Syria and Lebanon’s currency catastrophe aggravates their economic and social crisis

The causes of the double collapse of the Lebanese (LL) and Syrian (LS) pound are manifold: depletion of revenue sources, multiple and colossal public deficits, absence of governance – even government – endemic corruption and nihilistic politicians, in a context of instability and regional conflicts. Both countries have divergent political and economic systems. Lebanon’s is ultra-liberal, corrupt to the core and, of course, pro-Western. Syria’s is more planned, with a certain liberal twist – and a dose of corruption – over the past decades, before the war unleashed in 2011 destroyed everything in its path.

That ten-year war left deep fractures, impossible to fill without gigantic international aid, which is scarce due to Western financial and economic sanctions. Syria’s rulers – the same autocratic family that has been in power for half a century – reduced hopes for a better life to nothing.

But although Lebanon and Syria have taken different paths, they share many commonalities. Many Lebanese families have Syrian relatives, and vice versa. Several Syrian families contributed to the development in Lebanon of a long thriving banking sector, and dynamic relationships have been woven in the industrial sector. In the early 2000s, some Lebanese banks took stakes or created subsidiaries in Syria, where a timid liberalization of the financial sector was taking shape.

Neither with you nor without you

It should also be recalled that both countries shared the same currency until January 24, 1948, when Lebanon created its own currency after its independence and dissolving any legal relationship with the French Mandatory Power and Syria. In 1950, Syria in turn abolished the customs union between the two countries.

Since October 2019, the Lebanese pound on the official market, which as a guarantee of stability is tied to the dollar (at a rate of 1,507 pounds to the dollar), keeps sinking to abysmal levels on the parallel markets. Its depreciation currently reaches 90%, with an exchange rate on the informal market bordering on 15,000 pounds to the dollar (against 9,800 in July 2020). No one knows when the fall will stop, while the country has been without a government since August, when an explosion in the port of Beirut destroyed an entire neighborhood of the capital and led to the resignation of a government charged with initiating reforms.

“With these insensitive policymakers, we have the feeling of being in contact with a huge boulder or a steel wall,” says Jad Tabet, a civil society figure and secretary general of the Engineers and Architects Syndicate, bitterly. The banks, which were the jewel and engine of the economy before 2018, are on the verge of bankruptcy and prohibit in complete illegality the withdrawal of dollars from bank accounts, except in dribs and drabs and at a disadvantageous rate. In a largely “dollarized” and import-dependent economy, traders suffer, and bankruptcies and unemployment multiply.

In this context, the outgoing Prime Minister, Hassan Diab, warned that the reserves of the Bank of Lebanon (BDL) could not finance all subsidies (wheat, fuel, medicines, medical supplies and foodstuffs) beyond the month of June.

“Living in an illusion”.

Hardship or bankruptcy? The most surprising thing is that the Lebanese banks were swimming in income thanks to deposits from the Lebanese themselves, from expatriates, from the Gulf monarchies and from Syria. For that country, Lebanon was at once a safety valve, a refuge and a place from which industrialists and traders could carry out their operations while benefiting from attractive interest rates until 2019. Everything seemed to be going smoothly before the shipwreck, and the accumulated revenue losses of the Lebanese state and the inability of the monetary authorities to balance the abysmal balance of payments deficit turned out to be the main factor in the crisis. No more foreign currency was coming in, while countries such as Saudi Arabia were reluctant to place their surpluses in the country.

In fact, the BDL encouraged local banks to increase their interest rates to balance the deficits of the public utilities, which were accumulating mountains of debt ($60 billion, or 49 billion euros, in the electricity sector alone). The warnings of experts and international institutions about the situation, which had become unsustainable (the debt-to-GDP ratio had been close to 180% for years), had no effect, since in the short term nothing is more reassuring than blindness.

Thus, a few months after the protests of the northern autumn of 2019 and the draconian measures of the banks, which penalized their depositors by limiting access to their accounts, Prime Minister Hassan Diab announced on March 7, 2020 that for the first time in its history, the country was declaring itself insolvent on a part of its public debt (overdue Eurobonds for $1.2 billion or 999 million euros). It thus sent a very negative signal to the financial markets. “The Lebanese lived in the illusion that everything was fine, while Lebanon was drowning in an ocean of debts,” the prime minister added.

