THE ECONOMY

Lebanon Table of Contents

AS THE LEBANESE state fragmented, so too did the national economy. Many observers have argued that because of this fragmentation, there was not one economy in the late 1980s, but several. Areas held by some militia groups, most notably the Maronite Christian heartland controlled by the Lebanese Forces, appeared well on their way to becoming de facto ministates. These militias were successfully usurping basic functions of government such as taxation and defense.

Despite the fragmentation, there were still some shreds of the official economy. In late 1987 the main port of Beirut and Beirut International Airport were subject to intermittent government regulation. The Central Bank (also cited as Bank of Lebanon or Banque du Liban) maintained sizable financial reserves, although these declined sharply in the mid-1980s. There were spiraling budget deficits as the government attempted to reestablish the credibility of its security forces and maintain at least some social services.

Measuring the government's impact, however, was another matter. Although the government's financial role in the economy was growing, its role in the daily economic affairs of the Lebanese people was declining. The importance of the official economy in the late 1980s depended on where one lived and how one felt politically. But the economic collapse could not be separated from the human tragedy. For example, two of the most salient facts of life in Beirut in February 1987 were the collapse of the Lebanese pound to less than one-hundredth of a United States dollar and the request by Palestinian religious authorities for a ruling on whether or not it would be permissible for the besieged refugees in the camps at Burj al Barajinah and Shatila to eat their dead. In a country where violence had become endemic, where some 130,000 people had been killed and a further 1 million--a third of the population--had been injured, calculating the impact of the central government on the economy would be impossible.

In the years that followed the outbreak of the 1975 Civil War, political developments dominated economic affairs. Improved security conditions--such as from late 1976 to early 1978, or from September 1982 to January 1984--yielded considerable economic benefits, as relative peace enabled the recovery of commerce. Peacekeeping forces--Syrian, Israeli, United Nations, United States, and West European--brought with them favorable economic conditions in the communities where they were stationed. But the positive effects were frequently shortlived. For example, when Syrian troops entered Beirut in February 1987 (the first time a recognized power had attempted to enforce its authority in the capital since the February 1984 collapse of the Lebanese Army), there was a brief flurry of guarded economic optimism. The upswing of the Lebanese pound lasted only three weeks. But overall instability was the norm from 1975 to mid-1987, and it became clear that nothing short of a total change in the country's political and security structure--in effect, the end of sectarian partitions and militia rule--would lead to any sustained revival of what had once been one of the world's most vibrant economies.

By 1987 Lebanon had entered an era where reliable statistics on the state of the economy were usually absent. Lebanese economists were sometimes able to compile a few indicators, but the numbers were often based on incomplete data. But even without complete statistics, the downward trend of the national economy was obvious.

Bearing testimony to this trend, the Lebanese National Social Security Fund reported in May 1986 that 40 percent of the 500,000- strong private sector work force was unemployed. Industry was running at barely 40 percent of capacity, and per capita income was down to around US$250 a year in 1986, five times lower than eleven years earlier.

In 1985 estimates of the gross domestic product (GDP) varied from Lú30 billion to as high as Lú48.3 billion. In either case, GDP was no more than half of what it was in real terms in 1974.

Although the collapse of GDP began with the start of the Civil War, the fall of the Lebanese currency began much later. On the eve of the war, it required only Lú2.3 to buy a United States dollar. Currency values declined over the next several years, but it was not enough to destroy the basic Lebanese confidence in the pound, which was backed by substantial holdings of gold and foreign exchange. Whereas in 1981 the exchange rate had averaged Lú4.31 to the dollar, by the end of 1982, with the new government of President Amin Jumayyil (also spelled Gemayal) in office, the exchange rate was back to Lú3.81 to the dollar.

The pound, however, began depreciating rapidly in the aftermath of further Beirut clashes in early 1984 and the withdrawal of the Multinational Force (MNF) of peacekeeping troops from the capital. Although there was widespread currency speculation, the Central Bank could do little to investigate this problem became of Lebanon's tough banking secrecy laws.

Between January and December 1984, the pound lost just under half its value against the dollar, while in 1985 the trend gained speed, resulting in a further 60-percent erosion in value. The Central Bank was widely criticized, especially by the commercial banks, for failing to act decisively to halt the pound's slide. But even greater criticism was directed against commercial bankers and leading politicians, who were constantly accused of speculating against the national currency.

By 1986 the country was on the verge of hyperinflation as the pound lost almost 85 percent of its already shrunken value during the course of the year. On February 11, 1987, the currency crashed through the psychologically important barrier of Lú100 to the dollar and continued its fall. By August the pound was trading at more than Lú250 to the dollar. Compounding the problem was that these events occurred after a year in which the dollar had fallen sharply against most major international currencies.

The fundamental principle of the Lebanese banking system had been a freely convertible pound. Citizens were free to hold foreign currency accounts in their banks, and remittances received from friends and family living abroad could be processed with relative ease through banking channels. As the pound began its decline, the importance of foreign currencies (particularly the United States dollar) grew, and a "twin currency" economy emerged. Complex systems were soon set up to circumvent the banking system, not for fear of governmental interference but to prevent the loss of deposits or of letters of credit through bank robberies. In the twin currency economy, foreign cash and drafts on bank accounts held outside the country became increasingly common. It became impossible, however, to calculate how much foreign cash was entering the country once transfers began to bypass the banking system. But it was clear that most people were not receiving enough to retain their pre-1975 living standards.

By 1987 ordinary Lebanese were living in a very strange economy. Public services functioned according to the ability of the government to pay staff, the ability of different groups to tap into utilities (with or without official permission) and the ability of local groups (with or without official help) to keep services operational. The costs of basics, such as gasoline, home fuel oil, and cooking gas were all subject to government price restraints, yet prices could double or triple in times of shortages, as roads between refineries, gasoline pumps, and fuel depots were cut. People found the government price controls ineffective, and the struggle to secure vital goods and commodities reflected not so much a free market as a free-for-all. By 1987 a dozen years of conflict had shown them that economic control, as well as political power, came from the barrel of a gun.

By the late 1980s, years of conflict had distorted the economy. Total GDP was down, but the proportion of GDP contributed by the government was up. The national currency collapsed, and the country began sustaining balance of payments deficits. One commentator noted that 1986 marked the first time since the Civil War started in 1975 that Lebanon had suffered economic hardship to such an extent that it had affected the middle classes as well as the traditional urban poor. Another observer argued that Lebanon, once the model of modernity in the Middle East, was being threatened with "de-development."

For more recent information about the economy, see Facts about Lebanon.

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Source: U.S. Library of Congress