By Bhavya Surapaneni ’23
For months, Lebanon’s economy has been in a state of large-scale collapse as a result of long-standing political and systemic corruption in the Lebanese government. According to The New York Times, the primary catalysts of the economic free-fall were anti-government protests in October 2019 and a cessation of investment into the corrupt central banking system, the backbone of Lebanon’s economy. Since October, Lebanon’s currency, the Lira or pound, has depreciated significantly, prices have inflated, and residents of Lebanon are struggling to make a living and stay afloat.
The crux of the collapse occurred in late 2019, but corruption has been an ongoing issue for decades in Lebanese politics. Lebanon’s current problems began with the instatement of a sectarian government. Lebanon’s system of sectarianism utilizes the partitioning of people and power into sects, primarily based on affiliated religion. For instance, office positions are often accorded to individuals due to their sect rather than ability.
This concept of office positions being granted by religion or sect rather than merit was the solution to a fifteen-year civil war that tore the country apart and caused thousands of casualties and injuries, along with a displacement of almost one million Lebanese citizens.
This sectarian split of power has run into trouble because the political parties of today were formed from Lebanon’s wartime militias, including Hezbollah, an Iranian-backed, Shi’a Islam group designated as a terrorist organization by the United States. The distribution of governmental power and influence to militant parties facilitated a situation in which “the elites were enriched at the expense of the poor, and the foundations of the current collapse were laid,” according to The Washington Post. With officials driven by ulterior partisan, religious, and sectarian motives, the system drowned in a sea of illicit activity, namely clandestine financial transactions.
The Lebanese economic system is unique—it does not rely on exports and instead focuses on imports. Analysts have equated the economic system to a “state-sponsored Ponzi scheme,” with wealthy investors pouring money into the central bank because of the government’s high interest rates and promise of high yield on investments. The government urges investors to return and invest further by offering even higher interest rates on new deposits.
Lebanon relies on this system because of their import economy: to stay in the game, they need to maintain a fixed exchange rate between the Lebanese Pound, or Lira, and the United States Dollar. For years, the rate stayed consistent, but since last October, the Lira has depreciated by over 80%. A stable exchange rate is necessary to minimize import costs and streamline global trade. However, last year, investors realized that the Ponzi-esque system was unsustainable, and investors stopped returning, resulting in a nationwide currency shortage. Because of Lebanon’s reliance on other countries and internal backers, they couldn’t do much to get out of their financial quagmire.
In an interview with CNN Business in July, Dima Krayem, a Lebanese economist, explained the problem from an economic standpoint: “It’s a collapse of a model that has accumulated losses for three decades.”
It became clear that Lebanon was facing one of its worst economic downturns ever when opposition protests and bank restrictions on withdrawals emerged. In March, Lebanon defaulted on a $1.2 billion debt payment, marking the country’s first sovereign default. Lebanon’s options were few and far between, and they eventually chose to call on the International Monetary Fund (IMF) despite concerns on the part of both the IMF and Lebanon. The government released a financial plan on April 30, 2020 that detailed Lebanon’s intention to reach out to the IMF, a part of the United Nations system, for $10 billion in emergency funding. This funding was never granted to Lebanon because of the government’s reluctance to reform the corrupt economic system that led to the crisis. Hezbollah officials claimed that “any IMF bailout would spark social unrest.” The government attempted to address their financing issues without the IMF but couldn’t create a plan that would give them enough funding for their agenda.
While the wealthy and upper class Lebanese are responsible for suspending their investments to the bank, the middle-and lower-class people of Lebanon were disproportionately affected by currency shortages. According to the World Inequality Database, Lebanon has an immensely unequal distribution of wealth, with the top 1% being in possession of nearly 25% of the country’s income. Even in comparison to neighboring countries in the Middle East, this is a very high level of socioeconomic inequality. As a result, the wealthy were not heavily impacted by the collapse, but the same can not be said for Lebanon’s masses.
With rapid inflation of basic goods, civilians in Lebanon have gone to extreme lengths to provide for themselves and their families. Because of devaluation of the Lira, importing has become economically infeasible and prices for goods are rising rapidly. A 2019 press release from The World Bank stated that the 33% of the population in poverty in 2018 could increase to 55% by the end of the recession. With the sheer number of people affected, poverty levels in Lebanon could hit a new high very soon. To address this crisis, many Lebanese citizens have sold their valued belongings for food and other necessary goods for survival. Families have sold wedding rings to merchants to pay for basic goods and commodities, and households rely on food banks and aid from others to feed their families.
“Right now, the majority are bearing the brunt of this collapse, as opposed to the 1% that have made use and have made an infinite amount of dollars out of this system,” Krayem said. As a Lebanese economist, Krayem largely follows IMF negotiations with countries like Lebanon.
On August 4, Lebanon’s woes culminated in a colossal explosion in Beirut, the capital city of Lebanon. This explosion is still a recent development, so details of the origin of the blast are not yet confirmed. However, Prime Minister Hassan Diab of Lebanon revealed that 2750 metric tons of ammonium nitrate, a compound that is used in fertilizer and necessary for arid land, was stored in Beirut’s port for six years without the proper safety precautions, according to an article by CNN. Released videos have also shown a fire that started at the port before the explosion occurred. While it is unclear what caused the Ammonium Nitrate to combust, Diab claims that the ammonium nitrate was the underlying cause for the incident.
As of August 14, the death count is at 178 individuals, according to TASS. More than 6,000 were injured, 300,000 civilians displaced from their homes, and more than $3 billion dollars worth of damage will have to be accounted for.
Beyond fatalities and obvious economic trouble from a disaster, anger among citizens is festering, and many place blame at the feet of officials for the explosion. Civilians claim that government officials were responsible for overseeing safety measures in the port, and their carelessness proved deadly. With civilians already distressed over government corruption and a weak economy, the blast added more fuel to the fire.
The economic crisis in Lebanon is far from over, with the aftermath of the explosion perpetuating the problem. World leaders have addressed elitist bias and economic crisis, demanding accountability from the government and financial aid for the people. On August 6, two days after the explosion, President Emmanuel Macron of France visited Beirut. In an interview with Reuters, Macron commented, “It’s a political, moral, economic, and financial crisis, the first victim of which is the Lebanese people.” He then went on to discuss the reason for his trip to Beirut, stating, “So, for me, this visit is also an opportunity for frank dialogue, a demanding one, with political leaders and Lebanese institutions.”
With all of the events that have occurred in Lebanon, it’s foreseeable that the economy will plunge further into financial strife. Roy Badaro, a Lebanese economist, stated to a New York Times correspondent, “There are many sins and many sinners. The sins of the past have to be paid for today and in the future, so there is a distribution of pain to cover the costs.” It appears that the world will have to bide its time to understand how said distribution of pain will play out for Lebanon’s people and government.