While the world is grappling with the recessionary impacts of the Covid-19 pandemic, Lebanon is in an economic quagmire and looking for immediate financial support. The country is going through one of the worst financial crises it has ever faced. The Lebanese lira has been devalued by more than 80 per cent, compared with August last year, which is when the currency's value started its downward trend. It has been pegged to the US dollar since 1997, with an official exchange rate at 1,507.5 liras to the dollar. This is currently fluctuating at around 8,000 liras on the black market.
High inflation, job losses and rising poverty are affecting the people of Lebanon. This has led to higher prices for food and most other essential goods and services. The price of bread, for example, has risen for the first time in ten years.
The recent news about suicides in Lebanon linked to the country's economic situation demonstrates how poverty and hunger have rendered people helpless. They are struggling to pay their debts and meet their basic needs. Property owners want tenants to leave their houses because rents are not being paid. As power plants run out of imported fuel, electricity supplies are cut for 20 hours a day and more, leaving people to use candles like the old days.
Ordinary people are paying the price for the inept behaviour of the politicians over many years. Until and unless the ruling elite stops putting their own interests first, the people will be the victims of political incompetence, with many being obliged to leave the country at the earliest opportunity.
The reason for the financial meltdown is the depletion of the Lebanese Central Bank's foreign currency reserves. In March 2020, the government defaulted on a €1.2 billion bond, the first such default in the country's history. Prime Minister Hassan Diab described the level of available foreign currency reserves as "worrying and dangerous".
Last October, the government planned to initiate new taxes in a move which sparked protests across the country. They turned into a nationwide condemnation of political corruption and sectarian rule. The protesters have been seeking a system change and political transformation. There is now a lot of tension in Lebanon.
The technocrat government that was formed in January 2020 following the resignation of former Prime Minister Said Hariri couldn't be the remedy that the country was seeking. The economic situation was then exacerbated by the Covid-19 pandemic and the declaration of a state of emergency which closed most businesses, borders and ports, including Beirut Rafic Hariri International Airport. Although the airport re-opened last week, whether it will help to bring money into the country as travellers return remains to be seen.
While the government is looking desperately for solutions to ease the crisis, nobody seems interested in sending money to Lebanon. The recent talks with the International Monetary Fund have not yet brought any results. International lenders want to see a credible government with a serious economic programme before they think about helping.
When it comes to foreign aid, the United States is reluctant to support Lebanon because it believes that the Iran-backed Hezbollah is a terrorist organisation, and the movement is prominent in Lebanese social and political life. Moreover, the US sanctions on Syria imposed by the Caesar Act might have a knock-on effect on Lebanese banks, which are used by prominent Syrians.
The same goes for the support of the Gulf countries, and particularly Saudi Arabia, which halted a $4 billion aid package in 2016 to keep the pressure on Hezbollah. From 2003 to 2015, 76 per cent of direct foreign investments in Lebanon came from the Gulf. Over the past decade, Gulf remittances formed 60 per cent of the total remittances to Lebanon that constitute about 20 per cent of its annual GDP. However, such financial support has slowed to a trickle since 2016.
Although Qatar and Saudi Arabia had announced their readiness to support Lebanon following the outbreak of the financial crisis, the possibility of support in the post-Covid era is far from guaranteed given the huge economic impact of the pandemic on the Gulf States. Lebanon couldn't convince the Gulf countries in their recent meetings to deposit funds in the Lebanese banks.
With a prime minister and government backed mainly by Hezbollah, western donors are unwilling to give financial support. The movement's main supporter, Iran, has a financial crisis of its own, so is unlikely to be able to help Lebanon.
Lebanese expatriates are not eager to deposit more money in Lebanon until they can be assured that their assets are going to be safe. Depositors cannot withdraw their money from the banks so restoring confidence in the banking sector will be the most important step to convince expatriates to resume their remittances.
With a $90 billion debt that corresponds to a 170 per cent debt to GDP ratio, Lebanon has become the third most indebted country in the world, behind Japan and Greece. Most of the debt is held by the central and commercial banks, where bilateral and multilateral loans are equivalent to just 3.5 per cent of GDP.
The only immediate option left for Lebanon to cope with the dollar shortage is to convince foreign lenders through a structural reform programme which demonstrates that the government is indeed determined to defeat corruption and make tough decisions. The question is simple: are Lebanon's oligarchs willing to compromise on their own interests in order to benefit the country?
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.