Monitoring Desk
The Middle East traditionally has a reputation as a problematic and even dangerous region. Religious conflicts and territorial claims are combined with the struggle for control over rich natural resources and access to trade routes. Israel, Palestine, Iraq, Saudi Arabia, Iran, USA, USSR, and now Russia are just an incomplete list of those who are trying to dominate. But in the center of the region, despite the endless conflicts, a small country remained, which for a long time was perceived as an island of stability and security. Lebanon, which has earned the status of “eastern Switzerland”, no longer resembles its former self – the country has plunged into the abyss of the most difficult crisis in the past century and a half, and no way out of it is expected yet. Inflation, calculated in tens of percent per year, black currency market and impoverishment of the population – these are the new satellites of the once successful country. Free fall – in the material”Lenta.ru” .
At the bottom
The current crisis in Lebanon is one of the three worst in the last 170 years of world history. This is the conclusion made by the experts of the World Bankin the June report. By the end of 2021, they forecast a 21 percent decline in GDP, after falling 20.3 percent in 2020 and 6.7 percent in 2019. In absolute terms, the Lebanese economy shrank from $ 55 billion in 2018 to $ 33 billion in 2020, while GDP per capita fell 40 percent over the same period. Last year’s inflation was 84.3 percent, second only to the indicators of Venezuela and Zimbabwe, 155 thousand families fell below the poverty line, and the exchange rate of the national currency on the black market depreciated by 129 percent. Such dismal results are usually characteristic of military conflicts or even full-fledged wars and come as a surprise in times of peace.
According to the authors, with whom most observers agree, the acute phase of the problems began in the fall of 2019, when the government adopted austerity measures designed to save the country and its budget from bankruptcy. New taxes were announced , in particular, an unprecedented levy on WhatsApp – six dollars a month for the ability to make calls in the popular messenger. The authorities soon canceled this decision, but introduced other taxes, at the same time cutting pensions and salaries of civil servants.
This extremely unpopular step led to mass protests: tens of thousands of people took to the central streets and squares of Lebanon’s largest cities – Beirut , Tripoli, Byblos, Saida. Fresh measures became just a formal reason for protests – citizens’ dissatisfaction had been accumulating for years and was associated with corruption that penetrated all spheres of the economy, interruptions in the supply of gasoline, as well as in electricity and water supply. Almost in all establishments and in the courtyard of every residential building there have been autonomous electric generators for a long time, with the help of which people wait out long hours without light.
The Lebanese are also tired of the high level of socio-economic inequality. According to statistics from international organizations, one percent of the richest residents of the country own a quarter of GDP, 10 percent of the wealthiest – 55 percent of the total national income. This state of affairs was a side effect of the “Lebanese economic miracle”, which experts talked about until the beginning of the “Arab Spring” in 2011 – a series of revolutions in North Africa and the Middle East.
Glorious days
After gaining independence from France in 1943, Lebanon began to actively develop. The country was called “Middle Eastern Switzerland” (because of the large number of banks), and its capital, Beirut, was called “Eastern Paris” (for its colonial architectural heritage that attracted foreigners). Since then, foreign capital has been actively flowing to Lebanon , large companies have opened representative offices, and the convenient location has made the port of Beirut one of the main in the region. The income from it, together with the earnings of the tourism industry and the banking sector (the two main branches of the Lebanese economy), counterbalanced the apparent imbalance in the trade balance: the needs of importers in foreign exchange were five to six times higher than the earnings of exporters.
Lebanon was also famous for its high-quality education, which regularly supplied qualified specialists to the labor market. Thanks to them, industry gradually developed, labor productivity grew and the exchange rate of the national currency – the Lebanese pound – strengthened. All the same advantageous geographical location provided solvent sales markets in Syria, Israel, Egypt and the Arab states of the Persian Gulf. Over the seven years from 1966 to 1973, Lebanon’s GDP doubled to $ 2.7 billion at current prices, per capita to $ 1,023.
In 1973, Arab oil exporters declared an embargo on supplies to the United States and other Western countries that supported Israel in the Yom Kippur War against Syria and Egypt. In the face of limited supply, oil prices rose sharply, which played into the hands of Lebanon. The companies of the exporting countries kept their proceeds in the deposits of local banks, providing them with foreign currency and receiving additional income. In addition, Saudi Arabia and Iran considered Lebanon as an offshore for storing assets: for Riyadh – another, for Tehran- the only one in conditions of forced isolation. Lebanon’s economy was considered relatively stable and healthy, the country had high credit ratings, which made it possible to attract funds for development through the placement of public debt on acceptable terms.
