Lebanon: The looming economic collapse

The bad news keeps on spreading: Lebanon is on the brink of collapse, a World Bank report sounds the alarm, the U.N. just suspended Lebanon’s vote, electricity shortage will be getting worse and worse… It’s quite impossible to be optimistic. Quite.

Lebanon fuel shortage
“Only a reform minded government, which embarks upon a credible path toward economic and financial recovery, while working closely with all stakeholders, can reverse further sinking of Lebanon and prevent more national fragmentation”, said Saroj Kumar Jha, Regional Director at World Bank Mashreq. © Roula Messarra

Basic medical facilities and emergency services won’t be able to face the crisis. It will be game over soon. “Doctors and nurses faced grave dangers as they battled in the frontlines against Covid. Now, they find themselves battling other diseases almost empty handed. That is not acceptable. This week will be crucial. Without a solution to these shortages, many services may stop,” said Firass Abiad, Head of the Rafk Hariri University Hospital. Lebanon faces a crucial week ahead if the shortage in medical supplies is not resolved, he added. And he has no reason to be optimistic.

Lebanon is staring at a total economic abyss. Even before the Coronavirus-induced Covid-19 pandemic, the country’s economic condition was anemic at best. The pandemic added fuel to Lebanon’s raging economic fire, at a time when the country is already neck deep in financial crisis which is posing one of the biggest threat to its stability since the 1975-1990 civil war.

Lebanon’s economic crisis comes at a time when rising global oil prices have translated to fuel shortages in its cash-strapped economy. Ever since it’s economic crisis deepened in 2019, politicians have flirted with the idea of cutting back on fuel subsidies and replacing them with direct cash transfers to the poorest, as part of a wider reform package. The proposal however continues to stagnate even as the Lebanese government defaulted on a $30 billion international debt in 2020. The much-needed reforms would have unlocked billions of dollars in foreign aid.

Fuel Shortage coming

While the central bank had allocated $250 million each month for gasoline, diesel and liquefied petroleum, the figures got stretched with rising oil process, said Maroun Chammas, vice president of Medco, one of Lebanon’s biggest importers of refined petroleum products.

“You have the same amount of money but less volume so there will naturally be a shortage,” said Chammas. “When the central bank reaches that limit, it won’t pre-authorize additional tankers.”

In southern Lebanon, petrol stations shuttered down in protest against violent attacks on owners and staff over fuel shortages. Long lines at fuel pumps is a common theme across the country, with petrol station owners in Tyre saying they have been made “scapegoats of the national fuel crisis”.

Last week, the owners’ association opined they have no option but to “close for two days due to pressure and to avoid repeated attacks, the latest of which happened on Saturday”.

Such strikes underscore growing public frustration over the state’s inability to manage basic shortages of essential commodities in the country contributing to a breakdown in the security in many parts of Lebanon.

Last week in Tyre, there have been reports of three violent incidents at fuel pumps; similar incidents are becoming more frequent across the country. Two weeks ago, an Egyptian petrol station worker was shot dead in north Lebanon over a fight as to whose turn it was to fill petrol in their tank.

The fuel shortage has not only made a deep impact on the transportation industry, it is also having significant repercussions on the energy industry: the availability of electricity has taken a dip for the worse.

Case in point: fearing a worsening of fuel shortages, many households are hording petrol and low-grade diesel that are typically used in generators to compensate for growing power cuts.

“Everyone is hoarding [fuel]” said Toufic, a taxi company owner, over fears that authorities would not longer be able to provide basic necessities. “People either keep a few gallons at home or fill entire reservoirs in their buildings”.

Although Lebanese have learnt to live with electricity cuts for decades, the current scenario has taken it to newer height. According to Siham, a 70-year-old Lebanese, her building has installed two new tanks to store diesel for generators in anticipation of an even more acute fuel shortage.

“With all the shortages we are forced to buy the extra oil,” said Siham. “We don’t want to wind up without any electricity.”

