Lebanon’s Economic Death Spiral is a Lesson in Failed Peacebuilding
Protestors wave the Lebanese flag in front of a burning riot barricade at the Parliament building in Beirut. Photo: Bilal Hussein Zaidan, The Associated Press
On October 14th, 2021, gunfire broke out on the streets of Beirut when a protest organized by Hezbollah turned violent, claiming six lives and causing dozens of injuries. The protest targeted Judge Tarek Bitar, the current head of the investigation into the Port of Beirut Explosion that occurred in August of 2020. Hezbollah wants Judge Bitar removed on grounds of politicization after he called upon several Hezbollah-aligned politicians to testify.
Last year’s Port Explosion rocked the country to its core: the attack left 218 dead and 300,000 homeless, amounted 15 billion USD in property damage, and pushed then Prime Minister Hassan Diab to resign, promptly followed by his entire cabinet. Diab’s resignation marked the beginning of Lebanon’s nine month period without a fully empowered government, in which civilian upset radically intensified. Last month’s protest offers only a small glimpse into the larger disaster that the country endures today.
Lebanon is facing what The World Bank calls one of the worst financial crises of modern history. The severity of this economic emergency cannot be overstated: more than half the population is currently below the national poverty line. The unemployment rate skyrocketed from 28% in February to 40% in November last year. Essential consumer goods are completely unavailable: grocery stores and pharmacies are lined with empty shelves, and lines for fuel can last hours. The World Bank predicts a shrinkage in gross domestic product of nearly ten percent in 2021, following recessions in the two years prior.
This financial apocalypse is not without defined cause or start date: the origin of Lebanon’s present day state of affairs traces back to the country’s war-torn history of the late twentieth century.
The conclusion of Lebanon’s brutal Civil War in 1990 left the country at rock bottom under Syrian occupation, mourning some 144,000 civilian casualties and a mass exodus of over one million refugees. The war also wiped out enormous portions of essential civilian infrastructure, amounting to damages that surpassed an estimated 25 billion USD.
What followed in the wake of destruction was an era of peacebuilding where Lebanese Parliament enacted a slew of reforms endeavoring to rise from the ashes and rebuild. Despite the efforts towards national reconciliation, however, the process was deeply flawed from the start: mostly because it occurred under foreign occupation. Syria as a foreign facilitator of post-war peacebuilding not only stunted national healing, but also fostered ignorance of the underlying root causes of the war. The economic policies which came out of this faulty peacebuilding process, therefore, reflected the misaligned foreign interests of Syria and the Lebanese people, thereby further dooming the country to failure.
After the war, the Lebanese Central Bank tied its currency to the U.S. dollar in an effort to stabilize the market. But unlike other Arab states with fixed exchange rate currencies, like Qatar and Saudi Arabia, the Lebanese pound was not supported by any revenue-stable exports like oil or gas. Thus, in abruptly switching to a fixed currency system, the Central Bank contradicted every known principle of currency valuation and fixed 15,000 Lebanese pounds to be worth one U.S. dollar.
Unsurprisingly, this top-down approach to currency valuation ― especially without any accompanying directives to support the jump in national expenditure ―did not produce the intended outcome. Indeed, after a few brief years of residual stability, the fixed currency ruling sent Lebanon hurtling into a downward spiral where the value of currency depreciated more and more each year. Inflation radically spiked, reaching a shocking 84.9 percent last year. Since Fall 2019, the Lebanese pound has lost 90 percent of its value.
In a market where the national currency is worth close to nothing, consumer goods become accordingly unaffordable. The everyday Lebanese consumer has seen their purchasing power shrink copiously and their savings disappear entirely. Financial stress forces citizens to depend heavily upon basic public services ― sanitation, water supply, power, etc. ― which have radically deteriorated in the absence of a centralized government authority. The unaffordability of staple goods compounded with national shortages in petrol and medicine create a reality where survival is, for many, just too expensive.
Borrowing money offers no relief, either. All of Lebanon’s major banks are currently insolvent. Credit is essentially unavailable nationwide, and customers face steep limits on cash withdrawals due to capital shortages. In February, the Lebanese Central Bank called upon banks to increase capital reserves by 20% in an effort to avert impending liquidity exhaustion. Unsurprisingly, banks did not meet the goal and the liquidity crisis continues to worsen. Most of Lebanon’s big banks are owned by elite political families holding seats in Parliament, so there is no reason to believe banks will face any consequence whatsoever for their contribution to the country’s collapse.
Important to note is that the status of Lebanon’s economy cannot be attributed exclusively to the shift in currency valuation strategy. Other factors contribute to the crisis, including the role of political instability in deterring foreign investors, corrupt governmental spending habits, pre-existing wealth disparity, a controversial 2019 tax law on WhatsApp cellular phone calls, and the consequences of COVID-19 on an already fragile economy.
As for possible resolution: Lebanon’s financial recovery begins with anti-corruption. First on the list of corrupt government establishments is the Central Bank, which is at fault for the catastrophic currency reform and resulting inflation adjustments. More specifically, the problem can be traced to the head of the Bank, Riad Salameh, an exemplar of Lebanon's corrupt political elite. After years of shady behavior, Mr. Salamah made headlines in April after signing a contract transferring 330 million USD of government funds to a Swiss bank account belonging to his brother’s brokerage firm, which he hired to oversee government bond sales. Expectedly, Mr. Salamah has been investigated numerous times on suspicion of embezzlement, money laundering, and corruption. Disrupting the spiral of compounding economic failure requires that officials like Salamah be investigated, charged as fit, and removed from office. But again, this trajectory is highly unlikely considering recent political developments.
Last month, Lebanon named a new Prime Minister: Najib Mikati, billionaire telecommunications tycoon and family friend of Syrian President Bashar al-Assad. Given Mikati’s profile as a member of the wealthy political aristocracy, he is unlikely to pursue the anti-corruption reforms that the country so desperately needs. Simply put, Lebanon cannot be cured by any single election or political figurehead; the severity of the country’s current crisis demands an interruption of equal ferocity.
As we digest headlines of violence and unrest amongst Lebanon’s population, we must remember this: these protests are not some sudden turn towards chaos, but a culmination of thirty years of oppressive economic negligence. News publications portrayed the carnage on the streets of Beirut last month as an isolated response to last year’s Port Explosion, but that is not the full story; civilian outrage is intensifying on all fronts because Lebanon is on fire, and people are dying. Deficiencies in the rebuilding period following the Civil War gave way to an era of governance which upheld the same underlying issues ― corruption, instability, sectarianism ― that produced the war in the first place.
Lebanon today faces the consequences of its postwar laxity in the form of supply shortages, liquidity crisis, soaring currency inflation, bank insolvency, mounting unemployment, plummeting GDP, and rising poverty. The aristocracy has chosen a brutal path of laissez-faire self-correction over bank accountability and governmental action, and everyday citizens are those who will bear the costs of that decision. Without some form of radical disruption, the sores of corruption and hostility will continue to fester; civilians will continue to die at the hands of the political elite profiting from the demise of their country. Lest it be misunderstood: today’s bloodshed and economic anguish are nothing if not predictable, for a nation built upon a foundation of kindling is doomed to burn.
Kaitlyn Saldanha (BC’24) is a sophomore at Barnard College studying Economics.