Lebanon Report – October 2019

Lebanon in Revolt

Following the reported imposition of a “WhatsApp Tax” by the cabinet on October 17, a small protest in Beirut escalated in an unprecedented manner to all areas of Lebanon as thousands of people mobilized in opposition to new taxes.^[1] The underlying reasons however go much deeper to include poor provision of basic state services such as power outages, rampant corruption, political favoritism, rapidly declining socioeconomic conditions, and absence of trust in the ruling parties. These long term reasons were overburdened by a series of event accumulating since August, including the downgrading of Lebanon’s credit Rating by international agencies, an ongoing devaluation of the Lebanese currency (although officially the rate is pegged to the US dollar), and mismanagement of wildfires that ravaged the country only a few weeks ago.[2]

Major roads were blocked as the country entered into a state of paralysis for 12 consecutive days until Hariri’s resignation on October 29. PM Hariri’s attempts to convince protesters to leave the streets by issuing a reform plan announced on day 5 failed to achieve its desired outcome, in spite of international support for the reforms stated. At its peak, at least hundreds of thousands of protesters mobilized in Beirut, Zouk, Jal Dib, Nabatieh, Tur, Baalbek, Byblos, and Tripoli against declining socioeconomic conditions, unemployment, inflation, corruption, and absence of trust in ruling parties.^[3]

The Lebanese Forces Party resigned from the cabinet a couple of days into the protests and called its supporters to participate in the movement thus increasing the pressure on the cabinet. The move did not come as a surprise since the party had been outspoken in its opposition to the cabinet’s measures, budgetary discussions, and exclusion from state appointments.^[4] At the meeting of party leaders organized by President Aoun on September 2, Geagea had called for the government resignation and the formation of a new technocrat government.[5] On the other end of the spectrum, Hezbollah adopted the most aggressive rhetoric against the protest movement with Secretary General Hassan Nasrallah going as far as labeling protest leaders as conspiring against the “resistance”. This coincided with several instances of attacks of increasing intensity against protesters in Baalbek, Nabatieh, Tyr, and Beirut by Hezbollah and Amal supporters.^[6] In contrast to this violence, the Lebanese Army (LAF) and Internal Security Forces (ISF) adopted a tolerant approach toward protesters, even those blocking vital roads, as reports circulated of the refusal of using exorbitant force to disperse unarmed civilians.^[7]

Binding Presidential deliberations are expected to take place with parliament members and political blocs in the coming days to determine a new Prime Minster, with Hariri, if he wishes to, expected to have enough support to be renamed by most major parties. The negotiations over the form of the new cabinet and its members remains subject to future compromise between the ruling parties and the protesters.[8] However, it seems that anything short of a serious change in faces, caliber and way of governing enabling a major step forward in addressing the economic crisis and put into effect the structural reforms repeatedly discussed, will not satisfy the protesters’ aspirations and risks pushing them back to the streets.

Fears about the Economic Situation

There is no doubt that socioeconomic reasons rank highest for the mobilization of hundreds of thousands of Lebanese.[9] The timing is also no surprise as, in the past few months, importers of wheat, petroleum, and medicine staged several strikes.[10] Hariri’s announced reforms in response to the uprising were considered very ambitious and not credible by many economists.[11] Bloomberg for example shut out the possibility of achieving a deficit of zero percent as vowed by Hariri.[12]

The country was paralyzed from October 17 till October 29 by road closures which has cost the economy millions of dollars every day. Notable from the protests is the heavy criticism of the banking sector and governor of the Central Bank accused of monetary mismanagement. While the closure of banks since the protests erupted is partly related to employees’ safety, it is mainly to avoid the “run on the banks” effect.[13] A bank run happens when a large number of customers withdraw their deposits at the same time. Consequently, it is not clear when banks will re-open their doors especially that 50 percent of the deposits in dollars are frozen for only one month which means that they can be withdrawn.[14] Moreover, Lebanon has to pay 1.5 billion dollars on bonds that mature in November,[15] while credit ratings agencies fear a possible default on debts.[16] Any default may put the banks’ deposits at risk. What is more concerning are the reports of off the record money transfers to abroad even when banks are closed[17] which may affect small depositors, if a “haircut” were to happen.[18] The haircut, which will happen as per many financial experts, will cause an uproar if it targets all accounts, regardless of deposit size. Hence, it is important that the tax be progressive to target large accounts instead of small depositors (under $100,000) which account for more than 92 percent of total banks accounts.

