Al-Sharq Al-Awsat wrote: At the end of last year, the volume of output reached the level of $33 billion, driven by a growth of 3.8 percent, according to digital updates documented by the Central Bank of Lebanon, following an arduous journey of severe contraction over the years of the financial and monetary crisis that exploded in the fall of 2019, and led to a successive and combined decline of approximately 60 percent of the highest level of output, which approached $53 billion on the eve of the economic collapse.
According to Moody’s updated assessment, the recent conflict caused a major shock to the economy, as a result of the displacement of residents, the collapse of the tourism sector, the disruption of the agricultural and industrial sectors, and the major destruction of infrastructure. While it is feared that the decline in government revenues, in exchange for the rise in social and reconstruction needs, will lead to increased pressure on public financial conditions and reliance on foreign currency reserves.
While the ongoing geopolitical tensions threaten to exacerbate the existing weakness in the balance of payments, the temporary extension of the ceasefire and the ongoing discussion with the International Monetary Fund about possible rapid financing, according to the agency, may provide short-term support by enhancing liquidity and fiscal space, but they do not address the country’s structural weaknesses, such as sovereign default, the absence of a comprehensive restructuring of public debt, as well as a package of institutional and governance challenges.
In the political dimension, the agency referred to the recent diplomatic efforts led by the United States, aiming to push towards a more sustainable framework for peace and security between Israel and Lebanon, through the talks that were held in mid-May and will continue their rounds at the end and beginning of next month.
Although these negotiations may help reduce the escalation, the possibility of renewed conflict remains high, which continues to threaten the Lebanese economy, investor confidence, and the humanitarian situation. These discussions take place amid continuing reports of ceasefire violations, highlighting the fragility of the security situation and the persistence of geopolitical risks.
As for the economic and humanitarian dimension, the renewed wave of violence, according to Moody’s monitoring, has led to the displacement of more than a million people, the disruption of the labor market, the weakening of consumer demand, and the infliction of severe damage to productive sectors such as agriculture, industry, and construction, as a result of damage to infrastructure, capital, and supply chains. Service sectors, including tourism, health care, and education, were also affected by the economic slowdown the country is witnessing.
Lebanon still relies heavily on imports, which are partially compensated through tourism revenues and expatriate remittances, noting that these foreign currency flows may decline as a result of regional instability, high oil prices, and the possibility of expatriate remittances being affected by the new situation.
The agency noted that although discussions with the International Monetary Fund regarding providing emergency financing worth up to one billion dollars may provide temporary financial support and help cover urgent social and humanitarian spending, this support alone will not be sufficient to address the structural weaknesses in the Lebanese economy, noting that the response of the Fund’s management was not positive, according to Finance Ministry sources, in connection with Lebanon’s continued “default” in repaying its sovereign debts.
It is unlikely that Lebanon’s credit rating, which remains at C, will change if a comprehensive restructuring of the public debt is not implemented. Given the scale of the macroeconomic, financial and social challenges, knowing that any improvement in the sovereign rating after the debt restructuring process will depend, according to Moody’s, on the speed and effectiveness of financial and institutional reforms, in addition to the government’s ability to enhance revenue collection and the economy’s transition to a new growth model.
The low rating given by Moody’s to Lebanon is based on results recorded at four levels: Lebanon recorded a CAA1 result in the “economic strength” criterion. Given the significant economic downturn since 2019, the challenges are further exacerbated by population displacement and damage to infrastructure due to the outbreak of war. While remittances from expatriates and spending within the country contributed to supporting income levels.
Lebanon recorded a CA result in the “institutional strength” criterion, which reflects the weakness resulting from the continued default on sovereign debt since March 2020, and the fragility of the governance environment, which is characterized by the weak effectiveness of fiscal policy, which is restricted by the slowdown in economic activity and the decline in the ability to collect revenues.
As for financial strength, Lebanon obtained a “CA” score, which reflects the state’s large debt, which is likely to cause major losses to creditors if the state defaults. It also obtained a “CA” score in the “Exposure to Event Risk” criterion. Due to liquidity risks and large external exposure, as well as the banking sector’s large exposure to sovereign debt.
The agency noted that the “stable future outlook” indicates that it does not expect any improvement in Lebanon’s rating in the near term, and it will remain as it is unless fundamental reforms are implemented over several years on the one hand, and the ability to collect revenues is improved, there is noticeable progress in the dynamics of debt, and the country adapts to a new economic growth model on the other hand, in order to ensure the sustainability of the debt in the future.
Patricia Jallad wrote in “Nidaa al-Watan”: With the passage of time, recognitions are consolidated by international bodies such as the International Monetary Fund, after they had previously been consolidated in the testimonies of local institutions, led by the highest administrative judicial body, the State Shura Council, that the crisis in Lebanon is not an ordinary crisis, but a systemic crisis. This description opens a discussion about the state’s responsibilities in bearing part of the losses, alongside the Bank of Lebanon and commercial banks, within any path to restructuring the financial sector. What was stated in the latest study published by the International Monetary Fund, and how do economists explain the nature of this crisis and its repercussions?
A few days ago, the International Monetary Fund published a working paper entitled “Systemic Banking Crises Database: 1970-2025,” which updated previous working papers on banking crises (during the years 2013 and 2020) until the year 2025.