The same month, the Lebanese state declared its insolvency on the whole of its foreign currency debt: $35.8 billion (32 billion euros) on a total debt of $95.5 billion (79 billion euros) by the end of November 2020.

Those who advised more prudence were not listened to. The ship was sinking and panic reigned on board. In July 2020, Alain Bifani, former director general of finance, was claiming that despite tight restrictions and a ban on capital transfers, nearly $6 billion (€5 billion) had fled the country since October 2019

Guilty parties were needed. BDL Governor Riad Salameh and bankers were designated as responsible for a flawed and vicious system that could only endure with unrealistic rates applied to duped customers and in many cases with no other source of income in a near-paralyzed country.

Flattered, then despised

Today, confidence has evaporated. Crowned with glory until yesterday by international financial circles, which attributed to him the highest mark as head of the central bank for his management, Riad Salameh – accused of having implemented a Ponzi scheme, a fraudulent financial construction – is now singled out for his “calamitous” performance, although his mistakes must also be shared by the politicians and the system he helped to build.

The Lebanese judiciary has just opened a preliminary investigation into illegal transfers of funds from the bank’s governor to Switzerland, at the request of the Swiss judiciary. Riad Salameh – who was for a long time the personal business banker of Rafiq Hariri, former Prime Minister and businessman at the time when he worked for the American investment bank Merrill Lynch – denied any professional misconduct.

At the same time, many depositors, considering themselves wronged, initiated legal proceedings against Lebanese banks for their actions and against the BDL, long regarded as an untouchable fortress, a sort of State within the State.

Is there any ray of light in this dark sky where storms follow one after another day after day? “Lebanon is suffering from a severe and prolonged economic depression,” writes the World Bank in a study published in early April, with real GDP in decline for the past three years and inflation reaching 84.3%, while 55% of the population lives below the poverty line according to the United Nations Economic and Social Commission for Western Asia. “Lebanon is threatened by a total and dangerous collapse […], without equivalent to what happened in Greece, Venezuela or Argentina”, warned Lebanese expert Paul Salem, president of the Washington-based Middle East Institute, in an interview with a Lebanese radio station on April 11, while meetings were being held with the IMF, the World Bank and officials of the new U.S. administration. The expert added that the Biden administration had become aware of these dangers and would be ready to act with its partners. “There is an urgent need to prevent a financial and social explosion, in coordination with the IMF. The international community is concerned,” Salem said.

Syria, in a monetary impasse

Would a prospect of an exit from the crisis in Lebanon have positive, albeit limited, effects on Syria? The Syrian pound also falls to its lowest values in history. Paradoxically, the ordeal began with the official end of the fighting, in 2018-2019. Hit by the crisis in Lebanon, the Syrian pound fell in early December 2019 on the black market to 1,000 pounds to the dollar, while the official rate published on the website of the Central Bank of Syria was 434 pounds. Even in the black years of the war, the pound had never fallen to such low levels on the parallel market.

In fact, billions of dollars from Syrian depositors were suddenly blocked by Lebanese banks, generating a shortage of dollars in the Syrian market and causing the Syrian pound to fall. Not to mention the fact that the amount of Syrian deposits placed in Lebanese banks is estimated at several billions of dollars. Bashar al-Assad himself put the figure at $40 billion (33 billion euros), although the real figure is probably much lower.

Be that as it may, at the beginning of April this year, the pound was trading on the informal market at LS 3,700 to the dollar, after hitting a low of LS 4,700 on March 17, i.e. four times less than two years ago. Syrian business circles have become accustomed to the fluctuations of their currency and attribute it to manipulation. Did President Bashar al-Assad not call for the resignation on Tuesday, April 13, at the beginning of Ramadan, of the governor of the Central Bank, Hazem Karful, to calm the waters? “A farce or just another smoke screen?” wondered a shopkeeper in Damascus, while unemployment is rising, the fuel shortage is dragging on and prices are skyrocketing all over the place.

Was the timing right, other observers wondered. Because al-Assad is in the midst of preparing for his re-election, scheduled for May 26. The truth is that the dismissal makes little sense in a devastated country, with a crushed opposition, thousands of prisoners still incarcerated, a covid epidemic that continues to wreak havoc, and attacks and attacks by untamed Islamists who once again attacked the army. And a population in utter despair.

