Pulling Lebanon out of the Pit

An uprising of unprecedented scope has rocked Lebanon as the country’s economy tumbles deeper into recession. Poverty and unemployment could lead to violent unrest. Donors should put together an emergency package but condition further aid upon reforms to tackle corruption, a major grievance driving protest.

What’s new? The impact of the COVID-19 pandemic on Lebanon’s economy, which was already slowly imploding, has brought it to the brink of total collapse. Since October 2019, popular protests have pushed for greater accountability from an elite that, having engorged itself, seems incapable of instituting critical reforms.

Why does it matter? The accumulation of crises is driving ever greater numbers of Lebanese into absolute poverty. While the lockdown is gradually easing, the loss of jobs and purchasing power triggered new protests that are turning violent and may prefigure the disintegration of state capacity and institutions.

What should be done? Lebanon will need emergency external assistance to ward off the worst social consequences of the crisis. Beyond that, external actors and donors seeking to help the country exit the crisis should focus on efforts geared at rooting out corruption and clientelism.

Executive Summary

Three decades old, Lebanon’s post-war order has become dangerously unstable. Protests that broke out in October 2019 revealed the degree to which many citizens reject a ruling elite that has enriched itself at their expense. Those in power have struggled to retain control but for months appeared too absorbed in habitual power games to address an economic meltdown in the making. The danger of inaction is clear. With so many people sliding toward penury, violence may swell. An uptick in protests in late April suggested that things may go that way, especially once the COVID-19 lockdown’s full economic impact arrives. External donors such as the European Union and international institutions like the World Bank should prepare emergency humanitarian assistance to avoid the worst-case scenarios, but condition more substantial help on the government taking steps to fight corruption. Change will take years, but if aid can contain the immediate crisis, Lebanese actors may yet be able to steer the country out of the wreckage.

Lebanon has experienced mass protest over failing state services and economic and social grievances before, but the events in October and subsequent months dealt a serious blow to whatever legitimacy the political elites still enjoyed. They appeared to grasp the depth of the crisis only belatedly, believing that they could weather the storm with rhetorical exercises of voicing sympathy and pledging reforms. The established parties have been so fixated upon their struggle to retain or improve their share of power’s spoils that they have been unable to see the foundations of the political order that sustains them crumbling. While signs of impending crisis were clearly visible well before October, it took them more than six months after the protests began to produce a roadmap out of the country’s economic calamity.

” The economic crisis is without precedent in the country’s history. “

The economic crisis is without precedent in the country’s history. Highly import-dependent, Lebanon has run out of foreign currency to pay for what it consumes, while the state is printing money to pay salaries and is unable to service the public debt. Banks have imposed tight capital controls, which have staved off financial collapse until now, but only by bringing much of the economy to a standstill, manifested in soaring unemployment. Many businesses have failed, and the state of “medical emergency” imposed since 15 March to combat COVID-19’s spread will likely be the last nail in the coffin for many more. While a curfew stifled demonstrations and police cleared away the protest camp in downtown Beirut, street actions in late April suggest that virus-related hardships could trigger more unrest. Crunch time may come when the state, strapped for cash as tax revenue collapses, cannot meet the public-sector payroll or when hyperinflation wipes out the real value of people’s incomes. State institutions, including the police, may start to disintegrate, and what have been mainly peaceful protests could turn violent.

The current scenarios speak of doom and gloom, but there may also be grounds for hope. The collapse of the post-war economic and political model could open the way for a more productive economy that weans a growing part of society off its dependency on clientelist networks, allowing for a more representative politics and increased accountability. Lebanon will need emergency humanitarian assistance to ward off the worst social consequences of the economic implosion. Beyond that, donors should focus on supporting structural reforms that help root out corruption and clientelism in the process of creating conditions that allow the economy to restart. And all outside actors should refrain from exploiting the Lebanese crisis to score points in regional conflicts; instead, they should leave it to the Lebanese themselves to negotiate how to rebuild their country’s political order.

I. Introduction

Between late 2016 and December 2019, Lebanon was ruled by an alliance of the Free Patriotic Movement (FPM), a Christian group founded by President Michel Aoun, the Future Movement, headed by former Prime Minister Saad Hariri, and the two main Shiite parties: the Amal Movement, led by Parliament Speaker Nabih Berri, and Hizbollah, led by its secretary-general, Hassan Nasrallah.

This alliance put an end, if temporarily, to the debilitating polarisation between a camp aligned with the U.S. and its European and Arab allies (known as “14 March” after a huge demonstration on 14 March 2005 in Beirut against the Syrian military presence in Lebanon) and forces aligned with the “axis of resistance”, ie, Iran, Syria and a host of allied non-state actors (known as “8 March” after a smaller but still sizeable pro-Syrian rally on 8 March 2005).

Most of the other parties represented in the Lebanese parliament, along with a smattering of nominal independents, are closely aligned with these parties; some became junior partners in two successive national unity governments formed in December 2016 and February 2019. The country thus lacked an effective political opposition that could have challenged government policies or channelled popular grievances in the national debate. Parliamentary elections in May 2018, apart from weakening the Future Movement and strengthening the FPM as well as Amal, were marked by lacklustre participation, suggesting low trust in the political process.
Permanent infighting hobbled governance and further deepened the public perception that the political elite was either oblivious to mounting social problems or incapable of tackling them.

