The most explosive thing to keep an eye on in Lebanon is also what no one wants to think about seriously. Indeed, it is not terrorism, Syrian refugees, or the latest ostentatious squabble among the country’s political factions. If anything can genuinely threaten the country’s hard-earned and stubborn stability—it’s the economy, stupid. What solutions are currently discussed or implemented promise at best to postpone a severe, structural crisis. Most stakeholders view this prospect as sufficient, as the country’s economy has for decades been living on borrowed time. But that is the critical mistake they should want to avoid: a much flaunted “resilience” has become part of the problem, allowing for all sorts of anomalies to stack up, relentlessly bringing the system closer to breaking point.

The price of a sack of Lebanese flatbreads was fixed at 1500 LBP in 1997, but its weight went from 1,5kg to 900g today

Anecdotal signs of economic stress are multiplying. In 2016, a dangerous slowdown in foreign currency inflow forced the central bank—Banque du Liban or BdL—to intervene by making the kind of offer big money couldn’t refuse: a 20% kickback on US dollars deposited for as little as one year. Sustaining an overpriced real-estate market has also required legislative and financial stimuli orchestrated by BdL. In the absence of reliable figures, the IMF guesstimates growth at less than 1%. A decline of the insurance sector attests to slowing business across the board. Shop fronts have been putting up signs for rent or sale all over Beirut. At the bottom of the chain, taxi drivers jump on the first occasion to complain of ever longer hours to make ends meet.

Beyond anecdotal evidence, however, it is hard to form a clear opinion. On one side, Lebanon publishes virtually no credible macroeconomic data. On the other, the very nature of its economic model defies conventional analysis. It enigmatically maintains a stable currency, wondrous interest rates on Lebanese pound (LBP)-denominated deposits and tens of profitable home-grown banks, while running a sovereign debt valued at 144% of GDP, producing virtually no exports, enjoying hardly any foreign direct investment, managing government spending without a budget, and for years failing to agree on the basics of an economic policy.

Solutions discussed promise at best to postpone a severe crisis

How is this even possible? A frequent explanation invokes a mysterious form of Lebanese resilience… that seems to go without any further explanation. A variant conjures the genius of BdL governor Riad Salamé, who has held office under a variety of political leaderships since 1993, and who until recently was broadly expected to pull new solutions out of a hat at the advent of any crisis. Finally, Lebanon has developed an unshakeable faith in the existence of a deus ex machina—external developments that over the years have invariably saved Lebanon from its own economic failings. Today that belief is in full force, such that long-term economic thinking largely boils down to speculating about what new marvel—monetizing Syrian refugees, an offshore oil & gas boom, the ripple effects of Syrian reconstruction, or an international conference to bail out the country—will materialize this time around.

The point is elsewhere: Lebanon has developed core vulnerabilities that call not for more magical thinking and prestidigitation, but for a hard-nosed appraisal of the flawed economic system Lebanese have gotten themselves locked into, and whose current fragility is on the verge of compromising what is left of the country’s social compact. What is truly at stake is the stability of the Lebanese pound, whose volatility would have knock-on effects on ordinary people already hard-pressed by the economic downturn, bringing a build-up of all kinds of other social tensions to a head.

Lebanon’s economy, although stagnant and caught in the midst of regional turmoil, draws an aura of stability from three apparently unshakable anchors: a strong banking sector, a robust real estate market and an unflinching LBP, whose value against the dollar was pegged at 1507,5 a generation ago, in 1997.

The banking sector is unusually large and developed by regional standards. Among the country’s fifty commercial banks, fourteen garner about $200 billion worth of deposits. (Jordan, comparable in total GDP, has two major banks and few smaller ones, totalling just over $43 billion in deposits.) Despite a disastrous macroeconomic context, the six largest Lebanese banks increased their profits by 12% in 2016, which they attribute to greater efficiencies and innovative services. Such lucrative business is the third contributor to GDP.  Incidentally, foreign banks present no competitive threat, in a market that is both too small to be truly appealing and largely contingent on BdL policies favouring local entities. “For foreign banks, the profits just aren’t there,” said a former banker.

