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Lebanese Economic Crisis

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Lebanese Economic Crisis

The Lebanese pound has continued to plummet, exacerbating the country’s struggles with unemployment, poverty, and fuel shortages. Since 2019, the currency has lost more than 90% of its value as the country has been hit by high debt. What are the main causes of the Lebanese Economic Crisis? How have the country’s economy and citizens been affected? And most importantly, what can Lebanon do now to recover? In this article, you will find out all the relevant Lebanese economic crisis facts.

Lebanese economic crisis summary

The Lebanese economic crisis is an ongoing crisis in Lebanon that was most pronounced in 2019. It was triggered by the shortage of the US dollar one of the country’s trading currencies.After the civil war in 1990, LebaLebanon’snomy relied mainly on the services sector. About 60% of the country’s GDP comes from trade, tourism and financial services.

Commercial activities in Lebanon are supported by the Port of Beirut, which is the most important port in the Arab world and a major source of national income before conflicts erupted in the region. Tourism in Lebanon also flourished due to its strategic location with mild climatic conditions and breathtaking landscapes of mountains, valleys and the sea.In addition, Lebanese banks have been wildly successful in raising international capital to support regional development. In 1996, some banks raised more than $2 billion in the international bond markets. The attractive interest rates set by the Lebanese Central Bank were the driving force behind this success. To compensate for the lack of domestic goods, Lebanon also imported many goods from overseas. In these transactions, the main currency is the US dollar. This contributed to the country’s considerable foreign capital funds.With the dominance of the services and banking sectors, the Lebanese economy became heavily dependent on the US dollar for nearly two decades. It was used interchangeably with the Lebanese pound in many transactions.

In 2011, wars broke out in Syria, Lebanon’s immediate neighbour. Fearing to invest their money so close to the war zone, many foreign investors transferred their funds from Lebanese banks to other countries. As a result, Lebanon suffered from a shortage of US dollar cash. The situation worsened in the following years and led to the biggest economic crisis in LebaLebanon’story.

Lebanese economic crisis causes

What were the causes of the Lebanese economic crisis?

The US dollar is one of the most important currencies in Lebanon. Its inflows from international trade and investment enable the country to pay debts and carry out daily transactions. For many years, since the service and banking sectors dominated Lebanon, the US dollar was used as a medium of exchange for the Lebanese pound. People could easily withdraw US dollars from local stores or supermarkets.

Where did the US dollar come from?

The abundant inflows of the US dollar came from the service sector (trade, tourism, banking) and remittances from Lebanese working abroad. The Lebanese government has also engaged in financial engineering a series of mechanisms to offer banks attractive returns on new dollars to attract foreign investment and flush more foreign currency into the government’s funds.

How did the Lebanese economic crisis start?

Around 2011, however, the US dollar inflow began to wane. This occurred when wars broke out in Syria, LebaLebanon’sghbour, causing foreign investors to withdraw their money from Lebanese banks for fear of losing capital. As a result, US dollar liquidity in Lebanon fell for the first time in a decade. In the years that followed, reserves of US dollars were nearly depleted. Banks had to restrict cash withdrawals in US dollars because they no longer had sufficient funds to meet demand. Faced with a lack of foreign capital, the Lebanese pound depreciated, and the country fell further into debt.

What was the government’s initial response?

To salvage the situation, the government exchanged its public debt in Lebanese pounds for Eurobonds, then exchanged for other currencies. However, this only temporarily helped to solve the problem. Soon, the country’s debt expanded.

Effects of the economic crisis in Lebanon

The economic crisis has serious consequences for the Lebanese economy. The growing debt, poverty and unemployment deeply affected the government and the citizens.

  • No more foreign cash withdrawals: the dollar shortage dragged on, and banks were forced to restrict foreign currency withdrawals. In 2019, the central bank closed for a full two weeks as LebaLebanon’slar reserves were finally depleted.
  • A sharp decline in the value of the Lebanese pound: as the currency crisis worsened, the Lebanese pound depreciated at a rapid pace, from a fixed rate of LBP 1,507.5 per USD to LBP 3,000 per USD in April 2020, LBP 14,000 per USD in March 2021, and LBP 22,600 per USD in January 2022.
  • Default on public debt: Lebanon was scheduled to repay a $1.2 billion Eurobond on 9 March 2020, with upcoming maturities in April ($700 million) and June ($700 million). Total debt amounted to 170% of GDP. This far exceeded the country’s capacity to pay and led to Prime Minister Hassan DiabDiab’souncement that he would not pay the Eurobond debt.
  • Inability to pay for imports: the lack of cash from abroad limits the country’s ability to pay for imports, including vital goods such as wheat and oil. Local businesses also struggled as banks could no longer provide them with short-term loans. As a result of the crisis, 785 restaurants and cafes were closed, leading to the loss of 25,000 jobs.
  • Growing poverty: as the Lebanese pound lost 90% of its value, up to 80% of the 6.5 million Lebanese now live in poverty. Meanwhile, basic commodities prices continued to rise sugar became 670% more expensive, while wheat, tea and rice increased by 1000% over the same period.
  • Fuel shortages: the central bank has stopped its fuel subsidies. Public utilities can now supply residents for only a few hours a day. For the rest of the time, they must rely on private generators. In October 2021, a 24-hour blackout occurred because the two largest power generators ran out of fuel.

lebanese economic crisis gdp Per Capita fell after peak of economic crisis 2019 studysmarterFigure 1. Lebanese GDP per capita fell sharply after the peak of the economic crisis in 2019. Created with data from data.worldbank.org - StudySmarter Originals

As we can see in Figure 1 above, the economic crisis hit the Lebanese economy hard. GDP per capita plummeted from around $7,600 to $5,000. This figure shows how much the standard of living has fallen in Lebanon, especially as the government struggles to provide its citizens with everything they need.

