Analysis: New government, old problems for Lebanon

Lebanese parliamentarians met this week to formally confirm the country’s new government. The appointment earlier this month of telecoms billionaire Najib Mikati as prime minister ends a year-long political deadlock following the resignation of his predecessor in the wake of the deadly Beirut port explosion last August.

However, Mikati, who has twice served as prime minister previously, is widely seen as a member of the ruling elite which has led the country to the brink of economic disaster.

What happened

• In a symbolic illustration of the economic catastrophe which has wracked the country since late 2019, Monday’s parliamentary session was delayed following a power cut and a broken generator.
• Mikati, who was prime minister in 2005 and from 2011-13, was appointed prime minister on 10 September by President Michel Aoun. His 24-member cabinet contains only one woman and is dominated by political insiders with links to the country’s main parties, including terror group Hezbollah.
• Last week, Mikati pledged to work with any country – except its neighbour, Israel – to halt Lebanon’s economic meltdown. The new government “will deal with anyone for the sake of Lebanon’s interest, with the exception of Israel, of course,” the prime minister told a press conference.
• Lebanon’s economic crisis may rank as the third-worst anywhere in the world since the 1850s, according to the World Bank.
• Last week, Hezbollah said it had trucked more than a million gallons of Iranian oil into Lebanon from Syria. The action – a breach of multiple international sanctions – was condemned by Mikati as “a violation of Lebanese sovereignty”.

A respite from political paralysis

Mikati’s predecessor, Hassan Diab, resigned last August following an explosion at Beirut’s port which is estimated to have killed at least 218 people and which wrecked much of the city centre. But wrangling among Lebanese politicians left Diab remaining in place for more than a year at the head of a caretaker administration which was unable to begin addressing Lebanon’s deep economic crisis. Two efforts to form a new government – by diplomat Mustapha Adib and former prime minister Saad Hariri – ultimately collapsed; the impasse was the result of political jockeying ahead of elections next year and a byzantine system for apportioning ministries. In accordance with the rules governing the formation of Lebanese cabinets, half of the ministers are Christians and half are Muslims. Portfolios are allocated to ensure that the different sectarian factions are accommodated. The process of forming a government was further complicated by the fact that the international community is demanding far greater transparency and a clean-up of Lebanon’s notoriously corrupt system of governance – it is routinely listed as one of the most corrupt states in the world by Transparency International – before it helps bail the country out. The country’s political elite have found such a prospect distinctly uninviting and have shied away from forming a government committed to reform and fighting corruption. Indeed, Mikati himself was associated with corruption scandals during his previous terms in office. The new minister of finance, Youssef al-Khalil, is an official with the Central Bank, which is widely blamed for causing the crisis and is attempting to stifle International Monetary Fund requests for an audit of its books. The bank’s governor, Riad Salame, is under investigation in France and Switzerland for alleged money laundering.

Hezbollah: “the real winner”

Iranian-backed terror group Hezbollah effectively dominated previous Lebanese governments. The Mikati administration is no exception.

• For eight months Sunni politicians led by Harari rowed with the Aoun, a Maronite, over the composition of the cabinet. Aoun, who insisted on naming a plurality of ministers, is desperate to retain his power base and secure Hezbollah’s support for his effort to ease his son-in-law, former foreign minister and head of the Free Patriotic Movement Gebran Bassil, into the presidency as his successor next year. Hariri, meanwhile, was keen to ensure that his backers in the Gulf were on side.
• Reports suggest that – fearing Lebanon’s total collapse – Tehran eventually ordered Hezbollah to persuade Aoun to compromise and allow the formation of a new government. But this solution comes with a potentially heavy price tag, argues Dr Jacques Neriah, a Middle East affairs specialist and former foreign affairs adviser to Yitzhak Rabin: “By accepting Hezbollah’s mediation and solution, Aoun has given Tehran not only the keys to Lebanon’s political puzzle but also turned Tehran into the kingmaker in Lebanon’s politics. All observers and commentators of the Lebanese scene concur that Hizbullah is the real winner following the announcement of the formation of the Lebanese government headed by Najib Mikati.”
• Analysts say Hezbollah and its main ally, the Shiite Amal movement led by long-time parliamentary speaker, Nabih Berri, ultimately controls two-thirds of the governing portfolios, including the Ministry of Finance and Ministry of Public Works and Transport. The latter will be key in decisions surrounding contracts for the rebuilding of Beirut’s port.

