The current situation in Lebanon is one of the three worst in global history's last 170 years.
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| [Lebanon Crisis 2021] |
The Middle East has a reputation for being a troubled and even deadly place. The fight for control over rich natural resources and access to trade routes is mingled with religious disputes and territory claims. Israel, Palestine, Iraq, Saudi Arabia, Iran, the United States, the Soviet Union, and now Russia are just a few of the countries vying for dominance. Despite the continuous battles, a little country survived in the heart of the area, which for a long time was seen as an island of peace and security.
Lebanon, dubbed "eastern Switzerland," no longer resembles its previous self; the country has descended into the depths of its most difficult crisis in a century and a half, with no clear path to recovery. Inflation in the tens of percent each year, the illicit money market, and demographic poverty are the new satellites of the formerly prosperous country.
The current situation in Lebanon is one of the three worst in global history's last 170 years. This is the conclusion reached by World Bank analysts in their June study. After decreasing 20.3 percent in 2020 and 6.7 percent in 2019, they predict a 21 percent drop in GDP by the end of 2021. The Lebanese economy dropped from $ 55 billion in 2018 to $ 33 billion in 2020, with GDP per capita falling 40% during the same period. Last year, inflation reached 84.3 percent, second only to Venezuela's and Zimbabwe's figures, 155 thousand households fell into poverty, and the black market exchange rate of the national currency depreciated by 129 percent. Such bleak outcomes are more common in military confrontations or even full-fledged wars, and they come as a shock in times of peace.
According to the authors, the severe phase of the difficulties began in the fall of 2019, when the government implemented austerity measures to preserve the nation and its budget from bankruptcy, as most observers agree. New levies were revealed, including an unusual charge on WhatsApp - $6 per month for the right to make calls using the popular messaging app. The authorities quickly reversed their decision, but imposed more levies while also reducing pensions and pay for government workers.
Thousands of people flocked to the streets and squares of Lebanon's biggest cities, including Beirut, Byblos, and Saida, to protest this very controversial decision. Citizens' unhappiness had been building for years, and it was linked to corruption that pervaded all areas of the economy, as well as disruptions in fuel, power, and water delivery. For a long time, autonomous electric generators have been present in almost all enterprises and in the courtyards of every residential structure, allowing residents to wait out lengthy hours without light.
The Lebanese are also fed up with the country's vast socioeconomic disparities. According to worldwide data, one percent of the country's wealthiest citizens possess a quarter of GDP, while ten percent of the wealthiest own 55 percent of total national income. This situation arose as a result of the "Lebanese economic miracle," which experts discussed until the start of the "Arab Spring" in 2011, which saw a series of uprisings across North Africa and the Middle East.
Lebanon began to grow rapidly after obtaining independence from France in 1943. Because of the huge number of banks, the nation was dubbed "Middle Eastern Switzerland," while Beirut, the capital, was dubbed "Eastern Paris" (for its colonial architectural heritage that attracted foreigners). Since then, international cash has poured into Lebanon, big corporations have established representative offices, and Beirut's port has become one of the region's most important. Its profits, along with those of the tourist industry and the banking sector (the two largest branches of the Lebanese economy), counterbalanced the apparent trade imbalance: importers' foreign exchange demands were five to six times greater than exporters' earnings.
Lebanon was also known for its high-quality education, which provided the labor market with competent professionals on a regular basis. Industry progressively flourished, worker productivity increased, and the value of the national currency, the Lebanese pound, strengthened as a result of their efforts. Regardless, the excellent geographic position gave viable sales markets in Syria, Israel, Egypt, and the Persian Gulf Arab republics. Lebanon's GDP quadrupled to $ 2.7 billion at current prices in the seven years from 1966 to 1973, or to $1,023 per inhabitant.
Arab oil exporters announced an embargo on supply to the United States and other Western nations in 1973, in response to Israel's assistance for Syria and Egypt in the Yom Kippur War. Oil prices climbed dramatically as a result of the constrained supply, which benefited Lebanon. The exporting nations' firms retained their profits in local banks' accounts, giving them with foreign currency and additional revenue. Furthermore, both Saudi Arabia and Iran saw Lebanon as an offshore for keeping assets: for Riyadh, it was another, and for Tehran, it was the sole one under forced isolation. Lebanon's economy was seen as generally stable and robust, and the country had good credit ratings, allowing it to attract financing for growth by placing public debt on reasonable terms.
