Beirut on the brink

Regardless of corona, Lebanon is at economic breaking point

Lebanon's economy is imploding and with it social stability. While the country’s politicians understand the depth of the crisis, they have used the coronavirus lockdown, argues Maha Yahya, as an chance to settle old scores and – following months of popular rejection – stage a comeback

The Lebanese are facing a perfect storm of challenges, including a political crisis, not to mention a triple fiscal, banking and exchange rate crisis. The government recently acknowledged that the banking sector alone had accumulated losses of $83 billion. The Lebanese pound is in free fall, trading at around LL4,000 to $1, while the official exchange rate is LL1,500 to $1.

Recent consumer price index reports show price hikes of over 60 percent for some basic goods since March. Inflation for 2020 has been estimated by the government at 25 percent.

The economy is in deep recession, the private sector is strapped for cash due to informal capital controls imposed by an illiquid and possibly insolvent banking sector, and government revenues have collapsed. A stimulus package is needed to breathe life into the economy, but none has been forthcoming.

This crisis is not the outcome of months of protests against the political class, nor is it the consequence of measures taken to deal with the coronavirus. Rather, it is the result of decades of colossal political and economic mismanagement and corruption enabled by a sectarian power-sharing system.

The curse of vested interests

A self-defeating logic has prevailed in the country for the past seven months. Lebanon needs an immediate injection of dollar liquidity to support its economy. For that, the government must present a viable economic and financial plan through which it can negotiate external support, particularly with the International Monetary Fund (IMF), the only institution capable of an immediate disbursement of budgetary support. The IMF seal of approval would, in turn, open the door to assistance from other entities, including the European Union.

However, the IMF will only respond to a transparent and measurable reform plan. And that is where Lebanon is continuing to waver. The policies required to address Lebanon’s daunting problems include spending cuts in the public sector, ending the hijacking of state institutions and, perhaps most important, reform of the highly inefficient electricity sector, which contributes greatly to the annual budget deficit.

Yet most of the reforms would undermine the vested interests of the politicians and parties, who thus far have proven unwilling to accept the pain of adjustment. The political cost of necessary austerity measures would also lose these parties support among their political clients. As a result the government’s approach to the crisis has been ad hoc and inconsistent.

Facing a 'Great Depression'

This has had two consequences. First, Lebanon is in the midst of a deep recession. Dollar shortages have forced the economy to adjust to lower imports, while the pressure on public finances has triggered sharp cuts in spending (excluding essential spending).

The economy is experiencing a significant contraction, with some experts suggesting it may be in the order of 10–15 percent – equivalent to what the United States experienced during the Great Depression. Second, the dramatic depreciation of the Lebanese pound and the fact that Lebanon is highly reliant on imports, has resulted in high inflation, resulting in a rapid erosion of real income among Lebanese.

This double shock has had enormous and debilitating social consequences, which may have existential repercussions for the country. The scale of wealth destruction today is catastrophic. The middle class is becoming poor as more than 1.6 million Lebanese are unable to meet their basic needs. Unemployment is skyrocketing, with some 200,000 individuals said to have lost their jobs prior to the coronavirus lockdown. The number is surely higher among the youth.

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