How Corruption Led to Lebanon's Brutal Collapse

 

Background: Lebanon, once known as the "Switzerland of the Middle East" due to its thriving tourism sector and robust banking system, is now facing arguably the worst economic crisis the world has seen in 150 years. Over 80% of its population lives below the poverty line, and the national currency has lost more than 97% of its value.

Root Cause: The crisis can be traced back to the end of the civil war in 1989 when a sectarian government was established, dividing power among different religious factions. This system, intended as a temporary solution, became a breeding ground for corruption, with politicians putting their own people in power and filling their own pockets.

Economic Boom and Bust: After the civil war, foreign capital flowed into Lebanon, leading to a booming economy. However, much of this capital ended up in the pockets of politicians rather than being invested in necessary infrastructure. When foreign aid started to dry up, politicians and bankers devised a scheme to attract foreign capital into Central Bank reserves by offering high interest rates. This led to a ballooning government debt and a rapid decline in the economy.

Crisis Triggers: The crisis was triggered by several factors, including conflicts in neighboring Syria, political instability, and the government's failure to deliver on promised reforms. The situation was exacerbated by a global pandemic and a catastrophic explosion in Beirut's port area in 2020, which destroyed 70% of Lebanon's imports.

Current Situation: Today, Lebanon is experiencing hyperinflation, high unemployment, and widespread poverty. Essential services like electricity and water are scarce, and there are significant shortages of everyday essentials like food and fuel. The banking sector, fearing a bank run, has begun to withhold foreign reserves, effectively locking people out of their own deposits.

Future Outlook: The future of Lebanon is uncertain. While the economic solution seems straightforward—restructuring the banking sector, restarting essential services, and letting the national currency flow freely—the political reality is more complex. The sectarian political system remains unchanged, and the ruling elites show no willingness to relinquish their power. Meanwhile, the people of Lebanon are trying to carve out their own solutions, such as dollarizing the economy and conducting transactions in physical currency. However, these makeshift solutions come with their own risks and may drive even more people into poverty.