The policy of relying too much on debt to fund the budget has created problems for the young government of Prime Minister Hassan Diab.
In the ongoing protests in Lebanon, people have focused their anger on one particular target: banks. At least a dozen branches of different banks have been firebombed since protests broke out this week.
The weeks-long curfew to stem the spread of the novel coronavirus, eased just recently, has exacerbated the already worsening economic outlook.
Lebanon, the tiny nation of five million, which borders a hostile Israel, is the world’s third most indebted country. Even before the pandemic hit, the World Bank said Lebanon's economy had contracted last year. Now the virus could shrink it further by 12 percent, according to the International Monetary Fund (IMF).
What’s happening now is the continuation of a spontaneous protest drive which started on October 17 when a few people converged at Beirut’s Riad al Solh Square to record protest against a proposed tax on WhatsApp, the popular messaging service.
That tax was a desperate attempt by the government to raise money to pay off its burgeoning expenses. Lebanese people, frustrated over rising prices, falling income and an erosion of their savings with its pound currency losing value, poured out on the streets in thousands.
Later that month, Prime Minister Saad Hariri had to step down.
Anger has centred on political corruption and a system that rewards sectarian loyalty instead of competence during elections and government’s failure in providing essential services such as electricity.
Under Lebanon’s governing system, the president has to be a Manorite Christian, the prime minister a Sunni Muslim and the speaker of parliament a Shia Muslim. Lawmakers also get seats in the parliament based on sectarian quota.
Years of rot
This has spawned a culture of political appeasement as evident from the high number of government jobs that politicians hand out to their supporters.
Over the years, successive governments have borrowed heavily from domestic and foreign lenders. Around 50 percent of the state revenue goes to paying off the debt. At the same time, a major chunk is used to pay salaries of government employees, leaving very little for productive investments in sectors such as health and education.
Prime Minister Hassan Diab, who took office in January, has blamed Riad Salame, the central governor, for much of the present trouble.
Salame has been the head of Banque du Liban since 1993. Under him, the central bank pursued a policy of high-interest rates for years, making it easier for the government to borrow money.
This turned out to be a bounty for commercial banks, which lent to the government at a high rate and booked profits. In some of these banks, politicians hold shares, something that has added to the anger on the streets of Lebanon and Tripoli.
But the deposits, including those from the foreign investors, attracted on the back of high interest rates instead of good economic performance, were a bad idea as once this money leaves, it leaves in droves.
More than $5.7 billion have been withdrawn from the financial system in the first two months of this year.
The central bank has also kept the Lebanese pound rigidly pegged at 1,507 pounds to a US dollar. With the pound fixed at such a high artificial level when there’s a shortage of dollars in the market, banks have faced a barrage of withdrawals from depositors.
On the black market, the exchange rate is around 4,000 pounds to the dollar as business people, including importers are chasing the greenback. The capital controls, which limit how much foreign currency a depositor can be withdrawn, have added to the air of uncertainty.
The impact of the coronavirus pandemic on remittances, the money expats send home to families in Lebanon, can add to the economic woes. Remittances make up about 12.7 percent of GDP, making Lebanon the second most remittance-dependent Middle Eastern country - only behind Palestine.
Even before the lockdown, the World Bank had raised the fear that half the population could face poverty due to the deteriorating economic situation.
Now the Social Affair Minister Ramzi Musharrafieh told CNN that up to 75 percent of the people require aid.