The Lebanese Official Budgets Toward State Bankruptcy: A Comparative Approach to 2019, 2020, and 2021 Budgets

Abstract

The root causes of the Lebanese economic crisis extend beyond a mere financial issue. It is political and sociological, as the formation of sectarian divisions has been deeply marred within the various socio-political systems of the country. Each power is exercised through a particular religious faction, which has enabled the political elites to exploit state apparatuses in their favor, serving their sectarian followers to the detriment of the government and the general populace. Political leaders divert public spending for infrastructure and social services toward intense clientelism. Instead of spending on social welfare programs for citizens, leaders spend on buying loyalty by providing jobs, direct aid, and other benefits to their followers. Such adverse practices by political clients equally drain state apparatus resources, which in turn result in a budget deficit and the imposition of exorbitant taxes on the general population to fund them. This led to regressive tax policies, which, combined with existing wage stagnation, had devastating impacts on lower- to mid-wage earners. At the same time, political elites and their cronies financially enjoyed expensive privileges, resulting in unchecked, skyrocketing economic disparity, which aspect shaved the state’s authority. The Relationship Between the Lebanese Government and the Central Bank: Lebanon and its government had a pre-established relationship with the Central Bank, which held a somewhat autonomous position, playing a pivotal role in the political battlefield between the parties. The Central Bank had different policies for currency issuance and external debt servicing, which were not regulated by law and were thus politically charged. Before the Collapse - The Lebanese government, along with the central bank, was already in a cycle of accumulating debt, which continued to compound and ultimately led to an economic collapse. Due to administrative inefficiency and corruption, the government was operating with frequent budget deficits, which led it to depend on the central bank to finance its expenditures. The Banque du Liban (BDL) employed engineering monetary policy strategies by engaging in high-interest financial instruments, aiming to attract foreign deposits and maintain the Lebanese lira’s peg to the US dollar. Although these policies were able to provide some short-term stabilization to the economy, they created a financial bubble that relied on capital inflows. To sustain their clientelist networks, political parties were able to stabilize the economy and subsidize public sector employment. Even then, this tactic was unfeasible due to a growing dependency on foreign reserves that were not being provided by productive economic activity. During the Collapse - When the financial crisis struck in 2019, the government was unable to effectively manage the situation and address the structural flaws in the 1 economy. The central bank’s policies of subsidizing essential goods, such as fuel, medicine, and food, have cost the state over $15 billion. This unsustainable spending drained foreign currency reserves, yet the government did not intervene to adjust policies or introduce reforms. Instead, political leaders allowed the economic deterioration to continue, likely because taking corrective action would have exposed their roles in the financial mismanagement. The government’s inaction also allowed well-connected elites and businesses to profit from the subsidies, buying subsidized goods in bulk and selling them on the black market at higher prices. This phase of the crisis revealed the complicity of both the government and the central bank in prolonging an unsustainable system at the expense of ordinary citizens. Post-Collapse (2022-Present) - As Lebanon’s financial situation deteriorated, the general public's outrage did not affect the relationship between the government and the banking sector. To such an extent that even when the government declared a state of bankruptcy, the banking sector was not held accountable. At this point, the Association of Banks in Lebanon (Jamiyat al Masaref), a powerful and influential organization representing the interests of banks in Lebanon, had strong relationships with the political dictatorship, ensuring that depositors bore the brunt of the losses rather than the banks themselves. During this period, banks imposed capital controls, which prevented citizens and bank depositors from withdrawing their savings, but not those with influence and power, who could freely move their assets abroad. During this period, no profound changes were made in the banking activity or legal responsibility for embezzlement. The government chose to do nothing by allowing the situation to fade into the background over time, effectively using it as a means to normalize the crisis. The Elimination of the Lebanese Lira: One of the most significant yet underdiscussed outcomes of the economic collapse is the virtual de facto elimination of the Lebanese pound (LBP) as the country’s official currency. In recent years, the LBP has lost nearly all its power and value as a means of trade. Today, actual trade in Lebanon is conducted almost entirely in U.S. dollars. This shift has eliminated the characteristics of Lebanon’s official currency, converting the market into a dollar-based system without formal state acknowledgment. The absence of consideration on this matter suggests that political parties would likely prefer to avoid addressing the issue, as it would highlight their responsibilities toward the subject and necessitate restructuring the entire monetary system, as well as introducing reforms that could weaken their grip on economic power. Conclusion: The Lebanese government’s failure to take action in response to the economic crisis is, in itself, a deliberate strategy. By allowing time to pass without implementing reforms, the government is relying on the population’s gradual adaptation to the new economic realities. As people become accustomed to financial hardship and the erosion of their purchasing power, their ability to mobilize against those responsible diminishes. The public's growing disinterest in both the government and the banking sector is a result of economic exhaustion, a lack of alternatives, and a fear of further instability. Ultimately, the ruling elites have managed to maintain their influence by ensuring that no structural reforms are implemented, instead relying on external factors, such as foreign aid or regional political shifts, to provide temporary relief. This approach has left Lebanon in a state of prolonged stagnation, where the population continues to 2 bear the consequences of a crisis engineered by the very leaders who claim to represent them. This paper documents the chronological events that led to the collapse of the Lebanese economy, it explores how the political, sectarian, and economic dynamics affected Lebanon’s fiscal revenues and decision-making related to Lebanon’s public budgets by conducting a comprehensive and contextual analysis of political and sectarian influences, as well as other external influences that contributed to the economic collapse of the state, Exploring how the Lebanese government handled state spending and expenditures vis-a vis the declining economic situation and how this was incorporated into the official budgets for 2019, 2020, and 2021. What are the central policies that the government adopted or did not adopt to protect the Lebanese pound and the economy, and how do these policies impact the public budget? Do austerity policies do more harm than good, and is cutting public sector wages the best solution for plugging a budget deficit in an economy that has suffered years of low growth? When analyzing the influence of political sects and parties, such as the Free Patriotic Movement, Amal Movement, and Future Movement, on financial decision-making in Lebanon from 2019 to 2021, it becomes clear that political leadership plays a significant role in Lebanon’s economic crisis and decline. The governance model, which is heavily influenced by the concept of sectarianism, prioritizes the interests of sectarian leaders over the nation’s public and economic needs. This manipulation of benefits in favor of the ruling class, rather than the people, is a stark illustration of the impact of political influence on financial decision-making. Lebanon’s economic collapse is not a singular event, but a complex and ongoing crisis that has been unfolding over several years. The correlation between political and sectarian leadership and financial decision-making underscores how political mismanagement, sectarianism, and corruption persist as root causes of the collapse of the Lebanese pound, soaring public debt, and widespread poverty. Moreover, external events such as the promises of petroleum revenue, Saad Hariri’s resignation, the October 2019 revolution, and the CEDRE conference have only added to the complexity and severity of the crisis.