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And the government's failure to deliver reforms meant foreign donors held back billions of dollars in aid they had pledged.
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When the state needed to rein in spending, politicians splurged on a public sector pay rise before the 2018 election. Meanwhile, the cost of servicing Lebanon's debt surged to about a third or more of budget spending. By some accounts, the central bank's assets are more than wiped out by what it owes, so it may be sitting on big losses.
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What was less obvious - and is now a point of contention - was a rise in liabilities. Improved dollar flows showed up in climbing foreign reserves. Rivalries left it without a president for most of 2016.īut the central bank, Banque du Liban, led by former Merrill Lynch banker Riad Salameh since 1993, introduced "financial engineering", a range of mechanisms that amounted to offering banks lavish returns for new dollars. Lebanon was still politically dysfunctional. Given the Lebanese pound had been pegged to the dollar at 1,500 for over two decades and could be freely exchanged at a bank or by a supermarket cashier, what was there to lose?ĭollars flowed again and banks could keep funding the spending binge. That was until 2016, when banks began offering remarkable interest rates for new deposits of dollars - an officially accepted currency in the dollarised economy - and even more extraordinary rates for Lebanese pound deposits.Įlsewhere in the world savers earned tiny returns. The budget deficit rocketed and the balance of payments sank deeper into the red, as transfers failed to match imports of everything from staple foods to flashy cars. Sunni Muslim Gulf states turned away with the rising influence in Lebanon of Iran, via Hezbollah, a heavily armed Lebanese Shi'ite group whose political power has grown. Even in the 2008 global financial crash, they sent cash home.īut remittances started slowing from 2011 as Lebanon's sectarian squabbling led to more political sclerosis and much of the Middle East, including neighbouring Syria, descended into chaos. Yet one of its most reliable sources of dollars was remittances from the millions of Lebanese who went abroad to find work. But how did the nation of about 6 million people get there?Īfter the civil war, Lebanon balanced its books with tourism receipts, foreign aid, earnings from its financial industry and the largesse of Gulf Arab states, which bankrolled the state by bolstering central bank reserves. Some economists have described Lebanon's financial system as a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors.
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Its electricity plants can't keep the lights on and Lebanon's only reliable export is its human capital. Lebanon's financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints.ĭowntown Beirut, levelled in the civil war, rose up with skyscrapers built by international architects and swanky shopping malls filled with designer boutiques that took payment in dollars.īut Lebanon had little else to show for a debt mountain equivalent to 150% of national output, one of the world's highest burdens.