Blown apart

Le­banon’s fi­nances were in a dire state be­fore this dis­as­ter struck

The Daily Telegraph - Business - - Front Page - Rus­sell Lynch

The footage of the de­struc­tion of Beirut’s port has shocked the world, but Le­banon’s long-suf­fer­ing pop­u­la­tion are al­ready deal­ing with the fall­out of an eco­nomic ex­plo­sion that has tipped the coun­try into hyper­in­fla­tion.

A ru­ined city once called the “Paris of the Mid­dle East” now serves as a hor­ren­dous metaphor for an eco­nomic col­lapse trig­gered by decades of fi­nan­cial and po­lit­i­cal mis­man­age­ment, and en­demic cor­rup­tion.

The blast comes days af­ter fig­ures showed Le­banon’s 6.8 mil­lion pop­u­la­tion in the grip of an an­nual in­fla­tion rate of 89.7pc – with food prices more than tre­bling com­pared to the year be­fore. Aca­demics say the coun­try has now joined a sorry list of states such as Zim­babwe and Venezuela in the hyper­in­fla­tion club, de­fined as prices ris­ing by more than 50pc a month.

Its eco­nomic woes be­gan long be­fore this lat­est catas­tro­phe, how­ever. As far back as last Oc­to­ber hun­dreds of thou­sands of Le­banese cit­i­zens, faced with reg­u­lar elec­tric­ity black­outs and 25pc un­em­ploy­ment, took to the streets in protest against a po­lit­i­cal sys­tem based on re­li­gious sects formed af­ter the end of the civil war in 1990. Le­banon’s cul­ture of bribery, em­bez­zle­ment and nepo­tism has put it among the world’s most cor­rupt coun­tries, ac­cord­ing to Trans­parency In­ter­na­tional.

Ac­cord­ing to the World Bank, nearly half the pop­u­la­tion are now liv­ing in poverty.

Years of liv­ing on the never-never fi­nally came home to roost in March when Has­san Diab, the prime min­is­ter, de­faulted on the coun­try’s debts for the first time. Talks with the In­ter­na­tional Mon­e­tary Fund over a bailout of up to $10bn (£7.6bn) – equiv­a­lent to around 20pc of its econ­omy – have stalled, and only this week the Nas­sif Hitti, the for­eign min­is­ter, re­signed, warn­ing that Le­banon was in dan­ger of be­com­ing a “failed state”.

For years the heav­ily im­port­de­pen­dent econ­omy has run huge cur­rent ac­count deficits of more than 20pc, funded by a di­as­pora of cit­i­zens liv­ing abroad send­ing dol­lars home to help pay its way.

They were tempted by dou­ble-digit re­turns from Le­banese banks in a low-rate world and the cash was re­cy­cled to help fund the deficit, but in re­cent times the money has been dry­ing up.

The oil price shock also cost jobs across the re­gion and hit dol­lar in­flows, heap­ing more pres­sure on the na­tional bal­ance sheet – and then came Covid-19.

Ox­ford Eco­nom­ics spe­cial­ist Maya Senussi says: “The loss of con­fi­dence didn’t hap­pen overnight, it pro­gres­sively deep­ened on all fronts, both do­mes­ti­cally and among the di­as­pora and donors, as peo­ple lost faith in the gov­ern­ment’s abil­ity to im­ple­ment re­form, be­came more anx­ious about the out­look for the econ­omy and jobs, be­came more an­gry about the cor­rupt prac­tices and even­tu­ally lost faith in the safety of their sav­ings.”

Both the gov­ern­ment and the cen­tral bank, the Banque du Liban, have racked up bil­lions in for­eign cur­rency debts while at­tempt­ing to peg the lo­cal Le­banese pound at an ar­ti­fi­cially high rate of LBP1,507 to the dol­lar. In prac­tice, the rate is now five times as high on the black mar­ket as peo­ple lose faith in the lo­cal cur­rency and queue for hours for dol­lars at crip­pled banks re­luc­tant to give them out.

Le­banon’s abil­ity to fund it­self ex­ter­nally from its Gulf neigh­bours has also been ham­pered by Saudi Ara­bian sus­pi­cions over Diab’s gov­ern­ment – only formed in Jan­uary – and its Hezbol­lah back­ers si­phon­ing off the funds.

Cap­i­tal Eco­nom­ics’ Ja­son Tu­vey says: “It’s highly un­likely that Le­banon will be able to un­lock the fi­nanc­ing that it needs to over­come its fun­da­men­tal eco­nomic prob­lems.

“Some part­ners may be re­luc­tant to pro­vide sup­port given the in­flu­en­tial role of Iran-backed Hezbol­lah in the Le­banese gov­ern­ment.”

The de­struc­tion of the port now looks ready to in­crease the suf­fer­ing of the Le­banese peo­ple as up to 80pc of its food is im­ported, while grain stor­age si­los have been de­stroyed.

Senussi, who pre­dicts a dra­matic 30pc slump in the econ­omy this year and “in­fla­tion in the hun­dreds of per cent”, warns: “Any sup­ply short­ages will only sup­port the rise in prices. But a lot of peo­ple were al­ready starv­ing.”

Flat­tened: the dev­as­tated port area of Beirut af­ter the ex­plo­sion that killed at least 135

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