Will the Beirut port explosion bring about true change in Lebanon?

In Beirut’s Karantina, an area devastated by an explosion at the city’s port on August 4, volunteers have stepped in to help clean up its streets.

They are helping the area’s vulnerable – and now homeless – residents where the state is not, braving fragile infrastructure caused by the blast, which killed at least 171 people and injured more than 6,000.

It is a cruel allegory for life in Lebanon, where a systemically corrupt government has pushed its people to breaking point.

“This is the saddest part,” a senior Lebanese banker tells Euromoney. “The people there have nothing anymore, there is no state, there is no government.

“Thank god for the young people. They are coming to sweep, to take away the trash. Thank god for civil society, because the state is completely absent.”

Beirut-Karantina-clean-up-780.jpg
Volunteers helping in Karantina. Source: International Committee of Red Cross

Amid an economic crisis in Lebanon and global health pandemic, almost 300,000 people have lost their homes. St George Hospital, one of the biggest in Beirut, was severely damaged and forced to close.

Government estimates put the cost of rebuilding the port and nearby buildings at $10 billion to $15 billion, which is equal to 20% to 30% of GDP, according to MUFG. The bank’s preliminary estimates show real GDP shrinking by more than a quarter this year at -27%, with risks skewed to the downside.

Humanitarian aid

World leaders and international organizations have pledged nearly $300 million in emergency humanitarian aid, but have made it clear that no further money will be available until there is progress on political and economic reforms.

That Lebanon has been hit by such a catastrophe amid a debt-fuelled economic crisis, which has seen the currency lose around 80% of its value since October, is cruel and unjust. But if any hope can be gleaned from this incident, it is that it has paved the way for reform.

Inertia, entrenched corruption and the complex fabric of Lebanon’s political class have meant that there has been little progress on this front since a government was formed under prime minister Hassan Diab in January.

Diab’s resignation on Monday, as public anger fuelled violent street protests, has raised hopes that a new technocratic government can be established to push through the necessary reform.

This decision leaves the country in limbo – unable to negotiate with creditors, bond holders or the IMF. One analyst described the IMF deal as “dead in the water”.

“The current government could not have enacted these reforms,” the banker tells Euromoney. “We need a new government made of specialists. There will be resistance from Hezbollah [and other parties], but the pressure is too high and the cost of the total descent of Lebanon into chaos is too costly for even Hezbollah to bear.”

Beirut-port-780.jpgBeirut port. Source: International Committee of Red Cross

Hezbollah

The presence of Iran-backed Hezbollah in Lebanon, which the US and UK governments deem a proscribed terrorist organization, has paralysed the political system. As a political organization in Lebanon, it has won votes in legitimate elections and forms part of the government. It has the largest non-state military force in the country.

Others are less optimistic there is the will to create the political reform needed to enact real change, even if a technocratic government is brought in, and are predicting months of paralysis.

“Already we see the factions, the power brokers, the elites trying to stich up new arrangements,” says Charles Hollis, managing director of Falanx Assynt, a political and cyber risk consultancy.

“There is a lot of anger on the streets, but it seems mostly that the Christian communities that were hit worst by the blast. I’m not sure the Hezbollah supporters have been out on the streets demanding change.”

Standing firm is the only way for the international community to influence positive change in Lebanon 

Diplomat Nawaf Salam, a judge on the International Court of Justice, has been talked about as a possible successor to Diab, but even his election would feed straight into the traditional narrative that the prime minister has to be a Sunni.

“Even the candidates we are talking about as technocratic fall into the old sectarian pots,” says Hollis.

It is not in Hezbollah’s interest to encourage anything that leads to the beginning of an independent government, says Hollis.

“Their interest is to make sure nothing fundamental changes, so their control over parts of the economy isn’t undermined,” he adds.

The return of a Saad Hariri-led government backed by Hezbollah is possible, Hollis says.

“We are in this terrible standoff and it’s difficult to see a way through,” he says. “I think we’re going to see instability for at least a year.”

IMF stance

In the face of such a costly humanitarian disaster, some have called on the IMF to soften its stance and stop insisting on reforms before giving aid. This would not be the right thing to do and standing firm is the only way for the international community to influence positive change in Lebanon.

Managing director Kristalina Georgieva reiterated the IMF’s stance on Sunday, saying: “This is the moment for the country’s policymakers to act decisively. We stand ready to help.”

The IMF is calling on Lebanon to restore the solvency of public finances, put in place temporary safeguards to avoid continued capital outflows, reform state-owned enterprises and expand social support for the country’s most vulnerable people. Only then will it agree to a programme.

In March, the Lebanese government released a four-pillar restructuring plan, imposing $83 billion losses on the banking system, wiping out shareholders and bailing in depositors to restore the country to positive GDP growth in 2022. However, little progress has been made.

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