Desperation Might Just Drive Lebanon To Reform

(Bloomberg Opinion) -- The most severe of Lebanon’s intersecting crises is the country’s seemingly inexorable spiral toward economic catastrophe. In only the latest of many harbingers of doom, the likelihood of a default on a government bond due next month has sent stocks crashing to a 15-year low.

It’s not just investors who’re spooked. The national carrier, Middle East Airlines, was panicked into announcing that it would no longer accept Lebanese currency for payments. The decision was quickly rescinded, but it was a stunning vote of no-confidence in the pound, and by extension the economy and the government.

Lebanese authorities have asked the International Monetary Fund for guidance on stabilizing the economy, but international bailout conditions are likely to be painful. A team of IMF experts is scheduled to begin consultations next week.

But it is possible—if only just—to see a silver lining in all this. The desperate need for a bailout, combined with the ongoing people-power movement in the streets, could finally prompt significant economic and political reforms.

The intersection between the economic and political crises isn’t lost on anyone, at home or abroad. The World Bank’s Middle East representative, Ferid Belhaj, has called for reforms, issuing a stark warning for Lebanese leaders: “You cannot continue doing what you’ve been doing for years when you see what the reaction on the street is, and when you see what the state of the economy is.”

The massive street protests that began last October were initially centered on socio-economic grievances, but quickly evolved into a rejection of the entire political elite. The protests continue, but not with the breadth and intensity they had before. It remains to be seen whether the movement is fading, or whether it will regroup and make another major push for political reforms.

The newly-installed Prime Minister Hassan Diab, an ally of Hezbollah, has little breathing room, however. He is being snubbed by Gulf Arab countries that have long been crucial to the Lebanese economy, through aid and remittances from expatriate Lebanese workers. Only Qatar has agreed to receive him. The other Arab countries have clearly indicated they aren’t interested in propping up a government installed, they believe, to do the bidding of the Iran-backed group.

Capital investment has dried up despite another interest-rate cut. The all-important remittances, largely from the Gulf, are in freefall. In the last six months of 2019, Lebanese banks lost $10 billion of deposits, and the country is experiencing a rapidly-intensifying liquidity crisis, with dollars in short supply.

The most immediate threat is a $1.2 billion Eurobond that matures in March and does not appear payable. The IMF has suggested debt-holders may have to write off up to 70% of such investments, prompting another slide in the already beleaguered pound.

Diab knows an international bailout is the only way out of this mess. But the West and the Gulf countries, and even multilateral institutions such as the IMF and the World Bank, have made it clear they will not rescue Lebanon unless there are substantial, and painful, economic reforms—including currency devaluation, reduced subsidies and public-sector employment, and a crack-down on corruption.

And this would almost certainly involve significant political change as well. Greater transparency and accountability are crucial to any long-term Lebanese economic recovery. But the current political order has proven incapable of such tough measures and many of the leading national political figures are – as the protesters insist – deeply implicated in endemic corruption.

Nor will the changes be limited to domestic politics. To get long-term international support, Diab will be under pressure to finally enact the “dissociation policy” his predecessors have talked up for years but never implemented. This rather vague policy commits the Lebanese government “in all its components” to refrain from involvement in any regional conflicts or the affairs of other Arab states. To have any meaning, this would require Hezbollah to give up its cherished role as cat’s-paw for Iran in places like Syria, Iraq and Yemen.

But who will bell that cat? Hezbollah has just erected a statue of the slain Iranian commander Qassem Soleimani as a symbol of its—and Iran’—power over Lebanon. Diab’s best hope is that the Hezbollah leadership recognizes that they are inextricably bound to the rest of the Lebanese system, and that if the economy completely collapses, so will their finances.

If Diab is serious about mobilizing an international rescue, he needs to move quickly on the reforms that will be required by donors, especially the reduction of of the national debt and an end to the looting of national wealth by the elites. I wouldn’t hold my breath, though. Diab is, as the protesters have been saying, part of the elite.

Still, even if the Lebanese ruling class is determined to keep changes to the minimum necessary to ensure international support, as long as the donors stay firm on their demands for reform, they can begin to push the ossified power structure toward change. And if the protesters keep up the pressure on the streets, they may be able to force the implementation of constitutional provisions to create a more democratic and non-sectarian lower house in parliament.

If a combination of domestic and international pressure in the context of the emerging economic implosion is not enough to impose serious change on Lebanon, it’s hard to imagine what could.

To contact the author of this story: Hussein Ibish at hussein.ibish@gmail.com

To contact the editor responsible for this story: Bobby Ghosh at aghosh73@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Hussein Ibish is a senior resident scholar at the Arab Gulf States Institute in Washington.

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