埃及经济研究论坛（ERF）：黎巴嫩的危机：从无法偿还债务到新经济增长模式之间不确定的路径

ERFWorkingPaPersseries

LebanonatRisk:

TheUncertainRoad

fromADebtOverhangtoANewGrowthPath

IshacDiwanandHenriChaoul

WorkingPaperNo.1645

August2023

LEBANONATRISK:THEUNCERTAINROAD

FROMADEBTOVERHANGTOANEWGROWTHPATH

IshacDiwanandHenriChaoul

WorkingPaperNo.1645

August2023

Forprovidingsuggestionsthathaveledtoimprovementsinthepaper,theauthorswouldliketothankSamiAtallah,RoyBadaro,JoeBahout,AlainBifani,AmerBisat,ClementBrenot,MelaniCammett,KamalHamdan,EnzoJaffre,RamiKiwan,AdnanMazarei,CharbelNahas,MakramOuaiss,JimRobinson,NawafSalamDilekSevinc,BassemSneige,andMhamadZbeeb.

Sendcorrespondenceto:

IshacDiwan

FinanceforDevelopmentLab,ParisSchoolofEconomics

ishac.diwan@ens.fr

Firstpublishedin2023by

TheEconomicResearchForum(ERF)

21Al-SadAl-AalyStreet

Dokki,Giza

Egypt

.eg

Copyright©TheEconomicResearchForum,2023

Allrightsreserved.Nopartofthispublicationmaybereproducedinanyformorbyany

electronicormechanicalmeans,includinginformationstorageandretrievalsystems,withoutpermissioninwritingfromthepublisher.

Thefindings,interpretationsandconclusionsexpressedinthispublicationareentirelythoseoftheauthor(s)andshouldnotbeattributedtotheEconomicResearchForum,membersofits

BoardofTrustees,oritsdonors.

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Abstract

Thispaperprovidesanaccountofthe2019financialcrisisinLebanon.Itthenanalyzesaseriesofrelatedquestions.First,itconsidersthehistoricalbackgroundandaskshowthecrisiscouldhavebeenaverted.Second,itreviewspost-criseseconomicdevelopmentsandattemptstoexplorethereasonsbehindtheirseverity.Third,itreviewsthepolicyrecommendationssuggestedtoexitthecrisisandexamineswhethertheyneedtobeupdatedinviewofrecentdevelopments.Fourth,itoffersavisionofanewgrowthpathforLebanonandexaminestheimplicationsofarecoverystrategy.Finally,itdiscussesareviseddonors’strategybetteradaptedtothecurrentcircumstances.

Keywords:Lebanon,financialandbankingcrisis,balanceofpaymentcrisis,debtcrisis,growthpotential,stabilizationandrecovery,donorstrategy.