National and religious tensions that had built up over the years culminated in a civil war that lasted 15 years in 1975. Many armed rebels (and in reality terrorists) who battled with Israel were among the Palestinian refugees who migrated to Lebanese land, creating their own "state inside a state" and refusing to respect Lebanese laws. Islamic and Christian groups, who have always been close in size, attempted to use the situation to their advantage and minimize the power of opponents, but in the end, they created conflicts.
Syria and Israel then participated in the war, initially as mediators and subsequently as full-fledged players. The Syrian army stayed in Lebanon for 15 years after the acute phase ended and an armistice was signed, prompting some to call this time an occupation. The war significantly weakened the attractiveness of the Lebanese economy to foreign investors, and several banks were forced to close as a result of the conflict. For several years, I had to completely disregard tourism. Factories and businesses have been destroyed, and infrastructure has been harmed. In Beirut, nearly a fifth of the population was displaced.
Despite this, the country was able to recover soon enough, with Prime Minister Rafik Hariri playing a key role. When he took office in 1992, he quickly authorized the "Horizon-2000" program, which encompassed many directions at the same time. Construction is the most important. Solidere, a state-owned firm, was given the authority to forcefully purchase land and real estate from owners (mostly in Beirut) in return for its own shares and to rebuild areas. Simultaneously, the firm was accused of intentionally understating the worth of redeemed goods (typically just 15% of fair value), putting pressure on owners, and even harassing them. Hariri, on the other hand, was prepared to compromise his image in order to carry out an ambitious plan.
Horizon 2000 also called for the substantial privatization of public assets in a number of sectors, including energy, telecommunications, and transportation. Foreign direct investment was possible to be attracted by the government (acquisition of more than ten percent stake in the company). Tax advantages were offered to the purchasers. Hariri used his considerable contacts to negotiate with foreign banks and foundations to give loans on advantageous terms and free support. Before joining politics, he worked in the construction industry, and his firm, Saudi Oger, was the principal contractor for Saudi Arabia's royal court. As a consequence, Riyadh covered around 7% of the expenses of Lebanon's post-war rebuilding.
Hariri's strategy worked: owing to their small size, Beirut and the rest of the country were rapidly rebuilt. The economy began to recover as well: in the first postwar years, it grew by 6%; by 1993, bank total capital (owned funds contributed by shareholders) had doubled; total assets had increased by a quarter; and budget revenues had stabilized, though they were still insufficient to fund large-scale projects under "Horizon 2000."
As a result, the national debt grew at an alarming rate, increasing by 540 percent by the end of the decade, from $ 2 to $ 18 billion (with annual budget revenues at the level of one billion). Overall, fast expansion was swiftly followed by stagnation: real GDP growth was just 1% in 1998, and the economy entirely declined by 1% a year later.
In addition, the prime minister was accused of corruption. His personal riches rose quickly, and his foundation held a substantial investment in Solidere, leading to the conclusion that a conflict of interest existed. Hariri is well-known for bribing political opponents in order to get their support. The oil sector was headed by the sons of then-President Ilyas Hrawi (in the lack of its own resources, Lebanon is obliged to buy gasoline from elsewhere). According to some sources, the head of government reached an informal deal with Syrian authorities, guaranteeing him economic independence in exchange for control over other sectors, notably the media, from Damascus, which kept power in Lebanon after the war.
Officially, Hariri called for an early departure of Syrian forces, but this only happened after his murder in a terrorist assault in February 2005 that is still unsolved. The politician had resigned a few months prior against the backdrop of a government crisis that had developed exactly because of the failure to resolve a long-standing issue. The broad growth of nepotism is another effect of Hariri's problematic reign. Corruption has always been a problem in Lebanon, but it has reached new heights under Hariri. Representatives of many families, including relatives of the prime minister, were given control of key areas of the national economy. His son Saad, who grew up overseas and worked on his father's business enterprises until he was 35, took over the government in 2009 and governed it until the beginning of 2020, with a hiatus from 2011 to 2016.
Individual clan representatives are also active in the delivery of humanitarian supplies, which is delivered to Lebanon on an almost constant basis. Governments of various countries, as well as international organizations such as Transparency International, are constantly urging for greater transparency in the process, but in the end, they must accept theft of funds and allocate new tranches in the hope that at least some of them will reach the intended recipients. In 2021, the United States alone expects to spend $372 million.
