The COVID-19 public health crisis has unmasked a dirty little secret. A lot of the economic growth the world has experienced over the last decade has been built on debt, money-printing, and cooking the books. The expansion has been spurious, to say the least, and the Coronavirus ignited the powder keg. Everyone’s reaction in the aftermath of the Great Recession was extraordinary, but what followed at the height of the pandemiconomy was unprecedented. Are we paying for the sins of our past? After what has transpired in Lebanon this century, the people are the victims of the Faustian bargain.
The Unfolding Collapse in Beirut
The road to ruin for Lebanon started in October when anti-government demonstrations swept the country. Hundreds of thousands of Lebanese took to the streets and demanded the end to decades of a corrupt regime filled with leaders who have sought to enrich themselves at the expense of the citizenry. For President Michael Aoun, it has been business as usual, seemingly indifferent to what has been transpiring in his country.
Months later, the Coronavirus pandemic catalyzed Lebanon’s greater economic strife. The global public health crisis triggered the demise of businesses that left tens of thousands of people out of work. At the same time, the government defaulted on $90 billion of debt, exposing how much of a Ponzi scheme economy Lebanon had been for years.
The new normal in Lebanon in our post-Coronavirus world is quite different than what most countries are facing today and will endure tomorrow. The nation is experiencing a currency crisis, causing the pound to lose as much as 90% of its value in only a few months. Inflation has spiked 85%, and food inflation has soared 200%. Savings have been wiped out. Medicine shortages are prevalent, and the demand for social services has skyrocketed. The unemployment rate has topped 7%. Rolling blackouts and rising suicide cases have contributed to the financial crisis crippling Lebanon.
The people are now anticipating intensifying shortages, leading households to stockpile canned goods and other essentials. Even hospitals are adapting to the situation, limiting their work to emergencies and patients going through chemotherapy.
Since Lebanon defaulted on its foreign debt for the first time in March, the International Monetary Fund (IMF) had been requested to intervene with a bailout. Officials are asking that the IMF overhaul its finances and restore confidence in the system. The problem is that politicians and bankers back home are fighting over a myriad of factors, prompting the IMF to encourage the government to settle their domestic strife as soon as possible.
If the IMF does not help, the Lebanese government thinks it has a plan. Policymakers are betting on expatriated carrying U.S. dollars returning home once the COVID-19 restrictions are lifted. But if people are looking to leave the country, why would others come back?
Amin Younes, an entrepreneur, summarized the situation in an interview with Bloomberg:
“I’m an optimist by nature. I was always the one who’d say things will be OK but now I can’t see the light. You wake up and everything’s shattered, everything you worked for and poured your passion into and you have no control.”
A Lebanese Affair
But how did it get this way? Lebanon’s decimation was put into high gear late last year, but its demise had been initiated decades ago through a toxic concoction of state-led interventions and distortions.
The central bank borrowed from private financial institutions to keep the fixed exchange rate above 1.5000 pound per U.S. dollar. The purpose of this mechanism was to ensure prices for imports were lower. Unfortunately, the loans executed by the banks came from deposits of ordinary clients, the same people who were pushed to deposit their money amid unsustainable 15% interest rates.
Eventually, the multi-decade peg to the greenback set the wheels in motion for a crater-sized collapse. Corruption expanded, economic support from Saudi Arabia slowed, and general confidence diminished. As time went by, the government, the banks, and the people ran out of cash. The IMF has stated that it is willing to be of assistance, but only if the government is genuine about eliminating corruption.
Leaked documents to the press revealed that the central bank engaged in shady practices by boosting its assets by $6 billion. The Financial Times, which read the 2018 audited statements, reported that the central bank’s Riad Salame utilized questionable accounting tactics to increase the organization’s assets and balance its books, which had highlighted the swelling of risky liabilities. Although they were signed off by auditors at EY and Deloitte, two independent central banking experts noted that they had never heard of some of the accounting measures Salame performed. Plus, the “seigniorage on financial stability,” which refers to profits earned when a bank prints money, may have been incorrectly used to conceal losses. The government has pledged to conduct a forensic audit of the central bank after the report went public.
If there is an official finding of wrongdoing, this would further prove the corruption in Lebanon. Of course, the odious nature of central banking is just a symptom of a greater disease infecting the country.
The Coronavirus pandemic has exposed the fragility of so many nations around the world. The countries on the brink of collapse could have postponed their inevitable decay if it were not for the coronacrisis. The strain on their economies and budgets have forced the rest of the globe to see how phony these places have been for years. From China to Turkey to Lebanon, the dominos keep falling. The key question is: What is the next state to fall?
Read more from Andrew Moran.