The myth of Lebanon’s resilience

The economic slowdown is evident across most industries, amid a growing fiscal deficit, an unsustainable debt to GDP ratio, rising unemployment and a slowdown in deposits growth.
by Elias Sakr English

14 September 2018 | 14:14

Source: by Annahar

  • by Elias Sakr
  • Source: Annahar
  • Last update: 14 September 2018 | 14:14

This picture shows pedestrians walking in Lebanon's Centre Ville, once beaming with shops, restaurants and tourists (AP)

BEIRUT: Since the outbreak of the Syrian conflict, Lebanon’s economy has gone from bad to worse. The economic slowdown is evident across most industries, amid a growing fiscal deficit (1), an unsustainable debt to GDP ratio (2), rising unemployment and a decline in deposits growth (3); the primary source to finance state expenditures and debt servicing.

These negative indicators, coupled with aggressive monetary policies to defend the Lebanese pound, have driven interest rates significantly higher (4), which is translating into a higher cost of debt servicing and a slowdown in total loan growth.

This slowdown is, in turn, resulting in meager growth rates across various sectors, mainly the real estate market, which was hard hit by the termination of subsidized housing loans, one of several measures undertaken by the Central Bank to protect the dollar peg. Other measures to protect the currency include swap operations (5), a key factor behind the rise in interest rates that have been also fueled by a rise in global interest rates.

An increase in the ratio of non-performing and doubtful loans, subdued foreign investments, and a decline in remittance inflows (6) are among tens of other indicators that signal a looming crisis.

Yet, instead of recognizing the severity of the economic and monetary situation, the sweeping majority of state officials, bankers, and economists chose to reassure ordinary Lebanese that they have nothing to fear.

Some have even gone as far as to accuse the media of conspiring with local and foreign actors to deliberately spark a crisis. The few officials who acknowledged these alarming facts chose to blame Lebanon’s economic woes entirely on the Syrian refugee crisis in a clear attempt to score points against their political rivals. And while the refugee crisis has contributed to the economic slowdown, blaming Lebanon’s misfortunes solely on refugees is shortsighted, if not intentionally misleading.

If those refugees were to return to their homeland today, Lebanon’s economic hardships would persist, unless urgent and radical reforms are implemented; reforms that should be prioritized over local partisan interests and conflicting regional agendas.

The current Cabinet formation crisis, a recurring theme in Lebanon’s history and a trademark of Lebanese politics, reflects the everlasting power struggle over state resources and serves as a reminder that partisan interests will continue to transcend national ones.

If recent history is anything to go by, the Lebanese shouldn’t expect the upcoming Cabinet to change course. That is if a cabinet is formed anytime soon.

Quite the contrary, the regional turmoil fueled by an intricate web of conflicting American, Russian, Turkish, Saudi and Iranian interests, will manifest itself in deepening divisions in Lebanon, where the Iranian-sponsored armed Hezbollah group will continue to have the upper hand.

Despite this bleak outlook, some might argue that Lebanon, against all odds, will weather its political crisis and economic challenges.

Optimists cite the country’s “history of economic and financial resilience” as a buffer against shocks.

Yet, this resilience is nothing more than an illusion that the country’s financial and political elite has well marketed over the years.

An illusion, which they claim, helped Lebanon’s economy weather the assassination of former Prime Minister and business tycoon Rafiq Hariri, an event that shocked the country but was nevertheless followed, a few years later, by double digit growth.

Advocates of this theory, however, have chosen either deliberately or unintentionally to disregard the fact that Lebanon, at the time, benefited from an unprecedented inflow of capital, largely thanks to the global financial crisis rather than an attractive business environment.

A crisis that prompted many Lebanese expats, Gulf investors, and wealthy foreigners to channel billions of dollars into a relatively conservative banking environment that steered clear of complex financial products or so called derivatives and offered lucrative interest rates.

Only a decade before, Lebanon was on the brink of a financial meltdown, which the late Hariri averted after securing billions of dollars in international financial aid to avoid a repeat of a currency devaluation that began in the late 1980’s and saw the Lebanese pound hit 2800 against the dollar in July 1992.

History is rife with examples of missed red flags that preceded financial meltdowns, the latest being the US subprime mortgage crisis.

Assuming good intent, Lebanon is in denial.


(1) Lebanon’s balance of payments posted a deficit of USD 155.7 million in 2017, following a surplus of USD 1.2 billion in 2016, constituting the sixth annual deficit since 2011.

(2) Lebanon’s debt to GDP ratio is the world’s third highest at 150%. It is expected to grow to 180% of GDP in 2023, according to the International Monetary Fund.

(3) Customer deposits grew by 3.3% in 2017 compared to an average previous 5-year growth of 7%. Most rating agencies have maintained that Lebanon needs to maintain a deposit growth rate of at least 6% to finance its debt.

(4) In September 2018, S&P warned it could lower its ratings on Lebanon if “the government was unable to access the international debt capital markets for an extended period, perhaps evidenced by further Banque du Liban financial engineering transactions.”

(5) The volume of the Central Bank’s swap operations with commercial banks totaled about USD 10 billion in 2017 compared to nearly USD 15 billion in 2016.

Lebanon’s balance of payments posted a deficit of USD 155.7 million in 2017, following a surplus of USD 1.2 billion in 2016, constituting the sixth annual deficit since 2011.

(6) The inflows of expatriates’ remittances to Lebanon totaled USD 7.1 billion in 2017, down 7% from USD 7.6 billion in 2016.

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