Lebanon has long been portrayed as a beacon of economic liberalism. By injecting large sums of foreign currency into the economy via high interest rates and an unsustainable fixed currency regime, the country’s monetary authorities instilled and preserved a façade of social, economic, and financial stability for decades. But all of this proved to be transient as political and financial oligarchs threaded the needle between securing their own interests and the country’s economic wellbeing. 

In late 2019, and as central bank foreign currency reserves started to dwindle at a rapid pace, analysts rushed to declare the downfall of Lebanon’s postwar rentier economic order. Since then, the country’s economy has been spiraling out of control in the face of a depreciating local currency, skyrocketing inflation, and rapid job destruction. Even today, more than two years since the government defaulted on its foreign debt, a sense of faux stability seems to persist on the pretext that capital is still flowing in.  

Lebanon’s Balance of Payments (BoP)—a large part of which depends on foreign currency inflows—currently stands at a $230 million deficit,  down by 90 percent compared to two years ago. While this suggests there are stable foreign currency inflows, such inflows are not redistributed across the economy and are instead absorbed by a particular socioeconomic stratum.

To say that foreign currency inflows are restoring stability to crisis-torn Lebanon is indeed an overstatement. These inflows are barely sufficient to strengthen the country’s investment capacity, reduce economic inequality, recover losses, or trigger economic growth. Exacerbated by poor business confidence, financial sector collapse, and extreme social vulnerability, much of these inflows have turned into stopgap capital.

Here, we focus on two major sources of foreign capital, namely remittances and tourism revenues. 

Remittances to Lebanon over the past decade have largely supported consumption expenditures for a small segment of Lebanese society and are thus not serving the wider population as a vehicle of investment or a social safety net. Tourism revenues no longer have a multiplier effect, as sticky wages remain meager, and profits are not reinvested or placed in the financial system.  Not only are both of these inflows failing to holistically contribute to the strengthening of Lebanon’s economy, but they have quickly become key features of a renewed system characterized by wide income disparities. In this vein, we assess the real socioeconomic contribution of these inflows and how they contributed to further inequality and non-investment in Lebanon.

Remittances in the absence of social safety nets

Remittances have failed to contain the country’s multiple crises. They now play a strictly social function by easing access to basic imported goods for a small segment of the population. This demonstrates that remittances are not channeled to stimulate investment, strengthen human capital, or create jobs. Moreover, these inflows, while visibly steady across time, are most often reaching the country through informal channels amid financial sector collapse and are thus not being equitably redistributed. For these reasons, we are cautious about re-packaging remittance inflows as a prerequisite for economic recovery.

Between 2011 and 2020, the size of remittances ranged from $6 billion to $7 billion per year.² These inflows accounted for a large part of national income, and more so today. Well before the crisis, families who were lucky enough to receive remittances found them to be an important resource to access vital services and goods,³ such as food (61%), housing (59%), human capital investments in healthcare (46%) and education (18%). Also, these remittances helped finance Lebanon’s expensive import bill, which amounted to $194 billion, or 49% of all foreign currency outflows, during the past decade alone.⁴

Contrary to popular belief, the effect of remittances on the country’s socio-economic wellbeing was minimal, even pre-crisis. Official figures indicate that only 10% of all Lebanese households benefitted from remittances between 2018 and 2019.⁵ At the time, prior to the country’s currency crisis, more than half of the country’s population was multidimensionally poor.⁶ In retrospect, remittance transfers were barely enough to combat poverty or to cover the cost of social assistance in the first place. 

By early 2022, the share of households that benefitted from remittances reached 15%, at a time when the Lebanese lira (LBP) lost more than 90% of its value and households experienced a sizable loss in their purchasing power.⁷ A typical resident would need nine times more resources (in LBP terms) today to maintain their pre-crisis consumption level amid skyrocketing inflation.⁸  Given the extent of social vulnerability today, these inflows are stretched too thin.