JELClassifications:G2,N2

ﻣﻠﺨﺺ

ﺗﻘﺪﻡەﺬﻫﺔﻗﺭﻮﻟﺍﺩ⃞᠍ﺍﺔﻣﺯﻸﻟﺔ⃞ﻟﺎﻤﻟﺍﻟﻌﺎﻡ2019ᣚᡧᢝﻟﺒﻨﺎﻥ.ﺛﻢﺗﻘﻮﻡﺑﺘﺤﻠᘭﻞﺳﻠﺴﻠﺔﻣﻦﺍﻷﺳﺌﻠﺔﺫﺍﺕﺍﻟﺼﻠﺔ.ﺃﻭ،ًᢻﺗﺄﺧﺬᣚᡧᢝﺍﻻﻋﺘᘘﺎﺭ ﺔ⃞ﻔﻠﺨﻟﺍﺔ⃞ﺨᗫﺭﺎﺘﻟﺍﻭ⃞ﺗﺴﺄﻝﻒ⃞ﻛﻥﺎﻦﻣﺍﻟﻤﻤﻜﻦﺗﺠﻨﺐﺍﻷﺯﻣﺔ.ﻭﺛﺎﻧᘭﺎ،ᘻﺴﺘﻌﺮﺽﺍﻟﺘﻄﻮﺭﺍﺕﺍﻻﻗﺘﺼﺎﺩᘌﺔﺍﻟᣎᡨᢝﺗﻠﺖﺍﻷﺯﻣﺎﺕﻭﺗﺤﺎﻭﻝ ﻑﺎﺸﻜﺘﺳﺍﺏﺎ⃞ﺳﻷﺍﺔﻨﻣﺎﻟﺍﺀﺍﺭﻭﺎﻬﺗﺭﻮﻄﺧ.،ﺎﺜﻟﺎﺛﻭᘻﺽﺮﻌﺘﺴﺍﻟﺘﻮﺻᘭﺎﺕﺔﻘﻠﻌﺘﻤﻟﺍᗷﺎﻟﺴᘭﺎﺳﺎﺕﻭﺍﻟﻤﻘᡨᣂﺣﺔﻟﻠﺨﺮﻭﺝﻣﻦﺍﻷﺯﻣﺔﻭﺗᘘﺤﺚﺎﻣﺍﺫﺇﻥﺎﻡﺰﻠᘌﺎﻬﺜﻳﺪﺤﺗᣚᡧᢝﺀﻮﺿﺗﺎﺭﻮﻄﺘﻟﺍﺧﻷﺍᣂᢕﺓ.ᗷﺍﺭ،ﺎﺗﻘﺪﻡﺔ⃞ﺅﺭﺭﺎﺴﻤﻟﻮﻤﻧﺟﺪᘌﺪﻟﻠﺒﻨﺎﻥﻭﺗᘘﺤﺚﺍﻵﺛﺎﺭﺍﻟﻤᡨᣂﺗᘘﺔﻋᣢﺍﺳᡨᣂﺍﺗᘭﺠᘭﺔ ﺵﺎﻌﻧﻹﺍ.ﺧﺃﻭᣂᢕ،ﺍﻨﺗﺶﻗﺎﺳﺍﺔ⃞ﺠᘭﺗﺍﺔﺤﻘﻨﻣﻟﻠﻤﺎﻧﺤᣌᢕᡧﺗﺘﻜᘭﻒᚽﺸﻞﺃﻓﻀﻞﻣﻊﺍﻟﻈﺮﻭﻑﺍﻟﺤﺎﻟᘭﺔ.

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1.Introduction

Lebanon’seconomy,minedwithstructuralfaultsfordecades,hasbeencollapsingsince2019.TheGDPpercapitahasfallenfromUSD11,320in2018tolessthanUSD4,000in2022,andincomeinequalityhasshotuptoLatinlevels.Byearly2023,thecountrywasmiredinadebtcrisis,withdebttoGDPexceeding180percent;acurrencycrisiswiththeLBPdepreciatedby98percent;abankingcrisiswithdepositorsunabletowithdrawtheirfunds;andaneconomiccrisiswiththemainpillarsoftheeconomy(tourism,education,andhealthcare)experiencingmassivebusinessclosuresandbrain-drain.Threesuccessivegovernmentshavedonelittletostabilizethesituation.Thedescentcontinues,nowataslowerpace.Moredelaysmakeitharderfortheeconomytoriseagainatsomepoint.Themiddleclassisdisappearing,corporate,human,andfinancialcapitalareevaporating,andtheinfrastructureisdecaying.Thecountryisatriskofbeingstuckinapovertytrapdespiteitsrichpotential.

Morethanthreeyearsafterthefinancialblow-out,thispaperseekstoadvancefivemaintheses.First,itoffersasyntheticdescriptionoftherun-uptothecrisis.Thispartmakesitclearthatthecrisisislargelyderivedfromalongstandingovervaluationofthenationalcurrency,whichhasdiscouragedinvestmentandproduction.Inthefaceofloweconomicgrowth,thelargeexternalcapitalflowsthathavecharacterizedthecountryforthepasttwodecadeshadtostopsoonerorlater.Whentheydid,after2018,thebalancesheetsofthestate,itscentralbank,andthefinancialsectorweredecimated,producingasevereeconomicdepression.

