Understanding the Liquidity Crisis In Lebanon
While several countries are facing various economic challenges, there is perhaps no country facing more sustained financial issues than Lebanon. For the past three years, the middle eastern country has been plagued by a liquidity crisis that has led to runaway inflation, bank runs, and political paralysis. Here is how it happened.
Rampant Civil War Spending Has Keep Lebanese Economy Doldrums For Decades
The origin of the Lebanese liquidity crisis can be traced back to a civil war that lasted from 1975 to 1990. During this time, the government spent billions of pounds with very little to show for their efforts. Savers were often locked out from accessing their money and the Lebanese pound underwent several crashes during that time. After 1990, the government was able to stabilize its economy and successfully peg the Lebanese Pound to the US dollar. The country was even able to attract foreign money into the country through tourism and investment.
The COVID 19 Pandemic Brought New Challenges To The Lebanese Economy
The economy of Lebanon was driven back into economic desperation with the outbreak of the COVID 19 pandemic. Since 2020, foreign inflows into the country have collapsed. This caused the Lebanese Pound to lose its value quickly. For two decades, the Lebanese Pound was pegged to the dollar at 2500 to 1. Since 2020, the value of the Lebanese Pound has fallen dramatically. In January 2022, the street rate for one US dollar was 23,000 Lebanese Pound. By April, that rate increased to 34,000 Lebanese Pounds per dollar.
What This Means For The Average Lebanese: Runs On Banks, Unrest, And Continued Inflation
Today, Lebanon is dealing with rapid economic contraction which has led to further devaluation of the Lebanese Pound. Bank runs are common with depositors only getting a fraction of what was originally put into their savings. Because of this, there has been continued unrest in the country. In a particular incident in August of 2020 included a massive explosion at a Beirut port that killed 215 people and caused billions of dollars worth of damage.
Working To Undo The Damage
While the economic situation in Lebanon appears to be dire, there are some signs of progress that may begin to stabilize the local currency. A new government was formed in late 2021. The country is currently in talks with the International Monetary Fund to help implement monetary policies that can assist in an economic recovery.
Currently, the GDP of Lebanon is at $21.6 billion which is down from $52 billion in 2019. For the country to stabilize its economy, it will need to contract its spending and cut its deficit. That includes being able to control spending while ensuring that its population has access to consumer staples such as food and medicine. While the situation may seem untenable, a well-executed recovery plan can help stabilize the economy.
REFERENCE:
https://www.reuters.com/markets/rates-bonds/lebanons-financial-crisis-how-it-happened-2022-01-23/
https://www.worldbank.org/en/news/press-release/2022/01/24/lebanon-s-crisis-great-denial-in-the-deliberate-depression
