Background of the Problem

The first warning signs of trouble were visible on the horizon when the banks decided to reduce the amount permitted per withdrawal, and the country experienced anti-government protests. Delving slightly deeper into the root cause of the trouble and studying the previous economic trends, we can trace back the problem to the government’s decision to make up for Lebanon’s lack of dollars due to the complete absence of export production, by accepting investments and deposits from wealthy investors. To attract greater investments, the government offered higher rates, whose yields could only be met with newer deposits. The following policy was dubbed as a  ‘State-Sponsored Ponzi- Scheme’. Seeing the unsustainable nature of the same, many investors started pulling out. This essentially plunged the nation into not only a severe shortage of dollars but also severely affected millions of citizens. The World Bank predicted the poverty increase from 30% to 50%, and at the same time, the Human Rights Watch advised the government to act swiftly, or else millions of Lebanese and the excess of one million Syrian and Palestinian refugees would face severe hunger at the time of the lockdown initiated to avoid the spread of the deadly virus.

How has the Economy Survived for so long?

While analyzing the reason for Lebanon’s economy surviving for so long, one happens to notice an economic tendency of depending mainly on foreign remittances. Lebanon’s economic policy can be seen as an amalgamation of migration and geopolitics. These sums of remittances coming into the country from Lebanon’s large immigrant population, provided the backbone for the country’s banks to lend to the government. As mentioned earlier, due to the unsustainable nature of these policies and an array of other reasons, the current inflows of funds have dried up drastically. These reductions have mainly been due to the declining oil prices and the Syrian War that has made Lebanon less attractive for investment purposes.

Internal Factors

We cannot turn Nelson’s eye towards internal factors when it comes to analyzing the current economic crisis. The country has some of the worst economic fundamentals in place. It is one of the most indebted nations, so much so that the total debt amounts to 155% of the Gross Domestic Product. Since the country lacks a strong export sector, it invariably imports more goods and services, as a result of which the budget deficit is set to reach 10% of the Gross Domestic Product. The banks rely on wealthy Lebanese to deposit their money in Beirut. However, the enormous interest rates earned by these depositors flow into very few pockets. It is estimated that around 1% of all accounts are said to hold roughly half of the total deposits. At the center of Lebanon’s unproductive economy are the banking and real estate sectors, which have led to a great amount of income inequality. Top 10% of Lebanese income earners captured 57% of the total incomes earlier in 2014, while the bottom 50% accounted for a mere 11% of the income.

Protests over the Economic Crises

The country and in particular the capital city of Beirut, experienced major protests regarding the surging cost of living, as a result of the worst economic crisis the country has faced since 1975-1990. The recent clashes that began with young men blocking trucks carrying produce to Syria, saw more than a hundred people getting injured as a result of the police’s decision to fire tear gas on the protesters. This action forced the crowd to retaliate by throwing stones and using firecrackers at the law enforcers. In Martyrs’ Square in Beirut, demonstrators dressed in black, with their faces whitened, carried a coffin draped with the Lebanese flag in a symbolic funeral of their country. The government has condemned the protests and the ensuing violence, terming the efforts as a ‘coup’. Protests spread to other corners of the country as well, with protestors coming together in cities such as Saida and Kfar Roummane, in the South.

Conclusion

In the absence of clear leadership for the protests and the large number of demands they encapsulate, it has become all the more difficult to respond to them. There seems to be no sign of a breakthrough in the ongoing difficulties the country is facing. Recent suggestions included the formation of a technocratic cabinet. The idea, however, did not gain momentum, as the suggestion failed to gain support both of the political elite and the common citizens. Financial support from countries such as the United Arab Emirates, Saudi Arabia, and Qatar may be extremely instrumental in pulling Lebanon out of the crisis. With no alternative political leadership or real opposition to the ruling party, protests are said to continue at the current pace and the country may be in for a prolonged period of unrest. 

