Analysis

As Protests Refuse to Abate, Lebanon Is on the Verge of a Financial Abyss. Here's How It Got There

Lebanon's central bank, once the symbol of stability, is beginning to look like the main reason for the economic failure Hariri is running away from

A police officer lifts part of the fencing after protesters knocked it down, as they demonstrate outside of Lebanon Central Bank during ongoing anti-government protests in Beirut, Lebanon November 11, 2019.
REUTERS/Andres Martinez Casares

A few years ago, Banque du Liban, the Lebanese central bank, asked the publishing company of the As-Safir newspaper to write them a book called “50 Years: The Bank Responsible for the Stability of the Nation and the State.”

During the same period, the Lebanese national airline was showing an advertising video on its flights describing what Banque du Liban was doing for the public and the state. It wasn’t an optional film. Like the safety instructions that are screened, passengers couldn’t switch channels. They were a captive audience for the propaganda of the bank that for more than a quarter century has been headed by Riad Salameh.

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Banque du Liban has historically been considered a stable and stabilizing influence on the Lebanese economy. Since its founding in 1964, it has been a symbol of orderly government that conveys financial capability, the reason Lebanon was known as the Switzerland of the Middle East in the financial sense of the term. But it seems as if Salameh is the only senior economist who understood that the Lebanese economy could not rely merely on a stable bank as a gatekeeper.

Economists are now trying to understand how and why Lebanon is on the verge of a financial abyss, with a national debt that’s 155 percent of the gross national product and stormy demonstrations that filled the streets and brought down the government. Both Salameh and the bank he heads are starting to look like the main reason for the economic failure. It’s true that seven years ago Salameh started to warn against the distorted situation in which the average household’s debt was 55 percent of its income. Most families had no choice but to take more and more loans to make ends meet, to buy cars or apartments, or to pay for their children’s schools.

Anti-government protesters chant slogans during a demonstration, in front of the Central Bank, in Beirut, Lebanon, October 28, 2019.
AP Photo/Bilal Hussein, File

Data quoted last week in the Al-Akhbar newspaper from central bank reports show that the public over the years has taken consumer loans totaling $21 billion. This does not include housing loans, which total $13 billion. The public is paying $1.5 billion in interest on this debt, a sum that comes at the expense of savings. It also reduces consumption and undermines growth.

Under other circumstances, these loans could have been a way to increase growth and strengthen at least the homebuilding industry as a springboard for development. The problem is that even with mortgages, Lebanese have a hard time buying an apartment or upgrading their housing situation because of prices that have skyrocketed as the bank heaped money on borrowers. Now many of the borrowers can’t pay back the loans, while others have spread out their payments.The economic burden on all households has increased because of the general rise in prices and the limited number of jobs, especially among the weaker populations that are being forced to compete with cheap Syrian labor.

The decrease in revenues as well as widespread tax evasion have caused state tax revenues to fall in 2015 from 75 percent of total revenues to a low of 50 percent, at least according to official data. As a result, the state is unable to pay its debts without dramatically increasing taxes, but doing so could lead to a civilian revolt.

Theoretically, Lebanon has a funding source available — the $11 billion in aid promised to it by donor countries. However, this aid comes with conditions that include political stability and deep economic reform. Political stability does not exactly describe the situation in Lebanon after Prime Minister Saad al-Hariri resigned, and it isn’t clear how and when a new government will emerge.

As for economic reforms, many were already proposed by Hariri on the eve of his resignation. Among the reforms he suggested was a deep cut in the salaries of senior officials like ministers and MPs, the allocation of $160 million to aid the needy, doubling the taxation on bank profits and most importantly – a demand from the central bank and banks to help fund the deep budget deficit.

According to the draft budget, no new taxes will be imposed on the public. Hariri’s government continues to manage the state as a transitional government and it could be that he might even agree to be reappointed prime minister. But it’s doubtful that he’ll be able to move his reforms forward. Lebanese banks are owned by veteran families that won’t allow the political elite who depend on them (and some of whom own banks or bank shares) to undermine their profitability.

It’s the banks which have traditionally helped Lebanese governments out of financial crises by giving them generous loans, for which they collected an inflated amount of interest that only deepened the governmental debt. These banks are working together with the central bank, but in fact, dictate fiscal policy to its governor.

Hariri is now aiming for the banks to bankroll a portion of the national debt’s interest this year. By doing so, he could present a budget with a low deficit and convince donor countries to open their wallets. As in the past, the banks may agree once again to pay for some of the government debt’s interest, but it will be interesting to see what payment they will demand down the line. Hariri seems to be hoping to show profits from offshore oil and gas drilling within a year. And yes, there are also protests which refuse to dissolve.