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SITUATION UPDATE 5 October, 2021 Back

Situation Update - Lebanon's Economic Crisis

Konrad Pialucha

Lebanon Economic Crisis

Summary

  • Lebanon is in the midst of an economic and political crisis
  • Unworkability in the government stems from its sectarian structure
  • Materially, the crisis will continue to create scarcity of essential goods and services
  • Insecurity is presently elevated throughout Lebanon, with collapse of the army a possibility
  • The adversity works to the benefit of Hezbollah by way of filling vacuums left by the state

Situation

Lebanon is in the throws of a debilitating crisis, characterised by an economic implosion in combination with political incapacity. The country’s financial collapse began in 2019 when the Lebanese pound’s peg broke after being fixed at the same rate against the dollar for 22 years, thereby plummeting in value while inflation soared. To date, the Lebanese pound has lost 92% of its value and in July, Lebanon was the first Middle Eastern state to ever suffer an episode of hyperinflation when the monthly inflation rate reached 53%. In their Spring 2021 Lebanon Economic Monitor, the World Bank postulated that Lebanon’s economic crisis will possibly be recalled as ranking in the top three most severe episodes globally since the mid-19th century.

Accompanying policy inaction has stemmed from a 13-month impasse in government that began in the aftermath of the August 2020 Beirut ammonium nitrate explosion, which caused the administration of Hassan Diab to resign in response to public outcry. On 10 September, an increment of progress was attained when billionaire and two-time former prime minister Najib Mikati formed an administration. It followed the abandoned efforts of Saad Hariri who was unable to construct a cabinet amidst discord with President Michel Aoun. Government formation unlocked a long-awaited cash injection from the International Monetary Fund (IMF) in mid-September, though the 1.1 billion USD received by the Lebanese government represents a fraction of what the country would need to achieve firmer economic footing.

Unworkability in the Lebanese government stems from its sectarian structure, which ostensibly seeks to ensure representation of the country’s numerous socio-cultural groups in the public sector to the end of attaining inter-ethnic power sharing. While this consociational arrangement was designed to lessen the risk of conflict recurrence following Lebanon’s 15-year civil war that ended in 1990, it has come at the expense of ineffectual governance due to the multitude of often opposing interests at play, in addition to an entrenched clientelist symbiosis between sectarian political elites and their respective private sector allies.

Implications

In material terms, the crisis will continue to create scarcity of essential goods and services throughout Lebanon. Procurement of items such as fuel and medicine should therefore be understood as being relegated to black market social organising governed by an informal system of connections, bribes and reciprocal favours. Exemplificatory is the rampant petrol shortage, whereby contraction in Lebanon’s foreign currency reserves has created circumstances where the government is unable to secure enough fuel to run its power stations, resulting in households having to manage on a few hours of mains electricity a day. The shortages also extend to diesel, meaning that citizens are unable to reliably run personal generators that can act as a temporary solution to power sparsity. Low-level corruption, hour-long queues and bartering are presently ubiquitous at petrol stations throughout Lebanon, reflecting pervasive desperation induced by economic hardship.

A further consequence of Lebanon’s crisis is insecurity, with fuel shortages being similarly illustrative. Hijackings of fuel tanker trucks have become a daily occurrence, with local groups taking advantage of the near impunity afforded by erosion of state capacity via seizing trucks carrying petrol through force. Ethnic clashes over fuel have also taken place, such as an incident on 28 August when the residents of adjacent Shia Muslim and Christian villages in southern Lebanon confronted each other violently over a petrol related dispute. The aggression resulted in the wounding of six people, burnt property and blocked roads. Potential for further deterioration of the security environment derives from strain on the armed forces. As service people are paid in Lebanese pounds, military chiefs have warned of a possible collapse of the army. Prior to the crisis most of Lebanon’s army personnel earned the equivalent of 800 USD a month, which has now dropped to as little as 70 USD, creating a threat of mass flight by way of desertions or defections to militant groups that promise a better financial opportunity.

The adversity works to the benefit of Hezbollah, whose influence is expanding to fill vacuums in areas where the Lebanese state is no longer able to provide. Framed again through the shortage of fuel, Hezbollah has moved to procure petrol from Iran without seeking approval from the Lebanese government. The first delivery arrived in Lebanon on 16 September carried overland by convoy via Syria, which was portrayed by Hezbollah as a huge boost to Lebanon and in defiance of US sanctions that restrict dealings with Iran. In personal finance, Hezbollah has likewise striven to provide a more robust alternative to respond to the immediate socioeconomic needs of its constituents. The group’s al-Qard al-Hasan Association, officially a non-profit charity, provides current accounts and small interest free loans in dollars at a time when most commercial banks have suspended lending. As Hezbollah is labelled as a terrorist organisation by many Western governments and is aligned with Iran, the group’s increasing influence in Lebanon runs contrary to the objectives of US Middle Eastern foreign policy. The response of the US and its allies will likely take the form of continued sanctioning of those people or entities seen to be cooperating with Hezbollah, exhibited by how on 29 September the US and Qatari governments blacklisted several Arabian Gulf financiers accused of providing the group with material support.