The exchange rate of the Lebanese lira on the black market and in exchange offices continued to hike, reaching 2,000-2,050 Lebanese lira per dollar, exceeding the official rate by one third, by the end of last week.
While by any standards this is catastrophic for any country, in Lebanon the crisis is exacerbated by the fact that the country is lacking in resources and strategic exports.
Lebanon’s economy is primarily based on the people’s confidence in the banking system and the stability of its exchange rate, which attracts depositors’ money, particularly that of Lebanese expats who prefer Lebanese banks for their financial privacy and high interest rates.
This drastic depreciation of the lira means the erosion of depositors’ savings in the Lebanese banking system, especially after the imposition of restrictions on withdrawing dollars from Lebanese banks.
Lebanon is heading south and the indicators are dangerous in light of the country’s inability to import, and the withdrawal of businessman Samir Al-Khatib’s nomination for heading the government.
Another indicator is the statement of the office of former prime minister Saad Al-Hariri reporting “efforts exerted to make up for liquidity shortages” and ensuring basic imported commodities for the Lebanese. Al-Hariri sent “letters to the prime ministers of a number of brotherly and friendly countries, asking for help in Lebanon to secure credits for imports from these countries, to ensure the continuity of food security and raw materials for production for various sectors”.
The messages were sent to Saudi King Salman Bin Abdulaziz, French President Emmanuel Macron, Russian President Vladimir Putin, Egyptian President Abdel-Fattah Al-Sisi, Turkish President Recep Tayyip Erdogan, Chinese Prime Minister Li Keqiang, Italian Prime Minister Giuseppe Conte and US Secretary of State Mike Pompeo. Also included were German Chancellor Angela Merkel, UK Prime Minister Boris Johnson and Spanish Prime Minister Pedro Sanchez.
The Banque du Liban announced the reduction of interest rates on deposits to ease the pressure on banks, said economist Walid Abu Suleiman, adding that the announcement made no mention of reducing interest on deposit certificates — banks’ deposits in the Banque du Liban — which reduces the burden on the state’s public finances and the central bank.
Abu Suleiman said that at present there is $30 billion in foreign currency reserves, earmarked for imports and stabilising the exchange rate of the lira.
An indication of the decline of people’s confidence in the banking system, the professors association at the Lebanese University warned the banks against “fiddling with the salaries of professors”, demanding that they “pay them in full”, pointing out that, “this is not frozen money to invest in their benefits, and neither bleached nor looted. The money doesn’t smell of suspicious deals, quotas, supplies and tenders, and it is not investment funds in private businesses.”
The association added: “Don’t push the professors and their executive staff to sit at your doors and expose your actions and behaviours. The professors are ready for any move in defence of their livelihood and they are ready to work to collect their salaries directly from their source.”
The most alarming development, however, is lost credibility of the banking system in the eyes of the Lebanese people. Lebanon’s banking system hasn’t seen a worse crisis since the Civil War of 1975-1990.
There are accounts of armed clients entering banks to threaten employees due to restrictions on withdrawals. According to the Union of Bank Employees, bank workers are being cursed at and threatened by clients. This is amid the banking sector’s endeavours to avoid capital flight, prevent the majority of cross-border cash transfers, and impose restrictions on withdrawals in hard currency.
The crisis is Lebanon’s most dangerous because most of the Lebanese banks’ investments are concentrated in sovereign debt. Sovereign debt instruments represent more than 60 per cent of total assets in the banks’ budgets.
Lebanon is among the highest indebted countries in the world, compared to the size of its economy. Public debt amounts to about 150 per cent of GDP due to the hike in the debt service ratio and the increase in government spending coupled with a high budget deficit.
Lebanese banks also have one of the world’s highest percentages of assets in relation to the size of the economy, which means that Lebanon had a strong, rich banking system, albeit one that lends to a country that suffers from excessive borrowing.
The public tend to put the blame entirely on the banks. Despite the accusations directed at Lebanese banks of corruption — which is in each of Lebanon’s sectors — the banks are not solely responsible for the crisis. The political and financial systems of the country, in addition to regional and international developments, contributed to the crisis.
The fixed exchange rate, corruption and the absence of strong political leadership helped postpone the emergence of the crisis until it reached this catastrophic level.
The stability of the exchange rate helped attract depositors’ money, but it encouraged imports and weakened local industry and agriculture, which were already suffering from high energy and labour costs, and land scarcity.
Lebanon’s choice after the civil war, led by late prime minister Rafik Al-Hariri, was transforming the country into the region’s service and financial hub, and to depend on tourism and banking as two main industries. This is why Al-Hariri passed on floating the local currency, and instead worked on fixing its exchange rate.
Lebanon’s economy became based on dollarisation, tourism revenues, attracting deposits and real estate units purchased by the Lebanese and foreigners.
However, with consecutive crises after Al-Hariri’s assassination, and lately the Syrian crisis, in addition to the deterioration of Lebanon’s — particularly Hizbullah’s — relations with Gulf countries, Gulf tourists no longer travelled to or bought real estate in Lebanon.
Then deposits regressed in Lebanon’s banks due to multiple factors, including the high interest rate of the dollar in the US, and US sanctions on Hizbullah.
Regardless the criticism directed at his liberal approach, based on tourism and banking, Rafik Al-Hariri was a strong figure on the economic level. Since his assassination, however, a series of political crises hit the country that hasn’t since witnessed emerge a leading figure with the ability to take initiative.
The ruling leaders tried to take Al-Hariri’s path, which is to address low economic growth and weak state revenues by borrowing from banks without real investments, or even encouraging investments, to strengthen the economy and expand the tax base.
In addition, sectarian quotas, the weakness of the state, and corruption have reduced Lebanon’s ability to collect taxes and fees, for services that are already deteriorated. A large part of the Shia suburb, for example, does not pay for electricity.
As a result, state expenditure increased while revenues remained fixed. The difference in value was made up for by borrowing the main state expenditures, thereby increasing debt on an economy that maintained the same size.
A report presented before the US Congress expects Lebanon to continue deteriorating unless there is international assistance. Yet the majority of countries will condition aid upon political and economic factors.
Western countries want to bring to a halt corruption, which is a matter that touches all of Lebanon’s political forces.
The US wants to reduce the influence of Hizbullah, that in turn doesn’t want to relinquish power, especially after its 8 March forces won the latest parliamentary elections by a majority, and its ally, Michel Aoun, rose to the helm.
Hanin Ghaddar, a researcher at the Washington Institute for Near East Studies, presented a report to the Subcommittee on Middle East and North Africa Affairs and International Terrorism in the US House of Representatives saying the Lebanese are aware that the economy cannot be revived with the same sectarian political system, stressing that the country will not be able to survive without foreign aid.
Ghaddar warns of the possibility of Lebanon’s bankruptcy, at which point the state will not be able to pay the salaries of public sector employees, including members of the army and security forces. Foreign aid is necessary to save the country from total collapse and utter chaos.
However, Ghaddar said, aid should be conditional upon guarantees of the sovereignty of the state and the arrival of new, non-corrupt politicians in power.
In her report, Ghaddar calls for the formation of a government of independent technocrats and holding early elections being the two main conditions for Lebanon to obtain financial assistance.
*A version of this article appears in print in the 12 December, 2019 edition of Al-Ahram Weekly.