Economics globalization Human Rights Middle East & North Africa Politics & Government

Diversification of Lebanon’s Economy is the Path Toward Rebuilding the Country’s Broken Financial System

Lebanon’s precarious financial situation is no surprise to those that have paid attention to the government’s ineptitude, corruption, and constant sectarian strife for the last thirty years—but it was not inevitable.

A Historical Overview

Lebanon is a small country that made its global name as the Switzerland of the Middle East for its financial power, stability, and strict banking secrecy laws. Now, it has found itself coping with one of the worst fiscal crises a nation can face. Its people, known for their unparalleled resilience and ability to find joy in any situation, have been pushed to the brink of starvation because of their government’s incompetence. The party-like atmosphere has disappeared from the streets of Beirut as the country holds its breath, hoping for an economic miracle that is nowhere in sight. Instead, it is up to the Lebanese community, both at home and abroad, to address a worsening crisis.

Lebanon’s precarious financial situation is no surprise to those that have paid attention to the government’s ineptitude, corruption, and constant sectarian strife for the last thirty years—but it was not inevitable. In 1943, Lebanon gained independence from France and set out to form a self-sufficient government. In doing so, it set itself apart from its regional neighbors—devising a parliamentarian republic that maintained democratic electoral politics and a laissez-faire economic model. Although it was far from perfect, the country was able to develop a diversified economy centered on banking, commerce, and tourism that avoided debt and high taxes. However, it left social development up to NGOs and the private sector, a decision that would play a role in the turmoil the country faces today. Nevertheless, until the civil war, many would argue that the country and its people were thriving. 

However, in 1975,  the civil war began to rip apart the cotton candy skies that had made Beirut the lively place that it was. This war, fought over sectarian issues and exacerbated by the Palestinian Liberation Organization’s (PLO) interference, would test the country and its people in unimaginable ways over its fifteen-year duration. When the skies finally returned to their original hue in 1990, the country and its people—resilient as ever—set forth to rebuild. 

This was the setting for Lebanese business tycoon Rafic Hariri to enter the political landscape. In 1992 he was elected Prime Minister of Lebanon and began a massive restoration project in the heart of Beirut. Although the resultant buildings are undeniably beautiful, the project cost the country 35 billion dollars that it didn’t have, leading the country to become the second most indebted nation in the world today, and competing closely with Japan for a spot as the first. This was when the seed for today’s Lebanese financial crisis was planted. You see, for a country that imports eighty percent of its goods and relies on remittances and wealthy investors, thirty-five billion dollars is an impossible price to pay. Whereas Hariri sought to rebuild the city, the onus is now on Lebanon’s people to rebuild the economy.

What Sparked This Particular Crisis? 

In an attempt to pay the accumulating debt, the Lebanese government began to borrow from its banks. Many view this system of borrowing as a Ponzi scheme— an endless cycle in which fresh money is constantly used to pay off existing creditors. The scheme successfully quelled dissatisfaction for nearly 30 years— depending upon constant injections of fresh money to veil the country’s financial ruin. 

And fresh money kept pouring in. With “tourism receipts, foreign aid, earnings from its financial industry, and the largesse of Gulf Arab states,” in addition to the remittances from the country’s massive and devoted diaspora, Lebanon was able to hide the fact that it was the third most indebted country in the world. But just because it was cleverly veiled did not change the fact that its debt equated to 152 percent of its GDP, crippling the country’s economy. 

Due to this economic mismanagement, in 2011, with the Arab Spring well underway and sectarian quarrels within the Lebanese political system intensifying, the diaspora stopped sending money home. The diaspora remittances upon which the economy depended slowly but surely dried up. Simultaneously, Hezbollah (an Iranian Shi’ite political group classified as a terrorist organization by the United States) assumed a larger role in the country, stifling both Sunni Muslim and Western countries’ investments in Lebanon. 

From 2011 until 2016, the country fell deeper and deeper into debt and made no efforts to reorient its economy to be in a position to repay it. But in 2016, banks in Lebanon ‘brilliantly’ came up with the idea to offer investors remarkably high interest rates for US dollar and Lebanese lira deposits. Nearly instantaneously, fresh money began to flow into the country again as diaspora and wealthy investors throughout the Middle East took advantage of sky-high returns on investments. 

