Lebanon’s Dysfunctional Political Economy
Using the prospect of a flood of refugees as a bargaining chip in international negotiations, the government is happy to subsist on foreign-exchange reserves while waiting to collect geopolitical rents. Yet there is reason to hope that this strategy, which has already impoverished half the population, will fail.
PARIS – Lebanon’s economy has collapsed. There is little confusion about why or what is needed to save it. The question is why nothing has been done.
For the last two decades, Lebanon had been living off capital inflows, averaging 20% of GDP per year. Thanks to high interest rates, deposits – largely denominated in US dollars – grew to about 400% of Lebanon’s GDP, with much of the money being lent to the state to finance large fiscal deficits. Last July, the current-account deficit was over 25% of GDP, and public debt exceeded 150% of GDP. Government securities and deposits at the central bank accounted for 14% and 55% of bank assets, respectively, for a total sovereign exposure of nearly 70% of assets. Meanwhile, GDP growth has been close to zero since 2011.
The house of cards collapsed late last year, when large withdrawals led to a run on deposits, followed by a sudden stop to capital inflows. By the beginning of this year, Lebanon was mired in a triple crisis: both the state and the banks were bankrupt, lacking liquidity and unable to borrow, and the country suffered from a yawning external deficit.