Lebanon’s Economic Crisis

Lebanon’s Economic Crisis

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October 6, 2020
Lebanon’s Economic Crisis
Lebanon faces a serious economic crisis. The government
2011 and 2019. Debt service contributed to the fiscal
defaulted on its debt in March 2020, its currency has lost
pressures facing the government: roughly half of the
80% of its value since 2019, consumers and businesses are
government’s revenue went to interest payments on the
grappling with hyperinflation, and the banking sector is
public debt. Previous attempts at closing the budget deficit
insolvent. Unemployment and poverty in the country have
gap were largely unsuccessful: efforts to raise revenue via a
surged. Lebanon’s economic challenges have exacerbated
tax on the popular messaging system WhatsApp in October
political turmoil, fueling nationwide protests against
2019 triggered vast nationwide protests against corruption
inequality and the perception that political elites across the
and financial mismanagement, and resulted in the
spectrum have manipulated financial institutions for their
resignation of then-Prime Minister Saad Hariri. Unable to
own gain. Protests and political gridlock have resulted in
access new financing, Lebanon must now balance its
the resignation of three prime ministers since October 2019;
budget by increasing revenue collection and/or cutting
Lebanon has been unable to form a government since the
government spending.
August 2020 resignation of Prime Minister Hassan Diab.
Banking crisis. Lebanese banks were long-lauded as key
While Lebanon is urgently seeking financial assistance
engines of economic growth. Between 2011 and 2019, bank
abroad, its current caretaker government cannot enact the
assets had grown by 83% to $253 billion, equal to roughly
reforms that the International Monetary Fund (IMF) has
five times the country’s GDP. Lebanese banks were able to
stated are necessary for aid negotiations to progress.
attract dollar deposits from local customers and the large
Lebanon’s economic crisis has wide-ranging implications
Lebanese diaspora abroad by offering high interest rates (up
for political stability and regional security. U.S. adversaries
to 14%) on dollar-denominated accounts. The banks used
in Lebanon—including Hezbollah and its patron Iran—
these deposits to lend to the Lebanese government at a
could benefit from any instability in the country, including
higher interest rate, netting sizeable profits. As investor
by escalating operations in Syria and/or along the Israeli
confidence waned in late 2019, however, the banks were
border. Deteriorating economic conditions and a vacuum in
unable to meet customer demands for deposit withdrawals,
state authority also could prompt refugee outflows (of both
because their deposits were tied up in longer-term loans to
Syrians and Lebanese), renew sectarian conflict, and create
the government. Banks closed for weeks in late 2019 and
a permissive operating environment for terrorist groups.
after reopening, imposed weekly limits on cash withdrawals
in dollars. Additionally, the banks are major holders of
Overview of the Economic Crisis
government bonds, and their financial situation has become
Lebanon’s economic crisis combines various challenges;
more precarious since the government defaulted on its debt.
some analysts characterize it as simultaneous debt, fiscal,
banking, and currency crises (Figure 1).
Figure 1. Lebanon: Key Economic Pressures
Debt crisis. Following Lebanon’s civil war (1975-1990),
successive Lebanese governments borrowed heavily to
finance reconstruction, mostly from local banks, but also by
selling bonds in international capital markets. The
governments, however, did not always channel borrowed
funds into productive investments, and repeatedly rolled
over the country’s debt (paying off old debts with new
borrowing). Thus, Lebanon’s debt burden is one of the
highest in the world (roughly 155% of GDP in 2019).
Investors grew increasingly concerned in 2019 about the
sustainability of Lebanon’s debt and that a future
government would seek debt restructuring. With foreign
investors increasingly unwilling to invest in Lebanon, the
government in early 2020 found itself with limited foreign
exchange and faced competing priorities: it could use its
limited foreign exchange to make debt payments or finance

critical food and fuel imports. In March 2020, Lebanon
Source: IMF, World Bank, and Economist Intel igence Unit.
defaulted on its debt for the first time and announced that it

was discontinuing payments on its foreign-currency debt.
Currency crisis. The Lebanese pound has been pegged to

