Demonstrations once again blocked the streets of Beirut last November as angry crowds took to the street to protest the worsening socio-economic conditions. The collapse of Lebanon’s state-run electrical grid laid bare the devastating impact of the country’s economic crisis, now in its third year. The country’s population of five million has battled with soaring prices and high unemployment since 2019, in what the World Bank has deemed “one of the most severe crisis episodes since the mid-nineteenth century”.

Already heavily indebted at the start of the crisis, Lebanon’s inflation rate overtook that of Venezuela’s and Zimbabwe’s last year. The lira has lost more than 90% of its value in the last two years, such that supermarkets and shops no longer display prices that change by the hour. With three-quarters of the population now living below the poverty line, news of cuts to state subsidies led to renewed outrage.

Once known as the Switzerland of the Middle East, Lebanon has now become a melting point of the region’s many economic and political challenges. Yet with an ongoing political deadlock, an end to the crisis remains elusive.

The Economic Roots of Problem.

The seeds of Lebanon’s current challenges predate its 2019 economic crisis and indeed its 2006 war with Israel. The country’s crisis stems in large part from its economic response to the 15-year civil war that ended in 1990. In a bid to jump-start the economy and repair infrastructure, a new government headed by Rafik Hariri embarked upon an ambitious reconstruction project. Aptly named Horizon 2000, the plan consisted of an investment expenditures programme, and corresponding macroeconomic targets from 1993 to 2007.

Reconstruction and post-war reconstruction delivered high growth due to an initial injection of spending; however, it was limited as a long-term income-generating strategy. In the long run, growth performance is more dependent on structural change and economic policy reform. Consequently, the benefits of the construction boom were short-lived. By the early 2000s, Lebanon was struggling to contain its fiscal deficit. A regressive taxation system, with low corporate tax and high indirect taxes, emerged with little concern as to wider distributional impact. This set the stage for the entrenchment of future socioeconomic inequalities.

While the cracks in the system started to show, the 2008 financial crisis was an unexpected bonus for Lebanon. Despite a global economic slowdown, low-interest rates saw some $30bn of capital (around 100 percent of GDP at that time) flow into Lebanon, reducing the debt to GDP ratio. However, the capital inflows marked the beginning of the central bank’s excessive reliance on foreign currency, with authorities taking panic measures whenever reserves began declining even slightly.

Lebanese banks then embarked upon controversial policies of financial engineering, attempting to attract dollar deposits by offering subsidies to commercial banks. Operating as little more than a professional Ponzi scheme, these policies paradoxically resulted in a substantial reduction of the banks’ net reserves as they struggled to cope with the fiscal cost of the scheme.

Financial instability was compounded by other economic challenges brought in the aftermath of the Arab Spring. Exports declined dramatically for many sectors with the start of the war in Syria, on average, a Lebanese exporter to Syria lost $90,000 in 2012, a loss of 25% on pre-crisis levels. An influx of refugees also required increased state spending; while Lebanon does receive some $1.5 billion a year from international refugee support agencies to cover direct costs, estimates place the additional indirect costs of hosting the refugees at some $4.5 billion. As a middle-income country with a large service sector, Lebanon had also taken steps to develop. It attempted to develop its tourism industry before the Arab Spring. This naturally suffered from the drop in tourism post-2011, as well as competition from Gulf states as alternative tourism destinations.

Whilst the country had additionally sought to make the most of the country’s abundant Labour supply and transition to a knowledge-based economy through the expansion of higher education, it has encountered several structural challenges. Political instability and weak ICT infrastructure mean the country is unable to offer sufficient opportunities to attract and retain the younger, more educated segment of its population. This has led to significant migration, with remittances becoming its economic lifeline.

Lebanon’s peppered history has led to the emergence of structural economic obstacles have been further compounded by political challenges.

The Emergence of Crony Capitalism

 As with elsewhere in the region, Lebanon’s fragility has been exploited. An alliance of elite businessmen and politicians, who effectively control both legislation and all major industries, has led to widespread corruption and mismanagement. As early as the post-war era, reconstruction efforts were hijacked by a cadre of rich businessmen with political connections, who littered the Beirut skyline with skyscrapers, malls, and offices. Job creation was higher in politically connected firms, as they reaped the benefits of tax breaks; by contrast state oversight agencies have been left politically weak and underfunded.

Banks additionally wielded extraordinary influence over monetary, fiscal, and even political policy. Lebanon’s ruling class directly controls the commercial banking system, sustaining clientelist networks and heavily intervening in exchange rate policy. A significant challenge across the MENA region is elite capture (the hoarding of political power and wealth among a few). This has resulted in widespread exclusion from the market and pressure on smaller businesses.

Those at the upper echelons also used the country’s sectarian makeup to their advantage. By strategically distributing income and job opportunities through sectarian networks, they employed a form of economic divide and rule, successfully quashing more broad-based efforts that would have seen workers unite.