Lebanese economic crisis usd to lbp studysmarterFigure 2. USD to LBP Market Exchange Rate. Created with data from Lirarate - StudySmarter Originals

Figure 2 above shows the exchange rate of the US dollar to the Lebanese pound. The decline in the value of the Lebanese pound shows how uncertain investors are about the Lebanese economy. Although a depreciation of the currency leads to cheaper exports, imports become more expensive. This further exacerbates the supply shortage in Lebanon and causes inflation to rise.

Lebanese economic crisis solutions

To help resolve the crisis in Lebanon, the World Bank Group, the EU, and the UN have recommended the 3R framework reform, recovery, reconstruction in the short and medium-term. The recovery should be people-centred, transparent, inclusive, and accountable.

Short-term approaches include restructuring the debt and financial sectors and redesigning the monetary and fiscal framework. In the medium term, the country should focus on building better institutions, better governance, and a better business environment.

As we have seen, the Lebanese economic crLebaLebanon’siggest crisis in Lebanon’s history. It has dealt a severe blow to both the economy and the living standards of its citizens. Many people are struggling with poverty, fuel shortages and unemployment, while the government faces the consequences of enormous debts and dwindling public trust. It will take a long time for Lebanon to fully recover from the effects of the economic crisis.

Lebanese Economic Crisis - Key takeaways

  • The Lebanese economic crisis is ongoing in Lebanon, most pronounced in 2019.
  • The crisis arises from the shortage of the US dollar, which is one of the main trading currencies in Lebanon.

  • The causes are the government’s financial engineering and the political unrest in the Middle East regions.

  • The crisis has led to a sharp drop in the value of the Lebanese pound, rising inflation, unemployment rate, government defaulting on its public debt, and a shortage of fuel and other key imports.

  • The World Bank, the EU and UN recommended that Lebanon recover in the short and medium-term through the 3Rs framework reform, recovery, reconstruction.

Frequently Asked Questions about Lebanese Economic Crisis

The Lebanese economic crisis is an ongoing crisis in Lebanon that was most pronounced in 2019. The shortage of the US dollar – one of the country’s main trading currencies – triggered the crisis. The crisis has resulted in a sharp drop in Lebanese pound value, rising inflation and unemployment rate, the government’s default on public debts, as well as a shortage of fuels and other important imports. 

After the Civil War, Lebanon received a great inflow of foreign currencies from tourism, imports, remittances by Lebanese working abroad and foreign aids, and the government’s financial engineering scheme, which offers investors attractive returns on their foreign currency, posits. As it broke out, foreign clients withdrew their money, and the inflow of the US dollar in Lebanon declined. Since Lebanon relied heavily on the US Dollar for most transactions, the shortage of foreign currency leaves the country in a currency crisis and spells disasters for its economy. 

Lebanon Economic Monitor reported the Lebanese financial crisis is among the top ten most severe crises since the 19th century. From 2018 to 2021, the GDP dropped from $55 billion to $20.5 billion. (World Bank). 

The causes are the government’s financial engineering and the political unrest in the Middle East regions.

Yes. The Lebanese economic crisis is ongoing and was most pronounced in 2019.

Final Lebanese Economic Crisis Quiz

Question

What is the Lebanese economic crisis?

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Answer

The Lebanese economic crisis is the ongoing crisis in Lebanon, caused by the shortage of US dollar reserves. 

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When did the economic crisis in Lebanon become most apparent?

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Answer

Since 2019. 

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What happened to the Lebanese economy after the Civil War?

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After the Civil War ended in 1990, the Lebanese economy leaned on the service sector. They import many things from many countries, and the US Dollar was one of the main trading currencies. The Lebanese Central Bank also encouraged foreign deposits by offering attractive interest rates through financial engineering schemes. 

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What is the financial engineering the Lebanese government adopted?

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Answer

Financial engineering is a range of mechanisms to offer people attractive returns for new dollars.  

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Where does the inflow of the US dollar in Lebanon come from?

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Answer

Tourism and imports.

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Why did the US dollar inflow in Lebanon slow down since 2011?

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Government’s failure to carry out reforms as they promised.

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What is the action of Lebanon to recover the US dollar inflow in the beginning?

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Answer

The government exchanged its public debt to Eurobonds, later traded for the actual foreign currency. This resolved the liquidity shortage for a while, but the country’s pool of debt in dollars became wider.

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What are the effects of the Lebanese economic crisis? (You can choose more than one answer)

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Answer

No more foreign currency withdrawal.

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How did the crisis affect the Lebanese pound?

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Answer

The Lebanese pound lost 90% of its value and depreciated quickly from the pegged rate of 1,507 LBP per USD to 22,600 per USD in Jan 2022. 

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How did the crisis affect is the life of the Lebanese?

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80% of the population are now considered poor.

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What is the framework that can help resolve the Lebanese financial issue?

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Answer

The 3R Framework – reform, recovery, reconstruction.

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Why did Lebanon default on its debt of Eurobond?

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Answer

The debt far exceeded the country’s ability to pay and was 170% of Lebanese GDP in 2020. 

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How important is the US Dollar in the Lebanese economy?

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Answer

The US dollar is used interchangeably with the Lebanese pound in daily transactions. 

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Why does financial engineering lead to the crisis in Lebanon?

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Answer

Banks promise interest rates they can’t pay, which lead to government debt. 

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Why did the Lebanese bank restrict money withdrawal in foreign currency after the crisis?

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Answer

There was a shortage of US dollars. Banks have no foreign currency reserve left to provide for customers. 

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