Foreign analysts often call it "magic". The remarkable capability of the Lebanese economic system to remain afloat despite domestic instability, regional turmoil, and deep structural imbalances astonishes journalists and investors. Sometimes they "lose faith" and predict its "inevitable" collapse. So far, however, only to be proven wrong.
To be fair to international experts, the reasons for being concerned about the Lebanese economy are often significant, sometimes to the point that preparing for an imminent crisis really seems the wisest thing to do. And these days are no exception. Two indicators symbolise more than any others the fragility of the Lebanese economy: public debt, constantly around 150% of GDP, and the current account deficit, which recently exceeded 20% of GDP. These are figures that show a country heavily indebted both at the public and the private level. Debt service absorbs almost half of total government revenues, and every year the country needs increasing amounts of foreign investment to compensate for the current account deficit without endangering the stability of the national currency. In fact, since the end of the civil war, the Lebanese lira has been firmly pegged to the US dollar, becoming itself one of the most important guarantees of stability for international investors. Financial flows from abroad going to Lebanese banks are usually utilised for building and purchasing real estate properties, which, together with services, constitute by far the most important economic sector of the country. Real estate prices have been increasing constantly since the end of the civil war, only freezing temporarily during negative conjunctures. Together with the currency, price increases are the second pillar of the economy’s stability. They guarantee larger revenues for the national banks and, consequently, augment interest rates to attract investors and keep the system afloat. Members of the Lebanese diaspora, more than 10 million all over the world, have been the most important and stable source of financial inflows. Investors from the Gulf used to be almost equally important until rising tensions between GCC countries and Iran due to several post-Arab Spring regional crises reflected negatively on the Lebanese economy, causing a dramatic drop in Gulf investments. In particular, Saudi Arabia, the main foreign supporter of the dominant Lebanese Sunni party, "Mustaqbal", has seen with concern the increasing political influence exerted by the Shia and Iran-sponsored party, Hezbollah, and in 2015 officially "warned" its citizens from travelling to or investing in Lebanon.
But it is during this kind of dramatic time that the Lebanese "magic" surfaces again, avoiding the worst consequences in an apparently miraculous way. However, if one looks closely, it appears clear that the main components of such wizardry are actually quite earthly and can be summarised in two elements: first, the role and the ability of the Central Bank of Lebanon (CBL) to skillfully and independently manage the economic system using tools that significantly exceed the normal instruments in the hands of central bankers. Second, the small size and the strategic importance of the country, located at the heart of the Middle East, which make Lebanon at the same time "fundamental" and "cheap" to save for international powers.
Riad Salameh, governor of the CBL since August 1993, is the almost omnipotent architect of the Lebanese economy. Amid the dramatic drop of Gulf investments over the last few years, he introduced a chain of extraordinary measures that have been able to maintain the stability of the currency and even to increase the country’s foreign reserves at a time of decreasing foreign inflows and increasing current account deficits. In 2016 he invented a lucrative bond swap for national banks, luring them into exchanging their bonds in Lebanese lira for new Euro-denominated bonds, which they acquired by liquidating a share of their foreign assets. A move that significantly augmented the Central Bank’s foreign reserves. At the same time, he introduced state guarantees and incentives for local real estate buyers enabling an increasing number of young families to afford mortgages to purchase new homes. By doing so, the Central Bank managed to keep real estate prices stable and even slightly increase them. However, it is worth noting that even if on the one hand such measures strengthened the fundamentals of the economy in the short-medium term, on the other they externalised increasing systemic risks to banks and private consumers.
Nonetheless, despite the CBL’s interventions, such systemic risks can sometimes become unsustainable even in the short run. This has been the case of the crisis sparked by Prime Minister Saad Hariri’s recent (later withdrawn) resignation. Last November, Saudi officials are rumoured to have forced Hariri, Mustaqbal’s leader, to resign during an official visit to Riyadh. The plan, the rumours go, was to destabilise the entire Lebanese political system, causing turmoil and possibly a foreign – American or Israeli – intervention against Hezbollah. However, Hariri withdrew his resignation a few weeks later, thanks also to the intervention of French President Emmanuel Macron. Nonetheless, the episode sparked a new wave of grave concerns among international investors about the stability of the Lebanese system, making most observers believe that this time the country’s fragile balance was irreparably compromised. In fact, despite these signs of potential political instability, the CBL could not increase interest rates to secure more financial inflows – the classic move that a central bank would make in such circumstances – since this would have caused a further and unsustainable increase in state debt service. Instead, the CBL subsidised private banks to offer higher interest rates and use increased inflows to buy state bonds and to create new deposits in the central bank. However, such bold moves did not prove sufficient. Deposits have not grown as expected, falling to 3% in January 2018 from 6% in the previous year. Furthermore, more concerns were sparked by the possibility of an increase in FED interest rates this year, which could cause a big share of international investments to be redirected away from developing economies.
Such intertwined factors led France and other international and regional governments to organise a special conference on Lebanon in Paris last April, the CEDRE donor conference, in order to raise funds to sustain the Lebanese economy, which over the last six years has also been burdened with the presence of almost 1.5 million refugees from Syria. The conference managed to raise almost $US11 billion in pledges (860 million in grants and 10.2 billion in loans) from international donors, including several European countries and EU institutions, the US, Russia, Qatar, and Saudi Arabia. Maybe even more importantly, the conference channelled pressure from international investors towards long-needed reforms in the Lebanese economy, which led parliament to approve a national budget for the first time in 13 years. An ambitious list of reforms of the state sector, labour market and national infrastructures was presented by Prime Minister Hariri, who is running for re-election this May. Although it is hard to say whether all the reforms on the list will be implemented, international pressure is now high enough to reasonably expect some concrete steps in that direction after the elections.
Thus, risks of an imminent collapse seem significantly more distant now than just a few weeks ago. Fresh financial inflows from international supporters and a long-needed momentum for normalising the domestic political system provided by the elections (the first since 2009) avoided the worst. Apparently, the very earthly magic of Lebanon materialised once again to rescue the country from disaster. For how long, however, it is impossible to know.