Lebanon is on the brink of economic collapse and is now being forced to ask the International Monetary Fund (IMF) for help as a last resort. Last week, the government of Hassan Diab approved an economic reform plan: One that created more divisions. The plan was adopted two days after the long-serving governor of Lebanon’s central bank, Riad Salame, defended his policies and accused successive governments of squandering tens of billions of lira while avoiding any checks and balances. Salame’s defense was in response to Diab’s accusations that he had mishandled the latest financial crisis, in which the Lebanese currency has lost almost 50 percent of its value against the US dollar since December.
This public squabbling came against the backdrop of renewed protests by angry Lebanese — especially in the northern city of Tripoli — who have seen their living standards drop as the price of essential goods has skyrocketed. This time, protesters clashed with the army and torched banks, resulting in one civilian death and injuries on both sides.
Diab, who took over after an impasse that followed Saad Hariri’s resignation in December, is a Sunni technocrat who is backed by Hezbollah and the Free Patriotic Movement, which is represented by President Michel Aoun and his son-in-law Gebran Bassil. Diab came to power following mass public protests that gripped the entire country and called for the toppling of Lebanon’s political elite, which the demonstrators accused of mass corruption and of bankrupting the country. The once-solid Lebanese banks were overrun by mass cash withdrawals and found themselves unable to pay their clients, especially in dollars. In March, the country defaulted on a Eurobond payment and now finds itself on the verge of financial disarray. Under its new plan, the government hopes that foreign donors will release the $11 billion pledged at a Paris conference in 2018, which was conditional on economic reforms.
But Lebanon’s real crisis is not economic. The country is a victim of a sectarian system that has, over the past three decades, enriched former warlords, who are now in control of major industries and services. It is a dysfunctional system that benefited the few and resisted all attempts at reform.
Over the years, Hezbollah used the political stalemate to build a state within a state, with the direct financial and military assistance of Iran. Regardless of its declared agenda, under the mantra of “resistance” and confronting Israel, Hezbollah has become an extension of Iran’s regional presence and a vital proxy of the Islamic Republic.
A combination of factors has, in recent months, degraded Iran’s financial support of Hezbollah. Today, the militia finds itself in dire straits, unable to meet its obligations to thousands of fighters under its umbrella and, by extension, hundreds of thousands of Shiite loyalists who rely on the party for subsistence.
Heading to the IMF is anathema for Hezbollah and its Iranian backers. But Diab’s government has no choice. The risk is high, not only because the IMF will impose difficult and unpopular economic measures on the Lebanese government, but because it could also be used by Hezbollah’s nemesis, the US, to besiege and isolate the party.
Enforcing serious economic reforms requires a consensus among all major players and a political will. Both are lacking in Lebanon today. Diab’s economic plan, which includes overhauling the deep-rooted banking sector, was rejected by the powerful Lebanese Banks Association for failing to consult it when it will be a key part of the solution. According to Reuters, the plan rests on covering financial sector losses of about $70 billion. It would wipe out the sector’s capital and cash from large depositors, which would be restored later.
The IMF is unlikely to step in unless the government, the central bank and the financial sector are on the same page. Without a key role for the central bank, the people will have no confidence in the economic reforms.
But time is running out fast for Diab. The economy has stalled further as a result of the coronavirus crisis — the IMF expects the national gross domestic product to shrink by 12 percent in 2020 — and people are becoming restless as they see their life savings evaporate as the value of the national currency continues to slide.
Enforcing serious economic reforms requires a consensus among all major players and a political will. Both are lacking.
Hezbollah will have a key say on any possible deal between the IMF and the government. Reforms that will end subsidies, downsize the public sector, bring about financial transparency and regulate how the banks finance the government will erode the party’s sway over public life in Lebanon. Protesters are likely to return to the streets as soon as the country relaxes the coronavirus lockdown.
The question now is how far will Hezbollah go in allowing a deal with the IMF? It may accept some harsh economic reforms and austerity measures, but will certainly resist genuine political changes to a system that has benefited it for years. The irony is that, while more than 70 percent of Lebanese are now in need of direct government help, Hezbollah and the political elite, despite their open hostility for one another, share a common agenda that seeks to protect their own narrow interests.