A series of disasters have driven Lebanon into unchartered territory and towards socio-economic collapse in 2020.
A triple crisis including the defaulting on billions of dollar worth of Eurobond payments in March 2020, the outbreak of Covid-19 two weeks later and then the deadly Beirut Port blast on August 4 has made 2020 one of the worst years in the country’s recent history.
The sudden halt in capital inflows during 2019 precipitated informal and ad hoc capital controls, depreciation of the exchange rate and the creation of multiple exchange rates.
The value of the Lebanese pound plunged to above 10,000 to the US dollar at the end of June in the parallel market, compared with the official exchange rate of 1,507. By December 30, the exchange rate was LBP8,300 to the dollar.
In May, the Government of Lebanon formally requested the assistance of the International Monetary Fund (IMF) to bail out the economy as it continues to tailspin.
Hassan Diab’s government had the mandate to advance economic reforms and to negotiate an external financial support package with the IMF. However, negotiations with the IMF have stalled amid broad disagreements on the restructuring details among domestic stakeholders.
To make matters worse, Lebanese banks, fearing a run on deposits that would destroy the banking system, have limited the amount that can be withdrawn in US dollars, even if depositors have accounts in the currency.
Many now fear that their savings are at risk, despite government assurances to the contrary.
Meanwhile, the economy is in double digit contraction. With little domestic production in what is a highly dollarised economy, the sudden stop in capital flows led to a shortage of dollars that came to stifle trade and disrupt supply chains in virtually every sector.
While the economy had already contracted by 1.9 and 6.7 percent of GDP in 2018 and 2019, 2020 will be the third consecutive annual contraction, projected at around 20 percent of GDP, amid deteriorating economic indicators.
Inflation soared above 133 percent in November after registering a record high at 136.8 percent, threatening the livelihoods of hundreds of thousands of residents who make their income in LBP.
Lebanon’s government agreed in July to hire Alvarez & Marsal to conduct a forensic audit to determine how massive amounts of money were spent in a country plagued by corruption. The New York-based company terminated in November its contract after failing to receive vital documents.
The fallout of the economic crisis and the pandemic had led to a significant increase in poverty and were shrinking the middle class.
Recent projections estimate that poverty rates have surged from 28 percent in 2019 to 55.3 percent in 2020, bringing the total number of poor Lebanese to about 2.7 million.
Businesses are facing severe challenges from the lack of liquidity, a shortage of US dollars, informal capital controls, parallel exchange rates, an inability to import inputs and final goods, and disruptions due to the Covid-19 lockdown.
The tourism sector has been severely hit, particularly in the Beirut area, due to protests and subsequent turmoil. Similarly, industrial firms have faced challenges with the multiple exchange rates, complicating the import of raw material for manufacturing while driving prices up.
Political vacuum
Lebanon has a track record of lengthy negotiations to form governments, given its fractured political landscape.
Lebanese leaders have failed to form a new government amid ongoing political disagreements, nearly five months after the explosion at Beirut port on 4 August.
Hassan Diab formed his government on January 21, 2020 and resigned on August 10 amid intensifying protests in the wake of the devastating explosion.
On August 31, Mustapha Adib, a little-known diplomat, was designated as Lebanon’s new Prime Minister. He resigned on September 26, amid a deadlock over forming the next Cabinet.
On October 22, Saad Hariri, who resigned on October 29, 2019 in the wake of October 17 demonstrations, was designated to form a new government.
Coronavirus pandemic
Existing challenges are compounded by the Covid-19 pandemic, which is dealing a further blow to already weakened economic activity and government revenue.
On March 18, the government imposed a first general lockdown to counter the spread of Covid-19 with a second lockdown on November 14, lasting two weeks.
By December 30, Lebanon registered 177,996 Covid-19 cases and 1,456 deaths.
Beirut port explosion
Beirut Port was the site of a massive explosion generated by 2,750 tons of ammonium nitrate that killed around 200 people, wounded more than 6,000, and displaced more than 300,000 residents in surrounding areas.
Lebanese caretaker Prime Minister Hassan Diab and three former ministers, along with more than 25 Beirut Port officials, have been charged with criminal negligence as part of a judicial probe into the blast.
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