The financial crisis has triggered a political uprising. A popular revolutionary movement has taken to the streets to reject sectarianism and demand an end to corruption. Nonetheless, the regime's responses to Lebanon's economic problems have so far overwhelmingly favoured the elites, suggesting that the crisis could end up being "resolved" on the backs of the poor and the middle class and in a way that further consolidates sectarian politics.

Penalising ordinary citizens

For example, the state has refused to introduce capital controls, leaving it to each bank – whose major shareholders include ruling politicians – to decide how to ration cash withdrawals. In practice, this has allowed elites to shift their capital abroad while average citizens struggle to access their deposits.

Moreover, the central bank has reduced interest rates on deposits, but not yet on public debt, thereby boosting banks' profits. It has also continued to service its foreign debt, which is mostly owed to domestic banks, despite its falling international reserves. And there are signs that it could start to sell state-owned assets to elite-connected entities at fire-sale prices.
 
The formal exchange rate, meanwhile, has been left untouched, allowing elites to access cheap dollars while average citizens confront the realities of a rapidly falling free-market rate, which is now at a 40% discount. This devaluation will accelerate when the state starts printing liras to cover civil-service wages. In fact, the central bank is already using lira to pay interest on dollar deposits (which account for over 80% of all deposits), thus setting the stage to inflate away the public debt. With the costs of debt reduction being pushed onto depositors through "liralisation" of their holdings, the banks' equity could be largely spared.
 
If this scenario materialises, Lebanon's middle class will be decimated by lower real wages and pensions and a liquidation of its savings. The emigration of skilled youth would accelerate and even the financial interests of the diaspora – upon which the system relies – would be harmed. If the sectarian system were to survive under these conditions, it would govern an impoverished population that could be controlled by ever-cheaper patronage. Lebanon would find itself in a situation similar to that of Venezuela.

Riot police fire tear gas to disperse demonstrators during a protest targeting the government over the economic crisis, near the government palace in Beirut, Lebanon, 18 October 2019 (photo: Reuters/M. Azakir)
Replace corruption, cronyism and inequality with performance, meritocracy and social justice: the Lebanese reform movement believe the country is performing far below its potential. They aim to build vibrant high-tech industries, make agriculture more environmentally sustainable, position Lebanon as a cultural powerhouse and create more synergies with the diaspora

A revolutionary manifesto

The new republic being promoted by the revolutionaries, by contrast, would take a radically different approach. The revolutionaries want to improve Lebanon, not abandon it. They believe that it is performing far below potential and that performance, meritocracy and social justice should replace corruption, cronyism and inequality. They want to build vibrant high-tech industries, make agriculture more environmentally sustainable, position the country as a cultural powerhouse and create more synergies with the diaspora.

To achieve these goals, the reform movement wants to pursue an orderly reduction of public debt, which would be underwritten with bank equity and to force haircuts on the 1% of depositors who account for more than 50% of all deposits. They support a moderate currency devaluation and radical improvement in the business climate to boost export competitiveness. And they would pursue deep fiscal restructuring, emphasising the elimination of corrupt practices and higher spending on social programmes and infrastructure. The inevitable recession would be softened with support from the international community, including the International Monetary Fund.

Today's infighting over the composition of the country's next cabinet is part of a larger battle for a new political settlement. The financial crisis poses a mortal danger to the country; but it also represents an opportunity for political change. Lebanon's future hangs in the balance.

Ishac Diwan

© Project Syndicate 2020

Ishac Diwan holds the Chaire d’Excellence Monde Arabe at Paris Sciences et Lettres and is a professor at the Ecole Normale Superieure, Paris.

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