Unpacking the Collapse of the Lebanese Economy

The setting, a flattened land covered with soil and debris. Just a few hours prior, a loud bang followed by a shockwave sent the port of Beirut into a state of frenzy. People were sent running, desperately trying to find a place to seek shelter. Already experiencing an economic crisis, the explosion furthered its turmoil (NASSAR & NASTACĂ, 2021).

With its currency already depreciating, Lebanon's economy was sent into a mode of panic (Baumann, 2020). However, to know what truly happened to the Lebanese economy, we must first rewind when the economy first showed signs of failure (Blair, 2022).

War-torn Past and Religious Tensions

To better understand the current situation in Lebanon, we must acknowledge the precedents created by its history. Gaining independence from the French following the conclusion of World War Two, Lebanon, like many developing nations at the time, was divided along ethnic and religious lines (Snaije, 2022). The Lebanese National Pact of 1943 was a power-sharing legislation that mandated the President always be a Maronite Christian and the Prime Minister a Sunni Muslim. However, while this set the precedent for divisions in society based on religion, the coexistence remained largely peaceful and it was threatened by foreign intervention, specifically the migration of Palestinians into Lebanon (Lebanese National Pact | History, Significance, & Facts, n.d.).

Following an event in 1970 known as Black September, the Palestinian Liberation Organisation was forced out of Jordan, their previous stronghold. Geographically, the PLO shifted its operations toward Lebanon, and this exacerbated religious tensions which culminated in the Lebanese Civil War from 1975 to 1990. This war played a huge role in crippling the Lebanese economy as it resulted in Lebanon playing catch up with other Middle Eastern nations by taking immense loans which it has been unable to finance ever since (Salti, 2019).

Immense Corruption

A huge factor in Lebanon’s current state is the high level of corruption within its administration. In 2021, it achieved a score of 24/100 on Transparency International’s Corruption Perception Index, ranking it 149 out of 180 countries (Transparency International, 2022). Along with the Netherlands and Iraq, the Lebanese government allocates its seats based on Confessionalism, a practice that distributes power according to religion (Salamey & Payne, 2008). Many Lebanese officials have thus remained in power since the war, and are important cogs to a corrupted system which has infiltrated many aspects of the life of Lebanese citizens. The extent of the issue culminated in two notable riots in 2015 and 2019 over garbage and a rise in austerity. Furthermore, the former riot led to the emergence of Beirut Madinati, a volunteer political campaign that gained immense traction during both the 2016 Beirut Municipality Elections and the 2022 Lebanese Elections (Louthan, n.d.). It is important to acknowledge that Beirut Madinati received support from both Muslim and Christian districts, a sign of unity regardless of religion against its corrupt administration.

Poor Administration

Along with immense corruption, the Lebanese economy has been poorly managed. As many of the political elite have stakes in Lebanon’s private banks, they are naturally incentivised to raise interest rates despite the economy’s contraction. Furthermore, the government has covered little ground in terms of industrial policy or infrastructure investment. From 2012 to 2014, the country ranked last in the world in terms of electricity supply and has consistently been amongst the worst four ever since. While the industrial sector has played a crucial role for Lebanon in terms of employment, its contribution to GDP has declined by 2 percent annually between 2010 and 2016 (Abdou, 2019).

Also, there has been a critical lack of diversification in the country’s exports and income streams. Lebanon is among the world’s most remittance-dependent economies, and the percentage of remittance contribution to the GDP has continued to increase as Lebanese citizens try to navigate high inflation and a poor job market. However, with many of these workers working in the surrounding Arab nations’ oil and gas industries, the oil price crash in 2020 severely impacted these remittance streams and enhanced the decline of Lebanon (Bayly, 2020).

Port of Beirut Explosion

The Port of Beirut Explosion occurred on 4 August 2020 and could be viewed as the final nail in the coffin for the Lebanese economy. Caused by mismanagement at multiple levels of Lebanese authorities, the explosion occurred when approximately 2700 tonnes of ammonium nitrate was ignited (Fakih & Majzoub, 2021). The economy still experiences the tremors of the blast today, as its costs have been estimated to exceed 15 Billion USD and the families of its victims are still traumatised and seeking answers (Qiblawi, 2022).

Implications
 The consequences of these have been felt by Lebanon’s economy. Post explosion, the real GDP of Lebanon decreased by 37.1 percent(World Bank, 2021). As a result, the standard of living (SOL) was deemed ‘inadequate’, as over 300,000 Lebanese were left without a home and 70,000 were left without a job (Issa, 2021). With the national debt exceeding 95 billion USD (CEIC, 2021), and real GDP decreasing, this has caused the national debt to GDP ratio to be around 172% in 2020 (TakeProfit, n.d.). As there is a significant correlation between national debt and investments, such debt will be detrimental to the recovery of the Lebanese economy (de Mendonça & Brito, 2021). With FDI in Lebanon accounting for up to 5.08 of its GDP, it is one of the most significant contributors in the area (IDAL, n.d.). Hence, fixing its debt issue to encourage investors is imperative in its goal of rebuilding its economy.

Conclusion

The situation in Lebanon is extremely dire, with the path to recovery still much a blur. It is up to its new government to take reign of its inadequacies and past mistakes, while collaboration with foreign powers and international bodies is crucial to allow it to stay afloat.

This article was written by Ng Zheng Yi and Samuel Quay, with inputs from Keeven Cheong.

About the Authors

Ng Zheng Yi and Samuel Quay were Research Analysts at the Africa & Middle East desk at SEIC.

Keeven Cheong was the Research Director at SEIC.

The authors’ views are their own and do not represent the official position of the SMU Economics Intelligence Club. These articles may be reproduced with prior permission from SEIC and due credit to the author(s) and SEIC.

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