Thesecondgoalofthepaperistoexaminethereasonsbehindtheseverityofthecurrentcrisis.SeldomdoesGDPfallbythismuch(between40and60percent)duringpeacetimes.Thefreezeofthefinancialsystemisakeyreason;productionwasunabletoshiftfromdomesticdemandtoexport.Thepoliticalleadershipwasunabletoevenstartcleaningupthefinancialsystem,stymiedbythegargantuantaskofdistributinglossesevaluatedatmultiplesoftheGDP.Instead,policymakingbecamedominatedbyrent-seekinginterests.Banks’equityholdershave,sofar,beenspared.Thecentralbankspentmostofitsreservesoncapitalflightandimportsubsidies,andmuchofthebanks’loanportfolioswererepaidonthecheap,benefitingborrowersattheexpenseofdepositors.

Thethirdaspectofthepaperistoshiftthepolicyfocusfromexclusiveattentiontothebankingcrisis,totheothertwoongoingcrisesthatalsorequirecriticalattention:theacutesocialcrisis,withpovertyrisingtoaffect50percentofthepopulation;andthestatecollapse,withitsbudgetdowntenfoldandbasicservicesnolongerdelivered.Whiletherecanbenodynamiceconomywithoutabankingsector,therecanbenocountrywithoutastate.Eachofthesethreecrisesmakestheotherhardertoresolve.However,withoutprogressonthethreefronts,recoverywouldbeimpossible.

Thefourthaspectofthepaperistodiscusshowtoresolvethecrisisinthecontextofrebuildingasustainableeconomicmodelforthefuture,nowthatthepost-civilwarmodelhasdied.Ideally,arapidinitialeconomicrecoverywouldgetthestate,themarket,andthesocietytosimultaneouslystartmovingawayfromtheirdeeplywoundedconditions.Thiswouldrequire

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aboostinconfidenceaboutthefuture.Futuregrowthdoesnotrequiremassivestateinvestmentsorcomplicatedregulation.Lebanonhasmanycomparativeadvantages,fromaskilledpopulationtoaconnecteddiasporaandabrandnamethatisstillvaluableglobally.Atminima,itcanfunctionasamiddle-classdormitoryeconomylivingoffexpatremittances,withrecoveringeducation,health,andtourismsectors.AdditionalopportunitiescanbubbleupthroughSMEinnovationsacrosstheterritory,especiallyintheexportofservices.Theneededshiftinexpectationscanonlyfollowsufficientpoliticalprogresstodeliverimprovedcooperationamongthediversepoliticalpartiesinwaysthatensurethatvigorouspolicywouldbeimplementedasneeded,infrastructureremainsfunctional(especiallyelectronic),andexternalaidisavailable.

Finally,thepaperproposesarethinkoftheroleofdonors.Since2018,thedonorstrategyhasbeentodanglethepromiseofabigpushinexchangeforambitiouspoliticalandeconomicreforms.Sofar,thisstrategyhasfailedtoelicitanyprogress.Webelieve,however,thatexternalpressureshouldcontinueandremainsthebesthopeforreformtotakeplace.However,theriskwith“nuclearconditionality”istoallowthesocialandeconomicwoundstogrowsodeepthatrecoverybecomesimpossibleinthefuture.Inrecentyears,humanitarianaidhasactedasa“secondleg”replacingdevelopmentalsupport,butthisremainsfragmentedandineffective.Weproposetoconsolidatethissecondlegintoorganizedsupportforabasicservicespackagetolimitthedecayinthecountry’spotentialandpreserveitsfuture.

