Economic Crisis

Lebanon: Adjustment without reforms?

The Lebanese way of managing the economic crisis, and its consequences

Lebanon: Adjustment without reforms?

Before the economic crisis and its consequences took hold, Beirut's corniche was well lit at night. (Credit: AFP)

There are three reasons for skepticism about carrying out real economic, administrative or political reforms in Lebanon. These reasons are related to the regional geopolitical landscape, the local political context and the economic and financial situation. Yet, Lebanon has a vested interest in reforming its post-Taif “system,” because it is impossible for it to survive as is.

Geopolitically, Lebanon remains, more than ever, a zone of regional tug-of-war, with Iran’s influence strongly countered by that of Western countries (the United States, France), not to mention Turkey, Russia, the Gulf states and Israel itself. The Fertile Crescent, comprising Iraq, Syria and Lebanon, has de facto formed a real buffer zone separating the three major regional protagonists: Iran, Turkey and Israel.

While the Shiites have subsequently stepped up political influence in the Fertile Crescent, the Iranians, however, could not impose themselves solely there, since they have a tough opponent in Iraq. Shiite Arabs in Iraq consist of two-thirds of the population and are themselves divided based on the various external forces they are associated with, as the recent Iraqi elections have shown.

In parallel, Lebanon and Hezbollah have Israel to the south, and Syria (where Russia has a strong presence) to the north and east. However, while Moscow displays proximity with Tehran, it is also doing so with Ankara and Tel Aviv (this is particularly notable in Moscow’s lack of criticism of the Hebrew state’s near relentless shelling of Iranian troops and their associates in Syria since 2017).

In fact, Russia maintains a balanced position and stands at equal distance from the three regional protagonists. Based on that, Russian-Iranian relations are far from being clear and transparent, especially when it comes to Lebanon. In addition, Iran’s influence on the Lebanese arena is strongly opposed by that of other forces.

For instance, while Hezbollah is the armed wing of the Islamic Republic in Lebanon, as its secretary-general said, other local political parties maintain close relations with various external powers (including Saudi Arabia, Turkey or Russia). At the same time, Western countries regularly meddle in many political and economic issues (not to mention the delimitation of the Israeli-Lebanese [maritime] border where the United States assumes a key role).

Finally, the deal was expanded to include France, which made a strong comeback on the Lebanese scene more than a year ago with the French initiative. Paris plays a complex regional game that brings together Mediterranean issues with those of Lebanon, Syria and Iraq, where France has a particular military presence.

In fact, it is Lebanon that is at stake amid these regional rivalries, for which it pays an exorbitant price, because the slightest internal development, even the simple formation of a cabinet, remains dependent on the goodwill of and agreement among foreign powers, which can be called into question at any time (disagreement among Lebanon’s internal political actors obviously facilitates this external interference).

Hence, if Lebanon is therefore an “occupied” country, who is the occupier? Because it is indeed virtually [occupied] by many powers, and therefore by none truly. No one is [Lebanon’s] “protector,” and everyone wants to prevent the others from being so. This is the very definition of a “no man’s land.”

The divide that marks the domestic political scene has complicated the situation in Lebanon, which led to a congenital weakness of the state’s authority. This weakness was already evident before the 1975-90 Civil War, was exacerbated by the Taif Agreement and climaxed after the 2008 Doha Agreement.

The latter grants all large communities a de facto veto power (through the “blocking third” in cabinet, and the need to adopt major decisions by “national and sectarian consensus,” which is enshrined in the constitution).

This turns the Lebanese state into a hybrid structure, or a sort of “Frankenstein monster” made by bringing together multiple politico-sectarian “tribes,” each holding a “piece” of the various ministries and administrations, and capable of hindering the good functioning of the whole, if its demands are not met.

Political reforms are frequently raised as a way to unlock this situation. But this reform can only go in two directions: either through a centralization in order to thwart the sectarian centrifugal forces or by adopting the local decision-making process, which will lead to a decentralization (whatever its form), and limit contentious points while empowering the communities themselves.

However, a centralized system — which is more or less authoritarian — is presently impossible, given the absence of an external guarantor (regional and international actors are stuck in their mutual rivalries), as well as a Lebanese “arbiter,” i.e., a religious community that would assume the local leadership: the Christians, who had sought to play this role, lost it when the war broke out in 1975; the Sunnis, who had attempted to do so after 1990, suffered, with the assassination of Rafik Hariri in 2005, a crushing setback that has been amplified by the Syrian war since 2011, when the opposition to the Bashar al-Assad regime was defeated while the country’s Sunnis were pushed into a mass exodus.

Finally, the Shiites, who sought to take up the gauntlet after the 2008 Doha Agreement, are now suffering a significant failure with the economic crisis compounded by the security collapse (following the Beirut port blast on Aug. 4, 2020, and the Oct. 14 gunfight in Tayyouneh).

What does President Emmanuel Macron’s “French initiative,” which all the Lebanese components rallied behind, mean other than these components (including Hezbollah) acknowledging that they are unable to carry on outside this framework?

This certainly does not mean that these forces (and their external sponsors) have granted France an exclusive blank check. But it clearly underlines the Lebanese central authority’s weakness and inability to impose reforms.

