by Nicholas Dawson, Forecast International.
Lebanon is experiencing one of the worst economic collapses in recent history. The currency has lost over 90 percent of its value; an estimated three in four Lebanese citizens are now below the poverty line, and the country is plagued by shortages of food, gas and medical care. The power grid can barely maintain electricity for cities, with frequent blackouts. Finally, the country had to default on the payment of its debt, triggering its debt crisis. The debt crisis did not come about suddenly, but built up over time due to economic decisions made by previous governments. To understand how this crisis arose, it is necessary to examine the modern history of Lebanon, starting with the civil war of 1975.
The Lebanese civil war (1975-1990) is one of the landmark events that would pave the way for economic turmoil today. Economic woes did not materialize until the 1980s, after infrastructure was badly damaged and the Lebanese pound lost value due to inflation. By this time, many foreign countries had also stopped trading with Lebanon, and some had imposed restrictions that resulted in reduced exports. The main damage to the Lebanese economy has been the erosion of confidence, as before the war the country was known for its resilient economic policies and reliable assets. The country was stable until the civil war, but as more countries began to intervene and exercise their influence over Lebanon in the last years of the war, that trust was lost. Towards the end of the conflict, a war society was formed. Militias such as the newly formed Hezbollah were involved in smuggling, extortion, and the arms and drug trade.
In 1990, in the aftermath of the civil war, the new government headed by Prime Minister Rafic al-Hariri initiated economic reforms focused on social and economic reconstruction. These measures were largely effective, but led to an increase in domestic and external public debt, as most reconstruction efforts had to be financed by internal borrowing, resulting in significant public debt. This debt would ultimately become the third largest debt-to-GDP ratio in the world. The country’s low taxes, intended to support business ventures and encourage investment, and weak government intervention have attracted various markets and led to a gradual recovery. This economy would be able to weather the 2008 financial crisis, as the country was able to achieve an average GDP growth of around 8% from 2007 to 2010.
The first major post-civil war slowdown was precipitated by the Syrian civil war, as Syria was an important partner of Lebanon and, being its neighbor, Lebanon hosted large numbers of refugees. As new governments formed, none were able to address the growing economic problems facing the country. This led to accusations of corruption in the government as political tensions started to rise again. During this period, Hezbollah meddled in Lebanese politics while continuing its conflicts with Israel. Skirmishes between the two hampered efforts to stabilize the country, and Israeli retaliation has repeatedly resulted in damage to infrastructure that had previously been repaired. Under international pressure from Syria and Israel, the Lebanese economy has slowed down considerably, ultimately leading to mass protests and demonstrations against the situation and the failing government.
In 2019, the country defaulted on its debt payment, which has led to the current situation. Public debt included $ 31 billion in Eurobonds. Prior to the formation of a new government in September, there were two more attempts to form a government to address the issue: one in 2019 and one in 2020. The two appointed prime ministers failed to come to an agreement and the economic situation has worsened to its present point. . The 2020 government then failed after an explosion in a Beirut port in August, forcing Prime Minister Hassan Diab to resign. The COVID-19 pandemic only exacerbated the problem as the Lebanese economy continued to falter. The World Bank says that in 2020 Lebanon’s GDP contracted by 20.3%. The International Monetary Fund (IMF) estimates that it has contracted by 25%. In 2019, Lebanon’s GDP hovered around $ 52 billion, while it fell to $ 19 billion in 2020. Current estimates indicate that Lebanon’s GDP will continue to contract, with the World Food Program estimating an increase. potential contraction of 30%.
In 2021, President Michel Aoun chose Najib Mikati to become Prime Minister. Mikati would try again to form a government in the hope of finally being able to solve the economic problems. Mikati was previously Prime Minister in 2005 and from 2011 to 2014. In September Mikati achieved his goal and the government started to define what needs to be done. The first meeting of members of the new government was held on September 13, with Mikati stating that the government “has specific tasks within four pillars: dealing with the coronavirus pandemic, dealing with complications resulting from the explosion of the Port of Beirut, general reforms, and legislative elections.
As the situation worsens, there are reports of fighting in northern Lebanon between villages following political and religious strife. These conflicts arise because the Lebanese government is denominational, which means that it considers Sunni, Shiite and Maronite Christians to have power within the government. A Maronite Christian should be appointed president, a Sunni Muslim should be prime minister, and a Shia Muslim should be appointed president of the National Assembly. This configuration has led to sectarian conflicts between groups as the elections unfold. State security chiefs have been strained to contain the ongoing unrest in the country. Recently, US President Joe Biden called on the State and Defense Departments to allocate up to $ 47 million in aid to the Lebanese military through surplus goods, with the possibility of aid additional.
The current task of the new government is to secure funding from foreign sources to help alleviate some of the problems facing Lebanon. Prime Minister Mitaki mentioned that the government has entered into talks with the IMF in the hope of securing a bailout. Lebanon has recently struggled to negotiate with the International Monetary Fund because it has not been able to meet IMF conditions. Besides the IMF, Lebanon will look to other countries in the Middle East for aid and donated supplies. Lebanon has started talks with the World Bank to secure funding, and the energy ministers of Egypt, Jordan, Syria and Lebanon have endorsed a plan to help alleviate the electricity and gas crisis. In addition, Hezbollah will most likely continue to import fuel from Iran.
The Lebanese economic crisis has been mired in political controversy and the target of international pressure for years, culminating in this disastrous moment. The response to this crisis will prove historic for the Lebanese people and will greatly influence the future of the country and the region as a whole. The political implications of assisting the Lebanese will be lasting, because in future elections the Lebanese people will look to those who have helped them in times of need. Whether the government begins to turn to more Iranian aid, appeal to and lean more towards Western ideals, or turn more to its neighbors in the Middle East will depend on the conclusion of this dire situation. As internal conflicts brew again and external forces compete for influence, Lebanon is now at a crossroads. It remains to be seen whether Lebanon will rise from its ashes or continue to struggle, as it is now up to Prime Minister Mitaki’s new government to find a way forward.