Didn’t get along
But in 1975, national and religious conflicts that had accumulated over the years led to a civil war that dragged on for 15 years. The refugees from Palestine who moved to Lebanese territory, among whom there were many armed rebels (and in fact militants) who fought with Israel, created their own “state within a state” and refused to obey Lebanese laws. Traditionally close in size, Islamic and Christian communities tried to take advantage of the situation in their own interests and reduce the influence of opponents, but in the end they provoked clashes.
Subsequently , Syria and Israel intervened in the conflict , at first acting as mediators, but then becoming full-fledged participants. Even after the end of the acute phase and the achievement of an armistice, the Syrian army remained in Lebanon for 15 years, which allowed some to consider this period an occupation. The war greatly reduced the attractiveness of the Lebanese economy for foreign investors and hit banks, many were forced to close. I had to forget about tourism altogether for several years. Factories and enterprises were destroyed, infrastructure was damaged. In Beirut, about a quarter of the residents were left homeless.
Nevertheless, the country managed to recover quickly enough, and Prime Minister Rafik Hariri played a decisive role in this . Taking office in 1992, he immediately approveda large-scale program “Horizon-2000”, which included several directions at once. The main one is construction. Solidere, a company specially created by the state, received the right to forcibly buy land and real estate from owners (mainly in Beirut) in exchange for its own shares and to redevelop territories. At the same time, the company was often accused of deliberately understating the value of the redeemed objects (usually it was only 15 percent of the fair value), pressure on owners and even harassment. However, for the sake of implementing an ambitious plan, Hariri was prepared for reputational risks.
Up
Horizon 2000 also envisaged the massive privatization of state assets in various areas, primarily in energy, telecommunications and transport. The government was able to attract foreign direct investment (acquisition of more than ten percent stake in the company). The buyers were provided with tax breaks. Hariri personally negotiated with international banks and foundations to provide loans on favorable terms and gratuitous assistance, using his extensive contacts – before entering politics, he was in the construction business, and his company Saudi Oger was the main contractor for the royal court of Saudi Arabia. As a result, Riyadh paid about seven percent of the costs of post-war reconstruction of Lebanon.
Hariri’s policy was successful: Beirut and most of the country were quickly rebuilt thanks to their small territory. The economy also began to recover: in the first post-war years it grew by six percent, the total capital (own funds contributed by shareholders) of banks doubled by 1993, total assets grew by a quarter, budget revenues stabilized, although they were still not enough to finance large-scale projects within the framework of “Horizon 2000”.
As a result, the national debt increased at a catastrophic pace, and by the end of the decade had grown by 540 percent: from $ 2 to $ 18 billion (with annual budget revenues at the level of one billion). On the whole, rapid development quickly gave way to stagnation: in 1998, real GDP growth was only one percent, a year later, the economy completely contracted by one percent.
In addition, the prime minister faced corruption allegations. His personal fortune grew rapidly, and his basis was a large stake in Solidere, which made it possible to conclude that there was a conflict of interest. It is known that Hariri actively bribed political opponents in order to enlist their support. The oil industry (in the absence of its own resources, Lebanon is forced to import fuel from abroad) was led by the sons of then President Ilyas Hrawi. According to some reports, the head of government entered into an informal agreement with the Syrian authorities, which guaranteed him independence in economic matters in exchange for control from Damascus , which retained influence in Lebanon after the war, in other areas, including the media.
Officially, Hariri advocated an early withdrawal of Syrian troops, but it happened after his death in a still unexplored terrorist attack in February 2005. A few months earlier, the politician had resigned against the backdrop of a government crisis that erupted precisely because of the inability to solve a long-standing problem. Another result of Hariri’s controversial rule is the widespread development of nepotism. Corruption has always been a feature of Lebanon, but under Hariri it has grown to impressive proportions. Key sectors of the national economy were divided between representatives of several families, including relatives of the prime minister himself. His son Saad, who grew up abroad and until the age of 35, participated in his father’s business projects, headed the government in 2009 and, with a break for 2011-2016, led it until the beginning of 2020.
