Over the past two decades, the Lebanese government slowly became trapped into creditor dependency. Like so many developing countries before, the government now faces a dilemma between preserving its financial credibility or the livelihood of its citizens. Its policies have been oriented to the former, much to the detriment of the real economy. With no other ways to receive government funding, Lebanon will likely have to embrace international loans with strict conditions imposed.

To understand Lebanon’s situation now, you must look at the past. The core cause of the economic crisis is the government’s high share of US dollar-denominated debt. From 1997 onwards the decisions of the government have made the current situation inevitable. Since 1997, Lebanon has pegged its currency, the Lebanese Pound, to the US Dollar in order to stabilize its exchange rate. To maintain this rate, the government has to have a supply of dollars to maintain the rate. However, Lebanon has very few exports to receive dollars. Its non-financial exports are 25% of the value of its imports. To fill in this gap, Beirut has relied on international banking. Lebanon is one of the most heavily banked societies in the world, with deposits upwards of 150% of the GDP of its economy.

Meanwhile, the government relied immensely on the banking sector to shore up its budget. Through its central bank, the Banque du Liban (BDL), Lebanon sold bonds to the banks in order to finance its budget, while running deficits close to 10% of its GDP. These bonds are expensive for the country because it has a high-risk interest rate. Utilizing bonds as the solution to this huge deficit every year has caused market distortions in the banking sector which have bled into the economy. These dollar-denominated bonds debt rose quickly to make Lebanon the third-most indebted nation in the world as a percentage of GDP and left the currency system compromised.

The whims of the financial market have now paralayzed the economy. Foreign currency deposits steadily slowed and creditors both inside and out of the country began to get spooked by the country’s high debt rate. The Lebanese government stopped being able to sell bonds. The government is now attempting to save the dwindling foreign currency supply at all costs, in order to prevent default. Lebanon is severely limiting US dollar withdrawals and transfers of money out of the country.

After all this effort to prop up the currency and financial system, there might not be much of a real economy left in Lebanon. Black market rates for the US dollar are up to greater than 2000 lira per dollar, which has made businesses and normal livelihoods become too expensive. Imports from abroad are purchased in US dollars and thus the people are facing shortages of food, electricity, and medicine. Businesses too are shutting down in droves. Bank and gas station shutdowns, medicine shortages and high unemployment, upwards of 35% now, are the reality of the future.

Debt restructuring and conditional foreign loans are the only approaches that can change the situation but each come with their downfalls. If Lebanon restructured loans too aggressively then it would become a pariah state to the international financial community, jeopardizing future bonds and investments and the banking sector, a huge portion of Lebanon’s economy and political power. On the other hand, foreign loans would come from multilateral organizations, primarily from the IMF. IMF loans usually come with strict requirements of structural reforms including austerity measures and creditor-friendly policies. Most countries, recognizing the unrest that comes with IMF policy implementation, only take IMF loans as a last resort. These policies might finance the government, but like Lebanon’s current course it would hurt the lives of day-to-day citizens in the short term and produce questionable benefits in the long-run, as evidenced most recently by the anti-IMF unrest in Ecuador.

Prime Minister Saad Hariri who has resigned has seen the writing on the wall and has begun talks with the IMF. What kind of conditions the IMF and other international creditors will impose may save or break further Lebanon’s economy. Judging off the IMF’s poor intervention history, Lebanon should be more than skeptical that outside help will work. Unfortunately, Lebanon has nowhere else to go to.

The Middle Easterner

The Middle Easterner

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The Middle Easterner

Lebanon: Stuck Between a Rock and a Hard Place

The Middle Easterner