Edmund Blair

(Reuters.) Lebanon’s economic situation is deepened by successive governments that piled up huge amounts of debt after civil war between 1975-1990. With little evidence to support their spending sprees,

Paralysed banks are central to the service-oriented economic model. Savings have had their dollar accounts blocked or they were told that the funds they could access now only hold a fraction (or even less) of what it was. Many people are now in poverty due to the collapse of the currency.

WHERE WAS IT DONE WRONG

The story of Lebanon’s financial crisis since 2019 shows how the vision of rebuilding the nation that was once the Switzerland of Middle East, was thwarted by poor management and sectarian leaders borrowing with little restraints.

After the civil war ended, downtown Beirut rose with skyscrapers by internationally-acclaimed architects, and stylish shopping malls featuring designer boutiques accepting payment in dollars or Lebanese pound.

However, Lebanon was left with little to prove its debt mountain of 150% of national production. This is one of the most burdensome countries in the world. The electricity plant can’t provide 24-hour power, and the only export that Lebanon has is its human capital.

HOW DID IT BORROW SO MUCH?

According to economists, Lebanon’s financial system is a Ponzi scheme that borrows money from existing creditors. This works up until the money is exhausted. What is the secret to how did a nation with 6.5million people become so successful?

The country’s finances were balanced by tourism revenues, foreign aid and earnings from the financial sector. It also received assistance from the Gulf Arab countries, who helped to fund the government through the expansion of its central bank reserves.

Remittances of millions of Lebanese living abroad were one of the most reliable sources for dollars. Even during 2008’s global financial crash they still sent cash home.

However, remittances have been slowing since 2011, when Lebanon’s sectarian strife led to increased political sclerosis, and the Middle East, which includes Syria, fell into chaos.

Sunni Muslim Gulf countries, which were once trusted supporters, began to turn away from Iran via Hezbollah. This heavily armed Shiite Lebanese Shiite group has increased its political power and influence.

Due to insufficient imports, transfers did not match the cost of imported staple food and flashy cars. The deficit shot up as well as the balance of payment.

It was only until 2016, that banks offered remarkable rates of interest for deposits in dollars, which is an official currency within the dollarized economy. They also offer extraordinary rates for deposits in Lebanese Pounds.

Savers around the globe earned very little in return.

What could you lose if the Lebanese Pound was pegged at $1500 for more than two decades?

The dollar flowed back and the banks were able to continue funding spending.

How could banks offer such high returns?

The political situation in Lebanon was still dysfunctional, and it had been left without a President for the majority of 2016.

Banque du Liban was founded by Riad Salameh, a former Merrill Lynch banker. It introduced financial engineering, a variety of tools that allowed banks to receive lavish returns in exchange for dollars. This tactic was considered appropriate by bankers if followed quickly with reforms. But not if enough occurred.

It was evident that dollar flows were improving, resulting in higher foreign reserves. A rise in liabilities was something that was more obvious and now is a source of disagreement. Some accounts show that the assets of central banks are greater than what they owe, and it could be sitting on large losses.

Meanwhile, costs for servicing Lebanon’s debt soared to around one-third of the budget expenditures.

WHAT CAUSED THE COLLAPSE TO COMMENCE?

The state had to cut spending so politicians spent more on the public sector before the 2018 elections. The failure of the government to make reforms led foreign donors to withhold billions of dollars they promised in aid.

In October 2019, a plan was put in place to tax WhatsApp conversations. This ignited the final firestorm of unrest. Due to the large diaspora in Lebanon and the low tax system in Lebanon, it was unwise for many Lebanese to keep in touch with each other.

Massive protests were triggered by disenchanted youth who demanded change.

The dollar left Lebanon as a result of a decrease in foreign currency flows. So banks were unable to pay depositors who waited outside for hours because they no longer had sufficient dollars. In addition, the government defaulted on foreign debt.

It crashed, falling from 1,500 dollars to the dollar prior to the crisis to about 23,000 street rates in February 2022 after reaching 34,000 earlier that month.

An explosion at Beirut port on August 20, 2020, which killed 215 people caused additional problems and caused billions in damage.

According to some estimates, the amount of government debt in 2021 was 495 percent of gross domestic products. This is considerably higher than what crippled many European nations a decade back.

WHAT IS NEXT?

France led international efforts to encourage Lebanon to address corruption and to implement reforms as demanded by donor countries. The International Monetary Fund promised to resume talks with the new government that was elected in 2021. The government hasn’t implemented significant reforms.

Politicians and bankers must come to an agreement on the enormity of losses and what went wrong in order for Lebanon to change direction.