News | West Asia - Lebanon / Syria / Iraq - Corona Crisis - Middle East Against Hunger, Oppression, and Poverty

the Lebanese economic crisis and the revolution of 17 October



Miriam Younes,

[Translate to en:] Protest in Beirut 2020 (Foto: Doha Hassan)
Photo: Doha Hassan

On 28 April 2020, in the northern Lebanese city of Tripoli, Fawwaz As-Saman was shot by the Lebanese army at a demonstration; he succumbed to his injuries the following day, bringing the total number of deaths at protests in Lebanon since October 2019 to six. On social media, the young Fawwaz was quickly labelled a “martyr to hunger, oppression, and poverty”. Both As-Saman’s death and its designation as martyrdom are emblematic of the protests against hunger, poverty, and oppression that erupted in Lebanon in October 2019 and have been ongoing ever since. From the first demonstration on 17 October onwards,large swathes of the Lebanese population have directed their ire not only against the political elite and the policies they have enacted over the past several decades, but also the Lebanese political system as a whole. For decades, this system has fostered and protected a political elite whose reputation has been on the decline since the civil war. This elite rules the country with an intimate and intricate mixture of clientelism, confessionalism, and corruption, complemented by a tight neoliberal interweaving of capital and politics. The consequences of such politics are a quasi non-existent social welfare system, a shrinking or privatization of state services, a rise in living costs, the emergence of informal economic structures, and an increase in poverty and unemployment, particularly among the lowest strata in Lebanese society. In recent months, this decades-long political crisis has broadened to become a financial, economic, and currency crisis, manifesting as high levels of state debt, a stagnating economy, rising prices and poverty levels, a shortage of US dollars, and the ongoing depreciation of the Lebanese lira, as well as capital controls informally established by the country’s banks. In November 2019, the World Bank was already forecasting a worsening of the economic, financial, and social situation in Lebanon, warning that the poverty rate could increase to 50 percent and that unemployment would likely also rise, particularly among young people.

Miriam Younes is a director of the regional office of Rosa-Luxemburg-Stiftung in Beirut

In July 2019, the then-government under Prime Minister Saad Al-Hariri passed a delayed budget for 2019 which sought to contend with the rising levels of state debt and the stagnating economy. The ambitious and purported goal of this so-called “austerity budget” was to consolidate Lebanon’s economy and government accounts. In reality, however, the budget primarily consisted of short-term austerity measures that mostly impacted the country’s poor and demonstrated an unwillingness to enact structural reforms. Seven months later, on 7 March 2020, Prime Minister Hassan Diab explicitly declared what had been obvious for months: the government would be defaulting on its Eurobond debt. This was the first time in its history that Lebanon had not repaid state debt on schedule. In so doing, the government was not only essentially declaring state bankruptcy, but also leaving unanswered the question of how the country would find its way out of the twofold crisis of economy and state that it had become mired in. Diab provided the first part of the answer two months later, announcing an economic rescue plan that was agreed upon by cabinet on 30 April. In essence, the plan comprises an appeal for international assistance that includes receiving the $11 billion in credits pledged by donor states at the CEDRE conference in April 2018, alongside an announcement that Lebanon would seek a further $10 billion in assistance from the International Monetary Fund. Additionally, the plan puts forward a vaguely formulated re-structuring of the banks and of state debt, a “haircut” to previously high interest rates on large-scale investments made via the banks, and a gradual devaluation of the Lebanese lira by half between now and 2024. The plan also promises social safety measures for the country’s poorest, reforms to assist the fight against corruption, and the guaranteeing of 90 percent of USD-based investments in Lebanese banks.

Lebanese president Michel Aoun tweeted that 30 April was a historic day for Lebanon because the country now had an economic and financial plan for the first time in its history. There was little reaction from government politicians and surrounding circles regarding the quality and feasibility of the planned measures. Several key parliamentary blocs, however, vehemently rejected the plan and boycotted a meeting called by the president to discuss it.

