What happened to the Lebanese economy?

A gas station with no available gas. (Sabri Ben Achour)

Drive down any major street in Beirut these days and you will come across a line of barely moving cars, taking up an entire lane, and winding their way for a block or even a mile. These are gas pipes.

“I’ve been here since 6 a.m. to put this place in line, now it’s 11 a.m.,” said a sweaty and gray-haired Salim Al Arab from his station wagon, the windows rolled down in the Beirut summer heat. You don’t need air conditioning when gas is so hard to come by.

Al Arab stands at the head of a line that extends far out of sight. It includes bus drivers and electricians, taxi drivers and delivery workers who take all the hours of their day to get the gasoline they need for their lives.

Of course, gas is not half that. Inflation here reached almost 160% in March.

“The prices are amazing,” said Ahmad Zaki from the roadside next to another gas station. Zaki runs a mobile café out of the trunk of his motorcycle. “A kilo of coffee costs me what I earn a day. I can hardly make ends meet. “

I asked a baker about Kanafeh, a syrup-glazed dish made from fried cheese.

“We don’t do that anymore. The ingredients are too expensive, ”the baker told me.

Then there is the electricity. Those who depend on the grid get about an hour or two a day.

The Lebanese power grid has been notoriously dysfunctional for many years and has been unable to provide 24-hour electricity for decades, but this is a new low. Those with money to spare have generators – generators that use fuel.

Vartan Chakrian runs a small shop in Bourj Hammoud, the Armenian quarter of Beirut. He moves and speaks slowly, as if to save energy. A small parakeet keeps him company while behind him is a 2.70 meter high pile of Kleenex. Why So Much Kleenex? He saves perishable goods because the power fails or the refrigerator is frying.

Business is not going so well. Kleenex sells and doesn’t go bad, he said.

Of course, this economic crisis is only the basis for all the other weights that the Lebanese can endure – the pandemic is simmering in the background.

“I spent all my money on my brother last year,” Chakrian told me, his eyes suddenly shining. “He had COVID. It wasn’t enough. He died.”

According to the World Bank, the current crisis in Lebanon is possibly one of the three worst crises the world has seen in 150 years.

“Sudden stop” of capital flows

It’s both easy and anything but.

Simply in that it was triggered by a simple phenomenon in the economy: a “sudden stop” in capital. The inflows into the land of foreign currencies – dollars, euros – slowed and almost came to a standstill in 2019 and 2020.

Without enough dollars to look for Lebanese pounds, the currency’s market value collapsed. It lost 90% of its value in two years. Everything that had to be imported suddenly became expensive and difficult to obtain.

In Lebanon, a small country with an undernourished manufacturing sector, a lot is imported: gas, medicines, food.

Cancer patients protested a few weeks ago that their drugs were either not available or astronomically expensive. Jehan Saleh from Michigan is visiting his family in Lebanon. She strolls down the once bustling commercial street in Beirut known to everyone as Hamra.

Half of the shops are closed and you would never guess that it used to be a crowded shopping street. She arrived with a suitcase full of supplies.

A suitcase full of medicines

“Well, I’ve brought just as basic medication that you can’t find here – over-the-counter pain relievers, ointments, allergy medication, stomach medication, things you can’t find here. And if they find it, they can’t afford it, ”she said.

The government subsidizes essentials like gas and medicines, but this led to both being smuggled abroad where they could be sold at a higher profit margin. When the government announced it would cut subsidies, cases of inventory were reported as sellers wanted to wait until they could later sell their wares. Both phenomena exacerbated the scarcity.

St. George Hospital is near the port, where a massive explosion on Aug. 4, 2020 caused $ 15 billion in property damage and left 300,000 homeless. The lobby is newly renovated, but some of the windows are still broken.

Hospital loses nearly 100 nurses

“We used to have the best salaries,” said Wafaa Maalouf, head of nursing. “We used to be attracted to a lot of nurses from different backgrounds. Unfortunately, with the worsening financial situation in Lebanon, we are losing many nurses. ”

Transportation to hospitals has become expensive, rents have skyrocketed, and salaries have fallen.

“So I have around 96 resignations,” she said. “My employees used to be around 600. Today there are around 500.” Patients are discharged only to find that they are not getting the follow-on medication they need. Morale among the remaining nurses is low.

The sudden freeze of foreign capital inflows into Lebanon and the collapse of its currency are the tip of the economic iceberg.

