Lebanon’s central bank crisis worsens after several foreign banks decide to close the bank’s accounts in their own currency. How did it all start?
Once upon a time, Lebanon was the crown jewel of the Middle-East economy. Not even a country like Israel which happened to have the support of U.S. economic power and the blessings of the members of European Union. The so-called “Switzerland of the Middle-East” had one of the most robust banking laws in the region and the multipolar nature of the Lebanese society attracted all kinds of investors from all over the region but suddenly everything goes to hell. Why? Short-sightedness on a colossal scale.
Ever since the civil war in Lebanon broke out, those in power that could not afford to see minorities raising their voices against them began borrowing money from foreign powers until a mountainous debt piled up that amounted to more than the country’s national output. Not that they only failed at that endeavour, they were eventually forced to borrow even more money with greater interests to pay off the existing creditors. The emergence of Hezbollah within the country effectively ruined the plans the Gulf States had for the country so with a simple recalculation they began adjusting the flow of the money they were pouring into Lebanon.
No longer having the backing of Gulf States, Lebanese banks started giving away incredible interest rates to those willing to deposit dollars into their reserves, seeking to make up for the loss of petro-dollar flows by increasing the remittances coming from outside. While everybody seemed happy and content, the central bank of Lebanon was busy making promises to individuals it knew that it couldn’t deliver. The political chaos that followed in the years after 2016 only worsened other countries’ perception of Lebanon and they slowly began withholding the aid they had promised to Lebanon when they saw that no political resolution would be within the reach.
In a moment of desperation, Lebanese government introduced the controversial WhatsApp tax plan to make up for the losses that were piling up. At the time, WhatsApp was the most popular caller app within the country and the tax on it could generate enough money to pay off the debtors that were increasingly growing in numbers. Unfortunately, what they didn’t predict was that the younger generations of Lebanese youth, both in and out of the country, got wind of the ruse and began pulling out their assets from banks. In a blink of an eye, Lebanon’s dollar reserves dried up and inward remittances suddenly got slashed. That brings us to today.
Nowadays it is estimated that the Lebanese banks owe more than 90 billion dollars in foreign exchange to all sorts of entities, ranging from states to ordinary individuals. Lebanese pound has been in a freefall and currently has lost more than two third of its value against the U.S. dollar. Countries like Yemen and Syria demand the return of their investment whilst Lebanese youth are stuck having nothing to cling to but false promises. Today things even became much worse than what was initially expected.
According to Reuters, banks such as HSBC and Wells Fargo are cutting their ties with Lebanon’s central bank, Banque du Liban, while closing down the bank’s account in their own respective currency. Aside from these two, banks such as Deutsche Bank and the Bank of America have reduced the number of transactions they had with Lebanon’s central bank in areas such as cross-border payments. As of this moment, the economic outlook for recovery is all but bleak with the officials even claiming that the country might run out of funds to import basic necessities. Still, miracles have happened before and deals were forged in shadow, so nothing can be ruled out just yet. Nevertheless, the situation needs to be addressed as soon as possible or it might soon get too late for damage control.