This systemic economic collapse is having significant impact on every industry in the country, including on future Lebanese – the children of Lebanon.

Impact on education

Lebanese children may never return to school; while the coronavirus pandemic has led to increased remote learning, the lack of basic essential necessities is fueling an “education[al] catastrophe” the likes of which the country has never experienced before.

While the education crisis takes a massive toll on Lebanese youth, children of refugees, straddled on the lower economic spectrum, face an enormous burden to access basic learning tools.

Case in point, children of Syrian refugees living in a camp in east Lebanon, fear that education is totaling out of their reach. Among other families living in the refugee camp are Mohammad and his three sisters who fear that schooling will be out of reach for a third consecutive year because they do not have the means to access remote learning.

“Look at my phone. How do you expect my son to study on it?” asked Mohammad’s father Abdel Nasser. “The screen is cracked… and I have no internet.”

They are among tens of thousands of Lebanese, Syrian, and Palestinian children who have had no schooling for months because of COVID-19 related lockdowns.

“We can’t afford to buy a cellphone for everyone. We must first be able to feed our children,” said their mother Shamaa.

“I was happy before,” said 14-year-old Amal, sobbing. “I was studying Arabic, English, science and geography. But now my parents can’t afford to give me an online education.”

There are more than 1.2 million children in Lebanon who are not receiving any schooling since last year because of the coronavirus-induced COVID-19 pandemic, says Save the Children, a UK-based charity.

With poverty rates touching the stratosphere, especially among Syrians, 90% of Syrian families are barely managing to scrap out a living.

“Some Syrian children have had to give up their studies to work and help their families,” said Lisa Abou Khaled of the United Nations refugee agency (UNHCR).

Citing data from Lebanon’s Ministry of Education ministry, she said, while 25,000 Syrian students should have re-enrolled or entered grade one in 2020-2021, this has yet to happen. “We think the real number is higher than that,” she went on to add, while estimating that more than 50% of Syrian children of school-going age were currently out of classrooms.

Last month, the Education Ministry warned that given the large number of children who are out of schools, the majority of them may never get back into a classroom, either because they have missed their schooling years, or because their families cannot afford to enroll them. “Education for thousands of children in Lebanon is hanging by a thread,” warned the UNHCR.

Cause of the crisis

A report from the World Bank on the economic crisis states, Lebanon’s economic collapse is likely to be ranked among the world’s worst financial crises since the mid-19th century and predicted Lebanon’s economy to shrink by a whopping 10% in 2021.

There is “no clear turning point in the horizon” unless Lebanon’s lawmakers get their act together and pass much needed economic reforms.

Already the Lebanese pound has depreciated by 85% of its value as a result of which poverty has taken a hold in a country which was once seen as a beacon of prosperity in the region.

“The economic and financial crisis is likely to rank in the top 10, possibly top 3, most severe crisis episodes globally since the mid-nineteenth century,” said the World Bank report titled “Lebanon Sinking: To the Top 3”.

The near-complete meltdown of Lebanon’s economy can be squarely placed on widespread corruption and gross mismanagement by the country’s hereditary political elite.

“Policy responses by Lebanon’s leadership to these challenges have been highly inadequate,” states the report.

The country’s ruling class not only failed to act during Lebanon’s worst emergency crisis, their complete and utter mismanagement was apparent after the devastating blast at Beirut’s port in August 2020, and their gross mishandling in their response to the coronavirus pandemic which compounded Lebanon’s economic woes.

“The increasingly dire socio-economic conditions risk systemic national failings with regional and potentially global effects,” reads the World Bank report.

Even as the International Monetary Fund (IMF) offered assistance, Lebanon’s political barons failed at the most basic task of forming a government that could deliver much needed reforms, which in turn, can unlock much needed foreign aid.

“Subject to extraordinarily high uncertainty, real GDP is projected to contract by a further 9.5 percent in 2021,” states the World Bank in the report, dashing hopes of a quick economic recovery.

