Lebanon’s economic crisis: What and why?

Image Source: Al Bawaba

Lebanon is going through the most severe crisis episodes globally since the mid-19th century. According to the latest World Bank Lebanon Economic Monitor (LEM) released on June 1, Lebanon is going through a severe and prolonged economic depression which is likely to be ranked in the top 10, possibly top 3, of the most severe crisis episodes globally since the mid-nineteenth century.

Let us look at some of the indicators and causes.

TD; LR

Indicators

Lebanon’s GPD is in a constant decline, more than half the population is under the poverty line, the Lebanese pound and exchange rates are falling, and there is a drastic rise in inflation in prices.

Causes

  1. Beirut explosion
  2. Confessionalism political system
  3. Corruption
  4. Mounting external debt

Unprecedented GDP contraction

Lebanon’s GDP has been in a constant decline as it contracted by 6.7% in 2019 and by 20.3% in 2020. It is estimated that the country’s GDP plummeted to a value of $33 billion in 2020 from $55 billion in 2018. Even with no wars or conflicts happening in the region, such a brutal contraction in the GDP rate resulted in surging inflation rates, averaging 84.3% in 2020. The situation is going to get even worse as the GDP rate is projected to contract by 9.5% in 2021.

Rising unemployment and poverty

The ongoing economic crisis has forced more than half the population below the national poverty line, causing a crash in the purchasing power of the bulk of the labor force. The rising unemployment rate is also creating a problem for an increasing share of households to access basic amenities, including health care.

Falling exchange rate

The Lebanese pound which earlier was fixed at about 1,500/$1 since 1997 has now started declining since October 2019 to a third of its value at 4,500/$1 on the black markets as noted on April 28, 2020. Moreover, official valuations of the currency differ greatly from the black market as some depositors were able to withdraw Lebanese pounds from their dollar account at 2,000/$1, causing outrage against the banks.

Rise in inflation

The country, for its everyday transactions, uses US dollars but their shortage along with the crashing value of the pound has disrupted the nation’s ability to pay for imports, including essentials such as wheat and oil. Businesses are forced to move towards black markets for their needs as banks are refusing short-term loans.

In better times, a popular dish used to cost around 1,500 Lebanese pounds ($1) but now to match the current rates, the same would be about 13,000 pounds ($8.60), a tenfold increment.

Causes of the current situation

Beirut Explosion

On August 4, 2020, a large amount of ammonium nitrate stored at the port of Beirut, the capital of Lebanon, exploded, causing at least 207 deaths, 7,500 injuries, leaving an estimated 300,000 people homeless.

The impact of the explosion on Beirut’s infrastructure was immense. According to an analysis by Strategy&, economic damages (excluding public infrastructure) stood at over $3.1 billion. Rebuilding the public infrastructure– including the port, roads and water infrastructure– is estimated to cost to the tune of $15 billion.

Confessionalism political system and corruption

Lebanon’s government works within the framework of Confessionalism*. Many members of the government have been in power since the Lebanese Civil War (1990), with a simple shuffling of positions every election cycle. Many blame this system for the country’s continued corruption. Government officials reportedly often award contracts to friends and family leading to many of the country’s problems like daily power cuts. The working class relies on economic assistance from their party which stops them from speaking up against the system, despite widespread opposition.

*A political system in which government positions are allocated by religious confession

External debt

After the civil war, the Lebanese government resorted to massive borrowing to finance its post-war restructuring. Between 2005 and 2018, the yearly debt growth has averaged around 22 percent and the GDP growth for the same period has been in single digits with an exception of 2009. Due to this, Lebanon’s debt to GDP ratio reached 178 percent by the end of 2019, which makes it the third most indebted country after Greece and Japan. In 2020, Beirut defaulted on a $1.2 billion Eurobond, the first sovereign default since in its history.

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News Line is it Anyway?

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