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Pulling Lebanon Back from the Precipice
Pulling Lebanon Back from the Precipice
Demonstration asking to bring down the ruling political elite on Martyrs' Square, Beirut, 20 October 2019. CRISISGROUP/Heiko Wimmen

Pulling Lebanon Back from the Precipice

After months of mass protests, a new Lebanese government may take office soon. Yet it must make reforms that strike at the very vested interests that appointed it. Outsiders should give the cabinet a chance to succeed but plan for emergency aid if it fails.

A new government appears to be within reach in Lebanon, but the country’s crisis is far from over. On 21 January, news broke that the parties supporting university professor Hassan Diab’s nomination to be the next prime minister had agreed on a new cabinet line-up. The breakthrough comes at a critical moment. After three months of mostly peaceful popular protest against recurrent governance failures, followed by a brief holiday hiatus, new demonstrations broke out, which on 18 and 19 January escalated into a full-blown riot in downtown Beirut that left several hundred injured.

The shift to violence has been long in the making, the result of some protesters’ growing frustration with the apparent ineffectiveness of peaceful tactics. During the twelve weeks that elapsed between Prime Minister Saad Hariri’s 29 October resignation and the new cabinet's designation, political forces engaged in drawn-out negotiations to form a new government rather than respond to popular demands for radical change, seemingly preoccupied with horse trading and indifferent to citizens’ dramatically deteriorating living standards.

Protesters have now turned their wrath at the political elite against the banks.

The economic implosion was even longer in the making, the outcome of an artificially propped-up system that funded chronic deficits in the state budget and the balance of trade by piling up debt and attracting capital investment with unsustainably high interest rates. Import-dependent, Lebanon has run out of foreign currency to pay for what it consumes, while the state struggles to cover salaries and service a ballooning public debt. In the “parallel market” operated by licenced money changers, which determines the operative exchange rates for many purposes, the Lebanese lira has dropped by nearly 40 per cent against the dollar since August 2019, eating into state employee incomes in particular. Private-sector employees, often paid in dollars, also feel the pinch. Many have had their salaries cut by up to 50 per cent since November or been laid off. Worst of all, Lebanese who put their savings in ostensibly safe dollar accounts now have to queue for maximum weekly withdrawals of $300 and beg bank managers for permission to make urgent foreign transfers, as banks are low on liquidity and have imposed tight capital controls.

As a result, protesters have now turned their wrath at the political elite against the banks, whose treatment of customers has become a symbol of everyday indignity. Since the new year, branches and ATMs of local banks have become targets of firebombing and other forms of vandalism. Protests against the Central Bank, whose unsustainable fiscal policies contributed heavily to the crisis while enabling lavish profits for commercial banks, led to altercations with security forces on 14 January that set the stage for the subsequent riots.

If they consider themselves under direct attack, the security forces are liable to hit back with fewer and fewer inhibitions.

Things could deteriorate further. Initially, the Internal Security Forces and the Lebanese Army gave the protest movement significant leeway, at times going so far as to protect protesters from attack by thugs widely suspected of supporting the two leading Shiite parties Amal and Hizbollah. Relations between the movement and authorities began to sour in late November, when protesters accused police of looking the other way during a new round of such attacks, and further in mid-December when the Internal Security Forces repelled demonstrators attempting to reach the highly symbolic, cordoned-off parliament square downtown with tear gas and rubber bullets, causing dozens of injuries.

In the most recent violent incidents, some protesters reportedly attacked security forces unprovoked and some security forces allegedly responded disproportionately, a dangerous dynamic. The mood on all sides is tense. For over three months, soldiers and policemen have served under challenging circumstances. Like others, they have seen the value of their already modest salaries depreciate and their savings frozen. If they consider themselves under direct attack, the security forces, who have a strong esprit de corps, are liable to hit back with fewer and fewer inhibitions.

Appointing a new government is a step, but hardly a solution.

Appointing a new government is a step, but hardly a solution. Absent a substantial cash injection, the government eventually could well be unable to meet the public-sector payroll in full; alternatively, it might resort to printing Lebanese lira for that purpose, prompting hyperinflation. If and when the cash-strapped state’s capacity to pay salaries and provide services collapses, more street protests and rioting will become a virtual certainty. For angry, underpaid security forces to try to control crowds of angry, underpaid citizens, particularly after the earlier rounds of confrontation that fuelled mutual resentment, is a recipe for disaster.

Whether the new cabinet – which still needs parliament’s confidence vote – can break out of this downward spiral and turn the economy around quickly enough is, at best, uncertain. Pulling Lebanon out of the pit will require substantial external support – local economists estimate up to $20 billion – in the short run, and root-and-stem reform to eradicate corruption and put the economy on a sound footing in the medium term.

At its 11 December 2019 meeting, the International Support Group for Lebanon, which includes Lebanon’s most important external partners as well as international financial institutions, made clear that an “effective and credible government capable to meet the aspirations expressed by all the Lebanese” is a key condition for support. Whether the team now presented by Hassan Diab will cross this bar remains to be seen. To many of the protesters, the answer is no. While it is technically a government of “independents” and “technocrats”, many Lebanese suspect that it will be unable to perform its tasks independently of the political parties that endorsed it. The Diab government also lacks substantial support from Lebanon’s Sunni Muslims, and relies exclusively on the backing of parties belonging to one camp in the country’s divided political landscape, namely, Hizbollah and its allies.

Lebanon is at a crossroads, and there is reason to fear that it will take a wrong turn.

But the more fundamental problem is this: to combat corruption and institute required reforms, and thus to meet international donors’ demands, the new government would need to strike at the vested interests of the very parties that helped establish it. In the past, these parties have run the ministries and state institutions they control in the manner of quasi-feudal estates. Unless the parties fundamentally alter the way they conduct politics – a tall order indeed – it is hard to see how the Diab government can succeed.

For now, Lebanon’s external partners ought to give the new government the benefit of the doubt and a fair shot. Still, they would be reckless not to simultaneously prepare for the worst. Significant humanitarian aid will be required if the poverty rate surges from 30 per cent, where it now stands, to well over 50 per cent, where the World Bank estimates it will head should the economic crisis persist. Credit lines with international financial institutions like the European Investment Bank and the European Bank for Reconstruction and Development to secure at least the most essential imports, such as food and medicine, are another possible stopgap measure. Foreign partners might also consider providing security forces with additional training in non-violent crowd control.

Lebanon is at a crossroads, and there is reason to fear that it will take a wrong turn. Its foreign partners can help steer it in the right direction, but if the political elite refuses to change and put the national above their parochial interest, the Lebanese population will continue to suffer, many will seek to build their future elsewhere and the spectre of more widespread violence will linger.