Lebanon on the Brink of Economic Catastrophe

The Lebanese government has been unable to quell recent and spreading panic regarding the state of the economy. The country’s debt sits at 150% of its Gross Domestic Product (GDP) and its GDP growth is projected to be less than 1% this year. Triggered by an artificial shortage of dollars in the country’s banking system, the protests that have rocked Beirut all year have escalated in recent weeks.

The official currency of Lebanon, the pound, has been pegged to an exchange rate of 1,500 pounds to a dollar since 1997. The belief that the central government can infuse dollars into the economy during a time of crisis creates confidence in the Lebanese economy, but it is appearing more and more unlikely that the government is able to actually provide any long term solutions to the current crisis.

The dollar is vital to the survival of businesses in Lebanon, specifically those that rely on hard currency to purchase goods. Petrol stations buy fuel in dollars but sell it in pounds; any lack of dollars is potentially catastrophic to their ability to turn a profit. A recent dollar shortage prompted a nationwide gas station strike on September 26th, the most direct attempt by Lebanese industry to try and force Prime Minister Saad Hariri to address the crisis. Coupled with the mass demonstrations that reverberated throughout Beirut on September 29th, this strike caused the Central Bank to promise dollars at the official rate to businesses that import petrol, medicine, and wheat. While the solution provides immediate short term stabilization, many are worried that Hariri and the government have few plans to steady the economy going forward and to ensure the overall health of the country's banking sector.

While on paper, the Banque du Liban (BDL), Lebanon’s central bank, appears well capitalized, former officials say that the bank’s liabilities actually dwarf its assets. As the economy grew steadily over the past decade, the BDL continued borrowing money from commercial banks at above-market rates. While this borrowing helped the BDL acquire an immense surplus of dollars, it also led to an ever-increasing national deficit. As long as new capital flowed into the Lebanese economy and consumers still trusted banks to keep their money, this deficit was manageable. In 2017, this trend slowed, as consumers deposited less money into commercial banks, but money kept flowing into the BDL, driving up the national deficit. The increasing national deficit led to slowing growth across all major Lebanese industries. The construction industry, for example, which employs around 10% of the population, has seen a 17% fall in new building permits. 

In years past, the Hariri government would have relied upon wealthy Gulf neighbors to help shore up the Lebanese economy. Now, such a bailout is nowhere to be found, due in large part to what is seen the Lebanese government’s continued toleration of the Hezbollah terrorist organization. Surprisingly, Hariri did tweet on October 8th that the United Arab Emirates did promise “investments and financial assistance,” without providing specific details, after meeting with representatives from the country.  

Given all this social unrest and economic instability, the prime minister himself has transferred millions of dollars out of Lebanon. Court documents recently disclosed that Hariri paid $16 million to a bikini model with whom he had a romantic relationship. The payments, made completely legally from Hariri’s private accounts (Forbes rates his net worth at $1.5 billion), could not have been revealed at a worse time. While demonstrations have calmed for now, Hariri faces challenges to the reputations of both himself and his country’s economy.