Lebanese Government Announces New Financial Plan
Protesters in Beirut call for an overhaul of Lebanese economic institutions. (Wikimedia Commons)
The Lebanese government approved an extensive financial rescue plan on February 6. According to Reuters, the government will cut interest rates and recapitalize banks in the face of rising inflation, a dollar shortage, and spiraling public debt.
Lebanon’s finances have faced uncertainty since the post-civil war reconstruction period in the 1990s. The debt-to-GDP ratio has hovered at roughly 150 percent since 2000, and the current account deficit as percent of GDP has remained between 20 and 30 percent since 2015.
Unlike most other countries, Lebanon actually benefited from the 2008 financial crisis, which injected nearly $30 billion in foreign capital into the economy. The government failed to take advantage of this and instead used the capital inflows to finance government spending. The cash inflows and spending likely contributed to inflation, which reached 10 percent in 2008.
Furthermore, the Lebanese government has tied its economy to foreign currencies since 2008. Fadi Hassan, a research associate at the London School of Economics, and Ugo Panizza, a professor at the Graduate Institute in Geneva, wrote in The Financial Times, “Soon enough, foreign reserves became the be-all-and-end-all of all [Lebanese] policy, with the central bank going into panic mode if and when reserves began declining even slightly — despite them remaining well above pre-crisis levels.”
In 2015, Lebanon’s Prime Minister Saad Hariri was forced to publicly resign by Saudi Arabia, a political crisis that triggered the ongoing economic downturn. Hariri’s resignation sparked uncertainty in the investment sector, and the ensuing capital flight created a domino effect of financial woes.
The crisis worsened when foreign deposits collapsed in 2019. The impoverished public has taken to the streets, blaming government corruption and waste. The protests triggered a political crisis under which a new government was formed with Prime Minister Hassan Diab.
Diab’s plan seeks to rescue Lebanon from a complex and drawn-out situation. While the financial plan seeks what Diab calls “painful steps,” many in the government agree it is the best option.
The biggest hurdle for Lebanon will be securing foreign investment. Investors are unlikely to place capital into an uncertain environment, and Lebanon still faces a shaky future. Diab urged European nations to “help today at various levels, power, food supplies, raw materials,” and open lines of credit to the cash-strapped nation.
Some argue that government action and foreign investment will not be enough. Lebanon’s Former Minister of Economy Nasser Saidi told Reuters, “The danger of the current situation is we're approaching economic collapse that can potentially reduce GDP [gross domestic product for 2020] by 10 percent.” He argues that Lebanon needs a 20 to 25 billion dollar bailout from the International Monetary Fund.
Other experts have claimed that Lebanon’s newly proposed budget will do nothing to resolve the crisis. Rabih Haber, CEO and general manager of the Statistics Lebanon polling and research company, believes this results from the strange political situation, where Diab did not prepare the budget but must implement it.
Regardless, the approved financial rescue plan might be Lebanon’s only hope. As protestors resort to violence and the situation worsens, Lebanon might reach a boiling point. Equally worrisome, Lebanon’s relationship with Iran via Hezbollah might make securing foreign investment difficult. Fearful of angering the U.S., Western nations might not provide capital to suspected Iranian proxies.