Protests Continue in Lebanon as Lira Expected to Drop Further from All-Time Low
As people sink deeper into poverty, analysts fear violence that would make things worse
Demonstrator blocked main roads across Lebanon for the seventh day in a row on Monday, demanding an end to sectarian politics and a resolution to the economic crisis that has made citizens’ lives miserable for more than a year now, beginning even before the COVID-19 pandemic.
If the protests turn violent, analysts fear even further financial harm to Lebanon, as international donors would be less willing to contribute if political instability seems likely.
Dr. Raphaël Gourrada, an independent analyst specializing in Lebanon and the region, is concerned about such violence.
The protests could grow in size for several reasons, he explained: increasing anger, better weather, a lifting of Covid restrictions, and political manipulation, specifically by the Shia Amal movement. Nabih Berri, Lebanon’s speaker of parliament and the head of Amal, is notoriously at odds with President Michel Aoun, and the protests could be used to undermine the head of state.
Violence, Gourrada said, would be problematic for Lebanon’s already desperate fiscal health.
“You have a population which suffers daily from the restriction from the blowbacks of the financial crisis, coronavirus crisis, etc,” he said. “If the protests turn violent it may be a real setback for the protesters themselves because any [incident] will be used, manipulated and interpreted as risk for international donors regarding the stability of Lebanon and won’t provide them the confidence to give.”
It may, however, be increasingly difficult to keep the protests under control as the financial situation of ordinary citizens grows ever bleaker, Gourrada said.
The Lebanese lira, or pound as it is also called, dropped to its lowest value ever last Tuesday, at approximately 10,000 to the dollar.
Brig. Gen. (ret.) Tannous Mouawad, general manager of Middle East Studies Ltd, a research and consulting firm in Baabda, Lebanon, said the record devaluation reflected the total collapse of government.
“It symbolizes that Lebanon is a failed state not able to control its economy,” he told The Media Line.
As a result of the continuing fall in the value of the national currency, Lebanon’s central bank last August ordered all the country’s banks to raise their capital by 20%, and their foreign currency liquidity with correspondent banks abroad to 3% of foreign currency deposits. Many banks have missed deadlines to do so; the latest deadline was March 7.
Mohamad Faour, a postdoctoral researcher at University College Dublin in banking and finance, told The Media Line, “Most banks have allegedly managed to comply with the former [requirement]. The latter, however, is what most banks are struggling to implement given the scarcity of US dollars. …
“However, even if banks manage to comply with all the circular’s requirements, this will be far from enough to tackle the banking sector’s woes in the absence of a broader macro-financial framework that addresses Lebanon’s crisis in a comprehensive manner,” Faour said.
According to Iskandar Boustany, a consultant in public financial management and head of Financially-Wise, a Lebanese NGO promoting financial literacy, the lira plummeted because it had long traded above its true worth.
“Lebanon relied for the past decades on a strong currency which turned out to be artificially overvalued. This practice was harmful for both the industry and the agriculture sectors as investors turned toward tourism and services,” he told The Media Line.
Meanwhile, the middle class and the wealthy were able to live extravagantly, beyond what they could really afford, Boustany said.
Beginning in 2019, the central bank was unable to keep everything under control, and the problem has only worsened with the pandemic, he said, adding that the economy has lost around $80 billion due to the depression.
He expects the currency to lose even more value for a variety of reasons.
“The balance of payment deficit had not been totally closed despite the steep devaluation, and existing US dollar deposits are being withdrawn in Lebanese pounds at a rate that is higher than the official rate, which has led to a significant increase in money creation,” leading to massive inflation and a shortage of dollars, Boustany said.
“Banks are sourcing fresh US dollars from the black market to increase their capital, which is raising the demand for the American dollar on the local market,” he continued.
The country’s monetary regulators have served the interests of the wealthy and powerful, leaving ordinary Lebanese to bear the brunt of the suffering, he said.
“The country has failed to manage an equal distribution of losses and apparently depositors and citizens bore most of the losses, whereas bank owners were the ones who benefited for decades from high interest rates on treasury bonds and fueled the fiscal crisis,” Boustany said. “Normally in such scenarios, bank owners should be the first to bear the losses and lose their shares to new investors.”
Sami Zoughaib, a Beirut-based economist, agrees that Lebanon’s monetary policy has been designed to prop up the elite.
“The drop in the lira is the result of a deliberate policy drawn up by the country’s kleptocrats to throw the burden of the crisis on the people and ‘clean up’ the losses in the banking sector through inflation,” he told The Media Line.
“For the people, it means more poverty and more misery, which doesn’t seem to worry the politicians at all as they continue their childish feuds over their shares of power, as demonstrated by the current deadlock in forming a government,” Zoughaib said.
Lebanon’s caretaker prime minister, Hassan Diab, has served as such since he resigned last August in the aftermath of the Beirut port explosion. He has been unable to form a new government, despite support from international partners, notably France.
However, Faour said that the cause of the lira’s fall is unclear.
“There has been a lot of speculation on the potential reasons behind the current drop in the value of the lira, but it is nothing but mere speculation,” he said. “In a small market that lacks transparency such as the black market, abrupt movements in the exchange rate are not out of the ordinary, and are quite typical in most countries that have struggled with a currency crisis that led to multiple exchange rates.”
The failure of Lebanese politicians to form a government also prevents the arrival of desperately needed foreign aid, which is conditional on political reform.
“The funds from international donors are still blocked because no government has been formed and no reform has been implemented,” Gourrada said.
Still, Zoughaib is skeptical that a new government under the current leadership would lead to reform.
“It doesn’t really matter if a government is formed. A unity government headed by [former Prime Minister] Saad Hariri, who is responsible, alongside his father [the late Rafic Hariri, who was also prime minister], for a large part of the policies that drove the country into bankruptcy, will be there with the sole purpose of maintaining the status quo and extending its lifetime,” Zoughaib said.
Further financially devastating for citizens is the imminent removal of government subsidies on basic goods, he added.
“This will mean that the prices of essential goods will skyrocket and threaten the livelihood of the entire population,” Zoughaib said. “This issue is being thrown around like a hot potato because no one wants to be considered responsible for taking the decision.”