the dollar since 1997. However, as investors started to pull
Fiscal crisis. The Lebanese government has run large
funds out of Lebanon in 2019, demand for the pound fell.
budget deficits for years, averaging 8.6% per year between
Lebanon’s central bank sold foreign exchange reserves to
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Lebanon’s Economic Crisis
support the value of the currency, but an informal exchange
in the Persian Gulf, which usually account for 12% of GDP.
rate market developed in which the pound traded at
The Economist Intelligence Unit forecasts that Lebanon’s
increasingly depreciated rates and dollars became scarce.
economy will contract by 20.7% in 2020 (compared to a
The pound has lost about 80% of its value since 2019.
contraction of 5.6% in 2019, Figure 2), and that inflation
Lebanon is highly dependent on imports, and as the
will reach 490% by the end of the year (compared to 6.9%
currency depreciated, the prices of most goods rose. In
at end-2019).
2020, inflation reached over 50%, crossing the threshold
Over the long term, Lebanon will likely need to diversify its
into hyperinflation, depleting the value of salaries and
economy away from finance and towards other sectors—
savings and leading to shortages of consumer products.
such as preparing its multilingual and relatively well-
The crisis has been devastating for both Lebanese and
educated workforce for tech industries and high-end
refugees. Roughly 2.7 million of Lebanon’s 5.5 million
manufacturing, a lengthy process that would likely entail
residents live below the poverty line (less than $14 a day).
significant infrastructure investment. In 2018, international
Extreme poverty has tripled in the past 12 months, from 8%
donors at the Conference for Economic Development and
to 23% of the population. Unemployment has risen to 30%.
Reform through Enterprise (CEDRE), hosted by France,
Fuel shortages have led to rolling blackouts, and the United
pledged $11 billion in loans to Lebanon to finance
Nations has cautioned that more than half of the population
infrastructure modernization. However, the funds were
could face food shortages by the end of 2020.
offered contingent on as-of-yet unenacted reforms.
Policy Responses and Economic Outlook
U.S. Interests and Policy
In May 2020, the Diab government formally requested a
Lebanon’s economy is small and its economic crisis is
$10 billion financial assistance program from the IMF. The
unlikely to pose a systemic threat to the global economy.
program would be a loan conditional on the implementation
However, the economic crisis poses a serious risk to
of economic reforms. The cash infusion would give the
domestic stability in Lebanon, potentially creating an
government breathing room, but negotiations have been
opening for U.S. adversaries such as Hezbollah and Iran to
deadlocked for months over the exchange rate, government
expand their foothold in the country. U.S. policy towards
finances, and recommended banking reforms. In April
Lebanon to date has sought to counter the influence of these
2020, the then-government circulated a draft plan to
actors by strengthening Lebanese state institutions. In the
restructure its dollar-denominated bonds, with investors
absence of support from state institutions, Lebanese may
facing losses of 70%; Lebanon’s banking association
become more dependent on sectarian communal leaders. In
rejected the proposal. Negotiations between the government
exchange for political loyalty, these leaders provide access
and bondholders were put on hold after the resignation of
to job opportunities and services that the state is unable to
Prime Minister Diab, following a major August 2020
deliver adequately, such as access to electricity, water, and
explosion at the port of Beirut.
health care. Hezbollah arguably maintains the most
extensive communal social services network and may stand
The IMF is seeking broad-based political support among
to gain the most from state weakness.
the Lebanese for the economic reform program, but reforms
Despite U.S. interest in bolstering the Lebanese state, U.S.
to date have been stymied by the persistent corruption,
officials have described Lebanon as plagued by “endemic
vested interests, and system of patronage that are
corruption,” and emphasized that political leaders must
intertwined with the country’s sectarian political system.
implement structural economic reforms before receiving a
Additionally, the resignation of the Diab government placed
Lebanon’s government into caretaker status with reduced
bailout. Following the August 2020 Beirut port explosion,
the United States provided $19 million in emergency aid;
authorities. Until a new government is formed, Lebanon
U.S. officials emphasized that U.S. assistance will address
cannot enact the called for structural reforms.
only the “immediate humanitarian needs caused by the
Figure 2. Economic Growth in Lebanon, 2000-2020
explosion” and will be routed through international and
nongovernmental organizations. Officials also stated that
the United States will provide humanitarian relief, but
emphasized that “broader assistance is conditional on
fundamental change.” As noted above, enactment of reform
first requires the formation of a new government.
Potential Policy Questions for Congress
 What changes, if any, does Congress seek in U.S.
economic assistance to Lebanon? How can the United
States support reform efforts in Lebanon?
 Under what conditions would the United States support

an IMF program for Lebanon?
Source: Economist Intel igence Unit.
 If the economic crisis creates further political instability
Notes: Forecasted data for 2020.
in Lebanon, how might this affect patterns of U.S.
Lebanon’s economic outlook is bleak. The Coronavirus
assistance to Lebanon’s military and security forces?
Disease 2019 (COVID-19) pandemic has deterred tourism,
a key industry. Declining global oil prices have
Carla E. Humud, Analyst in Middle Eastern Affairs
significantly reduced remittances from Lebanese employed
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Lebanon’s Economic Crisis

IF11660
Rebecca M. Nelson, Specialist in International Trade and
Finance

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