” The unrest brought home that trust in not just the leadership, but the entire order established after the 1975-1990 civil war, has reached a nadir. “

Over the past decade, Lebanon had seen waves of protest against an elite seen as detached from the public’s experience of high unemployment, particularly among youth, and deteriorating services.
Nothing, however, appears to have prepared these leaders for the popular wrath that burst out in October 2019, including among their own constituents, or for these protests’ spread throughout the country. The unrest brought home that trust in not just the leadership, but the entire order established after the 1975-1990 civil war, has reached a nadir, with politicians continuing to play power games even as an economic and fiscal crisis was wiping out people’s savings and livelihoods. The shutdown of non-essential sectors, imposed between mid-March and late April to combat COVID-19, has accelerated the slide toward economic collapse. Restrictions were only partly lifted in May. Increasingly, vulnerable parts of Lebanese society are falling into dire poverty, to a point where they will soon need food aid to survive. This trend is even more pronounced among Lebanon’s 1.5 million-strong refugee population.

This report seeks to illuminate the drivers of the crisis, the dynamics that could make matters worse and the potential impact on Lebanon’s stability and viability as a state. It then proposes some possible ways out. It is based on some 60 interviews conducted with Lebanese politicians from among the established parties, opposition politicians of different stripes, activists from the current as well as previous protest movements, diplomats representing countries with significant influence on Lebanese political dynamics, and international institutions with a stake in pulling Lebanon out of the pit.

II. The October Uprising

Austerity measures and new taxes discussed in a cabinet meeting on 17 October 2019 were the straw that broke the camel’s back. Lebanese had suffered years of failing public services and state negligence, most visibly a dismal electricity supply, massive pollution and the breakdown of garbage disposal, which they attributed to deeply embedded corruption.
Political infighting compounded the governance problem by repeatedly paralysing state institutions. As a result, the cost of living ballooned, salaries stagnated and unemployment rose, prompting a significant proportion of the country’s well-educated youth to emigrate.

On the evening of 17 October, groups of youths – apparently coordinating among each other over spontaneously formed social media networks – took to the streets in response to the austerity measures discussed during the cabinet meeting. They closed major intersections in and around Beirut with burning tires.

Over the next days, the protest spread to other areas, bringing much of the country to a standstill.
On the first weekend following the outburst, huge crowds congregated in downtown Beirut, calling for the ouster of the entire political elite under the slogan “kullun ya‘ni kullun” (in Lebanese Arabic, “All means all [must go]”).

A. Elite Manoeuvring

Political parties reacted swiftly in an attempt to harness the protests for their benefit. On 19 October, Samir Geagea, leader of the Lebanese Forces (LF), a Christian party, withdrew its ministers from the government, citing a “lack of will to reform”, and called on its members to join the protests “as citizens”, ie, without displaying party symbols or pushing for a partisan agenda, in a bid to force the ruling coalition of the FPM, Future Movement, Amal and Hizbollah from power.
The (likewise Christian) Kataib party, one of the few in parliament left out of the national unity government, followed the same strategy, and both parties proceeded to deploy their mobilising capacity among Lebanon’s Christians, scoring points in particular against their main Christian rival, the FPM. The Progressive Socialist Party (PSP), a Druze movement led by Walid Jumblatt, initially appeared poised to perform the same manoeuvre as the Lebanese Forces, then decided to stick it out with the Hariri government.

” PM Hariri blamed his government partners for blocking sweeping reforms and set a 72-hour deadline for the government to prepare a reform plan. “

From among the ruling alliance, Foreign Minister Jibran Bassil, the FPM leader, was the first to issue a statement, after meeting President Aoun (his father-in-law) on 18 October.
Few, if any, appeared convinced by his attempt to present his party as a beacon of reform and economic probity shrouded by others, while protesters rejected his warnings of a “fifth column” among them set on sowing discord as patronising; a chant filled with expletives aimed at the foreign minister soon became popular. On 18 October, Hariri blamed his government partners for blocking sweeping reforms and set a 72-hour deadline for the government to prepare a reform plan, implicitly threatening to resign if it failed to produce one. The next day, Hizbollah Secretary General Nasrallah went on television to demand that parties that had been in government over the past decades live up to their responsibility to govern. While sympathising with the protesters, he echoed his ally, the foreign minister, in warning that the government’s resignation would create a power vacuum that would pre-empt reform and destabilise the country.

Neither these exhortations nor the reform plan that Hariri announced on the evening of 21 October stemmed the tide.
Protesters continued to block roads and burn tires and called for a general strike. While far from unified, the street shifted its demands toward the ruling elite’s wholesale removal, new elections and an end to the entrenched system of sectarian political representation and allocation of public resources (muhasasa).

Strikingly, sectarian sentiment, often called the currency of Lebanese politics, appeared almost completely absent from the impromptu debates and discourses in the streets and squares, with adherents of the 14 March and 8 March political groupings expressing their slightly different demands side by side, along with unaligned protesters.
Notably, the protests initially received significant popular support in Beirut’s southern suburbs and other parts of the country overwhelmingly populated by Shiites and dominated by Hizbollah and the Amal Movement.

That gradually changed. Toward the end of the first week, Hizbollah supporters, who could not accept to hear their leader criticised in public, increasingly engaged in altercations with other protesters.

Hizbollah’s Al-Manar TV station replaced its originally sympathetic protest coverage with segments highlighting hardships created by disrupted transport and supply lines, along with language linking roadblocks, the primary protest tactic, to practices associated with the civil war, when militias often abused and sometimes abducted or even killed civilians at checkpoints.

B. Hizbollah as Status Quo Power

In a second televised address, on 25 October, Nasrallah reversed his qualified support, claiming that political operators in the service of established parties and foreign embassies had hijacked the protests and turned them against the “resistance” (a term referring to both Hizbollah’s stance against Israel and its armed structures and arsenals outside state institutions). He warned of civil war and instructed his followers to leave the protest squares.
Several hundred of them, who had congregated in Martyrs’ Square shortly before the address and followed the speech over loudspeakers, promptly responded by performing a well-choreographed walkout.