The decision to regulate the exchange rate of the national currency was arguably the most contentious under Hariri Srrule. .'s One dollar has been legally equivalent to 1507.5 Lebanese pounds since 1997. As a result, the central bank attempted to contain inflation, which had accelerated far above the permissible level due to a flood of loans into the nation and increasing demand for a variety of commodities. One dollar was worth roughly three pounds before the civil war broke out, and by 1992, it had grown to 2.5 thousand.
Such techniques are not unique; they are used by monetary authorities in industrialized nations and regions in various forms. The Hong Kong Special Administrative Region of China maintains a flexible exchange rate for the Hong Kong dollar in a restricted range compared to the US dollar - 7.75-7.85 per unit of the US currency. The Hong Kong Monetary Authority (HKMA, an equivalent of the Central Bank) has the power to interfere in the situation through foreign currency market operations known as interventions, but this is rarely necessary in reality. Foreign investors flock to local banks to invest in bonds and deposits because of the favorable business climate, the city's reputation as an international financial hub, and the high interest rates.
To purchase them, you must first purchase the Hong Kong dollar: increased demand for the currency boosts the exchange rate, and investors' demands are satisfied, including by the issue (emission) of fresh HKMA money. When there is too much of the national currency in the economy, however, rates fall, which is accompanied by a reduction in the demand for borrowed funds from banks, businesses, and the general public. The Hong Kong dollar is losing its appeal to international investors: new investors are not creating the required demand, while current investors are selling off existing assets and getting rid of the currency, which is causing its rate to decrease. This is how many aspects of the economy's cyclical character reveal themselves.
This approach allows for predictability, which is particularly essential for the general public and importing firms. The Lebanese pound, on the other hand, does not operate because the country's financial system is too unstable and prone to repeated shocks and crises. The history of recent decades shows that development and prosperity there do not last long, which means that, in the absence of an influx of foreign investors, it is necessary to sell the Central Bank's accumulated reserves (provided that they have been accumulated beforehand) or go into debt on a regular basis to maintain the chosen course. Russia's default in 1998, which occurred in part due to a failure to support the ruble through intervention, demonstrates how difficult it is to do this on a long-term basis.
[Lebanon's state debt was at 1.2 billion USD as of March 2020, when the country declared default and refused to be held accountable for its debts.]
Nonetheless, the authorities, led by Riad Salama, the permanent governor of the Central Bank, were able to keep the national currency's exchange rate stable for more than two decades, allowing Lebanon to weather the second wave of its own "economic miracle." GDP per capita has increased by 32% after the Syrian army, which had been stationed in the nation for 30 years, withdrew in 2005 as a consequence of the nonviolent "cedar revolution." Between 1990 and 2010, the rate of increase was 119 percent. However, such a breakthrough has yielded mixed outcomes, and not everyone has benefitted. Agriculture has undergone a transformation for the better. Lebanon is among the world leaders in worker productivity, outperforming nations such as Germany, Singapore, New Zealand, and Italy.
However, the country slipped into a demographic trap linked with a significant growth in population in the early 2010s, and it just recently emerged from the "hole" created by the lengthy civil conflict. The enormous number of Syrian refugees fleeing the armed war in their nation also played an impact. There are around 1.5 million of them (22 percent of the entire population), and officials claim that they have spent $ 40 billion on their upkeep in less than ten years. Some economists believe Lebanon is on the verge of sliding into yet another trap: the Malthusian trap, which occurs when population growth dramatically outpaces the expansion of the state's food supplies. However, thanks to improved agriculture, it was still feasible to escape it.
By 2014, Lebanese real disposable income (adjusted for inflation and excluding required expenditures) had fallen by 2%, and social inequality had increased. When comparing the earnings of individuals from various socioeconomic categories with their "classmates" from other areas, especially industrialized nations, this is most evident. As a result, in 2016, during a time of relative quiet before to the start of the next crisis' severe phase, the average yearly income of a representative of the richest 1% of Lebanese was equivalent to similar statistics for Western Europe. Earnings among the 0.01 percent of the country's wealthiest citizens were 40 percent greater than in Western Europe, with incomes ranging from 0.001 percent to 90 percent higher.
