In 1990, when the Lebanese civil war ended, the country’s debt, caused by mass destruction of property and services, was too great of an expense to pay back. By 2019, the debt accumulated to the point where Lebanon was facing its worst financial hardship yet. As a result, the country’s currency began losing value rapidly.
Background on the Lebanese Pound (LBP)
Lebanon’s economy suffered immensely in the aftermath of the 1975-1990 civil war. However, before the war, the country was doing exceptionally well economically, but not politically. Government corruption was widespread for decades, as illegal bribes and payments are often traded to obtain certain judicial decisions. Economically, Lebanon experienced high growth rates, an increase of foreign capital, and rising per capita income, which was in contrast to the precarious political situation.
In the 20th century, Lebanon generated most of its national earnings from tourism, transit trades, and services, but did not produce much goods. Its earnings, however, allowed for imports to be a lot greater than their exports, as it would counterbalance. Additionally, Lebanon exported gold, diamonds, firearms and scrap copper, mostly to Switzerland, United Arab Emirates, and South Korea. The country’s top imports include oil, vehicles and packaged medicines, purchased primarily from the United Arab Emirates, China, Italy, Greece, and Turkey.
In 1973, the Lebanese Gross Domestic Product (GDP) totalled USD $2.7 billion, representing a significant and positive increase in comparison to a few years prior, when the GDP was sitting at 1.24 billion USD in 1966. It further improved in 1974, rising by almost USD $1 billion more to approximately USD $3.5 billion. A rising GDP meant that employment rates rose, wages increased, and the country’s economy was stable overall. During those golden years, commerce accounted for one-third of the country’s GDP and even contributed to nearly half of the government’s income. At that time, the currency was strong and credit was trouble-free.
At the same time during the Yom Kippur War in 1973, oil prices increased by 70 percent after the Organization of Petroleum Exporting Countries (OPEC) decided to regulate the industry more rigorously. Oil production was reduced by Arab countries by 25 percent, or roughly five million barrels per day. Research conducted by the University of California, Berkeley, revealed that flight capital was being poured into Lebanon by Egypt and Syria in response to the war, meaning, they had transferred their money to Lebanese banks, in order to avoid inflation or taxes, to achieve better return investments. As a result, Lebanese banks became the major channel for the soaring Arab oil revenues.
Although the country’s GDP rose, this economic development did not benefit all Lebanese citizens, as various communities, such as the residents of the Tripoli, still faced economic and social inequities. Former Lebanese president Fuad Shihab had previously acknowledged these inequities in the 1960s and had made an effort to aid these neglected communities, but planned projects were never carried out. Regardless, the economic boom in Lebanon’s capital, Beirut, seemed to be unstoppable.
The Economic and Political Outcomes of the Civil War
While economically, the country was doing fairly well before 1975, severe political disputes had frequently occurred between many religious sects. To this very day, Lebanon lacks structure within its national political system, which has contributed to unresolved issues, disputes, and a neglected population.
The underlying conditions that prompted the war in 1975 were multifaceted and deeply rooted, but, simply put, the conflict centred around deep sectarian divisions between Sunnis and Shias, and Muslims and Christians, and involved Syria, Israel, and the Palestine Liberation Organization (PLO).
The war lasted 15 years (1975-1990), but debt had started to accumulate very early on. According to the Beirut Chamber of Commerce and Industry, Lebanon had incurred losses of around USD $7.5 billion within the first nineteen months of the war. The country faced widespread destruction of services and infrastructure: approximately 250 industries were destroyed, resulting in the loss of one-fifth of the industry’s fixed capital. By the end of the civil war, debt totalled approximately USD $10-15 billion.
Unable to pay back its debts, Lebanon began a borrowing spree from primarily the Gulf States., receiving an estimated 76 percent of its foreign aid between 2003 and 2015 from the UAE, Kuwait, and Saudi Arabia. However, their support lessened in 2016, due to the continuous political conflicts within the country. Lebanon had no rescue plan regarding foreign aid and was left in a pile of debt.
Lebanese Liquidity Crisis Of 2019
While financial hardship had been long-lasting for Lebanon, from accumulated debt, matters worsened during October 2019. For the first time in two decades, the value of the Lebanese pound began lessening on a newly emerged black market. This was due to a foreign currency shortage, causing the black market’s exchange rates to enlarge. Lebanese banks began limiting foreign currency withdrawals to $200-$300 per week following the 2019 October Revolution. Over one million protesters took to the streets in more than seventy cities, chanting “Thieves!” and singing the national anthem. The LBP was initially pegged at approximately LBP £1,500 per USD $1, however, it skyrocketed to LBP £8,000 in the black market. As it is the last resort for Lebanese citizens to get their money, the black market is able to charge such high exchange rates.
In an effort to pay their debts, Lebanese economists even speculated that banks had been giving money belonging to customers to the Central Bank and, in turn, offering deposits as loans to the state.
By 2019, Lebanon became the third most indebted country, as its debt to GDP ratio was 152 percent. They had also reached a trade deficit of around USD $15 billion, as they had imported 80 percent and only produced 20 percent of total goods.
October 2019 was quite overwhelming for Lebanon, as the nation not only began facing dollar shortages but wildfires were spreading throughout the country and union strikes were being held. Unable to handle these predicaments, as Lebanese services are vastly under-equipped and underfunded, the government began drumming up solutions.
To generate some form of revenue, the Lebanese government introduced new taxes on gas, tobacco, and voice calls made on applications such as WhatsApp. Almost immediately, the government received major backlash; outraged citizens protested the proposed taxes and ultimately the government’s plans were suspended.
By the end of 2019, the LBP had lost 90 percent of its value on the open market. The Lebanese government responded by blocking currency exchange rate websites and closing exchange shops. The black market began controlling the country’s economy, as prices for the country’s goods reflected its unregulated exchange rates.
The Lack of Government Cooperation
Rebuilding the country from the impacts of a civil war is complex, and plans get continuously derailed due to deep-rooted corruption and mismanagement. The Lebanese Parliament, consisting of Sunni, Shia, Druze, Greek Orthodox, Greek Catholic, Maronites, and other minorities, is in constant disagreement.
With each religious sect having its own political agenda, the result is institutionalized government corruption. In 2019, the Transparency International’s Corruption Perceptions Index ranked Lebanon 137th out of 180 countries (180 being the worst).
Matters have worsened immensely this year, with more than half of Lebanon’s population living in poverty. French President Emmanuel Macron has insisted that Lebanese politicians form a new government made from non-partisan specialists that can begin managing the urgent financial crisis. However, disagreements flared between Lebanese politicians when trying to decide the shape and size of their new cabinet and how they should choose ministers. An open letter published in France’s ‘Le Monde,’ wrote: “political-economic mafia is responsible for the misery, hunger and insecurity from which more and more Lebanese suffer.” Over one hundred Lebanese civil society figures signed this letter, yet the situation continues to deteriorate.
The Future of Lebanon’s Economy
The effects of the Lebanese civil war have lasted decades and seem to be never-ending. In the end, citizens will continue to pay the price for this corruption. Until the Lebanese government organizes a legitimate party and takes action to begin reversing the damage, the country will fall deeper into this financial hardship.