Affluent banks offer essential support to many households, for whom returns on LBP savings, which average 6%, are often necessary to get by. “Average Lebanese clients are so squeezed by a failing economy,” explained a senior banking executive, “that they desperately need the additional income they make through their deposits.” Thus Lebanon’s high level of savings, by contrast with practices elsewhere in the region. Along with high interest rates, relatively accessible consumer loans and credit further make up for low income, and subsidised mortgages boost the middle class’ access to property.

The most important factor in the sector’s equilibrium is the diaspora

Real-estate is the second leg on which stands the Lebanese miracle, contributing to an estimated fifth of GDP. Although prices have decreased in some segments of the market, and although numerous buildings—old and new—are effectively empty, the sector remains unfazed: “if you look at long-term trends, prices have been relentlessly going up. Our market is different from the US or Europe, so rules that would apply there are irrelevant here,” claimed a former senior official at the Ministry of Finance. Indeed, Lebanon is a country where demand is propped up by steady demographic growth–over 4% in 2015–while supply is held in check both by land scarcity and a widespread tendency among owners to sit on property rather than rent or sell it under-priced.

The most important factor in the sector’s equilibrium, however, likely is the role played by the diaspora. For decades, the country’s volatile politics, underperforming economy and highly stratified society have forced Lebanese to try their luck abroad and acquire social mobility through physical expatriation. Many nonetheless retain strong ties to the homeland, supporting relatives, placing their savings in local banks and purchasing a pied-a-terre. A 10 million-strong diaspora is a steady source of cash; it generates over $7 billion per annum in remittances and represents more than 40% of total bank deposits–a massive influx of USD essential to squaring the country’s balance of payments. “We are net importers,” explained a Lebanese official, “but we can fund our imports with the inflow of foreign currency from the diaspora.” Indeed, in 2016 Lebanon’s trade deficit reached $11,6 billion.

Sending cash goes hand in hand with a powerful desire to make one’s sense of belonging concrete, through property used during holidays and sometimes envisioned as a place to retire. Some segments of the diaspora, particularly Lebanese working in the Gulf, reside in states that offer no prospect of acquiring nationality and little predictability in general terms, and therefore make sure they can fall back on the homeland whenever necessary. This explains in part the seemingly endless construction of new apartment blocks that appear mostly vacant. It also pushes prices beyond the reach of ordinary Lebanese. In the booming neighbourhood of Mar Mikhail, close to the city centre, real estate projects evict inhabitants and seem to ensure that “affordable housing is the last thing people can find in the city.”

The last leg of the Lebanese economy is an astonishingly stable exchange rate. The 1997 peg has held up despite one massive disruption after another, including the state’s virtual bankruptcy of the early 2000s, the assassination of former Prime Minister Rafic Hariri in 2005, the war with Israel the following year, and the fallout of the Syrian tragedy since 2011. This feat is broadly acclaimed as the ultimate evidence of Lebanese resilience. “And it’s one of the most important things the central bank is doing; it is essential for preserving confidence in the system,” said a representative of an international financial organisation.

Lebanese bread is twice subsidised: wheat is imported with an artificially strong LBP and then sold underpriced

This oddity has also become, over the years, an expected, incontrovertible fact-of-life. LBP and USD are interchangeable in everyday transactions, at an informal exchange rate rounded off at 1500. Although consumers are largely unaware of this, a stable pound contributes enormously to propping up their living standards, in an economy where approximately 80% of goods in circulation are imported. A practical example is bread, for which wheat is bought abroad; were the LBP to slip, wheat and therefore bread prices would immediately surge. “Everybody lives off the peg,” an economic journalist pointed out, “because it gives Lebanese an artificially strong purchasing power.”

But the peg plays an even more crucial role in maintaining the state’s own ability to live it up, way beyond what is sustainable even in the short term.

