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1 1 (October 06, 2020)

handle is hein.crs/govdcci0001 and id is 1 raw text is: 0,iE;0 , October 6, 2020 Lebanon's Economic Crisis Lebanon faces a serious economic crisis. The government defaulted on its debt in March 2020, its currency has lost 80% of its value since 2019, consumers and businesses are grappling with hyperinflation, and the banking sector is insolvent. Unemployment and poverty in the country have surged. Lebanon's economic challenges have exacerbated political turmoil, fueling nationwide protests against inequality and the perception that political elites across the spectrum have manipulated financial institutions for their own gain. Protests and political gridlock have resulted in the resignation of three prime ministers since October 2019; Lebanon has been unable to form a government since the August 2020 resignation of Prime Minister Hassan Diab. While Lebanon is urgently seeking financial assistance abroad, its current caretaker government cannot enact the reforms that the International Monetary Fund (IMF) has stated are necessary for aid negotiations to progress. Lebanon's economic crisis has wide-ranging implications for political stability and regional security. U.S. adversaries in Lebanon-including Hezbollah and its patron Iran could benefit from any instability in the country, including by escalating operations in Syria and/or along the Israeli border. Deteriorating economic conditions and a vacuum in state authority also could prompt refugee outflows (of both Syrians and Lebanese), renew sectarian conflict, and create a permissive operating environment for terrorist groups. .0-ve,,-A-,ew (>f k.me zco'-,. -niC. C,is Lebanon's economic crisis combines various challenges; some analysts characterize it as simultaneous debt, fiscal, banking, and currency crises (Figure 1). Debt crisis. Following Lebanon's civil war (1975-1990), successive Lebanese governments borrowed heavily to finance reconstruction, mostly from local banks, but also by selling bonds in international capital markets. The governments, however, did not always channel borrowed funds into productive investments, and repeatedly rolled over the country's debt (paying off old debts with new borrowing). Thus, Lebanon's debt burden is one of the highest in the world (roughly 155% of GDP in 2019). Investors grew increasingly concerned in 2019 about the sustainability of Lebanon's debt and that a future government would seek debt restructuring. With foreign investors increasingly unwilling to invest in Lebanon, the government in early 2020 found itself with limited foreign exchange and faced competing priorities: it could use its limited foreign exchange to make debt payments or finance critical food and fuel imports. In March 2020, Lebanon defaulted on its debt for the first time and announced that it was discontinuing payments on its foreign-currency debt. Fiscal crisis. The Lebanese government has run large budget deficits for years, averaging 8.6% per year between 2011 and 2019. Debt service contributed to the fiscal pressures facing the government: roughly half of the government's revenue went to interest payments on the public debt. Previous attempts at closing the budget deficit gap were largely unsuccessful: efforts to raise revenue via a tax on the popular messaging system WhatsApp in October 2019 triggered vast nationwide protests against corruption and financial mismanagement, and resulted in the resignation of then-Prime Minister Saad Hariri. Unable to access new financing, Lebanon must now balance its budget by increasing revenue collection and/or cutting government spending. Banking crisis. Lebanese banks were long-lauded as key engines of economic growth. Between 2011 and 2019, bank assets had grown by 83% to $253 billion, equal to roughly five times the country's GDP. Lebanese banks were able to attract dollar deposits from local customers and the large Lebanese diaspora abroad by offering high interest rates (up to 14%) on dollar-denominated accounts. The banks used these deposits to lend to the Lebanese government at a higher interest rate, netting sizeable profits. As investor confidence waned in late 2019, however, the banks were unable to meet customer demands for deposit withdrawals, because their deposits were tied up in longer-term loans to the government. Banks closed for weeks in late 2019 and after reopening, imposed weekly limits on cash withdrawals in dollars. Additionally, the banks are major holders of government bonds, and their financial situation has become more precarious since the government defaulted on its debt. Figure I. Lebanon: Key Economic Pressures Govemment Debt{%of GDP) 2-P4'9dat Banud Assets {% of 000 20 17 ' < ¢sX t e X :::::::::: ::::::::::::: :::::: Source: IMF, World Bank, and Economist intelligence Unit. Currency crisis. The Lebanese pound has been pegged to the dollar since 1997. However, as investors started to pull funds out of Lebanon in 2019, demand for the pound fell. Lebanon's central bank sold foreign exchange reserves to support the value of the currency, but an informal exchange gnom ggmm , q 'S SL IN 11LULANJILiN,

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