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explained | Lebanon’s economic slowdown and why people are robbing banks for their own money

Lebanon’s financial system has been paralyzed since 2019 and the Lebanese pound has lost nearly 95% of its value

Lebanon’s financial system has been paralyzed since 2019 and the Lebanese pound has lost nearly 95% of its value

the story So Far: Friday, September 16, five incidents Bank robbery attempts, not the first of their kind, were reported in Lebanon. One of the incidents involved an armed man, identified as Abed Soubra, seeking to withdraw $300,000 in cash from BLOM Bank in the capital, Beirut. Later Soura handed over his gun to security but remained locked in the bank till evening.

However, such attempts were made by individuals to gain access to their savings. Several such incidents, often involving armed individuals, have been reported since the beginning of this year and are a manifestation of Lebanon’s incredible economic crisis that began in 2019. The economic slowdown in an already politically unstable country has been compounded by the COVID-19 pandemic. And this 2020 explosion At the port of Beirut, the capital of Lebanon.


How bad is the economic crisis in Lebanon?

The World Bank described the Lebanese crisis as “one of the top 10 worldwide, possibly the top three most severe economic collapses since the 1850s”.

With blanket withdrawals of Lebanese depositors since the start of the crisis in 2019, dollar accounts in the country’s banks have almost frozen, with banks introducing “tighter” controls on withdrawals. Depositors can only withdraw the equivalent of $400 dollars in a month, according to financial Times, And when depositors make withdrawals in the local currency, the exchange rate takes away 95% of its value. On different occasions this year, the Lebanese pound has been valued on the black market for 25,000 and even $35,000.

The country’s GDP fell from about $21.8 billion in 2021 to about $52 billion in 2019, showing a 58.1% contraction. such a contraction, according to world bankassociated with severe events such as war.

In contrast, when many countries were grappling with the effects of the 2008 global financial crisis, Lebanon reported a 9.1% increase in real GDP. Its economy was booming, and its banks were resilient, with the International Monetary Fund lauding the efforts of its central bank, Banque du Liban (BDL) governor Riyad Salameh. Meanwhile, last year, the country recorded a negative growth of -19.2% in its GDP.

The World Bank had projected government revenue to reach 6.6% of GDP in 2021. Debt soared to 150% of its GDP in 2019 and climbed to 170% the following year, one of the world’s highest debt burdens. In March this year, the government said the deficit in the financial system could be $73 billion.

Poverty has increased dramatically, and the United Nations estimates that 80% of the country’s 6.5 million people can be classified as poor. Meanwhile, inflation reached 154.8% last year and is projected by Fitch to climb to 178% in 2022.

Prices for basic foods and meat are high enough to be out of reach for most Lebanese citizens. As Lebanon imports most of its fuel, prices have risen and households often have only one hour of electricity due to power cuts. Reuters.

Read also: Health worker exodus causes Lebanese patients to suffer

The crisis has prompted people to move out of Lebanon, which has been described as the most important since the country’s civil war from 1975–1990.

Many who have migrated are doctors and medical professionals—an estimated 40% of doctors (most of them specialists) have moved out permanently or are working part-time abroad. According to the World Health Organisation, hospitals in the country are operating at 50% capacity.

How did Lebanon get here?

Once known as the Switzerland of the Middle East, acrimony between the country’s various religious factions was credited with building the country back after a 15-year long civil war. The Lebanese administration and its central bank have been indicted over a period of 30 years for abusing the country’s citizens’ savings and misappropriating spending. The World Bank called it a “deliberate depression” organized by the country’s elite, who “have long occupied the state and live off its economic rent”.

Experts say Lebanon’s financial system is similar to a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors, which only works until the new money runs out. .

Debt accumulation under communal elite administration

After the civil war, Lebanon adopted a system of “Confessional Government” Or the communal political system in which important positions are allocated to the various Christian and Muslim sects in the country. According to Lebanon’s post-civil war constitution, the country’s president must be a Maronite Christian, the prime minister a Sunni Muslim, and the parliament speaker a Shia. Muslim.

This meant that the political elite in each denomination held substantial power, often spending more on skyscrapers and malls and less on building the foundation for basic public services such as water, electricity, transportation, health, education and social security. . according to a Reuters Analysis, the government also maintained a low tax regime skewed in favor of the rich.

After the war, the government relied on foreign aid, large loans from the Allied Gulf countries, income from its financial markets, and tourism in a service-heavy economy.

