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2 July 2020updated 09 Sep 2021 2:38pm

“We’re way beyond demonstrations“: why Lebanon is on the brink of collapse

The country once hailed as the “Switzerland of the Middle East” now faces the prospects of bankruptcy and chaos as never before.

By Jim Muir

“The Covid-19 virus couldn’t have come at a worse time,” Antoine Khoury, a lighting contractor in Beirut, told me. “Look what it’s doing to the rest of the world, and in Lebanon it came to a country that was already collapsing under its own much deadlier virus.”

Like Covid-19, Lebanon’s other virus is invisible to the naked eye. But as the Lebanese emerge from its coronavirus lockdown, which the government first enforced in March, the symptoms of the other virus are there for all to see.

I don’t need to look more than ten yards from my window in Beirut, where the bistro that opened eight years ago has now closed, just like many other restaurants, cafes, shops and businesses all over town. My local bank is now hidden behind a brutalist cladding of thick steel. Many banks had their façades smashed before the lockdown, when in October 2019 angry protesters attacked them in retribution for the financial meltdown that has brought the country to its knees.

Across in Mar Mikhael, in east Beirut, the big building that houses the state electricity company, Electricité du Liban, bristles with new spiky defences. Power cuts have become increasingly frequent, and there are rumours that these might last as long as 24 hours a day, leaving supply in the hands of the private generator and fuel mafias. The corrupt diversion of billions of dollars from the electricity sector is one of the enduring scandals of the current crisis.

Nobody knows how many thousands more will be joining the already swollen ranks of the unemployed as the Covid-19 lockdown eases. But Khoury, who belongs to a business group which supports the protest movement that broke out last October, believes an estimate of 50 per cent unemployment is optimistic; some expect 70 per cent in the coming months.

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“The private sector is dead,” he said. “If it goes on like this, how are they [the government] going to build their GDP if the private sector is not working properly? Where’s the revenue going to come from? Everything will collapse.”

With Lebanon’s Prime Minister Hassan Diab warning that many people may soon not even be able to afford bread, there are real fears of nationwide violence, whether as a continuation of the “revolution” that occurred on 17 October last year or as spontaneous explosions of rage.

There may also be a crime wave. It is no secret that there is between $5bn and $6bn in cash hidden in people’s homes, given the public’s widespread distrust in the banks. The first four months of 2020 has already seen a sharp increase in murder, car theft and burglary.

The cash-strapped, debt-laden Lebanese government has only been able to give about $100 (£80) each to the very poorest members of society. Alarmed about the potential for social unrest in Lebanon, the World Bank is preparing a $500m, two-year “social safety-net” programme aimed initially at the poorest 100,000 families.

“It is worsening day by day, and the needs are much more,” the Bank’s regional director for the Middle East, Saroj Kumar Jha, said. “With 100,000 households, you’re looking at people who are in extreme poverty. The actual number of poor people is much larger.”

Even this temporary fix, which amounts to little more than an emergency bandage, has been slow in coming. Delivery was expected to begin in early August, but has now been pushed back to September.

For something closer to an economic vaccine, Lebanon is looking to the IMF as the primary source of the $20bn that it desperately needs to keep the nation afloat. But that will not come easily or quickly. Lebanon has to demonstrate that it is putting its profligate and unruly house in order. To that end, it finally conceived an economic reform programme which is the basis of negotiations with the IMF that began in May and will last for many months.

There is no guarantee that the government will succeed. Lebanon’s position is drastically weakened by its first hard default in March on a $1.2bn Eurobond debt, which shattered any remaining confidence in the Lebanese banking system.

No results are expected from the IMF negotiations before October at the earliest. The Lebanese negotiating team is divided over the precise figures for the country’s enormous debts and losses, and two of its members have resigned.

Even if an agreement is reached with the IMF, there are other visible pitfalls. The US is currently resisting Iran’s application to the IMF for a $5bn Covid-19 emergency loan. There is no guarantee that Washington won’t likewise prevent a bailout for the Lebanese government, which it believes is dominated by Iran’s Hezbollah allies.

In an interview with a Saudi TV station on 26 June, the US ambassador to Lebanon, Dorothy Shea, openly blamed Hezbollah for the Lebanese government’s failure to tackle the economic crisis. Hezbollah has accused the US of starving Lebanon of dollars, and a sympathetic judge in the southern town of Tyre issued a ruling banning the local media from carrying statements from the ambassador.

The government’s reform programme has been denounced by virtually all of Lebanon’s factional leaders, although the cabinet is supposedly made up of independent technocrats. The main objection is to the thinly disguised haircut – taking a large chunk from the biggest accounts in exchange for shares in the bank – that would hit the top 5 per cent of bank deposits, seen as another devastating blow to investor confidence.

How did Lebanon, once hailed as the Switzerland of the Middle East, reach such desperate straits?

