The Lebanese pound has depreciated about 90% in the past 18 months, driving annual food inflation to 400%, erasing salaries and savings and pushing more than half the nation into poverty. All this comes at a time when the country is battling the devastation wrought by COVID-19 as well as the ravages from the 2020 Beirut blast.
The economic crisis in Lebanon is closely linked to the paradigm of financialization adopted by the ruling elite. This paradigm has converted the country into a “bankers’ republic”. The country that was once known as “the Switzerland of the Middle East” based its economy on the financial sector without regard for the productive sectors.
The beginnings of the current morass can be traced to the 1997 “peg,” which artificially fixed the Lebanese pound to the dollar at an overvalued rate, thus laying the ground for the rise of rentier capitalism. On one hand, it became more profitable to import than to produce locally. On the other hand, investing capital in unproductive economic sectors - namely financial products and real estate - became increasingly attractive as the risk of inflation receded.
A definite set of problems emerges when a currency is pegged at a high rate. Since the government sets the rate too high, domestic consumers will buy many imports, creating chronic trade deficits. When imports exceed exports, a country’s currency demand in terms of international trade is lower. Lower demand for currency makes it less valuable in the international markets.
In response to these devaluationary pressures, the government will have to appreciate its own currency. For this, the central bank needs to buy its currency in foreign exchange markets, paying with foreign currency. Since no central bank has an infinite amount of foreign currency reserves, it cannot buy its currency indefinitely. The government's reserves will eventually be exhausted, and the peg will collapse.
To maintain the peg, Lebanon’s central bank had to ensure a continual inflow of foreign currency, namely US dollars. This was done through a national Ponzi scheme - a scam in which existing investors are paid off with funds collected from new investors, while the organizers cream off a share for themselves. With the help of oil money from Gulf Arabs and remittances from the large Lebanese diaspora (estimated at more than 12 million persons, living on all continents), the bourgeoisie built the bases of domestic finance.
To further attract money from abroad, Lebanese banks promised high interest rates on deposits. Meanwhile, people who put money into the banks received more than 5% in interest on deposits. It was a great deal for investors in the region, who piled money into Lebanese banks. The money could have been used for productive investments but stayed in the financial chamber.
The dollar flows from abroad were used by Lebanon’s commercial banks to speculate on sovereign-debt instruments denominated in Lebanese pounds at interest rates significantly higher than the international market rates granted by the Lebanese central bank. In other words, the banks, flushed with deposits, started lending the money to the government, via the central bank. The banks had promised to pay a high interest rate on the deposits, but the central bank promised to pay even higher interest rate to the banks. It ensured the system could keep going for a little while. The banks turned around and lent the government a lot of money, pocketing the difference between the two interest rates.
The high interest rates on government bonds and bank deposits strongly limited investments of capital in the productive economy. Most of the money the state collected through the bonds was in the end used to repay the interest rather than to fund social welfare programs or public infrastructure. While proving to be catastrophic for the working class, this profit scheme enriched bankers.
The share of public debt held by banks reached nearly two-thirds in the 1990s, and it is estimated today to be nearly 43%. Indeed, interest rates went up to as high as 40% on untaxed treasury bills, helping the banking sector’s assets grow by 25% between 1993 and 2000 and increase nearly eightfold between 1993 and 2013. In addition, between 1993 and 2018, banks’ net profits increased from $63 million to a whopping $2 billion, representing a 3,000% increase.
It is important to note that the process of financialization was fundamentally aided by the political plutocracy. In fact, politicians in Lebanon are closely stitched with the financial magnates. Individuals closely linked to political elites control 43% of assets in Lebanon’s commercial banking sector. 18 out of 20 banks have major shareholders linked to political elite.
Moreover, 4 out of the top 10 banks in the country have more than 70% of their shares attributed to crony capital. Only 8 families control 29% of the banking sector’s total assets, owning together more than $7.3 billion in equity. For example, one of the controlling shareholders (over 5% of shares) of Bank Audi is a company wholly owned by Fahad Al-Hariri, brother of the Prime Minister, Saad Al-Hariri.
The collapse of the Ponzi pyramid constructed by the financial oligarchy began in October 2019 with the slowdown of flows of hard currencies in the context of the global crisis of capitalism, and instability in Middle East, particularly in Syria. The expatriation of capital organized by the wealthiest 1% of the population, who dominated the financial sector, exacerbated the lack of cash.
The banks, having lent three-quarters of deposits to the government, had become functionally bankrupt and increasingly illiquid. Unable to contain the crisis of their own making, they passed the burden on small depositors by setting illegal and discretionary capital controls that prevented them from withdrawing their pensions and wages.
In the hindsight, the crisis of Lebanon’s economic architecture was predictable. The state was borrowing from or via the central bank at exorbitant interest rates, the central bank was borrowing from the local banks, who were lending the money of their depositors, who in turn were lured in by high interest rates. High interest rates of up to 15% kept this unsustainable cycle going for years. But running out of cash was inevitable. When this happened, the entire structure of accumulation broke down.
Yanis Iqbal is an independent researcher and freelance writer based in Aligarh, India and can be contacted at firstname.lastname@example.org. His articles have been published in the USA, UK, Canada, Australia, New Zealand, India and several countries of Latin America.