The Country Where the Banks Ran Out of Money
(Bloomberg Opinion) -- After 13 months of foundering under caretaker prime ministers, Lebanon finally has a government.
That is very good news for a country suffering from the effects of economic collapse, political intransigence, financial malfeasance and the interference of foreign powers. And all that on top of the still mysterious port explosion last year that devastated the capital Beirut.
When the announcement came on Sept. 10, it prompted an immediate and significant recovery in the value of the currency, the lira. With a government in place, Lebanon can now access hundreds of millions of dollars in donor pledges, $546 million support from the World Bank and an expected $860 million from the International Monetary Fund’s Special Drawing Rights allocation.
The country’s political leadership, especially the pro-Iranian Shiite militia group Hezbollah, only agreed to form the government because the option of even more procrastination finally ran out. It was the country’s central bank that at long last forced the politicians to rearrange the deck chairs. On Aug. 11, its governor, Riad Salameh, announced the end of fuel subsidies, plunging the country into a desperate crisis. Without fuel, electricity, transportation, and many of the basic necessities of modern society ceased to exist. Salameh was effectively confronting President Michel Aoun, his Hezbollah allies, indeed all politicians, with a simple fact: the country was bankrupt at both the public and private registers.
Lebanon imports nearly everything and is heavily reliant on its financial sector. And that’s why it is in such desperate straits. For decades, the country’s banks operated what amounted to a giant pyramid or Ponzi scheme, whereby depositors would be paid exorbitant interest rates on simple deposits, and the banks kept the government going by endlessly lending money to the state. But massive protests that began on Oct. 17, 2019 over official corruption and ineptitude helped foment an economic crisis. And as the economy wobbled, it turned out that the foreign exchange the banks claimed they were holding on behalf of depositors and could lend to the government did not really exist.
The bubble burst. Lebanon was in an existential crisis. It needs the IMF and the international community to recapitalize its banks or it will never recover.
With the lights out, refrigeration down, cars stalled, hospitals struggling to function, and nothing working in much of the country most of the time now, even these masters of inaction had to respond. Hezbollah, in particular, was feeling distinctly vulnerable. Regional powers like Saudi Arabia, the United Arab Emirates and even Syria, operating independently of Iran, could find it very easy to acquire leverage in a completely helpless country. That could pose a serious threat to Hezbollah and Iran’s grip on the political system.
Hezbollah reportedly put enormous pressure on Aoun and his ambitious son-in-law, Gibran Bassil, to accept the formation of a cabinet in which they don’t seem to have loyalists to wield an effective veto. Tehran and Hezbollah apparently concluded the impasse was becoming extremely dangerous to them and crafted a deal with President Emmanuel Macron of France to broker the new government.
The new government is now planning to distribute ration cards in U.S. dollars to 500,000 of the poorest families. Meanwhile, all remaining energy subsidies will be lifted, meaning gasoline and other fuel should start to become accessible again, albeit at higher prices.
Fundamentally, though, nothing has changed. For the IMF and the donor community to provide fresh funds, Lebanon will be required to make significant concessions on accountability and transparency, among other conditions. It should at the least create a safety net for the mass of Lebanese who have now sunk into dire poverty so they won’t be dependent on increasingly rare handouts.
But it’s precisely these kinds of concessions the political leaders don’t want to make, not only because that means a certain loss of power and privilege, but because it will require them to agree on uncomfortable basic facts. For example, how much money was pilfered — and by who — and how the refinancing burden should be shared. The traditional power centers, all amply represented in the new coalition, dread the kind of economic and political compromises the IMF and donor countries are going to demand in order to recapitalize the effectively defunct financial system.
There will be a respite because of arrival of the pending aid and loans. Whoever is in charge will have to use the time to finally reach a long-term understanding with the IMF, without which a longer-term solution is impossible. That period should also give the international community a huge opportunity to force Lebanese leaders into serious concessions on transparency, accountability and responsibility.
Lebanon may have won breathing room. But its leaders — and the world around it — should not forget that the country’s existential crisis is not over.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Hussein Ibish is a senior resident scholar at the Arab Gulf States Institute in Washington.
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