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Will Beirut Survive The Explosion?

Beirut, the capital and largest city of Lebanon suffered a massive blast on August 4 with at least 135 people dead and thousands severely injured. The explosion probably was the biggest blast in the country since the Civil war. Places and infrastructure within a 6-mile range are reported to be damaged. Explosions of such magnitude occurred in history have shown that only joint efforts of the government and its citizens, along with foreign financial and philanthropic aid can gradually revive the natural state of the economy. Such devastation could be challenging to overcome for an Economy at the best of its times, but was Beirut’s economy in good shape?

[Image source: BBC.com]

Background

The Lebanese economy is essentially service-oriented, its main growth sectors driven by banking and tourism. However, it has a long history of severe economic crisis even before COVID-19 pandemic. The country was weak and declining financially, economically, politically and in its social way of life.

Political Strangle

Lebanon imported 85% of its food as on December 2019. It was highly depended on debt for most of its imports of food and fuel. The country's government made constant attempts to maintain the determined exchange rate since the Lebanese pound was pegged to US dollar in September 1999. Still the currency started losing value in the year 2019 and almost sank to 20% of its value. This was due to the large expenditure on imports that increased government’s total debt levels. Lebanon’s public-debt to GDP ranked third highest in the world.


The peg was sustained for a long time with a “Ponzi scheme” as the currency depreciation was deferred for years with financial engineering. The scheme involved the country's Central Bank raising finances via negotiations with the IMF and neighboring countries. The central bank also engaged in buying funds from commercial banks at unreasonably high interest rates and instructed banks to make zero-interest credits for five years to develop individual and institutional businesses.

Economic Turmoil

Political motives framing the economic policies were slowly exposed, lenders refused to extend further monetary help and there was shortage of money supply. Being a cosmopolitan, Beirut abodes 18 religion groups but the government posts are said to have risen from a narrow pool of families who want to preserve control. With curtailed money flow, banks began credit rationing and imposed limits on borrowing money which led to mass panic and protests. Inflation soared high and fiscal deficit widened. To fix the negative balance, government imposed greater taxes on tobacco, petrol, voice call and messaging services like WhatsApp and that further brought public disapproval and strikes.

NGO Transparency International places Lebanon 138th out of 180 countries based on the estimates of corruption perception index. Failure of the Lebanese banking system reduced the remaining faith of people off the government. Even the blast is argued to be a consequence of the corruption, neglect and incompetence on the part of workers and officials responsible for storage and disposal of the ammonium nitrate chemical that caused the explosion.

Social Activism

The economy couldn't be in worse health. Decreasing international trades, soaring prices, unemployment, corruption, falling tourism and banking industry, food shortages led to the fall of the government. The currency dived as the new government under the next prime minister, Hassan Diab failed to develop a unified strategy for resolving economic problems.

With Covid-19, the situation worsened and brought new challenges for the whole world. Lebanon’s economy was expected to contract by 12% this year, according to IMF data. A ratings cut from Moody’s has brought Lebanon’s credit score next to that of Venezuela’s.

The blast took a toll of so many lives; ruined the grains stock and 60% of all imports from that port; all the infrastructure collapsed; and severe damage to sensitive human organs such as ears, lungs; and victims suffering from heat-radiation effects. The seaport and airport were also damaged during the explosion which again is a hit to the economy on the trade side. A lot of European and Arab governments extended immediate relief.

Beirut formed the region’s financial hub harboring a seaport and an airport. The day following the explosion, thousands of people gathered together with the sound of glass being swept up on Beirut’s streets. The residents did this without much support from official agencies and might have realized that country needs change in its political fundamentals front and increased social awareness.

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