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Who’s to blame?

Pointing the finger at costs, beneficiaries, and tolls of financial mismanagement (2015-2023)

by Rouba Bou Khzam

In the annals of economic distress, poignant statements often serve as harbingers of the challenges that lie ahead. Three years ago, then- President Michel Aoun’s proclamation that we were going “to hell,” echoed through the corridors of power. At the time, he was warning about the road Lebanon would tumble down if a new government were not formed. Today his words have proved prescient: we are once again without a government, and the gravity of the economic predicament has only festered.  

Aoun failed to prevent a tumble into economic and financial hell, government or no government. The work of today is to unravel the costs of past financial mismanagement, spotlight the fissures in the central bank and banking sector, and install a stable government or at least fully uncover its overarching role of financial responsibility for past and future. But citizens’ voices are full of distrust in their government, most of the state’s institutions, and all public and private financial institutions.

With a grand failure to adopt the relevant laws, the process of establishing future accountability has hardly even begun, and the forensic analysis of the responsibilities and misdeeds of institutions and individuals is far from complete. The audits and forensic findings that span the timeframes from 2015-2019, and then from the start of the crisis until now, highlight these pressing questions: What led us to the precipice of economic catastrophe? Who were the ones that the World Bank’s Lebanon Economic Monitor (LEM) described as the “very few” that thrived amidst the turmoil, and who bore the brunt of the nation’s financial undoing?

How did we get here?

The Lebanese economy has long faced challenges arising from lopsided production and consumption patterns. Productive sectors contribute to just 14 percent of the GDP, with the economy heavily dependent on consumption, accounting for 88.4 percent of domestic product from 2004 to 2016. As per the World Bank’s assessment, Lebanon’s economic engines, encompassing real estate and construction, finance, and tourism, have continued to face sluggishness since the onset of the Syrian crisis in 2011. The country’s overreliance on consumption is nothing new: over the 2004-2016 periods, private consumption averaged 88.4 percent of the domestic product.

Crucially, the key sectors, including real estate, trade, and public administration, are not productive by nature, resulting in a significant reliance on imports. Furthermore, total investments, constituting 23 percent of GDP, were concentrated in the real estate sector, which experienced a 2018 decline, creating an employment shortage, as it traditionally provides one in every ten jobs in the country. The trade deficit escalated to $8,431 million in the first half of 2019, indicating a consumption pattern heavily skewed toward imports.

The balance of payments exhibited a considerable cumulative deficit, reaching $5.4 billion by June 2019. Successive deficits were recorded between June 2018 and May 2019, totaling over $10.4 billion. The insufficiency of dollars received by Lebanon to meet its external obligations heightened the demand for the dollar, jeopardizing the stability of the local currency, the lira. 

A public debt crisis

People await to enter a bank that has just reopened in the centre of the Lebanese capital Beirut on November 19, 2019, after the Federation of Syndicates of Banks Employees in Lebanon had announced the end of a strike, saying new security measures had been agreed with authorities to protect banks. – An unprecedented protest movement against the ruling elite entered its second month with the country in the grip of political and economic turmoil. The leaderless pan-sectarian movement has swept the Mediterranean country since October 17, prompting the resignation of Prime Minister Saad Hariri’s government. (Photo by JOSEPH EID / AFP)

In 2018, Lebanon’s fiscal health sharply declined, marked by an expanding public budget deficit soaring to 11.5 percent of the GDP. Despite the central bank’s inverted role of funding government spending, by January 2019, the public debt had surged to $85.3 billion, escalating further to approximately $85 billion by June. In May 2019, the proportion of public debt service relative to total payments reached a concerning 34.3 percent. The estimated cost of servicing this debt, known as interest, stood at about 8.5 billion Lebanese pounds (approximately $5.5 million) in the 2019 budget law, draining a substantial 44 percent of public revenues.


As per the Association of Banks in Lebanon’s December 2019 report, Lebanon faced a severe deterioration in public finances in 2018. The public budget deficit surged to 11.5 percent of GDP, with public debt reaching $85.7 billion by June 2019. The debt service accounted for 34 percent of total payments in May 2019, costing around $5.5 billion or 44 percent of public revenues. This escalation highlights rampant corruption in the government and public administrations. The escalating public debt and fiscal deficit, in relation to the GDP, pose as one of the most critical challenges for Lebanon’s public finances. The public debt crisis stresses the widespread corruption embedded in the Lebanese state and its public administrations.

The perils of BDL’s “unconventional tools”

In 2015, Banque du Liban (BDL), the central bank, led by then-governor Riad Salameh, introduced a massive financial engineering scheme. The rationale, according to BDL’s November 2016 document on the strategy, was that following the regional effects of decreased oil prices, the flood of Syrian refugees into Lebanon, and the two-year lack of consensus to form a government, Lebanon’s economy showed signs of protracted weakness and the central bank would play savior. It cited a 144 percent debt-to-GDP ratio, an eight percent fiscal deficit, and the 11-year absence of an official state budget as some of the woes the country faced at the time. As evidence of its record in steering the country to economic growth, the BDL referenced the stabilizing role of its 2013 stimulus package. It concluded that the financial engineering scheme would make Lebanese society “the ultimate winner: it will benefit from more financial inclusion, better economic development, and a more stable social welfare.”

