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Sunday, 08 December 2019

Lebanon meltdown

Amid stalemate in the political field, Lebanon’s economy is careering towards high inflation and endemic shortages, writes Hassan Al-Qishawi

Hassan Al-Qishawi , Wednesday 13 Nov 2019
Lebanon meltdown
Protesters rally outside Lebanon’s Central Bank (photo: AFP)
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As Lebanese protesters carried their unprecedented protest movement against the ruling establishment into its fourth week, former prime minister Saad Al-Hariri reportedly failed to persuade Hizbullah and the Amal Movement to offer a partial concession to the demonstrators on the formation of a government that combined technocrats and politicians.

On Sunday, 10 November, three highly placed sources announced that the negotiations over the formation of a new government had reached a dead end. Hizbullah stated that it would not be forced into making concessions.

A source close to Al-Hariri said that he believed that Hizbullah, Amal and the Free Patriotic Movement (FPM) were pushing for politicians rejected by the protesters to be included in the government. One of these was the FPM leader and foreign minister in the outgoing government, Gebran Bassil, who is the son-in-law of President Michel Aoun. According to the source, Al-Hariri believes that a government combining technocrats and politicians would not be able to convince Western donors to release billions of dollars in pledged aid to Lebanon and it would simultaneously anger protesters who want a complete change of leadership.

Caught in the political tug-of-war is the Lebanese economy which has taken a dangerous plunge in recent weeks. Already ailing before a government proposal to tax WhatsApp calls triggered nationwide protests last month, the economy is gripped by a severe dollar shortage. This is more perilous for Lebanon than it would be for other countries because of how the Lebanese economy depends on a fixed exchange rate and high interest rates on deposits in order to attract investors.

Banks have been struggling to forestall a flight of capital since they reopened two weeks ago. They have blocked most money transfers abroad and they have imposed curbs on hard currency withdrawals even though the Lebanese Central Bank has denied that any restrictions are in place.

The mounting demand on the dollar has generated an informal exchange market. The dollar has risen to 1,800 liras on the street, compared to the official rate of 1,507.5 liras.

Governor of the Central Bank Riad Salame has defended his monetary policy in the face of harsh criticism. Lebanon “has passed through many phases during which we were able to maintain the exchange rate”, he said, adding: “Since the beginning of 2015, we have faced sanctions that have detrimentally affected the flow of funds to Lebanon.”

The war in Syria is also among the main factors that slowed investment in Lebanon. On top of this was a reduction in Lebanon’s credit rating, several negative reports that undermined confidence in the country, and “rumours and fictions spread by people with ulterior motives”. All such factors were disincentives to investment, Salame said.

Addressing a press conference on Monday, 11 November, Salame stressed that the Central Bank “performed its role successfully, as stipulated by law, despite the pressures that have weighed on the Lebanese economy during the past two years. This was manifested in the preservation of confidence in the Lebanese lira which is instrumental to economic growth and social stability.”

“This success in maintaining the value of the lira can be measured by the degree to which it has served the Lebanese people and afforded them a dignified life,” the Central Bank governor continued. “However, the decline in economic activity and growth, which sank to zero in 2019, generated higher unemployment rates and affected many sectors of the population. We observed this in the growing inability to repay housing loans, which is why we have asked banks to be more flexible with these types of loans.”

Salame pointed out that Lebanon had a “dollarised economy”, which meant that “a steady lira is a sign of confidence in the continued flow of dollars into Lebanon.”

He lauded the “financial engineerings” that had made it possible to build up large reserves which bolstered the lira and facilitated meeting international banking standards. “We have not used public funds in these financial engineerings,” he stressed and described the demand for financial reengineering as “inaccurate”.

Keen to assure depositors above all, the Central Bank governor said that the bank had devised a mechanism to protect the assets of depositors and stressed that any losses would not be borne by them.

Riad Salame’s press conference occurred several hours after the Federation of Syndicates of Bank Employees declared a strike. Citing security concerns, the union called on workers not to report to work as of Tuesday, 12 November, until calm is restored and banking activities could resume as normal.

George Al-Hajj, the federation’s president, said the decision had been taken Monday at a meeting of the syndicate that represents 11,000 bank employees. “We call on employees to abide by our decision,” he said, adding he did not know how many banks might be closed as a result.

In justification of the decision, the federation, in a statement, argued that because of the unstable situation in the country during the previous week, working conditions had become unacceptable. Chaos prevailed in many bank branches and employees were subjected to abuse from depositors clamouring to withdraw their money, raising concerns for the wellbeing of employees.

Worried by the worsening economic situation, some Lebanese have begun to stockpile basic goods. Butchers and dairy stores are experiencing higher volumes of customers while there appear to be rushes on canned goods, grains and pulses. The recent surge may have been triggered by recent closures of petrol stations since shortages in fuel, imported with hard currency, are a harbinger of other shortages.

On Sunday, the Lebanese national news agency reported that most petrol stations in the northern Akkar province had to shut down because their tanks had run out of gas. This precipitated a rush on the few remaining open stations in the area. More and more petrol stations are closing shop with every passing day. In remarks to the press Saturday, Fadi Abu Shaqra, representative of fuel distributor companies, said that more than 60 per cent of petrol stations in the country had run out of gas.

On Monday, Sami Brax, head of the union of petrol stations, told the press that the fuel crisis in the country was caused by the Central Bank’s refusal to honour its pledge to ensure that petrol stations could obtain the full amount of money they needed for their purchases in dollars, since fuel importers require payment in dollars. Now, the bank would only guarantee them 85 per cent, forcing them to purchase the remainder of their dollar needs in the informal market. “Petrol stations are the victims because they were unable to prove they had enough to pay in dollars for their purchases, as required by importers,” Brax said. “Petrol stations suffered huge losses due to the shortage of supply, which forced a large number of them to close after their stocks ran out.”

Because of the dollar shortage, the chaos caused by the informal exchange market, the fuel crisis and other disturbing factors, Lebanese fear that food prices will shoot up as well. According to Zuhair Brou, chairman of the non-governmental Consumer Association, major food merchants unable to obtain the dollars they need from banks are selling goods to smaller merchants in local currency at the exchange rate that pleases them. He added that, on the basis of consumer complaints, his association has documented a seven per cent rise in meat prices and a more than 25 per cent hike in vegetable prices.

 

*A version of this article appears in print in the 14 November, 2019 edition of Al-Ahram Weekly.

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