Lebanon is a free market economy in West Asia which is presently facing an economic and political crisis. The economyLebanon is a free market economy in West Asia which is presently facing an economic and political crisis. The economy had been suffering from huge government debt (debt-to GDP ratio being 150% by 2019) and huge trade deficit, balanced only by foreign remittances and external debt. The country for a long time had followed a policy of deficit financing for funding government spending. By 2019, the budget deficit built up rapidly and the government had proposed another temporary remedy to tax free calls to raise revenue. This hurled the people into protests and political unrest. Political crisis caused a decrease in capital inflows until gradually they froze, which affected the fixed exchange rate pegged to dollar (1500 pound per dollar) and into devaluing the Lebanese pound. Reduction in dollar inflow caused a liquidity crunch, since dollar was also a fiduciary currency in the both domestic and foriegn markets.The country going into a lockdown, just at a time when the currency devaluation(fall in purchasing power) had squeezed the last pound of savings out of middle and low income groups, spiralling them into unemployment, inflation and subsequently poverty. The World bank estimated that 50% of Lebanese population could be pushed below the poverty line by 2020 if immediate action is not taken.

Loss of confidence of citizens and investors in the government was a consequence of temporary vote bank policies adopted by corrupt politicians. Foreign aid seems to be a far shot, given their frequency to default on economic reforms. Though CEDRE and foriegn countries like France and UK have advanced ‘soft’ loans to the Lebanese government, economists believe that external aid would be unproductive and an additional debt burden on the already bleeding financial system unless the government inculcates greater transparency and accountability to the public.

Lebanon economic policies should be directed towards increasing self-reliance in the economy, mainly in manufacturing sectors to boost employment. Financial policies to stabilize the economy are of primary concern. Actions should be taken to handle the refugee situation, and stop the drain of human capital out of the country. Improving the socio-economic conditions of the people is the need of the hour. Evidently, Lebanon’s government has a long way to go before it can earn the confidence of its people and the foreign investors and stabilize the economy.

Written by

S P Bharani, Intern

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