Out of Service: Is Lebanon nearing the point of no return?

Just days before the two-year anniversary of the 4 August 2020 Beirut Port explosion, a part of the burnt-out hulk of the nation’s grain silos destroyed in the blast, collapsed. For weeks, a fire had been smouldering in the silos as the extreme summer heat ignited the fermenting grains left to rot inside the mangled structure. It was an all too telling metaphor for the disastrous state of Lebanon’s economy likewise left to rot and poised for collapse. Is Lebanon nearing that point of no return?

Lebanon on the Brink

The national grain storage facilities were never replaced over the course of two years, just as political paralysis and corruption have prevented Lebanon’s leaders from setting the country’s ship of state on a steady course. Instead, the country’s citizens have been battered by waves of suffering since the onset of the economic crisis in autumn 2019. The country’s currency has lost 90% of its value since then and 80% of Lebanese live below the poverty line.  Food inflation is over 1,000% since 2019 and now bread is almost unavailable.  Without Beirut’s storage silos, Lebanon has one month’s worth of wheat storage capacity using flour warehouses in Tripoli. While the resumption wheat shipments from Ukraine could prevent Lebanon from running out of bread, it will not end the crisis.

Although Russia’s 24 February invasion of Ukraine exacerbated Lebanon’s woes, the crisis had already reached catastrophic proportions.  In August 2021, six months before Russia’s Ukraine invasion, Lebanon’s annual inflation rate hit 137.8%, surpassing Zimbabwe and making the Lebanon the leading candidate for the worst economic crisis since the end of World War II. In 2022, the inflation rate has been consistently over 200%. Fuel is exorbitant and in short supply, leading to power cuts that can last for 23 hours a day.  Known for its iconic cedars and ancient forests, Lebanon’s citizens are now cutting down the trees in those forests for fire wood amidst the fuel shortage.

Despite early warnings, Lebanon has lost precious time and numerous opportunities to adopt a path to reform its economic and financial system. “The cost of inaction is colossal not only on daily lives of citizens, but also on the future of the Lebanese people,” the World Bank’s Mashreq Regional Director warned in May 2022, adding that there is “a risk of a systemic failing of state institutions and pressure on an already fragile social peace.”

Lebanon’s Crisis is Putting its Service Economy Out of Service

Lebanon is a service economy. In its heyday as the Levantine commercial hub of the Arab world, services accounted for around 70 percent of the economy.  Even at the start of the crisis, the service sector – primarily commerce, financial services, and tourism along with health services and higher education – accounted for 60% of the country’s GDP.  Now Lebanon’s human capital is being severely depleted by the crisis, threatening to put Lebanon’s service economy out of service.

According to polling by  the Arab Barometer, 48% of the Lebanese population want to emigrate, a figure that jumps to 61% among those with a college education. One in five doctors in Lebanon has either already left the country or is planning to do so. From scientists and engineers to creative fields ranging from marketing to the movie industry, Lebanon’s best and brightest are leaving.  And, there may not be anyone in the future to replace them.

According a United Nations estimate, Lebanon’s fertility rate fell below the 2.1 replacement level in 2021 and is projected to decline to 1.97 by 2030. Many young Lebanese are reluctant to have more children amidst bleak economic prospects and soaring prices for such items as infant formula and diapers.  In 2021, the price of  infant formula increased  over 700% percent to 100,000 Lebanese pounds, equivalent to about $66 at official exchange rates.

Lebanon’s demographic decline is worsening the impact of the crisis and could push the country past the point of no return.  Companies, such as those in Lebanon’s engineering sector, are relocating their business outside of Lebanon.  In contrast, Morocco with its thriving business ecosystem and robust demographics has become a magnet for engineering services and business processes outsourcing. As supply chains shorten and firms servicing European markets seek to nearshore operations in the southern and eastern Mediterranean, Lebanon is being passed over for other locations. The one-time commercial capital of the Levant could find itself the odd man out in the new architecture of trans-Mediterranean commerce.

A Glimmer of Hope in the Eastern Mediterranean

The drivers behind the corruption in Lebanon’s political system are well known.  With a governance system that divides offices among the country’s major confessional faiths, elite capture has occurred through the wheeling and dealing among the elites of the various confessional communities. Lebanon’s resulting fiscal mismanagement, recently labelled by the World Bank as “Ponzi Finance”, has the country’s economy teetering over the edge of a cliff.  The major political actors within the Lebanese system are also connected to the larger geopolitical fault-lines in the Middle East involving Syria, Iran, the Arab Gulf States and Israel. These external rivalries serve to churn political conflict and violence within the country.

Lebanon has always thrived when it has been able to use its Levantine cosmopolitanism to broker interchange among people and business across the Eastern Mediterranean, linking Europe and the Middle East. The Eastern Mediterranean itself is now in a season of multilateral conciliation and this may provide a moment of opportunity for Lebanon. The Abraham Accords have brought Israel into closer cooperation with the UAE, Bahrain, Sudan, and Morocco, followed by a recent further thawing of relations with Saudi Arabia. Turkey has launched rapprochement initiatives with Egypt, Israel, and the UAE. The UAE and Saudi Arabia have been looking to reduce tensions with Iran.

A glimmer hope may rest in the progress made towards concluding an agreement between Lebanon and Israel demarcating their maritime boundary. Lebanon’s foreign minister announced that “massive progress” had been made in the 1 August round of negotiations, toward a final agreement.  A deal would help boost investor confidence in Lebanon’s efforts to develop its own offshore natural gas resources and could pave the way for Lebanon to join the Eastern Mediterranean Gas Forum. Beyond natural gas, an agreement may help make Lebanon less susceptible to being an arena for regional tensions.

The Lebanese people have proven themselves time and time again to be resilient and resourceful.  A more cooperative Eastern Mediterranean environment could be conducive to helping Lebanon’s citizens to put the country’s economic house back in order before the house collapses.