It probably started with independence back in 1943. The country has 18 officially recognised religious sects but the basic divide back then was between Christians and Muslims. In those days, the saying was that Lebanon was like a bird that needed its two wings to fly. Top jobs were divvied up on a sectarian basis. Nothing could happen without consensus.

One major problem now is that since the 1980s, there is a third divide, between Sunni and Shia Muslims. There is no such thing as a bird with three wings. If there were, it couldn’t fly. That is Lebanon today.

The 1975-1990 civil war entrenched the role of sectarian warlords who have dominated politics – and money – ever since. “This confessional regime is very solid, very entrenched,” argues Walid Jumblatt, the self-identified warlord of the Druze minority. “This political class, myself included, is part of this confessional system. The collusion between the leaders on corruption means they can never reform.”

Whoever is in governmental office, the real power lies with a handful of sectarian factional leaders who call the shots. On the Shia side, there are Hezbollah’s chief Hassan Nasrallah and his ally, Nabih Berri, speaker of parliament and leader of the Amal movement. For the Sunnis, Saad al-Hariri, former prime minister and son of the assassinated ex-PM Rafic al-Hariri, is the main figure. The Druze have Jumblatt, while the Maronite Christians are divided between President Michel Aoun with his Free Patriotic Movement, which is allied to Hezbollah, and the Phalangists (Samy Gemayel) and Lebanese Forces (Samir Geagea), who are in opposition. 

Together, the sectarian factional leaders have milked the country dry. In the post-civil war reconstruction years of the 1990s, money gushed into Lebanon from donors, from Lebanese expatriates remitting to their families or stashing it in high-yielding banks, and from the regional patrons of the political barons. The banks lent the money to the Central Bank, which lent it to successive governments, which went on spending-sprees as the leaders jostled for their share of the proceeds and stuffed the bureaucracy with loyal followers.

It was a bubble. Nobody was producing anything. But the public spending bonanza went on. By 2019 the country was saddled with an eye-watering debt ratio of 176 per cent of GDP, and a huge balance of payments and fiscal deficits. Corruption was rampant. An estimated $47bn was invested in electricity infrastructure, but the power cuts continued.

Corruption is tolerable when times are good. But not when the cold winds are blowing. In October 2019, when the bankrupt government of Saad al-Hariri tried to impose a tax on free social media platforms, the nation erupted. Across class, sect and regional barriers, unprecedented demonstrations in Beirut, Tripoli and elsewhere, denounced all Lebanon’s political leaders as never before. Hariri and his government resigned, and was replaced by the Diab administration, whose ministers were appointed only by the Hezbollah-led alliance.

[See also: Inside Beirut’s revolutionary movement]

The political barons were taken aback by this “revolution”. But they were saved by the coronavirus lockdown, which allowed them to reassert themselves as the patrons of aid and services in their own regions, while the government took advantage of the curfew to break up protest camps in the centres of Beirut and Tripoli.

In Martyrs’ Square, the epicentre of the revolution in downtown Beirut, all that is left of those heady days is a huge clenched fist with “Revolution” written on it, and a scrawled slogan on the statue of the eponymous martyrs, which reads: “Despite Corona, the Revolution remains”.

And so it does, in the shape of dozens of disparate groups which have kept in touch by social media but have failed to produce any structures or leaders. Many of its early enthusiasts had dropped out even before the lockdown. Attempts to stage a big demonstration on 6 June failed disastrously, with only a few thousand turning up and the affair dissolving into violence as protestors were attacked by Shia militants and rock-throwing hooligans clashed with riot police. This had sinister sectarian overtones raising alarming echoes of the civil war.

“We’re way beyond demonstrations,” said a teacher friend and erstwhile “revolution” supporter. “My salary used to be good, now it’s peanuts. Prices have tripled. The banks are holding our life savings hostage. As soon as we can leave the country, we will.” That disillusion is widely shared.

[See also: Lebanon’s people are finally rejecting their country’s entrenched political elite]

The Lebanese pound is now in free fall against the US dollar, slashing the value of people’s labour, salaries and savings as prices head in the opposite direction. If this were the UK, the pound in your pocket would suddenly have become worth 18p. Bankers say there is no limit to how far the currency could fall. Many are predicting a lost decade, or longer, and nobody knows what will emerge after that.

“Yes, it is existential,” says veteran banker Maurice Sehnaoui, who is advising the government and who is more worried now than during all the earlier wars and invasions.

“The state is sick, the economy is sick, and the banks are in very, very deep shit. Yes, the system could collapse. I am tense all the time. It’s not a question of bombs like we had before. I’m afraid of what will happen after the chaos. This time, I don’t know what is the future. Nobody does. But for sure it will not be the Lebanon you know.”

Jim Muir is based in Beirut and has covered Lebanon and the Middle East since 1975, much of the time for the BBC

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