Will the world come to the aid of Lebanon’s shattered economy?

Lebanon's economy had already fallen over the precipice before this week's horrific blast, says Ben Chu. Will this week’s tragedy break the impasse and unlock a much needed International Monetary Fund rescue package?

The IMF had demanded major structural financial reform in Lebanon in return for a state bailout (AP)

The massive blast in Beirut’s docks has devastated a considerable part of the physical infrastructure of the Lebanese capital. But in truth the Middle Eastern country’s economy was already shattered before the explosion, drowning in its worst crisis since the 1975-90 civil war.

The spill overs from civil war in neighbouring Syria have been considerable, with around 1.5 million refugees fleeing to Lebanon over the past decade, equivalent to a quarter of the country’s previous population.

But severe domestic economic mismanagement and gross corruption from the Lebanese political elite compounded the damage many times over.

The economy stagnated last year, with a fifth of the workforce unemployed and almost 30 per cent of young people out of work. Inflation was vaulting higher.

On top of this came the state-ordered lockdown in the face of the coronavirus pandemic, which crushed activity completely and imposed a brutal toll on the millions who rely on Lebanon’s informal economy for survival. In the absence of an adequate social safety net, poverty has, inevitably, surged to desperate levels.

Lebanon’s hospitals were also under increasing strain from the Covid pandemic, with detected cases starting to rise ominously in recent weeks.

Like Beirut’s harbour, Lebanon’s public finances are a disaster zone. The national debt stands at one and a half times the country’s national income and the government’s budget deficit was just shy of 10 per cent of GDP last year.

The repercussions of Tuesday’s blast would likely have tipped the state’s finances over the edge were it not for the fact that they already rolled over the precipice several months ago.

Lebanon defaulted on its sovereign debt repayments in March and was already deep in talks with the International Monetary Fund for an infusion of $20bn from foreign states to enable the country to pay for its vital imports and enact an urgent restructuring of its economy.

Those talks had been going badly, with the two parties unable to agree on a programme of domestic reforms – among them reform of the country’s subsidy-riven electricity sector and major structural financial reform – in return for the assistance.

IMF sources briefed, alas credibly, that Lebanon’s elite appeared more interested in protecting their own narrow financial interests than in rescuing the country’s economy.

In the wake of this week’s blast, foreign nations – including regional powers Iran, Qatar and Jordan – have pledged humanitarian assistance for Lebanon in the form of medical equipment and rescue teams. But what of the broader (and more expensive) international economic rescue package?

Will this week’s tragedy break the domestic Lebanese impasse and unlock the IMF bailout? Or will the IMF decide that the country’s urgent need for funds now has to take precedence over commitments to structural domestic reform and a clampdown on corruption opportunities?

The price of corruption

IMF

Or, a third possibility – might the preoccupation of Western governments with their still raging domestic coronavirus emergencies prove an obstacle to a deal?

It is hard to predict. Yet it’s somewhat encouraging that the bureaucracy of IMF remains operational in this pandemic, so the mechanism for delivering the financial aid is not broken provided a decision is taken to release it.

Western political engagement with Beirut could be the key. The decision of France’s Emmanuel Macron, to fly to the Lebanese capital suggests Paris, at least, recognises the scale of the emergency.

But whether other Western governments will engage as fully as is plainly warranted with the unfolding Lebanese economic disaster remains to be seen.