Causes of Lebanon’s financial meltdown

 Causes of Lebanon’s financial meltdown

Lebanon is struggling with a deep economic crisis

Beirut, 17 June: Lebanon’s struggling with a deep economic crisis after successive governments piled up debt following the 1975-1990 civil war with little to show for their spending binge.

Banks, central to the service-oriented economy, are paralyzed. Savers have been locked out of dollar accounts or told funds they can access are worthless. The currency has crashed, driving a swathe of the population into poverty.

Lebanon’s financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints.

Economists described Lebanon’s financial system

Downtown Beirut, leveled in the civil war, rose up with skyscrapers built by international architects and luxurious shopping malls filled with designer boutiques that took payment in dollars.

But Lebanon had little else to show for a debt mountain equivalent to 150% of national output, one of the world’s highest burdens. Its electricity plants can’t keep the lights on and Lebanon’s only reliable export is its human capital.

Ponzi scheme

Some economists have described Lebanon’s financial system as a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors. It works until fresh money runs out. But how did the nation of about 6 million people get there?

After the civil war, Lebanon balanced its books with tourism receipts, foreign aid, earnings from its financial industry, and the largesse of Gulf Arab states, which bankrolled the state by bolstering central bank reserves.

Yet one of its most reliable sources of dollars was remittances from the millions of Lebanese who went abroad to find work. Even in the 2008 global financial crash, they sent cash home.

But remittances started slowing from 2011 as Lebanon’s sectarian squabbling led to more political sclerosis and much of the Middle East, including neighboring Syria, descended into chaos.

The budget deficit rocketed and the balance of payments sank deeper into the red, as transfers failed to match imports of everything from staple foods to flashy cars.

That was until 2016 when banks began offering remarkable interest rates for new deposits of dollars – an officially accepted currency in the dollarized economy – and even more extraordinary rates for Lebanese pound deposits.

Role of France

Given the Lebanese pound had been pegged to the dollar at 1,500 for over two decades and could be freely exchanged at a bank or by a supermarket cashier, what was there to lose?

Dollars flowed again and banks could keep funding the spending binge.

France is leading international efforts to push Lebanon to tackle corruption and implement other reforms demanded by donors. Crucially, Lebanon needs to form a new government so it can resume stalled talks with the International Monetary Fund.

But politicians and bankers need to agree on the scale of the vast losses and on what went wrong, so Lebanon can shift direction and stop living beyond its means.

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