As the country slides closer to economic collapse and people are unable to access their money, questions are being asked about how the currency was kept stable for so many years during economic stagnation.
Over the last week, Lebanon’s three-month-long popular uprising saw its most violent nights yet. The political class, who have borne the brunt of protestors’ anger, have been perceived as having done nothing to address their political grievances and - perhaps more importantly - the economic and financial disaster facing the country.
With the country’s banks continuing to impose capital controls, which have severely restricted people’s ability to access their money, Lebanon's socioeconomic situation appears to be rapidly deteriorating.
The capital controls imposed by the country’s banking sector have exacerbated an already difficult economic situation that has seen significant layoffs, the reduction of working hours and high price volatility.
“People were already in a precarious social and economic situation prior to the protests… people are now struggling to make ends meet.” Nadim el-Kak, Beirut-based political activist and researcher with the Lebanese Centre for Policy Studies, told TRT World.
On top of all of that, the country is facing rising prices for staple goods such as food, fuel and medicine.
“Not only do people have less access to their money, but their purchasing power has decreased. It’s like a perfect storm and it's only getting worse” said el-Kak.
As a result, the anger towards the country’s banking and financial system - once upheld as the Switzerland of the Middle East - has become palpable and with people unable to access money and the risk of life savings dissolving away into nothing, the attention paid to the banks is only likely to increase.
For protesters, focus on the country’s financial institutions, including the Banque du Liban (BdL) - the country’s central bank - and the private banking sector is driven by a palpable sense of anger and frustration.
“The purpose behind [targeting financial institutions] was to target those that have been directly affecting people’s lives, specifically banks,” said el-Kak. “Because of the capital controls and the worsening economic situation, because we’re getting to the point where this has become the status quo, it's become clearer that things aren’t just going to suddenly get better. This feeling has set in and along with it came this rage and anger.”
In many ways this represents a new dynamic in Lebanon, a country that according to Hicham Safieddine, an Assistant Professor at King’s College London and author of the book Banking on the State: The Financial Foundations of Lebanon, “is one of the most neoliberal countries on the planet”.
Speaking to TRT World, Safieddine said: “Thanks to the general sector-wide nature of the current crisis and its direct impact on people’s daily lives resulting from withdrawal restrictions and rising prices, the financial system and the banks in particular are now under attack.”
But how did Lebanon get to this point?
For decades, Lebanon’s commercial banks have been considered the ‘bulwark’ of the Lebanese economy. These local banks are the focal point of any money coming into the country, money going out to buy imports and funding the public debt.
For its part, Banque du Liban was - like all central banks - tasked with enacting a monetary policy to ensure the stability of the Lebanese lira, and since 1997, BdL has managed to keep the exchange rate pegged at 1507.5 LBP to the US dollar.
Normally, currencies will fluctuate along with a country’s balance of payments, and will devalue as exports come in and foreign currency goes out. However, despite Lebanon’s near-zero industrial output and heavy reliance on imported goods, the exchange rate remained the same.
‘Maintaining the peg’, as it came to be known, became almost an obsession as it allowed for what is now becoming clear was effectively an illusion of middle class lifestyle in the country. The peg allowed for the conspicuous consumption of luxury goods, financed personal travel and study abroad, all while the economy continued to stagnate.
In order to sustain the illusion, Lebanon’s central bank had to ensure a continual inflow of foreign currency, namely US dollars. Enter what financial experts refer to as ‘financial engineering’ and what Triangle, a Lebanese think tank referred to as "a regulated Ponzi scheme which has benefited the banking sector and left the rest of the Lebanese to foot the bill."
Simply put, this consisted of BdL borrowing US dollar deposits from commercial banks at exorbitant interest rates. In return, commercial banks were entitled to take out Lebanese lira loans worth 150 per cent of the previously referred to US dollar loans at an interest rate of 2 percent. The commercial banks would then re-issue the same Lira loans back to the central bank at an interest rate of 13 per cent, all while offering their clients unusually high rates of return that unsurprisingly were never questioned.
While foreign cash was still flowing into the country, this shored up BdL’s foreign currency reserves - thereby facilitating the maintenance of the peg - and led to record profits for the banking sector, all while the economy continued to flounder. Lebanon’s banks had essentially been reduced to being the middleman between depositors and BdL. With most people unable to access their money and with analysts coming to the previously unimaginable conclusion that depositors’ money has become nothing more than an accounting entry, the inherent unsustainability of the system has come to the fore.
For Safieddine, the foundation of this issue ultimately goes back to the formal establishment of Lebanon’s banking lobby - the Association of Banks - in 1959 and the country’s neo-liberal economic orientation.
“The Association of Banks managed to hollow out Lebanon’s Law of Money Credit, which outlines the powers of the central bank, from provisions that would have empowered the central bank to better regulate the banking sector,” he told TRT World.
