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The Lebanese liquidity crisis is an ongoing
financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
affecting
Lebanon Lebanon ( , ar, لُبْنَان, translit=lubnān, ), officially the Republic of Lebanon () or the Lebanese Republic, is a country in Western Asia. It is located between Syria to the north and east and Israel to the south, while Cyprus lie ...
, that became fully apparent in August 2019, and was further exacerbated by both the COVID-19 pandemic in Lebanon (which began in 2020) and the 2020 Beirut port explosion. The roots of the crisis run deep and the country experienced liquidity shortages in the years prior to 2019 but the full extent of the fragility of the economy were concealed by the financial engineering of the governor of the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
. Lebanon's crisis was worsened by
U.S. sanctions After the failure of the Embargo Act of 1807, the federal government of the United States took little interest in imposing embargoes and economic sanctions against foreign countries until the 20th century. United States trade policy was entire ...
targeting
Syria Syria ( ar, سُورِيَا or سُورِيَة, translit=Sūriyā), officially the Syrian Arab Republic ( ar, الجمهورية العربية السورية, al-Jumhūrīyah al-ʻArabīyah as-Sūrīyah), is a Western Asian country loc ...
's government and
Iran Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...
-backed
Hezbollah Hezbollah (; ar, حزب الله ', , also transliterated Hizbullah or Hizballah, among others) is a Lebanese Shia Islamist political party and militant group, led by its Secretary-General Hassan Nasrallah since 1992. Hezbollah's parami ...
.


Background

Since 1997, the
Lebanese pound The pound or lira ( ar, ليرة لبنانية ''līra Libnāniyya''; French: ''livre libanaise''; abbreviation: LL in Latin, in Arabic, historically also £L, ISO code: LBP) is the currency of Lebanon. It was formerly divided into 100 pi ...
has been pegged to the
U.S. dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
at a rate of £L1,507.5 per US$1. The stability of the pound has been the cornerstone of the Lebanese central bank policy for over two decades. It was meant to bring about much-needed stability to the country after a severe
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
of the Lebanese pound following the end of the
Lebanese Civil War The Lebanese Civil War ( ar, الحرب الأهلية اللبنانية, translit=Al-Ḥarb al-Ahliyyah al-Libnāniyyah) was a multifaceted armed conflict that took place from 1975 to 1990. It resulted in an estimated 120,000 fatalities a ...
. Lebanon's post-war economy relied on different sources of foreign currency inflows that were critical to maintain this artificial
exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of t ...
: tourism, real estate,
remittance A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland. Money sent home by migrants competes wi ...
s from a diaspora made up of over ten million individuals, a very large financial sector that offered depositors much appreciated anonymity through banking secrecy and high interest rates. These inflows were critical to fund the large
trade deficit The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balanc ...
and the ever growing
public debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
. In 2016, Lebanon first witnessed a real slow down in foreign inflows: Between May 2015 and May 2016, the dollar liquidity of the country decreased for the first time in 11 years. As a result, the central bank of Lebanon initiated a series of
financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathem ...
operations which became known in the press as "the swap". The central bank exchanged
public debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
it owed in Lebanese pounds against
Eurobonds Eurobond may refer to: * Eurobond (external bond), a bond issued that is denominated in a currency not native to the country where it is issued * Eurobond (eurozone) Eurobonds or stability bonds were proposed government bonds to be issued in ...
, or debt labelled in foreign currency, for the equivalent of US$2 billion. Between June and October 2016, the central bank exchanged these Eurobonds against actual foreign currency with a selection of commercial banks. As a result, the Lebanese economy managed to avoid the consequences of a liquidity crisis at the time, but it increased considerably the public debt in dollars and cost the entire economy a fortune: the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
estimated that the banks that took part in the operation made US$5 billion while the central bank pull-out cost was US$13 billion in foreign currency. If these figures are correct, the banks involved made 40% return on the overall transaction. The central bank repeated similar financial engineering in the following years. However, even with these operations, Lebanon kept failing to attract sufficient foreign inflows to match the growing demand. As early as late 2018, some commercial banks started to restrict depositors' access to their own funds in foreign currency: they usually imposed an important additional fee on cash withdrawal in US dollars to deter clients from withdrawing dollar cash. In August 2019, due to various financial hardships, especially the growing probability that the
Lebanese government Lebanon is a parliamentary democratic republic within the overall framework of confessionalism, a form of consociationalism in which the highest offices are proportionately reserved for representatives from certain religious communities. The ...
will default on maturing debt obligations, the
black market A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the ...
exchange rate started diverging from the official exchange rate. Following the first large demonstration of the 17 October 2019 protest, Lebanese commercial banks closed for an unprecedented two weeks. When they reopened, commercial banks unlawfully restricted depositors' access to their own money in US dollars – despite no official
capital control Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measure ...
. These restrictions were one of the key factors that shook the confidence of Lebanese people in their own currency and pushed the value of the Lebanese pound below its official exchange rate. In the fourth quarter of 2019, the black market exchange rate reached £L1,600 per US$1, and increased to £L3,000 per dollar in April 2020, £L14,000 per dollar in March 2021 and £L15,200 per dollar in June 2021. One bank allowed depositors to withdraw Lebanese pounds from their dollar account at £L2,000 to US$1. This caused significant anger towards the banks, with the prime minister sharply criticizing the governor of the central bank over its performance. The USD black market exchange rate continues to fluctuate substantially due to devaluation of the Lebanese pound caused by acute dollar shortages within Lebanon. This dollar shortage also caused 785 restaurants and cafes to close between September 2019 and February 2020 and resulted in 25,000 employees losing their jobs. Consumer goods prices have increased by 580% since October resulting from the worst economic crisis in decades. The economic crisis made Lebanon's
gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
fall to about $44 billion from about $55 billion the year before. The dollar shortage was further exacerbated by the large amount of Lebanese pounds that the central bank printed from 2019 onward. Data from the Lebanese central bank (BDL) suggest that the money supply M1 grew by 266% from December 2019 to December 2021.


