People queue to withdraw cash from an ATM machine outside a bank in Beirut, Lebanon, on Jan. 20.JOSEPH EID/AFP/Getty Images
Two and a half years ago, one of the biggest non-nuclear explosions ever recorded levelled the Port of Beirut and shredded other parts of Lebanon’s capital. The detonation of almost 3,000 tonnes of ammonium nitrate haphazardly stored in a warehouse killed at least 218 people, injured more than 7,000 and damaged or destroyed some 77,000 apartments.
The effort to find who was responsible for the disaster has turned into a farce. This week, Judge Tarek Bitar resumed his inquiry into the explosion after its year-long suspension. He charged several senior officials, including a former prime minister, Hassan Diab, with obstruction of justice and other crimes. But Lebanon’s chief prosecutor pushed back, arguing that the inquiry was still under suspension and ordering the police not to abide by Justice Bitar’s arrest orders.
Sadly, high-level political resistance to the inquiry, which was entirely predictable in a state infamous for shielding its ruling class, seems the least of Lebanon’s problems.
Lebanon is on the verge of becoming a failed state after an economic collapse that is unprecedented in modern times. Ukraine’s GDP fell about 30 per cent last year, but Lebanon’s fell 58 per cent between 2019 and 2021, according to the World Bank – and Lebanon is not at war. The bank said Lebanese GDP will show a further loss of more than 5 per cent in 2022, which is easy to believe for a country with no functioning government and, consequently, no ability to launch a credible economic survival plan.
Lebanon is a harsh lesson to the world on nation-building – or lack thereof.
Its economic collapse exposed the dangers of spending more than you make decade after decade, burgeoning debt, a regressive tax policy that protects the rich at the expense of everyone else, imports that vastly exceed exports, a property bubble, financial engineering gone mad to the point that it was widely labelled a Ponzi scheme and an utterly corrupt, patronage-based, sectarian political system. The World Bank recently said that “Lebanon’s economic and financial crisis ranks among the worst economic crises since the mid-19th century.”
There was a time when Lebanon was considered the jewel of the Eastern Mediterranean. In the 1960s and into the 1970s, Beirut was known as the “Paris of the Middle East” – a stable, beautiful, liberal seaside party town with a thriving banking sector and a dynamic cultural life. Les Caves du Roy, a nightclub housed in Beirut’s Hotel Excelsior, was considered one of the hottest clubs in the entire region.
The good times ended in 1975, with the start of the Lebanese Civil War. The messy conflict pitted Christians against Muslims, killed 120,000 people, went on for 15 years and included starring roles for Syria and Israel, both of which occupied Lebanon at times. In 2006, war erupted between Israel and Hezbollah, the Lebanese Shia political party and militant group, that ended with the Israeli withdrawal from Lebanon.
At that point, Lebanon could have relaunched its economy to recapture some of its precivil war glory and entrepreneurial flair. It failed completely, ultimately impoverishing the government and the Lebanese people, creating a crisis that has seen most basic functions, from banking to electricity, break down. Anyone with a mattress full of U.S. dollars has fled to countries where the lights stay on.
While there are a thousand reasons for Lebanon’s collapse, including the pandemic, the Port of Beirut explosion and the refugee crisis – there are about 1.5 million Syrian refugees in the tiny country – the banking disaster lies at the heart of the economic calamity.
In recent years, the Banque du Liban, the central bank, used a scheme to encourage the flow of dollars into the economy. Those dollars were needed to finance the country’s hefty imports and maintain the Lebanese pound’s costly currency peg to the U.S. dollar. To do so, the bank pushed up deposit rates to crazy levels – as much as 10 per cent – and those deposits in turn were loaned to the central bank.
The scheme worked as long as the net inflow of dollars remained intact and new dollar deposits could be used to pay the returns on old deposits – the Ponzi scheme. At the same time, the commercial banks kept buying government debt. It was all a recipe for the inevitable disaster, which came in 2019, when the scheme ran out of momentum and the inflow of dollars dried up. Banks were forced to limit cash withdrawals, triggering mass riots that led to the downfall of the government.
Since then, every economic number has gone in the wrong direction. The World Bank says GDP per capita fell 36.5 per cent between 2019 and 2021. The banks have ceased lending and no longer attract deposits. More than half the population now lives below the poverty line, and unemployment has almost tripled, to 30 per cent. Inflation is running at more than 170 per cent, and government tax revenues have dried up.
Foreign exchange reserves are depleted, and the Lebanese pound is essentially worthless. This week, it fell to a record-low 56,000 to the dollar. Before the crisis began in 2019, the peg was 1,500 pounds to the dollar. Filling up a gas tank now costs more than a million pounds.
Lebanon’s implosion is not unique outside war. Argentina, which was once richer than France and Germany, has seen its economy fall apart in recent years and now survives on the good graces of the International Monetary Fund. Lebanon, by contrast, unravelled at alarming speed, which brings to mind Ernest Hemingway’s quip: “How do you go bankrupt? Two ways. Gradually, then suddenly.”
In Lebanon, the poor are poorer and the middle class is being wiped out. The rich are still rich, and many of them have left the country. There are a million lessons here, but a biggie is this: Do not let the political and business oligarchy run the show and shift the burden of their corruption and inaction onto everyone else.