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.
