Down with the ruling of banks, down with the corrupt : a short piece on lebanon’s economic collapse

Anti-government protesters in Beirut, Lebanon, reinstall a new large cardboard fist labelled “Revolution” in Martyr's Square. @Hussein Malla

By Rym Talhouk.

Shortly after the start of the revolution/intifada/movement/
protests, or as some of us like to call it, the October revolution,
the banks shut their doors for two weeks and Riyad Salemeh, the Lebanese Central Bank governor, told CNN that “Lebanon is days away from economic collapse”. Well, while Sherlock tried to scare Lebanese people that were sick of their blood being sucked by a corrupt political class, and costing the state millions of dollars every day by taking it to the streets and closing off the roads, little did he know that his turn was coming.

But before guillotining Riri and the stinky rich corrupt political “elite”, let’s try to understand the complicated financial and economic system in Lebanon.

Economics professor Layal Mansour describes the Lebanese economy as a “child with special needs” having a special rhythm that can’t be compared to developed countries’ economies. This “child with special needs” is born in the early 90’s with the dollarization of our economy. “Dollarized” means using both of the currencies: Lebanese pounds and dollars. In Lebanon, you can pay your groceries with both dollars and Lebanese pounds and receive the exchange in both currencies too. For my Lebanese compatriots, this sounds very natural. But in other countries, this behavior is considered to be a black market and is punishable. This dollarization of the Lebanese economy certainly has advantages. Otherwise we would’ve never adopted it. However, its negative outcomes are many and make it a very fragile economy. The problem with Lebanon’s
debts is not its astronomical number. Japan’s debt is way bigger
yet it’s never perceived as a problem. The problem with Lebanon’s debt is the fact that it’s in dollars, and guess what? We don’t print or control dollars value since it’s not our national currency. Bel englize el mshabra7, Layal Mansour defines the dollarization as a “lack of trust in the Lebanese pound”. The
rate of dollarization in Lebanon is more than 73%. Which means, according to her, that the rate of lack of trust in the Lebanese pound is more than 73%. The higher the rate, the less the Lebanese trust in their currency. So yes, Lebanese people have trust issues when it comes to their economy. But why did the BDL allow its own currency to be so untrusted?

In the 90’s, Lebanon came out of a very long and bloody civil war with big economic, security and political stability challenges. Lebanese people had very little trust in their economy and government, and the country was facing a high inflation. Introducing dollars in the economy has encouraged Lebanese people to invest and buy real estates. So this is how it goes inside a Lebanese’s head: “the dollar is not our currency, so the state can’t print out dollars and it can’t devalue it nor use it to pay its debts. Investing in dollars will keep my money safe and out of risks”. But the danger is that loans are in dollars and our stock of dollars is unstable and unguaranteed.

40% of our loans are in dollars.

One important thing to note is that the Lebanese pound is fixed to the dollar. Which means that since 1997, the Lebanese pound’s value has been officially fixed at 1511.86 to 1$. Some economists like Mansour argue that the Lebanese economy cannot survive if the Lebanese pound was “freed” from being fixed to the dollar. She says that in developed economies, or let’s say in normal economies without “special needs”, the currency’s value fluctuates depending on positive and negative “shocks” that occur in the economy. For example, every time a local business exports products, every time there’s a new investment
etc, it’s a positive shock and the currency’s value slightly increases. Every time there’s a business that closes down, an importation, or just money transferred to outside the country etc, the currency slightly depreciates. And thus, the currency’s value slightly fluctuates every minute. In Lebanon, where 90% of our consumption is imported, where investments are apprehended for security reasons like the almost-over war in Syria or Israel’s threats to level us “back to the Stone Age” every now and then, and where the currency is expensive, the Lebanese pound would only depreciate due to a lack of positive shocks. However, other economists argue that fixing the Lebanese pound to the dollar at a high rate has

1) hurt the tourism sector because all of the neighboring countries are much cheaper and can’t afford vacation in Lebanon

2) discouraged local production and killed our competitiveness because it’s much cheaper to produce in a neighboring country like Egypt, Turkey, Syria or Iraq, and this leads to

3) unemployment, which generates dozens of other
negative economic and social impacts.

But whatever the consequences, let’s admit that it’s not the BDL’s
(Banque Du Liban) job to create employments or to encourage production and exportation, but the ministries’ (big lol).

Now, keep in mind that in order to protect the peg fixed at 1511.86 for 1$, the country needs to always have deposits and stocks of dollars. The BDL has always done the impossible to find its stock of dollars to protect the Lebanese pound’s value: the more it had dollars, the more the Lebanese pound’s value was protected and stable. But how did it always manage to draw dollars into our economy? Tourists bring dollars, but then, tourism depends on the regional security. Lebanese expats
working abroad and sending their dollars or investing in Lebanon, and international aid are not always guaranteed. So you’ve guessed it: the sources of dollars are not guaranteed
for the long run.