The Caesar Law

Hezbollah leader Hassan Nasrallah has attributed the situation to a US-led siege. The U.S. Caesar Syria Civilian Protection Act, which threatens sanctions against those who help or work with the regime in Syria, has made the already difficult task of providing fuel and electricity to Lebanon difficult and discouraged some expatriates from making money to send to Lebanon. But there are many more factors underlying Lebanon’s economic collapse, and they go back decades.

“Fifteen years ago we imported goods worth around $ 20 billion a year. We only exported around 3 billion dollars, ”explains Kamal Hamdan, managing director of the consulting and research institute in Beirut.

The currency outflow was offset by tourists coming from the Gulf, Syria and Iran to spend money. In addition, there were international loans, international aid and remittances from millions of Lebanese living abroad, Hamdan explained from a dark and uncooled office room, while a generator for a nearby hotel was buzzing in the background.

“The turning point was 2011,” said Hamdan. “The Arab Spring and the explosion of antagonism between Saudi Arabia and Iran had an impact on the political and economic relations between Lebanon and Saudi Arabia and consequently on all Gulf states.” .

Domestic and foreign debt

Meanwhile, the Lebanese government ran up debts both domestically and abroad. The debt to gross domestic product ratio, which declined until 2012, was reversed and reached 150% by 2018.

Nassib Ghobril, chief economist at Byblos Bank Group, calls it unprecedented.

“Public spending [went] from $ 6.8 billion in 2005 to $ 18 billion in 2018. We saw 31,000 people hired in the public sector for political reasons, ”said Ghobril. “We have seen a decision to indiscriminately increase the wages of civil servants and employees and retirees without considering the impact on public finances and confidence.”

When the foreign currencies entering the country could no longer offset the outflows, the Lebanese central bank tried to lure foreign currencies into the country by raising interest rates higher and higher, reaching almost 10%.

It began to borrow from commercial banks that borrowed from their own depositors and customers. That bought a couple of years, said Hamdan. But at some point the currents began to slow down again. With fewer dollars coming in, the central bank had less ammunition to peg the Lebanese pound to the dollar. The exchange rates on the black market showed that the real value of the pound was falling.

2019 events “generated panic”

Then in 2019 a series of shocks brought down the house of cards. In the financial world, Fitch Ratings downgraded Lebanon’s debt in August, a small Lebanese bank was blacklisted by the U.S. Treasury Department, and an Israeli drone attack in a southern suburb of Beirut jointly rang alarm bells in investors’ ears.

“These three events combined caused panic and led to the tipping point of the sudden halt in capital inflows,” said Ghobril.

In November 2019, Lebanese banks closed amid nationwide protests calling for the government to resign, further undermining confidence in the banking system. Desperate Lebanese tried to buy up real estate or art during this period in order to maintain their savings.

In March 2020, the government finally hemmed its foreign debt.

“That led to an almost complete halt to the capital inflows that were still coming into Lebanon,” said Ghobril.

Banks restricted account access

The aftermath hit the banking system when banks restricted people’s access to their accounts and forced the Lebanese to exchange their US dollar accounts at the old dollar rate. This effectively meant that every depositor with dollars in Lebanon was effectively losing 80% of the value of their accounts.

“They stole our money,” said Laila Said angrily. She lives in the suburbs and took a rare trip downtown to run errands. “How have you been making money in years and someone is taking your money now?”

But like most other countries, Lebanon is a land of contradictions. There are areas of the economy that are doing better – wealthy and with dollars that tourists and expatriates bring in.

In the mountains outside Beirut, wedding music can still be heard through the valleys. In a restaurant by the waterfall in the Lebanese region of Shouf, a couple dine on a floating platform in a pool fed by a stream. Entry is $ 20.

The US and France have provided hundreds of millions of dollars in humanitarian aid. But a recovery would require billions in loans, say economists.

The IMF has offered such loans on the condition of reforms, but the government was unwilling or unable to agree to them. Until recently, Lebanon did not have a fully functioning executive – the last resigned in August 2020 after the massive explosion in the port of Beirut, but remained in the role of janitor. A new government was announced earlier this month and promises to deal with the crisis.

For some it is too little, too late.

Hisham Kekhia works for his family’s bottle maker. He fell ill in June last year.

“I couldn’t find the most basic medicine for three weeks,” he told me. “That was the last straw. It has become uninhabitable. So I’ll go. “He’s going to Turkey, he thinks.

He will leave behind a land that – for many – will become unrecognizable.

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