The country is bankrupt for the first time in its history. The necessary financial injections for the restructuring of the ailing economy are not in sight.
While the stock exchanges around the world gave way on Monday due to the fear of the corona virus, a self-made economic crisis broke out in Lebanon: On Monday a $ 1.2 billion bond matured, that the country couldn’t pay. The Mediterranean state, with its strategically important importance for the Middle East, is insolvent for the first time in its history.
The government in Beirut is now facing difficult debt rescheduling negotiations. Lebanese Prime Minister Hassan Diab informed citizens and creditors on Saturday evening that the state would not service the debt due. Currency reserves have dropped to a “critical and dangerous” level, he said. If Lebanon were to repay the amount due, the import of essential goods would no longer be guaranteed.
Now Beirut is waiting for the creditors to decide whether to agree to rescheduling or to take legal action against the state. However, Lebanon’s Finance Minister Raoul Nehme made it clear in an interview with Reuters that there was not much to get for the creditors. The state has few assets outside the country.
The crisis in Lebanon could affect the fabric across the Middle East. The country, with just over six million inhabitants, is owned by that Iran seen as part of the Shiite axis, which is supposed to give Iran access to the Mediterranean. Shiite Hezbollah is the strongest party in the Lebanon government and an important strategic partner for Tehran in support of the Syrian regime. If Lebanon starts to falter, Iran will also feel this clearly.
Lebanon’s economy has so far been largely based on the business of banks, which offered attractive interest rates for investments. In doing so, they attracted the money of many Lebanese abroad who took no exchange rate risk because the Lebanese pound is pegged to the dollar. The banks in turn bought high-yielding Lebanese government bonds. Over the years, this has contributed to one of the highest national debts worldwide. It is currently 170 percent of economic output.
Pressure to reform
The debt rescheduling negotiations could take several months, according to economic circles in Beirut. Without massive investments in infrastructure, Lebanon will not be able to get on its feet. Electricity supply is incomplete, waterworks are unreliable, and waste disposal has not improved for years. Finance Minister Nehme promised that an economic and fiscal policy plan as well as a new monetary policy would be elaborated in “two months”.
Diab and his government are under pressure from international financial organizations such as the World Bank and the International Monetary Fund (IMF) to implement austerity measures and reforms in return for financial aid. Reform measures could include an increase in VAT and gasoline prices. Experience has shown that this would trigger a new wave of protests in Lebanon. The IMF It is also out of the question as a savior because Hezbollah refuses to accept its help: it considers the fund to be a henchman of the West.
Precisely because of Hezbollah’s strong position, there is no other generous sponsor in sight who could save the country from collapse and finance the necessary investments. Western states and partners in the Persian Gulf, who had previously supported Lebanon with cash injections, are coldly shouldered by Beirut.
They are disturbed by the leading role of Hezbollah, which the United States classifies as a terrorist organization. Former US ambassador to Beirut, Jeffrey Feltman, also described Hezbollah as “Iran’s most successful export of the revolution”.
Hezbollah’s dual role
In mid-February, Tehran pledged support to Lebanon. But in Beirut the offer was received with skepticism. Money from Tehran would further increase the already strong influence of the Islamic Republic, feared in financial circles.
If Lebanon wants to get back on its feet, either way it will not be able to avoid changing its economic structure. The strong financial sector needs a diet. The country, Prime Minister Diab said recently, is a pension economy that depends too much on the capital of the large Lebanese diaspora.
The small state with its multilingual and well-educated population would have the best prerequisites to diversify its income base – for example in the Higech area. Tourism currently contributes almost 20 percent to the national product and also has potential for expansion.
Lebanon is a “hostage to Hezbollah,” says Michael Young of the Carnegie Middle East Center in Beirut. The militia funded by Tehran plays a dual role in Lebanon. On the one hand, it is a party, represents ministers in the cabinet and is part of the political system. On the other hand, Hezbollah controls parts of the capital with its terrorist militias and supports in Syria the regime of Bashar al-Assad. A power struggle with Hezbollah could lead to another civil war.
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