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May 30, 2020

LEBANON: Concurrent crises and no solution in sight

BY Jon B. Alterman

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( 5 mins)
  • Lebanon’s economic crisis represents a long-anticipated reckoning.
  • Widespread regional hostility to Iran, combined with a limited Iranian ability to help, constrains Lebanon’s choices still further.
  • A messy political re-ordering is in prospect.

Lebanon faces a series of concurrent crises, both economic and political. The International Monetary Fund (IMF)’s technical talks with the government to arrange a USD 10bn loan will only be able to address a small fraction of the elements of the country’s challenges. The international donor community is intent on imposing deep reforms on Lebanon in exchange for relief. Lebanon’s current power structure is resisting those demands, many of which it sees as an existential threat.

A banking problem

At its core, Lebanon’s financial problem is a banking problem. The country’s overvalued currency and its foreign debt are problems that have grown for years, covered up by a succession of central bank moves and deposits sent in by overseas Lebanese. For years, Lebanese banks did not lend much to Lebanese businesses, instead, lending to the central bank and government to finance deficits. Overseas Lebanese and some Gulf Arabs kept the system going by piling their money into Lebanese accounts, taking advantage of the dollar peg and often-high interest rates. When the system started to fray, the central bank had to embark on increasingly expensive, and increasingly desperate, financial engineering. On 9 March, the government defaulted on a USD 1.2bn Eurobond payment, the first sovereign default in its history.

Collateral damage from Syria

As storm clouds rose over the banking crisis, the Lebanese economy was taking other hits arising from the Syrian civil war. First, more than one million Syrian war refugees remain in Lebanon. Syrians have taken jobs in Lebanon’s informal sector for years, providing a steady supply of low-wage labor, but the crush of Syrians fleeing war has significantly worsened employment prospects for Lebanese, strained infrastructure, and raised social spending. Second, Lebanon has long been the economic lungs of Syria, and as the Syrian economy has collapsed after almost a decade of war, the Syrian economic crisis has contributed to a Lebanese one.

Iran

However, the Lebanese do not merely have an economic crisis. Diplomatically, the Gulf Arab governments that have supported Lebanon in the past are ill-disposed to helping now. Partly, they are hostile to the government, which they perceive to be run by Iranian proxies who represent an extension of Iranian influence into the Levant. The grievance against Iranian influence in Lebanon has been growing. Gulf states have long nurtured ties to Lebanon’s Sunni Muslim community, and they felt former Prime Minister Saad Hariri was too accommodating to Iran’s ally, Hezbollah. In 2017, the Saudi government forced his temporary resignation for that reason, and Gulf states watched with alarm as Hezbollah’s political power continued to grow.

The pro-Hezbollah coalition that came into office in January 2020 is an even starker manifestation of their concerns, and some Gulf governments quietly whisper that they want it to fail. They will not support Lebanon without clear assurances that Iran’s allies in the country will not benefit. However, with sharply lower revenues in the Gulf due to lower oil prices, they may not be willing to support Lebanon under any circumstances.

Meanwhile, the Trump administration is also hostile to Hezbollah’s role in Lebanese politics. Since it has made hostility to Iran a central pillar of its Middle East regional strategy, Iranian influence in Lebanon has undermined sympathy for Lebanon’s tenuous balancing act. The US joined France and other countries in the CEDRE conference in April 2018 that promised USD 11bn to Lebanon, conditional on reforms. The reforms did not take place, and the money has not flowed. Now, the Trump administration has been acting in close concert with the UK and France, helping forge a determination to resist aid requests until there has been a more thoroughgoing reform of Lebanese politics.

Protests and Covid-19

Politically, Lebanon has been mired in a political crisis intertwined with its banking crisis. Widespread protests broke out in October 2019 to demand an end to corruption and self-dealing by Lebanon’s political class. Leading politicians—including Hariri—reportedly have large shares in Lebanese banks, and as the country’s economic crisis has grown, they have been transferring billions of dollars abroad while ordinary Lebanese face strict limits on withdrawals. At the same time, opposition is rising against the country’s sectarian political system, which many see as entrenching warlords and power brokers who entrench widespread corruption.

Lebanon had some of the Arab world’s strictest lockdowns in response to Covid-19. The pandemic’s toll in Lebanon was relatively minor, and an added benefit for the political class was that the lockdowns ended the protests. Even so, the lockdowns imposed heavy economic costs.

An uncertain horizon

With Gulf donors staying away, and Western donors united in seeking thoroughgoing reform in exchange for relief, Lebanon is unlikely to have much recourse in the medium term. But because donors’ demands will be to shake the status quo in Lebanon, the present leadership is reluctant to agree to them. There seems to be little sense of urgency outside of Lebanon to save the country. The Lebanese leadership has burned through much of its previous goodwill, and the present government lacks a sympathetic figure inside or outside of politics who can elicit support.

While the Prime Minister has talked darkly about a food crisis in Lebanon, the far more likely outcome is a serious economic contraction that will take years to work itself out. As part of that, a combination of internal and external forces will force some reordering of the Lebanese power structure. The timeframe for such a change, and its products, are uncertain. What is clearer is that we are still at the beginning of what will be a very messy process.

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