Analysis

Can New Hezbollah-backed Government Save Lebanon From Economic Free Fall?

Even if Beirut’s new cabinet can implement its financial plan, that may not be enough to quell the protest movement

Protesters in Lebanon this week.
Bilal Hussein/A.P.

“On Tuesday morning at 7 A.M., we will surround the parliament building to protest against approval of the government,” read a message early this week on social networks and on the website Daleel Thawra, “The Revolution Guide.” The Lebanese protest movement that arose in October, in the wake of which Daleel Thawra was founded, is far from winding down. Last Saturday, despite harsh weather conditions, hundreds of demonstrators marched toward the parliament building and the central bank to protest the establishment of the new cabinet headed by Hassan Diab. Its announcement of the approval of a new economic plan to be implemented within its first 100 days also failed to quell the rage.

Looming challenge of repaying bonds

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The new cabinet, which was approved by parliament in Beirut Tuesday, is perceived among many as a direct continuation of the rule of the elite parties, even though it has been dubbed an “expert” cabinet to suggest that it is nonpartisan. Close to the date of the cabinet’s approval, Lebanese citizens learned that the limit on dollar withdrawal from their accounts had been cut in half. From now on, citizens will be able to withdraw at most $600 a month from accounts with at least $100,000 in them and be limited to between $2,000 and $3,000 per month for those with at least $1 million in their accounts.

The central bank governor, Riad Salameh, did promise that depositors’ funds would be guaranteed, but the trust in these promises dissipated long ago. The trust of the international financial community will be put to the test around the question of paying back government bonds. The deadline for repaying the first one, worth $1.2 billion, is next month. Likewise, the government must repay bonds and interest worth $2.5 billion later this year or ask the bondholders to exchange it for a longer-term bond, thereby giving the government breathing room to finance its ongoing expenses.

About a third of the bondholders are foreign investors, the rest being Lebanese nationals, the banks and Lebanese businesses that have suffered a shortage of dollars to finance their business or private activities for many long months. The central bank governor declared this week that according to the law, the decision on exchanging a bond, meaning delay of final payment, is in the hands of the government, while the government is seeking to place the responsibility on the central bank.

Lebanese Prime Minister Hassan Diab
Bilal Hussein/A.P.

Tug of war between government and bank

The central bank governor has expressed a firm position so far that the government must pay the debt to preserve Lebanon’s status as a country that honors its obligations, and to thereby ensure that international financial institutions will be prepared to extend it loans down the line. Lebanese citizens counter that the public interest demands that the cabinet delay the debt payment so that it can free up funds to import consumer products and raw materials to jumpstart the economy.

The decision over the fate of the bonds doesn’t replace the approval and implementation of the economic plan, which appears too ambitions given Lebanon’s political reality. The plan involves lowering loan interest rates and structural reform in the banking system in general and the central bank in particular. It includes a declaration of the intent to declare war on corruption that will include prosecuting offenders who illegally remove funds from Lebanon, improving the electricity system and pricing electricity realistically, and returning funds that were stolen from the state within a year. At this stage, these intentions look more like bold slogans that serve as window dressing for the ceremony of forming the cabinet.

Some of the clauses will require new legislation, and that will require passing the hurdles of political rivals and the wall of interests put up by political parties and leaders. Other parts of the commitments will be tested in their enforcement, especially regarding the war on corruption and returning government funds that found their way into the pockets of private citizens. The ability of the Diab government to realize these promises will face a stringent test by international institutions, including the International Monetary Fund and donor nations, which have frozen until now debts from two years ago and have provided Lebanon with aid worth $11 billion.

Donor nations and Hezbollah

The Lebanese public, which will be forced to bear the economic decrees, still hasn’t spoken yet, save for the economic protest against the government. The prime minister may have committed himself to taking measures that will prevent a fatal blow to the poorest classes. However, the middle class, which carries on its back high taxes and the mission to keep the Lebanese economy functioning, is the one which will have to decide how to respond, after hundreds of small factories, restaurants, travel agencies and service suppliers were forced to close. Even if the Lebanese government proves surprisingly able to implement the economic plan, the donor nations and financial institutions will have to decide whether they intend to collaborate with a government that contains elements that are members of or supported by Hezbollah.

Camouflaging the movement affiliation or party affiliation with the term “expert cabinet” cannot hide the fact that Hezbollah stood behind the appointment of many members, including those who are not counted among its ranks. In contrast, Lebanon’s economic collapse is liable to deepen Iran’s influence and boost the power of Hezbollah, whose military operations do not rely on state financing. Meanwhile, it seems that at least the European Union nations are prepared to ignore this difficulty in part, and the American government continues to send the military assistance to which it is committed.