Mayday! Mayday! Mayday! Lebanon!
THE FUTURIAN #5
The ‘Taif Agreement’ was signed in 1975 at the conclusion of the civil war in Lebanon between the Muslim and Christian communities. To avoid sectarian clashes the government was split into three parts based on sects to ensure an equitable distribution of power. The three major sects in Lebanon are the Maronite Christians, Shias and Sunnis. The distribution of power would result in the President of the country always being a Maronite Christian, the Prime Minister a Sunni Muslim and the Speaker of the Parliament a Shia Muslim. Such a structure created power zones where different sects controlled different ministries and consequently the divide in the system was there for everyone to see.
The Lebanese banking sector was by far the strongest component of the state. Although Lebanon relies heavily on imports, attractive interest rates provided by the Lebanese banks did more than enough to pull the big dollars to Lebanese shores. It is important to note that after the end of the 1975 civil war, Lebanon tied its currency to the American Dollar, in a way that 1 US $ would be equal to 1507.50 Lebanese Lira. This move legitimised the use of the American Dollar for transactions and implied a hassle-free exchange of American Dollars for the value equivalent of the Lebanese Lira and vice-versa. This move also meant that availability of American Dollars in Lebanese banks had become important.
To maintain the fixed exchange rate and make payments for the imported goods, a continuous flow of Dollars was important. The booming banking sector not only provided remarkable interest rates but also maintained secrecy, a characteristic feature similar to Swiss banks. Once Dollars entered Lebanon through substantial investments, they were used mainly to fund the government of Lebanon which depends heavily on the Lebanese banking sector for financing.
In an ideal world, the high interest rates offered by banks to its depositors would be covered by the money repaid by the government to banks as a result of development and further investments made for the betterment of the economy. However, that was not the case. The government siphoned off funds and spent money on the appeasement of their respective sects, with a not-so-ulterior motive of hoarding power and authority.
This scheme, howsoever unreliable, was able to keep the nation afloat for a considerable period of time through the high interest rates offered by the banks. Enough stress cannot be laid upon the fact that the sustainability of a nation’s economy on a system such as this is heavily dependent on the constant inflow of funds. If the investments stop, the nation which produces and exports less than it imports, and is vulnerable to corruption, will run short of hard currency to pay off its depositors and remain profitable.
The Middle East was then hit by what we now know as the Arab Spring. Lebanon’s immediate neighbour, Syria, like a lot of other Middle Eastern countries, was reduced to a state of chaos. Subsequently, investment and the willingness to keep funds in and around a war zone, started to dry up.
In such a situation, where political ‘rudderlessness’ and corruption were a constant, the banks, naturally, started to run out of money. This led them to formulate a plan which practically saw them destroy themselves. The plan involved a move to offer even higher interest rates to depositors willing to put their money into the Lebanese banks, to an extent that interest rates in the vicinity of 20% were being offered to potential depositors/investors. Though this helped the bank reserves, it essentially was a ‘Ponzi Scheme’ where fresh money is borrowed to pay off the old/initial debt.
A few political mishaps in 2018/19 tried the patience and readiness of investors to put their money into Lebanon. Very soon the vulnerabilities and volatility of Lebanon, came to the forefront. The bulk of the investment inflows ceased and the reserves of the banks took a major hit. What followed was the inability of the depositors and the investors to withdraw their own money, amounting to substantial sums in some cases. This inability, coupled with rising inflation rates, resulted into individuals resorting to a barter system. This clearly portrayed the regressive state of the nation as a whole.
In the August of 2020, an explosion — which was massive in every sense of the word — hit the port of Beirut, the capital city of Lebanon, killing 200 people. Interestingly, the explosion was more fatal to the Lebanese economy than it would have been in most other countries. The port was responsible for the import of vital commodities; commodities as basic as vegetables and clothing. An inoperable port meant that the costs of these items skyrocketed. Lifesaving medicines and food were being priced beyond most Lebanese citizens.
Even though the consequences of the explosion seen in isolation are horrible, this was just another setback for citizens who were already struggling with the lack of facilities like electricity, clean drinking water, fuel and food. According to the World Bank, ‘Lebanon’s GDP plummeted from close to US$55 billion in 2018 to an estimated US$33 billion in 2020, while GDP per capita fell by around 40% in dollar terms. Such a brutal contraction is usually associated with conflicts or wars.’ But there was no war, was there?
The International Monetary Fund (IMF), perhaps the last of Lebanon’s hopes to get out of this position, has asked the government in place to plan and propose reforms. These include the enhancement of the anti-corruption framework. Only after positive steps by the Lebanese government in this direction will the help be extended by the IMF. Will there be reforms? Logically speaking, at least when the very existence of the country is on the line, rational decisions must be taken. However, with Lebanon, you never know.
‘Mayday’ is a nautical term highlighting an extremely alarming situation. It indicates a vessel that is getting to a point of no-return. It suggests a disaster that is a foregone conclusion. Unless Lebanon adopts corrective measures, it is a ship about to be wrecked.
© Pranav Vanikar 2022