Evaluating both the government’s vaguely conceived plan as well as the competing proposals which have circulated in response to it requires a firm grasp of the underlying structural causes of the current financial and economic crisis in Lebanon. This will be followed by a look at the current protest movement and an examination of its political challenges and opportunities given the extensive nature of the crisis. One political scientist recently summarized the current situation in Lebanon as “Venezuela minus the oil with added political infighting”. In an infographic that ranked the economies of 66 developing countries published by The Economist on 2 May, these two countries occupied the two lowest positions. An end to the “hunger, oppression, and poverty”, for which Fawwaz As-Saman lost his life demonstrating, thus seems difficult to imagine in the foreseeable future.

A rentier economy, corruption, and government debt—the making of Lebanon’s financial and economic crisis

Since the 1990s, Lebanon’s post-civil war economy has been based on a traditional rentier and service-based system centred around the real estate market and the banking sector, both areas in which Lebanon’s postwar political elite have been able to reap substantial returns on their investments. Even before the war, the presence of the Lebanese state was limited: it neither implemented sustainable social, economic, or fiscal policies, nor did it invest in infrastructure projects (such as electricity supply, streets, water, education, or healthcare) or the development of a productive economy. When such projects were undertaken, well-established structures of clientelism and corruption would quickly re-assert themselves. To this day, the government still often awards large infrastructure projects to companies that have some form of connection to the political elite, whether that be through political loyalty or direct or indirect participation in government. The funds made available for such projects frequently flow directly into the pockets of the political figures responsible for financing them from the state budget. Under this arrangement, the project itself is of secondary importance. The obverse of this triumvirate of clientelism, corruption, and capitalism is the outsourcing of social welfare and public services to the private companies owned by this political elite, who need to ensure that their supporters (who in most cases are tied to them through confessional-clientelist relationships) are taken care of—receiving political loyalty and support in return.

The Lebanese economy’s unproductive character was further strengthened in 1997 when the national currency was pegged to the US dollar. To this day, one US dollar is still worth around 1500 Lebanese lira. One the one hand, this meant that investors who put their money into the real estate market or the banks did not need to worry about a devaluation of the lira; on the other hand, it made it more profitable to import goods than to produce them.

The Lebanese economy has thus more or less hobbled along in this fashion since the 1990s, although in recent years there have been increased warnings of the imminent and painful impact of a slow but inexorable downfall of an economic form and policies that neither consider the needs of the lower classes nor seem interested in sustainability. Since 1993, Lebanon’s state debt has steadily increased, both in terms of the so-called eurobonds [1] as well as in treasury bonds denominated in lira. Lebanon’s state debt currently sits at $90 billion, of which 37 percent are eurobonds i.e. foreign debt. At the end of 2019, the country’s debt-to-GDP ratio was 155 percent.

Why have high levels of state debt led to a devaluation of the local currency and to a shortage of USD liquidity in Lebanon? To understand this we must once again return to the close ties between capital and politics, in this case between the government/political elite, private banks, and the state central bank, a connection forged back in the 1990s by then prime minister Rafik al-Hariri. The Lebanese state’s creditors are primarily the banks, who repeatedly grant the government loans in exchange for an extremely high rate of interest. Around 75 percent of investment in the Lebanese banking sector takes the form of loans to the government or the central bank.  In turn, the central bank uses this credit to strengthen the local currency and maintain its relationship to the US dollar. The high levels of state debt and the high interest rates at which the loans were made means that around a third of Lebanon’s yearly government expenditure goes towards repayments. The high interest rates on these repayments can be explained by the close personal ties between the political elite and those who control the private banks: in this way, government money conveniently ends up flowing right back into politicians’ pockets. For their part, the banks finance their loans to the state and the central bank via investments made by their customers in US dollars, which they attract using high interest rates. As a result of the state’s growing inability to repay its debt, these customers’ investments and the interest they are supposed to receive also come under threat. Despite this development, the banks continued to attract new investors by offering high interest rates on investments made in US dollars or euros in order to be able to continue financing the state. Now that the state and the central bank are no longer able to repay their debt, the private banks are also unable to disburse their customers’ USD-denominated investments and interest payments. While the triumvirate of government, central bank, and the private banks all blame each other for this miserable state of affairs, in November 2019 the banks implemented illegal capital controls that still remain in force today. These mean that bank customers must sometimes wait for hours either in front of or inside the banks in order to be able to withdraw 100 or 200 USD of their own funds per week or month (depending on the bank). The Lebanese lira, which is officially still set at an exchange rate of 1508LBP to the dollar, has in reality been in freefall for months, reaching a sombre record low of 1 USD to 4400LBP on the black market during the COVID-19 lockdown. Given the way that banks have—seemingly ad hoc—made piecemeal adjustments to their own offerings match this informal exchange rate, inflation is only expected to rise in the coming months.