Deliberate mishandling of the economy

In a report, the World Bank Lebanon Economic Monitor (LEM) states, despite Lebanon facing significant economic challenges, the absence of a continuation in policy along with the absence of a fully functioning executive authority has fueled and given rise to dire socio-economic conditions with a fragile social peace on the brink of extinction, with no clear turning point in the horizon.

Policy responses by Lebanon’s leadership to the deliberate depression in 2020 have given rise to major challenges, the response to which have yet again been highly inadequate. The inadequacy in response stems not so much due to knowledge gaps and the quality of advice but has more to do with:

  • a lack of political will and consensus over creating and ensuring effective policy initiatives;
  • creating a political consensus to mitigate the country’s bankrupt economic system, which benefits only the ruling class. With Lebanon’s history of prolonged violence in the form of multiple conflicts and civil war, there is growing wariness of potential triggers to social unrest. The increasingly dire socio-economic conditions risks systemic national failings with potentially significant regional as well as global fallout.

“Lebanon faces a dangerous depletion of resources, including human capital, and high skilled labor is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country,” said Saroj Kumar Jha, Regional Director at World Bank Mashreq. “Only a reform minded government, which embarks upon a credible path toward economic and financial recovery, while working closely with all stakeholders, can reverse further sinking of Lebanon and prevent more national fragmentation”.

Impact on financial sector

The financial sector in Lebanon continues to deteriorate given the lack of consensus among key stakeholders on the sharing of losses, which has once again proved elusive. The burden of the ongoing adjustment/deleveraging in the financial sector is highly regressive, and is concentrated on smaller depositors, the bulk of the labor force and smaller businesses.

With more than 50% of the country’s population living below the poverty line, the bulk of the country’s labor force, paid in Lira, suffers from plummeting purchasing power. With rising unemployment rate and with Lebanese having to shoulder an increase in the share of households towards meeting basic services, including healthcare, the triggers for social unrest are rising rapidly.

Lebanon’s foreign exchange subsidy for systemic, critical and essential imports, presents heightened political and social challenges. The current foreign exchange subsidy expensive, distortionary, and regressive and replacing with a more efficient and effective pro-poor targeted approach would go to improve the country’s balance of payment and meaningfully extend the time-till-exhaustion of its remaining reserves, while helping to cushion the impact on Lebanon’s poor. This will provide only suboptimal solutions and is meant as a stop gap measure. Once this base has been established, lawmakers will have to carve out a credible and comprehensive macroeconomic stabilization strategy which can retain the country’s foreign exchange reserves and exit its disorderly and highly disruptive exchange rate adjustment.

This strategy will have to mitigate crises revolving around Lebanon’s four essential basic public services – water supply, electricity, education and sanitation.

Deliberate inaction has given rise to an increase in poverty rates, threatening the financial viability of operating the said sectors by raising costs and lowering their respective revenues. Since the delivery of essential public services is critical to the wellbeing of Lebanese, a sharp drop in deterioration of these basic essential services will have long-term socio-economic impact, including mass migration, weakening of the education sector, worsening health outcomes, lack of adequate safety nets, among others. Lebanon will find it very hard to recover from a permanent damage to human capital.  These aspects make the crisis facing Lebanon very unique compared to other global crises.

A “train to hell”

Henri Chaoul, a former advisor to Lebanon’s Finance Ministry has summed up the current deliberate mismanagement of the country as being put on a “train to hell” which is “about to reach the last station”.

Chaoul, who was earlier an adviser in the government during its negotiations with the International Monetary Fund, resigned in June 2020 after lawmakers failed to make necessary reforms needed to qualify for IMF assistance.

“This is not the government that will be good for the future of Lebanon,” said Chaoul. “It is clear that the old business model, the old model of governance in Lebanon has completely failed on many levels”; we need to be able to rebuild.”

Lebanon’s current caretaker Prime Minister Hasan Diab is aiming to implement a cash card program to help maintain social peace so that citizens can make ends meet.

