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The Cry for Reform in Lebanon

The Cry for Reform in Lebanon
 Rym Momtaz
POLITICO Correspondent in France

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. 

Lebanon has been living well beyond its means for years.

The financial management of the government remains shambolic as it has failed to provide reliable, accurate accounting to the International Monetary Fund during weeks-long negotiations in view of a bailout. The Central Bank too has failed to provide reliable numbers and hasn’t fared better in terms of accuracy and transparency.

The dramatic deterioration of the situation in Lebanon is hard to overstate, the middle class is collapsing and disappearing, anyone who has the means or the education level is finding a way to emigrate as soon as possible, many with no plans of coming back. Here are a few figures to help better comprehend the situation: 

  • A kilogram of ground meat costs €50, based on the former pegged exchange rate. 
  • The amount of money that used to buy a month's worth of groceries now buys a week’s worth. 
  • Half the population is living in poverty. 
  • The currency has lost 80% of its value in 8 months. 

What are the demands and expectations of the Lebanese population?

Let’s start by clarifying one important issue: there are no unanimous demands, there is no monolithic Lebanese polity. Lebanon continues to have a plurality of views that are becoming increasingly irreconcilable. 

Generally speaking, those who protested starting October and a growing number of those suffering from the collapsing economy want real government reforms. That means:

  • A reform of the electricity sector, to provide reliable 24h power, which hasn’t been the case for two decades and still costs over $1.5 billion annually to the treasury. Today, most of the country relies on private generators for their electricity
  • Creating a productive economy, reforming the banking system which has captured people’s wealth and deposit, and reforming the country’s finances, away from the "Ponzi scheme" model. 
  • Limiting corruption, kickbacks and illegal trafficking
  • Breaking the political monopoly of the same corrupt politicians and parties that have been ruling the country since the 1990s, by passing a reformed electoral law and holding new parliamentary elections.
  • Protecting Lebanon’s freedom of speech and assembly
  • Upholding the state’s sovereignty and enforcing its authority over the entire territory, by disarming the Iran-funded Lebanese militia Hezbollah. 

Remaining supporters of parties in power, including the party of Lebanese President Michel Aoun, its allies Hezbollah, and the Amal party, do not share all of these demands. 

Will Lebanon be looking to receive help from international actors? From whom, and what is at stake? 

Reliance on grants and loans from the international community has been at the core of Lebanon’s financial model for the past few decades. 

Foreign powers like France, the U.S., Saudi Arabia, Qatar have repeatedly bailed Lebanon out because it was deemed too geopolitically important to fail, too crucial for a fragile balance in the Middle East to be allowed to fail. Lebanon’s political leaders are asking once more for a bailout, thinking they can get $10 billion in aid through the IMF. 

But things have changed, especially in light of the coronavirus. Half the world’s countries are requesting an IMF bailout, so competition is stiff, and Lebanon has run out of most of the goodwill that it has previously benefited from. Even France, which has traditionally been the most eager international partner to stand by Lebanon, has changed its approach. It has refused to unblock funds promised in 2018 unless reforms are implemented. 

French Foreign Minister Jean-Yves Le Drian held that line in his recent visit to Lebanon on July 23 and 24. He confronted Lebanese leaders with the continued absence of concrete reforms, beyond promises and projects, and reiterated the request he made publicly in the French Senate for Lebanon to "help us help you." 

Lebanon has run out of most of the goodwill that it has previously benefited from.

Lebanese leaders don’t seem to have understood the message, and are not showing any intention of doing what is necessary to secure a financial bailout. 

On July 28, Lebanese Prime Minister Hassan Diab gave no sign that the government would finally start implementing reforms, some of which have been promised since 2002. Instead, he said that Le Drian’s visit "confirmed the international decision till now is not to help Lebanon," continuing the tradition of Lebanese officials of blaming foreign powers for all the ills of the country, without taking responsibility for the systemic corruption they have put in place and benefit from, or enforcing the state’s authority and sovereignty over the entire country. 

Some parties in power, such as Hezbollah, have floated the idea that China could replace Lebanon's traditional foreign supporters in providing a bailout. But that proposition doesn't hold water.

Meanwhile, Lebanon has lost its traditional partners by taking them for granted, by unnecessarily alienating them (such as Saudi Arabia, with Hezbollah actively engaged in the conflict in Yemen) or by overstating its own importance, just as the Middle East and considerably more important and more populous countries are imploding. 


Copyright: Mahmoud ZAYYAT / AFP

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