Lebanon Is Running Out of Cash, and All Its People Can Do Is Pray

Lebanese Prime Minister Najib Mikati was quick to condemn Hezbollah’s launch of three drones at Israel’s Karish natural gas field in the Mediterranean Sea.

That action “is unacceptable and exposes [Lebanon] to unnecessary risks,” Mikati said in a statement.

It wasn’t the first time Mikati had to condemn the Iran-backed group. At the beginning of the year, he slammed its leader, Hassan Nasrallah, for calling Saudi Arabia a terror state that is to blame for the spread of radical Islam across the world.

Nasrallah, as always, knows how to pick the right time to make his presence felt. Back then, Lebanon was in the midst of a diplomatic crisis with Saudi Arabia, which included a ban on importing Lebanese goods. This time around, Lebanon is on an economic cliff’s edge, and the one thing it certainly doesn’t need is a violent show of force by Hezbollah.

A public spat with Hezbollah isn’t a common sight, particularly with Lebanon in highly delicate talks on demarcating the maritime border with Israel. A Lebanese offshore gas field would not only serve as a potential source of income and investment, but also as a guarantee to pay off Lebanon’s massive debt, possibly rescuing the country from the most serious economic crisis in its modern history.

The Lebanese field is meant to be developed by an international consortium composed of France’s TotalEnergies, Italy’s Eni and Russia’s Novatek. But so long as there’s no agreement on the border and the threat of violent conflict between Israel and Hezbollah hovers over gas production there, not a single dollar will be invested in that field.

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• Hezbollah flexes its muscles at Israel's doorstep with several new border positions

Mikati, who was nominated about two weeks ago but still hasn’t been able to form a government, has no choice but to walk on a razor’s edge, as a government wouldn’t be possible without the backing of Hezbollah’s lawmakers. Given Hezbollah’s attitude, the prime minister’s chances of finding a solution for the economic crisis are getting slimmer.

Lebanese sources said that Mikati consulted with President Michel Aoun and Parliament Speaker Nabih Berri – a Nasrallah ally – before making his statement, to which Nasrallah has yet to respond.

Soaring debt

The drone incident occurred in the midst of difficult negotiations between Lebanon and the International Monetary Fund. Lebanon is seeking a $3 billion loan that would help finance repayment of debt that has soared to 170 percent of its gross domestic product, as GDP has shrunk from $55 billion in 2019 to $20.8 billion this year.

After months of discussions, a draft agreement with the IMF now exists, with just one obstacle remaining – the government of Lebanon agreeing to implement its terms and actually doing so. The IMF doesn’t give loans as gifts. Disbursement of the loan hinges on a long list of conditions, including undertaking a comprehensive reform of the banking sector, an investigation of the central bank’s management, economic reforms, strong regulatory and oversight measures, and ensuring repayment of the loan.

The biggest obstacle facing the economic program is the private banking system. Last month, the Association of Banks in Lebanon sent the IMF a letter rejecting its conditions as being “illegal and unconstitutional.” The letter didn’t explain why they were unconstitutional, but it did say they would cause Lebanon and its banking system irreversible harm.

The main point of contention is over who will cover the cost of the massive $70 billion-plus in losses that Lebanese banks and its central bank have sustained. The association blames the government, citing the economic policies it had employed before the crisis, its deep corruption and the lack of any supervision over the central bank. Since the government is responsible, it should bear the expense, the banks contend.

The association is demanding that the government sell assets and use its gold reserves to set up a $30 billion fund that will be used to cover the losses of the banking system and those who deposited dollars in it.

For its part, the government asserts that the banks are no less responsible for the loss. The banks made enormous profits from loans they gave the government and the central bank, so it’s only fair that they should begin covering the losses before the government steps in to help them, it contends.

Both sides have a point. Long before Lebanon’s economic crisis exploded, the government adopted a fixed exchange rate of 1,507 pounds to the dollar. To preserve that rate, the government was often forced to flood the market with dollars borrowed from the banks at high rates of interest. The scheme worked as long as the Lebanese economy kept growing and enjoyed an influx of dollars from tourism and from Lebanese citizens working abroad sending their earnings to their bank accounts in Lebanon.

Will banks play along?

The system collapsed as Lebanon suffered several severe blows, like the Syrian Civil War, which limited Lebanese exports to the rest of the Arab world; the coronavirus pandemic, which decimated the tourism industry; and the presence of some 1 million Syria refugees, which has weighed heavily on the Lebanese economy and infrastructure. The Lebanese pound’s value has declined by 90 percent, but the government stuck to the official exchange rate until it ran out of dollars to support it.

At that point, Lebanese banks began to impose limits on dollar withdrawals, even before the government issued its own. People suddenly found ATMs empty, parents could no longer send dollars to their children studying abroad, hospitals couldn’t pay for imported medicines in foreign currency and electricity became sporadic, because the state-owned power company had no dollars with which to buy fuel. Government debt owed to foreign creditors has been rescheduled, shattering Lebanon’s status as a responsible country that pays its debts.

The central bank came to realize that it could no longer peg the lira and set up an online platform called Sayrafa that publishes a new “official” exchange rate every day – albeit one that is far away from the one prevailing in the black market. Thus, for example, the black market priced the Lebanese pound at 29,000 to the dollar on Tuesday this week, while the official rate was 25,000.

A citizen lucky enough to get a permit to take money out of his dollar account, the only legal way to do so, will get the amount based on the central bank exchange rate. But when they try to spend the money they have withdrawn, they will be forced to do so at the black market rate, which amounts to a 20 percent loss.

Approval of the IMF agreement doesn’t have to wait until the formation of a new government. Recent legal opinions hold that Mikati is empowered to sign the accord by virtue of the fact that he was appointed prime minister by Lebanon’s president. But if Mikati does sign, the agreement will almost certainly be meaningless as long as the country’s banks refuse to implement their part.

Until a decision on the loan is made – which may also release the foreign aid promised to Lebanon – ordinary Lebanese will have to pray in front of their ATMs in the hope that some money emerges from them.