“Attracting foreign investment through high-interest rates on Lebanese pound deposits could have been a wise move, but it created a dependency on new deposits to meet the returns promised to existing depositors,” Mounir Younes, an economist and head of the economics department at Nidaa Al Watan, a news and media website, tells Executive, capturing the precarious nature of BDL’s financial engineering.

The recent release of a preliminary forensic audit conducted by Alvarez and Marsal, a US-headquartered firm, has uncovered peculiarities in central bank management and hinted at personal culpability at the level of governance. Encompassing the span between 2015 and 2020, the audit revealed a concerning “absence of comprehensive governance and risk management structures” within the central bank. It pointed to Salameh’s “unrestricted” discretion in implementing expensive financial engineering policies, at first widely praised as a buffer to reckless state spending, but now subject to scrutiny.

“A linchpin in BDL’s strategy was the fixation on maintaining a fixed exchange rate between the Lebanese pound and the U.S. dollar. While the government and the central bank believed that the fixed exchange rate would constitute stability at first, it became a source of vulnerability as economic challenges mounted and the fiscal deficit burgeoned,” adds Younes. “In our pursuit of financial engineering to attract foreign currency inflows, often through high-interest financial instruments, Lebanon found itself trapped in a cycle of borrowing to sustain its operations, leading to an ominous cloud of indebtedness hanging over the nation’s economic prospects,” notes Younes.

The repercussions of these strategies were keenly felt in Lebanon’s banking sector, where the fixed exchange rate contributed to a shortage of U.S. dollars. Younes elaborates, “The scarcity of dollars, exacerbated by a loss of confidence in the Lebanese economy, triggered a wave of capital flight, further depleting already strained dollar reserves.” This scarcity undermined the stability that the Lebanese banking system had previously been known for, pushing the financial system to the brink of collapse.

Personal culpability?

The audit points to Salameh’s “personalized” and “unscrutinized” approach. A striking revelation from the audit indicates that the central bank consistently reported profits each year by offloading costs onto its balance sheet, even in years marked by “actual losses amounting to several billion dollars.” Alvarez & Marsal also questioned the “non-traditional” accounting standards adopted by BDL, criticizing the opacity with which the institution published its financial data, effectively concealing substantial losses. “BDL’s unconventional tools were implemented with a notable lack of clarity, leaving investors and the public in the dark,” remarks Younes. 

A picture taken on on November 11, 2019, shows an ATM which has been sealed by Lebanese anti-government protesters in the capital Beirut during a rally against the banking system. – The country has since October 17 been swept by an unprecedented cross-sectarian protest movement against the entire political establishment, which is widely seen as irretrievably corrupt and unable to deal with a deepening economic crisis. (Photo by Patrick BAZ / AFP)

The report unveiled the existence of illegitimate commissions during the 2015-2020 periods, totaling a staggering $111 million, and directed to seven banks, one Swiss and six Lebanese, over the following half-decade, which seemed related to the same commission scheme under investigation by Lebanese and international prosecuting authorities. The report concludes that Lebanon’s problems are due to weak governance, a poor internal regulatory framework, and a largely ineffective government.

Examples of ineffective management

In addition to the state’s record of serial political paralysis that led to repeated absences of state budgets and subsequent spending reports, the fixed peg of the Lebanese pound to the U.S. dollar and the extensive government expenditures had hampering financial effects. These factors have played a pivotal role in triggering the crisis, leading to a lack of trust in the local currency and exacerbating the challenges faced by an inherently uncompetitive economy that relies heavily on importing 80 percent of its products. The repercussions extend to the public sector, where hiring for administrative positions becomes a cumbersome burden. Lebanon’s public debt is due in part to an excessive workforce of around 360,000 employees by some estimations, a public employment structure that many argue far exceeds the country’s actual needs and is fraught with nepotism.

Relying on external assistance, both the central bank and the Lebanese government placed particular emphasis on convening a financial conference to rescue their economic model from impending collapse, drawing parallels with historical instances like the Paris conferences. They were hopeful for loans and aid from the 2018 CEDRE conference to instill confidence in the nation and catalyze economic recovery. However, as Younes points out, a departure from past practices occurred when French President Macron stipulated that financial support would be contingent upon the implementation of reforms.

As an example, proposed reforms included establishing an electricity regulatory authority; a step that would potentially reduce the authority of the Ministry of Energy and Water as designated by the Taif Agreement. Consequently, a consensus was not reached, resulting in the failure to establish regulatory bodies for sectors like electricity and the broader economy. 