Simultaneously, the remaining 99 percent were happy with earnings that were 60 percent of those in Western Europe. In South Africa, where the racist apartheid system lasted in the second half of the twentieth century, and in Brazil, a similar image was witnessed for decades. Inequality has accompanied Lebanon since the middle of the last century and has become commonplace to some extent, but it has intensified in the last decade, manifesting itself in politics, where the majority of citizens lack real access to power and where representatives of the same families have become entrenched. Regular foreign interference causes political turbulence, which can sometimes devolve into a full-fledged crisis.
Their cause is sometimes referred to as "Hezbollah," a terrorist organization that is trying to establish a full-fledged Islamic theocratic state in Lebanon on the model of Iran, from which it gets money. The latter is one of the rare places where Shiites are virtually fully populated; throughout the Islamic world, on the other hand, they are a minority and substantially inferior to Sunnis. Hezbollah is sponsored by Iran and Syria (whose ruling family also adheres to one of Shiism's offshoots, Alawism), and battled Israel during Lebanon's civil war, which attempted to eliminate Palestinian terrorists in the country. Furthermore, Lebanon's Christian population has always had a strong affinity for Syria (representatives of the Maronite trend of this religion live in the country).
The 1989 Taif Agreements, mediated by Saudi Arabia, Iran, and Syria, helped bring the conflict to a conclusion. They expanded the laws in existence in Lebanon since the country's independence from France in 1943. The representatives of the three major communities then decided to assign each of them a position in the power structure: the president will always be a Christian Maronite, the prime minister will always be a Sunni Muslim, and the speaker of parliament will always be a Shia Muslim. The agreement's ideologists thought that by using this method, they would be able to foster positive contact amongst confessions and prevent disputes. Even though subsequent events revealed that the computation was incorrect, the provisions were established in the constitution and are still followed.
The Taif Agreement spelled out in detail the various roles that each of Lebanon's three political leaders would play, prompting commentators to draw parallels with the corporate sector. The president has taken on the role of chairman of the board of directors, with supervisory responsibilities. For the chairman of the board in charge of operational management, the prime minister (it was this post that Rafik Hariri received three years later). The speaker of parliament's position is most comparable to that of a company's CEO or president, who is responsible for developing internal rules and regulations. And Lebanon has taken on the characteristics of a joint stock corporation, with three major shareholders: Saudi Arabia, Iran, and Syria. They offered finance to Beirut on advantageous terms or entirely free of charge, as befitting investors.
A provision in the agreement called for the rapid disarming of civil war combatants. But not everyone followed suit: Hezbollah kept its arsenal and, over time, greatly expanded it (mostly through missiles), ostensibly to defend itself against Israeli strikes. The organization eventually developed a political branch and even sent delegates to parliament, but it remained a menace to Lebanon's fragile peace. In reaction to a government move to shut down Hezbollah's telecommunications network, gunmen seized the western suburbs of Beirut in 2008. Since then, some metropolitan districts have been subjected to harsh Islamic rules and have been walled off to outsiders, while Hezbollah has shelled Israel on a regular basis, prompting retaliatory assaults.
In November of 2017, a bizarre incident occurred. Saad Hariri made a loud and unusual comment on local television while on a visit to Saudi Arabia (whose citizenship he also possesses owing to his father's company). In it, the prime minister took aim at Iran, accusing it of meddling in Beirut's internal affairs, and announced his retirement. Observers thought Hariri Jr. was under pressure from Saudi officials and became a tool in the region's long-running power struggle between Riyadh and Tehran (Sunni Saudi Arabia is an ally of the United States, while Shiite Iran cooperates with Russia and builds a "Shiite crescent" around itself , including with the help of Hezbollah).
When he returned home, Hariri stated that his resignation had been revoked at President Michel Aoun's request, and he stayed in government for more than two years. Three months after hundreds of thousands of Lebanese marched to the streets, his rule came to an end in January 2020. The Central Bank had stopped dealing with the pound's support two months before, and the country had seen the emergence of a parallel black foreign currency market to the official one. It took a path that was several times greater than that of 1997. The authorities made superficial compromises after three days of protests and boldly scrapped the worst proposal, the WhatsApp fee.
