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How deep is Lebanon’s bottomless pit?

Sami Zoughaib,
Wassim Maktabi

Mired in a years-long financial crisis, Lebanon is challenging the adage “there is no such thing as a bottomless pit”. Regardless of how bad the situation is, it can and will get worse. Having been dragged into a seemingly endless abyss due to endemic corruption, greed, and financial criminality, Lebanon’s descent is unparalleled in the history of modern economies. 

That Lebanon’s protracted calamity is premeditated and man-made is not up for debate. Certainly, the World Bank is not an infallible institution, but when was the last time it described a domestic crisis as “deliberate”, as they have for Lebanon?1 

Lebanon’s class of kleptocrats and warlords bear the greatest responsibility for the crisis, as they turned the country’s economy into a cash cow that feeds a few gluttonous mouths at the expense of all others. Over three decades, the fiscal and monetary policies adopted by successive governments, parliaments, and the central bank fostered an ideal environment for rent extraction and wealth accumulation.2 The model is based on attracting capital inflows through high interest rates, banking secrecy, and high-yield—and extremely risky—financial instruments to fund confessional fiefdoms through the state budget and create a fake sense of monetary stability.

The collapse of this model—namely a major balance of payments deficit, increased fragility of the Lebanese financial sector, and regional security issues—triggered the onset of the 2019 crisis. Despite the decimation of private and public wealth and the rapid erosion of human capital, the state has failed to implement decisive reforms, and instead has opted for palliative and politically motivated measures. One such example of this is the central bank’s aggressive interventions in the currency market to artificially stabilize the Lebanese Pound (LBP) against the US dollar at about LBP 20,000 ahead of the heated election season.3 This decision cost Lebanon around $2 billion, almost the same amount as loans that could be disbursed by the International Monetary Fund (IMF),4 when Godot arrives.

In responding to the crisis, those responsible for and benefitting from state capture were able to preserve and secure their own interests. The state’s response does not stem from ineptitude, rather from calculated intentions. It primarily aims to socialize the near $100 billion in losses through inflation and the lirafication of deposits (at disadvantageous rates).5 By socializing the losses, small and medium depositors will carry the burden of the crisis in the form of an effective 80% haircut on their savings, while those who benefitted from egregious returns reign supreme. Those who do not have any deposits, more than one-half of the population, will see their incomes eroded by extreme levels of inflation.6

Collusion among elites effectively sabotaged what is now known as the Lazard Plan – the financial recovery framework adopted by the Diab government two years ago.7 The plan, which proposed the simple and rather capitalist principle of keeping private losses, i.e. those of the banking sector, private by writing-off capital and bailing-in large deposits, was met by fierce opposition and made obsolete.8 Efforts to undermine the Lazard plan were supported by every established party who – while cosplaying as staunch rivals during elections – worked together in the famous fact-finding committee in parliament to tear the plan apart.  

Now, after two long and very costly years, things have not improved despite the latest political and economic developments.

Parliamentary elections legitimized the ruling kleptocrats once again, giving the real overwhelming majority to the same interests that have brought society to its knees. Opposition figures entering parliament are rightfully celebrated as a major breakthrough,9 but they have largely failed to propose the radical agenda that Lebanon needs. Regardless of the popular narrative, anti-establishment MPs are not a monolithic group. The opposition comprises of people of various ideological leanings who differ over important policy prescriptions.10 On the critical issue of addressing the economic and financial crisis, some members of the emerging opposition in parliament have even adopted an establishment-friendly rhetoric, which reflects their opaque or inchoate positions regarding the distribution of financial losses. Put more bluntly, the current make-up of parliament is conducive to little more than perpetuating socioeconomic malaise.

Meanwhile, the Najib Mikati cabinet approved, rather ironically, the same plan which the very parties it represents had sabotaged two years ago. The current plan, which is a word-for-word translation of the draft letter of intent that was slated to be addressed—but was never sent—to the IMF board,11 espouses the same principles as the one approved by the Diab government. Only this time, the losses are larger, and the sacrifices are bigger. In fact, the central bank has wasted almost $20 billion—more than six times the size of the prospective IMF loan—of the country’s foreign reserve since the onset of the crisis, mostly on regressive subsidies and maintaining a thin veneer of monetary stability.12

Regardless of its major accountability loopholes and other weaknesses, the plan rightfully states that the losses should be addressed through writing-off of bank equity, bailing-in large depositors, restructuring and recapitalizing the financial sector, and minor contributions from public assets limited to recapitalizing the central bank. Adding insult to injury, the plan was ratified on the day before Mikati’s cabinet went into a caretaker role, rendering it unable to implement any of the stipulated measures. 