Consequences

The fall of the exchange rate caused the 2019–2021 Lebanese protests, which ultimately resulted in the resignation of Prime Minister
Saad Hariri Saad El-Din Rafik Al-Hariri ( ar, سعد الدين رفيق الحريري, translit=Saʿd ad-Dīn Rafīq al-Ḥarīrī; born 18 April 1970) is a Lebanese-Saudi politician who served as the prime minister of Lebanon from 2009 to 2011 and 2016 ...
and his cabinet. Following this, the
COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...
forced additional businesses to close their doors and to lay off their employees. Prime Minister
Hassan Diab Hassan Diab ( ar, حسان دياب, Ḥassān Dyāb; born 1 June 1959) is a Lebanese academic, engineer and politician who served as the 37th prime minister of Lebanon from 21 January 2020 to 10 September 2021. He was appointed by President Mic ...
stated that the country would default on its Eurobond debt and seek out restructuring agreements amid a spiralling financial crisis that affected
foreign currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general de ...
reserves. Lebanon was due to pay a US$1.2 billion Eurobond on 9 March 2020, with another $700million expected to mature in April and a further $600million in June. Due to the lack of foreign currencies, the prime minister said that the reserves had fallen to "a worrying and dangerous level which pushes the Lebanese government to suspend payment of the 9 March Eurobond maturity because of a need for these funds." The head of research at
Bank Audi Bank Audi (Arabic: بنك عودة, previously Bank Audi- Saradar) is a Lebanon-based universal bank and financial services company headquartered in Beirut, offering financial products and services in personal banking, business banking, private ban ...
stated that Lebanese banks owned $12.7billion of the country's outstanding $30billion Eurobonds as of January 2020. The central bank held $5.7billion and the remainder was owned by foreign creditors. The
debt to GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured i ...
sits at 170% as of April 2020. The default is the first one in the history of the country. Foreign currency inflows have slowed and Lebanon's pound has dropped in value compared to the dollar and other currencies. The nation's commercial banks have imposed tough restrictions on dollar withdrawals and transfers to maintain reserves. Due to this Lebanon's sovereign debt became junk rated. The shortage of US dollars, which are used in everyday transactions in Lebanon, and the crash in the value of the pound have undercut the country's ability to pay for imports, including essentials such as wheat and oil. Banks have stopped giving short-term loans to businesses and no longer provide them with U.S. dollars for imports, forcing people to turn to the black markets. There is also significant
inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
, which caused a massive loss of purchasing power and an increase in poverty. The price of foule or ful, a
fava bean ''Vicia faba'', commonly known as the broad bean, fava bean, or faba bean, is a species of vetch, a flowering plant in the pea and bean family Fabaceae. It is widely cultivated as a crop for human consumption, and also as a cover crop. Var ...
common in the region, was up 550% in March 2020 over a year earlier. Sugar has seen an increase of 670%, while wheat, tea, rice, and cigarettes have all gone up nearly 1000% over the same period. This liquidity crisis also created a barrier to everyone with accounts in Lebanese banks, as they are unable to access their deposits. Not only are they unable to access their deposits, but they are unable to withdraw any dollars directly. They can withdraw them in the national currency. These depositors needed to preserve the value of their savings, especially following press reports about restructuring of the banking sector. They therefore turned to buying real estate. For example, revenues from land sales of the major real estate developer,
Solidere Solidere s.a.l. is a Lebanese joint-stock company in charge of planning and redeveloping Beirut Central District following the conclusion, in 1990, of the Lebanese Civil War. By agreement with the government, Solidere has special powers of emin ...
company, soared from nearly $1.3 million to $234.5 million. Also, these depositors turned to buying shares in Solidere company, which lead to a rise of 500% in it between the start of the liquidity crisis and April 2021. Of seven million Lebanese, about 80% are below the poverty line, while an estimated 100,000 with "fresh money"—funds imported since the 17 October 2019 protests—are wealthy and use downtown Beirut restaurants and stores. On 1 June 2021, the
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
released a report which warned that the economic crisis in Lebanon would risk becoming one of the three most severe since the mid-19th century, if its "bankrupt economic system, which benefited a few for so long" weren't reformed. On 11 August 2021, the
Central Bank of Lebanon Banque du Liban (BdL, ar, مصرف لبنان, English: Bank of Lebanon) is the central bank of Lebanon. It was established on August 1, 1963, and became fully operational on April 1, 1964. It is currently headed by Riad Salameh. One of the ...
ended
fuel subsidies Energy subsidies are measures that keep prices for customers below market levels, or for suppliers above market levels, or reduce costs for customers and suppliers. Energy subsidies may be direct cash transfers to suppliers, customers, or rel ...
, announcing that they would instead offer "credit lines for fuel imports based on the market price for the Lebanese pound". The decision led to significant increases in fuel prices amid an economic crisis in the country, but the government was unable to alleviate shortages. Days later on 15 August 2021, 33 people were killed in a fuel explosion in the northern Akkar District, exacerbated by the widespread fuel shortages. On 9 October 2021, the country underwent a 24-hour full blackout as the two biggest electricity generators, Zahrani and Deir Ammar, ran out of fuel. Public utilities are only able to offer electricity for a few hours a day because they are unable to buy fuel to power central generators, leading to a massive increase in the number of people buying more expensive power from private generators. In December 2021,
BBC News BBC News is an operational business division of the British Broadcasting Corporation (BBC) responsible for the gathering and broadcasting of news and current affairs in the UK and around the world. The department is the world's largest broadc ...
reported that the economic crisis has caused shortages in the import of vital medicines. In September 2022, Lebanese Association of Banks announced that the banks would close for three days after depositors, who in 2019 overnight found themselves locked out of their bank accounts and unable to access the majority of their own savings, stormed several branches, holding employees hostage and forcibly demanding to withdraw their savings.