Still reading? Good, because this is where I’d like to explain how, to attract dollars into the country and “protect the Lebanese pound”, Riyad Salemeh literally helped the bank owners and big
shareholders (who ironically and by chance happen to also be politicians) to get richer at the expense of the poor getting poorer. So take a deep breath because what’s coming is outrageous.

According to a young economist that will remain anonymous, what Salameh has done was this: In order to attract dollars’ deposits from abroad, Salameh has set very high interest rate on savings. He set the interest rate on the Lebanese pound higher than on the dollar to theoretically induce the trust in the Lebanese pound, and because it was riskier to put them in Lebanese pounds. For example, let’s say that the interest rate of a loan in Lebanese pounds would be of 10%, while a loan in dollars would be of 6%. Our rich politicians who ironically own more than 40% of the banks assets, and who obviously don’t need loans, would take million dollars’ loans from Riri at a 6% interest
rate, then exchange their money in Lebanese pounds to benefit
from a higher interest rate (10%). 10-6=4%. This way, politicians and a handful of rich can gain extra 4% of their savings through this scam. To clarify it with numbers: if you’re
rich enough and happen to be a politician to take a 5 million dollars loan from the BDL at a 6% interest rate, you can exchange this money in Lebanese pounds and deposit them at a 10% interest rate. Which means that you will have to pay back 5 300 000 dollars to the BDL, but the person/bank/entity/corporation
who will borrow the money from you in Lebanese pounds will
pay you back +10% of the money (which means 5 500 000 dollars
worth of Lebanese pounds). 5 500 000 –5 300 000=200 000. This
way, you made 200 000 dollars out of nothing. Not through your work, not even by “doing business”, but just by legally robbing the money of the people, thanks to Salameh. I say “money of the people”, because of the Ponzi scheme that I will explain below.

To go back to the dollarization, if we look at the balance of payments, Lebanese people abroad like in the Gulf States or Europe or Latin America or Africa would deposit their dollars in Lebanese banks for the high interest rates, which increased dollars deposits more and more. In the early 2000s, billions and billions were deposited and the stock of liquidity became so huge, which means that the interests that the BDL have to pay back is also astronomical. The need to import raw material for local producers also required to exchange Lebanese pounds to dollars and dollars were moving towards outside the country. Dollars from international aid like Paris 1, Paris 2 and Paris 3 from France went to the stock of dollars to keep the cycle going instead of investing in public projects to pay our debts. In 2008, the global
crisis encouraged a part of the Lebanese diaspora to withdraw their money from the international banks and deposit them in Lebanon, since Santa clause has set a very high interest rate. Keep in mind that the Lebanese diaspora makes two to three times the size of the Lebanon’s population.

As for the Salameh’s “cycle”, he himself chooses to call it “financial engineering”. But basically it’s just a sophisticated fancy term to name his hidden Ponzi scheme. According to economists, this huge Ponzi scheme is now broken. What’s a Ponzi scheme?

To put it in extremely simple words, it’s when you pay your previous debts with money you borrow. When you don’t find a new borrower, the Ponzi scheme breaks. By definition, it’s fraudulent. It’s a scam.

Picture this: you are a Lebanese citizen and you have a bank account in bank x. In order to protect the peg, which means the Lebanese pound fixed to the dollar, the BDL needs to borrow dollar liquidity from commercial banks like your bank x, and it promises it with an extremely high interest rate with no risks. Your bank x deposits dollars in the BDL, which technically is your money and other clients of bank x. Your bank went bankrupt because it operated in Iraq, Egypt and Turkey where local currencies strongly depreciated. To help it out, the BDL gifted it 1 billion dollars (this money is the people’s). This gift is gifted through a promised astronomical interest rate for your bank, like 40% kind of astronomical. To pay back your bank x, the BDL will attract new commercial banks to deposit dollars liquidity, and pay back bank x with that new money. Bank x is Bank Audi in 2016. Other commercial banks also going bankrupt like BankMed owned by our ex prime minister reclaimed the same gift. Salameh, or let’s call him Santa clause, literally distributed money to the commercial banks from the people’s money deposited in those banks through this scheme to protect the peg. As long as the BDL finds new depositors, the scheme can continue. When it struggles to find new depositors, it would increase the ridiculous interest rate. Now picture this: your bank x as well as most of the other commercial banks are owned or partly owned by your beloved corrupt politicians. Which means that this system is solely benefiting them. This economic collapse didn’t happen abruptly; it slowly began to build up in the last few years. Lebanese people started exchanging their money into dollars more and more, so we started having a demand and supply imbalance (a way higher demand on dollars than what is supplied). Lebanese also started to withdraw their money from their banks and keep it at home. And once the Ponzi scheme broke, and during the 2 weeks when banks shut their doors, some politicians and bankers sent billions of their money to their accounts in foreign banks to protect it.

