Lebanon’s Economic Crises Becoming Even More Graver



 Photo Source: mei.org
 
By Naveed Qazi | Editor, Globe Upfront

Lebanon’s harrowing economic crises are also due to its political misfortunes. The country was politically rudderless, as there was no president between 2014 and 2016. Then there were multiple and lengthy delays in cabinet formation during that time, and eventually the 2018 parliamentary elections took place, but only after a five-year delay. The Hariri government that was in charge couldn’t tackle the crises, and it became impotent despite foreign support, which was not incentivised to handle the crises. The economic stability in his rule eventually slipped from his corridors.

The trigger for the current crisis was due to his mysterious resignation and disappearance to Saudi Arabia in November 2017, which may have spooked wealthy, well connected Lebanese depositors and encouraged them to move funds out of Lebanon. In a strange incident, Hariri had publicly resigned from his position in a televised statement from Saudi Arabia on November 4, 2017. After the appearance he was not traced for more than ten days, sparking fears that he was being held hostage by the Saudi leadership. Eventually, due to the intervention of French President Emmanuel Macron he was officially invited to France. Hariri thus re-emerged, and was able to return to Lebanon, where he immediately rescinded the resignation, and was reinstated as prime minister. However, it was only after this series of events that resident bank deposits truly collapsed, interest rates spiked, bank lending to the private sector declined, and GDP growth dropped.

By October 2019, the people of Lebanon had enough. Frustrated by the lack of firm action by the political class, hundreds of people took to the streets to demand a radical change. There was a looming economic catastrophe when capital inflows came to a halt. The political class remained silent spectators to rising inflation, exchange rate depreciation, putting more burden on the masses, and thereby protecting the interests of the oligarchy. In retaliation, protestors had smashed window panes of several banks in Beirut. The Lebanese diaspora had even set fire to a branch of Credit Libanais Bank in Tripoli in April 2020: having lent depositors' money to the government and the central bank in various forms, private banks hold most of Lebanon's public debt.

Lebanese central bankers had demanded that if local banks didn't raise the cash, the government would take them over, or force them to exit the market. In response, some Lebanese banks have sold subsidiaries in other countries, including in Egypt and Jordan, and there have also been layoffs in the Lebanese banking sector, which employs around 25,000 people. As the February 2021 deadline has passed, there has been neither the required increase in capital, worth an estimated $4.1 billion, nor the bank have liquidations happened. 

Amid the crises, banks, already insolvent, experiencing a sharp liquidity crunch, forced themselves to declare a ‘bank holiday’, and imposed severe restrictions on bank withdrawals. A foreign exchange black market emerged and the national currency, the lira, sharply depreciated to over eighty five percent. In turn, inflation soared and people’s real wages and purchasing power collapsed. GDP was estimated to have contracted by 25% by 2020.

In Lebanon, dollar scarcity has had led to a thirty percent premium for physical cash dollars over the official exchange rate (the Lebanese economy is both highly dollarised and cash oriented).  

To ameliorate the crises, the IMF wants Lebanon’s banking sector overhauled, formal capital controls put in place, corruption tackled, a forensic audit and reform of the state electricity company, and changes to the telecom sector, according to economists. But the audit is dead for now, and other problems have also emerged which go against reforms.

As a new government was formed in January 2020, it had worked with an international consultant on an emergency economic program, and initiated IMF negotiations. The program had called on all stakeholders to share in the burden, starting with creditors and bank shareholders. Unfortunately, the effort quickly proved quixotic.

Local economists estimate that Lebanese banks owe over $90 billion (€77 billion), since late 2019. Lebanese economy depends upon imports, and for years the central bank has helped to finance the trade deficit by offering high interest rates, sometimes more than 10 per cent a year, on dollar deposits from commercial lenders. The banks, in turn, passed those generous rates to their clients, helping to attract foreign currency from local depositors and the large Lebanese diaspora abroad. According to Financial Times, this system had helped Lebanese banks generate impressive profits. But, in 2019, the investor confidence waned, the flow of dollars began to dry up, and the system started to break down.

‘The banks made so much money along the way they are entirely partners in the crisis’, lamented Jad Chaaban, a Lebanese economist. ‘They are villains as much as the ruling thugs and the [political] parties who stole money and killed people.’

