How Did We Get Here – Haircut Part Two
30 Years at a Glance: The Recent Economic History of Lebanon
The current economic situation in Lebanon is – either directly or indirectly – a cumulative result of the previous strategies, policies, and events. Understanding the factors which led to the proposition of the Haircut in Lebanon necessitates looking back at the last 30 years from a financial and economic perspective. Below is the sequence of events leading up to the crisis we are witnessing today.
- The Lebanese civil war that lasted from 1975- 1990 utterly damaged Lebanon‘s economic infrastructure. After the war, the Lebanese Government launched a USD 20 billion reconstruction program which aided in:
- reducing annual inflation from 1005% to around 5% between 1992 and 1998
- increasing foreign currency reserves from 1.4 Billion to 6 Billion
- growing the real GDP 8% in 1994, 7% in 1995, 3% in 1997-98 and 1% in 1999; (1996’s results were affected by Israel‘s Operation Grapes of Wrath in April of that year.
- Solidere, a 2 billion USD firm, was founded to boost what was called the reconstruction of Beirut’s central district; a lot of ambiguity remains concerning Solidere to date.
- Eventually, the stock market reopened, international banks and insurance companies reinvested in Lebanon.
- The LBP was pegged to USD since 1997 at a rate of 1507.5 which led to an overvalued currency in relation to Lebanon’s national productivity with reliance on remittances to sustain the economy and the currency.
- Governments implemented a competitive, free market regime which was very controversial, knowing that exclusivities, which are counter-intuitive in such a market, are not only present, but also controlling the entire economy. The laissez-faire commercial tradition approach provided no restrictions on foreign exchange or capital movement.
- Government borrowing increased, and with no projects to boost productivity in sight, borrowing on budget allowed for more corruption and government spending on wages, debt servicing, and other undefined “expenditures”.
- The financial world crisis of 2008 threw an opportunity in the lap of the Lebanese banking system. A real estate bubble was created due to 20 billion surplus in the balance-of-payment, which was the result of reverse capital remitted by Lebanese expats between 2006-10 and mainly due to the lack of trust in foreign investment & banks especially during and post 2008 turmoil.
- Consequently, in 2008, the MSCI index provider ranked Lebanon the world’s best performer due to a 51% increase in Beirut Stock Exchange. This was mainly due to the major Lebanese diaspora who transferred huge amounts to Lebanon.
- After 2011, the local economy was affected by the Syrian civil war, growing by a yearly average of 1.7% during the year 2011 and until 2016.
- The central bank initiated a series of “financial engineering” transactions, which were technically swapping LBP for fresh dollars (attracted from overseas) at exorbitant interest rates reaching a staggering 30%. According to the governor, these swaps were made due to the imminent dangers at the time and the need to preserve currency stability which, in turn, is essential to maintaining social security.
- During this time, banks were making incredible, yet artificial profit.
- Interests owed to earlier depositors were paid out using the deposits of newcomers. Pulling off a typical, textbook Ponzi scheme.
- Banks offered interest rates that they were incapable of acquiring. This crippled the economy because high net worth individuals would then prefer to park their wealth in the bank hoping to make even more profit than if they were to invest it in their economy. This drained the market from any liquidity and deceived depositors into believing that they were earning high interest rates when, in fact, they were making artificial revenues that were no more than data entries.
- While deposits were increasing, liquidity was decreasing, and in 2019, government debt reached a new threshold of USD 90 billion.
- Since Lebanon’s trade balance is structurally negative especially due to complete reliance on services such as banking and tourism and the negligence of the industrial and agricultural sectors, the trade deficit reached USD 20.3 billion in 2017. That year, the country imported USD 23.1 billion worth of goods and services while barely exporting USD 2.8 billion.
- The losses of the Central Bank reached unprecedented levels due to the continuous lack of transparency and due to the ongoing, repetitive financial swaps or to put it differently, the government’s so-called “financial engineering”.
Similar shortcomings of the political and economic policies and system led to high rates of unemployment, real estate inflation, high cost of living, etc… and culminated in the major protest movement in October of 2019.
An endless abyss of corruption due to the continuous control of the lords of war, militias, and, above all, nepotism, which placed similarly corrupt political and economical elites in positions of power. Successively, governments were falling short of investigating and taking appropriate judicial action against corruption.
According to the NGO Transparency International, Lebanon ranked 138th out of 180 countries on the Corruption Perception Index in 2016. This very cycle of corruption also led to social inequality and a huge gap between social classes. The top 1% notably wealthy receive approximately a quarter of the total national income, placing Lebanon among the most inequitable countries in the world.
The Aftermath of These Inadequate Policies and Strategies:
- Unaccounted losses of the Central Bank and government
- Shortage of foreign liquidity
- Inability to repay foreign debts
- Shortage of major commodities as a direct result of the foreign liquidity shortage
- Partial collapse of the banking sector
- Mistrust in the banking system causing most of the Lebanese diaspora to refrain from transferring or depositing any more money in Lebanese banks
- Local, LBP, currency devaluation
Officials are turning to the Haircut as if it were the only available plan for salvation; as if they have completely forgotten about…
To be continued ..