Flagged by the World Bank in June 2021 as a situation that could soon elevate to the form of one of the three ‘most severe crises episodes globally’ since the mid-19th century, Lebanon is sustaining from a unique crisis of its own.
While the world has been enveloped by the unprecedented COVID-19 pandemic, Lebanon, since 2019, has been plagued by a financial implosion, an economic predicament and presently, the detrimental Coronavirus pandemic as well.
 

Background
From being a part of the Ottoman Empire to being governed by a political elite and affluent group of people, who dwelled on corruption for years, Lebanon, as a country has experienced various periods in history with a mix of stability interspersed with conflicts. Even before the crises accosted Lebanon, its economy had been dilapidated. The advent of the Lebanese Civil War (1975-1990) left the economy with huge losses in revenue (owing to a large exodus), ruining of critical infrastructure including residential property, loss of production in the sectors of agriculture and industry and the fall through of the tourism sector. It is estimated to have cost Lebanon a good fortune of US$ 10-15 billion.
 

The Root Cause
However, the root cause of the crises still lies within a decision taken shortly after the Lebanese Civil War (1975-1990).
In 1997, the Lebanese Pound (LBP) was pegged (tied) to the US Dollar at the rate of 1,507.5 LBP per USD, in place of letting the global market determine its actual value. Though this tie provided the country with a much-needed stable currency after the war, it also necessitated large reserves of USD to be stored with the Central Bank of Lebanon for the purposes of import and otherwise, but also because the central bank had to be ready to provide US Dollars at the preconceived rate of exchange at any given point of time. The ceaseless inflow of the foreign currency was thus achieved through massive borrowings immediately after the war which added to the debt, reaching up to 128.64% of the GDP in 1999. The sources also included a plethora of remittances by a large diaspora, exports, tourism, real estate, investments, etc.
With Lebanon continuing its reconstruction, war again broke out in 2006, which had an adverse impact on the economy, specifically on the tourism sector, but Saudi Arabia, European Union and a few other Gulf countries came to Lebanon’s aid with a total of $3 billion. It was not until the 2010s that the inflow started declining substantially.
 

The 2010s: A Decade of Turmoil
In the decade that followed, Lebanon, being sandwiched between Israel and Syria, found itself entangled in the scorching sectarian politics of the West Asian countries. The Syrian Civil War (2011-present) proved to be baneful for the Lebanese economy, with trade being deterred the most. The system started to fail due to escalating trade deficits, low remittances and increasing debt. The heightened political tensions made the conditions worse. The Central Bank of Lebanon hence resorted to what some economists, the United Nations Secretary-General, Antonio Guterres and even the President of France, Emmanuel Macron have referred to as a “Ponzi” scheme.
A Ponzi scheme is a fraudulent tool used to attract new investors for money and the money received is then used to pay the already existing creditors. In 2016, the banks started issuing high to very high rates of interest to those who offered to deposit USD with them. This scheme caught the attention of many and the central bank got the cash it required to keep the economy afloat.
In 2018, however, the trade deficit widened by a lot. Lebanon, being much dependent on imports, had them amounting to almost US$ 20 billion, exceeding 6-7 times its exports, i.e., US$ 3 billion. This was followed by more borrowings by the central bank, achieving a debt as high as 154.02% of the GDP, thereby insinuating its immense decline in the ability to return what it owed.
A directive was soon issued by the Central Bank of Lebanon to carry out cash transfers in the local currency only, thereby inviting more queries and hence, this misuse of a whole policy prevailed only for a brief period of time until the people had a stark rendezvous with the truth.
 