The IMF expects Lebanon’s sovereign debt to grow from 144% of GDP in 2016 to 160% by 2021. If this happens, debt payments or “obligations,” which currently eat up a third of the state’s revenues, would devour 60%. Given that the government’s productive investments are already down to an estimated 1% of its annual budget, this scenario would imply one of three adjustments: scaling back incompressible expenses such as civil servant salaries (approximately 30% of the budget) and subsidies on electricity (approximately 15% in 2016); cutting other key subsidies, like bread; or borrowing more in a vicious spiral. Although prospects for growth or foreign aid sufficient to offset this scenario are hazy at best, Beirut emitted another $3 billion worth of USD denominated treasury bonds (also known as Eurobonds) in March 2017, which were oversubscribed. In other words, the market just can’t get enough Lebanese debt.

The state plans to transfer $1,4 billion to cover the 2017 losses of Electricite du Liban, while illegal generators make $1,7 billion

Who, though, is “the market?” Of course, most foreign creditors would be suspicious of Lebanese bonds, and inevitably impose stringent conditions. Lebanon indeed is ranked “B-” by the rating agency Standard & Poor’s, grouped alongside countries like Argentina viewed as being on the verge of default in the event of any additional economic difficulties.

The trick is that Lebanese debt is a Lebanese business: together, the BdL and Lebanese commercial banks own more than 85% of it. An expatriate Lebanese banker put it bluntly: “Lebanese banks are the only reason why the state still holds.” And they need it to hold, because 60,7% of their assets are… government debt. If the state defaulted, its Lebanese creditors would lose over half of their belongings. For now, however, it’s an extravagantly profitable business: treasury bonds denominated in LBP offer an average of 7,53% interest. They are almost four times more rewarding than United States treasury bonds, which offer just over 2%. A former Lebanese banker said, “quite simply, banks live off the debt.”

The beauty of this scheme comes from the peg, which essentially annuls the foreign exchange risk: a Lebanese bank can exchange dollars to buy LBP denominated sovereign bonds, and convert its investment back into dollars at any given time, at an unchanged rate. Thus Lebanese debt is both profitable and, as long as the state is solvent, risk-free.

How will Lebanon conjure an additional $6 to 7 billion yearly?

In turn, such a fantastic deal attracts much-needed dollars from the diaspora. As Lebanese banks make huge returns by investing the bulk of their liquidity in sovereign debt, they offer high interest rates to their depositors—especially their bigger Lebanese clients abroad. To guarantee trust, Beirut has consistently allowed capital to flow freely, even during serious crises. “Foreign depositors put their faith in a system where their money both is always available and, thanks to the peg, never loses value,” summed up a former advisor to the Minister of Finance.

To loop the loop: deposits in USD, along with remittances, are indispensable to maintaining the peg, which depends on confidence in the country’s ability to service its debt obligations, its imports, its currency exchanges and any cash withdrawals made in USD—short of which the value of the LBP would plummet. As the country constantly bleeds dollars, due to its trade deficit and snowballing repayments of sovereign bonds, the IMF estimates that the Lebanese economy needs an annual 6 to 7% increase in the inflow of USD deposits. So the question is: how will Lebanon conjure up an additional $6,2 to 7,2 billion yearly, without a dramatic overhaul of its economy?  

The problem with the Lebanese economic miracle—based on banks, real estate and the peg—is that it is thoroughly unproductive. Having spent a third of its revenues on interest paid to local banks, another third on salaries & pensions for 300 000 current and past civil servants, and the remainder on subsidies, social security and various forms of redistribution, the state invests virtually nothing in infrastructure, innovation, job creation and the like: Lebanon’s 1% of productively invested GDP compares with a global average of 8,2%. The $1,6 billion UN envelope deployed in response to the Syrian crisis represents, on its own, three times what the government spends productively out-of-pocket.

The Lebanese private sector, meanwhile, does little to pick up the tab. Interest rates on deposits are attractive to the point of dissuading investments in the real economy, which in any event is bedevilled with poor infrastructure and basic services, abundant red tape, an unreliable legal environment, and a predatory ruling class. Such liabilities deter banks from lending to small and medium enterprises, other than at exorbitant rates and against prohibitive collaterals. Even the fiscal structure favours idle money, with heavier taxes on work revenue than on capital revenue.

