From Hopes of Economic Prosperity to a Major Collapse with Seismic Ramifications - How years of economic mismanagement in Lebanon affected war torn countries

Opinion piece by Jad Haddad, Contributor

April 18th, 2021

Once in a while, a seemingly random and insignificant event causes a whirlwind of change. This is not one of them. This is a story of financial mismanagement and its effect on three economies; the Lebanese, The Syrian and the Yemeni. 

In order to understand how we got to this point, it is important to look back at the last decades or so, and whilst the original story starts right after the end of the Lebanese civil war, let’s focus on the events of 2008 onwards. 

How does a debt-ridden, war torn country with a historic precedent for banking closures (intra bank, amongst others) achieve record profits during the 2008 financial crisis? Enter Lebanon’s Central Bank governor. Whilst many countries were trying to stimulate their economies by slashing interest rates Lebanon became a magnet for wealth by offering some of the most attractive rates of return. This caused a bigger influx of dollars than previously seen, and Lebanon was on track to become something much more than it had been just a few years ago: on road to recovery after political turmoil, a series of assassinations, and the 2006 war. But whilst the world economies were recovering, it was not.

In order to maintain its attractiveness, Lebanon resorted to increasing the yield on its bonds, all the while accruing more and more debt despite the fact that its economy was slowly declining. Instead of trying to develop a sustainable economy with a long-term plan, Lebanon instead focused on short term solutions, investing heavily in the banking and tourism sector, “an economic model relying on an outsized financial system to fuel growth has left the Lebanon’s working class with the bill.” as Steve Hanke put it.

But when those who benefit the most from this system are the ones in power, change is unlikely to come, and so instead of trying to improve its agricultural sector or expand the industrial sector to produced more than just cement and tissues, Lebanon doubled down on its financial system and tourism industry. While the Lebanese youth was migrating and the rest of the people were starving, Lebanon was throwing parties that would put in on every to-do list and opening bars and restaurants that ranked amongst the highest in the region and the world. Beirut constantly ranked amongst the most expensive cities in the world due to the skyrocketing real estate prices, meanwhile 50% of the Lebanese adult population did not have accounts with financial institutions or mobile money service providers, further raising the alarm that something wasn’t quite right.

Lebanon was trying to become a playground for the rich and wealthy; rules, laws and businesses were set up to appease those who had the means to spend ludicrous amounts of money on apartments, weddings and yachts. While foreign banks such as HSBC were terminating their services here in Lebanon, local banks were acquiring and managing their biggest clients’ wealth. How can such a small country with a declining GDP witness the birth of many new banks in such a small amount of time?

Foreign money further fuelled the Lebanese financial system, it was not only feeding off of local money but it was also taking in money from those who were desperate and afraid, fearing for their lives and avoiding sanctions, many Syrians have resorted to putting their money in local Lebanese banks, and the US dollar accounts made it cheaper for Yemeni banks, tradesmen and businessmen to operate without having to pay further conversion rates and so these countries became victims of the economic meltdown.

As the events of October 2019 started to unfold, strict measures were put in place in order to avoid any massive devaluations or bank runs. This meant that not only were the Lebanese people unable to transfer or withdraw their money, but that all depositors now had their money stuck in a banking sector that is bleeding them dry.

Thus it is no surprise that Syrian authorities partly blame Lebanon for their economic mishaps since it is estimated that a few dozen billion dollars are stuck in Lebanese banks, whilst Yemen has about 20% of its foreign currency reserves stuck here as well, countries that have fallen on hard times due to political and social disasters occurring within them. But they are not the only ones blaming Lebanon for their financial situation, Kurdish politicians claim that $1 billion in oil sales were trapped in Lebanese banks as well.  

The road to recovery is a long and arduous path, it will take time and proper planning to start economic progress. However, time has run out and no actions have been taken yet…