Like clockwork, traditional parties from across the political spectrum, including the ones represented in the government, started to voice their deep concerns regarding the ratified plan under the tired and worn-out pretext of “protecting the deposits”. Despite the glaring hypocrisy, this narrative is disingenuous.13 The only course of action that would save most depositors is found in the very plan that political elites and banks are now sabotaging.14

The proposed alternative is a “sovereign fund” that manages public assets and covers realized losses. With the exact governance structure and feasibility of such a fund left intentionally vague, it is, plainly said, a robbery of biblical proportions. 

Sovereign funds are established by states with valuable resources and commodities to preserve wealth and benefit future generations. The returns on investments in these funds are spent on public projects, such as infrastructure, to support and spur development. In Lebanon, by contrast, the proposed fund does the exact opposite. It would use the current and future generations’ public wealth to cover past and existing private losses. This not only flies in the face of ethical and humane principles, but also capitalist ones.

Moreover, establishing a sovereign fund would effectively hand the management of all public assets in Lebanon over to a centralized body with high political exposure. Considering the extent of corruption and cronyism in our captured state, one can only imagine how the returns will be distributed.15

Lastly, some proposals of the fund place public assets as collateral against the debt owed by the government and central bank to commercial banks. This means that if the returns from these assets fail to cover the owed debt, creditors become their rightful owners. 

The financial crisis in Lebanon leaves little room for hope. Based on the current trajectory, the distribution of losses will foster a new, mutated power-sharing arrangement like the one that ended the civil war. Only this time, society will be in a much more vulnerable position.

That said, there is reason for action as we stare into the abyss. All those who stand against the injustices that pervade this chapter of Lebanon’s history must coalesce and partake in the arduous task of challenging the imposed status-quo and charting a new course away from a shared dark fate. Only through purposeful political organization that reignites popular movements and maintains a close cooperation with MPs and bureaucrats who represent public interest, may a light shine at the end of Lebanon’s bottomless pit. 

The authors would like to thank John McCabe for his valuable feedback and for editing the article.

1. World Bank. December 2020. “Lebanon Economic Monitor: The Deliberate Depression.” World Bank Group.
2. Maktabi, W., S. Zoughaib, and S. Atallah. 2022. “Anatomy of the Lebanese Financial Crisis: How and why it happened.” The Policy Initiative. (forthcoming)
3. Banque du Liban. December 2021. Basic Circular #161
4. The Lebanese government reached a Staff-Level agreement with the IMF for a package worth $3 billion
5. Banque du Liban. December 2021. Intermediate Circular #601.
6. World Bank. World Development Indicators; Central Administration of Statistics. April 2022. Consumer Price Index.
7. Lebanese Council of Ministers. April 2020. “The Lebanese Government’s Financial Recovery Plan.”
8. Atallah, S., M. Mahmalat, and S. Zoughaib. September 2020. “Hiding Behind Disaster: How International Aid Risks Helping Elites, Not Citizens.” Lebanese Center for Policy Studies.
9. Atallah, S. May 2022. “Lebanon’s Parliamentary Elections: How did the opposition win?” The Policy Initiative.
10. El Kak, N. and S. Atallah. April 2022. “Lebanon’s Political Alternatives: Mapping the Opposition.” The Policy Initiative.
11. Ghosn, J. May 2022. “لماذا أغضبت حكومة نجيب ميقاتي المصارف في يومها الأخير قبل تصريف الأعمال.” [Podcast].
12. World Bank. December 2020. “Subsidy Reform Note.” World Bank Group.; Banque du Liban Foreign Currencies.
13. Mahmalat, M. April 2020. “Deposits Made “Sacred”: The Dangerous Red Line of Lebanon’s Elites.” Journal of Middle Eastern Politics and Policy.14. Association of Banks in Lebanon. May 2022. “موقف جمعية المصارف من إقرار الحكومة لاستراتيجية النهوض في القطاع المالي.”; LBCI Vision 2030 (@Vision2030LBCI). May 23, 2022. See here Atallah, S., M. Mahmalat, and W. Maktabi. 2021. “Public infrastructure procurement in post-conflict power-sharing arrangements: Evidence from Lebanon’s Council for Development and Reconstruction.” The International Growth Center.


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