The one, ostentatious exception revolves around a nascent start-up ecosystem, which is flaunted as the best hope for job-creation for a young and supposedly tech-savvy workforce. BdL has incentivized investments in start-ups through its circular 331 of 2013, a convoluted form of financial engineering that boils down to another extraordinary scheme: BdL gives recipients three times the amount they invest against half their realised gains, via transactions that rely on swapping debt. Regardless, by early 2017 Lebanese investors had reportedly used, in support of Lebanese start-ups, only a fraction of the $400 million dedicated to the initiative. Meanwhile, no measures have been taken to address the many serious hindrances—notably in terms of education, legislation and communications—that hamper bottom-up entrepreneurship. In 2016 local internet speed continued to average 1,8 megabits per second (Mbps) against 6,3 Mbps worldwide. But sobering realities are eclipsed behind the hocus-pocus of international conferences and hackathons.

None of this would matter if the Lebanese economy weren’t broken in more fundamental ways

Instead of triggering innovation, Lebanon’s many obstacles to entrepreneurship and scarce opportunities for other meaningful employment continue to stimulate a vivacious brain drain, which ties back into the economy of debt: successful expatriates repatriate money, through banks that invest in debt, fuelling the very system that pushed them out in the first place. A cynical Lebanese banker captured the cyclicality of it all: “Lebanon is a country whose only export is expats.”

None of this would matter if the Lebanese economy weren’t broken in more fundamental ways. Prospects for growing agricultural or manufactured exports are handicapped by an artificially strong national currency. Cut off from its hinterland by the Syrian conflict, Lebanon has lost its status as a transit hub for regional trade. Tourism has suffered badly from ambient, and occasionally internal, instability. Tensions with Saudi Arabia, a vital economic partner, have made matters worse. Former competitive advantages, such as Lebanon’s ability to serve as a platform for modern business services unavailable elsewhere in the Middle East, have long receded.

What’s left? Mostly dubious bets on the future. Some wager, against all odds, that the old ruling class, which for years has presided over political paralysis and economic plundering, will redeem itself with improved governance. A major real estate developer recalled that, following the October 2016 appointment of Michel Aoun as president, after two and a half years of institutional vacuum, his office “suddenly started receiving 30 phone inquiries a day, instead of 30 a week. People seemed to think that the time had come to buy.” Since then, the cabinet’s performance has been underwhelming. Its draft budget includes no real reforms, but proposes to raise the deficit ceiling from 7,9 to 9,5% of GDP. The government’s two notable initiatives so far have been a proposed VAT increase, from 10 to 11%, and renewed discussions around oil and gas exploration in the Mediterranean seafloor.

Lebanon’s bike sharing scheme, called “Bike 4 All”, will cost 5000 LBP an hour—five times the price of a bus ride across the city

Although Lebanon’s politicians seem to put much stock in a treasure trove of natural resources soon to be extracted along its coastline, they are years away from establishing the sophisticated institutional and regulatory framework required to run an oil & gas industry. Offshore wells will inevitably incur high operating costs, which may deter investment in a depressed international market. An economic journalist, habitually optimistic, sighed: “oil money will be long in the waiting. Even if politicians manage to kick-start exploration, that in itself doesn’t create jobs for Lebanese, nor substantial amounts of foreign direct investments.”

In the interim, many assume that the Syrian conflict can be more advantageously “monetized,” either through increased aid to Syrian refugees on Lebanese soil, or a reconstruction boom in Syria. It remains unclear, however, when any sort of reconstruction might be in the offing, and precisely what role Lebanon may hope to play. Equally uncertain is how a polarized and economically stagnant European Union, or an increasingly inward looking United States, might increase their already formidable financial contributions to alleviating the crisis in Syria and its environs. Meanwhile, none of Russia, China, Iran or Saudi Arabia have given any signs of wanting to throw money of their own at the issue.