Unanswered questions

Last August’s explosion at Beirut’s port was caused by a cache of 2,750 tonnes of ammonium nitrate which had been impounded in 2013 and improperly stored. As the New York Times recently suggested: “Many Lebanese saw the blast, and the efforts by powerful politicians to hobble the investigation into its causes, as the starkest example yet of the country’s deep dysfunction.” A committee established to investigate the causes of the explosion promised answers within five days. A year on, few have been forthcoming. A judge overseeing the investigation has been repeatedly obstructed with politicians blocking his requests to question former ministers and the head of Lebanon’s main intelligence agency. The judge’s predecessor was sacked earlier this year when he attempted to charge four officials with negligence.

A brutal economic collapse

The collapse of Lebanon’s economy over the past two years – the country defaulted on its debts in 2020 – has been brutal.

• Inflation was 101 percent in June, and is running at more than double that rate for food. Lebanon’s currency has rallied somewhat with the formation of the new government, but has still lost 90 percent of its value over the past two years. Life savings have been wiped out and dollar bank accounts are inaccessible.
• Unemployment has topped 30 percent and GDP has dropped by more than 20 percent since 2019. More than half of Lebanese are now below the poverty line (the UN puts the figure at 75 percent), and nearly half of this population is destitute, or “food insecure.”
• As the Central Bank’s foreign reserves have drained away, Lebanon – which is heavily reliant on imports – has struggled with shortages of food, fuel and medicine, and there is electricity for only a few hours each day.
• The new government is now able to access $546m from the World Bank and an expected $860m from the IMF to temporarily ease the crisis. It is also due to start paying cash assistance to destitute families in dollar vouchers designed to guarantee the value of the payments if the pound falls further. However, more pain is on the horizon with the cash-strapped government planning to end subsidies on food, fuel and medicine. “It is not our desire,” the prime minister said on taking office, “but we don’t have any reserves or money that allows us to help.”

A state-sponsored Ponzi scheme 

The economic crisis had been a long time coming. Weak and corrupt governments, a failure to undertake structural reforms, and an economy which has been keep afloat on a sea of mounting debt (Lebanon is the third most indebted state in the world) have, together, combined to unleash the current crisis, which was exacerbated by covid lockdowns. The unravelling began in autumn 2019 when the strategy deployed by Lebanon’s banks to bring in much-needed dollars – which has been compared to a state-sponsored Ponzi scheme – began to collapse. Lebanon’s central bank had encouraged wealthy investors to make large dollar deposits by offering ever-higher, unsustainable levels of interest. Paying those rates to depositors, however, required the bank to then offer even higher interest rates on new deposits. When the strategy was effectively rumbled in 2019, new deposits dried up, and the banks were left with less dollars than they had promised to pay in interest. Last year, Diab, the former prime minister, estimated there was a $83bn hole in the banks’ balance sheets.

Hezbollah to the rescue?

• The 80-tanker convoy carrying Iranian fuel which arrived in Lebanon last week is due to provide supplies to a Hezbollah-owned fuel distribution company, which is subject to US sanctions. Experts say one million gallons might help individual institutions, but is small relative to Lebanon’s overall needs; the terror group says the initial delivery is just the first of many more.
• The trucks entered Lebanon from Syria via an open stretch of land, avoiding official border crossings, customs and security checks. It is unclear whether they had any legal authorisation, according to the New York Times. Iran says the fuel was purchased by Lebanese businessmen.
• “This latest event gives yet another confirmation that Hezbollah has considerably increased its sway over the Lebanese state,” argued political scientist Karim Emile Bitar. “It is no longer even trying to hide behind the veneer of legality offered by official institutions.”
• Hezbollah falsely claimed the tankers had “broken the American siege”; US sanctions are targeted on the terror group and its allies, not the Lebanese state. Indeed, the US is the largest donor of humanitarian aid to Lebanon, with the Biden administration pledging a further $100m in aid to help with food, health care, water and sanitation.
• Hezbollah’s seemingly altruistic decision to side-step the state and “solve” Lebanon’s energy crisis is nothing of the sort, suggests Neriah. “Most of the oil products will be channelled to Hezbollah’s facilities (mainly hospitals and social institutions), and the rest will be sold to Hezbollah’s political allies or smuggled to Syria.”

What happens next

“There is little in Najib Mikati’s return to power as prime minister or the very familiar makeup of his new cabinet to inspire confidence,” suggested Hussein Ibish of the Arab Gulf States Institute. “For the IMF and the donor community to provide fresh funds, Lebanon will be required to make significant concessions on accountability and transparency, among other conditions … But it’s precisely these kinds of concessions the political leaders don’t want to make, not only because that means a certain loss of power and privilege, but because it will require them to agree on uncomfortable basic facts. For example, how much money was pilfered — and by who — and how the refinancing burden should be shared.”