How Corruption Led to Lebanon's Brutal Collapse

has been a disaster in slow motion almost everybody saw it coming lebanon's politicians have simply stood by and watched their country slip into the abyss hi welcome to another episode of Cold Fusion Rising inflation stagnant wages and a sluggish economy is the story of a lot of countries today but the story of Lebanon depicts a collapse of a different magnitude currently it's facing arguably the worst economic crisis the world has seen in 150 years more than 80 percent of its population lives below the poverty line prices are spiraling out of control and the national currency is in free fall losing more than 97 percent of its value but it's not all about economic figures and data it's a human tragedy millions of people are losing everything they have it's a sad tale of frustration a sense of betrayal and a pervasive exhaustion with never-ending corruption and mismanagement within its government families are sending children to orphanages simply because they can't afford to feed them citizens have resorted to robbing banks not to get other people's money but to get back their own meanwhile the banks have smuggled over six billion dollars out of the country and the bankers themselves are buying multi-million dollar properties in New York what makes this so shocking is that if you go back just a couple of years you could not predict just how deep this crisis would reach back then Lebanon was doing much better than their Regional peers boasting one of the largest gdps per capita in the Middle East its tourism sector thrived and its banking system was was an iron-clad Vault it was called the Switzerland of the Middle East but just a few years later it was all decimated so what triggered this rapid Decline and what are the consequences echoing today and more importantly is there a light at the end of this very dark tunnel buckle up as we embark on a deep dive into the story of Lebanon and its struggle for survival to fully grasp the Lebanon crisis we must travel back to 1975. at the time Lebanon was in the midst of a civil war between the Christians and Muslims a feud that permeated every level of society for 15 long years the war raged taking a devastating toll of one hundred and twenty thousand lives the conflict finally ceased in 1989 when representatives from each faction agreed to sit down and hash out a deal the outcome a sectarian government that promised a slice of the political pie to each religious faction in this political landscape each religious group would have representation in the nation's Parliament and political parties would form around religious lines sect would also claim different Ministries essentially dividing the government into five terms the thing was this Arrangement was supposed to be a temporary three-year fix a stepping stone to a more stable non-sectarian system but the transition never happened and this divide can be considered the root cause of all the issues that began to ensue in the following decades this separation just happened to be the perfect breeding ground for politicians to put their own people in power and fill their own pockets in the process so after this Civil War Lebanon was in Ruins and in need of rebuilding due to some sense of political stability Capital started to flow into the country the government capitalized on foreign aid and created more incentives for foreign investment soon the country began to Blossom between 1990 and the year 2000 lebanon's GDP surged by an impressive 400 percent about 60 percent of the country's GDP came from trade tourism and financial services and also those who were Lebanese and living overseas tended to send a lot of money back home given the service-centric economy Lebanon was reliant on Imports for Basics like food and fuel and with most transactions in global trade being conducted in dollars the US currency became an essential part of lebanon's economy having that in mind by 1997 the government had opted to Peg the local currency to the US dollar at a fixed rate in turn this made the unstable local currency stronger offering sturdiness to the country's economy and thus allowing the government to get more financing but the main problem was during this time much of their cap Capital flow directly into the pockets of politicians instead of being invested into necessary infrastructure this wasn't at the Forefront of everyone's Minds though because the economy was booming and everyone was fat and happy citizens were enjoying progressively higher standards of living so much of the corruption and mismanagement by the government went unnoticed but things started to take a darker tone once the foreign aid started to dry up as this happened politicians began to look for new ways to enrich themselves at the time most politicians had Direct ties to or outright owned National Commercial Banks politicians and bankers designed a new way to bring money into the government now imagine lebanon's Financial structure as a three-tiered cake on the top tier we have the government fragmented into several pieces as we discussed each represented by a different sect in the middle lies the central bank and on the base tier we have the commercial Banks the final goal was to use the central bank's reserves to fuel government spending to do that they first needed to attract foreign Capital into Central Bank Reserves to accomplish this the Central Bank offered extremely high interest rates incentivizing commercial Banks to deposit their reserves with them since the central bank was offering such attractive returns commercial Banks had everything to gain by parking their clients deposits there and the plan worked imagine having a 10 return on a dollar deposit at a time when banks in Europe and the US were offering low to no returns on the same type of deposit combine this with a high level of banking secrecy and a very conservative banking practice and Lebanon turned into a money magnet it pulled in large amounts of foreign deposits into local banks servicing anyone from the Middle East to Europe as deposits started to flow in commercial Banks deposited the money at the central bank as the Central Bank started to accumulate large amounts of foreign currency reserves they started to lend that money to the government he hidden behind the facade of lebanon's rapidly growing economy this scheme flew under the radar once more as a result government debt began to balloon and soon lebanon's debt to GDP ratio soared well past 100 in itself high debt levels are not an issue as long as the government is able to invest in infrastructure and systems that will create more growth for the economy but as we know in Lebanon this did not happen a major chunk of these funds was Landing in the pockets of the politicians and this caused even the most basic of services to crumble constant