Lebanon has been experiencing unprecedented rising tensions and is currently facing the worst moment in its post-war history. Indeed, once known as the Switzerland of the Middle East, the beleaguered country faces “the potential multifaceted collapse—of its financial system, its economy, and its security situation—with no effort by political leaders to prevent this.” What we are witnessing is the progressive collapse of a dysfunctional political, economic, and financial system whose faulty structural aspects have exacerbated pre-existing social tensions. On top of this, the devastation caused by the Beirut port explosion in August 2020, the subsequent deficient handling of the investigations, and the impact of Covid-19 has worsened Lebanese dire situation. Against this background, Lebanon is now confronted with a complex and multifaceted crisis that unfolds at a social, political, economic, and financial level.
Economic & Financial Crisis
The economic and financial crisis can be brought back to three main causes, which became evident in mid-2019. First, public sector debt had reached such elevated levels that a default had become a question of when, not if. Second, the banking sector, having lent three-quarters of deposits to the Government, had become functionally bankrupt and increasingly illiquid. Third, the productive economy had experienced virtually no growth for an entire decade — a development with acute socio-political implications. Hence, in October 2019, the economy plunged into a financial crisis brought about by a sudden stop in capital inflows, which precipitated systemic failures across the banking sector and debt sector, as well as affecting the exchange rate. A foreign exchange black market emerged, and the national currency, the lira, sharply depreciated. In turn, inflation soared, and people’s real wages and purchasing power collapsed. Subsequently, on March 7, 2020, the Government defaulted on the redemption of a US$1.2 billion Eurobond, marking Lebanon’s first-ever sovereign default. Moreover, beyond the human tragedy, the economic impact of the Beirut explosion has had implications at the national level, that added to long-term structural vulnerabilities that include low-grade infrastructure—a dysfunctional electricity sector, water supply shortages, inadequate solid waste and wastewater management—public financial mismanagement, large macroeconomic imbalances, and deteriorating social indicators. The confluence of these large negative shocks led to the implosion of the economy: GDP is estimated to have contracted by 25% in 2020, with an additional 10-15% decline forecast for 2021. An extreme form of wealth destruction occurs, with the Lebanese de facto losing most of their bank savings. Meanwhile, four out of every ten Lebanese are out of work, and half the population is under the poverty line. Coronavirus-related restrictions have added to systemic economic problems, pushing unemployment and further reducing incomes and economic activity.
Against the rampant economic crisis background, there is a blind political structure, insensitive and in denial of the country’s grievances and whose neglect prolongs Lebanon’s agony. There are three likely explanations for such inactivity. First, an intractable political environment that makes collective decision-making difficult. Second, Lebanese political parties are “agents and not principals,” effectively acting as messengers of regional and international players who are currently not incentivized to solve the Lebanese crisis. Third, paralysis reflects an active decision by the political class to do nothing: high inflation, exchange rate depreciation, and deposit “lirafication” shift the burden onto the population at large and away from the oligarchy’s interests. The deficiencies of the political system are to be found in the confessional power-sharing mechanisms embedded in Lebanese political praxis since the country’s independence in 1943. Indeed, although never written, this custom is at the core of the political system and implies that the highest offices are proportionately reserved for representatives from certain religious communities, namely Christian Maronites, Muslim Shia and Muslim Sunnis. Therefore, it is neither the political agenda nor the reform programs of such candidates which matters but first and foremost their confessional affiliation and then, within their community, their partisanship and clientelist influence. Such a system brings about systemic corruption and a severe lack of accountability of the political elite, both of which have been two of the numerous grievances that pushed people to the streets in October 2019. Lebanon is thus stuck in a political stalemate as prime minister Saad Hariri and his Cabinet were forced to resign under the demonstrators’ social pressures in mid -October 2019. Since then, two prime ministers have come and gone without being able to tackle the problems. After more than a year, reforms had gone nowhere, stability was elusive, and Lebanon turned to a familiar face, Saad Hariri, who had been driven out of power as a representative of a corrupt elite and was tasked with forming a new cabinet. Six months later, he has not yet forged one. At the end of March, Hariri stormed out of his 18th meeting with President Michel Aoun, firmly rejecting his claim of dictating cabinet seats and having veto power over his decisions. On the one hand, Hariri has called for a technocrat cabinet to enact reforms long demanded by the IMF and donor countries such as the United States and France and is backed by the Shiite Amal party. On the other hand, Aoun insists on a Cabinet based on a sectarian distribution of candidates and supports the third-plus-one veto system that will be beneficial to his party Free Patriotic Movement (FPM). Hezbollah, for its part, underpins Aoun’s presidency and commands significant influence. With a new administration in Washington reassessing policy towards Iran, the regional balance of power is shifting and Hezbollah, as Iran’s main client, appears reluctant to back a new government that might be seen as offering a concession to Saudi- and Western-backed rivals such as Hariri. While it agrees on the need for a government and the need for reforms in the country whose stability depends on its very existence, Hezbollah is not ready to pressure Aoun and risk its alliance with his large Christian party. Hariri and Aoun have a limited time period to agree and proceed to government formation, but it might get delayed further to the end of the year if both stick to their very different demands for the Cabinet: this will mean a further increase in serious problems creating an alarming outlook for the country.