Believing in Lebanon’s economic rebound is, above all, an act of faith

But believing in Lebanon’s economic rebound is, above all, an act of faith. A senior portfolio manager perfectly captured the problem: “all these White Knights people are waiting for are illusions, with the exception of Syrian reconstruction. Of course, the matter is overblown. But there will be some momentum, and Lebanon will derive some benefit.” And that belief is enough to live by.

The overreliance on unforeseen saviours has historic foundations. Over decades, the success of the Lebanese economy has often been coincidental. Its banking sector thrived when Palestinians fled their homeland after the creation of Israel; when Syrian and Egyptian industrialists and land-owners incurred nationalisations and moved their base to Beirut; when oil money started flowing from the Gulf; and, more recently, when the US occupation of Iraq caused wealth to change hands. Throughout, the 1956 banking secrecy law, the sacrosanct free flow of capital, and the financial sector’s overall resilience helped Lebanon build the image of a safe-haven.

Today, this applies mostly to Lebanese worldwide, whose faith in the system appears unshakable: during the 2008 global financial crisis, Lebanese banks experienced a 23% increase in non-resident deposits, reflecting a widespread reflex within the diaspora of repatriating capital to a homeland seen as more reliable than other economies. The biggest problem Beirut faces in the short-term is that even this windfall is coming to an end.

Instead of opening up to new opportunities, the Lebanese economy is becoming ever more locked into the vicious circle of debt. And while the latter is growing, the pool of willing depositors may be shrinking—although the lack of reliable data is keeping up the suspense. Ailing economies in the Gulf, the West and places like Nigeria and Brazil make Lebanon’s advantageous banking services even more appealing to expats, but simultaneously reduce the amount of wealth available for repatriation. The same applies to real estate: while it becomes more desirable as a fall-back option, it also becomes less affordable. Aggressive US legislation targeting the finances of drug traffickers and designated terror groups threatens connections between shady Lebanese networks in Africa and Latin America, on one side, and the homeland’s real economy, on the other. By the same token, the burden of compliance, which makes it increasingly challenging to execute international financial transactions, forces many Lebanese to operate via their own national banks and their branches abroad.

The weak link in the cycle of debt was exposed when, between May 2015 and May 2016, Lebanon’s foreign exchange reserves decreased for the first time in 11 years. The drop reflected a slowdown in non-resident deposits, which—given Lebanon’s craving for USD—forced BdL to attract fresh dollars through an elaborate exercise in financial engineering, since referred to as “the swap.”

It started in May 2016, when BdL exchanged with the Ministry of Finance LBP denominated sovereign bonds against Eurobonds valued $2 billion; in other words, it swapped with the state debt it carried in LBP for debt in USD. Between June and October, BdL then sold these Eurobonds, along with other products equivalent to $11 billion, to a selection of Lebanese commercial banks, whose balance sheets were reported to have been jeopardised by risky investments. To buy these products, the banks used their reserves in dollars, as well as dollar deposits in their branches abroad; they also placed what is known as a “private call” to big clients to invite them to participate in the transaction.

In a conventional frame of reference, such an operation would have created even more anxiety

Buying such products at presumably high (but undisclosed) interest rates certainly was interesting in itself, but BdL sweetened the deal further: it bought back from the banks LBP denominated bonds, paying on top of their actual price a bonus corresponding to half the total interests these bonds would have yielded had they been held until maturity. The huge (but undisclosed) profits enabled banks to reward their big clients with 20% one-off interest rates on their deposits in dollars, recoverable within one year. Long story short: the IMF guesstimates that participants made instant gains equivalent to $5 billion, while BdL pulled in $13 billion in fresh dollars. If these figures are correct, the banks involved made a whopping, 40% return on the overall transaction. 