” Hizbollah has kept a clear, at times hostile distance from the protest movement. “

Since that day, Hizbollah has kept a clear, at times hostile distance from the protest movement. Repeated attacks on protesters by thugs flying Hizbollah and Amal flags took on increasingly sectarian undertones, while the two parties used social pressure and threatening postures by supporters to reduce, though not entirely suppress, expressions of dissent in parts of the country they dominate.
Thus, by the second week, protests and roadblocks were largely confined to some predominantly Christian, Sunni and Druze areas and absent from predominantly Shiite areas, resurrecting the 14 March vs. 8 March polarisation that the 2016 alliance between Aoun and Hariri had supposedly resolved and that the shared grievances that erupted on 17 October had temporarily transcended.

To justify the shift, Hizbollah leaders and supporters point to what they argue were significant changes in the protests’ composition and orientation during the course of the first week. By their assessment, a movement that had largely originated among poorer youth increasingly acquired a middle-class demography, which they saw as evidence that social issues such as rescinding new taxes and austerity measures were no longer the main drivers.
They cite the alleged presence and influence of political parties and operators whom they believe serve Western interests, in particular the Lebanese Forces, as evidence that the protests had become part of a concerted effort to alter the balance of power to the detriment of Hizbollah and its allies.

A senior Hizbollah official said:

You have a lot of good people in there. Leftists, marginalised youths, people who support the resistance, who want to fight corruption. But there is another component that wants something else, that is much more politicised. They want to drag the movement back into traditional Lebanese politics, which we reject. We have no issue with bringing in new people, people who speak for this movement. But using it to change the balance of power between the traditional political players, this we won’t accept.

The official also claimed that the protest movement had failed to formulate, much less create consensus around, a program for systemic change, and that attempting any significant change to the existing political order would be impossible, if not dangerous, during a period of heightened regional tensions.

That Hizbollah would emerge as a defender of the Lebanese status quo should not come as too much of a surprise. After years of pitched political battles and a mini-civil war in May 2008, the tripartite alliance with the Future Movement and FPM forged in 2016 had established the party both firmly within the state and yet autonomous from it, endowing it with enough political and institutional clout to pre-empt any attempt to rein in its activities.
These comprised its armed posture, purportedly aimed at deterring Israeli attacks and, more recently, support for allies within the “resistance camp”, such as Syrian President Bashar al-Assad.

It also established the party firmly as a legitimate political actor and provided it with allies with strong external connections and credibility, in particular Prime Minister Hariri, thus thwarting U.S. efforts to isolate it.
” Hizbollah has long been a target of U.S.-led attempts to isolate it, a drive that the Trump administration intensified in tandem with its “maximum pressure” campaign against Iran. “

Hizbollah’s fear that changes in Lebanon would be used to undermine it was rooted in its experience. It has long been a target of U.S.-led attempts to isolate it, a drive that the Trump administration intensified in 2019 in tandem with its “maximum pressure” campaign against the party’s main external sponsor, Iran. As a result of U.S. sanctions against Iran and Hizbollah, the party has suffered a notable reduction in its financial resources; U.S. officials and other Hizbollah detractors claimed that the party’s support base has begun to significantly erode as a result.
So persistent were these claims that even Nasrallah felt compelled to devote much of a speech in March 2019 to dispelling them. Media coverage and statements by influential U.S. think-tanks and officials lent plausibility to party leaders’ claims that Washington intended to harness the protest movement as part of its “maximum pressure” campaign against Tehran.

That a significant part of the protests, at least initially, emerged from poorer parts of the Shiite community rattled Hizbollah in other ways.
Standing up for the downtrodden is one of its foundational values; the impression that the party, once it became part of the government, had turned a blind eye to its partners’ corrupt practices in exchange for being able to protect its weapons, and that it abandoned championing the deprived, was highly damaging to its credibility. In addition, the popular outburst against the Amal Movement, particularly in the south, raised concerns among Hizbollah’s leadership that its Shiite partner might suffer significant damage. Framing the uprising as a ploy to hobble the “resistance”, and to undermine Lebanese Shiites more broadly, appears to have succeeded in bringing the vast majority of Shiites back into the party’s fold.

III. Power Vacuum and Economic Collapse

On 29 October, Prime Minister Hariri announced that he had reached a dead end and tendered his resignation, arguing that Lebanon needed a “shock” to be saved.
Reportedly, Hariri’s move was largely motivated by his failure to gain support, in particular from Hizbollah, for a cabinet reshuffle that could have given him a freer hand to govern. In the protesters’ eyes, the months of wrangling over a new government’s composition that followed while the Lebanese economy went into a tailspin proved the political elite’s indifference to ordinary citizens’ plight.

A. Government Formation: Into a Hall of Mirrors

For nearly three months after Hariri’s resignation, political parties continued to bargain over a new government’s composition. Since the council of ministers is the locus of executive power, holding cabinet seats reflects a political actor’s relative weight within the power balance and provides a means of retaining and reproducing it. Ministries that control revenue streams are particular plums, because parties can use them as patronage vehicles, in particular to allocate public-sector jobs.
” Efforts to form a new cabinet appeared focused on preserving the compromise formula forged in 2016. “

For more than six weeks, efforts to form a new cabinet appeared focused on preserving the compromise formula forged in 2016: a cabinet led by either Hariri or a person endorsed by him and supported by the Shiite parties Amal and Hizbollah and the Christian FPM. Yet negotiations ultimately failed due to what the pro-Hizbollah camp claims were Hariri’s attempts, encouraged by his foreign allies, to change the power balance by appointing a technocratic government under his leadership, thus reversing some of the institutional successes Hizbollah and its allies had achieved over the previous decade, in particular the 2018 election results.
Instead, they insisted on a combination of technocrats and politicians that would guarantee Hizbollah representation at the cabinet table and hence voting rights in decision-making.