Wissam Abou Sleiman, auditor and director of Abou Sleiman & Co (for ERM, Assurance, and Tax Advisory), tells Executive about an instance during Prime Minister Hassan Diab’s tenure from January 2020 to September 2021. Abou Sleiman and other auditors recommended the establishment of an audit committee to supervise both internal and external auditing activities for public institutions handling state finances and project expenditures. Unfortunately, this proposal received inadequate attention, indicating a disregard for transparency and a failure to adhere to established procedures. Another notable occurrence during this period was the neglect to implement suggested reforms, including those targeting the restructuring of state-owned enterprises. This failure exacerbated the crisis, perpetuating inefficient practices and leading to a misallocation of resources. 

What role did sayrafa play?

In 2020, the Sayrafa platform was launched by the BDL in a bid to stabilize the Lebanese pound. Under Circular 157, all banks were mandated to register, facilitating the trading and recording of customer exchange transactions at rates set by the central bank. The platform aimed to enable banks to sell dollars at rates lower than those in the parallel market, supporting businesses and mitigating severe currency fluctuations. However, the platform’s intent shifted as it became a tool for quick profits, exploited by a wide segment led by merchants, importers, financiers, and individuals benefitting from a “quota” system.

Some individuals went as far as borrowing money for speculative trading through “banking.” Notably, cases of “excessive importation” were recorded, where merchants sought to capitalize on profit margins through the platform. The World Bank LEM in spring 2023 criticized Sayrafa, stating it turned into an unfavorable monetary instrument, facilitating profits of up to $2.5 billion for dealers, excluding public sector salaries. The platform’s financing mechanism remains unclear, raising questions about its reliance on Lebanese depositors’ funds in the central bank’s “mandatory reserve.”

Younes highlights a distinction between trades under Circular 157 and public sector salary funding under Circular 161. He notes that the central bank used cash reserves from currency printing to finance government expenses, avoiding inflation. Despite legal provisions, Sayrafa defended the exchange rate using funds from both banks and depositors, violating Lebanese monetary laws. Lack of transparency is a glaring issue, with Younes emphasizing the necessity for clear records of transactions and user identities, a feature currently absent on Sayrafa. Known users include public administration employees and bank depositors, but the identities and benefits of merchants, speculators, and banks remain unclear, underscoring the need for regulatory clarity and oversight in Lebanon’s financial landscape.

Karim Daher, an attorney and chairman of the committee for safeguarding depositors’ rights at the Beirut Bar Association, tells Executive that beneficiaries of Sayrafa can be categorized into two groups: public sector employees receiving salaries in dollars and individuals who rely on Sayrafa as their primary income source. Daher criticized the proposed 2024 budget law, which imposes taxes on Sayrafa earnings, deeming it unreasonable to burden public sector employees when this arrangement was initially permitted by the government in collaboration with the central bank. The proposed law entails progressive income taxes for individuals, ranging from four percent to 25 percent, a 17 percent tax rate for companies, and a 10 percent tax on distribution. Daher recommends additional taxation for those reliant on Sayrafa income, proposing adjustments to standard taxes, the removal of banking secrecy through Law 306/2022, and a census to identify major beneficiaries. He underscores the necessity for regular tax arrangements and increased transparency measures.

Winners and Losers amid Economic Turmoil

Venezuelan opposition leader and self-proclaimed acting president Juan Guaido (C, bottom) speaks during a protest in the fifth day of a crippling power blackout, in Caracas on March 12, 2019. – Venezuelan opposition leader Juan Guaido on Monday called for a new mass demonstration as a devastating blackout that has left millions without power entered its fifth day and the US said it is withdrawing its remaining diplomatic personnel from Caracas. (Photo by Federico Parra / AFP)

Lebanon’s financial crisis, marked by government mismanagement and risky central bank policies, has left a stark divide between a privileged few and a suffering majority. Daher emphasizes the urgent need for accountability, citing the failure to address corruption and implement reforms as exacerbating the crisis.

This sentiment aligns with the findings of the LEM spring 2023 report, which states that the crisis has resulted in a scenario where only a few emerge as winners while the majority faces losses. The report underscores the systemic failure of Lebanon’s banking system and the collapse of the currency, creating a pervasive dollarized cash economy, nearly half of the GDP in 2022.

As the crisis lingers, disposable income sees a marked decline, and a widening current account deficit hampers growth prospects. The ripple effects extend across all sectors – agriculture, industry, and services – leading to soaring unemployment, poverty, and inflation. Moreover, the crisis has given rise to increased informality, tax evasion, and money laundering, further straining the economy.

The Lebanese people bear the brunt of the crisis, with allegations against the political elite for embezzling and laundering hundreds of millions of dollars in public funds. Millions of citizens find themselves robbed of their life savings in a country grappling with the harsh realities of an economic downturn that disproportionately impacts the vulnerable majority.

President Michel Aoun’s warning three years ago about Lebanon heading “to hell” has materialized. The urgency lies in untangling past financial mismanagement, addressing institutional pitfalls, and restoring trust in a government plagued by citizen distrust. Lebanon is at a critical juncture, requiring swift action for economic recovery and sustainable governance.

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Rouba Bou Khzam

Rouba is a journalist at Executive magazine
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