According to many analysts Lebanon is a country that has already failed. For others, crack is very close. What is certain is that the country is undergoing a severe and prolonged economic depression. According to the latest World Bank report, Bank Lebanon Economic Monitor (Lem), released in June, the economic and financial crisis in the land of cedars is among the worst ever in history, even from the mid-1800s. For some economists, Lebanese economists are in the top 10 of financial defaults, for others even in the top 3. “In the face of colossal challenges, persistent political inaction and the absence of a fully functioning government continue to aggravate already disastrous socio-economic conditions and a fragile social peace without a clear turning point on the horizon “, writes the Washington institute.
The title of the World Bank report does not bode well: “Lebanon Sinking: To the Top 3”. The publication presents recent economic developments and examines the country’s prospects with associated risks. For over a year and a half, Lebanon has faced different challenges: the greatest economic and financial crisis in peacetime, the Covid-19 pandemic and the explosion of the port of Beirut, which took place on August 4 last year.
As highlighted by all international observers the political and economic responses of the Lebanese authorities to these challenges have been completely inadequate and unsuccessful. There has never been a consensus on effective political initiatives in the country. The unity of purpose, on the other hand, was found in the strenuous defense of a failed economic system that continues to favor the few to the detriment of the majority. To make matters worse, a protracted civil war that has aggravated increasingly disastrous socio-economic conditions that risk provoking systemic national failures with regional and potentially global effects.
The numbers of the World Bank leave no way out and sketch a scenario with a lot of shadows. Therestituto estimates that GDP contracted by 20.3% in 2020, after a decline of 6.7% in 2019. In fact, Lebanese GDP plummeted from nearly $ 55 billion in 2018 to about $ 33 billion in 2020, while per capita output fell by about 40%. Such a strong contraction is usually associated, the World Bank explains, with conflicts or wars. “Monetary and financial conditions remain highly volatile; in the context of a multiple exchange rate system.”
The average exchange rate depreciated by 129% in 2020. The effect on prices has resulted in a surge in inflation, with an average of 84.3% in 2020. Subject to exceptionally high uncertainty, iGDP will contract by a further 9.5% this year as well.
“Lebanon faces a dangerous resource depletion, including human capital, and highly skilled workforce are increasingly inclined to seize opportunities abroad, creating permanent social and economic loss for the country, “said Saroj Kumar Jha, regional director of the World Bank’s Mashreq.” Alone. a reformist government, which embarks on a credible path of economic and financial recovery, and which works closely with all the parties concerned, can reverse the course of a further fall and prevent greater national fragmentation “.
Conditions in the financial sector continue to deteriorate. The burden of the ongoing adjustment in the financial sector is highly regressive, concentrated on the smallest depositors, the majority of the workforce and SMEs. More than half of the population is below the national poverty line, with most of the workforce – paid in lire – suffering from the collapse of purchasing power. With the unemployment rate on the rise, a growing share of households are facing difficulties in accessing basic services, including health care in this more important time than ever.
The Washington institute also points out the impact of crises on four basic public services: electricity, water supply, sanitation and education. The depression further undermined already weak public services through two effects: it significantly increased poverty rates, with more families unable to afford private substitute goods, thus becoming more dependent on public services. It puts the financial sustainability and basic operations of the sector at great risk, increasing its costs and reducing its revenues.
The provision of essential public services is essential for the well-being of citizens. The sharp deterioration in basic services will continue to have long-term implications: mass migration, loss of learning, poor health services, lack of adequate safety nets. Permanent damage to human capital, the World Bank points out, would be very difficult to recover. And perhaps this dimension of the Lebanese crisis makes it unique compared to others
The reasons for the collapse of a country that was once known as the Middle Eastern Switzerland they are many. There corruption made it impossible, after the civil war that lasted from 1975 to 1990, a strong recovery also because the strength of the country was the human capital, now at the end of its life, and services. Some economists have spoken of Lebanon’s financial system as one schema Ponzi nationally regulated, where new money is borrowed to pay off existing creditors. It works until the fresh money runs out.
After the civil war, Lebanon tried to put its public finances in order, with tourism, foreign aid, the financial industry and the generosity of the Arab Gulf states, which financed the state by supporting the reserves of the central bank of Beirut. Another reliable source of dollars was the remittances of the millions of Lebanese who went abroad to work. Even during the global financial crash of 2008, flows into Lebanese banks continued. Remittances started to slow down starting in 2011, with the political deterioration of the area and the fall into the chaos of neighboring Syria. The Gulf Sunni Muslim states have drifted apart because of the growing influence in the country of Iran, through Hezbollah, the armed Lebanese Shiite group whose political power has grown dramatically.
The budget deficit skyrocketed and the balance of payments sank even further. That was until 2016, when banks began offering higher interest rates for new dollar deposits, an officially accepted currency in the economy. All this while in other parts of the world rates were moving towards zero. The dollars have started to flow again and the banks to finance the ever increasing spending. But the high interest rates have to be paid. And now the bill was served.