When democracies collapse: Lebanon, what went wrong?

Critical infrastructure nearing shut-down, service institutions strained to their breaking point, weakening security sector, and eighty per cent of the population below the national poverty line;as of 2022, the little Middle Eastern-Mediterranean State of Lebanon has entered its worst possible downslide.

The Lebanese Republic, whose once thriving capital Beirut, is now merely remembered as the ‘Paris of the Middle East’ has collapsed as a result of what the World Bank has deemed to be one of the most severe economic and financial crises globally since the mid-nineteenth century.

Though the point of no return was marked in 2019, the year the public debt reached the unprecedented critical level of about 170% of the Nation’s GDP (as well as the year that saw the start of the revolutionary movement known as the Thawra, take to the streets and carry out still ongoing protests) and, thus Lebanon’s doom was brought to light in the past two years, its collapse was inevitable and situated years back.

Its origins can in fact be identified in the mainly economic and socio-political trends that have been known to country since its post-civil war years.

The face of corruption in the wake of a financial crisis

The decade that followed the Lebanese civil war, a multifaceted ethno-religious conflict spanning fifteen years (1975-1990), was characterized by the country’s re-flourishinf. Post war reconstruction, starting 1990, was in part owed to foreign aid: the Gulf Arab States, among others, strengthened central bank reserves and bankrolled the State.

Yet today its public debt is among the world’s highest burdens. What happened?

As a matter of fact, economic growth was soon hindered by a trail of corruption and mismanagement, as political elites, starting from the very first governments, began their unrestrained borrowing. Their spending habits were favored – and at the same favored – the Lebanese financial system acting as a nationally regulated Ponzi scheme, a kind of investment fraud in which new funds, collected from new investors, are borrowed to pay existing investors. Ponzi schemes require a constant flow of new money to survive but collapse when such flow stops.

The scheme was the object of the 2021 fraud investigations against Riad Salameh, Lebanon’s decades-old central bank chief, accused of enriching himself and his inner circle through years of corruption.

Dollars, Ponzi schemes, Geopolitics

Corruption set aside, the financial crisis is additionally linked to the very-same postwar policy that, from 1990, tied the country’s currency, the Lebanese pound (lira), to the U.S. dollar. Then, Lebanon’s central bank promised the exact exchange of 1,507 Lebanese lira to 1 U.S. dollar, as well as Lebanese banks to always exchange one for the other. For this policy to thrive, Lebanon’s banks would have to hold, and keep, a large store of U.S. dollars, a problem they were brought do deal with until at least 2011. The nation’s most reliable source of dollars was in fact remittances from the millions of Lebanese abroad and foreign investments.

However, 2011 was yet another year of political scleroses. Much Middle East descended into chaos, but it was the war in neighboring Syria that dealt the blow, reigniting tensions between the already highly sectarian, divided and fragmented domestic politics. As Sunni Muslim Gulf states turned away (a result of the rising influence in Lebanon of Iran via Hezbollah, the heavily armed Lebanese Shi’te group), Lebanon’s parties’ divergent positions deterred other foreign investments: the budget deficit rocketed, the balance of payments sank deeper.

To tackle the public debt, Lebanon’s central bank resorted once more to the Ponzi scheme. In 2016, Lebanon’s central bank announced it would offer remarkable interests for new deposits of dollars.

The spark for unrest then came in October 2019, when the government planned to tax WhatsApp calls, igniting the Thawra. Ever since, the currency has been collapsing. The Lira has lost 90% percent of its pre-crisis value. At the time of writing, one dollar is sold for 24.000 Lebanese pounds. And when banks no longer have dollars to pay their depositors, they shut their doors.

It is of extreme relevance to note that the financial crisis does not affect all Lebanese equally. At the most critical point stands most of the population: the citizens that earn their salary in pounds. Lebanese families spend ‘5 times minimum wage on food .

Faction politics, or the lack of patriotism

Through the drastic financial crisis, the socio-political is not of lesser importance.

Lebanon’s main tragedy remains its lack of national unity and patriotism, an immovable political trend highly related to the sectarian aspect of Lebanese politics. As a matter of fact, the different religions, and most importantly internal sects, are deemed to be behind the country’s regrettable mismanagement.

When the French mandate ended in 1943, and the Lebanese Republic was granted its independence, its Constitution was drafted as to guarantee all eighteen religious’ sects in the country to be represented in government, military and civil service.

As such, Lebanese politics are and remain highly resting on a sectarian power-sharing structure. Within the main government positions for instance, the president must be a Maronite Christian, the prime minister a Sunni Muslim, and the speaker of the parliament a Shia Muslim.

While the system was issued as an attempt to assure equality and representation in the governments, it has acted out as a division of power between the elites of the very same sects, and entailed patronage-based politics, with, again, corruption lying at the center.  Ruling political parties treat state institutions as sources of income. Government departments related divisions place sect against sect in competition and continue to halt efforts towards cohesive political reforms.

While the Thawra potentially came into light as both old and younger generations attempt to break the continuously damaging pattern, but the traditional parties’ dominance remains de facto unchallenged; almost of the population has lost its aspirations for any future reform, even in the wake of the soon to be held 2022 elections.

As a half Lebanese just returned from a trip to Beirut, recalling the heart-to-heart confrontations with the alas hopeless Lebanese people makes writing about the modern-day Cedar Republic a painful task.

Yasmina Dionisi

References

International Crisis Group, “Managing Lebanon’s Compounding Crises”, October 28, 2021, https://www.crisisgroup.org/middle-east-north-africa/east-mediterranean-mena/lebanon/228-managing-lebanons-compounding-crises

The World Bank, “Lebanon Sinking into One of the Most Severe Global Crises Episodes, amidst Deliberate Inaction”, June 1, 2021, https://www.worldbank.org/en/news/press-release/2021/05/01/lebanon-sinking-into-one-of-the-most-severe-global-crises-episodes.

The New York Times, “Lebanon’s crisis, An Explainer”, October 12, 2021,

Reuters, “Explainer: Lebanon’s financial meltdown and how it happened”, June 17, 2021, https://www.reuters.com/world/middle-east/lebanons-financial-meltdown-how-it-happened-2021-06-17/

Investor.gor, “Ponzi scheme”, https://www.investor.gov/protect-your-investments/fraud/types-fraud/ponzi-scheme.

The New York Times, “As Lebanon Collapses, the Man with an Iron Grip on Its Finances Faces Question”, August 4, 2021, https://www.nytimes.com/2021/07/17/business/lebanon-riad-salameh.html

The New York Times, “Lebanon’s crisis, An Explainer

Reuters, “Explainer”.

France 24, “Lebanon families spend 5 times minimum wage on food”, July 7, 2021, https://www.france24.com/en/live-news/20210721-lebanon-families-spend-5-times-minimum-wage-on-food-study

International Crisis Group, “Managing Lebanon’s Compounding Crises”, October 21, 2021, https://www.crisisgroup.org/middle-east-north-africa/east-mediterranean-mena/lebanon/228-managing-lebanons-compounding-crises