In typical Ponzi scheme fashion, their ‘brilliant’ idea had to come to a calamitous end eventually. The country’s debt was still piling up, and fresh money wasn’t cutting it anymore. Just when the government needed to reign in spending the most, it decided to splurge on pay raises for the public sector to be in constituents’ good graces for the 2018 election. Since approximately ten percent of the population received a government salary, this was a good political move for government officials hoping to secure votes, but it was not financially feasible. Essentially it ensured that foreign donors— particularly France, the International Monetary Fund, and the World Bank— would withhold their pledged aid due to the government’s failure to reduce the deficit and cause Lebanon’s finances to plummet even further. 

In October 2019, the culmination of several economic missteps saw the country hit rock bottom. Kicking off the crisis, the Lebanese lira fell in value for the first time in two decades, scaring off the country’s much-needed outside investments from wealthy Arabs in surrounding countries and diaspora. Then, unprecedented wildfires lit the Lebanese mountainside on fire and Lebanon’s underfunded firefighters failed to get them under control, infuriating civilians and further spooking those still bringing in fresh money to the country. And finally, with the proposal of a ridiculous tax on Whatsapp that would charge citizens $0.20 a day to make phone calls via the app, the public’s frustration with the government’s inability to provide even the most basic services despite their sky-high tax rates reached boiling point. Thousands of protestors erupted in the streets of Beirut and across the world as Lebanese individuals voiced their outrage at the government’s ineptitude. The protests, though meaningful, catalyzed the financial crisis by ensuring that investors would pull their money out of Lebanese banks and topple the Ponzi scheme that the country had been relying on for so long. 

Today, Lebanon is in a dire state. Banks have officially boarded their doors, unable to allow customers to withdraw the equivalent of more than a few hundred dollars a month. US dollars are practically nonexistent in the country as the Lebanese lira has gone from an exchange rate of 1,200 lira per dollar to nearly 15,000 lira per dollar. No matter whether rich or poor, peoples’ life savings have disappeared without a trace, leaving the entire country desperate and incapable of moving forward. Meanwhile, inflation has reached 120%, with food inflation climbing as high as 400%.

Who is it affecting? 

a. Lebanese citizens

Currently, Lebanon’s unemployment rate has skyrocketed to 25%, with the COVID-19 pandemic further exacerbating the fiscal crisis. Worse, the youth unemployment rate has hit an all-time high at 37%, forcing Lebanon’s brightest minds to flee the country in search of employment elsewhere. At an unprecedented rate, doctors, nurses, engineers, and many other skilled workers are leaving their homes and lives behind because they feel that Lebanon has nothing left to offer them. 

And many might say that that’s true. 

Even grocery store shelves have been left barren for the most part as “dollars are in such short supply that the central bank will only give them to importers of wheat, medicine, and fuel.”  In many places, egg cartons that used to cost as little as $1 now cost up to $20, and with so little money circulating, such high prices are destined to lead to starvation. Luckily, a few NGOs are still offering food donations to ensure that those most in need are fed, but in the ongoing absence of government intervention citizens may soon find themselves worse off than Americans were at the height of the Great Depression.

b. Refugees

With such large-scale suffering, it is no surprise that Lebanon’s most vulnerable are being hit the worst. Amongst those most vulnerable are the country’s approximately two million Syrian and Palestinian refugees. Without Lebanese work visas, they are unable to work regular jobs, leaving Syrian and Palestinian refugees at the very bottom of Lebanon’s economic food chain. Now, with the financial crisis and the pandemic working in tandem to tear the country apart, refugees are further disadvantaged.

Of the meager funds that Lebanon has received to try to alleviate some of the pressure that the citizens are facing, such as the World Bank’s Emergency Crisis and COVID-19 Response Social Safety Net Project, there is no financial aid available to refugees, leaving them ill-equipped to handle the extenuating circumstances. In fact, “eighty-eight percent of Syrian refugees in Lebanon are in extreme poverty.” Some Syrian migrants have even felt that the situation has gotten so bad that they would be better off returning to Syria.

c. Domestic Workers

Another underprivileged group, which make up approximately 250,000 of the Lebanese population, are migrants seeking better work in the ‘Switzerland of the Middle East’. These domestic workers came to Lebanon with hopes of supporting their families back home in Ethiopia, the Philippines, Bangladesh, or Sri Lanka. Domestic workers, or migrants hired by Lebanese families to carry out household chores, have long been abused by the Lebanese Kafala (or sponsorship) system, making it incredibly difficult for them to achieve autonomy. Compounding upon systemic measures already working against them, the financial crisis has further severely reduced immigrant domestic workers’ quality of life. 