Unsurprisingly, remittances flowing into Lebanon bolster the incomes of select households and their capacity to consume. This is aided by their steady flow to date, indicating that remittances are largely being used to finance imports. Noticeably, as opposed to the pre-crisis period, remittances no longer support investment in human capital, which is necessary for job and economic growth.

Pouring salt on the wound, remittances are now flowing into Lebanon through informal channels amid a near total collapse of the financial sector. Most families or households are receiving inflows in cash or in-kind, and in some cases, via money transfer operators. Such informality excludes remittances from any policy effort that aims to redistribute or invest them fairly in order to restore the health of the economy.

Finally, and despite their stability over the past decade, remittance inflows can decrease in light of global economic trends. Soaring inflation in global economies as well as tightening monetary policies at central banks abroad can translate into a decreased capacity for remitters to send money to their families in Lebanon.

Tourism and economic inequality  

The tourism sector is once again being hailed as a lifeline or rather, a hedge, against a social collapse. However, tourism revenues in Lebanon have so far failed to produce economy- and society-wide surpluses and are hardly shielding the country from impending collapse. Just like remittances, foreign currency receipts from tourist activities are not going through the banking sector for redistribution and are inflating the books of corporations, who are losing their appetite for investment. It is therefore unlikely that a boom in tourism spending will drive economic activity in a manner that kickstarts growth.

According to central bank data, inflows attributed to travel services totaled $2.35 billion in 2020,⁹  down from $8.4 billion pre-crisis in 2018. Seeking to address this, the Ministry of Tourism recently issued a circular allowing businesses to price their services in US dollars from June to September this year,¹⁰ in an attempt to recover economic losses related to the COVID-19 pandemic and economic downturn. The ministry is betting on a foreseen boom in tourism revenues of about $3.5 billion.¹¹ 

But the reality is that only a few who can afford to provide these tourism services will be reaping the benefits of such a policy. 

Much like remittances, the profits realized in the tourist sector will remain outside of the financial system. This means that they are unlikely to bolster economic activity through providing an increased capacity for lending or credit issuance in the banking sector. 

Furthermore, the lack of appetite for investment is already apparent in poor private sector performance. Lebanon recorded a value of 49 (out of 100) in its Purchasing Managers Index (PMI),¹² hinting at stagnation in the level of private sector investment despite the potential inflow of tourists. This indicates that profits realized from tourism spending, which will largely be taken in by large corporations in the sector, likely will not translate into re-investment in these firms and hence increased economic activity.

Finally, it is unlikely that workers will see an increase in wages relative to currency depreciation or benefits.  Moreover, only 3% of those employed in Lebanon earn in foreign currency, meaning tourism spending is unlikely to trickle down to broader society through labor.

Market dynamics driven by macro-economic policy failures strongly suggest that the majority of this promised touristic spending will be concentrated in profits for big firms in the tourism, retail, and services sector without having the promised effect on the Lebanese economy. On top of that, these market dynamics are exacerbated by Lebanon’s unfair, leaky, and inefficient taxation system. Lebanon’s corporate income tax is as low as 17% compared to OECD and MENA averages,¹³  and tax collection remains inadequate at the official exchange rate of 1507.5 LBP/$.

An antagonistic economic model on the rise

The flow of foreign currency, either in the form of remittance transfers or tourist receipts, will not save Lebanon. This belief that foreign capital can reverse the tide has grown out of the disillusionment in the state’s capacity to develop clear and concrete steps for economic and financial recovery or provide proper social protection schemes. 

When analyzing the financial crisis, it is common to look back at the postwar economic model and reflect on how deep it has cut through Lebanon’s contemporary social order. But the reality is that a more destructive economic paradigm is on the rise. By widening income gaps between those with access to foreign currency and those without, the postwar model is re-inventing itself through newer, more aggressive, and far-reaching mechanisms which further exacerbate inequality.  

Instead of entertaining misguided public narratives about the economy, we should be exerting more pressure on authorities to develop a recovery plan in the form of a cogent, well thought-out economic vision. This should include concrete steps to repair the colossal damage shouldered by society, paving the way for sustainable and inclusive economic growth.