25.02.2020 | Lebanon’s turmoil

Beirut’s banks are in the eye of a storm. In and around the city centre, the epicentre of a months-long protest over economic mismanagement, some branches have been daubed with graffiti, others have had their windows and ATMs smashed. They are so short of hard currency that informal capital controls have been imposed, infuriating customers desperate for dollars.

The banks, widely seen as predominantly serving the interests of the political and business elite, have been targeted periodically by anti-government protesters. Some are encamped in Martyrs’ Square. And when we walked by, all was calm. But on several occasions since the unrest broke out in mid-October, mass demonstrations, the biggest in a decade, have at times brought central Beirut to a standstill. Put down by the security forces, the protests have shaken the country, worsening the economic climate and heaping pressure on the authorities.

The demonstrators claimed a major political scalp in late October when then prime minister Saad Hariri resigned. But his replacement Hassan Diab, a former minister, has inspired little confidence despite pledging to meet some of the opposition movement’s wide-ranging demands. That is because what the diverse groups of protesters share is an overarching desire to overhaul the sectarian political system that most see as lying at the heart of the economic malaise. The country is one of the world’s most indebted relative to the size of its economy.

Not far from Martyrs’ Square are gleaming office blocks and glitzy shopping centres. But on closer inspection all is not what it seems. Many of the apartment buildings and malls are empty or certainly under-occupied. Beirutis have been priced out while rich Gulf Arabs have yet to turn up in any number. Investment in high-end developments appears to have taken priority over basic infrastructure, with congested roads, electricity shortages and limited internet connectivity a source of exasperation for locals and foreign visitors alike.

Administrative mismanagement has its roots in the way the country is run. After Lebanon’s brutal civil war, the various parties to the conflict carved up power, with executive and parliamentary roles divided up between them. It spawned a system of governance dominated by sectarian loyalties, cronyism and patronage. Corruption mushroomed, the political class seen by its critics as enriching itself and having little regard for ordinary Lebanese. The protest movement sprang to life after an ill-judged tax on WhatsApp calls was mooted.

The dysfunction has been compounded by the increasing influence of the Iranian-backed, Shia militia-cum-political party Hezbollah. It has alienated Lebanon from the rich Gulf states, which have previously propped it up, and further raised tensions with Israel. Hezbollah, which together with its Christian and Shia allies dominates parliament, is believed to have hand-picked Diab and his cabinet, whose formation was delayed by weeks of political wrangling over portfolios. The Shia party’s critical role casts doubt over the premier’s assurance that he had put together a government of technocrats able to address the country’s economic crisis. 

And those problems are mounting by the day. Since the beginning of October tens of thousands of jobs have been lost and one in ten companies have closed, according to Infopro Research in Beirut. After borrowing heavily for years, the country’s finances are in such a parlous state that the government might be forced to restructure or default on its international debt and possibly go cap in hand to the IMF. Against this background, there are fears of capital flight. And some of those withdrawing Lebanese pounds from the banks are reportedly buying high value goods, such as jewellery and expensive cars, to preserve the value of their savings in the event of a devaluation. But not everyone can afford such luxuries.

The seeds of this financial debacle were sown following the global financial crisis. With interest rates in western debt-ridden economies plunging, Lebanon’s central bank hiked its up, attracting overseas investors, many of them Lebanese expats. The revenues generated helped to subsidise the economy, in particular buttressing an exchange rate pegged to the dollar. But interest payments contributed to putting the country deeper in hock - most government debt is owed to domestic creditors. That was compounded by slowing growth amid a regional economic downturn and the government’s prioritisation of public spending over investment in infrastructure and the development of productive sectors.

As foreign investors turned their backs on Lebanon, the central bank sought even more dollars from domestic banks who charged high interest, and it now owes them tens of billions. The banks are largely owned by the politicians and, as shareholders, they benefit from them taking on more government debt – a fundamental conflict of interest.  Some have likened this arrangement to a Ponzi scheme, with the central bank borrowing from domestic lenders to pay their interest.  

The state desperately needs an influx of funds whether from western donors or traditional backers, the Saudis and Emiratis, whose relations with Lebanon have recently improved. Late last year, the Gulf nations reportedly signalled their willingness to provide finance, but this now seems doubtful with the new government so heavily influenced by Hezbollah. That leaves western donors, and in return for assistance they will likely demand reforms – on which Lebanon has a poor record of delivery.

The demonstrators see the current quasi-democratic sectarian system as the main obstacle to reform and economic progress. But an overhaul will not happen anytime soon because of vested interests and concerns that, as flawed and corrupt as the system is, overhauling it could not only plunge the country deeper into financial crisis but bring about Lebanon’s nightmare: sectarian strife and the prospect of a Syria-like conflagration.