November 6, 2019 / 2:57 PM / 12 days ago

Explainer: Why is Lebanon in an economic and political mess?

BEIRUT (Reuters) - Demonstrations have convulsed Beirut and other cities across Lebanon since mid-October, forcing the prime minister to resign and shaking confidence in an economy that was already in crisis.

FILE PHOTO: A woman holds a Lebanese flag as she stands at a roadblock during ongoing anti-government protests in Beirut, Lebanon November 4, 2019. REUTERS/Andres Martinez Casares/File Photo

Protesters’ anger is focused on the perceived corruption of Lebanese sectarian politicians who have dominated the country since the 1975-90 civil war.

WHAT’S WRONG WITH LEBANON’S ECONOMY?

Lebanon exports little and imports heavily, while its economy is choked by one of the world’s largest debt burdens as a result of years of inefficiency, waste and corruption.

Ten years ago, GDP growth was ticking along at 8-9% a year. But this has fallen sharply for several reasons including the impact of war in Syria, wider regional turmoil and diminished capital flows from abroad.

Economic growth, which has been stuck between 1-2% for several years, has fallen to zero this year. Yet, the government continues to borrow. While GDP stands at $55 billion, the national debt is around 150% of GDP, or $85 billion.

With few sources of foreign exchange, Lebanon depends on its diaspora to remit cash to the banking system, which is then recycled to finance imports and the state deficit.

But despite increasingly high interest rates, these inflows have been slowing. This has led to a scarcity of dollars and pressure on the Lebanese pound which has weakened on a black market that emerged in recent months. The weaker pound has started to push up prices.

The bulk of the government’s spending is absorbed by debt servicing and paying a bloated civil service stacked with political appointees.

Infrastructure is poor. Lebanese suffer daily power cuts and depend on expensive private generation to fill the gaps. The state-owned mobile operators are expensive.

Unemployment among under 35s runs at 37%.

Despite years of warnings about the need to reform and rein in the deficit, governments have failed to act.

WHAT’S WRONG WITH LEBANON’S POLITICS?

The protesters accuse the political elite of exploiting state resources for their own benefit through networks of patronage and clientelism that mesh business and politics.

Unlike many Arab countries, Lebanon is not dominated by one strong ruler but has a number of leaders and parties with sway over the country’s various sectarian groups.

Positions are apportioned by quotas among 18 officially recognized sects. Parliament is half Christian and half Muslim. The prime minister must be a Sunni Muslim, the president a Maronite Christian and the speaker of parliament a Shi’ite.

Critics say the system has kept the ruling caste in power indefinitely and allowed politicians to put their own interests above those of the state. The protesters’ demands include not only removing the elite, but also overhauling the system.

“There’s a self-centered political elite that still hasn’t acknowledged the changing realities or how difficult the situation is,” said Mohanad Hage Ali, a fellow at the Carnegie Middle East Center. “They want to focus on their own profiteering in the system.”

Lebanon’s fractured politics is also vulnerable to foreign interference that has long fueled domestic crises.

Since Syrian troops left in Lebanon in 2005, many of its political conflicts have reflected tensions between Iran, which backs the Shi’ite group Hezbollah, on the one hand, and U.S.-allied Gulf Arab states, which have backed Hariri, on the other.

Hezbollah is heavily armed and designated a terrorist group by the United States.

WHAT HAPPENS NEXT?

Because the protests have no leader and encapsulate a wide-range of demands, responding to them is not easy. A first package of measures offered by Hariri was resoundingly rejected — demonstrators demanded far more sweeping changes.

Political leaders including Hariri have been holding closed-door discussions over a new government.

One idea is for a new cabinet at least partially made up of technocrats who can win public trust and press on with reform.

But one week since Hariri quit, there is no sign of a quick breakthrough. It took nine months of negotiations to form the outgoing coalition government.

Protesters demanding a complete government overhaul and new elections will be disappointed with any cabinet including old faces. At least some will seek to press on with demonstrations.

“If this mood prevails and protests continue at the current pace and scale, the country may be in for a prolonged period of unrest,” International Crisis Group analyst Heiko Wimmen wrote in a recent analysis. “No alternative political leadership or real opposition to the ruling parties exists.”

Further economic deterioration, including the risk of a sharp currency devaluation, would exacerbate social tensions.

“This is a society that had a civil war only 30 years ago,” said Hage Ali, concerned that some of the ingredients that fueled that conflict are stewing again.

“We’ve been to dark places in this country before, and I don’t see a way to avoid something like that.”

In a less disastrous scenario, a new cabinet is formed quickly, which unlocks financial support from governments including the United Arab Emirates, Saudi Arabia or Qatar.

To arrive at such a cabinet, Hariri may need Hezbollah’s help to secure compromise from its allies, notably Christian politician Gebran Bassil, a son-in-law of President Michel Aoun, who has been a target of protester ridicule.

Writing by Luke Baker, Tom Perry; Editing by Peter Graff

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