How WhatsApp and Facebook Caused an Economic Disaster    
What initially started as liquidity shortages (availability of liquid assets; here, USD reserves) latent by the central bank, turning into a huge financial burden, gradually taking the form of a financial meltdown, was only a few steps away from turning into an economic disaster.
In the summer of 2019, the citizens were finding it very difficult to get their cash back from the banks. The already restricted access to the accounts of the depositors in 2018 was now met with curtailment becoming more rigid, giving rise to doubts and questions.
It was in the mid of October 2019, that the whole country exploded into chaos with protests. The government proposed to impose a tax on VoIP (Voice over Internet Protocol) calls used by applications like WhatsApp and Facebook along with taxes on gasoline and tobacco which aggravated the crowd to a greater extent.
The year was quickly powered with a mammoth protest against the sectarian rule, corruption, unemployment, failure of the government’s policies and ultimately, the stagnation of the economy. The commercial banks remained closed for an undisclosed span of two weeks, which only fueled the demonstrations further. It also acted as a vital agent in Lebanon losing its currency value.
This resulted in the then Prime Minister (Saad Hariri) announcing his resignation along with the Cabinet on October 29, amidst the protests. Lebanon ranked 3rd in the list of the most indebted countries of the world, with a catapulting debt of 171.11% of the GDP.
The value of the Lebanese Pound (LBP) now began being determined in the black markets as a consequence of the banks being unable to provide the people with enough money. The citizens lost faith in the banking system and the trade kept on continuing in the black markets. The rate of exchange incrementally fell with soaring demand for US Dollars.
 

Beirut Explosion and the COVID-19 Pandemic
A ruinous explosion on 4 August 2020 in the Port of Beirut, the capital of the country exacerbated the cost of the crisis by US$ 15 billion in property damage among fatal injuries and deaths. This incident was followed by the resignation of yet another Prime Minister and the country fell into a much more vulnerable position with political instability and rising protests.
Hyperinflation attained triple digits and has skyrocketed to 281% by June 2021 and almost three-quarters of the population has been forced into poverty. The GDP per capita also fell by 37.1%, a number which is usually associated with “conflicts” or “wars”. The value of the Lebanese pound is presently fluctuating somewhere between 25,000 to 30,000 LBP per USD in the black markets. There has also been a scarcity of resources like fuel and limitless obstacles in the procurement of basic amenities which include water, electricity, food and gas with the humongous price rise.
The onset of the COVID-19 pandemic has only amplified the circumstances. Though the incumbent Prime Minister (Najib Mikati) has been dealing with the pandemic through intermittent lockdowns and other measures, an already weakened health system continues to face its challenges. The vaccination was initially financed by the World Bank, but the country faces problems in the form of shortages of medicines and otherwise. A much negatively larger impact has been observed on the children and their education as well as on the mental health of the demography.
Though the World Bank along with the United Nations has tried to mobilize the current state of affairs for the revival of the Lebanese economy with the support of the government, the condition doesn’t seem to be getting better anytime soon. Therefore, years of corruption and mismanagement have eventually culminated into the ‘three-fold’ Lebanese crisis, as it is known today.
 

New Year, New Hope?
With the elections underway in May 2022, people are trying to be optimistic post the dreadful two-three years. An increase in international support from the IMF (International Monetary Fund) could also help to bolster the economy, but that largely depends on the analysis of the present scenario by a delegation that would soon be sent from the IMF. The statistics are nonetheless wielding contradictory predictions and the worst is yet to be seen.

 

REFERENCES:
•    https://www.worldbank.org/en/country/lebanon/overview#1
Background:
•    Harvie, C., & Saleh, A. S. (2008). Lebanon’s economic reconstruction after the war: A bridge too far? Journal of Policy Modeling 30(5) 857–872. https://doi.org/10.1016/j.jpolmod.2007.04.004
The Root Cause:
•    https://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS?locations=LB
2010s: A Decade of Turmoil:
•    https://wits.worldbank.org/CountryProfile/en/LBN
•    https://www.statista.com/statistics/455257/national-debt-of-lebanon-in-relation-to-gross-domestic-product-gdp/
How WhatsApp and Facebook Caused an Economic Disaster:
•    https://www.statista.com/statistics/455257/national-debt-of-lebanon-in-relation-to-gross-domestic-product-gdp/
Beirut Explosion and the COVID-19 Pandemic:
•    https://news.un.org/en/story/2021/09/1099102
•    https://www.worldbank.org/en/country/lebanon/overview#2