International Policy Digest

Dalati Nohra
World News /02 Aug 2020
08.02.20

Lebanon Hunkers Down for a Long Rescue Aid Waiting Game

Time is running out in Lebanon. The recent news that a team of International Monetary Fund (IMF) negotiators walked out of talks with the country’s leaders probably doesn’t surprise too many in Lebanon, which is in the midst of an economic meltdown with spiraling food prices, a currency in freefall, and very real worries that this small country is on the abyss of a state of emergency.

It’s very tempting to simplify the crisis and polarize it into two camps: those with Hezbollah and those against. But the reality is a lot more nuanced. The war which is raging now in Lebanon is really between the elite (who are aligned politically to their warlords but see less significance in the colors of their armbands) and the rest. The middle class has practically vanished in recent months as whoever had savings, has lost them in the devaluation of the local currency by the banks. Many lost their jobs and stories of people who were once rich begging friends in Europe for money are becoming common.

The elite, whether they are part of Hezbollah’s ruling coalition government or not, are holding the country for ransom. What we are witnessing is a game of Russian roulette played by the state itself whereby the super-rich – who are not affected by hyperinflation in local currency – are playing a waiting game with the rest of the country’s citizens who have lost everything and are struggling even to buy food.

The latest talks with IMF negotiators were a farce as it became clear quite soon that any deal that the politicians sign up to, had to have a built-in “kickback” to them, both financially and politically. How can that be the basis of talks?

The problem for those in power – and for those they position in government – is that an IMF plan has too many scenarios which expose the elite and its stupendous looting going back decades. And worse, it takes away key competences, for them to carry on manipulating the economy.

Among the IMF’s demands are that Lebanon audits its central bank and issues official capital controls to replace informal withdrawal and transfer caps imposed by the banks when the protests kicked off in October of last year. The Central Bank in Lebanon is highly politicized and a black hole of corruption, embezzlement, blackmail, and financial irregularity. Regulating Lebanon’s central bank would be like trying to convince junkies to convert to smoothies or asking the Lebanese to respect road traffic laws.

This idea is almost as fanciful as the proposal that the country “floats” its currency so Lebanese can follow a single exchange rate.

The IMF talks come as tensions rise between Washington and Hezbollah, the Iran-backed Shiite movement, which holds most of the power in Lebanon, which Washington has listed as a “terrorist” organization. The IMF walks a tightrope and things are trickier as sanctions imposed both on Iran and Hezbollah make doing anything in Lebanon complicated.

There is a general feeling that IMF officials and their Lebanese counterparts are prepared to wait the remaining four months for U.S. elections to happen, before real negotiations can begin. And even with a change then, the current administration will remain in place until January 20, 2021.

Unfortunately, whenever there is a whiff of international aid, all political factions only think of themselves, which makes negotiating very hard. It’s like the IMF is actually negotiating with half a dozen countries at the same time who all share the same area of land.

The extent of the losses is also central to much of the problem. The banks and the government disagree strongly over the formula which should be used as the banks are worried that they will be hit harder for losses incurred. And add to that there is a strong will by the political class (the elite) to only allow the IMF reform plan through if it gives them – as opposed to the Diab government – both the credit and a boost to their control.

In other words, an IMF deal has to stink of corruption itself if it is to get through.

Seems impossible to grasp, but one obvious outcome in all this is that Hezbollah, after the November U.S. presidential elections, will give up on Prime Minister Diab who has his own place in the Oxford dictionary under the word “useless.” Diab’s resignation could be a new smoke and mirrors scenario for those who believe they can pull off a massive deception by allowing a $20 billion-dollar aid package to both save the people and save the elite. Two birds, one stone.

The real question in this maze is how long has Lebanon got? Does it have four months before something gives?

Suicides are up, as is crime. People are struggling to eat. Many argue that when people are so desperate they are even more vulnerable to their political masters controlling them. And this is perhaps the heart of the matter, which gives the elite in Lebanon the confidence to play the long game.

Protests which started in October last year shook the political class but have since assured it that protests alone will achieve nothing except work as a relief valve for many out of work people who need to chant. In reality, not all protests are what they seem. Very few are random and represent people who genuinely want the present political system to be scrapped. Most are organized by political groups which see an opportunity to use the crisis as a way of leveraging Hezbollah.

Hariri and Geagea in particular think that Hezbollah’s power can be compromised by the demonstrations as a polarized cause takes hold in Lebanon and identifies the Iranian-backed political group as responsible for the chaos. In reality, it is all parties who have invested in a corrupt system of governance—that uses the confessional system as a way of scaring people—which gives strength to the militias and their leaders to keep their positions even while draining the economy of billions. Just recently it was revealed that $6 billion had been moved out of Lebanon when the crisis took hold.

On July 21, President Aoun’s office announced that the government had hired Alvarez & Marsal, a New York-based firm to conduct a forensic audit of the Lebanese Central Bank’s accounts as well as two other major companies for traditional accounting audits as billions had vanished.

However, it’s the system which is entirely corrupt to the core. It’s simply that Hezbollah is bigger and more powerful and so appears to be a bigger culprit. It is that same system now that is organizing demonstrations, often appearing more like street parties, which seems to be arguing: keep the same system, just push Hezbollah out of it so we can control it more.

Demonstrations are not the answer. An overhaul of the entire political system is the only way forward but as the IMF talks have shown, we’re about a thousand years away from that ever being an option. The Lebanese are battered and exhausted, but their failure to really rise up and organize a real protest movement, which genuinely represents a problem for the elite, shows that they are still suffering from Stockholm Syndrome when it comes to berating their captors whom they claim to hate.

We are still stuck in Lebanon in a trance which is, in fact, pushing people closer to their political clans/militias which, in turn, are determined to play a much, much longer waiting game. But as the weeks become months and the lira-dollar peg keeps climbing, it doesn’t take an economist to see that Iran believes it can play a long game too in Lebanon as its own internal economy with Hezbollah is dollar-based and bypasses banks.

For anyone, directly, or indirectly, working for Hezbollah, this means that they are also not affected by inflation. In other words, Hezbollah and those on its payroll get richer and stronger as each month passes, as U.S. sanctions forced it to become an autonomous economy which operates parallel to the Lebanese one. Who said Lebanon was an irony-free zone?

This article was originally posted in Inside Arabia.