Nobody Will Save Lebanon’s Economy if the Lebanese Are Not Worried About Immediate Crisis

Hussain Abdul-Hussain

The condition of the Lebanese economy “is not sustainable,” said the vice president of the World Bank, Ferid Belhaj, in a statement that shook whatever confidence Lebanon still had left. (But more on that later.) Even though Belhaj opined that he was, nevertheless, “not worried” just yet, he also said the country had been willfully defying gravity and that “a day would come when gravity materializes.” “Gravity,” in Lebanon’s circumstance, would take the form of debt, or rather, unmanageable debt. For it is clear, despite the latest exhortation by the Bank, that Lebanon has not the will to reform itself out of a dependency on borrowed money.

You can start this story at almost any point in the past half century. But more recent iterations of the perennial Lebanese crisis began with the central bank’s attempt to boost the economy by instructing banks – following the outbreak of the Syrian war in 2011 and the accompanying economic downturn in Lebanon – to offer cheap money to first-time home buyers. As expected, this caused a real-estate bubble. Then, under pressure from the World Bank, Beirut ended its easy money policy last month, causing the bubble to burst. The real-estate industry and the economy at large are now in retreat. With a sharp decline in demand, developers have put their plans on hold. “[N]ew construction permits [were] down 18 percent in the first half of 2018,” according to the economic research department at Byblos Bank.

As the real-estate sector fell, the Lebanese economy was left with two other main sources of income: remittances and tourism. Yet even these two traditional contributors to GNP have been underperforming as well.

Byblos Bank noted that remittance inflows were down 7 percent in 2017, and stood at $7.1 billion, equivalent to 13 percent of GNP. In 2004, remittances constituted 27 percent of Lebanon’s GNP.

Meanwhile, even though tourism grew 10 percent in 2017, that lagged behind growth levels set in earlier years, such as at the height of tourist arrivals in 2005. Moreover, growth now came from a lower base. The nation’s deteriorating infrastructure and environmental pollution have been turning off foreign visitors, which means that what tourists there have been have mainly been expats in Lebanon or foreigners of Lebanese stock. Not a great deal of new foreign exchange was coming into the country, in other words.

Yet, Lebanon cannot afford to face declining remittances or foreign tourists. It depends on the hard currency they bring in to help repay debt, the third-highest national indebtedness in the world, relative to GDP. The alternative is to borrow more to service older borrowings. In fact, Beirut has already been doing just that. Even in the good years, it never made enough money to pay its expenses. But sustaining debt by more debt surely is an unsustainable policy, one that Beirut either has to change or else face greater risks. This is the defiance of gravity that Belhaj of the World Bank alluded to.

“Debt has become like a monster with an insatiable appetite for new dollars,” according to Walid Marrouch, professor of economics at Lebanese American University. “This policy is like riding a bicycle, you stop peddling and you fall,” Marrouch said. “The central bank has no option but to keep borrowing money to feed the growing debt. But how far can debt grow without defaulting?”

In the past, friends of Lebanon, such as Saudi Arabia and other Gulf countries, would come to the rescue whenever it needed help. Right after Hezbollah’s war with Israel in 2006, Riyadh parked $1 billion at Lebanon’s central bank to stabilize the national currency. Throughout the 1990s and until his assassination in 2004, former prime minister Rafik Hariri managed to work his connections in Gulf states. But today, with Beirut playing geopolitics by siding with cash-strapped Iran instead of the wealthy Gulf, the next time Lebanon finds itself under economic stress no friendly government is likely to be so forthcoming with aid.

The World Bank wants Lebanon to introduce fundamental reforms that can, in the medium and long term, shield the economy from the inevitable “day of reckoning.” Such reforms require policies that are much deeper than reshuffling debt. They include making Lebanon more attractive to foreign investors. According to Byblos Bank, Lebanon ranks eighth in foreign direct investment attractiveness in the region. But how much more attractive can Lebanon become for foreign investors when the Hezbollah militia holds the strings of power and the nation’s top elected official continue to sink in a bottomless pit of corruption?

Neither Hezbollah nor the rest of the political establishment have shown any past form in instituting reform. The problem is that while many have shaky confidence about the state of the economy generally, paradoxically, they are also, like the World Bank’s Belhaj, sufficiently unworried about immediate collapse. Without that, there is no imperative to institute reform for the long run. Lebanon must find itself an economic engine other than rent from remittances, real-estate bubbles or on entertaining tourists. (But don’t hold your breath.) It just might be that what Lebanon needs is a jolting shock so that it stops being so unworried about the present. It should be worried for the short-, medium- and long-run. For ironically, being worried is the best way to secure the future.

Hussain Abdul-Hussain is the Washington bureau chief of Kuwaiti daily Al-Rai and a former visiting fellow at Chatham House in London.