On the other hand, decentralization is not the only solution either, because while it could relegate some problems to the local or municipal level, the central state, which is in escheat, will continue to be in charge of the key issues (monetary policy and the central bank, defense and the army, foreign policy, management of oil and gas resources, customs policy and trade openness to the outside world, and the economic model). So, things are not going well.

What can be done in this situation? It is noteworthy that the Lebanese authorities seemingly decided to deal with the most pressing issues, prioritizing two key topics: the financial issues, which involve the public debt and the Banque du Liban’s balance sheet, which is closely related to the banking sector (the banks placed most of their liquidity — the people’s deposits — with the state and BDL).

However, the Lebanese authorities are dealing with the situation through an extremely brutal “clean up”: the real value of deposits in local currency dropped from $50 billion in 2019 (at the official rate of LL1,500 to the dollar) to less than $3 billion at the parallel market rate.

This is while the real value of deposits in US dollars trapped in the banks, which have come to be known as 'lollars,' would drop from nearly 100 billion today to less than 20 billion if the current “concealed” haircut was legalized and applied to all bank withdrawals on all accounts.

Based on this calculation, the total value of bank deposits (lira + dollars), which amounted to nearly $170 billion prior to the crisis in 2019, would fall to around $20 billion [if the haircut is applied]. This vertiginous drop, would, if enacted or legislated or officialized (BDL continues to set the official exchange rate at LL1,500 to the dollar), burden depositors with the largest part of the adjustments, while cleaning up the accounts of banks, BDL and the state all at once.

Hence, the debate is presently centered on the percentage of losses that should be covered by the banks (whose capital or even reserves abroad could be used), by the state (which could contribute with some of its assets), by BDL (which would incur future debts; the gold reserve is a totally separate issue), as well as by depositors and the population in general.

Once this distribution of losses is officialized, the country will be able to unify the various exchange rates in line with the free market rate. The gradual restoration of the trade balance, following the sharp fall in imports (which is a corollary of the decline in living standards) and BDL ending subsidies (particularly fuel subsidies), would possibly allow the slowing down of the increase in the exchange rate (at least theoretically, because confidence in the country remains weak). This will all take place against the backdrop of a sharp increase in poverty and inequality.

The authorities’ second priority seems to be centered on public entities, such as Electricité du Liban or the Beirut port, which was partially destroyed in 2020. In other words, the entities that are key to the functioning of the economy, and that could be exploited by foreign stakeholders so as to rebuild their capacities.

Add to that, the oil and gas reserves issue, which is potentially strategic in the long term, as well as the ration card issue, which is supposed to provide a minimum safety net for citizens.

Ensuring a “clean up” of the financial sector, overhauling minimum infrastructure, and providing a minimum social safety net: this is the essence of the current state program — a crisis management plan.

Yet, all of the above means that the real problem was merely touched upon, as many questions have yet to be answered. What about reforming the judicial system, or the civil service? How can we clean up public administrations, reducing the large number of unproductive staff while keeping efficient civil servants and digitalizing public service (e-government)? What economic model does Lebanon want to adopt? Should the country introduce a different tax system to boost productive investment?

What infrastructure does Lebanon want to prioritize and on the basis of what economic strategy? Will it be open to the West in addition to Syria and Iraq? Will it focus on industrial development with priority given to the environment, tourism or services?

In short, can we carry out real economic reforms with a shaky political system?

It also remains unknown whether Lebanon would cease to be the arena of regional conflicts, which makes any political program doomed to failure as a result of political deadlock.

Obviously, all these questions are very difficult to answer, and the Lebanese authorities are, alas, likely to ignore them in this phase.

The current measures, notably the negotiations with the IMF, would then only aim to ensure economic assistance allowing the country to keep its head above water (which is the same case with the energy supply via Egypt, Jordan and Syria).

At the same time, these negotiations would ensure that the Lebanese financial system regains, thanks to IMF assistance, a semblance of credibility. Lebanon would thus make the choice of “adjustment without reforms.”

But in reality, this choice is not actually an option, because the Lebanese system cannot survive as it is. Without economic, social and political reforms, there is no hope on the horizon, the population will completely lose confidence in the future, and change will take the form of mass emigration, upsetting the internal balance.

Admittedly, this is not the first time since the 19th century that Lebanon has suffered a crisis that has pushed a portion of its population to depart the country, thus (literally!) eliminating a substantial part of the potential for socio-political dispute or contestation, while at the same time ensuring a flow of funds via remittances from Lebanese abroad.

The difference is that this time the economic crisis is more violent and is happening at the end of half a century of almost continuous destabilization, which has exhausted the population, in a context where nearly a third of the country’s residents are not Lebanese.

Which communities and which political leaderships can therefore be certain not to emerge from this game as losers?

For change to occur, there needs to be a regional and international compromise, leading to a new deal when it comes to Lebanon, and making it possible to shake up the current deadly status quo.

Would some leaderships and parties (including Hezbollah among others) not risk finding themselves at odds with this external dynamic, causing a new wave of instability?

While the question remains open, we must in any case hope that change will occur quickly, peacefully, and, ideally, in the upcoming parliamentary elections.

There are three reasons for skepticism about carrying out real economic, administrative or political reforms in Lebanon. These reasons are related to the regional geopolitical landscape, the local political context and the economic and financial situation. Yet, Lebanon has a vested interest in reforming its post-Taif “system,” because it is impossible for it to survive as is.Geopolitically,...