control over the border between Lebanon and Syria and over the port – it was Hezbollah's politicians who most hindered the investigation of the explosion in the port of Beirut. At the same time, Hezbollah has many allies among the country's political forces. However, this is not the only paramilitary organization in Lebanon: Christian, Sunni Muslim and Druze parties also have an armed wing, albeit a small and informal one. The main current politicians of all ethno-confessional groups are former leaders of the civil war militias or their sons. That is why one of the main slogans of the October 2019 protests was “Everything means everything.”
Only a temporary fix
For the past three years, virtually no one has ruled Lebanon: the interim administrations of the party, resigning one after another, have not taken steps to bring the country out of the crisis. The future of the country depends on whether Lebanese politicians can form a government, elect a president and implement the reforms that the International Monetary Fund has made the main condition for further bailouts. Now traditional donors are signaling that without major changes, Lebanon will not receive any more money.
As part of an April 2022 agreement between the IMF and the Lebanese government, the organization will provide access to approximately $3 billion in the first phase of a larger program to rescue the Lebanese economy. Conditions set by the IMF include cuts in government spending, such as food subsidies and public sector wages, as well as tax increases, privatization, and currency devaluation. Such measures will further hit the most economically vulnerable sections of the country.
Conditions imposed by the International Monetary Fund on Lebanon will further hit the most economically vulnerable residents
The International Monetary Fund's proposal may seem like Lebanon's only and last option, but this temporary solution to the problem doesn't even touch its sources. The system of theft, bribery and impunity will not disappear and is likely to continue the vicious cycle that brought the country to a critical situation. Such a mechanism has already been applied in several countries without much success , for example in Greece, Egypt and Argentina. The ideas of international leaders and organizations about the necessary reforms and changes diverge from what the Lebanese opposition activists demand, and even more so from the interests of the authorities.
In May 2022, the first elections since the beginning of the crisis were held, but the formation of the government and the election of the main persons of the state are once again delayed – there is no clear winner in the parliament. Previously, Hezbollah's largest bloc lost its majority: the organization retained its seats, but their Christian allies, the Free Patriotic Movement, lost. The position of the largest Christian party has shifted from allies of Hezbollah to their opponents, the Lebanese Forces party, backed by the US and Saudi Arabia. Also elected were 13 independent candidates associated with the civil movement that developed amid the mass protests of 2019. Delays in forming a government in Lebanon are more the rule than the exception: the previous government was formed after 13 months of constantly deadlocked negotiations.
The foreign political situation also does not add confidence in the bright future of Lebanon. The conclusion of protracted negotiations on the renewal of the agreement on the Iranian nuclear program is approaching. If it is achieved, Iran will have to curtail its nuclear program in exchange for the lifting of Western sanctions. This will allow Iran to make much more profit from oil exports, and thus direct more funds to its allies and proxies, including Hezbollah. That is why Israel opposes the deal, seemingly interested in Iran not having nuclear weapons. At the same time, Lebanon and Israel are trying to reach an agreement on maritime boundaries to develop gas fields in disputed waters. Production of offshore gas could help Lebanon cope with the energy and economic crisis. Hezbollah chief Hassan Nasrallah has threatened Israel with escalation if Lebanon doesn't get the desired control over the gas field in talks with Israel.
Offshore gas production could help Lebanon cope with energy and economic crisis
The parliament, paralyzed without a clear majority, is waiting for another test in October 2022, when parliamentarians will have to elect a new president. This can lead to an even greater aggravation of socio-economic tension. The daily life of the Lebanese depends on the ever-changing and ever more unstable situation in the global markets for fuel and food due to the Russian invasion of Ukraine. The number of clashes between warring communities has increased. Constant stress due to the lack of almost everything leads to the fact that people are already on the verge, they go to desperate acts, and this tension can turn into small but armed escalations. For example, one Lebanese took hostage employees of a bank branch in Beirut. He entered the premises with a rifle and spilled gasoline, demanding that the bank give him the money frozen in the account. He shouted out that they needed to pay for the treatment of his father. Outside the bank, people were chanting, "You're a hero!"