ThegoalofthepaperisnottoofferanelaboratepoliticaleconomyreadingoftheLebanesesituation.Morethanelsewhere,Lebanonsuffersfrom“politicaldominance”inthesensethattheevolutionoftheeconomicsituationisconditionedontheevolutionofrelationsbetweenthemainLebanesepoliticalparties.Afteritscivilwar,Lebanesepoliticalforceshavebeendeeplydivided,especiallyaftertheendofPaxSyrianain2005,reflectingtherisingtensionsbetweenSaudiArabiaandIran.1Howdoesonedealwitheconomicrationalityinsuchasituation?While

wetrytodisentanglesomeofthepoliticaleconomyreasonsthatpushedforparticulardecisionsinthepast,wetakeamorenormativeapproachwhendiscussingthefuture.Byfocusingonhowtomaximizethesizeoftheeconomicpie,wehopethatpoliticalinteractionscouldbecomemorecooperativefortheinterestofall.

Thisisclearlynotaconvincingwaytopredictthefuture.However,wethinkthatitisausefulcontributionforthreereasons.First,Lebanon’seconomicproblemsarecomplexandnotwellunderstood,andanecessaryconditiontosolvingthemistounderstandthembetter.Second,nowthatithasbecomeclearhowcostlynon-cooperativebehaviorcanbe,itbecomesevenmorenecessarytoaspiretoandadvocateformorecooperativesolutions,evenwhilerecognizingthattheyaredifficulttoenforce.Third,ifbettersolutionsarenotfoundwithinthesystem,theknowledgethatbettereconomicoutcomesarepossiblecanonlyencouragecitizenstoredoubleeffortstochangethesystemitself.

1Thesedivisionsarerootedintheinheritedcommunitariansystem(seeSalloukh,2023forareviewofahugeliterature).Thereweremanyexternalshocksthathaveputmorestressonthesystem–particularlyIsrael’swarsonLebanon,theSyriancivilwarof2011,andSaudiArabia’sdisengagementin2016.

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Whileweleaveitforotherstostudythe“logic”ofapoliticalsystemthatseemstoencouragetheemergenceofzero-sumandevennegative-sumsituations,itisusefultoclarifythepoliticaleconomyapproachunderpinningouranalysis.Broadly,webelievethatuncooperativebehavioramongthemainpoliticalactorshasbeendominant,leadingtolarge“agencycosts”thatunderminegoodgovernance.Withinthisbroadframe,therecentdeteriorationofthepower-sharingsystemwasduetothreefactors.

Thefirstreasonwhyagencycostsroseoriginateswiththeformationofalargepower-sharingcoalitionafter2008,whichcametoincludeallmajorpoliticalactors(Salam,2021;Bahout,2015;Salloukh,2017).Thishelpedensurecivilpeace,avaluableachievementgiventhehighlevelofinsecuritythatcharacterizestheregion.However,thecoalitionofpartieswithdifferentpoliticalagendasandoftenconflictualexternalalliancesalsomadeithardtoreachagreementsoneconomicpolicies.2

Second,theprivatesectorhasalsobeendividedandunabletopushforrationalpolicieswithaunifiedvoice.Historicaltensionsbetweenbankersandimportersontheonehand,andindustrialistsontheother,favoredthefirstgroupinHariri’spost-wareconomy,adominancewhichremainedafterthefinancialblowoutof2019.Theexpansionofmonopolisticcronycapitalismalsodividedtheprivatesector.

Third,thesystem’sdysfunctionsareexacerbatedbythepredominanceofwaitingtactics,whereactorstrytoshiftthecostofadjustmenttoothers.Thisphenomenoniscloselyconnectedtothehighlevelsofgeopoliticaluncertaintyintheregion,whichencourageplayerstowaitforbetterregionalconditionsbeforesettling.Negotiatingthedistributionoflossesisdifficultgiventheirimmensityandtheuncertaintyaboutthestayingofthevariouspoliticalforces.3Thereareseveraltypesof“waitinggames”takingplacenow;politicalpartiesaretryingtoensureabetterpositionrelativetoeachother;4theregimeisnegotiatingwiththestreet,inflictingpainsothatafinancialsettlementbecomesmoreaccepted;andthestateisnegotiatingwiththeworldformoresupportwhilethreateninganinfluxofrefugees.

