Lebanon: Notes from a Crisis

This article was originally written by Aryan Aggarwal on Café Economica on 30 July 2020.

This country has no future.” said a 50-year old former warehouse keeper, Hussein, as he packed up the few belongings his family has left, ready to leave Lebanon. Hussein is one of the tens of thousands Lebanese fleeing the country and its economic and social collapse.

Since October 2019, protests and the number of demonstrators along with the incidents of violence between civilians and armed forces are on the rise.

Source: Wael Hamzeh/EPA

The protests began to oppose the introduction of the new ‘Whatsapp tax’, have now taken a whole new face. Locally referred to as the “October Revolution”, the protests soon became about opposing the mismanagement of the economy, and the rise of inequality marked with the rise of the new political elite.

Along with these protests came a whole range of new economic problems. Since October 2019, the Lebanese pound has lost 70% of its value against the US dollar in secondary markets and food prices have increased by 55% in 2020 alone. The World Bank estimated that nearly 48% of the population was living below the poverty line in 2019. This number has clearly increased since.

Source: WFP Retail POS Data Warehouse

In this article, we explore how a country which was revered as the ‘Switzerland of the East’ is now on the verge of a complete societal collapse and attempt to understand what may lay ahead for the fate of the 6.8 million people in Lebanon.


Many claim that the foundations of the current crisis was laid almost 30 years ago in 1990. After the end of a 15-year long civil war, Rafiq al-Hariri (who became the Prime Minister in 1992) began heavy borrowing from international markets to boost consumption. His successors followed on his path and continued the path of massive borrowing. What allowed them to do so? The currency peg.

The Lebanese central bank pegged the currency at 1507.5 pounds per US dollar and has maintained it for 22 years. A currency peg is an economic tool under which the central bank of a country ensures that the price of its currency against other currencies remains constant.

Although currency movements follow demand and supply, the central bank is forced to constantly interrupt markets to ensure consistency. A currency peg ensures stability in the short run, however in the long run, it can deviate the value of the currency from its original value. Today, the Lebanese pound is said to be more than 50% over-valued.

The main culprits behind this are the consistent budget deficit and current account deficit.

Source: Republic of Lebanon Ministry of Finance
Source: IMF

Current account deficits occur when a country is importing more than exporting. What it causes is a net capital outflow. Money constantly leaves the country as governments, consumers and businesses pay other countries. This increased the supply of Lebanese pounds. Annual interest payments on public debt to foreign entities by the government added to this problem. The result – the Lebanese pound losing its value.

Hence, to ensure that money keeps coming into the country, the central bank kept on increasing the interest rate. High interest rates attract investments as investors seek higher returns.

Source: Trading Economics

The rationale behind high interest rates was to ensure flow of US dollars. What was thought to bring stability to the country brought a stagnation for domestic industries.

The high interest rates ensured that the cost of taking a loan and starting a business was too high and the cheap US dollar ensured that imports remained cheap. The result became a country which had no infrastructure, no domestic industry and only imports.

But, the central bank did not stop there. Soon high interest rates were not enough to attract US dollar inflows. The government still had a lot of debt to repay in US dollars. So began the so-called “financial-engineering” by the Lebanese central bank. Or as many experts have called it since, A Ponzi Scheme.


The banking sector in Lebanon was once hailed as the crown jewel of the Lebanese economy. This is their current state.

A protester smashes a bank window during demonstrations in Beirut in April
Source: Hussein Mala

Bankers hide behind barricades and military protection to save themselves from the wrath of the protestors. Banks have imposed capital controls (limitations to the amount which can be withdrawn), to ensure stability causing locals to rapidly lose faith in the financial industry, and for the right reasons.

The currency state of Lebanese banks is best stated by Raid Obegi, the chairman of Banque BEMO, one of the biggest banks in the country, “If you follow what international standards are saying then there are no more banks with equity, they are all insolvent.”

The root of the collapse of the financial system lay in the tactics deployed by the central bank in 2016. Commercial banks had huge amounts of US dollar reserves, which the government desired desperately. Thus began “financial-engineering”.

While explaining the exact swaps is far too complicated and beyond the scope of this article, I have attached a video, which explains it, for those who are interested.

The end result of these financial maneuvers was that commercial banks lent their dollars to the government through the central bank. Yes, it was chaos. The government used the dollars to pay its foreign debt, however still remained inefficient. The end result was that 70% of assets owned by commercial banks were locked up in the government.

Then in March 2020, the government announced that it would no longer be able to pay back its debt. That meant the end of the line for banks.

Bankers and the central bank, all knew what was happening. Money was flowing to a government which is known for its corruption, inefficiency, high levels of debt, and extremism. However, they all enjoyed growth, high interest rates and profits. They all willingingly backed a government which was doomed to fail.


