Lebanon’s banking sector, which was once hailed as a pillar of stability and growth in the region, is facing a deepening crisis as Arab investors withdraw their deposits and seek safer havens. The country’s banks have been struggling to cope with a severe liquidity crunch, a soaring public debt, a collapsing currency and a political deadlock that has left the country without a functioning government for more than a year.
According to the Association of Banks in Lebanon (ABL), Arab deposits in Lebanese banks fell by 17% in the first half of 2023, reaching $19.5 billion, the lowest level since 2008. Arab investors, mainly from the Gulf Cooperation Council (GCC) countries, used to account for more than a third of the total deposits in Lebanon’s banks, but their share has dropped to less than a quarter.
The ABL said that the main reasons for the withdrawal of Arab deposits were the deteriorating security situation in Lebanon, the lack of reforms and transparency in the banking sector, and the uncertainty over the fate of the $11 billion aid package that Lebanon secured from international donors in 2018 but has failed to unlock due to its inability to meet the required conditions.
Lebanon faces multiple crises and risks default
Lebanon is facing one of the worst economic and social crises in its history, exacerbated by the Covid-19 pandemic and the massive explosion that devastated Beirut’s port and surrounding areas in August 2020. The country’s gross domestic product (GDP) contracted by 25% in 2020 and is expected to shrink by another 10% in 2023, according to the International Monetary Fund (IMF).
The country’s public debt has reached more than 170% of GDP, one of the highest ratios in the world, and its foreign currency reserves have dwindled to dangerously low levels, forcing the central bank to impose informal capital controls and ration the supply of dollars. The Lebanese pound, which was pegged to the dollar at 1,507.5 for more than two decades, has lost more than 90% of its value on the black market, reaching a record low of 25,000 in July 2023.
The inflation rate has soared to more than 100%, eroding the purchasing power of millions of Lebanese who are struggling to afford basic goods and services. More than half of the population is living below the poverty line, and unemployment has reached 40%. The social unrest and protests that erupted in October 2019 have continued sporadically, demanding an end to corruption and mismanagement by the ruling elite.
Lebanon is also at risk of defaulting on its external debt obligations, which amount to $31 billion, or about 60% of its GDP. The country missed a $1.2 billion Eurobond payment in March 2020, triggering a sovereign default for the first time in its history. The government has been negotiating with its creditors since then, but no agreement has been reached so far. The IMF has offered to provide financial assistance to Lebanon, but only if it implements comprehensive reforms to restore fiscal sustainability and governance.
Lebanon needs a new government and urgent reforms
The key to resolving Lebanon’s multiple crises is the formation of a new government that can implement a credible reform agenda and restore confidence among domestic and foreign investors. However, this has proven to be a daunting task due to the deep divisions among the country’s political parties and sectarian groups.
The last government, led by Prime Minister Hassan Diab, resigned in the aftermath of the Beirut blast, which was widely blamed on negligence and corruption by the authorities. Since then, Lebanon has been ruled by a caretaker government that has limited powers and cannot enact major policies or legislation.
Two attempts to form a new government have failed so far. The first one was led by former Prime Minister Saad Hariri, who was nominated by most parliamentary blocs in October 2020 but stepped down in July 2023 after failing to agree on a cabinet lineup with President Michel Aoun. The second one was led by Najib Mikati, a billionaire businessman and former prime minister who was designated in July 2023 but has also faced difficulties in forming a consensus government.
The main obstacles to forming a new government are the distribution of ministerial portfolios among the various political factions, the representation of independent experts and civil society activists, and the alignment with the French initiative that was launched by President Emmanuel Macron in September 2020. The initiative calls for the formation of a “mission-driven” government that can implement urgent reforms in exchange for international support.
The international community has repeatedly urged Lebanon’s leaders to form a new government and implement reforms as soon as possible, warning that the country is heading towards a “social explosion” if no action is taken. The United States, France, Saudi Arabia, Qatar and other countries have expressed their willingness to provide humanitarian and economic assistance to Lebanon, but only if it shows serious commitment to reform and accountability.