And who pays the price? You and other Lebanese citizens. Your bank x is running out of dollars liquidity so it has imposed a capital control on you. Which means that it has restricted you with a weekly amount of money to withdraw from your account. It has restricted you to do transfers to your children studying abroad, and obviously to exchange your money to dollars. Some even went crazy enough to talk about haircuts. Haircuts is when the central bank or the state takes a percentage of all the people’s bank accounts in a situation like this, when there’s no more liquidity. So they wanted the people to pay for the scam orchestrated by the corrupt and incompetent 1% rich politicians and bankers.

But what “broke” the Ponzi scheme? Why did debts spiral out of control? Why is our economy collapsing today even though the system has been orchestrated by Salameh long ago?

The reasons are many. For me, it’s partly due to the global free
market and liberalism
failing again, partly due to the greed,
corruption and incompetence of our political elite, and partly due to the fact that businessmen and bank owners in power will only serve the interest of the rich. Almost everywhere in the world, economies are witnessing a global slowdown. In fact, this Ponzi scheme has long relied on the Lebanese diaspora and especially on young Lebanese graduates who will leave the country to find job opportunities and draw dollars into the country by investing, buying real estates, coming on vacation or sending money to their parents or families. Unemployment has been increasing almost everywhere in Europe and the Gulf States and this Lebanese youth is struggling more and more to emigrate and find jobs. International aid for Lebanon has decreased, because that’s what you logically do when you keep sending money to a country for it to be able to invest and make its own money but chooses to just spend it unwisely, or let it get stolen by its politicians.

In Lebanon today, dollar reserves have run low and hard currency (money whose value is stable) has become a rare good. As a consequence, the Lebanese pound fixed at 1511.86 to the dollar has depreciated in the black market. What I mean is that officially, the dollar still costs 1511.86 Lebanese pounds, but there’s just no dollars in the country, so exchanging it is just impossible. To exchange it, Lebanese people reach out to the black market where the dollar is sold up to 2500 Lebanese pounds if not more, since its cost is increasing of 100 almost every single day because of it becoming a rare good.

So you can now imagine how hurtful it is when you have a small business or industry for which you import your merchandise or raw material and pay it in dollars while selling your goods/services in Lebanese pounds. This is currently leading to a shortage in all sorts of products, medication, gas, and we are witnessing our supermarkets’ shelves getting emptied and a worrying and painful inflation.

Another (not so) fun fact is that Lebanese people pay a lot of taxes without having anything provided in return. We pay taxes on literally everything including healthcare, medication, education, and probably the highest taxes on phone bundle services in the region. In return, Lebanese people have the electricity cut for 5 to 12 hours a day (depending on the region, the season, and of how much politicians robbed off the public funds), to have the water cut, to have no free healthcare, horrible infrastructures, no public transportations except the ancient buses, bad public education program, no insurance for the elderly, no job opportunities, and I can go on for hours. So there is indeed money funding the state, but the state is not providing anything in return. So where did our money go? In the pockets of whom? Hmmmmm…hard riddle. 

The only thing that kept the Lebanese people sane in tough economic situations was the Lebanese pound’s value and their ability to exchange it with dollars to keep their money safe. With the banks’ decision to impose a capital control, i.e restrictions on the banking procedures, on hard currency transfers, limiting weekly cash withdrawals and exchanges to dollars, and with the inflation and rise of unemployment that this has generated, Lebanese people have been suffocated further and pushed them to take it to the streets.

In Lebanon, according to World Inequality database, the richest 0.1% earn as much as the poorest 50%. Marxism-Leninism aside, wherever you place yourself on the political compass, anyone with common sense should find this atrocious.

Lebanon’s empty restaurants, empty shops and empty shelves smell the anxiety and hopelessness about the present and the future. Beirut’s streets resonate the cries of despair, of suffering, of hunger and tiredness. Beirut’s walls covered with graffiti, its vandalized luxurious shops and banks scream “the city is for the people”. Beirut’s skyscrapers, yacht club and luxurious downtown hide a mother’s tears mourning her son whose debts made him kill himself. They hide a Syrian child who was almost going to throw himself off a building because he’s hopeless and tired of working all day and getting beaten up for not bringing money home. Beirut’s pretty neighborhoods silence the employers and workers lining up in a queue for hours to withdraw their hardly earned money from the banks, and a million families struggling to pay their rent and children’s schools. Beirut’s poor suburbs, Palestinian camps and slums are screaming from the top of their lungs “Inequalities”.

So down with the ruling of the banks. Down with the ruling of the corrupt rich. Listen to the streets expressing its anger, reclaiming its dignity and no longer accepting to suffer, closing off the roads, burning tires, breaking the banks façades and fancy shops owned by their oppressors. You can’t make a revolution in white gloves. So take it to the streets. Revolt. Everything in this world can be robbed except the love for life and human dignity. Today, sectarianism has proven that it’s weaker than class divisions. Today we no longer ask for our sectarian rights that won’t feed the hungry. Today we are taking our basic rights by ourselves, as a united people.

To quote Che, “A revolution is not an apple that falls when it is ripe. You have to make it fall”. So get up there and pick this apple. 

A true revolutionary is guided by a great feeling of love.

Che


This article is part of the special edition in partnership with Agora

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