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How Lebanon collapsed into a state of paralysis

Governor of Banque du Liban Riad Salameh stands amid the gold reserve at the central bank in Beirut. (Reuters)
Governor of Banque du Liban Riad Salameh stands amid the gold reserve at the central bank in Beirut. (Reuters)
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25 Nov 2022 03:11:09 GMT9
25 Nov 2022 03:11:09 GMT9

Once upon a time, perhaps near the end of the last century, a well-meaning bureaucrat was sold on the idea of a world where everyone — and he or she did mean everyone — would own their own home, no matter their background. This set in motion a process where bad or subprime loans were facilitated and it ended as the global financial crisis of 2007-09, the most serious meltdown since the 1929 Great Depression. There were many participants in the chain of events that led to that collapse, but no one remembers who made the original decision.

In “The Big Short,” a 2015 movie about the crisis, we saw all the protagonists unaware of the implication of their actions. Realtors, bankers, lenders, borrowers, hedge fund managers, quantitative analysis whiz kids and fintech brokers were all acting in character and at the same time contributing to the collapse. If this was a crime that robbed widows of their pensions and savings, then they are all guilty, yet they are all at the same time innocent — they were doing no more than what they would normally do. If Oprah Winfrey brought them on to her show, they would be pointing fingers and accusing each other. Our well-meaning and faceless bureaucrat would hardly be mentioned as a suspect. It was the perfect crime.

Something similar happened in Lebanon. The country has been catapulted into the abyss and everyone is accusing everyone else. People accuse bankers, who accuse the central bank, who accuse politicians, who accuse each other, and so on. Everyone is guilty, including the depositors, who are accused of being greedy for depositing their money in high-interest accounts; yet they are also somehow innocent because they acted in character, doing what they do.

Total collapse is a complex phenomenon that can be explained through several disciplines. Engineers have a concept whereby an accumulation of shocks — the systematic and constant pounding of the edifice, with none of the shocks large enough to collapse the structure alone — can have a fatal cumulative effect. They call it fatigue failure. A classic example is the 1876 Ashtabula River railroad disaster in Ohio. None of the many trains that passed over the bridge were too heavy, but at some point, due to train after train, the bridge’s cast-iron elements cracked and collapsed due to fatigue. Trains and planes have crashed, tanks filled with molasses exploded and oil platforms keeled over, all due to ruptures caused by constant pounding and fatigue.

Lebanon’s collapse can also be explained by the constant battering the country has experienced over a long period. The chronology is astounding. I have described it before and one wonders how many countries could have survived such a systematic succession of crises. Cracks began starting to show in Europe when it received the equivalent of 2 percent to 3 percent of its population as refugees. Lebanon received as much as a third in a shorter period due to the Syrian war.

Since 2004, the country has been through a series of assassinations that created a paralytic state of terror. Then there was the destructive war with Israel in the summer of 2006, the 18-month political crisis, Hezbollah’s attack on Beirut in 2008, and then an imposed agreement in Doha that continues to paralyze decision-making and government formation to this day.

A coup in January 2011 brought down the government. This happened when a politician was forced to withdraw his party’s support due to threats of violence against his person, his family and his community. Then the impact of the war in Syria came after that, followed by a major political crisis with the country’s main economic partners in the Gulf. The result of this isolation and boycott by the Gulf states was a run on the banking system that began in November 2017, not in October 2019 as is commonly believed. This was when the country’s partners decided that Lebanon was completely dominated by Hezbollah and gave up on it.

The economy was being strangled year in, year out as a result of these successive crises, with widening budgetary and balance-of-payment deficits, until the coup de grace came when, under political pressure, a salary scale and benefits review turned out to be several times more expensive than the Ministry of Finance had estimated. This more than doubled the annual budget deficit in one year. An MP opposed to it predicted that the consequences on the country would be several times more severe than the war with Israel in 2006 — and they were.

There could have been measures taken to prevent the country’s total collapse, but not while there was a constant paralysis of government and state institutions. Long-term stagnation and inactivity in any organism can bring about what doctors describe as atrophy — deterioration and decline leading to degeneration and an incapacity to function. This is, for me, what best describes the effect of the political paralysis on Lebanon.

The cracks started to show in 2011 and a wise monetary policy could have prevented the total collapse. Yet there was more than three years of total paralysis, with no functioning parliament, government or president. All this while constant tension was maintained by several declarations of war with Israel every year, resulting in failed tourist seasons and canceled investment projects. It is difficult, under these circumstances, to imagine a central bank governor making decisions such as getting the currency off the peg with the US dollar or announcing the cessation of subsidies for electricity and essential items like bread and fuel, and then resigning as some suggest.

Developments after the initial crash were far worse. The default on debt servicing in the spring of 2020 and declaration of bankruptcy precipitated the downward spiral of the Lebanese currency, while the draining of what remained of the reserves and with it people’s access to their deposits was continuing via the smuggling of fuel and other subsidized commodities through porous borders. Debts were also paid back in Lebanese lira at a fraction of their value.

One wonders how many countries could have survived such a systematic succession of crises

Nadim Shehadi

We have now entered another period of paralysis of the three principal institutions: A caretaker government incapable of taking major decisions, a parliament that meets with one item on the agenda, and the presidency in total vacuum with no candidate in sight.

Prof. Saleh Machnouk estimates that, between 2005 and 2021, Lebanon was in a state of paralysis and stagnation for 2,925 days, i.e., more than half the time. This is how Hezbollah gained control of the country, thanks to the hollowing out of institutions, the constant battering of the edifice and the paralysis of decision-making, with everyone, including the protestors of the 2019 revolt, accusing everyone else, including the experts, of being responsible.

  • Nadim Shehadi is a Lebanese economist. Twitter: @Confusezeus
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