This working paper presents studies conducted by two researchers, Luke Laeven and Fabian Valencia, that considered the crisis to be systemic in any country that meets two basic conditions:
1- There are significant indicators of financial pressure in the banking sector.
2- These pressures may lead to major interventions in terms of banking policies in response to large losses in the banking system.
This paper included Lebanon on the list of new banking crises since the last research in 2020, along with other countries such as Azerbaijan, Chad, and Equatorial Guinea, while the crisis in Sri Lanka and Nicaragua was classified as irregular.
This recognition, contained in the paper published in the International Monetary Fund’s report on banking crises in the world, was preceded, with regard to Lebanon, by assurances from the Bank of Lebanon and commercial banks that the financial and economic crisis in Lebanon is systemic, and no two disagree on that. However, it remained unrecognized by the Lebanese authority, i.e. the state, and remained in a “tightening the ropes” stage over its application to Lebanon or not. In this context, economic and financial expert Nassib Ghobri told “Nidaa Al Watan”: “The political authority avoided using the phrase ‘regular’ in the draft deposit recovery law and called it a comprehensive crisis.”
The crisis is systemic, says Gabriel, “when an entire system stops working, collapses, or freezes, or shocks occur that affect the work of an entire sector. The shock is external and leads to the paralysis or collapse of the work of this sector. In a situation like Lebanon, the shock in it is a crisis of confidence that led to a liquidity crisis. The roots of this crisis of confidence go back to the mismanagement of the public sector and public institutions of a commercial nature, the failure to implement good governance and management, and the isolation of Lebanon from its natural Arab surroundings through decisions taken by someone Therefore, the crisis is not technical, nor is it high interest rates, the cost of stabilizing the exchange rate, financial operations between the Bank of Lebanon and commercial banks, or high public debt. These are all the results of a crisis of confidence that led to a liquidity crisis.
If we go back to the past years, it becomes clear that the crisis of confidence did not arise suddenly in Lebanon. Rather, it began, Gabriel says, “to appear gradually at the beginning of the year 2018, practically through the scarcity of liquidity in foreign currencies in the economy, and it gradually expanded to…
When we reached July-August 2019, the parallel market for the exchange rate of the Lebanese pound was born for the first time since 1997, and this is evidence of a significant decline in liquidity as a result of the decline in capital flow to Lebanon.”
This crisis of confidence exploded when depositors lost their confidence in the state and the banks, so they rushed to the banks in large numbers to withdraw their saved money or transfer it abroad. In all countries of the world, when depositors lose their confidence and rush together at a specific time to withdraw their deposits, the largest bank in the world cannot meet the needs of all its customers. “Liquidity,” Gabriel says, “at any bank in the world does not exceed 5 or 6% of the deposits it has, knowing that the depositor’s right is firmly established to dispose of his deposit at any time and at any time. All of these factors have led to a scarcity of liquidity in the banking sector through a crisis of confidence and the inability of depositors to dispose of their deposits.”
The role of the state in crises
In light of the crisis of confidence that erupted 6 years ago and continues, what role can the state play in managing a crisis of this magnitude?
In a study prepared by three economic researchers and professors around the world in October 2022 related to banking crises and the causes of banking crises, on the basis of which they received the Nobel Prize for Economics. In that study, the researchers, Ben S. Bernanke (a study of the Great Depression in the 1930s), Douglas W. Diamond, and researcher Philip H. Dybvig (who presented the Diamond-Dybvig Model that explains why banks are fragile and how the attack on banks to withdraw deposits, known as a bank run) occurs, say that the state in any country must play an essential role in maintaining stability in order to maintain the confidence that makes the banking sector perform its work normally, so the confidence of the markets remains List of banks.
Hence, enhancing confidence, Gabriel says, “instills reassurance to the depositor and does not make him afraid to dispose of his deposit when he wants to do so, which prevents a large number of depositors from rushing to banks and demanding their deposits.”
The Lebanese state did not do this. Instead of enhancing confidence in the banking sector, the Lebanese state made citizens lose confidence in it. It did not succeed in managing the crisis, as it wasted about $11 billion (between 2019 and 2021) from the Bank of Lebanon’s reserves on random and ill-considered support that the Lebanese did not benefit from, and on electricity… It also did not approve the “Capital Control” law to protect banks, and it failed to pay Eurobonds without negotiating with creditors.
Before the crisis, Gabriel says, the government mismanaged the public sector and managed public institutions of a commercial nature. It did not implement governance, did not adopt good management in its public institutions, and did not respect the principle of separation of powers, independence of the judiciary, and constitutional deadlines. Public expenditures increased by 165% between 2011 and 2019 without approving a budget. In addition, 31,000 people were employed in the public sector, most of whom had no actual work, in addition to missing out on opportunities granted to Lebanon from abroad, such as the CEDRE conference.
The political authority, as is known and practiced in all countries of the world, cannot act as if it was sitting on the shores of “Copacabana” in Brazil when it read in the newspapers in October 2019 a piece of news entitled “A mysterious economic crisis is striking a far away country called Lebanon.” This is how the authorities behaved before and after the crisis when they mismanaged the crisis.
Today, after the IMF acknowledged in a study it published by researchers that the crisis in Lebanon is systemic, has the state not shouldered a portion of the losses become inevitable and included within the mechanism for bridging the financial gap to return depositors’ money? It is the one that squandered, wasted, borrowed, and impoverished the Lebanese and oppressed the middle class.