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Political Conditions

Lebanon is a country that divides its political power along with religious and sectarian rights. Power-sharing is a whole different thing in Lebanon, with the stated intention to give every group an equal say in the political affairs of the country, the system has tried to maintain a fragile peace. This unique decayed and mismanaged sectarian political system is one of the most important reasons for the protests. This system was formed under the Taif agreement in 1989 and is perceived as exploited by the current Lebanese politicians.                                                                                                                                                  

Due to this faulty system, the government has failed to provide even the basic rights to the citizens. Since 1975, there has been no stable 24- hour electricity in the country. The people have no access to drinking water except through purchasing bottled water through private companies. The country even suffers from deficient sanitation and sewage infrastructure, which led to the 2015-16 protests as against the “garbage crisis”. Thus the political conditions in the country were in a dire state with the lack of basic rights and no plan of action for solving the problems

Economic Conditions

From 1997, the Lebanon government has tried to maintain a pegged exchange rate between the USA dollars and Lebanese pounds.  Yet its economic fundamentals are among the worst in the world. It is one of the most indebted nations; its government debt is estimated at 155 per cent of gross domestic product. The country imports vastly more goods and services than it exports and the government budget deficit was around 10 per cent of the GDP in 2019. The excessive borrowings of the government had inflated the politically well-connected banking sector that lends to the state at high-interest rates.                                                 

Also since the country depends on imports, currency devaluation raised prices for imported goods and eroded the living standards. Lebanon’s unproductive economy which revolves around banking and real estate even created great income inequality. The burden on financial institutions was light, while indirect taxes paid by everyone, such as value-added tax (VAT), were continuously increasing. While the wealthy and politically connected earn state-induced banking profits, the state was drained of the resources to tackle social and environmental crises. Thus the economy was in a stagnant state, unemployment had reached 46% in 2018, and endemic corruption was prevailing in the public sector. All these factors further escalated the protests of 2019-20. 

Protests Against the Government 

Due to the prevailing political and economic crisis in the country, protests against the government authorities began in October 2019. The initial reason for these protests was to fight against the new tax policies introduced by the government and though the tax reform plan was quickly scrapped yet the protests continued. They expanded it for a much significant cause and long-standing grievances such as increasing level of corruption, dire level of the economy, high unemployment rate, and lack of basic rights. As violence continued, the prime minister tried to defend him and blamed the rival groups and his government for blocking reforms. Prime minister blamed his coalition government for obstructing reforms to unlock 11 billion dollar aid pledged by international donors. To tackle the ongoing situation, the cabinet of ministers introduced a lot of economic and political reforms and even formed an anti-corruption panel. Yet still, the people weren’t satisfied and they demanded the resignation of the government.                                                          

Finally on 21 January 2020, the prime minister announced the formation of a new cabinet of 20 ministers, bringing an end to several months of riots that have left the country in a deepening economic crisis. On 27 January, the Lebanon Parliament passed a 2020 budget, amid the debilitating financial crisis. The budget was highly criticized by the citizens and though the government claimed that the newly formed ministers were experts and academics, protesters still accused the political groups of participating in forming the new cabinet.                                                                                      

With these ongoing crises in the country, came the coronavirus pandemic which worsened the situation. Due to lack of resources and health care workers, the county’s health care system turned out to be a failure. The lockdown situation led to further weakening of the economy. The people continued these protests but with more precautions and fewer in numbers. But on 4^th august 2020, the capital of the country Beirut was hit by a massive explosion.

Beirut Explosion and Government Resignation

On the afternoon of 4th august 2020, two explosions occurred in Beirut, causing at least 220 deaths and 6000 injuries. About 2,750 tons of ammonium nitrate, which had been confiscated by the Lebanese government from the abandoned ship MV Rhosus and then stored in the port without proper safety measures for six years has led to the massive explosion.  As a result of this disaster, the Lebanese government declared a two-week state of emergency.                           