“We’re hungry, so we’re going to steal.” The Lebanese protests, COVID-19, and the financial and economic crisis

The so-called thawra (revolution) in Lebanon began with a demonstration on 17 October, when people took to the streets in large numbers to protest a planned new tax on smartphone apps such as WhatsApp and Viber. In the subsequent weeks and months, the protests spread across the entire country, developing into the largest protest movement in Lebanon’s recent history. Since then, the movement has gone through a number of phases and experienced both highs and lows. To date, it has four characteristics worthy of particular mention: 1) it has not been instrumentalized by any of the established political parties, instead generally remaining politically independent. 2) It has broadly remained a consistent presence throughout the country, with individual movements in different regions continually expressing solidarity and unity with one another and demonstrating this movement’s cross-class character and ability to circumvent confessional structures. 3) Despite its cross-class character, this movement is one sustained primarily by members of the lower strata. The reaction to the so-called “WhatsApp tax” is symbolic of the rebellion of a generation and class that in the immediate sense cannot afford a 20 cent daily tax on VoIP services such as WhatsApp and who have long suffered the effects of the country’s lack of social welfare provision and dire economic situation. 4) The fact that this movement is able to transcend class, confessional structure, and regional difference also means that it has formulated few clear and coherent demands and rejects a political framing of the protests. One of the movement’s slogans is “I am the leader of the revolution” (“ana qa’id/at al-thawra”), a reference to the idea that each and every one of the protesters can be seen as having equal footing at this revolution’s helm.

In March the movement experienced an unforeseen setback when COVID-19 broke out in the country. In response to the spread of the virus, on 15 March the Lebanese government announced a country-wide shutdown of schools, kindergartens, and public institutions, as well as firms, businesses, restaurants, bars, and night clubs. In addition, all inbound and outbound passenger flights were halted and the population was exhorted to stay home and only leave the house when absolutely necessary. The various squares and other locations around the country where the protests had taken place suddenly became deserted, with only a few abandoned tents and the protests’ symbolic cardboard fist statue, inscribed with the word thawra, the sole reminders of the demonstrations and huge crowds that had been present here just a few days prior. At the end of March, the Lebanese army took advantage of the situation and destroyed the tents on Martyrs’ Square in Beirut.

Although Lebanon’s testing capacity remains comparably low (1000-2000 people per day), the dramatic increase in coronavirus cases and subsequent overloading of the already stretched Lebanese healthcare system that many observers expected is yet to transpire. While the government’s rigorous measures were widely applauded, responses have tended to overlook the fact that the government has no plan for the socio-economic consequences of the nationwide shutdown. In a country which was already in the midst of its worst-ever economic crisis, these consequences are devastating: not only is the lira falling to new lows, but prices for both imported and local products have also risen an estimated 40–60 percent, and poverty and unemployment is now a reality for over half the population. Lebanon’s Minister for Social Affairs estimates that around 75 percent of the Lebanese population are currently in need of aid. There seems to be no end to the economic free-fall in sight.