Therestofthepaperisorganizedasfollows.Section2providesahistoricalbackgroundtothe2019crisisandexploreshowthecrisiscouldhavebeenaverted.Section3reviewsthe

2ApoliticalequilibriumisdefinedbyDouglasNorth(2007)assatisfyingtwoconditions:agoverningcoalitionlargeenoughtoensuresecurity,butnotsolargeastobetoocostlyfortheeconomytosustain.Inthisview,Lebanonhadtogiveuponthesecondgoalinordertobeabletosatisfythefirst–especiallywiththeDohaagreementof2008,whicheffectivelyimposedatwo-thirdsmajorityruleforallimportantdecisions.

3ThisargumentfollowsAlesinaandDrazen’s(1989)argumentonwhystabilizationgetsdelayed.Moregenerally,thenon-cooperativebehavioroftheotherhypothesesbelongstothetypeofbreakdownsthatleadtowar(seeFearon,1995forareviewof“rational”wars).

4Thechoiceofpresidentisacaseinpoint;theelectionofPresidentAoun(2016-22)tookmorethantwoyears.Traditionally,thisinvolvesnegotiatingarangeofissuesthatwoulddefinethenewregime.Currently,accordingtonewsreports,thereareongoingnegotiationsoverthenamesofthenextprimeministerandheadofthecentralbank;apossibleIMFprogram;thefutureelectorallaw;potentialdecentralizationreforms;andadefensestrategytointegrateHizbollahintothearmy.

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economicdevelopmentpost-crisisandexamineswhyithasbeensosevere.Section4offersavisionofanewgrowthpath,whilesection5reviewspolicyrecommendationsconsideringrecentchanges.Section6discussesthedonors’strategy,andsection7concludes.

2.Structuralfaultsandmissedopportunities

TheLebanesecrisisemergedintheconfluenceoftwofactors:acountryincreasingly“livingonthecapitalaccount,”andaneconomyunabletogrowformorethanadecade.Thepost-civilwarpolitical-economic-financialmodelwasinitiallydrivenbyanexpansionarystate,rebuildinginfrastructurelavishlybyborrowingonthepromiseoffutureprosperitytogetgrowthgoing.Overtime,largecapitalinflows,comingtoanunstablecountrywithanatrophiedpoliticalsystem,contributedtothefailuretobuildaproductiveeconomyandledinsteadtoover-consumption(i.e.,morethanthatcouldbeaffordedonasustainablebasis).Thissectionarguesthat,contrarytopopularbelief,thesourceofthecrisiswasnotaprofligatestate,butabroaderproblemofawholesocietylivingbeyonditsmeansforfartoolong.

Capitalflowsaveraged20percentofGDPayearinthe2000s,whichisprobablyaglobalrecord(attheirheightin2016,aboutUSD17billion).Attractinglargeflowswasstatepolicy.Afterthecivilwar,Lebanon’sfinancialdoctrinebecametopegtheLBPandadjustinterestratesasnecessarytokeepflowscoming.Intheend,thepegbecamesocostlytomaintainthatitbroughtthehousedown.Whiletheylasted,theselargeinflowsallowedthestatetorunfiscaldeficits,andtheprivatesectortoconsumemorethanitproduced.Suchhugeinflowscouldonlybesustainedinafast-growingeconomy,andforashortperiodoftime,buteconomicgrowthwasnotimpressiveovertheperiod.WhilerealGDPgrowthapproached10percentearlyinthereconstructionphaseduringthe1990s,itfellinthe2000sandwasclosetozeroafterthestartoftheSyrianwarin2011.Theseriesofpoliticalandsecurityshocksthatcontinuedtohitthecountryovertheperiodcertainlyweakenedtheeconomicoutlook–thisincludedpoliticalviolenceandassassinations,conflictwithIsrael,andthestillongoingSyrianrefugeecrisis(Figure1).Inaddition,afteritsinitialreconstructionboom,Lebanondidnotfindanewgrowthengine.Theultimatecauseoftheeconomiccollapseof2019wastheaccumulationofliabilitieswithoutacommensurateincreaseinassets.

