As war rages and poor Lebanon takes it on the chin, it is important to look at what has put Lebanon in this position, whereby American banking sanctions and internal political chaos have combined to ensure that Lebanon cannot become stable.
Where does Lebanon stand in terms of its long-term post war future? Lebanon is a complicated consociational state divided along religious lines between its Shia Muslim and Maronite Christian population. The country’s legacy as a postcolonial state from an historic French mandate, combined with its strategic position between Turkey and Syria up north and Israel to the south, have also placed Lebanon in a region of geopolitical conflict over the years. The Lebanese civil war of 1975 to 1990, as well as Israeli and Syrian military occupations in parts of the country, have further left Lebanon scarred and challenged in regard to proper governance with state functions limited.
Furthermore, the sectarian divide between its religious factions, as well as the local and regional clans, have made it difficult for the Lebanese state to secure its borders, as well as maintain financial security for its people. The recent years of struggle are most notable, with Lebanon undergoing both a major financial crisis after years of mismanagement and international banking sanctions, and continued external threat with violent conflict between Israel and Lebanon on the southern borders. As a result of these factors, Lebanon is commonly considered a failed state, with its presidency left vacant since Michel Aoun’s departure at the end of his Presidential term in October 2022. While it continues to boast a strong civil society that is driven by its political and cultural institutions, Lebanon’s political instabilities challenge its ability to battle its economic collapse and external threats. Here are some updates:
Lebanese Economic Crisis
For the past five years, dating back to the demonstrations that began on the 17th of October 2019, Lebanon has been under a major financial crisis that caused the collapse of both the public services and the banking system. Decades of financial mismanagement have caused the dangerous mix of budget deficit, economic decline and austerity measures to mix in a liquidity crisis. The subsequent years would worsen matters, especially as American sanctions against Hezbollah and Syria, and also a chain of calamities in COVID-19 pandemic, 2020 Beirut Port Explosion, and the Russo-Ukrainian War, would come to weigh down upon Lebanese economy.
The past years have not been kind to Lebanon and its people as it struggles to mount an internationally-organised recovery plan. On 7th of April, 2022, Lebanon and the International Monetary Fund (IMF) agreed to a four-year, staff-level agreement in Beirut where the Lebanese authorities would formulate and undergo a ‘comprehensive economic reform program’ that’s aimed to improve financial sustainability, transparency and recovery in spending. The agreement, which would last for 46 months, would provide Lebanon access to US$3 billion in exchange for restructuring public debt and bolstering governance and transparency.
Developments, however, have come slowly because of the fragmented nature of the Lebanese parliament, where the country’s political elite represent individual sectarian interests, limiting and in some cases purposefully standing in the way of making progress. The first of two events that happened in last couple of years would suggest such, when Saadeh Al Chami, the deputy prime minister of Lebanon also known as the architect behind the IMF plan, suggested on 9th of June, 2022, that the Lebanese banks should absorb the losses accrued and reimburse depositors first. Al Chami’s statement was swiftly rejected by the Associations of the Banks of Lebanon under the hands of the political elite’s sectarian interests, throwing the plans awry. This was followed by the devaluing of the Lebanese Pound by 90% on 1st of February, 2023, as an attempt to unify multiple exchange rates under IMF-stated conditions. While well intentioned, the move was criticised both abroad and at home for its inability to make a major difference.
Struggles in ensuring that progresses be met on the roadmap would follow, eventually coming a head with the admission that political roadblocks stop proper economic recovery. On the 22nd of May, 2024, Ernesto Ramirez Rigo, the IMF Mission head on a visit to Lebanon, stated that the recovery process has stalled. Rigo noted that while several measures taken by the Lebanese finance ministry and central bank may have helped reduce inflation, the banking sector remained limited in its ability to provide credit necessary for the economy to function.
Salameh’s Arrest and what it could Mean
On the 3rd of September, 2024, the latest developments in the saga took place when Riad Salameh, the 73-year old former governor of Lebanese central bank, Banque du Liban from 1993 to 2023, was arrested in Beirut for ‘alleged financial crimes‘ linked to Optimum Invest, a Lebanese brokerage firm, from 2015 to 2018. Held in detention under embezzlement charges, Salameh would later be called for what is likely to be the first of several court hearings on the 9th, with a second court hearing on the 19th of September.
The arrest of Salameh, whose long tenure began strong but would end with a downfall that coincided with the current economic crisis, holds a certain degree of significance. Salameh’s status as the most senior figure to be indicted over the events regarding the Lebanese financial crisis, suggests a major, nationwide call for accountability and action. In recent years Salameh has been under international sanction by the United States, the United Kingdom and Canada, as well as France and Switzerland, for money laundering charges, with his reputation affecting the stability of the Lebanese financial system and vice versa. In some ways his arrest is a symbolic matter in which Lebanon, whose economy has been slowly recovering after years of continued spiral, is reaching out to the international community in a way to regain its trust.
At the same time, however, it remains to be seen if the necessary measures will be taking place. First of the concerns is that little change would occur following Salameh’s arrest. Salameh’s arrest, while symbolic, may end up a solitary affair on surface that could be used to protect the political elite by pacifying the Lebanese public in light of the current situation that’s not only lost $70 billion, significantly slashed its GDP, and left over 80% of its population below the poverty line. Furthermore, there is a firm chance Salameh’s arrest may end up causing legal and political complications for Lebanon as several Western nations could demand extradition. While the arrest brings forth a promise of improving relations between Lebanon and the West, the current Lebanese financial crisis goes beyond political issues as its biggest external problem may also factor into it. Strikes have been ongoing along its southern borders between Hezbollah and Israeli forces since 7th of October, 2023, bringing with it a conflict has killed hundreds on both sides of the border, and left tens of thousands displaced with additional economic damage, but is unlikely to be resolved in the immediate future with both authorities warning one another of major consequences of a possible invasion.
This external problem, while discussed relatively less in terms of the current economic crisis in Lebanon, is relevant. The U.S’s passing of the Hezbollah International Financing Prevention Act (HIFPA) that’s intended to tackle Hezbollah’s use of Lebanese banks under procurement process in 2015 has complicated the Lebanese banking system, especially as the political party and its paramilitary arm form a significant part of the current governing coalition. In a country with particularly high dependency on remittances that consist 38% of its GDP, banking sanctions cause complications for the banks and the government. Additionally, Lebanon’s continued issues with sectarianism and rampant corruption have come to limit cooperation between public and private sectors with active, civil society choosing to stay away from the government. This causes a major issue where the high cash flow does not correlate to stronger governments or banks, and even less improvement in trust between private and public sector.
Salameh’s arrest, while presenting an interesting foray into the issues at hand to address banking sanctions, may also cause no practical change to the crisis if the ongoing conflict between Israel and Hezbollah is not addressed. The issue, after all, is a multifaceted problem that goes beyond the fate of a single high-ranked official, and would likely involve a concerted effort from all parties of the nation’s governing institutions, as well as its civil society that has proven to be resilient over the past five decades. More will be determined if the hope for greater change will be met.