With most Lebanese families unable to pay their rent, let alone spend money on house care, domestic workers have been left stranded in a country with no job, home, or access to resources. Many have returned to their home countries, but the process is not so simple for those that have stayed in Lebanon illegally. This lack of work and impossible immigration circumstances have forced some to stay in tents outside the UNHCR building because they simply have nowhere else to go. 

International Effects

The crisis has also not been limited by borders. Due to Lebanon’s popularity as a haven for foreign direct investment, the effects of the banks’ financial collapse have been felt all around the world. From the portion of the Lebanese diaspora who kept their life savings in Lebanese banks to Lebanon’s neighboring countries, the crisis is spreading and shows no signs of slowing. 

Angry at the unjust situation, some foreign nationals have looked to their own countries’ judicial systems to seek revenge on the Lebanese banks holding their savings hostage. Recently, a decision rendered by a UK Court has made it possible for European nationals to sue Lebanese banks under European consumer law. Despite this decision, the likelihood that courts will force Lebanese banks to transfer consumers’ money from Lebanon is slim, so many will have to cope with the fact that their life’s earnings have disappeared into the wind. 

Meanwhile, in neighboring Syria, financial turmoil seems to be spreading quickly. Syrian and Lebanese economies have been closely intertwined for quite some time, as wealthy Syrian elites have utilized Lebanon’s highly regarded banks to “skirt sanctions and do deals abroad” since 2011. Now that their money is inaccessible, dollars have become nearly as scarce in Syria as they are in Lebanon, plummeting the Syrian pound to record lows. For a country that is already in such turmoil, the loss of an estimated forty billion dollars may be insurmountable for the Lebanese banks. 

What Needs to Happen 

Lebanon is certainly in a precarious position, and any wrong moves could send it spiraling even further. However, some believe that this is the country’s opportunity to start fresh and restructure its economy more sustainably. 

To do so, Lebanon will need to manage its debt and diversify its economy. With its fiscal reputation in ruins following the financial crisis, relying on foreign funds to bolster the economy will no longer be possible. Therefore, the government must look to foster the development of new private sectors. Moreover, the politicians currently in power—the same ones that are responsible for the country’s abysmal rank as 137th out of 180 in corruption—need to be removed and replaced with individuals that are willing and able to reform the broken system. If not, international donors have already pledged that Lebanon will not receive any aid from them and the country will be left to fend for itself. For positive change to occur, the country will need to come together, undivided by the sectarianism that has plagued its governments before and commit itself to creating a Lebanon that can once more be known as the Switzerland of the Middle East. 

Despite Western media’s portrayal, it is important to note that Lebanon is not a country desperately in need of a white savior to wash away all its problems, nor is it a country that has been consistently plagued by war and terrorism, never truly able to thrive. As economists like Dambisa Moyo have proved, international aid from wealthy countries often leads to a greater financial burden and rarely resolves crises. While international support for the country is necessary, Lebanon must regain its footing primarily on its own. The country will need to utilize its natural resources such as oil, gas, limestone, salt, and arable land to begin exporting products and producing revenue, and young Lebanese citizens that have fled the country will need to return to avoid a crippling brain drain to the economy. The massive diaspora, which is five times the size of the country’s population, will likely need to reach deep into their pockets to begin funding ventures in the country that can employ Lebanese citizens and further stimulate the economy. 

Throughout all of this turmoil, hope is still blooming in Beirut alongside the beautiful spring flowers that line the once-bustling city streets. No amount of aid from the West will do much to alter the course of things. It is therefore up to the Lebanese people to do what they do best: rebel against despair and breathe in the hope that is filling their air.

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By Lea Haddad

Lea is a first-generation immigrant from Lebanon who is pursuing a bachelor's degree at UCLA in Political Science with a minor in Professional Writing. She aspires to be an attorney and aims to specialize in gender and human rights.

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