The Hariri camp, for its part, placed most of the blame on the third partner in the ruling alliance, the FPM, and in particular on party leader and former Foreign Minister Jibran Bassil.
Relations between the party leaders deteriorated during the crisis, with Hariri calling Bassil “sectarian” and “racist” and refusing to work with him. The former foreign minister retorted that Hariri’s policy choices had not only stalled the negotiations, but also caused the economic crisis. Hizbollah and Amal, in turn, felt compelled to hold on to Bassil, considering attacks on him and President Aoun to be directed at themselves.

Repeated attempts to overcome the dilemma by identifying a candidate Hariri could support from outside the government failed. By contrast, forming a government supported by only the 8 March parties that excluded Hariri and the Future Movement came with the risk of antagonising Lebanese Sunnis (between one quarter and one third of the population), for whom the position of prime minister is traditionally reserved and whose religious leadership had explicitly thrown its weight behind Hariri.
It also made it appear likely that some of Lebanon’s traditional foreign supporters would see the new leadership as a “Hizbollah government” and shun it, calling into question their inclination to bail Beirut out during an economic crisis. Throughout November and December, Hizbollah, Amal and FPM representatives asserted that forming a “government of one colour”, in local parlance, was their least favourite option.

After more than six weeks of back-and-forth, on 19 December, Hizbollah and its allies took this step after all, appointing the little-known university professor Hassan Diyab as prime minister with the support of only 69 parliament members, a thin majority. Protesters took to the streets to reject the appointment, though in smaller numbers than before.
Anger was evident especially in predominantly Sunni areas, where people read the nomination of a candidate without Hariri’s blessing as a Hizbollah manoeuvre to usurp the most important position reserved for Sunnis in the Lebanese power-sharing system. Protests and road blocking in Sunni areas, in particular on the coastal highway connecting Beirut to the Shiite heartland in the south, suggested that sectarian tensions, particularly between Sunnis and Shiites, could escalate.

” People read the nomination of a candidate without Hariri’s blessing as a Hizbollah manoeuvre to usurp the most important position reserved for Sunnis. “

Hizbollah, Amal and FPM representatives tried to heal the rift, promising that Diyab would form an inclusive cabinet, and saying they hoped that the Future Movement and other currents would join the new government.

Yet no such show of support was forthcoming, and even with only interests within one of the two political camps to accommodate, it still took Diyab more than a month (albeit interrupted by celebrations for Christmas and the New Year) to present a cabinet line-up on 21 January 2020. On 11 February, more than three months after Hariri’s resignation, the new government received a vote of confidence in parliament.

B. In the Midst of a Meltdown

Given Lebanon’s recent experience with long periods of political stalemate, power vacuums and drawn-out government formations, three months may appear to be a reasonable time frame for the transition from one government to the next. Unlike before, however, Lebanon this time faced the immediate prospect of an exploding fiscal and economic crisis that was threatening, and continues to threaten, the livelihood of swathes of the population. The mid-March shutdown of the already struggling economy in response to the COVID-19 crisis could well turn disaster into catastrophe for many people. Severe pressure on broad strata of society, including people who consider themselves middle-class, may create new tensions that could turn violent. In that scenario, it is unclear how long the security apparatus would be able to keep control.

Lebanese leaders had acknowledged before the protests that the fiscal and economic system was in dire straits.
At the root of the problem lies an unsustainable model whereby Lebanon imports far more than it exports, while the Lebanese state spends way more than it receives in revenue. Funding the resulting chronic current account and state budget deficits while keeping a fixed exchange rate has required a constant inflow of funds. This money arrives in the form of remittances from the Lebanese diaspora, external assistance, foreign direct investment and bank deposits, to a large extent also from Lebanese living abroad.

Starting in 2016, the Central Bank (the Banque du Liban) engaged in a string of complex debt swapping operations it termed “financial engineering”.
These schemes amounted to extracting dollar liquidity from Lebanese commercial banks – some 65 per cent of bank deposits were denominated in U.S. dollars at the time – by offering exceptionally attractive interest rates and discounts for exchanging dollars for Lebanese lira. As a result of these operations, Lebanese banks deposited most of their liquid dollar assets with the Central Bank, which now owes these banks in excess of $100 billion, almost five times the size of its remaining foreign reserves ($22 billion). Lebanese economists argue that since the Central Bank is a public body, this negative balance should be added to the nearly $90 billion in official public debt, equal to more than 170 per cent of GDP, the third highest ratio worldwide after Japan and Greece.

The Central Bank, in turn, spent most of the hard currency thus collected to defend the fixed exchange rate and fund imports. As the ratings for Lebanese sovereign debt continued to descend into junk territory and the government’s access to international financial markets deteriorated, the Central Bank increasingly had to compensate for the perennial budget deficit as well.

” Failing services and stagnating growth while the financial sector’s profits skyrocketed further increased inequality and unemployment. “

Lebanese economists have long argued that these fiscal and monetary practices had a debilitating impact on the economy.
They blame the constantly rising cost of debt servicing, as well as graft and the politically motivated bloating of the public sector, for the state’s inability to invest in dilapidated infrastructure and underperforming public services that hamstring economic activity. They also see the Central Bank’s strategy to attract depositors by offering high interest rates as a major reason behind the private sector’s sluggish growth, as available capital has gravitated toward the higher and ostensibly safer returns of bank deposits rather than to investments in productive ventures other than the highly speculative real estate sector. Failing services and stagnating growth while the financial sector’s profits skyrocketed further increased inequality and unemployment, preparing the ground for the popular explosion of 17 October.

As some observers had pointed out well before the current crisis, a system that relied on exceptionally high interest rates to guarantee a constant inflow of fresh money to pay off previous investors, while not generating enough revenue to pay for the constantly increasing cost of the interest, suspiciously resembled a state-backed Ponzi scheme that was bound to collapse sooner or later.
During 2019, warnings of an impending liquidity crunch in the banking sector grew steadily, and by October, foreign media reported an increasing dollar shortage. During the second half of October, banks along with public institutions and many private enterprises remained shuttered, as road closures often prevented employees from reaching work. Yet in the case of the banks, the closure further undermined confidence, as did persistent warnings about an impending financial meltdown from government ministers and opposition activists alike. Fear spread that, once they reopened, a run on the banks would ensue that could precipitate a complete financial collapse.