Political stability in Lebanon has been a rare sight. Heightened political tensions have led to investors panicking and withdrawing their money out of the country. This all dates back to November 2017.

In November 2017, the sitting Prime Minister of Lebanon, Saad al-Hariri disappeared for 10 days after his strange resignation from Saudi Arabia. Only to appear later in France and officially reclaim his post.

The trend of chaos has continued since. In October 2019, the Prime Minister Saad al-Hariri resigned, again. In June 2020, the finance ministry’s top civil servant Alain Bifani stepped down.

However, the main factor tearing apart the country is the Shia-Sunni conflict brooding in the Middle East for decades. While the Sunni backed political bloc led by Saad al-Hariri has the support of Saudi Arabia and the US, it is losing political strength. In the latest 2018 elections, the Iran-backed Shia Islamist party Hizbollah won more seats than ever before. While many view the party as a defender against Israel, it is viewed by the Gulf States and the US as a terrorist organisation.

Concerns about the increasing influence of Hizbollah has led to the drying up of many loans and emergency funds which were provided to Lebanon, by the US and Saudi Arabia.

In a time of crisis, the country finds itself more lonely than ever before.


In 2008, much of the debt in the western world collapsed. Monetary authorities rushed to slash interest rates in order to boost demand. In a time when interest rates reached historical lows, Lebanon was one of the few countries which was offering investors sky-high interest rates. Money flowed into the country and boosted economic demand. A country with a precedence of excessive spending now became addicted to foreign money.

Source: IMF

Persistent budget deficits, fuelled by politicians using public funds to buy votes ensured that a debt crisis was near the corner. The government expanded public hiring, hiked the pay of public servants and kept alive a loss making state-owned electricity company. When we add the cost of paying interest on the massive public debt which the government had slowly accumulated over the years, we get a country with more bills to pay than cash in its wallet.

Source: Goldman Sachs

The recipes for disaster were all laid out. A central bank destroying local business. A country heavily reliant on foreign imports. A persistent overvalued currency, which ensured that any reduction in its value would cause massive inflation. A banking system which owned public debt more than anything else. Rising extremism and lack of reforms. A corrupt debt-ridden government. Drastic inequality.

Then, in October 2019, the government plans to introduce a tax on Whatsapp calls became the last straw. The country broke down.

In March 2020, the Lebanese government stated that it would no longer be able to pay back its debt. The debt-crisis induced the financial crisis.

A country heavily reliant on foreign inflows, saw money rapidly leaving the country as chaos took over. A currency crisis emerged which has since induced rapid inflation.

The groundworks of the crisis were laid for decades, and today Lebanon finds itself in the worst position possible.

The government turned to the IMF in last hopes to bring peace and stability back to the region, but there has been little to no progress.


The country currently is divided into two camps. One is the IMF backed government which accuses the central bank and commercial banks for the disaster in the country and the other is the central bank, living in self-denial. The IMF states that the central bank has incurred losses of $49 billion and total bank losses in the country is $62 billion. The central bank states that these figures are overstated. The country is at a stand still.

To understand why this dispute is rising and why the figures around bank losses matter, we need to understand who would pay the price. The greater the amount of losses reported at the banks, the greater would be the “haircut” which banks would have to impose. This means that they would have to significantly lower the interest they pay to their depositors. The greater the haircut, the more money will be withdrawn from the banks and bankers will lose. Furthermore, a haircut would harm first and foremost the elite in Lebanon, those with the most money in banks will lose the greatest amount of interest payment.

The banks on the other hand press for the government to sell off their assets to pay back the $25 billion debt the government owes. This argument does have its merits. A lot of industries operated by the government ranging from electricity, water supply, public transport, telecoms, and even a Casino, have been termed non-performing (not generating profits). Privatisation of loss making industries, will boost output, productivity and provide the government with much needed revenue through the sale of assets.

However, the buck doesn’t stop here. If the country is to truly emerge out of this crisis successfully a lot of issues would need to be tackled. The over-priced currency peg needs to be gradually and systematically lowered to its true value. The government needs to impose import restrictions and provide incentives to local businesses to produce more. The country needs to develop stronger institutions and attract foreign investment, which would bring in new technology, increase productivity and competition in the economy. This is all much easier said than done.

Lebanon may be in gradual collapse but the worst clearly lies ahead. The elite would have to be willing to give up their control over banks and the government would have to recognise it’s faults. If change is not brought about fast, the country could become the next Venezuela.

Lebanon today stands as the classic example of what happens when corrupt government officials and bankers are left alone, unchecked for decades. Lack of accountability and decades of flawed economic policies ensure that all it takes for a country to stumble into chaos is a little nudge. And in Lebanon the nudge was a tax on Whatsapp calls.

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