The explosion that rocked Beirut on Tuesday evening will require vast resources for reconstruction – but Lebanon’s finances are already strained to the breaking point.
In March, the Diabi government defaulted on $90 billion of debt, showing the pressure on an economy that is no longer attracting investment or foreign exchange or bank deposits on a large scale. Instead, the central bank, the Banque du Liban, has used “a complex series of sovereign debt and currency swaps with local lenders — what the central bank governor has called ‘financial engineering’ — to stabilise the Lebanese pound, the Financial Times reported in June.
The governor of the central bank Riad Salame is currently under investigation for allegedly inflating the amount of assets on the bank’s books by at least $6 billion using unorthodox accounting techniques.
That led to a collapse in the value of the currency in which the Lebanese pound has lost more than 80 per cent of its value in eight months, pushing up the price of goods by up to five times. Meanwhile the central bank lost $49 billion, which is equal to more than 90 percent of the country’s total economic production in 2019 according to World Bank numbers.
The result is that thousands of businesses have shuttered, and chronic power cuts have become the norm. “The middle class is swelling the ranks of the poor, with the World Bank estimating that around 50 percent of Lebanese now live below the poverty line, while thousands are going hungry. Clothes, food, and fuel are becoming unaffordable as year-on-year purchasing power has been halved, with inflation reaching 90 percent in June 2020,” writes notes Maha Yahya, director of the Middle East Centre for the Carnegie Middle East Centre.
In Lebanon, lenders have imposed restrictions on bank withdrawals with growing protests which began in October 2019.
The banking sector, once critical to the country’s economy, is in tatters. “In 2018, financial services contributed 8.5 percent of GDP and the tourism sector (mainly hotels and restaurants) 3.1 percent. Today, losses in the banking sector are estimated at $83 billion. In a country that imports almost everything it consumes, informal capital controls and the cancellation of lines of credit to businesses show a banking system that no longer functions,” Yahya says.
The country’s politicians are at swords point, at the very time when they must make difficult decisions. The International Monetary Fund (IMF) is offering a $10 billion loan programme, but will not proceed until a solid economic plan is laid out going forward. But the top officials in the cabinet and those at the central bank simply cannot agree on such a plan. This means that the IMF may just walk away, and that would leave the country with very few options.
According to UN statistics, one in three Lebanese have lost their jobs.
“Vulnerable Lebanese and other at-risk groups, such as refugees and migrant workers, are increasingly unable to meet their basic needs.
“This situation is fast spiralling out of control, with many already destitute and facing starvation as a direct result of this crisis”, said UN High Commissioner for Human Rights Michelle Bachelet. “And as is so often the case in such situations, it is the poorest and most vulnerable who suffer the most.”