When banks finally reopened for business in early November, withdrawals from dollar accounts, which amount to more than 70 per cent of deposits, were initially restricted to $1,000 a week at most banks and for most accounts, following an informal advisory by the Association of Banks in Lebanon. Money transfers outside the country were restricted to “urgent personal matters”, such as supporting children studying abroad and paying for life-saving medical care.
Banks have continued to tighten these limits since, and by early April many had stopped dispensing cash dollars altogether.

Customers were allowed much higher withdrawals if they accepted to receive the counter value of their dollars in Lebanese lira at the official exchange rate of 1,507 lira to the dollar, but many were deterred by the widening gap between the official rate and the lira’s real value. As access to dollars declined, the dollar’s lira price started to rise, reflecting the mismatch between supply and demand. By early April, the exchange rate in the black market, the only source of real, cash dollars, was approaching 3,000 lira.
Withdrawing dollars in lira at the official rate therefore implied an effective loss of 45 per cent of their nominal value. The Central Bank responded to pressure on the currency by gradually allowing banks to pay out holders of dollar deposits limited amounts at a higher lira rate, initially 2,600, then 3,000 to the dollar. As many of those who took advantage of the improved rates promptly sought to buy cash dollars with the lira they withdrew to protect themselves from further devaluation, the currency weakened even further, hitting 4,300 lira to the dollar on 27 April.

These restrictions, the general lack of liquidity they created and the devaluation that followed have wreaked havoc on the daily lives of most Lebanese, and on much of the economy as well. Until November 2019, the lira was used interchangeably with the dollar at the official rate, and the majority of transactions not involving the public sector were conducted and denoted in dollars. Since banks no longer pay out dollars, most Lebanese who have to meet dollar obligations (for example, to pay rent and school fees or to cover expenses outside Lebanon) have no choice but to buy the hard currency from money changers at the black-market rate, often for lira they had taken out of their dollar deposits at the official rate.

The April rate adjustments initially reduced the losses that depositors incurred this way, yet the low ceiling for withdrawals at many banks limited the effect to small expenses, while the gap between the newly introduced rates and the black-market price of cash dollars quickly widened again. Those who accept payment in lira instead of dollars often apply the black-market rate or one between it and the official rate.
” By late January, one third of businesses had laid off employees, at an average rate of 60 per cent, while another 12 per cent had laid off all employees. “

The banking sector’s lack of dollar liquidity has also drastically reduced importers’ access to letters of credit, prompting many to resort to direct transfers and insist to be paid in cash dollars by the retailers they supply, forcing the latter to convert the lira they receive from customers into dollars at the black-market rate.

As a result, by April the currency devaluation had pushed up lira prices by more than 50 per cent across the board.
This increase reflects the rising black-market rate at which importers have to obtain the dollars they need to import new merchandise. Lira salaries, on the other hand, have remained the same, meaning that those who receive them have lost nearly half their purchasing power.

Moreover, the dramatic reduction in purchasing power resulting from the de facto devaluation, in addition to the disappearance of consumer credit, has depressed demand and slowed economic activity to a halt in many sectors. The CEO of a major vehicle importer said:

I shipped most cars I had here to the Emirates. The banks no longer provide car loans, so nobody is buying anyway. The whole sector sold around 40,000 units in 2018. This year, we are at 22,000, and for 2020 the projection is 4,000.

Plummeting demand, which has led to an average contraction of turnover of around 70 per cent for more than 90 per cent of all business owners, has prompted a massive wave of lay-offs. By late January, one third of businesses had laid off employees, at an average rate of 60 per cent, while another 12 per cent had laid off all employees, ie, closed down, at least temporarily.
Based on these figures, 220,000 employees may have lost their jobs already then. A business spokesperson predicted that the number would reach 300,000 by the end of the first quarter of 202o, equivalent to roughly one fifth of the active labour force.

With the lockdown imposed in response to the COVID-19 pandemic, many businesses, in particular in the hospitality sector, are now closed and have furloughed their staff, often without pay, and with uncertain prospects of reopening once restrictions are lifted, making it appear likely that the number will surge even higher.
The economic downturn has also led to a dramatic decrease in state revenue, already down by around 40 per cent in the last quarter of 2019, a trend that the lockdown is also certain to amplify, auguring an even larger budget deficit in 2020. In the absence of external support, the state will have to resort to the printing press to pay salaries, further fuelling inflation and currency depreciation, and reducing the real value of lira salaries.

C. A Slide to the Bottom

” Economic pressure will generate more movement in the street, and with enough pressure, the whole country could collapse. “

The fiscal crisis that the COVID-19 pandemic magnified pushed the Lebanese economy into a downward spiral toward recession, soaring inflation, mass unemployment, shortages of imported goods and state insolvency.
While the social impact of the crisis is still emerging, it will doubtless be severe. Already in November 2019, the World Bank warned that the poverty rate may rise to 50 per cent and that the poor and the middle class may be hurt especially. By January 2020, a social affairs ministry spokesperson said the rate may even reach 70 per cent and reported that many public-school students in peripheral areas such as the Beqaa valley were showing signs of malnutrition. Knock-on effects may include the closure of many private schools, which serve more than half of Lebanese students, by the academic year’s end, as parents who lose their jobs or are on reduced salaries amid the inflation will no longer be able to afford fees, forcing students into the overloaded public school system. In early December, several suicides apparently triggered by economic hardship highlighted the pressure that many people face.

