Lebanon’s Economic Crisis
Explodes, Threatening Decades of Prosperity
Bad planning, corruption and
the sudden shock of a pandemic have caused the Lebanese currency to crash and
consumer prices to jump. Hunger looms.
A rooftop in Beirut last month. Lebanon’s economic problems have
been building for years as its government has become one of the world’s most
indebted. Credit...Diego Ibarra Sanchez for The
New York Times
By Ben Hubbard
May
10, 2020
BEIRUT,
Lebanon — Flawed policies and sudden shocks have thrust Lebanon into its worst
economic crisis in decades, with its currency collapsing, businesses shutting,
prices for basic goods skyrocketing and the threat of hunger looming for its
poorest people.
“They
come to sell because they need to eat,” said Ali Sabra, a gold merchant in
Beirut who pays cash to families selling dowries and wedding rings to buy food.
“This
time you sell your gold,” Mr. Sabra said. “What will you do next time?”
Lebanese
have long stood out in the Middle East for not letting political upheaval or
civil violence get in the way of enjoying the finer things in life. Night clubs
and hotels stayed open though wars, and while the tap water was undrinkable and
the electric grid unreliable, even the middle class could afford nice clothes,
low-paid maids from Ethiopia or the Philippines and occasional foreign
vacations.
Domestic
workers from Bangladesh in Beirut.Credit...Diego Ibarra Sanchez for The New
York Times
Underlying
that lifestyle was a longstanding government policy that kept the value of the
Lebanese pound pegged to the U.S. dollar, allowing the Lebanese to interact
seamlessly with the world economy.
But
that system has unraveled in recent months, fueling an economic collapse that
has been exacerbated by a government-imposed lockdown aimed at stopping the
spread of the coronavirus. Analysts warn that the downturn could pauperize the
middle class, making it that much harder for the country to recover.
“There
are many sins and many sinners,” said Roy Badaro, a Lebanese economist. “The
sins of the past have to be paid for today and in the future, so there is a
distribution of pain to cover the costs.”
The
result will be, he said, “a serious downgrade in lifestyle.”
Lebanon’s
economic problems have been building for years. A nation of 5.4 million on the
Mediterranean with a variety of religious sects and large groups of Syrian and
Palestinian refugees, Lebanon has long suffered from internal conflict and
spillover from the wars afflicting its neighbors. Its historically weak
government has relied on increasing amounts of debt to pay its bills, while
failing to carry out reforms that could have bolstered its economy or unlocked
international aid. That has made it the third most indebted state in the world,
and rampant corruption has further siphoned funds from state coffers.
Clear
signs of trouble surfaced late last year, when banks began limiting withdrawals
and anti-government protests erupted across the country.
The
immediate breakdown was a nationwide shortage of dollars. Since Lebanon
produces almost nothing for export, the country’s primary source of dollars has
been large deposits from wealthy investors in the central bank, which were
needed to maintain the link to the Lebanese pound.
Food
distribution in Tripoli, Lebanon.Credit...Diego Ibarra Sanchez for The New York
Times
To
keep those investments coming, the central bank offered ever-higher interest
rates for large deposits, whose yields could be covered only by newer deposits
at even higher rates.
That
strategy, which analysts have likened to a state-sponsored Ponzi scheme,
ran out of gas last year when new depositors suspected the policy was
unsustainable and stopped coming. Soon, the real dollars in the bank were far
short of the theoretical dollars that had been earned in interest on previous
deposits.
That
shortage has now hit individual Lebanese account holders, whose banks have
either limited dollar withdrawals or stopped handing out dollars altogether. At
the same time, the Lebanese pound has lost about two-thirds of its value on the
black market, further burdening the lives of people who once moved easily
between the two currencies.
The
pain for average citizens is clear in the depositors lining up outside banks,
often wearing face masks and standing in the sun, to see whether they can
withdraw any of their own money.
“My
salary no longer has any value,” said Mirna Haddad, 54, an accountant waiting
in line outside a Beirut bank last week.
While
her salary in Lebanese pounds was modest, she had always been able to easily
convert it into dollars to, say, buy a car or take occasional family trips to
Greece. Now, that money is worth less, and her bank will not let her transfer
it abroad to her son, a university student in France.
“Our
whole life is going to change,” she said.
An
empty restaurant in Beirut during the lockdown.Credit...Diego Ibarra Sanchez
for The New York Times
Nearby
stood a sales director for an events management company, Ghassan Nawfal, who
said all but two of his company’s 30 employees had been put on unpaid leave.
The two who remained were earning only half salaries — for now.
Behind
him was Fouad Tawk, 53, who had retired after 24 years in the Lebanese Army
with a pension that used to be worth $800 per month. Now it is worth just over
$200.
“The
pound went from the sky to the ground,” he said.
Mr.
Tawk said he was struggling to make up the shortfall by doing carpentry work,
which was hard to come by, and farming land in his village, although the prices
of imported agricultural supplies have risen as well.
“We
used to be OK between the pension and the land, but now it has all collapsed,”
Mr. Tawk said.
The
crisis will fall hardest on Lebanon’s poor.
Searching
for food on the streets of Beirut.Credit...Diego Ibarra Sanchez for The New
York Times
In
November, the World Bank warned that the portion of Lebanon’s
population living in poverty could increase from 30 percent to 50 percent if
the government did not act swiftly. But that was before the currency crash and
the coronavirus pandemic hit, making matters worse.
Last
month, Human Rights Watch warned that millions of Lebanon’s
residents, including more than one million Syrian refugees, were at risk of
going hungry during the coronavirus lockdown if the government didn’t come to
their aid.
Desperation
has made the country’s protests more violent. Bank branches have been bombed
and burned, and one protester was recently killed in the northern city of
Tripoli after the security forces opened fire with rubber bullets and live
ammunition.
Antigovernment
protesters clashing with security forces in the northern city of
Tripoli.Credit...Diego Ibarra Sanchez for The New York Times
The
crisis has struck blows at historic institutions. Two hotels that survived the
country’s 15-year civil war have announced that they are shutting their doors,
and the president of the American University of Beirut, one of the Arab world’s
top universities, sent a letter to faculty and staff last week to prepare them
for “perhaps the greatest crisis since the university’s foundation in 1866.”
In
an interview, the president, Fadlo Khuri, said the university had to figure out
how to protect the purchasing power of faculty whose salaries have been
effectively reduced by the currency crash, as well as help students struggling
to pay tuition.
But
Dr. Khuri’s greater fear for Lebanon was that the crisis would impoverish the
middle class and prompt a new wave of migration by the very people the country
needs to rebuild its economy.
“The
middle class is becoming day after day poorer and poorer,” Dr. Khuri said.
“Some of the best and brightest are not just immigrating, but this time they
may permanently turn their backs on this country.”
The
government has struggled to stop the tailspin.
Homeless
people warming themselves under a bridge in Beirut in March. Credit...Diego
Ibarra Sanchez for The New York Times
In
March, it failed to make a $1.2 billion payment for foreign bonds, the first
such default in Lebanon’s history. Its economic recovery plan, released on
April 30, said the economy was “in free fall” and that Lebanon would seek $10
billion in aid from the International Monetary Fund. But previously promised
aid has never arrived because Lebanon has failed to make progress on the
funders’ required reforms.
Even
if some version of the government’s plan is eventually enacted, the benefits
could take years to reach people like Abu Haytham Sirhal, a vegetable merchant
who buys in dollars and resells in Lebanese pounds and has watched his already
thin profit margin disappear.
“I
have never witnessed anything like this in Lebanon’s history,” said Mr. Sirhal,
80. “This is the worst period ever.”
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