“Later banking reforms were repeatedly undermined by the propensity of both institutions to shy away from regulating the sector in a manner that would reduce the risk of crisis under the pretext of safeguarding Lebanon’s free-market economy.This meant the sector was liable for severe shocks in bad economic times such as those we are seeing today.”
Despite the announcement of a new government, after almost three months without one, beyond short-term solutions involving injections of foreign cash into the system, there is no serious long-term solution on the table, a fact implicitly acknowledged by the incoming prime minister who admitted that Lebanon is facing an economic catastrophe.
For supporters of the popular uprising, this means more direct targeting not only of the country’s political institutions, but its financial institutions as well.
“We’re past the stage where the revolution was mostly restricted to big squares in downtown Beirut. Now it's more about action and about actual existences and livelihoods being threatened. The types of mobilisations we are seeing reflect the increasing state of panic and despair,” el-Kak told TRT World.
“I see attacks against government institutions and private banks only increasing. There may be some shifts in strategies where protesters may start targeting the homes of bank owners or board members.”
A revolt against neoliberalism?
While there has been a tendency to classify the popular movement in Lebanon - along with those in Chile, Iraq and elsewhere - as part of a global wave of revolt against neoliberalism, in Lebanon’s case, the country’s deeply ingrained neo-liberal economic outlook arguably puts a temper on such analyses.
“Many, if not most Lebanese, are - so far - not ideologically opposed to the major pillars of neoliberalism… the recent campaign against Gebran Bassil’s participation in Davos because he is a ‘bad ambassador’ of Lebanon, rather than because Davos itself is a platform for neoliberal global elites, illustrates this point,” Safieddine told TRT World. He added: “[Historically] there has been little opposition, even among the general population, to free market economics and banking power.”
At the same time, it has become clear that the political, if not ideological ground in Lebanon has shifted. This has not gone unnoticed by the country’s political class who have all sought, in one form or another, to position themselves as the country’s saviours.
“There are definite attempts by political parties to vindicate themselves or to at least remove a share of the responsibility,” el-Kak told TRT World.
While responsibility for the architecture of Lebanon’s post-Civil War financial order rests in large part with the late Rafiq Hariri and his cadre, for el-Kak, no party can claim to have been fundamentally opposed to the system that was created.
“Although not all parties have been the masterminds behind the [current] economic model, they have all tremendously benefitted from it and all have, in some way or another, taken part in reproducing it and extracting from it as much as possible.”
While for Safieddine “forces in both camps are supporters of free-market economics”, there is a clear historical delineator between the March 14th Western-aligned camp led by former prime minister Saad Hariri and the March 8th, Hezbollah-led camp.
“While the two camps are not as clearly delineated today as they were after the 2005 asssassination of [Rafiq] Hariri, in general… March 14th forces are much more aligned with the banking oligarchy as well as Western and Gulf capital and thereby much more sympathetic to banking interests. March 8th forces, such as Hezbollah, are critical of central banking and private banking policies designed to appease US financial sanctions aimed at undermining funding for armed resistance to Israel,” Safieddine told TRT World.
This provides context for the reported appearance last week of Hezbollah supporters outside of BdL headquarters in Beirut in support of protesters who they have previously opposed - often violently - in the course of the three-month long popular uprising.
Coming on the back of the formation of a new Free Patriotic Movement - a Hezbollah-dominated and nominally ‘technocratic’ government led by Prime Minister Hassan Diab, there exists a distinct possibility that we may see increased attempts by the new government to translate the popular anger towards the banks into the required political capital to carry out their agenda in the lead-up to the scheduled parliamentary elections in 2022.
For el-Kak, this process has already begun, however, hopes for substantial change are low.
“We are already seeing that Hezbollah and Amal are trying to stick to their more left-leaning socialist rhetoric in terms of economic policy, but I truly doubt that whatever alternative plan they come up with will be very different from the previous one.”
Echoing this sentiment, Safieddine said: “It is unlikely that a new government endorsed by the same ruling elite whose policies are responsible for the crisis will be able to come up with a feasible plan to address the current situation, particularly if Western governments and their Gulf allies refuse to provide any meaningful financial support.”
If Lebanon’s modern history is any indication, this assessment may prove to be correct. Historically speaking, some within the popular movement have tended to limit their calls for reform to anti-corruption and good governance, as opposed to deep structural reforms.
For Safieddine, this is an indication of how deeply accepted the system itself is, even if people want to change out the pieces. “We are still far from a revolutionary transformation in the way the majority of people view the role of banks in the economy,” he said. “[However] the longer the crisis and the more organised radical opposition to the banker power is, the more this shift in focus may be consolidated into a revolutionary ideology for drastic change rather than for lowkey reform.”
The longer the new government struggles to bring about significant structural changes to the Lebanese economy and financial system, the more difficulty the established parties may have in adjusting to the country’s newly emerging political reality. The question remains however, is the street the power that could ultimately bring that transformation about? Or will Lebanon continue to be a case of ‘the more things change, the more they remain the same’?