After the civil war ended in 1990, Lebanon saw the value of its currency depreciating against the dollar by two-thirds, as well as a 100% increase in inflation. To stabilize the economy, in 1997 Lebanon decided to maintain a fixed exchange rate, pegging the Lebanese pound at around $1,500. a yale analysis However, it indicates that it proved to be a stable measure after the war, but the fixed exchange rate created parallel markets with a fixed rate and a black market rate with a large disparity between the two.

Foreign aid and investment from Middle Eastern countries during successive governments kept the country’s foreign exchange reserves high, but debt continued to accumulate in the background, and so did liabilities and debt repayment costs. The World Bank’s August report states: “Excessive debt accumulation was used to give the illusion of stability and to reinforce confidence in the macro-financial system to allow deposits to continue to flow.”

In 2020, debt-servicing or interest payments accounted for nearly half of government spending, and in March of that year, for the first time, Lebanon defaulted on its sovereign debt, not paying on $1.2 billion in Eurobonds. In April, the government announced that the country’s economy was in free-fall.

remittance dependency

By some estimates, 8 to 20 million Lebanese people – much more than the country’s 6.5 million population – live outside Lebanon. As a result, the most important exports of the import-heavy country were human resources. The large diaspora meant that remittances from those living outside the country became a major source of revenue.

Remittances were once considered one of the most reliable sources of revenue for Lebanon, so much so that millions of Lebanese working abroad sent money home even during the 2008 global crisis.

However, the movement of remittances began in 2011, as Lebanon’s sectarian political system began to destabilize and a large part of the Middle East, including Syria, fell into crisis.

To compound this, the Allied Gulf countries turned their attention away from Lebanon due to Iran’s growing influence through the Shia armed group Hezbollah. In addition, countries that had previously provided foreign aid now placed conditions on the government for failure to reform.

Central Bank’s ‘Financial Engineering’ Policy

In 2016, Banque du Liban governor Riyad Salameh devised a policy called “financial engineering” to attract new dollar deposits from the country’s banks, rather than rein in debt.

BDL’s policy provided banks with attractive returns (up to about 15%) on new dollar deposits to increase the government’s dollar reserves, and the funds to provide such high returns to banks came from external debt or the sale of Eurobonds by finance. . Ministry.

While financial engineering increased the government’s dollar reserves, it also increased its liabilities, meaning that its reserves were nearly wiped out from what it owed. Furthermore, because banks were more interested in keeping their dollars with the BDL, the policy reduced liquidity in the real economy.

2019 protests, pandemic and Beirut explosion

communal governance system Communications Decision-making paralysis, corruption and unstable financial policies in Lebanese politics. Lebanon did not have general elections between 2013 and 2018 as they were postponed three times by the government. In 2018, despite mounting debt, politicians largely spent on increasing public sector salaries. After the election in 2018, it took nine months for the government to approve the budget.

Ultimately the public’s dismay at the combination of the factors of governance Resulted in widespread protests in 2019When, to increase revenue, the government planned a $6 monthly tax on WhatsApp calls that Lebanese people used to stay connected with relatives working overseas.

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Popular protests led to the resignation of the country’s Sunni prime minister, Saad al-Hariri. The protesters demanded an end to corruption, the resignation of the country’s powerful elite and a change in the political system.

Public anger continued to mount as the country dealt with the pandemic and the devastating explosion at the port of Beirut in August 2020, one of the largest non-nuclear explosions in history, killed more than 200 people and injured nearly 7,000 others. It is estimated to cause a loss of about $ 15 billion.

Now what happened?

Lebanon has not had a stable administration since the 2019 protests and three consecutive prime ministers were unable to form a government. Billionaire and telecom tycoon Najib Mikati became the country’s prime minister in mid-2021.

General elections were held in May 2022, and Mr. Mikati was tasked with forming the new government; However, this has not yet happened, as the result caused the communal parliament to be further divided into several camps, none of which have a majority.

The alleviation of the economic crisis depends on the formation of a stable government, which is one of the pre-conditions for the bailout of the IMF. Talks about $3 billion IMF funding, along with an economic recovery plan to lift the country out of crisis, have stalled as political leaders are not on the same page about accepting actual scale of loss Or who is responsible for this.

Hello Friends, My Name is Raushan Kumar. I am a Part-Time Blogger and Student. I am author of https://searchnews.in . We're dedicated to providing you the best of News, with a focus on Business, Health, Lifestyle, World, Tech, India, Gadget.


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