The severe economic and political crises eventually erupted into widespread social unrest. On 17 October 2019, the Lebanese Cabinet announced new tax measures to address an economic crisis. In response, tens of thousands of peaceful protesters took to the streets across the country calling for their social and economic rights, accountability, an end to corruption, and the resignation of all political representatives. Such protest movement was remarkable because it was cross-communities, cross-generations, cross-social layers’ movement, underlining the diversification of the protestors’ profiles as Lebanon’s economic and geographical margins have been included. Underlying frustration with the Government and the political elite had been accumulating for years. Public anger has escalated in recent years over electricity and water shortages, as well as the Government’s failure to manage the country’s waste and economic crises. The largely peaceful protests since October 2019 have been met with violence by the Lebanese military and security forces with beatings, teargas, rubber bullets, and at times live ammunition and pellets. The protests ceased as the country went into lockdown over the pandemic of COVID-19, but difficult living conditions exacerbated by the COVID-19 response reignited the protests in late April 2020. Another round of protests erupted in the past months against the strict lockdown imposed by the Government, which was worsening the severe economic crisis, left many without income, and increased the number of people living below the poverty line. The domestic situation is thus deteriorating as the political stalemate is prolonged. If a detente is not achieved, soon protests may flare out to block cities, major transits between cities, and even access to critical infrastructures like government offices and Beirut International Airport.
In conclusion, Lebanon’s multifaceted crisis is far from being over, and the outlook appears bleak. There are prospects of medium to long-term political impasse for two main reasons: at the macro-level, Hezbollah is willing to prolong the stalemate until the Iran-USA nuclear deal negotiations unblock, at the micro-level, the level of defiance, untrust, and antipathy between Aoun and Hariri has reached a deep level, and none of them is willing to make concessions to the other to unclog the situation. Additionally, the absence of a fully formed government hinders international aid, and in the lack of an IMF bailout and other financial aid, Lebanese banks can’t operate fully. Against this backdrop, protests will indeed resume and gain further momentum as Covid-19 restrictions are eased. Social violence could also head towards political violence as communities resort to self-defense and the “us vs. them” discourse accelerates at the communal level. Lebanon is thus facing an existential moment in which it needs to act quickly to avoid the risk of collapse by developing an agenda of structural change and reform that could be a viable long-term solution. On the one hand, it is clear that the economic and financial operating model of the country is over: there is the need to rethink the Lebanese productive economy and reform it by adopting a new paradigm to enhance productive capacity and shifting from “a rentier state economy” towards a real economic system. On the other hand, it is imperative to rethink the current power-sharing strategy at the political level, away from sectarianism and towards a true representative parliamentary democracy.
The Editor: Raffaella Colletti
Raffaella Colletti is an MA student in Middle Eastern studies at SOAS. She holds an MA in Intelligence and International Security from King’s College London and a BA in Political Science. She gained professional experience in research, risk assessment, and political analysis in international environments including Europol and the International Institute for Counter-Terrorism. Her main research interests lie at the nexus of security/conflict issues and human rights with a specific focus on the Middle East area.