Beirut, a city once known as the Paris of the Middle East, is in a state of mourning. On Aug. 4, 2020, a cataclysmic blast in the Lebanese capital’s major port area left 170 people dead, and thousands injured. The figures are likely to rise as rescue efforts continue. At the time of writing, it is estimated that around 300,000 people have lost their homes.
The blast has been linked to 2,750 tonnes of ammonium nitrate stored in a warehouse on the waterfront following the seizure of Russian cargo ship the Rhosus by port authorities in 2013. The explosion created was so powerful that it was felt in Turkey, Syria, Israel, and heard as far away as Cyprus, more than 250 km away across the Mediterranean Sea. The United States Geological Survey have said that the blast created seismic waves equivalent to a magnitude 3.3 earthquake.
The explosion took place at a critical moment in Lebanon’s modern history. The country has been experiencing the worst economic crisis since the 1975-90 Lebanese Civil War. Prior to the blast, the World Bank had projected that the current financial crisis could push 45 percent of people in Lebanon below the poverty line. With reports of daily blackouts, food shortages and extreme price hikes in recent months, the United Nations now warns of a humanitarian crisis in the country.
What’s behind Lebanon’s economic crisis? And, with the world’s eyes on Lebanon, can the blast be a catalyst for change in the country?
A falling local currency
In 1997, Lebanon’s Central bank, the Banque du Liban (“BdL”), pegged the Lebanese Lira to the U.S. dollar at 1507 to 1. Lebanon’s dollarized economy allowed for people to pay in Lebanese Lira and U.S. dollars almost interchangeably. The country’s economy relied heavily on remittances from its large diaspora community and the tourism industry, that both increased the flow of U.S. dollars into the country. Then, in September 2019, the Lira’s value dropped for the first time in two decades.
In June 2020, Reuters reported that the Lira had lost 80 percent of its value since October 2019. Sharp falls meant that it was trading at nearly 9,000 to the dollar on the black market. With Lebanon’s currency in free fall, citizens who had saved their money in lira saw a lifetime of savings wiped out.
The collapse of local currency, worsened by the slowdown of global production due to the Covid-19 pandemic, led to severe price hikes in goods. Lebanon is an import-based economy, with 80 percent of products imported from abroad, including staple foods such as meat and grains. By April 2020, prices of basic goods soared by 60 percent, and have since worsened. Today, bread is too expensive for many citizens to afford and some bakeries even threatened to stop bread distribution, saying they were losing money. Beirut’s strategic grain silo, that served as a reserve of wheat for the country, was also destroyed in the blast.
Banking sector near to collapse
Lebanese banks have long attracted large foreign inflows by offering some of the region’s highest interest rates. The inflow of U.S. dollars had allowed the country to pay for imports despite their low exports. Yet, in 2016, reports indicated that capital flows into the country had slowed, affected in part by the Syrian refuge crisis. In a bid to keep money flowing in and to incentivize deposits, the BdL engaged in a novel – but controversial “financial engineering” practice that critics have labelled Lebanon’s state-sponsored Ponzi scheme.
The BdL set up complex borrow arrangements with local banks, whereby banks offered interest rates as high as 14 percent. These high rates, in turn, required new deposits to continue to pay the interest rates to the previous customers. Local banks used these deposits to make their own deposits with the BdL. The BdL used these funds for government spending, such as imports and interest payments – at favourable exchange rates.
By September 2019, the BdL could no longer curb the flow of money leaving the country or prevent the fall in the Lira. The following month, banks imposed severe restrictions on the amount of dollars that people could withdraw from their accounts, usually, it is about $200 a week. Those who kept their savings in dollar now cannot access their money, simply because there aren’t enough dollars in the Lebanese financial system. Even Lebanese expats who want to send money in dollars to family and friends in Lebanon cannot do so as the dollars are being confiscated by banks.
A Corrupt Political System
Ordinary Lebanese citizens maintain that the port explosion fits into a pattern of failed corrupt governance in Lebanon. The official response to the blast suggested that port officials were aware of the dangers posed by the store of ammonium nitrate, while reports have suggested that the prime minister’s office was told about the ammonium nitrate store in late July. Many believe that the incompetence at the centre of this tragedy reflects a multitude of failures committed by a corrupt political class and decades of economic mismanagement by successive governments.