With decades of widespread corruption having rendered the public sector dysfunctional, and with steadily declining living standards, the national uprising that broke out on 17 October 2019 was not unexpected. The low tax-regime skewed in favour of the rich became particularly apparent when plans to tax WhatsApp calls were announced, a suggestion that was met with widespread protest. Subsequently, the Beirut blast on the 4^{th of} August 2020 similarly highlighted the extent of state incompetence. It led to 218 deaths, with seven thousand injured and an estimated $15bn loss to due to property damage, with 300,000 made homeless. This had a devastating effect on an already fragile economy.

Leaked documents have shown that successive governments were warned at least ten times of the dangers of stockpiling the chemicals but took no action. Public officials and politicians have used the right to immunity over the past year to shield themselves from an investigation into the blast. For many Lebanese, the port explosion was reflective of a state in the grip of cronyism, unaccountability, and political negligence,

Despite promises of reform, the political elite has little incentive to enact such changes. Following the 2019 protests, the government introduced several anti-corruption laws and the National Anti-Corruption Strategy to pacify an angry public and enhance the country’s appeals for international funding. Yet in the past, reforms were implemented following ‘soft loans’ from the IMF. In the absence of external oversight, suboptimal political institutions allow the persistence of crony capitalism to flourish.

Sectarian Politics and Political Deadlock.

 The recent economic crisis has laid bare the fault lines at the heart of Lebanon’s political makeup. Attaining independence from France in 1943, the post-colonial state that emerged, though small, was demographically diverse. The constitution ensures that the government is representative of the country’s religious and sectarian makeup, ensuring a Maronite Catholic president; a Sunni president; Shia parliamentary speaker; a Greek Orthodox deputy prime minister and deputy president; and a Druze army chief. Whilst aimed at creating unity, in practice, this has resulted in administrative inefficiency in decision-making and implementation. This institutionalisation of sectarian divisions has also led to the distribution of benefits through such sectarian politics and networks, preventing the unification of people against the political elite themselves.

Despite these challenges, the country managed to maintain a delicate state of stability. However, the start of the Arab Spring brought significant challenges as the country began to occupy a more precarious position in the region. As well as hosting new waves of refugees from neighbouring Syria, Lebanon became a site of proxy wars, receiving competing attention from both Iran and Saudi Arabia.

Historically, Lebanon received significant backing from Saudi Arabia and the US, on the condition of keeping a watchful eye on the activities of Shia militant group Hezbollah, and its ties to Iran. Yet with the eruption of war in Syria, Hezbollah and Tehran openly backed the Alawi regime in Damascus. With growing Iranian influence in Syria, Saudi moved to reassert their influence over Lebanon in 2017, by detaining Prime Minister Saad Hariri during a trip to Riyadh. In a televised statement during his trip, Hariri abruptly announced his resignation; the decision was rejected by Lebanese President Michel Aoun, and Iran who argued the detention was a plan on the part of the US, Israel, and Saudi Arabia to undermine Tehran. On his return to Lebanon, Hariri rescinded his resignation, but the extent to which the Saudi Crown Prince Mohammad Bin Salman would go to maintain their sway over Lebanon has become clear.

Following the protests of 2019 and the resignation of the government, the Lebanese government has pledged multiple reforms. Yet the design of the Lebanese judiciary, such that it is tied to the executive administration makes impartial investigation difficult to secure. The lack of action following the Port of Beirut blast has been a prime example of the immobilisation that has become inherent in the Lebanese government.

No End in Sight to Economic Misery.

Despite warnings that the country is heading towards state failure, Lebanon remains trapped in crisis, with no one willing to take the stand to enact the necessary change. After months of political paralysis since Hassan Diab resigned in August 2020, in September 2021 Najib Mikati – Lebanon’s richest man – became prime minister, a position he has held twice before. In October 2021, Saudi Arabia and the Gulf states moved to expel the Lebanese ambassadors and ceased trade with the country, a ban that would incur an annual loss of $244 million if continued. Protesters again filled the streets towards the end of last year, after subsidies were cut. The cycle of instability continues.

The economic and political crises in the country are inseparable; but lacking the political will to enact change, an IMF bailout has been considered the only solution. Yet the IMF’s neoliberal blueprint when lending to heavily indebted countries usually stipulate the conditions of public service cuts, currency devaluations, and the removal of subsidies – all measures that will increase unrest and worsen poverty. Adding to the debt burden of a highly unstable economy will only prove to be a ‘band-aid’ of short-term proportions that will only add to Lebanon’s economic woes.

As the country looks to 2022, the need to look at long-term solutions to Lebanon’s structural weaknesses is more imperative than ever. Stability can only emerge from deep-rooted reforms, which require a fundamental re-evaluation of its history thus far. The sectarian legacy, institutionalised by the creation of a colonial imposed nation-state system has failed to progress Lebanon into a stable and prosperous state meeting the needs of all its people. To stimulate a genuine economic revival, a different economic and political imagination is required.

 Hana Hassan is a Research Associate at the Ayaan Institute.