The relative calm in the country as a response to the pandemic was thus short-lived, with protests first resuming again in the northern city of Tripoli on 22 March. In one of the videos circulating on social media, a demonstrator formulated their demands as follows: “We are hungry, we want to eat. We will steal… we need an alternative.” Weekly demonstrations, spreading beyond Tripoli to other regions, including Beirut, have occurred ever since. Additionally, a number of banks have been destroyed or set on fire in a series of night attacks. Following As-Saman’s death, the army issued a statement in which they condemned the protestors’ violence and demanded that they return to the peaceful form of protest that they had largely adhered to in October and November. The recent increase in violent attacks of banks and security forces as well as street vandalism, however, is representative of the increasing loss of hope and perspective among the Lebanese population, as well as their anger regarding the structural forms of (state) violence (poverty, hunger, inadequate social welfare services) that they have been living with for months. The drastic measures taken by the Lebanese security forces (arrests, as well as the use of tear gas, police batons, and rubber bullets) and the political elite’s ongoing attempts to turn a blind eye towards the protests suggest the situation is only going to escalate further.

“Alternatives do exist (albeit won’t be possible without a revolutionary government)”—pathways out of the crisis?

Seemingly the most important part of the economic rescue plan announced by President Diab on 30 April is the indication that the government will both seek to claim the credit promised at the CEDRE conference while also requesting an additional $US10bn in assistance from the IMF. The latter action had been a recurring theme in recent discussions regarding possible ways out of the crisis. Following Diab’s announcement, many economic experts in Lebanon were quick to label it the only feasible solution. In this line of argument, any and all political and economic measures and reforms required to secure an IMF loan become absolutely essential and necessary steps towards beginning to find a way out of the crisis. This approach pays little regard to the actual experience of other states that have utilized IMF loans to extricate themselves from economic crises (such as Argentina, Jordan, South Korea, Pakistan, Indonesia, and Greece). Nor does it adequately consider the extent to which in a Lebanon still governed by the old political elite, IMF credits would simply facilitate further corruption and the enrichment of a select few. In the aforementioned countries, the radical austerity policies that have been an integral part of all IMF loan arrangements since the Washington Consensus have tended to exacerbate rather than reduce social inequality and poverty and in many cases have also led to these states becoming dependent on the IMF in the long term.

For Lebanon, turning to the IMF for assistance would mean implementing a raft of neoliberal policies, such as cuts to healthcare, education, and social services, privatization in the public sector, and increased taxation. Not only would these measures primarily impact the lower and middles classes, they would also be entirely consonant with the recurrent patterns that have defined Lebanese politics since the 1990s, in the process worsening precisely the same structural deficiencies inherent to the Lebanese system and Lebanese politics that led to the present crisis in the first place: corruption, clientelism, and capitalism. IMF involvement is thus in no way some unavoidable lesser evil of an already difficult path out of Lebanon’s political and economic crisis. Instead, it could in fact simply make the situation worse.

Nevertheless, the question of available alternatives is a valid one: given the present situation, it is difficult to envisage how Lebanon can readily extricate itself from the depths of the current crisis. If it has shown us anything, however, it is that Lebanon must pursue an entirely new political and socio-economic direction. A first and likely unavoidable step would be a restructuring of both domestic and foreign debt. Malaysia, which unilaterally implemented a successful restructuring of state debt without IMF assistance at the end of the 1990s, would serve as an ideal model in this regard. For Lebanon, this would merely be the beginning of a protracted and complicated process of difficult legal negotiations with its creditors. For the first time, however, this would signify the government taking responsibility for the current situation and for a halfway equitable distribution of the inevitable sacrifices that are to occur. Taking a slightly longer view, a shift away from the failed rentier economy to a more productive and unitary economic structure is unavoidable, not only in terms of consolidating the national budget, but also to facilitate the drawing up of a new social contract based on guaranteeing social rights and economic fairness. The current protest movement provides an ideal template for this new social contract: now is the time for a (“revolutionary”) reform government to come to power, one which at least tries to realize these ideas using pragmatic methods.

Translated by Ryan Eyers and Sam Langer for Gegensatz Translation Collective

[1] Eurobonds are bonds denominated in a different currency to that of the country that issues them. In the case of Lebanon, these are overseas bonds, denominated in USD, which require repayment.