According to a source from the government close to the cabinet, “the position of the Prime Minister is that it is essential the card program be instituted before any subsidies are removed.”

The “mechanism of instituting a card program is complex to design and implement, and the funding of the card program has to come from the Banque Du Liban,” said the source.

Clearly, without a proper functioning government, Lebanon will not be able to move forward and make the necessary reforms to unlock IMF led economic aid it so desperately needs.

The effectiveness of Lebanon’s lawmakers is clearly visible, with the country seeing its third prime minister designate take office within a span of just 1 year.

“We need to see a silver lining in this crisis and build a new social contract so that the young of Lebanon decide to stay in Lebanon and build their future,” said Chaoul.

A glimpse of hope

Midst this monstrous economic gloom that has enveloped the country, an “Agricultural Village” in eastern Lebanon, is a lone star alleviating the suffering of hundreds and providing some job opportunities to the economically starved population.

The “Agricultural Village” is essentially a one of its kind project in the country which was launched on a small plot of land that is being used as a plantation which caters to organically grown seedlings which are distributed among farmers at cost effective prices.

The project is giving employment to hundreds of workers, including engineers, technicians, and farmers who arrive at the project site every morning to work in various fields, according to their specialization.

The project has expanded its operations to include additional services such as opening a restaurant which markets the produce that has been grown, an agricultural training facility, a cafe, and an agricultural academy.

The idea for the project germinated with the help of a large group of activists who work with the Lebanese Association for Studies and Training.

According to Rami Lakkis, “the absence of official agricultural and industrial strategies prompted civil society organizations to explore solutions that would reduce the burden on farmers by helping them reduce the cost of production, market their produce and raise their income”.

The Agricultural Village, which initially was 10,000 square meters has expanded to 37,000 square meters, with parts of the area being used for plastic tents, training and research centers, and experiment and production fields.

The project has been a great success in providing seedlings, training and guidance to farmers, as well as in coordinating joint agricultural activities by providing processing tools for agricultural products such as tomato paste, various kinds of wines and jams, said Lakkis.

“We have also succeeded in securing financial support for more than 250 families, valued at 250,000 euros … we have provided job opportunities for 100 permanent employees, 400 part-time agricultural workers and 15 agricultural engineers,” said Lakkis.

Incidentally, agriculture plays a vital role in Lebanon’s economy and contributes nearly 7% of the country’s GDP.

Healing binding Peace

Another sign of hope comes Pope Francis, who has said, he is ready to meet Lebanon’s Christian leaders to find ways for the country to mitigate its ever-worst crisis.

During his weekly blessing, Pope Francis told tourists and pilgrims in St. Peter’s Square that the meeting in the Vatican on July 1 would be a “day of reflection on the worrying situation in the country”, in reference to Lebanon.

Pope Francis has urged the international community to help Lebanon get back on its feet. Global leaders have also been asked to contribute to the alleviation of Lebanon’s financial crisis so as to protect the country’s social fabric and prevent the loss of its “identity and specificity.”

Towards this end, bishops and patriarchs of Lebanon have requested the support of the Christian population in Lebanon through ecclesial institutions, which, “are and will always remain at the service of all citizens without distinction or discrimination, and will keep on working tirelessly for the common good.”

Lebanon’s identity, is forged on “the encounter between all its communities, based on the values of liberty, human dignity, pluralism, as well as of peace, respect and love of neighbor,” which makes Lebanon a natural place for “dialogue between the diversity of religious and cultural communities.”

“Those fundamental values of citizenship and liberty are the backbone to build a Lebanon that wants to continue being, for our time and our world, a message of freedom and a witness to harmonious coexistence,” they said.

It is the Church’s task through its many institutions including social, healthcare, educational ones to accompany “all generations, of diverse affiliations,” in building a culture of peace and dialogue, “thus upholding the principle of solidarity and reinforcing the cohesion of the social fabric, which are at the heart of the Lebanese identity.” Will it be enough to save Lebanon from the “train to hell”? It’s hard to be optimistic about it.