In any conventional frame of reference, such a convoluted, opaque and lucrative operation would have raised flags and created even more anxiety. First, it proved that BdL had to brandish extraordinarily profitable conditions to recapitalize. Second, the central bank ended up selling LBP, de facto, at a low rate—implicitly devaluating the national currency, while paradoxically preserving the appearances and reality of the peg. Third and last, it mobilized key financial operators within the diaspora who will have picked up these worrying signals, nonetheless jumped on the opportunity to make short-term returns, and likely will refrain from ordinary deposits in the period to come. Worse, many can be expected to pull out deposits made in the context of the swap on expiry of its one year term. Said otherwise, BdL staved off a potential crisis of confidence with stop-gap measures that put the financial system at greater risk.

Causes for concern go beyond the current predicament and forecast. In reality, no one has a clear sense of how the economy is doing, because of how systematic Lebanon has been in dismantling its ability to generate systematic data. The last government budget to be approved and published dates to 2005. Intriguingly, BdL doesn’t release its annual balance sheet in full, making it impossible, for example, to determine the exact costs and benefits of something as massive as the swap. Even such basic markers as GDP are anyone’s guess. “The Central Authority for Statistic is doing a poor job,” lamented a prominent Lebanese economist. “For lack of willingness or capacity to collect information in the field and pressure companies for data, it’s all a bit fly-by-night.”

The Central Administration of Statistics publishes only National Accounts “estimates” open to revision, sometimes years later

Left in the dark, foreign institutions like the IMF and local players, notably BdL and commercial banks, knock together a variety of “indicators” whose exact meaning and trustworthiness are uncertain. For instance, Blom Bank circulates a “Purchasing Managers Index” based on the presumed performance of 400 companies, in a country where accounting isn’t particularly straightforward or transparent. BdL’s “Coincident Indicator,” which combines trends such as oil imports and electricity production, is unanimously cited as an essential reference, although its variations—say +3,5% for December 2016—go without any explanations on what they are supposed to describe.

The problem, therefore, isn’t so much a lack of data, but an abundance of undependable figures that reverberate around the financial sector in self-reinforcing ways, with IMF guesstimates ultimately serving to anchor such speculation into more conventional forms of legitimacy. In this context, BdL’s capacity to sustain enough trust for the system to function comes close to wizardry. And, indeed, the illusion holds thanks to one man only. Enter Riad Salamé.

The governor of BdL stands centre-stage in Lebanon’s economic theatre. In theory, the central bank’s mandate is limited to three things: stabilizing the country’s currency, containing inflation and regulating the banking sector. Salamé has been successful on all three accounts, despite the political paralysis that could have affected his regulatory role. In November 2015, an otherwise defunct parliament convened to vote on two laws against financing terrorism, thus enabling Lebanese banks to meet international standards, maintain their access to the dollar, and generally reassure the markets. Observers credited Salamé for this extraordinary—indeed, unconstitutional—session.

More unusual still, BdL has expanded its influence to real estate, a sector that today is inextricably bound up with the banks. 90% of the latter’s loans are related to real estate one way or another–whether through mortgages, lending money to construction companies, or using property as collateral. In 2015, Salamé issued circular 135, which relieved banks of their obligation to sell property acquired from defaulting borrowers within two years—extending the period to 20. This enables banks to behave like traditional owners, and sit on goods they deem undervalued, rather than flood the market and push prices down. The same regulation authorised banks to rate substandard loans (renegotiated with borrowers unable to pay) as normal—therefore preserving the healthy appearances of their balance sheets. BdL also actively uses real estate to increase the banks’ profits. “By lending money to them at 1% rates, when customers borrow starting at 3%, it ensures banks make at least a 2 points margin on real estate loans,” said a Lebanese financial analyst.

The absence of a government-led economic policy has created space over the years for Salamé to run the show. The former Ministry of Finance advisor quipped: “the government’s policy has been, exactly, to do nothing. Someone had to step in.” Since 2013, BdL has implemented stimulus packages adding up to $1 billion annually, to boost the economy through subsidised mortgages, consumer credits and other loans. According to the World Bank, however, “little evidence exists regarding the effect of the BdL stimulus on economic growth or job creation.”

