The Economist 14Dec2019

42 Middle East & Africa The EconomistDecember 14th 2019

O

ver thepast two months everyone in

Lebanon has become an economist.

Walk down the street and you will probably

hear snippets of conversation about dol-

lars and exchange rates—and vitriol aimed

at bankers. The country is in the third

month of a political and economic crisis

caused by a drop in remittances and bank

deposits that has left everyone short of

hard currency. Customers queue in banks

for hours only to face arbitrary limits on

dollar withdrawals. Credit has dried up,

leaving firms unable to finance imports.

Though the Lebanese pound is still official-

ly pegged at 1,500 to the dollar, in practice

the peg no longer exists: traders charge

2,000 pounds or more.

Now Lebanon’s crisis is rippling across

the border into Syria. Their economies

have long been linked. Syrian labourers re-

built Lebanon after its civil war, which end-

ed in 1990. Banks in Beirut were a safe place

for wealthy Syrians to park their cash. Since

the Syrian conflict began in 2011, business-

men have used Lebanon to skirt sanctions

and do deals abroad. But Lebanon is no use

as a financial hub if its financial sector is

frozen. With dollars scarce, the Syrian

pound has followed its Lebanese counter-

part and crashed to record lows, from 500

to the dollar at the beginning of 2019 to 950

in early December (see chart). Though it

has stabilised a bit, Syrians expect it to fall

further in 2020.

As winter sets in, Syrians worry about

how they will afford fuel, often sourced

through Lebanese ports. Shortages of cook-

ing and heating gas last winter, caused by a

mix of international sanctions and corrup-

tion, led to widespread anger. The queues

and scarcity will probably be worse this

winter. Petrol stations in Lebanon are al-

ready struggling to keep the pumps filled;

they briefly shut down last month to prot-

est at the shortage of dollars at the official

exchange rate.

The Syrian government is trying to re-

duce imports, but the country’s shattered

factories cannot provide basic goods. Many

firms rely on raw materials from abroad,

bought with dollars, then sell their fin-

ished goods on an impoverished domestic

market. In some industries prices are fixed

by the government: drug firms, for exam-

ple, find it all but impossible to break even.

Last month Bashar al-Assad, Syria’s dicta-

tor, decreed a pay rise of 20,000 pounds

($24) for civil servants. That is a 50% in-

crease for many—but it is barely enough to

allow them to pay for a winter coat.

Lebanon is Syria’s biggest foreign mar-

ket: it bought $132m of Syrian goods in 2017,

21% of total exports. A drop in purchasing

power may hurt trade. It will also dent the

value of remittances. Though many of the

1.5m Syrians in Lebanon are refugees

barred from formal employment, aid

groups estimate that their remittances still

account for perhaps one-sixth of the total

sent back to Syria from abroad. A pro-gov-

ernment newspaper in Syria has suggested

that Mr Assad tax the diaspora. That might

be tricky. It was his brutality that sent mil-

lions into exile in the first place.

Mr Assad has shrugged off concerns

about the economy. “Syrians have a lot of

money,” he says. Meanwhile, Lebanon’s

leaders are fighting over berths on a sink-

ing ship. The prime minister, Saad Hariri,

resigned on October 29th after weeks of

protests. In November politicians seemed

to agree on Samir Khatib, a businessman,

as his replacement. But on December 8th

Mr Khatib abruptly withdrew from consid-

eration. Talks about a new cabinet were

again postponed. His nomination seems to

have been a stunt intended to make Mr Ha-

riri look like the only viable option. “It’s a

game. He still wants the job,” says an aide.

Lebanese protesters want a cabinet

stocked with technocrats to rescue the

economy. Mr Hariri and his allies also back

this arrangement, not least because the

government must make painful choices

about whether to restructure debt and de-

value the currency. Few politicians want to

be blamed for such decisions. But Hizbul-

lah, the Shia militia-cum-political party,

and its partners are reluctant to give up

their foothold in the cabinet.

While its leaders squabble, Lebanon is

literally and figuratively underwater. Win-

ter storms flooded parts of the country this

month, a reminder of how the government

has squandered money meant for infra-

structure. One-third of Lebanese are poor,

according to the World Bank, a figure that

could rise to 50% as the crisis worsens.

In April 2018 donors pledged $11bn to

help Lebanon; it has yet to make needed re-

forms to unlock that money. Before a fol-

low-up meeting on December 11th the

French foreign minister, Jean-Yves Le

Drian, said he hoped to “encourage the Leb-

anese authorities to realise the seriousness

of the situation”. It may take much more

than a reminder to convince them to act. 7

BEIRUT

As Lebanon’s economy drowns in debt, Syria’s begins to sink as well

Lebanon and Syria

Reverse contagion

Double trouble

Exchange rates against the $, inverted scale

Sources: Syrian Pound Today; Lebaneselira.net

Syrian pound Lebanese lira

Aug Oct Dec Aug Oct Dec

2019

1,000

900

800

700

600

500

2,500

2,250

2,000

1,750

1,500

1,250

Parallel

Official

2019

That sinking feeling