Representatives of individual clans are also involved in the distribution of humanitarian aid, which is rendered to Lebanon on various occasions almost continuously. Governments of different countries and international organizations, such as Transparency International, constantly urge to make the process more transparent, but in the end they put up with theft of funds and allocate new tranches – in the hope that at least some of them will reach the addressees. The United States alone plans to allocate $ 372 million in 2021 .
Put in place
However, perhaps the most controversial during the reign of Hariri Sr. was the decision to fix the exchange rate of the national currency. Since 1997, one dollar is officially equal to 1507.5 Lebanese pounds. So the central bank tried to resist inflation, which, due to the flow of loans into the country and the increased demand for goods of various categories, grew much more rapidly than the acceptable level. Before the outbreak of the civil war, one dollar was worth about three pounds, and by 1992 it had risen in price to 2.5 thousand.
Such practices cannot be called unique – in one form or another, monetary authorities resort to them even in developed countries and regions. Hong Kong Special Administrative Region of China maintains a floating exchange rate of the local dollar in a narrow corridor relative to the American one – 7.75-7.85 per unit of the US currency. The Hong Kong Monetary Authority (HKMA, an analogue of the Central Bank ) can intervene in the situation through transactions in the foreign exchange market, called interventions, but in practice this is rarely necessary. A healthy business climate, the status of an international financial center and high rates attract foreign investors who invest in bonds and deposits of city banks.
To buy them, you must first buy the Hong Kong dollar: the demand for it strengthens the exchange rate, and the needs of investors are met, including through the issue (emission) of new HKMA money. However, when there is too much of the national currency in the economy, rates fall – in parallel with a decrease in the need for borrowed funds from banks, companies and the population. The Hong Kong dollar is losing its attractiveness to foreigners: new investors do not create the necessary demand, old ones sell off existing assets and get rid of the currency, its rate is falling. This is how the cyclical nature of many areas of the economy manifests itself.
This mechanism makes it possible to achieve predictability, which is especially important for the population and importing companies. But it does not work with the Lebanese pound: the country’s financial system is too unstable and prone to frequent shocks and crises. The history of recent decades shows that development and prosperity there does not last long, which means that in the absence of an influx of investors from abroad, in order to maintain the chosen course, it is necessary to regularly sell the accumulated reserves of the Central Bank (provided that they have been accumulated beforehand) or go into debt. … The example of Russia, which went through a default in 1998, including because of the refusal to support the ruble through intervention, shows that it is very difficult to achieve this on a permanent basis.
Nevertheless, the authorities, represented by the permanent governor of the Central Bank, Riad Salama, managed to maintain the exchange rate of the national currency for more than 20 years, during which Lebanon managed to survive the second wave of its own “economic miracle”. Since 2005, when the Syrian army, which had been there for 30 years, left the country as a result of the peaceful “cedar revolution”, GDP per capita has grown by 32 percent. Over the two decades from 1990 to 2010, the growth was 119 percent. However, such a breakthrough has had limited results and has not benefited everyone. A change for the better has taken place in agriculture. In terms of labor productivity in it, Lebanon is among the world leaders and is ahead of countries such as Germany, Singapore, New Zealand and Italy.
Fell into the hole
However, in the early 2010s, the country fell into a demographic trap associated with a sharp increase in population: it finally managed to get out of the “hole” caused by the protracted civil war. An additional role was played by the massive influx of Syrian refugees fleeing the armed conflict in their homeland. Currently, there are about 1.5 million of them (22 percent of the total population), and the authorities say they spent $ 40 billion on their maintenance in less than ten years. Some economists said that Lebanon was in danger of falling into another trap – the Malthusian one: this is the name of the phase of development, when population growth significantly outstrips the growth of the state’s food resources. However, it was still possible to avoid it – largely due to developed agriculture.
By 2014, Lebanese real disposable income (adjusted for inflation and excluding mandatory payments) had declined by two percent, and the stratification continued to grow. This is most clearly seen when comparing the incomes of citizens from different social groups with their “classmates” from other regions, primarily from developed countries. So, in 2016, during a period of relative calm and before the onset of the acute phase of the next crisis, the average annual income of a representative of one percent of the richest Lebanese was comparable to similar data for Western Europe. Among the 0.01 percent of the richest residents of the country, incomes were 40 percent higher than in Western Europe, in the stratum of 0.001 percent – 90 percent higher.
