IR Made Easy: Lebanon’s Economic Crisis

Beirut. Photo by Piotr Chrobot on Unsplash.

Countries around the world are struggling to cope with the economic consequences of the COVID-19 pandemic, but Lebanon was heading towards crisis before the virus became an issue. Once admired as a beacon of stability in an increasingly unstable region, Lebanon is facing an unprecedented economic crash and a massive rise in poverty. So what’s happened and how did the country get to this position?

What’s happening

Lebanon is facing its worst economic crisis in the modern era. The local currency, the Lebanese Lira, is in freefall and lost 60% of its value over June, as well as decreasing in value by 80% since October. Grappling with an economy on the verge of hyper-inflation, the government has been unable to fund wheat imports, leading to bread shortages. Other essentials, such as medicines, safe drinking water, power, and internet access, are in short supply as thousands descend into poverty; the world bank projected that over half of the population would fall below the poverty line this year. With the world’s third highest public debt to GDP ratio and an umeployment rate of 25%, the government has announced that they will default on their foreign debts.

Many Lebanese feel that the government is not doing enough to support people and the economy, and many people have taken to the streets in the largest anti-government protests seen in over a decade. Public pressure led to the resignation of Prime Minister Saad Hariri, leading to the formation of a new government in January. However, a change in leadership has not brought the drastic change needed to the country and protests are still ongoing.

Lebanese protesters gather outside a money transfer service provider shop in the southern city of Sidon. AFP via Getty Images.

How Lebanon got here

Many see the collapse of Lebanon’s economy as something that was inevitable. Successive Lebanese governments have been accused of economic mismanagement, endemic corruption, and overspending. But the main catalyst for the current situation was the shortage of foreign currency in October 2019, causing the value of the Lebanese Lira to fall against the dollar on the black markets that emerged. To increase revenue, the government introduced sweeping tax proposals on commodities such as tobacco, petrol, and voice calls, but these plans were fiercely opposed by Lebanese citizens and were thus rescinded. Although a lockdown imposed in March in response to the COVID-19 pandemic forced many protesters off the streets, it also worsened the economic crisis and exposed the inadequacies of the country’s welfare system.

Following the resignation of Saad Hariri, Hassan Diab assumed the position of Prime Minister promising economic reforms, but these have been forgotten and not implemented. Many blame ruling elites who have built up their own wealth over the years while failing to reform the struggling economic system. Lebanon’s economic crisis is ultimately the result of poor economic policy and institutional corruption.

Political commentary on the streets of Gemmayze, East Beirut, Lebanon. Photo by Brian Wertheim on Unsplash.

Implications for international relations

Lebanon’s economic crisis also has implications for the future of Lebanon’s foreign policy and relations. Lebanon has sought support from the International Monetary Fund, but after six weeks of discussion, talks have stalled due to arguments within the Lebanese delegation. This comes alongside a reduction in international transfers as more foreign banks want to avoid the Lebanese banking sector, which faces accusations of mismanagement.

The international community have not been keen to help Lebanon’s struggling economy. The country’s western allies have been offering an $11 billion loan package since 2018, but this is on the condition that the government implements reforms in the public sector; as these changed haven’t been made, the loans have not been granted. Furthermore, many nations are concerned about Iran-backed Hezbollah’s involvement in Lebanese politics, and on this basis wealthy Persian Gulf nations are refusing to offer assistance to the country. The US has repeatedly said that any aid offered to Lebanon would be on the condition that Hezbollah withdraws from government.

In order to access foreign aid and investment, Lebanon would have to dramatically change their domestic and foreign policies, particularly in relation to Iran and Hezbollah, which would be destabilising for the region and create a more complex and dangerous situation. But until even the smallest reforms in Lebanon’s fiscal policies are made, the international community will be reluctant to offer any form of financial support to the nation.

Protests have continued, even during lockdown. Photo by Christelle Hayek on Unsplash.

What can Lebanon do now?

Writing for Forbes, Tatiana Koffman makes two suggestions for how Lebanon can deal with their fiscal issues, although neither of them are without their drawbacks. The first is dollarisation, a policy where a nation adopts the dollar as their main form of currency. This was used by Zimbabwe in 2009 following hyperinflation. Adopting the dollar is seen as a safe currency substitute, particularly for nations with high dollar-based debts and imports.

Dollarisation poses two problems. Firstly, by adopting the US currency, a nation surrenders its financial future to the stability of America. Secondly, the COVID-19 pandemic has engendered a global shortage of dollars, and driving a demand for this currency in Lebanon would only bolster black markets.

The second suggestion is adopting cryptocurrencies like Bitcoin, which is now widely being used in Venezuela. The advantage of these digital currencies are that they are independent of governments and banks. Expats can also safely send funds into the country using Bitcoin without undergoing government scrutiny. However, a switch to Bitcoin would require mass education and awareness of Lebanese communities, which is difficult at a time when many public places are closed and internet connections are unreliable.

The next few months will be crucial in determining Lebanon’s financial and political future. The international community cannot continue to ignore the situation when thousands are facing starvation and extreme poverty, and the Lebanese government will not survive if it doesn’t implement reforms to support the population. But in a time of global uncertainty, it will be hard to predict what the next steps for Lebanon will be.

Sources

The Washington Post: “The lights go out on Lebanon’s economy as financial collapse accelerates”

Forbes: “Lebanon’s Currency Crisis Paves The Way To A New Future”

CNN: “Dumpster diving, blackouts and suicides. Lebanon’s woes laid bare as crisis deepens”

BBC: “Lebanon: Why the country is in crisis”

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