Twofactorsarestrikingwhenlookingatcapitalflows:howlongtheycontinuedtocomeforovertwodecadesdespitetheincreasedaccumulationofworrisomeclouds;andhowtheimbalancetheyfinancedwasincreasinglynotconnectedtoapublicsectordeficitbuttospendingbytheprivatesector.Theexternalimbalance,measuredbythecurrentaccountdeficit,canbedividedintoapublicandaprivatecomponent,accordingtothenationalaccountidentity:

Currentaccountdeficit=Private(savings–investment)+Governmentdeficit.

Forexample,in2018,thecurrentaccountdeficitstoodat25.5percentofGDP,anditwasdividedalmostequallybetweenapublicsectordeficit(11.1percentofGDP)andaprivatesectordeficit(14.3percentofGDP).Theprivatesectordeficititselfismadeofthedifference

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betweenamodestinvestmentrate(20.4percent)andadismallylowprivatesavingrateof6.1percentofGDP.5Figure2showstheevolutionofthecurrentaccountandthepublicdeficitovertime.Itisstrikingthatuntilaround2007,thefiscaldeficitabsorbedmostoftheinflows,butafterward,capitalflowsstartedfinancingmainlyaprivatedeficit.Itshouldalsobenotedthatthedebtservicewasmainlyremittedtothedomesticprivatesector,boostingitsexpendituresevenmore.

Theotherfactorishowlongthisstateoffinancialdisequilibriumlasted.Oneofitsmainsupportingpillarswasanimplicit“Saudiguarantee,”whichweakenedovertimebutwasclearlyremovedwhenPrimeMinisterSaadHaririwasinvoluntarilyretainedinSaudiArabiainNovember2017.Overthelongerperiod,monetarystabilityrestedonastronghomegrownbiasbybankdepositors,includingalargebaseofexpats,theoccasionaldonor’sbailouts,andthecollectiveinterestofLebanesebankstoavoidshakingthesystem.

Publicdebt

Sincepublicdebtisanessentialpartoftheproblem,itisusefultounderstanditsdynamics.Publicdebthasbeen“toohigh”inLebanonsincetheearly2000s,aresultofthebiginfrastructurepushofRafikHariri.BythetimeofhisassassinationinFebruary2005,publicdebttoGDPstoodat200percent.Thepoliticalbetdonein1993wastofuelarecoverythroughamassivereconstructionprogramfinancedbydebt,gagingonaregionalpeacethatwouldinundateLebanonwithagenerouspeacedividend.Thebetwaslostbytheendof1995withtheassassinationofIsrael’sPrimeMinisterYitzhakRabin.Fromthatpointon,theeconomicstrategyhasremainedonautopilot.

ThefollowingfiveyearssawrapidGDPgrowthrates.6Tightbudgetsandrisingfiscalrevenuesledtoseveralyearswithprimarysurpluses.7Thisledtoimprovementsinthedebtratio,whichfelltoalowof130percentofGDPin2012–stilladangerouslyhighlevelbyinternationalstandards.Figure3illustratesthedynamicsofthepublicdebtratio.After2011,thecontinuousriseofthedebtratio,reaching170percentofGDPin2018,wasentirelydrivenbyacombinationofrisinginterestratesandlowGDPgrowth.Thisoccurredevenastheprimarydeficithada(small)surplusinthe2010s(+1percentofGDPonaverage).Theoveralldeficitkeptgrowing;debtgrewendogenously,sotospeak,becauseoftherisingrefinancingcost.

