2021-10-14 12:32:14 Lebanon’s Crisis, an Explainer – The New York Times
Lebanon’s Crisis, an Explainer – The New York Times
Weekly grocery bills can amount to several months’ worth of a typical family’s income. People are unable to withdraw funds from banks. Basic medicines are frequently in short supply, and gas-station lines can last for hours. Every day, many homes are without power.
Lebanon is experiencing a humanitarian disaster as a result of the financial meltdown. According to the World Bank, this is one of the worst financial crises in centuries. “It really feels like the country is melting down,” said Ben Hubbard, a Times reporter who has spent the last decade in Lebanon. “People have seen an entire way of life vanish.”
It’s a startling reversal for a country that was once one of the Middle East’s economic success stories in the 1990s. Given the magnitude of the suffering and the limited media attention it has received while the rest of the world is focused on Covid-19, we are devoting today’s newsletter, with Ben’s assistance, to explaining what has happened in Lebanon.
What caused this to happen?
As is typical of a financial crisis, the situation grew slowly — and then collapsed quickly.
Following the end of Lebanon’s 15-year civil war in the 1990s, the country decided to peg its currency to the US dollar rather than allowing global financial markets to determine its value. Lebanon’s central bank promised that 1,507 Lebanese lira would be worth exactly one dollar, and that Lebanese banks would always exchange one for the other.
That policy brought stability, but it also required Lebanon’s banks to keep a large stock of US dollars on hand, as explained by Nazih Osseiran of The Wall Street Journal — so the banks could keep their promise to exchange 1,507 lira for $1 at any time. Lebanese businesses also required dollars to pay for imported goods, which account for a sizable portion of the economy in a country that produces very little of what it consumes.
Lebanon had no trouble attracting dollars for many years. That changed after 2011. Syria’s civil war, as well as other Middle Eastern political tensions, have harmed Lebanon’s economy. Foreign investors were also put off by the growing power of Hezbollah in Lebanon, which the US considers a terrorist organization.
To keep dollars flowing in, Lebanon’s central bank chief devised a plan in which banks would offer very generous terms — including annual interest rates of 15% or even 20% — to anyone who deposited dollars. However, the only way for banks to honor these terms was to repay the initial depositors with money from new depositors.
Of course, this practice has a name: a Ponzi scheme. “Everything fell apart once people realized that,” Ben explained. “In 2019, people stopped being able to withdraw money from banks.”
The official exchange rate remains unchanged. However, in everyday transactions, the lira’s value has dropped by more than 90% since 2019. This year, the annual rate of inflation has surpassed 100%. The economy’s output has plummeted.
Even before the crisis, Lebanon was a deeply unequal country with a wealthy political elite that had long enriched itself through corruption.
Three new issues
Since 2019, three events have exacerbated the situation.
First, the government attempted to raise funds by imposing a tax on all WhatsApp calls, which many Lebanese families use due to the high cost of phone calls. The tax enraged people, who saw it as yet another example of government-imposed inequality, and sparked large, sometimes violent protests. “People on the outside looked at the country and said, ‘Why would I invest in a place like that?'” Ben explained.
Second, the pandemic harmed Lebanon’s already weakened economy. Tourism, which accounted for 18% of Lebanon’s pre-emergency economy, was particularly hard hit.
Third, in August 2020, a massive explosion at the port in Beirut, Lebanon’s capital, killed over 200 people and destroyed several thriving neighborhoods. “Many people couldn’t afford to fix their houses,” Ben explained. (This Times project takes you inside the port to show how corruption contributed to the explosion.)
What happens next?
For the first time since the explosion, Lebanon formed a new government last month. Najib Mikati, a billionaire, is the prime minister, having previously held the position twice since 2005.
The French government and other outsiders have pressed Lebanon’s government to implement reforms, but there is little evidence that it will. The Biden administration has chosen not to become deeply involved because it is focused on other parts of the world.
Many Lebanese families rely on money sent from family members living in other countries to survive. “The only thing keeping a lot of people afloat is that most Lebanese families have relatives somewhere in the world,” Ben explained.