Such desperation could turn into violence as the crisis deepens. In mid-November, a representative of an opposition party warned:

In the past few weeks, the people you saw in the streets were protesting because they want a better country. Soon, they will come out because they can’t feed their children. This will look very different from what we have seen before.

In late January, a spate of violence that left 600 injured started with protests at the Central Bank’s perimeter; on occasion, protesters have also vandalised the street fronts of bank branches and ATMs.
Renewed unrest in late April left one protester dead in the northern city of Tripoli. The danger that such events could spin out of control is difficult to assess, as is security forces’ capacity to control the situation. Since the beginning of the protests in October, soldiers and policemen have served under challenging circumstances. Like others, they have seen the value of their already modest salaries depreciate and their savings frozen. How they will hold up if new protests erupt and turn violent is difficult to predict.

A Lebanese security official said:

Economic pressure will generate more movement in the street, and with enough pressure, the whole country could collapse. It won’t lead to a plan or a solution, but to social chaos and war. We are very concerned. … If this gets too big, it won’t be possible for the military to control it. This is still a civic thing, peaceful and civilised. But suppose that tomorrow someone comes out with arms? Up to what point can we confront that?

IV. Pulling Lebanon out of the Pit
” Whether the political actors running this system are capable of initiating and overseeing such a transition is highly questionable. “

The current Lebanese government, and any government that may follow it, will have to carry out substantial structural and institutional reform to put the country’s fiscal and economic system back on a sound footing. To succeed, such structural change will have to put an end to the political model in which corrupt and self-serving cliques appropriate and redistribute state resources and public goods. Reform inevitably would strike at their vital interests and at the method by which they maintain and reproduce their political power. Whether the political actors running this system, who have been thriving on it for decades, are capable of initiating and overseeing such a transition, thereby pulling out the rug from under their own feet, is highly questionable. It is very hard to imagine that they will do so unless the Lebanese who have gone into the streets since October 2019 find ways to exert sustained pressure on the country’s political institutions.

A. Conditions for Rescue

On 7 March, Prime Minister Hassan Diyab announced that Lebanon was suspending its foreign debt servicing, in particular the repayment of Eurobonds worth $1.2 billion maturing two days later, to preserve what remains of the dwindling foreign reserves for essential imports.
On 23 March, the finance ministry announced that it would suspend payments on all outstanding Eurobonds in foreign currency, a total of $31 billion. On 30 April, the government approved a 53-page reform plan laying out a roadmap for pulling the country out of the crisis.

According to the plan, the government intends to negotiate with its creditors to reduce the debt load and aims to curb expenditure while gradually increasing state revenue to tackle the budget deficit. The goal is to reach a 1.6 per cent surplus by 2024.
The plan also mentions reducing and eventually abolishing subsidies for electricity and fuel, and downsizing the public payroll – quick relief measures that most local and foreign observers and economists have also proposed. The plan does not refer to privatisation of state assets (such as the electricity and telecommunications sectors), which could provide additional revenue but would likely require prior creation of complex regulatory frameworks.

Reducing the balance of trade deficit, the second main drain on reserves, will require a drastic reduction in the volume of imports.
The government plan bases its calculations on a devaluation of the lira to 3,500 to the dollar, followed by a gradual decline toward 4,300 until 2024. Such a devaluation will make imported goods far more expensive in the local market, implying that most Lebanese will have to adapt to far lower living standards. The weaker currency should also make exports cheaper and thus more competitive, yet the failing infrastructure and difficulty of importing raw material needed to produce items for export due to the dollar scarcity may stand in the way of benefiting from this advantage, at least initially.

The government plan calls for dedicated credit lines to address this issue, along with a bundle of growth-enhancing measures, such as subsidised loans to boost productive industries.
” The real challenge lies in the revival of the country’s financial system. “

The real challenge, however, lies in the revival of the country’s financial system, without which the economy cannot be restarted. Nearly 70 per cent of Lebanese banks’ assets are sovereign and Central Bank debt instruments, such as bonds and certificates of deposit. With the state defaulting and the Central Bank insolvent, many Lebanese economists believe that once the balance sheets are adjusted to reflect these “assets’” real value, the entire sector’s capital will be wiped out. With the economy in free fall, most banks will likely also suffer a significant increase in the number of non-performing loans, forcing them to initiate foreclosure on the collateral, overwhelmingly real estate.
Whether this real estate can be sold at prices that are anywhere near their original appraisal is unclear; chances are that significant amounts will have to be written off that way as well.

To revive the sector, the government plans to impose a “bail-in” on bank shareholders. In effect, this measure would amount to an expropriation by marking down the shares’ value and requesting reinjection of dividends paid out since 2016, the year when Banque du Liban’s “financial engineering” kicked off. It likewise would claw back excessive interest payments and money transferred abroad illegally.
While the plan vows to protect depositors as much as possible, it remains difficult to see how the losses could be managed without wiping out a significant part of the deposits or freezing them for a long period of time. Some economists also believe that not all banks will, or indeed should, survive the current crisis, and that a restructuring of the banking sector will be not only necessary but beneficial.

B. External Help

As previewed in the 30 April government reform plan, Lebanon initiated remote talks with the International Monetary Fund (IMF) for support on 13 May.
Economists and foreign diplomats appear to concur with the plan’s assessment that the IMF as a mandated “lender of last resort” will be the only source from which the government can gain access to fresh funds, and the only international actor with enough financial heft to address the problem. Many also explicitly support the expectation, also expressed in the plan, whereby other external actors who could pitch in, including those who pledged support for the 2018 CEDRE package, would take their cue from the IMF.

What remains unclear is the extent to which the Hizbollah-led political camp, which underpins the current government, would accept the conditions that may come with an IMF financial assistance package. Party representatives in late February and early March suggested that they harboured strong reservations about a substantial role for the IMF in addressing the crisis.
On 13 March, however, Nasrallah moderated this rhetoric, indicating that the party’s position would depend on the terms attached to potential assistance.

