When armed hostilities came to a halt in the early 1990s, fifteen years of civil war had left Lebanon decayed and broken on all levels, a shell of its former self. Despite grand reconstruction and development plans peddled by the post-war political elites, the subsequent decades proved to be no more than a race to the bottom. The false promises essentially transmogrified the shattered Lebanese state into a corrupt parasitic vehicle for self-enrichment by the post-war sectarian elites and their foreign patrons, while countless citizens emigrated permanently in search of dignity and opportunities.

Yet, the anchor that supposedly kept the country going was its esteemed banking sector and the infallible governor of the central bank, long venerated as the only adult in the room ostensibly keeping the country and its economy on its feet. Alas, this confidence in the financial sector turned out to be mere hubris, as Lebanon is currently facing one of the world’s most severe financial crises of the past century and a half, triggered by the collapse of a Ponzi scheme run by the state and the banking sector.^[1]

Since 2019, the local currency—the Lebanese Lira—sharply depreciated, the size of the economy halved, and inflation skyrocketed.^[2] While moments of crisis can be drivers of policy change, Lebanon has strongly challenged this once conventional wisdom,^[3] as three years into the crisis, none of the crucial structural economic, monetary, judicial, and administrative reforms have been enacted. Instead, the country’s political and economic elites have responded to the crisis by sabotaging reforms and delaying any socioeconomic stabilization, effectively impoverishing society. Indeed, while the state failed to endorse a financial recovery plan, the implicit shadow plan adopted by elites shifts the burden of the crisis from commercial banks, their shareholders and large depositors, onto ordinary citizens through the costs of inflation, currency depreciation, and de facto ‘lirafication’ of dollar deposits.^[4]

The Conductor: Banque du Liban orchestrating the response to the crisis
Entrusted by Lebanon’s traditional political parties since 1993, central bank governor Riad Salameh dictated the response to the crisis in a discretionary manner, favoring his political protégés and commercial banks. At the institutional level, BdL’s issuance of circulars increased twofold in volume and rate during the crisis compared to pre-crisis times (figure 1).^[6]

First, as of April 2020, BdL mandated banks to perform a de facto haircut on dollar-denominated deposits, forcing depositors to withdraw Lebanese liras from their dollar accounts at a disadvantageous rate.^[7] This gradually allowed commercial banks to reduce their liabilities, while small depositors saw the value of their hard-earned money erode rapidly.

Second, as of January 2022, BdL aggressively intervened in the currency market to temporarily stabilize the local currency at LBP 20,000 to the dollar, providing a veneer of monetary stability ahead of the May 2022 parliamentary elections. This politically-motivated measure wasted more than $2 billion of the central bank’s foreign currency reserves, as by July 2022, the Lebanese lira had again lost the marginal value it had artificially gained.

Third, with BdL effectively neutralizing its Banking Control Commission and Special Investigation Commission, it enabled the wealth transfers abroad of political and economic elites, while everyday depositors suffered from unregulated capital controls during the same period. In fact, a former director-general of the Ministry of Finance estimated that $6 billion were “smuggled” outside Lebanon.^[8]

Between August 2019 and May 2022, these three major operations directly reduced BdL’s foreign currencies by more than $18 billion (60%) and commercial banks’ deposits by $45 billion (25%), all in the absence of an overarching financial recovery plan.

The Pretender: Government mired in caretaker role and political constraints
Since the onset of the crisis in August 2019, Lebanon’s executive branch was restricted to a caretaker duty for 16 months—equivalent to more than one-third of the crisis period. The country saw three different cabinets and two designated prime ministers who failed to form one. Compared to pre-crisis times, the activity of the government exhibited a decreased degree of political collaboration, as the issuance of decrees declined by one-third (figure 2).^[9] The first cabinet that governed during the crisis period was forced to resign amidst mass protests in 2019. The second cabinet, headed by Hassan Diab and composed of several technocratic figures, defaulted on the sovereign debt, albeit in a disorderly manner, and drafted a financial recovery plan that espoused the bail-in of large depositors and restructuring the banking sector, among other reform prescriptions, only in its first 100 days in office. The plan, however, was quickly made obsolete after it was abandoned by the cabinet itself and challenged by the Association of Lebanese Banks (ABL) and traditional parties in parliament. The Diab cabinet was also responsible for designing a regressive subsidy scheme that exhausted an average of $287 million per month from the country’s foreign reserves and generally benefitted the country’s politically-affiliated oligopolistic importers.^[10]