At the same time, the remaining 99 percent were content with earnings at the level of 60 percent of Western European ones. A similar picture was observed for decades in South Africa, where the racist apartheid regime existed in the second half of the 20th century, and in Brazil. Inequality has accompanied Lebanon since the middle of the last century and to some extent has become commonplace, but in the last decade it has intensified, and it is also felt in politics: the majority of citizens do not have real access to power, where representatives of the same families have become entrenched. Regular outside intervention provokes political confusion, at times turning into a real crisis.
Each piece
Their cause is often became “Hezbollah”- a group that is recognized as terrorist in many countries (but not in Russia) and is fighting to build a full-fledged Islamic theocratic state in Lebanon on the model of Iran, from which it receives funding. The latter is one of the few countries almost entirely inhabited by Shiites: in the Islamic world, on the contrary, they are in the minority and significantly inferior to the Sunnis. Hezbollah is funded by Iran and Syria (the ruling dynasty of which also belongs to one of the offshoots of Shiism – Alawism) and during the civil war fought the intervention of Israel, which, in turn, sought to neutralize Palestinian militants in Lebanon. In addition, the Christian community of Lebanon has traditionally been oriented towards Syria (representatives of the Maronite trend of this religion live in the country).
The end of the war was made possible by the 1989 Taif Agreements, brokered by Saudi Arabia, Iran and Syria. They expanded the rules that have been in place in Lebanon since 1943, the year of independence from France. Then the representatives of the three leading communities agreed that each of them will be assigned a post in the power structure: the president will always be a Christian Maronite, the prime minister – a Sunni Muslim, and the speaker of parliament – a Shia Muslim. The ideologists of the agreement hoped that such an approach would help establish constructive interaction between confessions and avoid conflicts. Further events showed that the calculation was not justified, but the rules were enshrined in the constitution and are still observed.
The Taif Agreement in detail prescribed before a diffuse role of each of the three leaders of Lebanese politics, and analysts immediately carried out an analogy with the world of business. The president has become like the head of the board of directors with oversight functions. The prime minister – for the chairman of the board in charge of operational management (it was this post that Rafik Hariri received three years later). The role of the speaker of parliament is most similar to that of the CEO or president of a company, whose responsibility is to develop internal rules and regulations. And Lebanon has become like a joint stock company, in which the three main owners own shares: Saudi Arabia, Iran and Syria. They, as befits investors, provided financing to Beirut – on preferential terms or completely free of charge.
The document also contained a clause on the immediate disarmament of participants in the civil war. But not everyone did it: Hezbollah retained its arsenal, and over time significantly increased it (mainly through missiles), hiding behind the need to defend against Israeli attacks. In the future, the group acquired a political wing and even delegated representatives to parliament, but it did not cease to be a threat to the fragile peace in Lebanon. In 2008, Hezbollah militants took over the western outskirts of Beirut in response to a government decision to shut down the organization’s telecommunications network. Since then, some metropolitan areas live under strict Islamic laws and are closed from outsiders, and Hezbollah periodically shells Israeli territory, provoking retaliatory attacks.
Windy man
A very wild case happened in November 2017. While on a visit to Saudi Arabia (whose citizenship he also has thanks to his father’s business), Saad Hariri made a loud and strange statement on local television. In it, the prime minister attacked Iran with accusations of interfering in the internal affairs of Beirut and announced his resignation. Observers assumed that Hariri Jr. was under pressure from the Saudi authorities and became a weapon of the long-standing struggle between Riyadh and Tehran for power in the region (Sunni Saudi Arabia is an ally of the United States, while Shiite Iran cooperates with Russia and builds a “Shiite crescent” around itself , including with the help of Hezbollah).
Returning home, Hariri announced that the resignation was canceled at the request of President Michel Aoun, and remained in office for more than two years. His reign ended in January 2020, three months after hundreds of thousands of Lebanese took to the streets. Two months earlier, the Central Bank had ceased to cope with the support of the pound, and a black foreign exchange market, parallel to the official one, appeared in the country. The course on it was several times higher than that recorded in 1997. After three days of protests, the authorities made cosmetic concessions and defiantly canceled the harshest measure, the WhatsApp tax.
Already in March 2020, the new government under the leadership of Hassan Diab announced a default – a refusal to answer for obligations, which at that time amounted to $ 1.2 billion. In fact, the country went bankrupt. Further, the situation only worsened, which was facilitated by the introduction of quarantine due to the coronavirus, the closure of many enterprises and, as a result, an increase in unemployment to 25 percent. Diab and his government did not enjoy the support of the population, who considered them to be henchmen of the previous government. In addition, Lebanese hospitals were unable to cope with the influx of coronavirus cases.
