No one is sure when Lebanon’s compound financial, fiscal, debt, banking and economic crisis, described by the World Bank this month as one of the world’s worst three depressions since the mid-19th century, is finally going to hit bottom.
After the coronavirus pandemic and last August’s cataclysmic explosion in Beirut, moreover, not many Lebanese seem to feel it will make much difference, given the unwillingness of corrupt dynastic elites to agree on forming a government, let alone enact vital reforms.
“It is clear the political class has no incentives to co-operate and put their country first,” says a top Lebanon watcher in Washington. “They have strangled the economy.”
The sectarian mafias that lord it over Lebanon are insulated by their billions in ill-gotten wealth from the misery and hunger suffered by the poor, or by the sinking middle class whose bank deposits they have for most practical purposes confiscated.
The local currency has lost 90 per cent of its value since October 2019. Dollar depositors are locked out of their accounts by an insolvent banking system that lent their foreign exchange to a bankrupt state and central bank that cannot repay. The size of the economy has shrunk from $55bn in 2018 to $33bn last year, says the World Bank, which reckons 55 per cent of the population is below the poverty line. Output may contract a further 10 per cent this year, but the economy is shrinking too fast to know.
Many depositors have lost their savings in a zombie banking system closed to them since October 2019, when a civic uprising began against the entire political system, bringing down one government. Another was toppled after last summer’s explosion, which destroyed entire quarters of central Beirut.
Bankers, and the politicians enmeshed in almost all the big banks, grew immensely rich on interest rates that reached double digits, courtesy of a compliant central bank. While the banking world elsewhere was trying to get its head around negative interest rates, Lebanese bankers were squirrelling away dubious windfall profits. Having lent 70 per cent of their assets to a bankrupt state — leaving a hole in the banking system the government last year calculated at $83bn — they still claim to be solvent.
International estimates, furthermore, say $17bn left Lebanon in 2020, while Lebanese officials say roughly $16bn left in the second half of 2019 — despite de facto capital controls on most deposits.
The day-to-day political gridlock in Lebanon — without a government since Beirut’s port erupted in a mushroom cloud 11 months ago — is the latest chapter in the sectarian quest for advantage by Sunni and Shia Muslims, Christians and Druze among the country’s 18 recognised sects and their myriad parties.
Above it all is Hizbollah, the Iran-backed Shia paramilitary movement. It is allied with Amal, the former militia turned Shia mass movement, and with the Christian Free Patriotic Movement whose figurehead, former general Michel Aoun, occupies the presidency. Hizbollah also has a firm foothold in the security forces and army, controls a majority in parliament and has a veto on cabinet appointments. Determined not to risk its invaluable Christian alliance, it now serves as a shield for the kleptocracy that has brought Lebanon to its knees.
These political and financial clans are pretending to co-operate with international donors and the IMF while stalling to try to inflate Lebanon and their banks out of debt — at the cost of impoverishing all but rich Lebanese. In April last year, the government put forward a rescue plan that would have protected 90 per cent of depositors, local and international officials say. This was rejected by bankers, politicians and central bank governor Riad Salame, in what a World Bank report in December called a “deliberate depression”.
Diplomats and insiders say there is now almost no discussion of the crisis, with all factions fixated on the next elections and prolonging their power.
There is growing conviction inside and outside Lebanon that the elites will only start to bargain if their bank accounts and property assets (mostly held abroad) are hit and they are prevented from travelling. Europeans are now preparing sanctions on those obstructing the formation of a government and involved in corrupt practices.
The EU as a body may be hindered by, say, Viktor Orban’s Hungary. But nothing prevents individual European states from acting. France is already investigating Salame, who is at the heart of the meltdown. It may be followed by non-EU Switzerland and perhaps the UK.
The US is in two minds about the central bank governor, long seen as a linchpin of stability. “We don’t know whether he’s the safety pin or the grenade on the table,” says one official. But Washington started targeting key politicians last year. Nothing else has worked, and Lebanon is very close to hitting rock bottom.