The Lebanese government’s debt levels are currently the third highest in the world. The inability to solve the economic crisis has resulted in continuous anti-government protests since October last year, sparked by former prime minister Saad Al-Hariri’s tax proposals on tobacco, petrol and WhatsApp’s voice messaging service. This was the straw that broke the camel’s back and thousands took to streets to protest the tax reforms, as well as wider issues of sectarian quotas and government corruption. The protests resulted in Al-Hariri’s resignation. However, despite promising change, Hasan Diab’s successive government failed to implement a coherent strategy to deal with the crisis and discontent with the current system grew.
On Aug. 8, 2020, four days following the blast, demonstrators stormed government buildings and took to the streets with banners demanding politicians to “Resign or Hang.” Lebanon’s information minister, Manal Abdel-Samad, resigned the same day, apologising for failing the Lebanese people over the blast. Her resignation, she stated, was made “given the magnitude of the catastrophe” and “in response to the public will for change.” Later the environment minister resigned. By Sunday evening, Aug. 9, nine MPs had resigned with more expected to follow. On Monday Aug. 10, Prime Minister Hassan Diab announced the resignation of his government.
A turning point for Lebanon?
For decades, sectarianism and division have effectively been constitutionalised. Article 24 of Lebanon’s constitution, adopted in 1926, specifies that Christians and Muslims must have equal number of seats in parliament. As a condition of independence in 1943, all parties agreed that the President must be a Maronite Christian, the Prime Minister a Sunni Muslim, and the speaker of Parliament Shia Muslim. Carving up political power among its religions and sects may have helped keep the peace by ensuring that all Lebanese have a say in government. However, it has also enabled powerful elites, whose power is guaranteed, to hand out jobs based on sect and patronage. The endemic corruption within this system has plundered ministries and lead to economic collapse. The blast is being widely seen in Lebanon as a symbol of the rottenness of the state.
Years of economic fragility, followed by the Covid-19 pandemic and now the blast, leave Lebanon today in a desperate state. The explosion in Beirut embodies all the aspects of failed governance and criminal negligence that the Lebanese people have been protesting since October 2019. It further exemplifies the state’s complete disregard for the security and welfare of its citizens. The country needs urgent reforms. This will only be possible with a government that puts sectarian divides on hold and unites under a narrow mandate to rebuild the country and recommence negotiations with the IMF.
On Sunday, Aug. 9, an emergency donor conference led by French President Emmanuel Macron raised pledges worth nearly 253 million euros (equivalent of $298 million) for the provision of immediate humanitarian relief. However, donor countries emphasised that beyond this, any longer-term support would be conditional on changes brought in by the Lebanese authorities and establishing reforms. No-one is prepared to give a bankrupt Lebanon financial aid until the country’s political powers commit to true reform.
Diab’s government is now in a caretaker position as political factions debate the formation of a new government and appoint a new prime minister. This is the first challenge and may take several months. The Lebanese people may have little say in who is selected for the successive government, since the cabinet is appointed by President Michel Aoun in consultation with Parliament. Given that the system itself is set up to protect the political elite, any potential for change is dependent on this group’s willingness loosen their grip on power. Many believe that the new cabinet may simply be a version of the old one, which is why international pressure and continued protest is key.
The strongest candidates to head the new cabinet appear to be former Prime minister Saad Al-Hariri and Lebanese Ambassador and judge Nawwaf Salam. Former minister Khaled Qabbani’s name has also been mentioned. Reappointing Hariri would be favoured by the United States and France. However, if he were to be appointed again, he would have to form a new government that is also acceptable to the Lebanese people. At the beginning of the October protests, Salam was regarded as an acceptable alternative by the protest movement and his name was previously put forward as a possible prime minister since he is not embedded within established political groups.
Many demonstrators, however, believe that the country must look outside its governing elite and beyond the current political system for real change. Facing a humanitarian disaster, the people of Lebanon urgently need food, jobs and the means to rebuild Beirut. But protests since the blast highlight that they are demanding much more than this. They seek democracy, the rule of law and freedom to speak their minds. What is clear at this point, is that this is just the beginning and there is a long road ahead.
Clara Guest is a London-based freelance translator and writer with a regional focus on the Middle East and North Africa. She holds a BA in French and Spanish and a Master’s in Near and Middle Eastern Studies from the School of Oriental and African Studies (SOAS).