This is the beginning of the end of Lebanon’s current financial model; the problem is that we refuse to accept it. There are clear signs that painful change is coming, made all the more painful by attempts to ignore the inevitable.
Chronic corruption has paralyzed the country. The absence of growth the past eight years has caused thousands of businesses to shutdown (3,000 in the last 18 months) and seen unemployment hit record high numbers in times of peace—unofficial estimates put unemployment at 35 percent in 2018, up from 16 percent in 2010. The Lebanese lira is under a pressure not seen in 27 years; an indicator that the post-war economic and financial system is coming to an end.
Banque du Liban (BDL), Lebanon’s central bank, has been forced to prioritize crucial imports, such as wheat, medicine, and fuel.
Long unsustainable
The choice to peg the lira to the US dollar is a monetary policy that works best for small open economies like Lebanon, where investors feel safe to transfer wealth because they know that they can take it back at the same exchanged value—along with their profits—whenever they please. And so, with the help of the peg, Lebanon was blessed with GCC investment and tourism dollars, and, more importantly, expats’ dollars— leading to one of the largest deposits to GDP ratios in the world. The latter seems like good news, but it came coupled with GDP growth rates that consistently lagged behind potential.
What does that tell us? With one of the largest debt stocks to GDP in the world, mainly borrowed from local banks, it means that every resident and non-resident depositor—who are currently fleeing—has funded 27 years of corruption, instead of financing an economy that had great potential 20 years ago.
It is not true that local debt is better for the stability of the financial system, because when the game ends, it is the locals that pay the highest price—not foreign banks. It is also not true that Lebanon is dollarized; it has a pegged system, but all government income and expenditures are in lira. Its debt service is in US dollars, which it is unable to generate. This all might be common knowledge, but a crucial point has been missed over the years when describing the rentier economy of Lebanon. The system of feeding corruption through the dollar deposits of Lebanese locals, expatriates, and GCC tourism could not continue forever because the rate at which the inflows needed to increase would never match the rate at which the problem was growing. The GCC tourists are long gone, and the Lebanese no longer trust their own financial system and currency.
We now live in a country that cannot afford to pay back what it owes and cannot finance its expenditures.
Instead, it is feeding its citizens cancer through the corruption and lack of basic infrastructure that permeates through every bite of local produce we eat and every breath we take.
We are one of the worst credit-rated countries in the world; our debt ratios are much worse than other countries that have faced government debt crises in the past few years. Interest to revenues per year in Lebanon is now at 50 percent; when the Greece economy tanked their interest to revenues was at 17 percent. Our pain will be several times their pain.
Time to choose
Our politicians are starting to throw around the hot potato; the head of state bluntly tells reporters to go ask the governor of BDL and the finance minister about the situation because he was busy traveling.
We have lost all credibility with the international community; foreign diplomats do not hesitate expressing their disgust with us. It has been 18 months since our leaders agreed to implement reforms in exchange for loans pledged by the international community, yet in that time we have failed to even start building one power plant. The electricity sector is in dire need of reform, but our latest electricity plan includes more barges under the excuse of a “temporary so lution” before new plants are built. The same excuse we heard in 2012. What a bad dream.
The first choice is to keep watching ourselves drown, allowing politicians to reinforce the denial they promote by promising us that offshore gas will solve everything. As a result, Lebanon will soon be force-fed the usual poison, which could have been avoided had change occurred earlier.
This will include a combination of devaluation, a haircut on debt and depositors, and selling government assets cheap—all of which will lead to extreme poverty and from which it will require decades to recover. The other choice is to say stop.
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