electricity cuts and non-drinkable tap water became the norm has lived through Wars and occupation his currency has collapsed his savings vanished with a functioning State without fuel or money everything is wrong take medication for a chronic disease and we're told we may find the Beirut but for double the price and even then we still couldn't get it we can't even find cough medicine and Panadol for power Lamppost has become a beacon for this community we are electricity refugees says this woman I can't stay at home [Music] hoarding has become commonplace petrol stations a front line where men are killed in fuel disputes the Army has been deployed public outcry finally started to grow people were angry with the corruption and mismanagement because now they could see it but the politicians merely switched places within their Ministries and the problems persisted as we've seen from the U.S banking crisis when there's a shaky Foundation it's only a matter of time before The Perfect Storm arises threatening to topple the House of Cards but it's not a bank that we're talking about here but an entire nation's economy for lebanon's situation the first Domino to fall came in 2011 when conflicts sparked in neighboring Syria over the next few years Lebanon became a refuge for around 1.5 million displaced syrians this put significant pressure on lebanon's already shaky social system remember this is the same system that could hardly support their local population let alone 1.5 million extra people meanwhile the building tensions in the region created a vacuum of confidence for investors and this reduced new foreign investment inflows with funds drying up and a desperate need for dollar reserves to maintain its import dependent economy Lebanon found itself at a Crossroads riding in on a white horse to save the country was Riyadh Salome a former Merrill Lynch banker and the chairman of Lebanon Central Bank using his expertise and financial engineering he introduced a range of extremely complex Financial mechanisms basically it would offer commercial Banks lavish returns as long as they could bring in new dollar deposits into the country interest rates on deposits started to Skyrocket even further as local banks started to use any and all techniques they could to get foreign currency in it was the quasi-ponzi scheme and the plan worked despite Regional tensions more Capital once again flowed into the country though success was short-lived because unfortunately this tragedy was in fact more of a double-edged sword sure it brought in the funds but it also increased the liabilities for both Banks and the government due to the higher interest rates so the financial engineering magic transformed their national debt into foreign currency debt debt servicing costs skyrocketed reaching 1 third of the country's yearly budget soon foreign currency reserves started to deplete due to Newfound expenses and it soon became clear what was going on but it was already too late by 2017 political instability led by the prime minister's resignation and later the government's failure to deliver on-promise reforms prompted foreign donors to pull back their Investments with no foreign investment coming in and no other means of securing the funds necessary to pay back the debt lebanon's only option was to take on more debt and a debt burden quickly spiraled out of control by 2019 the debt had reached 170 percent of GDP this was the final straw and the government was forced to default on its foreign debt unemployment began to rise inflation wasn't the triple digit and a once thriving nation was brought to its knees as if the situation wasn't bad enough a global pandemic swept through the nation but the worst was yet to come on August 4th 2020 a disaster shook the country the entire Lebanese government has stood down Following last Tuesday's catastrophic explosion in Beirut the Prime Minister said it was the result of endemic corruption which is bigger than the state itself angry protests have continued at the government's handling of the crisis as the country faces economic collapse and food shortages a warehouse in beirut's Port area exploded foreign the warehouse had been storing 2 700 tons of Highly volatile ammonium nitrate since 2013. it was a clear risk but government officials failed to take action for many years the explosion which caused hundreds of deaths and billions of dollars in Damages also destroyed the port responsible for 70 of lebanon's imports of course this increased import costs even further sky-high inflation wasn't coming down now as for accountability no one has been held responsible and many politicians continue to act like nothing happened the people of Lebanon were truly living through the darkest days but sadly in the years to follow there would be little Improvement of course the people were angry and they protested but nothing changed every effort hit a brick wall an activist couldn't even agree on the root causes of the crises what they should even prioritize and the types of political reforms that they should advocate for as for the government themselves they were now out of options and desperate for funds so in all of their Infinite Wisdom they decided to propose a new tax bizarrely the government wanted a payment of 20 cents per day for the use of whatsapp's video call feature obviously this tax only affected the poorer people imposing attacks on communication only added fuel to the fire of discontent the result Mass protests these were driven largely by disheartened youth demanding a complete overhaul of the political system which seemed to benefit the elite few at the expense of everyone else as the political climate deteriorated the banking sector got nervous fearful of a bank run that could ensue from the process they began to withhold foreign reserves particularly dollars effectively locking people out of their own deposits it's important to remember that most people used to save their money in bank deposits and because a lot of families sent money back home from over abroad there was a large amount of dollar denominated deposits held at local banks as one can expect taking away people's savings was not a good idea the public were Furious and faith in the local currency diminished people began to exchange the Lebanese pounds for dollars and because banks no longer offered exchange services the currency black market boomed and this caused the exchange rate to plummet a drop was both quick and devastating sliding from 1 500 Lebanese pounds to the dollar before the crisis to a street rate of 23 000 to 1 in late January 2022 and a staggering one hundred thousand to one dollar by April 2023 the Lira and the dollar have always existed side by side in lebanon's economy until 2019 the exchange rate between the two currencies was stable with one dollar equal to fifteen