The Lebanese uprising has been raging since October 17th and there seems to be no solution in sight since the resignation of Prime Minister Saad Hariri on October 29th.
Although schools have resumed classes and banks have reopened their doors, Lebanon’s economy is at the brink of collapse while economic conditions for ordinary citizens have been worsening by the day: Prices of basic goods have increased by more than 20%; gas stations have been intermittently on strike; banks have instituted capital controls on international transfers; the Lebanese Pound dropped as much as 50% vs the dollar on the black market last week (however, the official rate is still 1507 pounds to the dollar); many companies have started paying half-salaries and many workers are being laid off from their jobs.
How did Lebanon get to where it is now? Here is a brief overview of the now bankrupt post-civil-war economic model.
When the civil war ended in 1990, the Lebanese government borrowed a lot of money in order to fund the reconstruction of a devastated country. However, little investment was made in the productive sectors of the economy.
This led to the ballooning of the public debt that has been snowballing ever since: at $86 billion in 2019, Lebanon’s public debt reached an unsustainable 150% of GDP.
Furthermore, Lebanon’s monetary system has been structured around a fixed exchange rate (peg) with the dollar since 1997. Until recently, both currencies have been used interchangeably at shops and restaurants and the US dollar has become the main currency in bank deposits.
However, maintaining such a peg and a highly dollarized economy proved to be very expensive since imports largely outweigh exports. Keeping the system afloat therefore has required a constant inflow of dollars which was achieved thanks to high interest rates on bank deposits that allured Lebanese expats in the diaspora, especially those in the Arabian Gulf (banks in return bought high paying Lebanese government bonds).
In 2010, things started to turn sour. Real GDP growth collapsed coupled with years of economic mismanagement, corruption and political deadlock. Furthermore, inflow of remittances from the diaspora started to stagnate due to declining oil prices in the Gulf.
The start of the Syrian war in 2011 did not make things easier as cross-border trade became more difficult while hundreds of thousands of refugees put additional strains on a crumbling infrastructure and a weak labor market. Unfortunately, refugees were used as scapegoats to justify the political classes’ incompetence.
Throughout the past five years, the Central Bank has been implementing financial acrobatics that were meant to maintain the currency peg and buy time for policymakers to address the country’s woes, but to no avail.
In the past, Lebanon was able to get away with its poor economic performance and mounting debt by appealing to its friends abroad through international donor conferences where it received grants and soft loans in exchange for stillborn promises of economic reform. These conferences restored confidence in the economy for a while, however very few promises were implemented.
Finally, Gulf States that came to Lebanon’s rescue with emergency cash transfers during previous crises now seem reluctant to provide any help, especially since they see the increased economic pressure as a means to pressure local allies, namely Hariri, to confront Iranian proxies in Lebanon.
It is with this situation in mind that we are learning the hard way what it really means to trust in God and “not worry about tomorrow, for tomorrow will worry about itself” (Matthew 6:34 NIV). We can take heart knowing that the Lord will provide, for He is “our refuge and strength, an ever-present help in trouble” (Psalm 46:1) and it is “for such a time as this” (Esther 4:14) that we are called to be faithful witnesses.
By Wissam Nasrallah
Chief Operations Officer | LSESD