Lebanon Quagmire Spins Out of Control

On October 17, 2019, the Government of Lebanon, the world’s third most indebted country, decided to impose a tax on WhatsApp messaging application to engulf its amassed fiscal deficit. Unfortunately, nothing changed except the calamity exacerbating with each passing day. As the prices for basic commodities soar high, people find it difficult to feed themselves and have resorted to selling their gold in order to fill their empty stomachs. Adding to the troubles, the pandemic is likely to downgrade the economy, which is already unable to withstand the jolts it has received, by 12-13%. With an urgent requirement of aid to 75% of its population, an instantaneous revival for the economy reminds me of the Gucci shoes in my shopping wishlist for years that have never been able to find their path to ‘add to cart’.

The Lebanese have been known for maintaining a fine standard of living, the bars and restaurants have always stayed open even during the wars. The unhygienic water, heckling power supply, etc. was never a matter of concern for the middle-class until they enjoyed their affordable foreign tours. Despite a kaput monetary system, the luxuries and seamless interaction with the world have been courtesy of the Lebanese currency’s 22-year-old peg to the US currency, but who knew that this could turn into a substantial contributor to the crisis.

For several years, the Government has continued to borrow from global as well as domestic lenders to keep up with the pegged US dollars. As the Central Bank liberally hiked the interest rates, Lebanon became a strong magnet for the opulent investors across the globe. The unrealistic peg at 1,507 Lebanese pounds to a dollar and thriving efforts to keep up with it when there was a shortage of dollars in the market led to enormous debts. Further, to escape from the deficit, the Central Bank increased the interest rate to attract more investors. Nearly 50% of the state revenue goes into paying the debt, a major chunk of the remaining portion is put in effect for the government employees’ salaries, leaving very little margin for infrastructure development, capital investment, and expenditure on human resources. Thus, the Lebanese economy closes its boundary for revenue generation as there is no scope from other sectors, all the money is burned for consumption through imports, real estate and to defend the peg. Despite a sluggish economy, the government kept piling on the debts through depraved spendings, majorly on the expanded public sector which was put in effect to brim up their vote banks and divert focus from an ailing power grid. The situation became even more hostile owing to the political instability and the Prime Minister disappearing into Saudi Arabia, this shook the confidence of the Lebanese affluents who then decided to transfer their deposits out of the country. With the fear of depleting the country’s reserves, the banks had to close owing to the shortage of dollars. This has been a major concern for ordinary citizens, who have to stand in long queues to only return with a tiny amount of cash in hand which is insufficient to buy the daily bread, and have to sleep with an empty stomach during this pandemic. Economists view it as a matter of concern as the government continues to prioritise foreign creditors who hold an enormous $12 billion of the Lebanese debt, at the expense of the empty stomachs of its citizens. The banking sector, which has enjoyed mellow relations with the country’s political elite who held shares in some of these banks is a significant culprit. As the ordinary citizens fear a risk to their deposits, the commercial lenders who were always on the receiving end, even after capital controls in action have managed to pave their way for profits.

With an uncertain political atmosphere, inefficient government policies driven with self-interest, faulty monetary system, and much more on the home-front, there are a few external factors that also act as a cherry to this toppling cake. A small country with a population of six million is largely dependent on remittances. 12.7% of the Lebanese GDP constitutes remittances from family members living abroad and majorly from the majestic oil-producers in the Middle-Eastern country, second only to Palestine. As coronavirus grips the world and the global GDP, numerous people have lost their jobs in various parts of the world. Owing to the global crisis, the number of people transferring and depositing money in Lebanon for their families and for tax exemptions abroad has seen a significant drop. In fact, they seek withdrawal from their already deposited funds in the Lebanese banks. The truncated oil prices have aggravated the revenue crisis for Lebanon. Moving closer, the oil-rich nations neighbouring the state of Lebanon that inhabited Lebanese emigrants have already cut down on the remittances they provided at regular intervals. These nations formulated the major chunk of the revenue Lebanon generated from remittances and used it further to fund its additional debt. With a threat of Saudi Arabia likely to expel Lebanese nationals, the inflow of remittance dollars that would support the dysfunctional peg has begun to diminish at a petrifying rate, making the situation even more muddled up for the government.

The Lebanese economy finds itself amidst a thick forest, and the process of revival is definitely going to be a prolonged one along with a dire need for sustained efforts. With an urgent need for external liquidity that is possible only with the IMF reform programme which comes with a set of associated reforms that all the nations need to abide by when subscribing to the stimulus package. As the IMF estimates a debt reaching 155% of the Lebanese GDP, the government remains reluctant to adopt the IMF reforms and slashes the reports presented by the organisation. The economic experts and advisors, both within the state and globally, have to ultimately adopt the IMF reforms package to survive and provide daily bread to its citizens and the refugees. This detailed analysis is food for thought for further plan of action and devastating experience to learn from for the other countries.


Vanshika Sighroha

A woman with opinions and confidence to voice them out freely, I am currently pursuing my majors in Economics. With a love for food, books and movies, I also love to write and further expand my horizon. I find my solace in travelling and good music!

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