At least on the surface, Hizbollah’s reluctance to agree to a request from the IMF rests on assumptions about the institution’s approach, which they fear would be counterproductive. A senior Hizbollah official specialised in economic issues said:

The political and financial elite will happily apply the austerity measures that the IMF will demand, like currency devaluation, increase of value-added tax and electricity prices, and so make the poor pay for the crisis. What we really need is a shift toward a developmental state that protects and promotes sectors in which Lebanon can be competitive. Without developing our productive sectors, after five to ten years we’ll be in the same place where we are now, with even more debt. This crisis could be an opportunity to move toward a different economic model, and an IMF package will not get us there.

” Lebanese governments have a history of committing to institutional reforms and then failing to deliver. “

Hizbollah opponents, by contrast, allege that the party is concerned about the scrutiny that typically comes with IMF programs, which could expose and unravel its parallel economy, in particular by enforcing customs controls.
Representatives of France, which has taken the lead in mobilising support for Lebanon within the EU, have also voiced concern that the U.S. could use its leverage over IMF decisions to impose conditions related to its “maximum pressure” campaign against Hizbollah’s external sponsor, Iran. Language used by Nasrallah in his 13 March 2020 speech, intimating that any foreign support cannot impinge on Lebanon’s sovereignty, appears to allude to similar concerns. By contrast, multiple diplomatic sources in Beirut say there is consensus among Western donors and supporters that the decisive criterion should be whether the Lebanese government embarks on substantial reform.

Lebanese governments have a history of committing to institutional reforms to solicit support from international donors and then failing to deliver. A European businessman and economist who served as an academic expert for his country for the Paris I (2001) and II (2002) donor conferences said:

The purpose of Paris I was to convert the post-war order, which was really a federation of former warlords and some businessmen, into an actual state with proper institutions. From Paris II onward, we told our government that Paris I had not been fulfilled, but our advice went unheeded. We were made to understand that [Lebanon’s] stability was more important. And this pattern never really changed: we are still trying to implement Paris I today, twenty years later.

In early April 2018, just a month before the last parliamentary elections, yet another Lebanon conference convened in Paris, called CEDRE.
This time, international donors and investors conditioned their engagement on reform, with a clear message that no money would flow before verified implementation. Yet once again, nine months of government formation, with the attendant vacuum and partisan bickering, slowed progress to a crawl, with no uptick even after a new government took office.

” Any new government will have to get serious about tackling corruption and clientelism. “

To establish the accountability and governance standards that foreign donors and lending institutions demand, any new government will have to get serious about tackling corruption and clientelism, which have blocked institutional reform and regulatory efforts and rendered major infrastructural undertakings prohibitively expensive or otherwise impossible. Witness the dysfunctional electricity sector, which has drained public finances for decades. Moving away from the previous economic model of attracting funds from abroad for domestic consumption and toward a productive economy that can compete in export markets, earn hard currency and create jobs will require fixing the dilapidated infrastructure but also uprooting the deeply entrenched cronyism that skews competition in many sectors.

Opposition representatives argue that these are not aberrations that can be corrected but features of the traditional parties’ political model, which renders them incapable of leading such a transition. An opposition politician and former minister said:

The role of these parties is to appropriate state resources and redistribute them to their constituents. There are no more resources to distribute now, only losses and pain, so this model is finished. Now we need actors who can rise above the fray, tell people the truth and inspire confidence that the painful measures that have to be taken are for the greater good of everybody. The status quo parties are functionally incapable of performing this role.

That is clearly not the view of the parties in power, which bargained hard to secure slots within the current government that they would then fill with “independents” of their own choice, and which remain adamant that they have the parliamentary and popular mandate to lead the transition.

Another opposition politician said:

If the old parties were smart, they would do exactly what we tell them to do: take a step back, let others fix the mess, then have elections after maybe two years and come back. Instead, they are clinging to a system that is in slow-motion implosion. I could be cynical and say this is good for us, as the opposition, because a complete collapse may be the only way in which they will be forced to give up some of their power in the end. But the longer it takes, the bigger the damage will be.

C. Systemic Change

” Lebanon’s main political actors sharply disagree over who should lead the transition. “

Lebanon’s post-war political and economic order may be unsalvageable. Local and international actors seem to agree on the diagnosis, and even on the main outlines of the appropriate treatment: a fiscal rescue package followed by structural reforms that entail a relentless fight against all forms of corruption; building credible institutions; and creating an economic model that harnesses the country’s undisputed assets – cultural versatility, creative energy and pursuit of education and entrepreneurship – into a productive economy that keeps the country’s youth gainfully employed rather than encouraging them to emigrate.

Yet Lebanon’s main political actors sharply disagree over who should lead the transition and remain divided by deep distrust of each other’s intentions. Perhaps most important, they all have big stakes in the current system.

The protest movement, for its part, appears split into different currents. Some express hostility toward politics per se, or reluctance to enter a playing field they feel is clearly tilted against them.

Others are ready to enter formal politics; among them, a number even plan for the next elections. A member of an activist group that played a central role organising the protests said:

We fielded candidates in the last elections, and one got very close to getting a seat, without any campaign money or publicity, through volunteering and networking over social media. The protests have swelled our support base so much that now we can raise substantial amounts of money through crowd funding. We will get in, and once you are in parliament, you have a platform, the media can no longer ignore you, and you build from there.

An opposition politician belonging to a party that considers itself part of the protest movement likewise took an optimistic view of the prospects for change through formal politics and said:

We need new elections, and we need them fast before the momentum of the protests dissipates. If we have them this year, I expect that around twenty MPs will represent these new forces – between transformed old parties like us and the new initiatives that are forming now. If we can get our act together, we will be the biggest bloc in parliament. We can balance between the two traditional blocs, or even be kingmakers. Or the old parties all align against us, as they usually do when challenged by newcomers, and then we pummel them for all their failures. Either way, come the elections after that, you will see the power balance really change. Then a majority for reform forces may be within reach.

