Lebanon’s Prime Minister-designate Saad Hariri met with President Michel Aoun this week – for the 14th time since being nominated in October – in what will likely be yet another ill-fated attempt at forming the ‘technocratic’ government necessary to unlock foreign assistance.

At this point, Lebanon’s inability to form a cabinet following the previous government’s resignation in the aftershocks of the 4 August Beirut port explosion is incredible – yet at the same time completely emblematic of the rot at the center of Lebanese politics. The first candidate, Mustafa Adib, floundered for a couple of months before Mr Hariri (who was forced to resign last November due to nationwide protests) once again returned to the scene (MEES, 13 November).

The French-led international effort to aid Lebanon’s collapsing economy is practically begging for a new government, no matter how nominal its ‘technocratic, independent’ credentials actually are. After all, the country is on the verge of collapse, and even if the West (and the US in particular) is reluctant to help a country where Iran’s presence via-Hezbollah is as strong as it is, the consensus is that another failed state in the Middle East suits no one.

And ‘failed state’ status is exactly what Lebanon is approaching. Over the last 16 months, the country has transformed from a stagnant – though occasionally opulent – middle income country into arguably the world’s biggest economic basket case.


The crisis, of course, was years in the making (MEES, 21 December 2018). The low-growth economy ran one of the largest current account deficits globally over the last decade, but its government (and particularly the central bank, Banque du Liban) assured everyone that its foreign reserves were intact and sufficient to back the $80bn+ in dollar-denominated commercial bank deposits as well as keep the long-standing currency peg (LBP 1,500 = $1) intact.

By the end of last year, it was clear that Banque du Liban had been cooking the books, utilizing accounting schemes that would make Bernie Madoff proud (MEES, 20 December 2019). Banks increasingly barred depositors from withdrawing US dollars; the Lebanese Pound lost over 80% of its value against the US dollar; and year-on-year inflation grew to 100-500% depending on the product.

All told, the carnage – though still in its early days – is immense. The IMF forecasts 25% GDP contraction this year (see chart), which only rivals Venezuela and Libya. And even that fails to grasp the devolution. The entire population cannot withdraw dollars from the bank (and won’t for the foreseeable future), instead having to convert them into rapidly depreciating Lebanese Pounds.

As one banker puts it, “In the next few years, Lebanon will essentially become what Syria was pre-civil war. The wealthy will travel to Cyprus or London for some shopping, as the Syrian bourgeoisie did to Beirut. But the notion of a comfortable, middle class life here will soon become a fantasy as purchasing power completely erodes.”

Charts included Off A Cliff: Lebanon’s Economy Is Set To Contract 25% This Year (GDP Growth, %)



What’s the best-case scenario for Lebanon going forward? Short of a full-scale revolution (which, given its factionalized population would likely descend into civil war), the most people can hope for is a new government inevitably formed more-or-less by the country’s existing power brokers. Though by no means ideal, this would at least meet one of the international community’s main demands and reopen dialogue for reconstruction aid, IMF loans, and allow for a rejigging of the loans it defaulted on earlier this year (MEES, 13 March) and the loans it has to repay in the near-term.

This does offer some hope. Back in 2018, $11.5bn was pledged in soft loans for infrastructure development at the Cedre conference in Paris. In theory only a few fiscal reforms could unlock a good chunk of this (MEES, 13 April 2018). Separately, the IMF was negotiating a $10bn+ bailout with the Lebanese government prior to its collapse (MEES, 26 June).

But even in a best-case scenario, the future for the population looks grim. True, some IMF cash and international project finance would boost GDP (or just offset contraction), but Lebanon’s ultimate fortunes are tied to the Banque du Liban. Foreign money will do little to restore confidence in the commercial banks to a point where depositors wouldn’t unleash a run-on-the-banks as soon as capital controls are eased. On some level, a major haircut is inevitable. And even if financial stability were restored, Lebanon’s once-heralded banking sector will never again attract the foreign deposits (and thus current account deposits) that helped keep the import-obsessed economy afloat. Lebanese weren’t the only depositors: throughout the entire Middle East (and Lebanese diaspora), Lebanon was once considered a safe and profitable place (via exorbitant interest rates) to park one’s money. Not anymore.

This also means the lifting of subsidies – which cover basic foodstuffs, medicine, and fuel – is an inevitability. With no dollar subsidy in place, this means citizens will be paying for these goods with a currency worth 1/6th of what it was 16 months ago. BdL chief Riad Salemeh says reserves required to cover subsidies could expire by January, so whether aid beginning trickling in following government formation will be immaterial to the harsh reality ahead.

Unlike nearly every other country, 2020 in Lebanon may somehow represent the calm before the storm; and 2021 will be the year that the slow, steady decline begins.