With a severe devaluation of its currency and a mind-boggling loss of purchasing power, the crisis in Lebanon is reaching catastrophic dimensions. Reforms are needed, but the corrupt political class is refusing to budge. What has truly caused this situation and what are the prospects for Lebanon? Rym Momtaz, France Correspondent for POLITICO, breaks the situation down through three questions.
Amid protest against corruption and a severe devaluation of its currency, the crisis in Lebanon is reaching dramatic dimensions. What are the main causes and effects of the current situation?
The current crisis Lebanon is experiencing is a perfect storm of political, financial and regional dynamics. Simply put: authorities lost investor and depositor confidence, which was a central pillar of monetary policy, the foreign currency market could no longer sustain the Lebanese and Syrian demands it had been servicing, systemic corruption, illegal smuggling of fuel and wheat to Syria, and a failure by the government to implement reforms, and regain control of the situation has sent Lebanon on a self-feeding downward spiral.
This week, Moody’s rating agency downgraded Lebanon to C, the lowest rating on its scale. Lebanon has been living well beyond its means for years, importing up to 80% of its food, and sustaining the world’s third highest public-debt-to-gross-domestic-product ratio.
The government’s monetary policy, based on an artificial peg of the Lebanese pound to the dollar and abnormally high interest rates on bank deposits to attract foreign currency deposits, which some have referred to as a central-bank run "Ponzi scheme", imploded over the past year. It came after decades of various governments increasing public debt to pay its bills, and failing, or refusing to implement reforms that could have bolstered a productive economy, reined in corruption and given the country access to much-needed international assistance.
Depositor and investor confidence started waning last summer. Remittances from its large diaspora working in the Arab Gulf, Africa, Europe, North America and Australia, as well as large dollar deposits by foreign backers like Saudi Arabia and Kuwait, dried up. Dollars became harder and harder to get a hold of, banks started limiting dollar withdrawals. These limits, in addition to continuing demands from Syria for dollars (Lebanon is a central supplier of dollars to Syria given international sanctions), exacerbated a nascent foreign currency black market and led to a collapse of the value of the Lebanese pound for the first time since 1997.