Lebanon is a country that has received little attention during the Covid-19 crisis. As of Monday, the country officially had over 250 coronavirus cases, with four confirmed fatalities. People in Beirut estimate the real number of infections to be four to five times that number, and the government’s decision to deploy the army to prevent people from violating quarantine rules reinforces that view.
For now, the disease still appears to be under control. However, the fear is that if things were to get out of hand, the public health system would be overwhelmed. What makes Lebanon more vulnerable than many other places is that the country is going through a major economic crisis. The state is bankrupt and its ability to withstand a long lockdown, or to import material to address the health emergency, is limited.
The shutdown, which began in mid-March and involves people remaining at home while most commerce is suspended, will also have severe consequences for a county that cannot afford to be idle. In the past five months, Lebanon’s economy has been in free fall, with banks reacting by severely limiting withdrawals or transfers abroad. This has forced many businesses to close, leaving tens of thousands unemployed.
The downward slide began last October, when demonstrations took place against the corruption of the political class and increasingly stringent economic measures. As protests continued, banks introduced de facto capital controls in the realisation that the angry mood had undermined the system the state had set up to finance its ballooning public debt. Many refer to it as a Ponzi scheme that has come to an end. Banks had offered interest rates on deposits that were much higher than the global average, paying these off by attracting new deposits into the system. With confidence gone, the banks feared account holders would rush to withdraw money, leading to the banking system’s collapse.
Foreign assistance to Lebanon has been conditional upon the introduction of reforms. Yet the country’s political class has resisted this, as it would reduce their share of the rents they are extracting from the state. Indeed, Hezbollah was one of the parties initially opposed to a bailout from the International Monetary Fund. The party feared that this would cut into its own revenues, while also weakening the political class it has propped up to solidify its position in the country.
In recent weeks, however, Hezbollah had walked back its resistance to IMF funding, understanding that Lebanon has no other source of hard currency available to help it out of its predicament. For a country whose foreign currency reserves have reached alarmingly low levels, and that imports most of its food and medicine as well as all of its fuel, refusing an IMF bailout would be suicidal.
The Covid-19 pandemic makes recourse to the IMF even more probable, limiting the latitude of politicians to sideline economic reform. Because of the freezing of economic activity since October, and particularly since the coronavirus outbreak, the state’s revenues have fallen precipitously. This will ensure a larger budget deficit than the government had anticipated, requiring drastic spending cuts the politicians would have preferred to avoid, or delay.
These cuts will impose painful trade-offs on the state. More importantly, they will place the politicians in a dilemma. On the one hand, spending cuts will mean that more people suffer, making resistance to the IMF and its menu of austerity easier. On the other hand, it would make a recourse to the organisation to help Lebanon manage its debt even more urgent, with politicians less able to prevent it.
The reality is that many Lebanese are of two minds about the IMF. While they do not want the burden of reform to be placed upon their shoulder, many would welcome the international organisation providing liquidity to help revive the economy and reduce unemployment. They would also welcome seeing the political class cornered by an outside actor into introducing necessary reforms, such as in the highly corrupt, expensive, and inefficient electricity sector for instance.
In addition, the increased expenses from treating the coronavirus outbreak – which may include importing medicine, equipment and other necessities from the international market – could run down foreign reserves more rapidly than expected. This would also increase pressure on the state to go to the IMF.
Yet the international economic environment is something of which the Lebanese should be wary. Most countries will suffer from the aftershocks of Covid-19. This means that international interest in Lebanon’s well-being – never high in the first place – may disappear. In other words, the country will have to show seriousness if it wants to compete for IMF assistance against a rapidly expanding field of countries in distress. To be blunt, today Lebanon is a priority to no one but the Lebanese.
It may be dawning on Lebanon’s politicians that the system they plundered so recklessly for decades is falling victim to Covid-19. The unsustainable nature of that system was evident months ago, but the virus may have just made the efforts of the political class to keep it alive all but impossible. When a system is rotten to the core, a complete rebirth is often the only remedy to resolve things.
Michael Young is editor of Diwan, the blog of the Carnegie Middle East programme, in Beirut