BdL’s remit also encompasses startling legacies of the past, extending its influence into unexpected but critical corners of the Lebanese economy. The central bank owns over 99% of Lebanon’s national flag carrier, Middle East Airlines (MEA), since it saved it from bankruptcy in 1997 by swapping its debt for equity. Prior to this episode, BdL was already a shareholder of MEA, via the Intra Investment Company (IIC) it had formed in 1966 to salvage assets of the collapsing Intra Bank. IIC, meanwhile, owns 53% of Casino du Liban, which enjoys a monopoly on Vegas-style gambling in Lebanon. BdL, in turn, is the dominant shareholder of IIC, making it the only central bank worldwide to have decisive powers over a casino.

In January 2015, Casino du Liban sacked 191 employees on grounds of inefficiency. Some had received a salary while settled abroad

The halo surrounding Salamé extends beyond his vast practical influence and into the realm of the mythological. The economic elite of Lebanon are quasi-unanimous in their acclaim of a governor who has also received numerous distinctions abroad, to include the French “Legion d’Honneur,” the “Euromoney Award of the Best Central Banker,” and—most whimsically—the “Arab Creativity Award in Economics.” In recent years, a string of documentaries, interviews and panegyrics have weaved a personality cult, exemplified by this excerpt from MEA’s inflight magazine: “He is the exceptional man for an exceptional post in an exceptional era, and the pioneering successful initiatives he designed for the Lebanese Central Bank have rendered it a model for the world to follow. This is Riad Salamé, the best Central Bank Governor in the world.”

If the spectacle of Lebanese finance is bewildering, the most astonishing behaviour is not necessarily on stage. Spectators such as international financial institutions, rating agencies (who proffer “stable” outlooks) or governments that count themselves as friends of Lebanon are mostly crying, “encore!” They celebrate an ill-defined “resilience” as a magic wand that reconciles stability with economic practices they would unequivocally condemn in any other part of the globe. The IMF, which in the past viewed the peg as macroeconomic suicide, has come to endorse it. A consensus has gelled around the liability of reforming a system that is altogether absurd, precarious and apparently functional.

Such thinking has deep roots. “I remember my father telling me a story he had heard from his own father, about a foreign expert mission that investigated the economy in the mid-twentieth century,” a Lebanese sociologist recalled. “They concluded that they didn’t know how it worked but that it worked anyway, so advised everyone to just leave it alone.” Indeed, those were, give-or-take, the recommendations of Paul Van Zeeland, commissioned as an advisor by the government in 1948. A prominent Western diplomat gave a contemporary equivalent: “The way the economy operates is unsustainable, but it is not new and certainly not news to anybody in the game today. If you raise the need for reforms, all you’ll ever hear is ‘why mess with the only reasonably steady country in the region?’”

The Ministry of Water and Electricity publishes monthly consumer guidelines for purchasing electricity illegally

This aversion to rocking the boat is attributable, in part, to Lebanon’s large population of Syrian refugees, which resonates particularly with European governments concerned that these masses might be forced across the Mediterranean. It also reflects, arguably, Lebanon’s peripheral importance to the world economy: Lebanon’s economy is so small, and its debt structure so self-contained, that multilateral institutions like the IMF and World Bank can afford to behave more as spectators than creditors.

The very same arguments, however, are reason to voice criticism. If stability is so valuable, it is reckless to pin hopes on wishful thinking. Meanwhile, in theory, Lebanon’s lack of integration in the global economy should give external players full freedom to be honest. Such candour is particularly incumbent upon Lebanon’s external backers given that, this time around, Beirut is on its own. In the early 2000s, when the state was on the verge of defaulting on a sovereign debt that had reached 200% of GDP, then-Prime Minister Rafic Hariri had the wherewithal to rally international support. The 2006 war with Israel prompted a similar call to action. Friendly nations in the West and the Gulf organized spectacular conferences, later known as Paris I, II and III (respectively held in February 2001, November 2002 and January 2007), where they pledged €500 million, $4,4 billion and $7,6 billion to salvage the Lebanese economy.

