In the last four years, Lebanon’s economic crisis has significantly deteriorated, receiving the title of “one of the worst [economic collapses] globally since the mid-19th century” from the World Bank as the Lebanese pound tanks, losing 90% of its value in months. As a small country heavily dependent upon imports, annual inflation rates as high as 162% illuminate Lebanon’s trade deficit as the government can no longer afford to import basic necessities such as fuel.
While Lebanon begins seeking external help, it is constrained by its reputation of aid mismanagement. With Egypt, Israel, Jordan, the US, the International Monetary Fund (IMF), and the World Bank stepping up to offer assistance, the question remains—will foreign aid benefit Lebanon’s economy in the long term despite the systemic inefficiency of the country’s fundamental governing infrastructure?
Though many blame the COVID-19 pandemic and the August 2020 Port of Beirut explosion as the cause of Lebanon’s economic crisis, they instead served to shed light on a legacy of deep-seated corruption and mismanagement at the core of the so-called “Deliberate Depression” that has plagued Lebanon since the end of the Lebanese Civil War. Lebanon has been trapped in a negative feedback loop since the end of the war; the government wasted money, requested aid, then wasted that money, and so on, giving Lebanon a reputation as a “nationally regulated Ponzi scheme.” Although foreign nations allocated $4 billion in funding to Lebanon immediately after the war, the government hardly repaired or replaced any infrastructure. Fuel losses have amounted to over US$17.4 billion since 2009, mostly because of political mishandling and corruption, but also because of dilapidated infrastructure. Energy grids, power plants, and pipelines are inadequate, as much infrastructure has yet to be rebuilt since the end of the civil war, resulting in non-technical losses of 21%.
Politically, Lebanon’s troika confessionalist government favors the Christian Maronite minority, a favoritism that created stalemates, inconsistencies, and power voids in the country’s political system. Concerning corruption, Lebanon ranks 46th most corrupt out of all 180 countries, and individual interests dominate every aspect of public projects. The national bank failed due to political elites illegally transferring wealth abroad, fuel subsidies cost the country over $35 billion in losses due to politicians’ smuggling schemes, and most foreign aid made its way to politicians’ pockets.
As far as its economic system, Lebanon holds the highest debt-to-GDP ratio in the world—about 5 to 1—thanks to massive, greed-driven government spending of foreign aid. The government’s unnecessary expenditures came to light on March 9, 2020, when for the first time in the country’s history, Lebanon officially defaulted on its sovereign debt. With a collapsed currency, failed central bank, no reliable material exports, and defaulting on its debt, it is no wonder why some, including the UN, predict Lebanon may become a failed state.
Now, in the midst of economic ruin, as Lebanon calls upon its neighbors and international organizations for financial assistance, this shadow of corruption and political mismanagement is causing hesitancies and delays in external political players’ willingness to provide funding. Past mismanagement of aid validates these hesitancies: in 2021, for example, Lebanon secured World Bank funding for a targeted cash-assistance social welfare program that subsequently failed, leaving thousands impoverished.
With hardly any domestic energy resources, Lebanon is the world’s 40th largest importer of refined petroleum. As Lebanon’s currency is now nearly worthless, importing fuel is close to impossible. The government can only provide up to two hours of electricity daily, gas is rationed at a third of a tank, and hospitals, schools, and businesses were forced to shut down in effect. More troubling, fuel smuggling by corrupt politicians from state-owned energy enterprise Electricité du Liban (EDL) attributed to half of all public debt, which effectively delegitimized and bankrupted Lebanon’s fuel subsidy program. Now without social welfare programs, civilians must rely upon shoddy, expensive personal generators for nearly all electricity.
To solve its fuel problems, Lebanon recently signed two gas deals brokered by the US—one with Jordan in January of 2022 and the other with Egypt in June of 2022. The Jordanian deal would provide about two additional hours of electricity per day, and the Egyptian deal would provide four additional hours. While both deals are contingent upon World Bank funding, they have been delayed as the Bank demands systemic adjustments from Lebanon.
World Bank Regional Director Saroj Kumar Jha reported that funding “will require essentially a complete reform of the sector…a precondition for us to go to our board of directors for approval is a comprehensive electricity sector reform program of the government…and disbursement of the World Bank funds only when they move into implementation.”
While awaiting World Bank funding, Lebanese officials requested aid from the International Monetary Fund (IMF)’s international reserve via special drawing rights (SDR). Yet like the World Bank, the IMF required a myriad of policy reforms prior to allocating funds. These reforms included strengthening anti-corruption measures, improving upon weak governance, establishing a credible exchange rate system, abolishing central bank financing, and providing “better services without draining public resources.” Should Lebanon enact these reforms, and pending approval via the Executive Board, the IMF has offered US$3 billion.
Both the World Bank and the IMF’s responses prove what the Lebanese people know and the government hides—Lebanon must reconstruct its core political and economic operating procedures should they wish to gain self-reliance and reestablish themselves as a legitimate state with a functioning economy. Without significant reform, foreign aid will slip through the grasps of the civilian population and accumulate in the pockets of Lebanese politicians. In the words of UN Special Rapporteur Olivier De Schutter: “The destructive actions of Lebanon’s political and financial leaders are responsible for forcing most of the country’s population into poverty.” How can the international community trust them with even more gifted aid?
While in the short term Lebanon may only seek a given amount of fuel, no tangible substance will save the country; only policy reforms will. While IMF and World Bank reform requests are crucial to receiving aid to purchase fuel, they are even more vital to redesigning Lebanon’s fundamentals as a country. Therefore, it is in Lebanon’s best interests to adhere to the IMF and World Bank suggestions not only to receive funding but to create long lasting change for the future of the state.
Even if Lebanon adopts reforms necessary to procure funding for fuel deals with Egypt or Jordan, the government must develop internally if the state ever wants long-term financial and political stability. Lebanon imports 98% of all its energy resources, leaving the country at huge risk to international economic and political volatility. While international deals seem promising, Lebanon’s neighbors are ultimately undependable—Syria’s instability already caused administrative issues with the Egypt deal because oil cannot pass through the Arab Gas Pipeline without gaining US permission to void sanctions. Russia, who Lebanon imports most oil from, is now also unreliable due to the ongoing war with Ukraine.
Though not endowed with significant raw materials, Lebanon has the potential to develop its renewable energy sector. Independent projects from young entrepreneurs such as Rayan Bahchik, a Lebanese young adult who invented portable solar panels, need to be taken more seriously. Solar energy is hardly developed in Lebanon. This is a market that can redirect Lebanon’s fate by providing jobs for impoverished Lebanese citizens, establishing self-reliance, and most importantly, weaning off petroleum dependency. Thus, Lebanon not only needs to completely restructure its economic and political policies in alignment with IMF and World Bank suggestions, but should turn to more sustainable long-term resources such as solar energy in order to save itself from becoming a failed state. Lebanon must develop internally by creating a domestic market and redesigning its political framework if the state wants long-term financial and political stability.
Well researched and written. Great. job!