Lebanon: A Final Chance to Seize

The Worst Economic Crisis Since the Mid-19th Century. This is what Lebanon has been enduring since 2019, suffering an extraordinary contraction of more than 60% of its GDP over four years, a currency that has lost 98% of its value, inflation rates at times nearing 200%, and a poverty rate that now affects 80% of the population.

For the first time in its history, Lebanon defaulted on its debt in March 2020, failing to pay $1.2 billion that had come due. This default was only the first in a series, as Lebanon’s public debt now exceeds $100 billion, reaching a staggering 280% of its national GDP. This debt, denominated 60% in foreign currencies and 40% in Lebanese pounds, has been the subject of various restructuring plans, all of which have failed for three main reasons: political instability, the undeniable lack of technical expertise among decision-makers to address a problem of unprecedented complexity, and the presentation of plans that were both unrealistic and unfeasible. One such fanciful plan proposed giving depositors the illusion of recovering their funds over a period of 11 to 15 years, offering them crumbs in the short term and promising further payments in the distant future.

At the heart of Lebanon’s financial crisis lies its banking sector. Lebanese banks, having heavily invested in high-yield bonds issued by the central bank, were hit hard by the state’s default, as these investments lost nearly all their value, threatening the banks’ solvency. Faced with estimated losses exceeding $70 billion out of $120 billion in deposits held in 2019, Lebanese banks had no choice but to impose informal capital controls, which outraged the population and fueled widespread anger. Improvisation and makeshift measures dominated, with a system of multiple exchange rates emerging amid this chaos. Meanwhile, the central bank, the Banque du Liban, accumulated nearly $80 billion in losses, with its foreign currency reserves virtually depleted.

Today, the political stalemate seems to have been resolved, as Lebanon finally has a new president, elected with a comfortable majority and broad consensus. Consequently, the value of Lebanon’s eurobonds, previously in a “zombie” state, has surged in recent days, anticipating a debt restructuring within the next 12 months. The challenges are Herculean, but there are clear paths to save the country and alleviate the suffering of its population.

These include the forced consolidation of Lebanese banks to create fewer than ten viable entities, the establishment of a “bad bank” to isolate toxic assets, and the swift unification of exchange rates through the implementation of a “crawling peg,” a system where a currency is allowed to depreciate (or appreciate) gradually at a predetermined rate rather than abruptly. Negotiations with creditors for a significant haircut (between 60% and 70%) on eurobond debt must be prioritized, alongside the gradual restoration of confidence.

Lebanon’s wealthy and educated diaspora must be mobilized through the subscription of “diaspora bonds,” backed by future revenues from Lebanon’s oil and gas resources. Expert estimates suggest that Lebanon’s reserves include between 340 and 700 billion cubic meters of natural gas and 865 million barrels of oil.

The absolute burden of Lebanon’s electricity sector must be addressed through privatization, enabling state investments in renewable energy and infrastructure projects in sectors like ports and water. A thorough and rapid tax reform aimed at improving tax collection and broadening the tax base—especially in the under-taxed real estate sector—is crucial. A determined digitalization of the administration is essential to reduce corruption, which must go hand in hand with the establishment of an independent anti-corruption authority. Finally, a universal social safety net should complement these measures.

Only by adopting all these measures quickly and resolutely can Lebanon and its people hope to restore the prosperity they once knew.