Realeconomyeffects

Thispolicystance(highinterestratesandanovervaluedexchangerate)hadnegativeeffectsoncompetitiveness.CapitalflowsactedakintoDutchdisease,leadingtoarisingappreciation

5ThistermalsoimplicitlyincludesimportsdestinedforSyriabutnotincludedinre-exportdata–arecurringprobleminLebanesestatisticsgivenalongandporousborder.

6Theriseingrowthratesinthelate2000scameontheheelsofsignificantdepositinflowtoLebanon.Thediaspora,impressedbythefactthattheLebanesebankssurvivedtheglobalfinancialcrisisunscathed,increaseditsinflowssignificantly(anditsinvestmentsinrealestateaswell).

7Moregenerallythough,fiscalexpenditureswerebadlyunbalanced,focusedonthepaymentofinterestondebt,overstaffinginthepublicsector,andalargesubsidytothepowersector,attheexpenseofpublicinvestmentinhumancapitalandinfrastructure.

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ofthereal(effective)exchangerate(REER).Asrealwagesandthepriceofnon-tradablesrose,aninflationdifferentialgrewrelativetotradingpartners.Therealappreciationinthedecade2008-18isestimatedatsomewherebetween30percent(Mora,2020)and45percent(IMF,2019).

Therewasnorenewaloftheeconomicmodel,whichincreasinglyoperatedasthatofarentiereconomy,butonewithoutasustainablerent.Citizensbehavedasiftheywererich,withthewealtheffectoperatingthroughboththeappreciationofassetprices(thenationalcurrency,land,andrealestate),andthegrowthofbankdepositsboostedbyhighinterestrates(thesereached200percentofGDP,levelsonlyobservedinveryrichcountries).Thispushedupdomesticspending,especiallyconsumptionandimports,andledtoafallindomesticsavingrates.Atthesametime,domesticproductionsuffered.

Thefallineconomicdynamismcanbeseeninkeyaggregates.Privateinvestmentdeclinedovertime,from20to12percentofGDPbetween2010and2019(seeFigure4).Moreover,mostinvestmentswentintorealestate,anareathatdoesnotgeneratemuchforeignexchange(althoughitdidattractsomeforeigndirectinvestment).Therewasalsoaseculardeclineinmanufacturingvalue-added,whichfellfrom24to14percentofGDPduringtheperiod.Exportsofgoodsandservicesalsofellastheybecamelesscompetitive.Thefallofexportswasexacerbatedafter2011bytheSyrianwar,aslandaccesstotheGCCmarketclosed.Theprivatesector,alreadymoremercantilethanproductivist,sufferedfromanincreasedmonopolizationoftheeconomytothebenefitofthepoliticallyconnected(DiwanandHaidar,2021).Contrarytoitsreputation,theLebaneseeconomywasnotathrivingmarketplacewithadynamicprivatesectorinthe2010s,asthebusinessclimatebecameincreasinglypoliticizedandcostlytonavigate.

Benefitsandcostsoftheexchangeratepeg

Theneedtoattractsufficientfundingtofinancealargecurrentaccountdeficitwasaconstantchallengeforthegovernment,whichledtoanout-of-the-ordinarylevelofactivismbythecentralbank,BanqueduLiban(BdL).Itsgoalevolvedovertimefromafocusonfinancingreconstruction,tofinancingfiscaldeficits,tohelpingservicealargepublicdebt,and,finally,topreventdepositsfromfleeingthecountry.Thecurrencypegwasseenasessentialtothisstrategy,guaranteeingthatforeignfundscouldexitatpar.Thedefenseofthepeg,however,cameatanincreasinglyhighcost.Intheend,itwasthecurrencymismatchattheBdL,ratherthanfiscaldeficits,thatgeneratedmuchofthenationallosses.Seeingthisrequiresclarifyingtheimbricationofitsbalancesheetswiththatofthebanksandthestate.