On 6^th August 2020, as an aftermath of this event, protests erupted in various parts of the counties against the government for their failure to impede the explosions. As violence increased and more and more people started protesting against the government, Prime Minister Hassan Diab and his cabinet resigned on 10^th august 2020. In his last speech as the prime minister, he blamed the country’s ruling class for hindering the reform plans and worsening the economic crises. Then he proceeded to the presidential palace where President Michel Aoun approved the resignation of his cabinet. Despite the fact that Diab’s government has resigned, protests in Lebanese are still going on against the economic crisis that the country is currently facing.

Conclusion

The protest which initially began as a rebel against the tax reform policies of the government later became a fight against a high level of corruption, lack of basic rights and economic crisis ultimately led to the resignation of the government. People might consider this as a victory for the Lebanese people but in reality, the economic and healthcare situation in the country is still in a very detrimental state. People lack even the basic necessities like water, sanitation, and electricity. The coronavirus pandemic has made the situation in the country even worse and has led to the death of thousands of people. Adding further to this, the country was hit by the Beirut explosion which wrecked the entire state. The country is in a very poor condition with a lack of healthcare workers and increasing economic crisis. Various countries are trying to help the country deal with such a crisis but yet recovery in the near future seems quite impossible for the Lebanese people.

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Existing Turmoil in Lebanon

“It’s an economic crisis, a financial crisis, a political crisis, a health crisis, and now this horrible explosion,” said Tamara Alrifai, the spokesperson for UN Relief and Works Agency for Palestine Refugees in the Near East.

The Beirut explosion is another nail in the coffin of Lebanon which is currently in the depths of several ongoing crises since 2019.

Lebanon experienced the biggest blow to its stability in October 2019 when the Lebanese pound severely depreciated by 75% of its official value on the black market and is now trading at nearly 9,000 to the dollar in comparison to the official peg of 1,507.5 to the dollar.

The currency devaluation poses a serious problem in an import-dependent country like Lebanon because imports have become extremely costly and people have to sell their personal belongings to be able to afford even the necessities like milk and bread. It has also led to the shutting down of several businesses. Lebanon’s public debt-to-gross domestic product has been the third highest in the world. About one-third of the country’s population is below the poverty line and the economy experiences an unemployment rate of  25% (source).

There had been massive protests all across the country since October on account of the people not receiving basic amenities promised by the government. There have been a series of blackouts, some lasting more than 22 hours, due to shortage of oil and diesel. The political elite of the country had been pushing the country towards its doom while benefitting from the country’s reserves by their corrupt practices. The Lebanese economy has been hit by hyperinflation on account of economic mismanagement by the government. The financing of huge fiscal deficits of the government by the Central Bank due to the inability of taxes and other techniques to generate sufficient revenue to meet the government expenditure has contributed a great deal to the ongoing hyperinflation.

This, along with Lebanon defaulting on its foreign debt, for the first time, in March goes a long way to show the incompetence of the government and its policies. The International Monetary Fund, on being asked for a financial rescue package and restoration of confidence by Prime Minister Hassan Diab, has refused any help unless the government provides a proper plan to revive the economy and shows initiative to combat existing corruption.

IMF Managing Director Kristalina Georgieva has said that there is no near scope for a breakthrough in negotiations and there is uncertainty regarding the capability of the government to implement reforms and bring the economy back to its growth path the country despite having a strong entrepreneurial culture in the past and taking the initiative to host Palestinian and Syrian refugees, thus, easing a humanitarian crisis.
The COVID-19 breakout and synchronized worldwide lockdowns have further contributed to the sharp economic decline of Lebanon and have “exposed the inadequacies of Lebanon’s social-welfare system”

Impact of the Explosion

The double-blast of 4th August will have grave consequences on the already falling economy of Lebanon. Beirut, the largest port in Lebanon was completely destroyed and will remain dysfunctional unless urgent repairs are made which could take up to several weeks or months. Domestic production in Lebanon accounts for only 10% of the country’s consumption. For a nation which is highly dependent on imports for most of its vital consumer goods, the destruction of the Beirut port, which was an entry point for imports to “feed a nation of more than 6 million people”, will lead to an epic downfall of the Lebanese economy and cause adversities in the supply chain. The nearest port of Lebanon, Tripoli, will not prove to be of much use, being one-third of Beirut’s size. Thus, even if the imports were shifted to arrive at Tripoli, they will not be able to accommodate the additional cargo volumes and there will be congestion. 

