The Lebanese economic crisis, which began taking shape in October 2019, has been described by the World Bank as one of the top three most severe global crises since 1850. For Lebanon, this downfall has stemmed from a variety of political factors such as the government’s failure to reach an agreement with the International Monetary Fund (IMF) and their lack of willingness to promote recovery. At its core, the crisis’ link to the political makeup of ruling coalitions makes it such that any solution to it lies in cutting the knots that bind political and economic interests in Lebanon.
The CrisisAt A Glance
Lebanon has been in the throes of an unprecedented financial crisis since October 2019, when the country was shaken by widespread demonstrations protesting a tax on WhatsApp messages. In a “Sudden Stop” scenario, Lebanon’s unstable fixed exchange rate, large external and fiscal deficits, and mounting losses in the banking sector soon after led to an abrupt reduction of capital inflows. Consequently, Lebanon defaulted on its government debt in March 2020, the first sovereign default in its history. Following events like COVID-19, the global energy crisis, and the Beirut explosion, Lebanon’s economy continued to suffer as the currency devalued by over 98 percent, inflation skyrocketed to triple digits, and more than two-thirds of the population was pushed into poverty.
Since May 2020, Lebanon has been in negotiations with the International Monetary Fund (IMF) for a rescue package that would help stop the deterioration of its macroeconomic outlook. An initial Staff Level Agreement (SLA) was signed between Lebanon and the IMF in April 2022 for a four-year extended fund facility that envisioned restructuring the financial sector, undertaking fiscal reforms, and strengthening governance. However, progress in implementing the actions mandated by the 2022 agreement has been extremely slow. Several measures such as the introduction of the banking secrecy law of July 2022 have been counter to the goals and requirements of necessary reform. In such a scenario of limited progress, the IMF has warned that continued inaction and weak willingness for reform could lead to a “never-ending crisis.”
The Problem: Political Resistance
In these challenging times, pursuing an IMF agreement to address the most urgent problems facing Lebanon would seem to be a priority for any government. Instead, the Lebanese authorities have sabotaged any progress towards an IMF program. By distributing different roles to each other in such a way as to block any reforms and levying blame elsewhere when caught, they have repeatedly engaged in “the art of illusory reform,” where key measures, such as the Competition and Public Procurement Laws, are enacted but never implemented. Some politicians have even explicitly stated that the country can manage its problems on its own and does not need the IMF or any other foreign entity.
The core of these resistance dynamics lies in the fragmented nature of the Lebanese parliament where seventeen political parties hold seats but twelve of these parties have five seats or less. It has been argued that the central political parties (i.e., those in the majority) never had the intention of embarking on an IMF program.
Members in these spheres do not support the IMF deal for two main reasons. First, political elites have created cartels or exerted some other form of market power in every major sector of the Lebanese economy. The IMF reforms, however, mandate both competition and various rules on public procurement which would loosen the grip of the politicians on various economic sectors. Second, these reforms are demanding more transparency and accountability and would likely expose the corruption of the Lebanese political class. Thus, endlessly delaying them may be the optimal response for the ruling class in hopes that the “waiting game” will buy them enough time to access forthcoming resources, such as natural gas revenues.
In practice, such intentional delaying has taken the shape of multiple misguided policy interventions. From subsiding the exchange rate for imports to paying public employees’ salaries at the below-market Sayrafa rate, many of these policy decisions have proved to be “unaffordable, inequitable, and inefficient.” Unfortunately, the burden for these failures has been levied on the average household.
The overall costs of a delayed IMF package to Lebanon have increased exponentially due to this stalling. Net financial losses in the financial and public sectors have increased from $44 billion to more than $72 billion. The Lebanese lira has also depreciated by 98 percent, resulting in an increasingly dollarized economy.
Simultaneously, the burden on the population has only exacerbated. Studies have shown that 70 percent of the population cannot meet its basic needs and that multidimensional poverty rates have doubled compared to pre-crisis levels. According to a recent survey, 78% of Lebanese households report an inability to keep their household warm. Medicines for the treatment of serious illnesses have become harder to procure, with some cancer treatments entirely unavailable. In a particularly notable protest against the current situation, “cancer patients carried and smashed a wooden coffin symbolizing their death caused by the lack of medicine and inability to receive treatment.” Deaths from drowning at sea have also increased over the past three years, as people attempt to flee the country by boat.
Consequently, trust in the government has dwindled and the international community has become increasingly pessimistic about the local political class in finding a path out of Lebanon’s woes.
Other governments that have experienced financial and economic crises have typically signed IMF agreements and begun rapidly implementing their provisions. For example, Sri Lanka has recently entered into a forty-eight-month arrangement with the IMF for $3 billion in support of its economic policies and reforms. Unlike Lebanon, Sri Lanka’s aid was quickly packaged after it became increasingly evident that structural reforms were needed. Other countries, including Cyprus, Serbia, and Iceland, have also leveraged IMF packages to revive their economies.
It is then a legitimate question to ask where Lebanon is headed. The Lebanese people and the international community have been hoping for quick actions to solve the most urgent problems in Lebanon, starting by implementing the prior actions listed in the SLA agreement and moving quickly to a full program under the IMF. However, the political system of resistance within Lebanon has made this almost impossible. More than a year has passed since the signing of the SLA, and only a couple of action plans have been initiated. The government has a long way to go in terms of implementing a fiscal and debt restructuring strategy, unifying the exchange rate, and implementing sound banking legislation.
However, for Lebanon, achieving true reform is not a matter of ticking the boxes. Lebanon needs a reform-minded president, prime minister, and cabinet if it hopes to win international aid. Good governance and development will need to go hand in hand.
Dr. Leila Dagher is Assistant to the President for Public Policy and Associate Professor of Economics at the Lebanese American University. She has been serving as an economic advisor to several policymakers since January 2020.
Dr. Sumru Altug is Professor and Chair of the Department of Economics at the American University of Beirut and a Research Fellow at the Centre for Economic Policy Research, London, UK. She is currently active in academic, policy, consulting, and media circles internationally as well as locally.
The rate of female labor force participation (FLFP) fails to improve across the Middle East and North Africa despite women’s increasing educational attainment, rising age at first marriage, decreased fertility…