As the politicians had given statements in which they said that Lebanon had been bankrupt, it had led to more uncertainty. The Lebanese people believe that politicians indulged in a kind of a scam, which invoked itself through lies and more lies. The people had slid into poverty, and there are major fuel, electricity and food shortages.

Many have called the central bank’s behaviour during this time as being akin to running a Ponzi scheme, an investment fraud that pays existing investors with funds collected from new investors.  It is not surprising, then, that deposits placed with the central bank between 2017 and August 2019 swelled by a whopping 70 percent. The dividends paid out by banks, moreover, went to shareholders, of whom many were politicians and who were thus incentivised to continue with the scheme.

Actually, the period following the financial crisis in 2007 saw Lebanon being one of the very few countries to offer investors highly attractive rates of return, while much of the rest of the world slashed rates to stimulate economic recovery. This made the small Middle Eastern nation a magnet for wealthy investors from around the world. But, relying on overseas dollars was a dangerous policy. The central bank continued to pay higher and higher rates to attract funds into the country, despite those dollars being insufficient to cover interest and capital payments.

By 2019, almost half of the government’s fiscal revenues went to servicing external and domestic debt, and most of the rest was used to pay public-sector salaries. Indeed, the debt has ballooned to such alarming levels that Lebanon stands today as the world’s third-most indebted nation with a 152-percent debt-to-GDP ratio, only behind Japan and Greece. After Lebanon defaulted in March 2020, the position of Lebanon’s banks became even more parlous, as the local banking sector had been a major buyer of government bonds.

In total, commercial lenders hold $25bn in local and foreign currency government debt, approximately 12 per cent of the sector’s total assets. The government estimated that the total losses across the banking sector were at $69bn, including $50bn in losses at the central bank alone. The banks didn’t have any equity, there were all insolvent.

The caretaker government of Prime Minister Hassan Diab, who was first appointed in January 2020, and then resigned after accidental Beirut blasts, had been seeking to push through reforms to stabilise the economy and secure emergency financing from the IMF. As per an article written by Chloe Cornish in Financial times: ‘Mr Diab wanted to shrink the oversized banking sector and inject new capital into each lender. But the bankers were resisting a government mandated bail-in, because they believed using a percentage of depositors’ holdings to recapitalise the banks, would permanently destroy confidence and harm future economic growth.’

Mike Azar, a Lebanese economist and former lecturer at Johns Hopkins University in Washington has talked about other option, instead of government mandated bail in, and it seems to be supported by the banking lobby. It is to use national assets, such as the two state-owned telecommunications companies, to pay back the $25bn in local and foreign debt the state owes to commercial lenders. But, Mr Azar questioned the fairness of using such a sale process, as it would just protect those ‘high-net worth individuals otherwise facing a possible deposit haircut’. “To say that we need to sell state assets to make up the losses that the top X per cent are facing, that’s unjust,” he said.

In its history, Lebanon has a long history of high public debt, and external imbalances that dates back to the post-civil war reconstruction period of the 1990s. While  there were a series of donour conferences, co-ordinated by then French President Jacques Chirac over 2001-2007, with pledged substantial financial assistance, it never managed to restore fiscal and external sustainability.

Some other economists and writers feel that a well defined re-profiling of the public debt could go a long way in restoring fiscal sustainability. It is already one hundred fifty percent more of the gross domestic product. However, the banks that hold large amounts of government debt would suffer from such action. And it would also be important to treat all depositors equally.

Since the fiscal and external situation remains unsustainable, any such solution would be complex and hard to implement. It is therefore of paramount importance that the policies are perceived to be  fair by all the stakeholders, especially given Lebanon’s many socio-economic cleavages and its religious cleft. As talk of collapse continues to grow, Lebanon remains on course to face arguably the most challenging financial moment in its history. The 2022 parliamentary election are hoped for the resolution of the crises. The repercussions of Lebanese banking crises also have not been vastly international, though it has affected few non-local companies. The region, it seems, is moving on without Lebanon.

Comments

Post a Comment

Advice from the Editor: Please refrain from slander, defamation or any kind of libel in the comments section.

Popular Posts