Riad Salameh trials

In February 2022, a
subpoena A subpoena (; also subpœna, supenna or subpena) or witness summons is a writ issued by a government agency, most often a court, to compel testimony by a witness or production of evidence under a penalty for failure. There are two common types of ...
was issued by Judge
Ghada Aoun Ghada Aoun (Arabic: غادة عون) is a Lebanese judge and Mount Lebanon's state prosecutor. While some see her as a prominent and incorruptible prosecutor, others accuse her of bias towards the President Michel Aoun of the Free Patriotic Move ...
after
Riad Salameh Riad Toufic Salameh (Arabic: رياض توفيق سلامة, born July 17, 1950) is the current Governor of Lebanon's central bank, Banque du Liban since April 1993. He was appointed Governor by decree, approved by the Council of Ministers for ...
failed to show up to court for questioning, while his whereabouts were unknown after a raid in his office and two homes, as part of an investigation for alleged misconduct and corruption. This sparked controversy with another security agency that was accused of protecting him from trial. Later on 21 March, Salameh along with his brother Raja were charged for illicit enrichment by Ghassan Oueidat, but also failed to attend for questioning. Raja spent a month in detention, but was released on May 22 while on a record bail of LBP100 billion. On 21 June 2022, Salameh's home was raided again by the
Internal Security Forces The Internal Security Forces Directorate ( ar, المديرية العامة لقوى الأمن الداخلي, al-Mudiriyya al-'aamma li-Qiwa al-Amn al-Dakhili; french: Forces de Sécurité Intérieure; abbreviated ISF) is the national polic ...
.


See also

*
Impossible trinity The impossible trinity (also known as the impossible trilemma or the Unholy Trinity) is a concept in international economics which states that it is impossible to have all three of the following at the same time: * a fixed foreign exchange rate ...
*
List of stock market crashes and bear markets This is a list of stock market crashes and bear markets. The difference between the two relies on speed (how fast declines occur) and length (how long they last). Stock market crashes are quick and brief, while bear markets are slow and prolonged. ...
*
Currency crisis A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated deb ...
*
Government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
*
Economic impact of the COVID-19 pandemic The COVID-19 pandemic has had far-reaching economic consequences including the COVID-19 recession, the second largest global recession in recent history, decreased business in the services sector during the COVID-19 lockdowns, the 2020 stock ...
*
2021–2022 inflation surge The 2021–2022 inflation surge is the higher-than-average economic inflation throughout much of the world that began in early 2021. It has been attributed to the 2021 global supply chain crisis caused by the COVID-19 pandemic, and unexpecte ...
*
Sovereign default A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
* State collapse * 2019–present Sri Lankan economic crisis


References

{{Financial crises 2019 in economics 2020 in economics 2021 in economics 2022 in economics 2019 in Lebanon 2020 in Lebanon 2021 in Lebanon 2022 in Lebanon Economic history of Lebanon Financial crises