Seasoned civil society representatives report a change in the breadth and intensity of citizens’ involvement in the public sphere. A veteran activist and former candidate for parliament said in November:

I have participated in, on average, two town hall meetings every day for the past month, often in parts of the country where this kind of thing never happened before. The hunger for information and the drive to participate is overwhelming. I have done this kind of activity for the past twenty years, but this is on an entirely different scale.

Yet it would be wrong to assume that a new, emerging political elite can easily or seamlessly replace the current one. As the currency devaluation continues to wipe out public-sector salaries, state institutions may falter. Security forces in particular may be tempted to moonlight for whoever pays – political parties, wealthy individuals and/or communities seeking to organise their security locally. The fiscal and economic crisis may reduce the flow of resources that sustain clientelism to a trickle and destroy people’s livelihoods; rather than undermining the legitimacy of the political actors responsible for the crisis, such resource scarcity may allow those who control what little is left to consolidate their sway over core constituencies. A Lebanese political scientist said:

The bitter irony could be that by plundering the state to the point where it falls apart, the political parties responsible for the mess may be able to recreate their power. When the state collapses, they will be the only ones with the money and organisational structures to control their areas, and they will be the only gateway to whatever is left of public resources.

Yet such a gradual disintegration of public institutions also threatens to create extended instability punctuated by violent outbursts. Underpaid and overstretched security forces may gradually blend with local security providers who offer them extra pay and are likely to compete with one another for control over resources and local taxation. Traditional political leaders may resort to sectarian fearmongering as a substitute for the services they can no longer provide. As poverty spreads into ever-larger parts of society, new protests could break out that the security forces may no longer be able to control with non-violent means.

To obtain the fresh funds required to ward off such scenarios, Lebanon needs to urgently push ahead with the negotiations with the IMF, on which support from other sources also depends. That the current Hizbollah-backed government initiated talks on 13 May suggests that the party is ready to revisit its earlier reservations.
It should now try to incorporate its macro-economic priorities into the government’s position in negotiations with the IMF and ready itself for compromise. In the absence of such assistance, Lebanon will almost certainly face a severe recession that will hurt Hizbollah’s constituents as much as anyone else. Equally important, other Lebanese stakeholders, in particular the government, private banking sector and Central Bank, will need to seek a unified position vis-à-vis the fund.

” Until more substantial international support becomes available, external donors may need to step up humanitarian assistance to help those hardest hit by the crisis. “

In the meantime, and until more substantial international support becomes available, external donors may need to step up humanitarian assistance to help those Lebanese hardest hit by the crisis.
Moving forward, donors could condition future, more substantial support on steps to bolster accountability, including a level of transparency that allows for public scrutiny, for example by strengthening local accountability bodies’ authority and the judiciary’s capacity to prosecute graft. Applying these principles while supporting high-profile projects – such as repairing the ailing electricity sector – that previously were allegedly held up due to politicians’ competing interests, may also make it possible to highlight examples where the rules have changed.

There may also be an opening to form new political parties as well as civil society and advocacy organisations, whose integration in the political sphere could help boost its legitimacy. During the uprising’s first weeks, gatherings across the country evinced an urge for active public participation unseen in the post-civil war period, along with equally unprecedented condemnations of political parties, expressions of cross-sectarian solidarity beyond liberal milieus and denunciations of leaders’ sectarianism, including by some of their own supposed constituents. For some older parties, several of which are headed by civil war era leaders, such a shift in popular sentiment could accelerate or initiate internal reforms.

In turn, reformed parties and new political forces emerging from this and previous protest movements may eventually translate into a robust parliamentary presence, helping to change the dynamics of Lebanese politics and improve prospects for accountability and wider public participation.

Amid this turmoil, it would be a mistake for foreign actors to use the Lebanese theatre for their own, extraneous purposes, such as trying to squeeze Iran by isolating its Lebanese ally Hizbollah. True, numerous Shiites participated in the earliest protests against a government in which Hizbollah was prominent and criticised the party’s performance (though they directed more reproof at Amal). But there is no evidence to substantiate the notion, notably promoted by the U.S. administration, that the protest movements in Iraq and Lebanon amounted to a “rebellion” against Tehran’s overbearing influence.
If anything, it has been self-defeating, as it helped the party reassert its clout among Lebanon’s Shiites. More broadly, Hizbollah’s foreign alignment and its arsenal outside state control appeared to be minor issues for the protesters. While some activists and opposition politicians asserted that reform would fail without tackling these questions, none named them as motivation for protesting or as priorities. By contrast, several explicitly said that opening these debates now would be counterproductive.

V. Conclusion

Lebanon has entered a dark tunnel that may run deep and take several more turns. In the end, the crisis of the post-civil war political model and a rekindled urge to engage in public affairs could help move discussions away from bickering over shares in clientelist schemes. Of course, there still will be fuel for debate: on whether Lebanon should stick to a free-market economy or adopt aspects of a developmental state, on how and at what pace sectarian representation in politics should be abolished (as stipulated by the 1990 constitution), and on whether the country should take sides (and which side) in regional conflicts.
” The opportunity exists for Lebanon to embrace new patterns of political representation and participation. “

These are important questions, worth debating. But what ought not to be controversial is the need to reform a system that has ruined public finances and provoked the ire of a substantial part of the population. The opportunity exists for Lebanon to embrace new patterns of political representation and participation that reduce the salience of the rigid sectarian and political divisions of the past three decades, which have repeatedly turned Lebanon into both a source of regional conflict and an arena for it.