The Lebanese Economic Crisis: How It Happened; the Challenges That Lie Ahead

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by Nicholas Dawson, Forecast International.

Lebanon is experiencing one of the worst economic collapses in recent history. The currency has lost more than 90 percent of its value; an estimated three in four Lebanese citizens are now below the poverty line,  and the country is beset by food, gas, and medical shortages. The power grid can barely maintain electricity for cities, with frequent blackouts occurring. Finally, the country had to default on its debt payment, launching its debt crisis. The debt crisis didn’t come suddenly, but was building up over time due to economic decisions made by previous governments. To understand how this crisis came to be, an examination of Lebanon’s modern history is in order, starting with the civil war in 1975.

The Lebanese civil war (1975-1990) is one of the landmark events that would set the course for economic trouble today. The economic woes didn’t come into fruition until the 1980s, after the infrastructure had been severely damaged and the Lebanese pound took a downturn in value due to inflation. Many foreign countries at this time had also stopped trading with Lebanon, and some imposed restrictions that led to reduced exports. The main damage to the Lebanese economy was an erosion in confidence, as before the war, the country was known for its resilient economic policies and reliable goods. The country was stable until the civil war, but as more countries began to interfere and exert their influence upon Lebanon in the later years of the war, that confidence was lost. Toward the end of the conflict, a war society was formed. Militias such as the newly formed Hezbollah were getting involved in smuggling, extortion, and the arms and drug trade.

In 1990, in the aftermath of the civil war, the new government led by Prime Minister Rafic al-Hariri began economic reforms focusing on social and economic reconstruction. These measures were largely effective, but led to an increase in internal and external governmental debt, as most of the rebuilding efforts had to be financed by internal borrowing,  leading to a large public debt. This debt would eventually become the third largest debt-to-GDP in the world. The country’s low taxes, meant to prop up business ventures and encourage investment, and low government intervention did attract various markets and led to a gradual recovery. This economy would be able to weather the 2008 financial crisis, as the country was able to achieve average GDP growth of about 8 percent from 2007 to 2010.

The first big downturn post-civil war was precipitated by the Syrian civil war, as Syria was an important partner to Lebanon and, being its neighbor, Lebanon took on a large number of refugees. As new governments formed, none were able to address the growing economic problems the country was facing. This led to accusations of corruption within the government as political tensions once again began to rise. During this period, Hezbollah  became entwined in Lebanese politics while continuing its conflicts with Israel. The skirmishes between the two hindered efforts to stabilize the country, and Israeli retaliations have on multiple times led to damage to  infrastructure that had previously been repaired.  Under international pressure from Syria and Israel, Lebanon’s economy slowed substantially,  eventually leading to mass protests and demonstrations against the situation and the flailing government.

By 2019 the country had defaulted on a debt payment, leading to the current situation. The public debt included $31 billion of Eurobonds. Before the September formation of a new government, there were two other attempts to form a government to address the issue: one in 2019 and one in 2020. Both appointed prime ministers failed to work out a deal and the economic situation worsened to its current point. The 2020 government then failed after an explosion occurred at a Beirut port in August, forcing Prime Minister Hassan Diab to resign. The COVID-19 pandemic only exacerbated the issue as the Lebanese economy continued to buckle. The World Bank states that in 2020, Lebanon’s GDP contracted by 20.3 percent. The International Monetary Fund ( IMF) believes it contracted by 25 percent. In 2019, Lebanon’s GDP hovered at around $52 billion, while it dropped to $19 billion in 2020. Current estimates are that Lebanon’s GDP will continue to contract, with the World Food Program estimating a potential contraction of 30 percent.

In 2021, President Michel Aoun picked Najib Mikati to become the prime minister.  Mikati would once again try to formulate a government in hopes of finally being able to address the economic issues. Mikati was previously the prime minister in 2005 and from 2011-2014. In September, Mikati succeeded in his goal and the government has begun to outline what needs to be done. The first meeting among members of the new government was held on September 13th, with Mikati stating that the government “has specific tasks within four pillars: confronting the coronavirus pandemic, dealing with the complications resulting from the explosion of the Port of Beirut, general reforms, and parliamentary elections.”

As the situation worsens, there are reports of fighting in northern Lebanon between villages as a result of political and religious conflicts. These conflicts arise because Lebanon’s government is confessional, meaning it sees Sunni, Shia and Maronite Christians having power within the government. A Maronite Christian must be appointed as president, a Sunni Muslim is required to be the prime minister, and a Shia Muslim must be given the role of speaker of the National Assembly. This set-up has led to sectarian conflicts between the groups as elections go forth. State security chiefs have been strained to contain the ongoing turmoil in the country. Recently, U.S. President Joe Biden asked the State and Defense departments to allocate up to $47 million in assistance to the Lebanese Army through excess goods, with the potential for further aid.

The current task of the new government is to secure funding from foreign sources to help alleviate some of the problems Lebanon is facing. Prime Minister Mitaki has mentioned that the government has begun talks with the IMF in hopes of obtaining a rescue package. Lebanon has recently had trouble negotiating with the International Monetary Fund because it has been unable to fulfill the IMF’s conditions. Aside from the IMF, Lebanon will look to other Middle Eastern countries for aid and donations of supplies. Lebanon has begun talks with the World Bank to secure financing, and energy ministers from Egypt, Jordan, Syria and Lebanon have approved a plan to help alleviate the electric and gas crisis. Additionally, Hezbollah will most likely continue to import fuel from Iran.

The Lebanese economic crisis has been mired in political controversy and the target of international pressure for years, culminating in this disastrous moment. The response to this crisis will prove to be historic for the Lebanese people and will greatly influence the future of the country and the region as a whole. The political implications of assisting the Lebanese will be far lasting, as in future elections the Lebanese people will look to who helped them in their time of need. Whether the government will start to pivot toward more Iranian assistance,  appeal more to Western ideals and lean toward them, or look more to its fellow Middle Eastern countries will depend on the conclusion of this dire situation. With internal conflicts once again brewing and external forces vying for influence, Lebanon has now reached a crossroads. Whether Lebanon will rise from the ashes or continue to struggle remains to be seen, as it is now up to Prime Minister Mitaki’s new government to find a way forward.

Defense & Security Monitor source|articles

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