From Cedars to Crisis: The Staggering Collapse of Lebanon’s Economy

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Smoke and dust rise from the 2020 Beirut explosion (Image Credit: VOA)

Lebanon’s economic trajectory has been a daunting tale of chronic instability and precipitous decline. The nation’s current state, marked by currency collapse, a banking crisis, deeply rooted corruption, and long-lasting repercussions of the 1975-1990 civil war, presents a complex tableau of interwoven factors that led to this economic catastrophe. The Beirut port explosion of August 2020 further amplified these existing problems, plunging the economy deeper into crisis and struggle. 

The collapse of the Lebanese pound marks the epicenter of the nation’s economic shockwave, rendering it a poignant symbol of Lebanon’s overarching fiscal crisis. This economic debacle did not happen overnight but was the outcome of long-standing structural and policy failings that culminated in a full-blown monetary disaster. The Lebanese pound was traditionally pegged to the U.S. dollar, a policy intended to provide stability, underpin confidence, and foster economic growth. This mechanism also facilitated a comfortable business environment, as it diminished exchange rate risk and promoted trade with the Western world, particularly the United States. For decades, this peg was maintained through the steady inflow of foreign currency, particularly from Lebanese diaspora remittances, foreign aid, and tourism revenue. However, the maintenance of this peg became increasingly precarious due to several interlinked factors. One of the main culprits was a persistent and growing current account deficit, driven by Lebanon’s heavy reliance on imports for basic goods and the absence of a substantial export sector to balance it out. Consequently, this deficit led to a continuous outflow of foreign currency, gradually depleting Lebanon’s foreign exchange reserves. At the same time, Lebanon suffered from chronic fiscal deficits, caused primarily by an oversized and inefficient public sector, high debt service costs, and subpar public revenue collection. To finance these deficits, the government turned to the domestic banking sector for borrowing, offering high-interest rates. This practice led to the accumulation of vast quantities of government debt held by the banks, rendering the state and the banking sector dangerously interdependent and vulnerable. 

Corruption in Lebanon is an inextricable component of the country’s economic woes, serving as a relentless, pervasive force that has systematically undermined economic development and political stability. It permeates all levels of government, from local public institutions to the highest echelons of political power, intertwining with the very threads of the Lebanese socio-political fabric.

Lebanon’s political structure, characterized by a sectarian power-sharing agreement following the end of the civil war, has inadvertently fostered an environment conducive to corruption. This consociational democracy, designed to ensure the representation of all significant religious sects, has led to a political culture of sectarian patronage. Political leaders use public funds to secure support from their respective communities, distributing resources, public sector jobs, and services in exchange for loyalty. This endemic patronage and clientelism not only inflate public sector expenditure but also stifle efficiency and meritocracy. Bureaucratic corruption, including nepotism and bribery, is another manifestation of Lebanon’s corruption pandemic. Government posts are often distributed based on personal connections rather than merit, leading to a culture of impunity and mediocrity. Consequently, the efficiency of public institutions is hampered, and the delivery of public services suffers. Additionally, bribery is widespread, creating an informal economy that further depletes state resources and undermines the rule of law. The lack of transparency and accountability in public finance management has enabled high-level, or ‘grand’, corruption to thrive. Political elites have exploited their positions for personal gain, embezzling public funds, engaging in illicit transactions, and awarding contracts to allies without fair competition. The case of the electricity sector is a prime example, where despite billions of dollars spent over the years, the government has failed to provide reliable power, and citizens are forced to rely on private, often politically connected, generator providers. The corrupt practices have also seeped into the banking sector, creating a toxic symbiosis between the financial industry and political elites. Banks, often owned or controlled by political figures, have lent vast sums to the state, earning substantial interest and further perpetuating the cycle of public debt. Meanwhile, these politically affiliated borrowers often default on their loans, thereby exacerbating the banking crisis. Corruption’s overall effect on Lebanon’s economy is crippling. It has eroded public trust, discouraged foreign investment, and drained much-needed resources from the public coffers. The 2022 Transparency International Corruption Perceptions Index ranked Lebanon 150 out of 180 countries, underscoring the country’s dire need for drastic anti-corruption measures. To rekindle economic growth, it’s imperative to dismantle the entrenched corruption networks and establish a culture of transparency, accountability, and good governance. This task, although monumental, is essential for Lebanon to regain its financial footing and rebuild a robust, resilient economy.

The Beirut port explosion of August 4, 2020, was not only a human tragedy but also a cataclysmic event for an already distressed Lebanese economy. The destruction caused by the explosion reached an unprecedented scale, exacerbating Lebanon’s economic crisis and adding layers of complexities to the country’s path towards recovery. The Beirut port, as the country’s main maritime gateway, was the nexus of Lebanon’s trade activities. The port handled more than 60% of all Lebanon’s imports and exports, playing an integral role in the nation’s supply chain, particularly given its heavy reliance on imports for basic goods, from food to fuel and medical supplies. The devastation of the port thus significantly hampered the country’s ability to meet the essential needs of its population, leading to shortages and further escalating prices in a country already grappling with hyperinflation. Moreover, the explosion led to the destruction of vast swaths of the city, including numerous businesses and commercial facilities. The World Bank estimated the physical damage to be between $3.8-$4.6 billion, with economic losses amounting to $3.5 billion. These catastrophic figures translate into a significant contraction in economic activity and loss of employment at a time when Lebanon can least afford it. Thousands of businesses, ranging from small retailers to large enterprises, were wiped out or severely damaged, leading to job losses and further eroding Lebanon’s economic capacity. Additionally, the explosion significantly damaged Lebanon’s tourism industry, a vital sector of the economy that had already been suffering due to the ongoing economic crisis and the COVID-19 pandemic. The international media coverage of the disaster painted a grim picture of Beirut, once known as the “Paris of the Middle East,” deterring potential visitors and exacerbating the tourism sector’s decline. The blast also had a profound psychological impact, further diminishing investor confidence. The international community saw the explosion as a stark manifestation of the government’s negligence and mismanagement, prompting many potential investors to reconsider or halt their financial engagements in the country. This lack of confidence has resulted in a reduction of capital inflows, a vital source of foreign currency, and has added to the pressure on the Lebanese pound. The disaster’s fiscal implications cannot be underestimated either; with an already overstretched budget, the additional financial burden of reconstruction further strained public finances, adding to the colossal public debt. Despite international pledges of aid for reconstruction, without comprehensive reforms and measures to ensure transparency, the impact of such assistance remains to be seen.

Written by Vincent Kikano

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