Inthe1990s,publicsectordeficitswerefinancedinlocalcurrencybythebankingsector,whichovertimeincreaseditsexposuretopublicdebt.TogetthebankstobuyTreasuryBills,twofactorscameintoplay:highinterestrates,whichreached40percentinthemid-1990s;andastableexchangerate.Intime,Lebanonalsostartedraisingdebtininternationalmarketstoborrowatlowerinterestrates.RiskstothesystemchangedfrommainlydevaluationrisksreflectedinriskpremiaonLBPdepositsoverUSDdeposits,anddefaultrisksstartedtorise

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showingasriskpremiaondollardepositsoverglobaldollarrates(Figure5).AsLebanon’screditratingdeclinedfurtherinthe2000s,banksbecamemorewaryofsovereignrisk,andBdLincreaseditsexposuretostatedebt.Tomaintainthefixedexchangerate,however,itneededtohaveaccesstohardcurrency.Asystemiccrisiswasavertedseveraltimes.In2001-02,afinancialcollapsewasavertedthankstotheParisIandIIconferences,wheresignificantexternalfinancialaidcametotherescue.In2007,theParisIIIconferencegeneratedmuch-neededreliefafterthe2006Israeliwar.Aidwaspromisedagainin2018toavertaloomingcollapse(CEDRE),butthiswasmadecontingentonreforms.

Toattractforeignexchange,BdLincreasinglysoughttogetdollardepositsfromcommercialbanks(Figure6).Between2006and2019,theshareofthebanks’assetsinvestedinBdLrosefrom35percentto70percent.8Thiswasariskystrategyforthebankscomparedtoinvestingtheirdollardepositsabroad,especiallysincetheywerehighlydependentonnon-residentsdeposits.9Ifnon-residentsstartedtowithdrawtheirdeposits,theassetsofcommercialbankswouldhavetobeliquidatedatfire-saleprices.

However,thiswashighlyprofitable.TheIMF(2019)estimatesthatbankprofitsaveragedfourpercentofGDPoverthedecade.10TheirprofitsallowedbankstoincreasetheircapitalfromUSD250millionin1993toUSD18.9billionin2018.

ThebalancesheetofBdLgrewimmensely,butadangerouscurrencymismatchalsogrewalongsideit.Bankdeposits,largelyindollars,rosefrom40percenttonearly80percentoftotalliabilitiesbetween2000and2019.Atthesametime,BdL’sassetsbecamemoreinvestedinLBPdenominatedpublicdebt(goingfromfivepercentto32percentofassetsbetween2000and2019),andlessinvestedinforeigncurrencydenominatedassets(goingfrom62to22percentofassetsoverthesameperiod).11Thisstrategyledtoalossofreserves,visibleinFigure7(inthatbanks’depositsgrewwhilereservesremainedflat)duetotheheavycostofcarry;placementsabroadcarriedinterestratesmuchlowertothatpaidtobanks.MorereserveswerelosttooccasionalFXinterventionstostabilizethepeginthefaceofweakeningexternalflows.ThesefinancialchoicesmeanttotheBdLbalancesheetbecamehighlyexposedtoexchangeraterisk.Intheend,mostofitslosseswouldoriginatefromthisimbalance.Themainreasonwhylossesturnedouttobesohighisthatunlikeothercountries,wheredefendingthepegendswhenthecentralbankrunsoutofreserves,BdLkeptdefendingthepegoncreditusingcommercialbanks’funds.AsseeninFigure7,2016marksthefirstyearwhereBdL’snet

8Atthesametime,theirliquiditywasreducedtoameresevenpercentofassets,downfromanaverageofaround90percentduringthe1975-90wartimeaverage,whichallowedthemtosurvivedespiteahighlyunstablepoliticalsituation.

9Since2011,thenetpositionofbanksinnon-residentassetshasbeennegative,reachingUSD-17billionin2017.10TheprofitrateofthebankingsectorisabouttwicethatintheUS(twopercentofGDP).Gaspard(2019)calculatesthatbanks’profits