How Government Incompetence, Organized Crime, And Tragedy Collapsed Lebanon

Since 2019, Lebanon has been afflicted by an economic crisis the World Bank says ranks among the worst since the mid-19th century. 

Why though?

Following the 1975-1990 civil war, successive governments accumulated a whole lot of debt with little to show for their spending binges, resulting in Lebanon's economic crisis. According to some economists, Lebanon's financial system turned into a Ponzi scheme, in which new money is borrowed to repay existing creditors. 

How did the country accumulate debt?

In the aftermath of the civil war, Lebanon balanced its books with tourism, foreign aid, earnings from its financial sector. Gulf Arab states, like Qatar and Saudi Arabia, also pumped a significant amount of money into the country by funding projects and investing in businesses. They mostly bankrolled the Lebanese state by bolstering central bank reserves.

Yet one of its most reliable sources of dollars was remittances from the millions of Lebanese who went abroad. Lebanon is the 22nd largest recipient of remittances in the world and the 16th largest among developing economies. Remittance inflows to Lebanon account for 1 percent of global remittances flows in 2020, and account for 12.6 percent of remittance inflows to Arab countries. The World Bank estimated total remittance inflows to Arab countries, excluding Syria, at $53.2 billion in 2020.

The remittances to Lebanon began to slow down thanks to Hezbollah, a fascist Lebanese Shi’ite transnational organized crime group with political influence and Iranian backing. Hezbollah has sparked sectarian destabilization of communities nationwide. A litany of sectarian spats led to a deterioration of political conditions and the Middle East, including neighboring Syria, descended into chaos.

Hezbollah also helped increase the influence of Iran in Lebanon which has led to several Sunni Muslim Gulf states reducing their investments in the country. As a result of lower remittances and reduced foreign funding, the budget deficit grew and the balance of payments deteriorated, as transfers failed to match imports of everything, from basic foods to luxury items.

The Central Bank Yolo'd

Thanks to the sectarian spats, growing divisions, and political rivalries Lebanon was left without a president for most of 2016. The central bank, Banque du Liban, led by former Riad Salameh since 1993, introduced “financial engineering”, a strategy aimed at luring banks into accepting new dollar deposits with lavish returns. Commercial banks would be offered generous interest rates - as high as 11% - for swap operations involving government debt and US dollars. The financial-engineering swaps offered bonuses and other incentives on top of enticing interest rates to commercial banks.

The improved dollar flows showed up in climbing foreign reserves but also dangerously increased liabilities. The central bank’s assets are now more than wiped out by what it owes. Meanwhile, the cost of servicing Lebanon’s debt surged to about a third or more of budget spending. Before the 2018 election, politicians splurged on a public sector pay rise when the state needed to reduce spending. The government’s failure to deliver reforms also discourage foreign donors who held back billions of dollars in aid they had pledged.

Catalyst

The final spark for unrest and economic collapse came in October 2019 with a government plan to tax WhatsApp calls. The planned tax would have mainly hit already struggling Lebanese who used WhatsApp to keep in touch with each other and their relatives in Diaspora, who act as a financial lifeline. Youth-led protests erupted against an aging political elite, many of whom were warlords who thrived while others struggled.

The inflow of foreign exchange dried up and dollars exited Lebanon. Banks could no longer pay depositors queuing outside and shut down. The currency collapsed, sliding from 1,500 liras to the dollar to a street rate of as much as 8,000 liras. Then the COVID19 pandemic reduced the global economy and on August 4th, 2020 catastrophe struck Beirut port killing 200 and caused billions of dollars of irreparable damage. Ultimately collapsing the government.

What happened to Lebanon's money?

After the economic collapse, banks across the country found themselves crippled and holding currency that is currently worthless. People who spent lifetimes saving money suddenly found themselves locked out of dollar accounts or told their funds and/or life savings were now worthless. The Lebanese currency crash has driven millions of people into poverty, most of which the change happened overnight.

What are the consequences of the collapse?

As a result of the economic collapse in Lebanon, there is an outrage against the political class, many of which are linked to organized crime and can't confront the country's hardships. The country is also suffering from shortages of medicine, food, and fuel which are imported using foreign currency. Since the massive 2020 bomb blast in Beirut, which killed more than 200 people and ravaged swathes of the capital, the country has been without a functioning government. As a result of the disaster, the government resigned, however, a deeply divided political class has been unable to formulate a new cabinet. Meanwhile, most of the country has now sunken into poverty and Hezbollah has increased its grip across the region through violence and its growing presence in the international drug trade. Currently, France is leading international efforts to force Lebanon to tackle organized crime in government and implement other reforms demanded by foreign donors.