Lebanon’s Economic Crisis Didn’t Happen Overnight. So How Did It Get to This Point?

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Lebanon’s Economic Crisis Didn’t Happen Overnight. So How Did It Get to This Point?

Hundreds of thousands of Lebanese continued to protest after Prime Minister Saad Hariri proposed a list of reforms on Monday. Going on since last Thursday, the protests throughout Lebanon are driven by the country’s deep social and economic crisis, which has roots in decisions made after the end of the Lebanese civil war in 1990.

Those economic and political choices have led to an increasingly untenable situation for which the country’s political class has few answers. The benefits of unsustainable government borrowing has fed a narrow class of elites without addressing growing poverty, while the tax system further entrenched inequality.

The government has failed to address such large-scale issues as the widespread corruption, recent forest fires and a looming currency crisis. And protesters are expressing that they’re no longer willing to stand by. Here’s how this came about.

Lebanon’s fiscal policies are producing large-scale debt and inequality

The country depends on imports. A currency devaluation would raise prices for imported goods and erode living standards. Since 1997, a dollar peg has reassured foreign investors of the country’s stability. The decision by Lebanese banks this month to ration access to U.S. dollars therefore alarmed Lebanese.

Its economic fundamentals are among the worst in the world. One of the most indebted nations, its government debt is estimated at 155 percent of gross domestic product. The country imports vastly more goods and services than it exports, and the government budget deficit is set to reach 10 percent of GDP this year.

Excessive government borrowing has inflated the politically well-connected banking sector that lends to the state at high interest rates. Banks prefer to lend to the government rather than finance innovative enterprises, depressing private-sector investment.

The banks rely on wealthy Lebanese and especially the diaspora to deposit their money in Beirut. The enormous interest rates earned by these depositors flow into very few pockets: About 1 percent of all accounts are estimated to hold roughly half of total deposits.

According to my research on the current economic crisis, Lebanon’s unproductive rentier economy revolves around banking and real estate, which creates, as a result, great income inequality. A recent study found that the top 10 percent of Lebanese income earners captured 57 percent of the total income earned in 2014, while the bottom 50 percent accounted for a mere 11 percent.

The burden on financial institutions is light, while indirect taxes paid by everyone, such as value-added tax (VAT), are increasing. The recent WhatsApp tax — which sparked last Thursday’s outbreak of protests — became a symbol of the country’s skewed political economy. While the wealthy and politically connected earn state-induced banking profits, the state is drained of the resources to tackle social and environmental crises.

More debt means less capacity to deliver public services amid an intensifying environmental crisis

Servicing the country’s excessive debt leaves little room for government spending on burning social problems. Government hiring and spending along sectarian lines fuel a systematic lack of transparency and patronage in political appointments.

The dysfunctional electricity system forces households to pay excessive fees for access to private generators. Households rely on bottled water because tap water quality is poor. Dwellers of luxury real estate developments can insulate themselves from state failures, but even the middle class struggles to keep up.

Lebanon’s estimated 1.5 million Syrian refugees represent an additional burden, but the causes of public sector failures go back further than the start of Syria’s war in 2011. This has not stopped politicians from using the refugees as an easy scapegoat for their own failings.

The state’s poor performance endangers its citizens. A failure to collect garbage in Beirut in 2015 kicked off demonstrations not unlike the current ones. Politicians found no sustainable solution to the crisis other than dumping the waste across the country’s mountains and seashore. This, in turn, resulted in severe water pollution and renewed local protests.

The environmental crisis worsened last week when forest fires ravaged Lebanon’s mountains. Crucial firefighting equipment was unavailable because of a lack of maintenance. The apocalyptic atmosphere of forest fires and looming currency crisis provided the backdrop to the protests. The WhatsApp tax proposal then set them off.

How has Lebanon’s economy survived for so long?

The answer lies in the regional constellation of migration and geopolitics. Lebanon is highly dependent on remittances from its large emigrant community, not least to provide the deposits that Lebanese banks then lend to the government. These inflows have stagnated in recent years. Declining oil prices reduced remittances from Lebanese in the Gulf, while the Syrian war has made Lebanon a less attractive investment destination. The threat of U.S. sanctions on banks handling funds for Lebanese Shiite movement Hezbollah further undermined confidence.

During previous times of crisis, friendly Gulf governments would restore investor confidence in the central bank’s ability to defend the currency through well-publicized emergency cash transfers. Such support has grown uncertain. Saudi Crown Prince Mohammed bin Salman has tried to pressure his local ally, Hariri, to confront Iranian influence in Lebanon. Meanwhile, Hariri’s Saudi construction business has floundered.

The central bank has had to resort to complex financial acrobatics to maintain the coalition of interest among banks, diaspora capital and the Lebanese treasury. At a 2018 donor conference, the Lebanese government pledged economic reforms in return for funds but has not delivered.

The politicians’ inadequate response

Lebanon’s politicians use sectarianism to control their confessional constituencies and to undermine efforts at political mobilization that could threaten the status quo.

Now faced with nonsectarian mass protests, the politicians’ familiar script of coercion and co-optation failed. On Friday night, Hariri asked for a 72-hour grace period before security forces cleared out central Beirut using tear gas and mass arrests. The next day, protesters returned.

Some leaders were calling on followers to join the protests while others sent gunmen. Some ministers resigned and the government may yet fall. Hezbollah leader Hasan Nasrallah — Lebanon’s most influential politician — warned of the dangers of the uncontrolled collapse of the country, in effect urging patience.

In Monday’s proposed overhauls, the government sought to appease protesters through measures such as a one-time tax on banks, a cut in officials’ salaries and promises to tackle corruption. They also included long-standing neoliberal proposals, such as the privatization of the mobile phone network. For protesters who have faced security forces and militias to demand real change, these responses may be too little, too late.

Source: Washington Post

Author: Hannes Baumann