We are all aware now of the devastating explosion at the Beirut port on Tuesday which took the lives of at least 145 people and has injured more than 6000 more. What is even more devastating however is the fact that the explosion came in the midst of Lebanon’s worst economic crisis in decades. In today’s blog we dive deeper into the explosive nature of Lebanon’s economy.
Lebanon was once a prosperous regional center for trade and finance however that has been tarnished by decades of unrest fueled by political turmoil, corruption and sheer bad luck. The addition of conflict between Israel and Hezbollah (Iran backed Shia militia) doesn’t help the Lebanese case. All these factors in consideration, the Lebanese economy has been steadily slowing since 2011 following the Arab springs, the Syrian conflict and internal political tensions. Estimated at -1.9% in 2018, GDP growth amounted to -6.5% in 2019 and has decreased even more to -12% in 2020, due to the outbreak of COVID-19. The traditional engines of growth in Lebanon (real estate, construction and tourism) have stalled and the banking sector, which had so far been praised for its resilience, has proven to be vulnerable, revealing worrying prospects for growth. (To summarise this paragraph: the lebanese economy is in shambles)
"Most parts of Lebanon are receiving no more than two or three hours of electricity a day. An incoming flight at Beirut’s airport had to abort a landing this month because the lights on the runway went out. The traffic signals in the capital have stopped working, adding to the congestion on Beirut’s already chaotic streets. " Cited from Washington Post
It was in 2019 that the already worrying economic situation in Lebanon worsened, it raised fears of a collapse of the country. In order to raise funds, the government had decided to impose a tax on Internet calls like WhatsApp which triggered the biggest uprising the country has known in a decade and forced the then Prime Minister Saad Hariri to resign in October 2019. This proves that corruption doesn’t spark revolutions, taxation on social media does. Welcome to the age of millennials!
Flawed policies and sudden shocks have thrust Lebanon into its worst economic crisis in decades, with its currency collapsing, businesses shutting, prices for basic goods skyrocketing and the threat of hunger looming for its poorest people.
Lebanon’s Economic Crisis Explodes, Threatening Decades of Prosperity
Lebanon is the third most indebted country in the world. In October 2019, their banks had to close for two weeks, causing panic among depositors who saw their withdrawals limited and their transfers abroad prohibited. Credit dried up, preventing companies from financing imports, and non-performing loans were on the rise. The Lebanese Pound is valued poorly against the US dollar.In addition, the Lebanese pound remains in freefall on the black market. This has led to skyrocketing inflation, which hit 56.5% in May, eroding consumers’ purchasing power. The country faces many social issues in addition to macroeconomic and political challenges. The massive influx of Syrian refugees (25% of the country's population) has shaken the country's demographic balance, labour market, and has put pressure on the costs of rent, infrastructure and supply of public services (water and electricity).Unemployment has skyrocketed following the inflow of Syrian refugees, who are competing with Lebanese workers in the informal sector and could hit over a quarter of the workforce. Over 70% of refugees live under the poverty line. The 'waste crisis', which began in 2015, is yet to be resolved as garbage continues to pile up along the Mediterranean Sea.
In hopes to remedy this, an interim government has been put in place, the priority of which is to restore political stability in order to implement the reforms necessary for economic recovery and to obtain international funding.
By tying the exchange rate to the dollar for 23 years, Lebanon effectively subsidized imports, allowing its people to enjoy lifestyles otherwise beyond their means. High interest rates paid to depositors attracted diaspora remittances -- a crucial source of dollars -- but discouraged enterprise as Lebanese could earn more depositing money in the bank.
Lebanon’s Economic Crisis Is Spinning Out of Control, Fast
International lenders, including the IMF, say they’re ready to help once Lebanon shows it’s serious about ending corruption and restructuring the economy but with the Beirut disaster the hopes of stabilising the economy has taken a further hit. .
How will Lebanon rise up from this crisis?
The only feasible solution is to have the expatriate lebanese return home with their Dollars. Bringing back cash would help stabilise the economy. The biggest step however would be to end corruption which is an extremely difficult task (coming from an Indian). Till then we can only hope and pray that the Lebanese people overcome this adversity with the same joyous spirit that we have come to expect from the people of their great nation.