Thereupon, practical solutions should be implemented to save the financial situation and protect the Lebanese Lira. Capital control is a must to restrict the flow out of the country, as well as to reduce imports of non-urgent goods which may decrease the dollar bleeding.[19] Some economists also insist on the recovery of the illegal financial engineering profits, but Hariri rejected the proposal.[20]

Central Bank Governor Riad Salameh’s comments to CNN caused some panic as he reportedly claimed the economy will collapse in a few days if protests continue. He later clarified that a quick political solution is needed to appease protesters and begin reforms to save the economy from collapsing in the future.[21] Despite the protests accelerating the deterioration of the economic situation, they are the consequence, rather than the cause, of decades of mismanagement.

Bassil’s Intended Visit to Syria

Foreign Minister Bassil called at an Arab League meeting earlier this month for the return of Syria, whose membership has been suspended since 2011, to the regional organization. He then subsequently stated his intention to visit Damascus to discuss the return of Syrian refugees. The statements came after a seven-hour long meeting held between Bassil and Hezbollah Secretary General Hassan Nasrallah. These two positions were heavily criticized by the Lebanese Forces and Progressive Socialist Party – all of whom oppose reestablishing proper relations with Assad. Hariri’s response however was relatively weak. While reiterating support for Lebanon’s dissociation policy from regional conflicts and abidance by Arab unity, he also gave Bassil the freedom to do as he wishes as an individual, and that his actions do not represent the cabinet. This is a clear step back from his duties as Prime Minister to keep the members of his cabinet in line with the cabinet policy. Whilst the Lebanese Forces is now resigned from the government following ongoing protests, the Syria issue reignited the political divisions between blocs formerly known as March 8 and March 14.[22]

The timing of the statements has been linked to the presidential ambitions of Bassil. In order to outbid his rival and close Assad ally Sleiman Frangieh, Bassil had to offer something concrete for the Syrian leadership. Diplomatic backing in regional and international circles could be on the table.[23] This would break international consensus and runs a very high risk of a backlash from the international community, notably the US still imposing heavy sanctions on anyone dealing with the Assad regime.[24] Even though the public justification of the visit is the return of refugees, many have cast doubts over whether Assad even wants the return to happen, especially amid reported demographic engineering in core areas of the country and heavy harassment of returnees.[25]

US Sanctions against Hezbollah and Allies

Reports circulated of a Western diplomat conveying the opposition of the US to the policy of toleration adopted by Lebanese parties to Hezbollah’s presence in the Lebanese state. The current situation has led to some voices in Washington to support sanctions beyond Hezbollah even if they impact the Lebanese government. This comes after the US imposed sanctions against two parliamentary representatives of Hezbollah, following through on ending the separation between the political and military wings of the party.^[26] While previous speculation believed Berri would be next on the list, current reports points otherwise as the US wants Berri to remain a channel of access to Hezbollah. FPM members however are a possible target in spite of disagreements within Washington over the effectiveness of alienating the biggest “Christian party” in the country.^[27]

Possible future sanctions are coupled with ongoing tightening visa measures by the US Embassy in Beirut against members of parliament, ministers, bankers, politicians, and anyone within the circle of suspicion of being involved with Hezbollah.^[28]

On a related note, the US Treasury Department launched the Counter-Hezbollah International Partnership. With a membership of over 30 countries, it targets Hezbollah’s financial networks through a variety of measures such as prosecuting financial facilitators, information sharing, and developing targeted financial sanctions regimes.[29]