American Univesity of Beirut

Does Lebanon Need a Miracle

Does Lebanon need a miracle?

​​​​​​Dr. Simon Neaime talks about Lebanon’s economy: the macro, micro, and what happens next​​​

October 25, 2020​

Give us the big picture of what happened with the Lebanese economy in the last six months.
Last spring, I was concerned about factors brewing a perfect storm—banking crisis, currency crisis, sovereign debt default crisis, social, and political crises. Add to that the pandemic and the August 4 explosion, and the perfect storm has arrived. We are in the eye of it.

The political class needed to move fast so the financial system does not collapse. The faster they moved, the less severe the recovery would be with access to IMF funding. French President Macron offered to help break the freefall but the political class has not responded positively so far to the French initiative. I had optimism about the new government in place, but there were zero steps taken toward introducing badly needed reform.

What do you see as the attitude of the government toward the financial crisis?
The government defaulted on its debt, and the two negotiating government teams made the IMF talks into a joke. They had two scenarios on whom to blame and different numbers quantifying the size of the total loss. Clearly the political leadership doesn't want to do anything except see how to further profit by bankrupting the whole country. They have not yet introduced any single reform nor conducted a forensic audit. Why? We can only assume because they are implicated in the corruption itself. Because they are part of the problem, they can't find a solution. 

Instead, they have been printing money for the last six months with zero reforms. The Central Bank is printing money to secure liquidity, causing the domestic money supply to more than triple in just six months, bringing about hyper-inflation and the further devaluation of the Lebanese pound. The inflation rate is now increasing 50 percent per month, and the pound is trading at LBP8,000/US$ in the parallel market.

Since money printing is not sustainable, the Central Bank and local banks have started restricting the withdrawal of Lebanese pounds. The political class went after whatever dollars the public had in their bank accounts, and now they're after our Lebanese pounds bank accounts as well.

While the government blames local banks and the Central Bank, the banks—having benefited from high interest rates—blame the government for the collapse of the financial system. The bottom line is we now have an $80 billion loss in the banking system which was lending our bank deposits to a corrupt government for the past 30 years, and a $50 billion loss at the Central Bank attributed to the Central Bank's ill-guided monetary policies (fixed exchange rates and high interest rates policies) and the Ponzi scheme adopted since 2016. A total of $130 billion, representing the deposits of the Lebanese people. As a result, Lebanese people's deposits/savings have been blocked in dollars and now maybe in Lebanese pounds.

What is the effect in the micro, for the person who wants to buy groceries?
The economic contraction's forecast for 2020 is at -25 percent. Unemployment is above 40 percent. Now 50 percent of the population lives below the poverty line. What can you buy in terms of groceries when you have lost 80 percent of your salary? The country hasn't completely collapsed yet only because the government is still subsidizing strategic commodities at the official rate of LBP1500/US$. However, in two months the Central Bank will run out of reserves to subsidize medications, wheat, and oil imports.

Our Christmas gift will be the removal of subsidies, and the price of medication, basic goods, services, and fuel will increase five-fold on top of us having already lost 80 percent of our purchasing power.

What are possible scenarios moving forward?​
​The first scenario is that politicians continue to do nothing. Then we are looking at the collapse of the entire economic and financial system and becoming a failed state like Somalia or Venezuela. It means the disappearance of Lebanon as an entity. Then we are open for foreign intervention, military intervention, social unrest, or even a civil war. Lebanon has been taken hostage by its political class. It's as if we're in an elevator, and every month or so, someone cuts one of the ropes.

An alternative is to find a spark of sanity in the health of the political class, form an independent government with one mission: to introduce reforms and stop the bleeding. We are going to need an IMF program and the sooner we reach an IMF agreement, the less costly will be the economic recovery. Once that's in place we can unlock the CEDRE money and put the economy back on track, reestablish confidence, and move forward at last.



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