In mid-spring, there was timid hope for improvement when the government agreed with the International Monetary Fund (IMF) to provide $ 10 billion in aid over four years. The funds were supposed to go to the reconstruction of industry and the creation of new jobs, but the fund was ready to allocate them only on condition of urgent political reforms and full reporting on the economic situation in the country, which in the end was never done.
Nail in the lid
In early August 2020, an explosion occurred in the port of Lebanon , recognized as one of the largest man-made disasters in the history of mankind. 2.7 thousand tons of ammonium nitrate, stored in warehouses since 2014, claimed the lives of 207 citizens (more than 700 were injured) and damaged almost a third of the capital. Some areas were completely buried under the rubble. But the most painful consequence was the destruction of a medicine warehouse and an elevator, where about 85 percent of the entire national grain supply was stored. Overall, the port provided about 60 percent of all Lebanon’s imports, almost entirely dependent on the supply of essential goods from abroad.
The incident led to the immediate resignation of the Diab government, but a new one could not be appointed, so the ministers continued to work in their previous positions with the prefixes acting. In February, investigators from the Swiss prosecutor’s office began working in the country. They are trying to understand the activities of the Central Bank and personally Riad Salame. He is suspected of numerous violations and embezzlement of about $ 350 million. So far, nothing is known about the progress of the investigation, since the Ministry of Foreign Affairs has asked for it to be classified.
In the spring, there were almost no demonstrations in Lebanon – the conditions of one of the most severe lockdowns in the world prohibited free movement on the streets. But once the restrictions were lifted, protests resumed with renewed vigor. Last October, President Aoun instructed Saad Hariri to lead the government for the third time, but over the next eight months they did not manage to agree on specific candidates, and in July 2021, Hariri Jr. announced that he would stop trying to form a cabinet.
Abroad won’t help them
Over the past year, Lebanon has experienced many more upheavals. Mass blackouts of electricity and water, interruptions in gas supply became more frequent and became the norm. A shortage of gasoline supplied from abroad has led to many kilometers of queues at gas stations and forced many to refuse to travel by private cars. Foreign suppliers are ready to ship fuel only on a full prepayment basis. In the absence of fuel, the Lebanese cannot use electric generators, which is especially critical in summer, when it is very hot outside and people are used to turning on air conditioners. Hospitals are recording acute shortages of medical supplies, while many Beirut residents have not recovered from the aftermath of the blast. Sewer manholes made of precious metals disappear en masse on city streets, and the police record a record number of suicides.
The banking system is undergoing a collapse, as a result of which the citizens of the country have lost access to their foreign exchange savings, and the withdrawal of funds in pounds is strictly limited. The exchange rate of the national currency dropped to ten thousand per dollar (ten times lower than the current official one), and the average salary over the past two years fell from 670 to 67 dollars. A deep crisis has befallen the army as well: servicemen cannot provide food for their families and are deserting en masse, despite the threat of criminal prosecution. The Defense Ministry leadership is afraid of losing control of the country to Hezbollah militants and is asking international organizations for help – not in money, but in food and ammunition.
The situation could be improved by support from abroad, and many countries, responding to the call of France, which feels responsible for the fate of the former colony, are ready to provide a targeted loan of $ 11 billion. But the condition, again, is the implementation of reforms or at least the formation of a government, which the country has not seen for more than a year and a half. Back in 2017, after the sudden announcement of the resignation of Saad Hariri, the Conference for Economic Development and Reform (CEDRE) was formed in Paris, the purpose of which was to organize aid to Lebanon. A “trust agreement” was signed with the government, which was supposed to give Beirut access to the credit tranches, but the terms of the agreement were never fulfilled.
Experts say that only the resumption of cooperation in the CEDRE format can move the Lebanese economy off the ground. However, another opinion is expressed, according to which economic and political upheavals are the constant companions of Lebanon, after which there always comes a period of development and relative prosperity. Despite all the hardships, the country still receives tourists, and specialized portals claim that it is safe to be on the streets of the country’s largest cities. The coming months should show whether Lebanon will be able to recover from the crisis, recognized as one of the worst in 170 years, or will turn into what political scientists are used to calling the term “failed state.”
Courtesy: (lenta.ru)