hundred pounds the exchange rate changes daily on this morning a dollar was worth twenty one thousand pounds almost 15 times more than two years ago the dollar rate keeps Rising so Supply prices are rising too I have to continually adjust my prices so let's look at the numbers and be prepared because they're staggering since 2018 Lebanon has lost more than half its GDP by July 2022 the collapse of the currency has ushered in hyperinflation some products have increased in price by 10 times by the end of 2022 inflation had reached 124 percent this may not really hit home so let me give you some real life perspective so someone who used to earn 900 a month is now earning less than fifty dollars and to make things worse the minimum wage hasn't been increased since 2017 and even this dismal pay is a blessing to some because thirty percent of the population is now unemployed these shocking statistics don't fully capture the human suffering seventy percent of households are struggling to make ends meet and in more than a quarter of these households an adult had to skip a meal due to lack of money or food resources parents are being forced to send their children to orphanages simply because they can't afford to feed them because of the shortage of foreign currency reserves the country can't import the goods it needs leading to significant shortages in everyday essentials fuel is the most significant issue after the destruction of their main Port there are lengthy queues around gas stations where people are stuck waiting for hours electricity has become a fleeting luxury now just accessible for a few hours a day this has caused a massive crisis in hospitals only worsened by the lack of essential medicine Water Services have taken a hit too the country is witnessing disease outbreaks including its first cholera outbreak in decades as the situation worsens a self-perpetuating cycle emerges for instance public teachers went on a three-month strike since their salaries no longer cover even basic commuting costs most local businesses are on the brink of bankruptcy electricity shortages and the population's plummeting purchasing power make it impossible for companies to operate and of course as people begin to get more desperate there has to be a surge in crime it's simply become impossible to put food on the table desperate citizens have resorted to robbing banks and this is simply just to get their own money back many of them have become national heroes representing the grit and the strength to keep fighting against the people that put them in these circumstances people are leaving Lebanon the amount of people exiting increased by 450 percent between 2020 and 2021 many risk their lives undertaking dangerous Journeys by sea to reach Cyprus turkey and the rest of Europe this has led to a massive brain drain where those with high schools are the first to leave sectors like healthcare are suffering let's not also forget that there's still over a million refugees in Lebanon for everyone involved the hardship is almost too much to imagine as for those responsible for this mess most of them still remain in power the true scope of the corruption is hidden but the hints have already surfaced after the 2019 protest six billion dollars fled the country into offshore accounts Bankers are buying properties overseas and even the infamous chairman of Lebanon Central Bank Riyadh Salome who was supposed to save the country is under investigation for alleged money laundering and embezzlement as the curtain on lebanon's Banking and political system slowly draws back in the coming years we will likely witness the full extent of the corruption so what about the future how can this be fixed as for possible solutions on an economic level the solution is fairly straightforward first up the country desperately needs cash flow to restart essential services such as Imports electricity water and Medicine next should come the restructuring of the banking sector as well as the restructuring of social services without this step the country's issues will only persist and accumulate even further lastly the national currency needs to let go of the dollar pack and become a free-flowing currency slowly rebuilding trust in financial institutions once more this would all work in an ideal world but reality is more complex unfortunately efforts so far once again have hit a political wall and have been postponed Lebanon has been in discussions with the IMF for a bailout plan for the past three years but such Aid would require the condition of government restructuring and this would mean that the elites would lose their power and at this time it's a concession that the regime isn't willing to take as we've seen before lebanon's root problem lies in its sectarian politics as long as the political system remains unchanged the ruling Elites have no incentive to modify their behavior irrespective of the suffering of the populace with no help in sight the people of Lebanon are carving out their own Solutions a major development has been the dollarization of the economy selling products and services in US dollars is an effort to sidestep the local currency but such makeshift Solutions provide their own risks this dollarization while aiming to control inflation and stabilize the economy may drive even more people into poverty other countries like Zimbabwe and Ecuador have adopted the US dollar to counter hyperinflation and economic troubles but with mixed results hence it's unclear whether this is going to work in the long run for Lebanon on top of that due to the bank mail functions Lebanon has morphed into a cash economy basically all transactions are conducted in physical currency this means decreased tax revenues for the government Christine ozier built the business through two pregnancies but after the port explosion and the financial crisis she's ready to leave there's an Incredible strength in people but but when it comes to you know Finding medicine finding bread things like that doesn't matter how resilient you are so it's definitely a rough road ahead for the people of Lebanon but all I can say is that I really do sincerely hope things get better there have been multiple times throughout history where countries have gone through economic disasters and have recovered on the other end so let's all hope that that's the case here alright so that is the story of the Lebanon crisis it's a tragic tale but I think it's one that needs to be highlighted so thanks for watching my name is dagogo and you've been watching cold fusion and I'll catch you again soon for the next episode cheers guys have a good one [Music] change [Music] cold fusion it's me thinking

Channel: ColdFusion

Views: 1,221,905

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Id: fvVeslmt1-E

Length: 21min 24sec (1284 seconds)

Published: Tue Jun 20 2023