“Yesterday a friend invited me to lunch and the bill came to the amount equivalent to a teacher’s monthly salary,” a Damascus resident who asked to remain anonymous told OrientXXI. At least some can eat, even if at an exorbitant price. Because a few hundred kilometers from the capital, in an apocalyptic landscape, some 2.8 million displaced Syrians from the war huddle in makeshift camps in Idlib province, in the northwest of the country, a once prosperous and agricultural region now under the control of a jihadist group.

“Our air is different from theirs.”

Controversy erupted on March 24 after a surprise visit to Damascus by Lebanese Health Minister Hamad Hasan. Syria gave the go-ahead to deliver 75 tons of oxygen to Lebanese hospitals, particularly for covid-19 patients, due to shortages in Lebanese factories.

“Despite the increased need for oxygen to treat Syrian patients, the response was positive […]. Relying on brother and friend [Bashar al-Assad] in times of crisis is a winning bet,” said Hassan, a minister of the Shiite Hezbollah movement in the outgoing Lebanese government.

The amount of oxygen available in Lebanon is barely enough for a single day, while intensive care units are almost saturated, with a thousand patients on ventilators, the minister said. There are two factories producing oxygen in Lebanon, and the vice-president of one of the country’s largest factories, Khaled Hadla, said that local production was insufficient and that his country imported part of its needs from Syria before Damascus limited its exports to supply its own market.

Farès Souhaid, a former Lebanese deputy on the anti-Syrian side, reacted in a tweet addressed to the Syrian president: “We don’t want your oxygen… Our air is different from yours”. The reaction inflamed the social networks, as the issue revives the deep divergences in Lebanon on the relevance or not of a normalization of relations with Syria, longed for by one part of the Lebanese and rejected by the other.

Since the beginning of the pandemic, 455,381 cases of covid-19 and 6,013 deaths have been officially recorded in Lebanon. In Syria, the governmental areas – approximately two thirds of the territory – recorded 17,743 cases and just over a thousand deaths, but in reality the balance would be much higher than the official figures.

Memories of Syria from a 113 year-old refugee

Hamde Fares’ gnarled fingers nimbly run the beads of the masbaha, the Muslim rosary, which she holds in her left hand. Every so often, the elderly Syrian woman pauses in her story to murmur a prayer. According to her Syrian ID card, she is 113 years old, so theoretically she was 105 when she fled the war in Syria to become a refugee. Sitting on a mattress inside the tent she inhabits in the informal camp of Tueli, in northeastern Lebanon and bordering the Syrian border, this herdswoman recounts the last decade of strife in Syria, the era of greatest poverty in more than a century of life, she says. Wiry, the woman clears her throat, her throat dry from not drinking water all day. Despite her age, she still observes the fast in this holy month of Ramadan.

Fares crossed the Lebanese border in 2013 accompanied by her youngest son, Rasein, who today sits next to her and is in charge of shouting questions in her ear, without a mask. “She never studied, she is a simple and devout woman,” the son apologizes to each answer. She lost her sight in 2001, just as the ophthalmologist Bashar el-Assad was one year in power after the death of his father, Hafez el-Assad. The United Nations counts 865,000 Syrians living as refugees in Lebanon, a figure the Lebanese government puts at 1.5 million. Of these, only 50 are over 100 years old, says Lisa Abou Khaled, spokeswoman for the Refugee Agency (UNHCR). Fares is the oldest among those registered, after another 119-year-old compatriot who “neither sees nor hears,” says Abou Khaled.

The old woman is hard of hearing, but her memory is intact. “Before, there were no borders, I took my cattle from one side to the other without any problems,” she recalls in an interview last April 22. By “before,” he means at the beginning of the last century. In winter he would walk for weeks to take his camels and cows to graze in Al Badia, the Syrian desert in the center of the country. In summer he did so in the province of Homs and in the meadows of the Lebanese Bekaa Valley, long before France and the United Kingdom agreed in 1916 to partition the Middle East into zones of direct control and influence. A line then separated the land where Fares’ animals grazed, dividing Lebanon and Syria on either side. Then, the Bedouin and her family stopped being nomads to settle in their village in Homs.

