To understand Lebanon’s financial collapse, look to its politics.
The country has been deeply damaged by an increasingly dysfunctional political system. A series of compromises have alienated it from its main markets in the Gulf and strangled its economy; anyone that has glanced at fluctuations in Lebanese bank deposits over the last 10 years can see the correlation.
Imagine if Boris Johnson or Donald Trump were obliged to form joint governments with Jeremy Corbyn or Bernie Sanders. The result would be paralysis and lack of accountability as each party pulls the country in opposite directions and blames the other for the state of limbo. This has been the state of affairs in Lebanon since the Doha agreement of 2008.
That agreement followed an 18-month siege that paralyzed Beirut and an attack on the city by Hezbollah’s ‘black shirts’. The Doha formula imposed governments of national unity between Prime Minister Saad Hariri’s pro-Saudi camp and Hezbollah’s pro-Iran camp and their respective internal allies.
The pattern was set: each period of subsequent paralysis was followed by further compromise as the tug of war pulled the country away from its principal economic partners, the Arab Gulf states, with the regional balance of power tilting towards Hezbollah.
It was not supposed to be like this. The Baabda Declaration in June 2012, reached after a process of national dialogue, was meant to secure Lebanon’s neutrality in regional conflicts, with both sides promising to hold back on external alliances and coexist despite difference over major regional issues like the war in Syria, the standoff between the US and Iran or relations with Israel or the Gulf states.
This has worn away. The Baabda declaration itself became a sham when Hezbollah inserted itself into the war in Syria in support of the Assad regime and overtly got involved in Iraq and Yemen as an Iranian proxy. This was followed by Saudi opposition to concessions by Hariri that led to the election of General Michel Aoun, an ally of Hezbollah, as president in October 2016; again, after a political paralysis that lasted 29 months with no active government and no head of state.
The Saudis were also furious when President Aoun’s son-in-law, Foreign Minister Gebran Bassil, abstained from condemning the burning of the Saudi embassy in Tehran at an Arab League meeting in Cairo in January 2016, citing the need to preserve national unity.
Fearing that he was simply providing Hezbollah with protection in the guise of compromise, the Saudis pressured Hariri to resign in November 2017 during a trip to Riyadh, but he later challenged that by retracting on his resignation when back in Beirut. Lebanon was caught between two sides, and as the regional conflict intensified from tension to open confrontation, neutrality was no longer an option.
An estimated 350,000 Lebanese expats live and work in Saudi Arabia, the UAE, Qatar and Kuwait. These countries are also the main clients for Lebanese contractors, consultants and advertising companies, some of which have offices there. The domestic tourism industry relies heavily on Arab Gulf visitors and they are a principal source of foreign investments especially in the real estate sector.
Lebanon also enjoyed a certain degree of political and economic protection from the US and the Gulf, and Hezbollah benefited indirectly from that protection, as it also shielded it to a certain degree from sanctions.
The deterioration of relations meant that the country was cut off by its Gulf partners. This was manifested in travel bans for Gulf Cooperation Council (GCC) nationals to Lebanon and a decrease in investments and bank deposits, as well as a decrease in remittances from Lebanese expats, partly because of economic crisis in the Gulf countries themselves.
Saudi Arabia withdrew $4 billion of aid to the Lebanese army and internal security forces, and no aid or deposits were forthcoming as the economic and financial situation deteriorated.
The costs to the Lebanese economy include the opportunity cost created by the annual threat of war with Israel, after which trips are cancelled and projects postponed. Hezbollah also controls a section of Beirut port where it pays no duty or taxes. Add to that the economic fallout from the war in Syria, such as the impact on exports, the inflow of refugees and the cost of Hezbollah’s involvement.
The burden of these political factors is difficult to estimate but it constitutes the ransom that the Lebanese economy bears as a cost of the compromise. This is not to absolve Lebanese politicians from corruption or bankers of mismanagement but to add that political factors cannot be ignored.
The cumulative cost and economic impact of being cut off from its main economic partner eventually bankrupted the country. The fiscal and financial aspects, with Lebanon’s inability to service its debt, are but a reflection of these political factors. In the long run, the key to avoiding complete collapse is to restore relations with the GCC and free Lebanon from that very costly grip.