Lebanon Says Economy on Verge of Collapse

With the FIFA World Cup over and French victory secured, people can go back to discussing the mundane topics of weather and other worldly affairs. For the Lebanese, this means a return to politics and, principally, the economy, which, many observers say, stands on the point of crashing.

Not one usually wary of accusations of scaremongering, Gebran Bassil, caretaker foreign minister and son-in-law of Lebanese President Michel Aoun, said: “Lebanon’s economy was on the verge of collapsing," MEO reported.

While Bassil’s economic prophecies are largely more to do with his strategy of demonizing Lebanon’s Syrian refugees and blaming them for the country’s problems, the fear of an economic failure is not unfounded.

As it stands, Lebanon’s public debt is $80 billion, the third highest globally as a percentage of GDP (150%) with more than one-third of the annual budget dedicated to servicing the country’s debt, making—without significant change—economic recovery impossible.

Discussion of potential collapse brings back memories of the 1986 crash, which saw the value of the Lebanese pound plummet, leading to inflation and resulting in the loss of savings for most Lebanese.

Fiscal Crisis

Despite the civil war, the pound had been stable against the dollar, trading at around three pounds. However, the crash saw it reach 2,825 pounds to the dollar in 1992. The Lebanese Central Bank, or BDL, intervened by fixing the exchange rate, a measure that remains in effect.

While pegging the currency to the dollar might work as a protective measure, it is not without constraints, hindering growth and placing an additional burden on Lebanese state coffers.

“The main problem today is that fiscal policy is almost non-existent, which forced the BDL to go beyond its mandate of monetary policy and do things it should never do,” said Walid Marrouch, associate professor of economics at the Lebanese American University.

Marrouch said approximately 80% of Lebanon’s budget goes to public sector salaries and benefits, plus the cost of servicing the debt. The remaining 20% is allocated for fiscal policy. However, “the corruption of the ruling elite is making this meager 20% smaller and their refusal to pass policy reforms draws the fiscal crisis even closer,” he said.

Subsidies on Housing Loans Suspended

Only recently did the effects of the government’s persistent failure reach the housing sector when the government suspended subsidies on housing loans, which will cause dire repercussions for first-time homeowners.

However, the true tragedy of the housing crisis is beyond straightforward economics and speaks to the years of corruption and abuse of the real estate market, because politicians and lawmakers manipulated circumstances to keep prices artificially high.

Many of those responsible for the country’s government are developers or heavily invested in real estate projects. As such, they have gone out of their way to thwart taxes or legal measures that would benefit rentals at the expense of the housing market, leading to the current crisis.

Game of Thrones Continues

Despite the alarming symptoms of Lebanon’s deteriorating economy, the ruling elite has shown neither vigor nor foresight in addressing the challenges. Instead, it has continued its game of thrones.

Caretaker Prime Minister Saad Hariri, selected to form a new cabinet, has failed to put forth a lineup that would be instrumental for adopting promised reforms.

The $11 billion grant and loan package, which the international community earmarked at the CEDRE conference in April to help Lebanon overhaul its infrastructure, hinges on Hariri’s ability to form a cabinet, a process that seems to have become bogged down by internal bickering and corruption.

Discard Alarm Bells

Though the auguries appear grim, there may be hope. A capital market expert, speaking on condition of anonymity, said: “A lot of alarmism exists now in Lebanon, some based on inaccurate economic numbers. Nevertheless, the economic environment is worrying and if the trends continue, it will be alarmingly so.”

Despite this, he said, Lebanon’s banking sector provides cause for qualified optimism. It plays a vital role in maintaining the economy and is sure to be critical to any resurgence.

The Lebanese have always gambled that, whatever dark political and economic clouds gather overhead, they will be blown away by the winds of regional political change. Such gambles have borne out, with Lebanon’s central role within the Middle East ensuring a reliable supply of Persian Gulf funds.

Unfortunately, those days are gone. The Lebanese failed to capitalize on any lifeline extended to them, betting on a fairy-tale ending to grim economic times without undertaking fundamental reform.