Her family is from Nahariyah, a small village on the outskirts of the city of Qusseir (Syria), although Fares probably came into the world in the winter of 1908, because her identity card marks Al Badia as her place of birth that year. It was precisely there that he was surprised by the departure of the French troops when in 1946 Syria ceased to be a Gallic mandate to become an independent country. “When we returned from Al Badia to the village there was not a Frenchman left,” he recalls. For the Bedouins, identity did not depend then on a document issued in Damascus but on the tattoos that still mark the tanned skin of this woman between her eyebrows and chin, symbols of belonging to the Nughim tribe. Official registration came later.

At 113 years old, Hamde Fares is one of the longest-lived Syrian refugees in Lebanon. Another 50 displaced persons, among more than 865,000 refugees, have lived more than a century.Natalia Sancha García

For this woman the history of Syria is also not defined by political preferences or social freedoms that guide the debates of her grandchildren, but by droughts, taxes, confiscations of livestock and obstacles in the movement to graze. In the time of the French, he asserts, they were the only ones with vehicles. “Times have changed,” the old woman continues, “because now the ranchers transport their animals in trucks.”

The departure of the French ushered in an era of political and economic instability, Fares continues. For her, Maamoun’s arrival in Kuzbari in 1952 as vice president brought an improvement in the quality of life. None of those present in the store, between the two sons and several of the more than 100 grandchildren and great-grandchildren, know who Kuzbari is. The younger ones scramble for a cell phone to Google the name. However, when asked what she thinks of the Islamic State’s (ISIS) entry into the war, the old woman replies, “Who are those?”, sparking laughter from those present.

Of the five children she gave birth to, two died of natural causes. Her husband has been dead for more than half a century. The rest are all refugees in various camps in Lebanon. Qusseir was one of the toughest battles of the war and the town is now taken over by Lebanese Hezbollah militiamen. Return is impossible. Of the 3,000 inhabitants of the village, only about 30 have remained in their homes. The rest have scattered to seek refuge in neighboring countries or in Europe, says his son Rasein.

Political instability was a constant in the Levantine country, recalls the centenarian: “The leaders did not even last six months”. This is how she sums up the era between 1949 and 1970, when eight coups d’état took place. The last one brought Hafez el Asad to power, establishing a period of stability based on an iron fist. “At the beginning everything went very well with Hafez, and life improved. We had access to hospitals and the young people were educated,” says the refugee. “Then came the fear,” she continues. She voted for the president by signing each ballot “with her thumb smeared in ink”. Hafez won four consecutive elections with between 99.9 and 100% of the votes. Fares will not vote on May 25, when Bashar is expected to win his fourth election as president in a country devastated by a decade of war, economically ruined and plunged into pandemic.

Clinging to her masbaha, Fares claims she does not fear covid-19. In fact, she has refused to be vaccinated. “I have delicate skin and fear a skin reaction,” she says. The last 10 years of strife are just one passage in this woman’s memory, but the saddest, she says: “Before there was always something to eat, now Syrians go hungry.” Blindness prevented her from seeing anything of what was happening, but she was able to hear the roar of the bombs and live in her flesh the hardship of becoming a refugee dependent on UN aid in a land now alien to her, where her children, opposed to the regime, took her. The same land where she used to graze her cattle.

She says she is fortunate because, although she no longer has animals or land, she lives surrounded by her family, even if it is crammed into a tent. Blindness has condemned her to spend her days lying on a mattress. Dressed in black and with her head covered by a cloak, she agrees to get up and walk a few steps to pose for the camera. She does it slowly but without much help as she tells how much she misses the apricots, figs and pistachios of her village. A village to which, “if Allah wills it,” he may one day return.

Norway, the sleeping green giant

As one of the world’s leading exporters of natural gas, Norway faces a unique challenge in a world increasingly moving away from fossil fuels. The country has all the financial, technological and human resources it needs to thrive in a decarbonized future; what is lacking is political leadership.

LONDON – Responding to the climate emergency is difficult for everyone, but particularly for countries whose economies depend on oil extraction or production. Decarbonization is an opportunity to kick-start a green industrial revolution, but as more and more nations join this path to future prosperity, assets, technologies and capabilities that rely on fossil fuels will lose value, and that will put employment, exports and industrial innovation in oil-dominated economies at risk.

One such economy, Norway (the world’s third largest exporter of natural gas) today faces a unique challenge. Its industrial and investment structure is closely tied to hydrocarbon-based sectors and services (which in 2019 generated 36% of total exports), but the energy it consumes comes almost entirely from renewable sources (water energy conversion).

