InterRegional for Strategic Analysis


        
<p><strong>Saadeh Al-Shami, Lebanon’s Deputy Prime Minister, declared on the evening of Sunday, 3 April 2022 that "the state is bankrupt, as is the Central Bank, and the loss has occurred." Several media sources circulated Al-Shami’s statements, leading Central Bank Governor Riad Salameh to come out and stress that the bank continues to play the role entrusted to it by law, and reports of its bankruptcy are false. </strong></p>



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<p>Coinciding with the statements, on April 4 the Regional Director of the Mashreq Department at the World Bank, Saroj Kumar Jha, described Lebanon’s current crisis as the worst in its history, and as one of the three worst crises in the world. For two years, the Lebanese state has suffered a stifling economic crisis, resulting in a financial collapse and huge losses to the banking sector of about $69 billion. Since 2021, Lebanon’s economy contracted 60%, according to government estimates.</p>



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<p><strong>Given the confusion of the simultaneous statements, inquiry and discussion returns once more about the economic crisis in Lebanon, how it reached that stage, and what its main repercussions are for the Lebanese economy.&nbsp;</strong></p>



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<p class="has-vivid-red-color has-text-color"><strong>Successive Crises</strong></p>



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<p>The background of the crisis goes back to the post-Civil war decision, in the late 1990s, to peg the Lebanese currency to the US dollar. At the time, the Central Bank promised that the dollar would always remain equivalent to 1,507 Lebanese pounds. Initially, Lebanese banks were able for years to attract enough dollars to allow account holders to exchange at this rate, but that did not last. Over the past ten years, a number of local, regional, and international conditions and circumstances have snowballed and led the Lebanese economy to its current state. They are:</p>



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<p><strong>1. ‘Arab Spring’ repercussions: </strong>After 2011, the Syrian war and tensions across the Arab region slowed the flow of US dollar investments in Lebanon. At the time, that led the state to resort to other tactics that further aggravated the situation. Banks began raising interest rates to 15-20% for depositors, but the cash needed to pay the return was not available, forcing them to pay from the deposits of new investors. &nbsp;</p>



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<p><strong>2. Banking system suffers successive shocks: </strong>In summer 2019, dollar withdrawals were limited and banks were closed amid protest against the ruling authority in Lebanon. When they reopened, people were not able to withdraw their money. A black market appeared for the pound, embroiling Lebanon in a spiral of hyperinflation that has continued ever since, with the black market exchange rate reaching around LBP 33,000 to the dollar earlier this year.</p>



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<p><strong>3. COVID-19 crisis setbacks:</strong> Lebanon’s economic crisis has deepened since the beginning of the pandemic. In 2020, the economy contracted by 21.4% due to the lockdown and global supply chain disruptions in the first half of the year, negatively impacting the Lebanese economy.</p>



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<p><strong>4. Beirut port explosion damages: </strong>The August 2020 Beirut port explosion destroyed the port’s important grain silos, killed 218 people, and caused at least $5 billion in damage at a time when the economy was already groaning due to the outbreak of the COVID-19 pandemic. Together, these damages share responsibility for worsening the crisis in 2020. &nbsp;</p>



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<p><strong>5. Ukraine war exacerbates the crisis: </strong>The Lebanese economy has not been able to catch its breath from the economic repercussions of the pandemic, but the Russian war in Ukraine has deepened the country’s food crisis. According to Bujar Hoxha, the CARE International Country Director for Lebanon, between February 24 and March 21 the price of food rose by 14%. The price of bread rose by about 27%, white sugar by 72%, and sunflower oil by 83%. This prompted the government to call on the US and other donors to provide assistance and wheat reserves to Lebanon, which has been impacted by supply chain turbulence caused by economic sanctions against Russia.</p>



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<p class="has-vivid-red-color has-text-color"><strong>Economic Decline</strong></p>



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<p><strong>Successive crises in Lebanon and its extreme sensitivity to regional and international events in recent years have led to a number of repercussions, such as:</strong></p>



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<p><strong>1. Worsening inflation rate: </strong>According to the latest official figures, the inflation rate in Lebanon has increased by 4.31% since January 2022, reaching 215% in February. The rise in inflation is, in part, due to the authorities’ inability to control and contain retail prices, as well as the deteriorating exchange rate of the Lebanese pound in the parallel market and the gradual lifting of fuel subsidies. This encouraged wholesalers and retailers to seize the opportunity and raise consumer goods prices at an accelerated and inappropriate pace.</p>



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<p><strong>2. Depreciation of the Lebanese pound:</strong> The Lebanese pound has lost more than 90% of its value since the crisis erupted in 2019. While the pound was trading at LBP 1,500 to the dollar before the crisis, it is now trading at LBP 20,000 to the dollar. In response, banks froze US dollar savings accounts and implemented withdrawals in local currency at an inappropriate exchange rate that wipes out about 80% of the market value of dollar savings while helping banks reduce their losses and expenses.</p>



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<p><strong>3. High debt and default: </strong>Lebanon is defaulting on its debts of more than $90 billion, of which international debts make up more than $30 billion. The total debt is about 183% of GDP, the fourth-highest debt ratio in the world, after Japan, Sudan, and Greece. Lebanon has started rescue talks with the International Monetary Fund (IMF) to formulate a plan to completely restructure its debt balance, carry out comprehensive reforms, restructure its financial sector, and reduce the huge public debt surplus in order to secure financial assistance and open the door to billions of dollars in aid from donor institutions.</p>



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<p><strong>4. Damaged sectors: </strong>The crisis has cast a long shadow on the transportation sector, with costs up 510% in February over the same month last year. Prices increased in the restaurants and hotels sector by around 449% and in the health sector by 413%. The cost of water, electricity, gas, and other fuels rose by 372%. Food and non-alcoholic beverages saw prices rise by 396%.</p>



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<p><strong>5. Declining GDP: </strong>Real GDP fell by 10.5% in 2021, against the backdrop of a 21.4% contraction in 2020. Thus, the GDP fell from about $52 billion in 2019 to $21.8 billion in 2021, a contraction of 58.1%, leaving the Lebanese economy with the highest contraction on a list of 193 countries. The Trading Economics platform expects Lebanon’s annual GDP growth rate to be -9.00% by the end of this quarter, and that the annual growth rate will be around -2.00% in 2022 and 2.50% in 2023.</p>



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<p><strong>6. Increasing demand for cryptocurrencies: </strong>Demand for bitcoin trading in Lebanon has increased recently, due to the ability of cryptocurrencies to bring in much-needed foreign currencies, given the country’s financial distress. According to a statement by Mark Iskandar, the CEO and founder of the cryptocurrency company Magmamining in Beirut, the percentage of bitcoin traders in his company has increased by around 67%, while the company has seen a 145% increase in revenue.</p>



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<p><strong>In conclusion, Lebanon has been facing a stifling economic crisis for two years, making it one of the three largest crises in the world since the mid-19<sup>th</sup> century, according to the World Bank. The Lebanese economy is still struggling, while the government tries to complete the first phase of ongoing negotiations with the IMF to reach a preliminary memorandum of understanding. At the same time, Lebanese Prime Minister Najib Mikati endeavors to restore relations with Gulf nations and renew his commitment to the requirements for strengthening cooperation, in an attempt to find funders for Lebanon’s economic crisis before the May 15 elections.</strong></p>

      

Lebanon’s Economic Decline Intensifies Under Successive Crises