Beirut’s main grand silo at the port which was the largest grain storage facility in all of Lebanon was completely destroyed by the blast, leaving the country with barely less than a month’s grain reserves. Although the economy minister of Lebanon has said that the inventory of bread and flour is sufficient to avoid a crisis, one can never fully give up on the possibility of a supply chain shock, especially in an economy like Lebanon’s. Hani Bohsali, head of the importers’ syndicate, said, “We fear there will be a huge supply chain problem unless there is an international consensus to save us.” The silo stored around 85% of the country’s cereal, thus, experts are predicting an upcoming food shortage despite the assurance by the government.

Beirut’s main grand silo at the port which was the largest grain storage facility in all of Lebanon was completely destroyed by the blast, leaving the country with barely less than a month’s grain reserves. Although the economy minister of Lebanon has said that the inventory of bread and flour is sufficient to avoid a crisis, one can never fully give up on the possibility of a supply chain shock, especially in an economy like Lebanon’s. Hani Bohsali, head of the importers’ syndicate, said, “We fear there will be a huge supply chain problem unless there is an international consensus to save us.” The silo stored around 85% of the country’s cereal, thus, experts are predicting an upcoming food shortage despite the assurance by the government.

The blast has left nearly 300,000 people homeless. It has led to massive infrastructural damage which would take ages to fix. More importantly, even if the time required to rebuild the city is not taken into consideration for the moment, the repairs would cost the government several billions of dollars, gathering which is an impossible task considering the worldwide reputation and negative credit-worthiness of the nation owing to the prevailing corruption.

Owing to the explosion, several primary healthcare centres and hospitals have been so damaged that they cannot admit patients anymore. However, the number of people requiring immediate physical aid has increased, both, due to the blast and due to a hike in COVID-19 cases owing to the chaos amidst the emergency. The World Health Organization has reported that the explosion led to the destruction of 17 containers filled with hundreds of thousands of medical supplies and protective instruments to combat the deadly virus leading to an urgent need for supplies in that region. There is also the social cost of the explosion which has released harmful fumes in the environment, polluting it and bringing about the danger of genetic breathing disorders for years to come.

The explosion further shows the inadequacy of the government as it did not deal with such a large shipment of explosives, despite repeated warnings, and chose to ignore the matter since 2013. This incident will reignite the civil protests, which had been at bay due to the coronavirus spread, thus causing additional turmoil in the country.

The impact of the explosion can lead to further depreciation of the Lebanese pound, thus, rendering imports costlier than before and putting the economy in a recessionary spiral that could take ages to recover from unless a massive boost is given to the economy via international consensus and support.

Conclusion

The ongoing consequences of the economic crisis will hinder the economy’s ability to bounce back from the 2020 blast.^[14] Despite immediate recovery measures being taken by several international agencies and governments to deal with the emergency at hand and to help provide relief to and boost the well-being of the people in need, the future of Lebanon does not seem to be very promising. Unless the Lebanese politicians realise the severity of the situation, acknowledge their mistakes and present a united front to help the people, the future of Lebanon looks bleak. The resilience of the public will not be enough to come out of this disaster unless backed by government policies. The explosion has led to the complete loss of faith of the people in their administrative bodies and long-term situations will not improve unless fundamental reforms are brought about in the policies of the nation and implemented for the betterment of the people. 

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