The new administration, led by Hassan Diab, announced a default - a refusal to meet debts totaling $ 1.2 billion - in March 2020. The country, in reality, fell bankrupt. Furthermore, the situation worsened, aided by the implementation of quarantine as a result of the coronavirus, the closure of several businesses, and, as a result, a 25% increase in unemployment. Diab and his government did not have popular support since they were seen as stooges of the previous regime. Furthermore, hospitals in Lebanon were unable to cope with the surge of Coronavirus infections.
When the government agreed to offer $ 10 billion in aid over four years with the International Monetary Fund (IMF) in mid-spring, there was a glimmer of optimism for change. The money were meant to go toward industrial rehabilitation and the creation of new employment, but the fund was only willing to give them out on the condition of quick political changes and thorough reporting on the country's economic status, which was never done.
An explosion in the port of Lebanon in early August 2020 was widely regarded as one of the worst man-made tragedies in history. Since 2014, 2.7 million tons of ammonium nitrate have been stockpiled in warehouses, killing 207 people and injuring over 700 more, causing damage to nearly a third of the capital. Underneath the rubble, several areas were totally buried. The loss of a medicine warehouse and an elevator, which held roughly 85 percent of the nation's grain supplies, was the most devastating result. Overall, the port supplied roughly 60% of all imports to Lebanon, which is virtually completely reliant on foreign supplies of critical products.
The Diab government resigned immediately as a result of the incident, but no new government could be formed, thus the ministers continued to work in their old roles with the prefixes acting. Investigators from the Swiss prosecutor's office arrived in the nation in February. They're attempting to figure out what the Central Bank is up to, as well as Riad Salame personally. He's accused of a slew of infractions and a $ 350 million theft. So yet, little is known about the investigation's progress because the Ministry of Foreign Affairs has requested that it remain secret.
In the spring, there were practically no protests in Lebanon since the country was under one of the strictest curfews in the world, preventing unrestricted movement on the streets. Protests began with fresh force when the limitations were relaxed. President Aoun appointed Saad Hariri to lead the government for the third time last October, but they were unable to agree on particular candidates during the next eight months, and in July 2021, Hariri Jr. declared that he would no longer try to create a cabinet.
Lebanon has gone through many more changes in the last year. Mass blackouts of power and water, as well as gas supply disruptions, grew increasingly common and became the norm. A scarcity of gasoline imported from overseas has resulted in long lines at gas stations and prompted many people to decline to go by automobile. Foreign suppliers are only willing to ship fuel if they are paid in full in advance. The Lebanese are unable to utilize electric generators in the lack of fuel, which is especially important during the summer, when it is extremely hot outdoors and people are accustomed to putting on air conditioners. Medical supplies are in short supply in hospitals, and many Beirut citizens have yet to recuperate from the blast's consequences. Suicides are at an all-time high, as sewer manholes constructed of valuable metals vanish en masse on city streets.
As a result of the banking system's collapse, people of the nation have lost access to their foreign exchange holdings, and withdrawals of cash in pounds are tightly limited. The national currency's exchange rate plummeted to ten thousand dollars per dollar (ten times lower than the official rate), and the average income decreased from 670 to 67 dollars in the last two years. The army is also in a severe crisis: troops are unable to feed their families and are deserting in large numbers, despite the fear of criminal punishment. The Defense Ministry's leadership is concerned about losing control of the country to Hezbollah terrorists, and is seeking assistance from foreign organizations in the form of food and munitions rather than money.
The situation may be remedied with international assistance, and several nations have responded to France's demand for a targeted loan of $ 11 billion, believing that they are accountable for the former colony's plight. But, once again, the prerequisite is reforms or, at the at least, the formation of a government, which the country has been without for almost a year and a half. Following Saad Hariri's abrupt departure in 2017, the Conference for Economic Development and Reform (CEDRE) was established in Paris with the goal of organizing help to Lebanon. The government negotiated a "trust agreement" with Beirut that was meant to allow Beirut access to the credit tranches, but the requirements of the arrangement were never met.
According to experts, the only way to get the Lebanese economy off the ground is to resume collaboration under the CEDRE model. Another viewpoint is that economic and political upheavals are a continuous companion of Lebanon, followed by a period of progress and relative prosperity. Despite the difficulties, the nation continues to attract tourists, and specialist portals report that walking the streets of the country's major cities is secure. The following months will reveal if Lebanon can recover from its crisis, which has been described as one of the worst in 170 years, or if it will become what political scientists refer to as a "failed state."