Can a collapse in Lebanon be avoided?

Lebanon’s economy has been in dire straits for decades and is now, yet again, a war zone. Could better times be on the horizon?

The unending modern tragedy of Lebanon has taken another bitter turn, with the return of war to the country. Since mid-September, Israel has ramped up its military action aimed at eliminating the threat from Hezbollah, the Iran-backed Shia militant group that dominates Lebanese society and controls parts of the country. Since then, many hundreds of people have been killed in attacks aimed at Hezbollah targets, including in densely populated areas where civilian casualties are inevitable. Earlier in the month, Israeli forces assassinated Hassan Nasrallah, Hezbollah’s powerful leader since 1992, in a series of strikes on the group’s headquarters in Beirut. Israel has also launched a ground invasion of southern Lebanon, with the stated aim being to cripple Hezbollah’s forces and infrastructure in border areas.

As the crisis deepens, the government is nowhere to be found. That’s just the latest example of the ways in which Lebanon, which has had a caretaker government and no president for the past two years, is already a failing state. The state barely provides any electricity, for example, leaving everyone dependent on generators, if they can afford the fees. Waste disposal systems have collapsed. Crucial workers such as doctors, nurses and medical technicians have left the country in droves. Teachers go unpaid. And there have been multiple cases of bank-account holders resorting to armed hold-ups in branches to access their own money.

?The country’s agony has somewhat faded from the headlines since the collapse of its financial system in 2019, and the Beirut port blast in August 2020, which wrecked whole neighbourhoods of the capital and destroyed any lingering faith in the nation’s politicians. But its economic and societal crisis, fuelled by long-term mismanagement, corruption, and inability to service high debts, has only intensified.

Since the default on $30bn of international bonds in 2020, few investors have the stomach for investment in a country once known as the Switzerland of the Middle East. Per-capita income fell from about $9,000 in 2018 to around $3,000 now. GDP collapsed from $59bn to $22bn in the same period. The Lebanese pound (or lira) has lost 95% of its value. Estimates of the proportion of the population below the poverty line vary from 45% to 75%.

The economy has been shrinking since 2011. And since it fell off a cliff in 2019, with what the World Bank assessed as the biggest peace-time economic collapse since the 19th century, the global economic backdrop has been grim. The Covid pandemic hit Lebanon’s tourism-dependent economy especially hard, hindering attempts to turn things around and fuelling inflation. The country has suffered from the mass emigration of wealthy professionals, while also struggling with the integration of around 750,000 refugees from neighbouring Syria. More broadly, Lebanon has simply not had a fully functioning set of state institutions for much of the past five years.

Since the 15-year civil war that ended in 1990 (and saw a million people leave the country) the country’s complex political system, aimed at balancing the tensions between different communities, has frequently led to conflict and stagnation. Even following the financial collapse and national humiliation of 2019-2020, its political class has proved unable to overcome the intense rivalries and feuds that has hindered stable government for so long.

There are some grounds for optimism. Last year, GDP stabilised, with a marginal contraction rather than a slump. Lower commodity prices and higher remittances (from Lebanon’s 15-million strong diaspora) helped reduce pressure on the current account. In addition, up until the Hamas attack on Israel on 7 October 2023, Lebanon had seen a big rebound in numbers of tourists, bringing in much-needed hard currency.

In the spring of 2024, annual price inflation returned to under the 100% level for the first time in four years, largely due to the creeping dollarisation of the economy. Dollarisation has eased inflation but has also made life harder for people who are still paid in Lebanese pounds and don’t have access to foreign currency. Meanwhile, official figures show inflation dipped sharply from late 2023 onwards (to 70% in March this year, and 35% in July, well below its shocking peak of 269% in April 2023).

The Lebanese pound also stabilised in the black market from the summer of 2023 onwards, also contributing to the lower (yet still cripplingly high) inflation. Exchange-rate volatility eased after the central bank introduced measures aimed at unifying the multiple exchange rates in the economy.

In the short-term, the economy may be even worse off without Hezbollah, in particular the hundreds of millions of dollars in annual funding it receives from Iran. More optimistically, the elimination or weakening of the militia might remove its influence and let Lebanon start to rebuild. Aid and investment flows from the Gulf and the West might restart. More serious efforts at exploiting offshore natural gas reserves could also get under way.

Before the crisis of 2019, Lebanon had a strong education sector, and still has several well-regarded universities. It also has a long history of entrepreneurship, a large and engaged diaspora, and a culture on which to build a modern knowledge economy. All is not lost.

But nor, sadly, can the risk of collapse be ruled out. A failed state at the heart of the Middle East is in no one’s interest, whatever the outcome of the current fighting.

29th October 2024