If stability is so valuable, it is reckless to pin hopes on wishful thinking

If stability is so valuable, it is reckless to pin hopes on wishful thinking

Such goodwill has since vanished. Interest in Lebanon has waned worldwide, and the main financial contributors of the 2000s are now focused on severe economic challenges of their own. Meanwhile, and critically, the country’s leadership presently inspires more contempt than sympathy; many feel that Beirut has forfeited its credibility as a recipient of financial assistance by failing to deliver on any of the quid pro quos expected of it—whether explicitly (major tax reforms, privatisations and fiscal discipline) or more implicitly (distancing itself from Syria and later Iran). In other words, the line of credit has been irredeemably cancelled. 

Holding on to the belief that more financial voodoo will see Lebanon through its current economic predicament is irresponsible. Reality is slowly but surely catching up with the illusionism. With virtually no prospect for short-term growth, a rapidly snowballing debt, massive stress on the country’s USD reserves, and shrinking pockets for refinancing, the threat is simple: it’s unclear how the peg, whose maintenance consumes ever more dollars, can be sustained.

An advisor to several Lebanese banks summed up the problem in vivid terms: “Just imagine a man is trying to kill you. You find refuge in a building and climb up the stairwell, but he’s still on your tail. On the first floor, you consider jumping out the window, but you fear spraining your ankle. On the second floor, you fear breaking a leg. As you reach the fourth floor you give up on the idea entirely, because it would kill you anyway. So your only option is to continue to climb, up and up, until you reach the rooftop.” Lebanon is getting ever closer to the rooftop, though it remains unclear exactly how many floors are left.

What happens at the top? The pound comes tumbling down

What happens at the top? The pound comes tumbling down. Prices of basic staples, subsidized by an artificially strong LBP, shoot up, immediately impacting the cost of living, with a series of knock on effects on other essential daily transactions, such as transport. Savings of ordinary people, whose bank accounts are mostly denominated in LBP, evaporate. (The richest Lebanese tend to prefer the safety of USD, and retain various assets abroad, making them infinitely less vulnerable to a systemic breakdown.) In a country of about 4 million where 1 million already live under the poverty line, and which in addition hosts an estimated 1,5 million Syrian refugees, the social consequences could prove catastrophic.

The politics wouldn’t look pretty either. The former senior official at the Ministry of Finance warned that, “in the event of a crisis, people wouldn’t turn to the state for succor as they know it is useless. They will go to their za’im,” or communal representative within the ruling elite. These local patrons, who often count among the banks’ major shareholders, have long supplemented the government’s failings, by ensuring employment in the bureaucracy, shielding individuals from taxes, paying medical fees out-of-pocket, funding scholarships and so on. But their own wealth is dependent on the real economy, stretching their capacities.

The social compact is at risk of breaking down

That is where the social compact, which boils down to the political class doing at least enough to help ordinary Lebanese muddle through, is at risk of breaking down. Growing disenchantment and frustration with the elite could easily skyrocket, prompting factions to accuse each other to deflect and divert the anger. Already, a variety of officials have made statements pointing in that direction, scapegoating Salamé for the state of the economy or accusing the banks of being inordinately profitable. By way of comparison, Cairo’s plunging economy finally forced the Egyptian pound down to earth, and ordinary people are paying for it. But Lebanon isn’t a well-consolidated dictatorship capable of repressing dissent: it’s a patchwork of sectarian erstwhile militias practiced less in governing than in stoking their constituencies’ outrage at one another. The implications are explosive.

Tautological thinking, whereby Lebanon’s obstinate stability warrants the international endorsement of an obviously dysfunctional system, is reminiscent of much of the Arab world prior to 2010. The regimes held, effectively containing their societies, so why push for any meaningful form of change? Lebanon deserves better than the Arab spring, where a mixture of wishful thinking and risk aversion largely spawned worse-than-worst-case scenarios. Betting, against all odds, on Lebanon’s magical resilience will tell us one thing only: what exactly, of all the hardships that Lebanese have tolerated over the years, was the one too many.

2 May 2017

Rosalie Berthier