So perhaps the Norwegian economy is now ready for a green industrial transition, with the caveat that falling global demand for fossil fuels will lock in its main growth engine.

Norway’s dependence on hydrocarbons is a symptom of “Dutch disease”: the problem that occurs when one dominant sector thrives to the detriment of the others. The huge disparity in hydrocarbon investment compared to other industries attracts the most skilled professionals to the fossil fuel sector. At the same time, the extraordinary profitability of the oil and gas sector has generated excessive price and wage growth in the rest of the economy, creating difficulties for other exporters.

This is why Norway has been one of the OECD countries that since the late 1990s has lost the most international market share in the non-energy export sectors. During the last decade, Norway’s non-oil trade deficit has grown steadily and the share of the manufacturing sector in the economy has halved compared to the other Nordic countries.

To make matters worse, a recent report by the Norwegian Central Bureau of Statistics predicts that over the next decade, investment in the Norwegian energy sector will decline. While average annual investment in the sector over the previous decade exceeded NOK 170 billion (about $20 billion), between 2025 and 2034 that figure is projected to decline by about NOK 60 billion (even without oil production curtailment policies).

It is clear that Norway needs a new industrial strategy. In a recent report, we propose a way to use the technical and financial resources of the oil sector to turn Norway into a “green giant.” But the transition from oil extraction to a greener economy will not be automatic: it demands bold, but very well calibrated, action from the public sector. Government cannot micromanage the process, because it would stifle innovation, but neither can it leave it entirely to the market.

The solution is for governments to show the way with high-risk investments in the early stages, which will then be joined by private actors, with rewards for those willing to invest and innovate. In the case of Norway, an industrial strategy is needed that directs the state’s considerable financial resources towards investments in the creation of a new industrial base focused on green energy.

Norway has the world’s largest sovereign pension fund, but has not yet channeled its resources into investments in the green transition, inside or outside the country. On the contrary, Norway’s Statens Pensjonsfond Utland (SPU) is a major financier of some of the most devastating fossil fuel projects in the planning or development phase today. A recent report warns that just twelve of these projects will consume three-quarters of what remains of the world’s carbon budget, making it extremely difficult to limit global warming to 1.5 °C.

Under current Norwegian tax regulations, SPU deposits oil revenues in a fund earmarked for overseas investment. Every year Norway transfers an average of 3% of the value of the fund to the domestic economy, a sustainable withdrawal rate as it matches the expected return on the fund.

This policy has proved effective in limiting inflationary pressure from oil extraction, while providing an additional source of revenue to the state. But today Norway needs a patient and lasting financing process that makes economic diversification possible. As the current fiscal rules allow large public investments to be maintained outside the normal state budget, it is aggravating the Dutch disease by perpetuating a path dependency on oil.

But it does not have to be this way. It is possible to turn the SPU into a powerful investor with a sense of mission and presence at home and abroad. Instead of using oil revenues to recapitalize the fund, they can be directed to a new public green investment bank, acting in coordination with other public funds and agencies dedicated to the green transition.

The Norwegian national innovation system is characterized by significant state involvement. In particular, the Norwegian state owns 67% of the Norwegian oil industry’s flagship company, Equinor (formerly Statoil). But the Norwegian state-owned companies that were once key players in creating, out of nothing, the oil industrial ecosystem, have not played the same role in the green transition. Instead of reinvesting its profits in renewable energy sources, in 2019 Equinor announced that between now and 2022 it will spend $5 billion on buying back its own shares.

The impact of Covid-19 highlighted the risks of over-reliance on (volatile) energy markets. While the Danish energy giant Ørsted got through the pandemic without major inconvenience and did not halt the process of transition to renewable sources that it started a decade ago, Equinor had to cut dividends and take on debt to maintain its commitments to shareholders in a context of insufficient revenues.

Like its Danish counterpart, Equinor must become an energy giant with a sense of mission. This requires freeing its managers from the pressure to distribute dividends, returning it to the status of a fully state-owned company focused on the country’s economic future.

Mariana Mazzucato, Professor of Economics of Innovation and Public Value at University College London, is founding director of the UCL Institute for Innovation and Public Purposes. She is the author of The Value of Everything: Making and Taking in the Global Economy, The Entrepreneurial State: Debunking Public vs Private Sector Myths and, most recently, Mission Economy: A Moonshot Guide to Changing Capitalism.