The Lebanon banking crisis continues to worsen as Banque du Liban Governor Riad Salameh says the central bank only has the capacity to keep providing subsidies for a further two months. Lebanon has been using subsidies to import critical goods including food, medicine, and fuel as an economic meltdown has reportedly left half the population in poverty.
Following a year of economic decline instigated by the ongoing COVID-19 pandemic and further entrenched by a massive and fatal explosion at the port of Beirut in August, Lebanon now hangs on the verge of collapse. Analysts at the World Bank predict a reduction in the Lebanese economy of 19.2 percent this year followed by a further 13.2 percent in 2021.
Lebanon’s debt to GDP ratio could reach as high as 194 percent by year-end, plunging the already struggling nation into extreme poverty. The situation has prompted World Bank economists to issue a warning via a Lebanon Economic Monitor report titled The Deliberate Depression:
“As things stand, Lebanon’s economic crisis is likely to be both deeper and longer than most economic crises,” the report reads.
Failure to Allow an Audit
Salameh has told Saudi news network al-Hadath TV that the central bank will allow a forensic audit of Lebanese government accounts following demands from foreign donors. Many feel that the country has suffered under years of neglect and corruption and refuse to offer aid until an audit has been completed. However, Salameh noted that to disclose the accounts of domestic banks would require a change in legislation.
Restructuring consultancy Alvarez & Marsal has already withdrawn its commitment to an audit, citing a lack of cooperation from the bank that resulted in information being withheld.
“Due to the insufficient provision of information, A&M is unable to complete its review,” the consultancy said. A&M went on to clarify that the firm remains available to offer services “under circumstances more conducive to a successful completion of the mandate.”
The Finance Ministry denied the claims, stating that Alvarez & Marsal had attended a Presidential Palace meeting and agreed to an extension on the deadline to secure the information. Lebanese President Michel Aoun feels the audit has been derailed by “interest-driven roadblocks” and he will ensure it is reinstated to avoid failure “in the eyes of the international community.”
Economic Ramifications
The recession has tanked the Lebanese pound by 80 percent, leading to scarce foreign exchange, informal currency controls and chronic electricity shortages. Skyrocketing inflation reached 120 percent in August this year, leaving elderly and vulnerable citizens in a dire state, with already strained pensions losing most of their value.
Tourism has been decimated and merchandise imports shrank by 50 percent in the first eight months of the year, with the World Bank now expecting severe declines in both tax and non-tax revenues. The youth of Lebanon has been hit hard by rising unemployment, with a crippling 40 percent now unable to either work or study.
“Lebanon’s recession is likely to be arduous and prolonged given the lack of necessary policymaking,” said the World Bank.
To counteract the ongoing effects of the crisis, the central bank plans to reorganise and sell domestic Lebanese banks that fail to increase their capital by 20% by the end of February 2021. The Lebanese government has already failed to honour a $1.2 billion Eurobond repayment scheduled for March this year, just 11 days before entering full lockdown to combat the spread of COVID-19.
This only compounded the problem, throwing the economy into a rapid downward spiral and driving millions of people into poverty.
US Sanctions
Following threats of US sanctions, Salameh has assured citizens that the bank is doing everything in its power to cooperate with the US Treasury. Under suspicion of enabling Iranian-backed militant group Hezbollah, the US government has previously enacted sanctions on certain Lebanese officials.
On December 4, 2020, Hezbollah filed lawsuits against former MP Fares Souaid who in May this year said Hezbollah Secretary General Hassan Nasrallah was “ready to give up Lebanon in exchange for the lifting of the sanctions imposed on Iran.” He went on to state that the “US is not responding and its empathy cannot be exploited.” Nasrallah recently announced his intentions to move to Iran over concerns for his safety following the assassination of senior Iranian scientist Mohsen Fakhrizadeh.
No end in sight
When the government imposed new tax measures in October 2019 to address the banking crisis, Lebanese citizens flocked to the streets in protest, demanding accountability and the resignation of politicians.
The peaceful action was countered with teargas, rubber bullets, beatings, and live ammunition from military and security forces. Most recently, Lebanese lawyer Wassef Al-Harakeh was brutally beaten by riot police on December 4, 2020. He was leading a protest against Salameh and other Lebanese politicians believed to be involved in corruption. At the time, Salameh was giving a lecture outside the ESA Business School in the Clemenceau district of Beirut.
Without serious action, there seems no visible end to the deepening crisis, and yet Lebanese officials continue to reject demands that would unlock billions in much-needed aid. Lebanon has now been in a deep recession for over a year due to widespread corruption, chronic mismanagement and the knock-on effects of the war in neighbouring Syria.
The Lebanese banking crisis is one that we will update as time goes on. For more banking and financial stories be sure to visit our newsroom.