BOILING POINT: HOW THE PANDEMIC AND PORT EXPLOSION HAVE LAID BARE LEBANON'S POLITICAL FRAGILITY

The operational environment in Lebanon currently looks very difficult to navigate. Tapis consulted our Lebanon expert, “Nassim”, about the sociopolitical developments in the country and the operational implications for businesses.


On August 4th, Lebanon became the focus of international attention as 2,750 tons of ammonium nitrate stored at the Beirut Port exploded. Causing over 200 deaths, injuring thousands and displacing hundreds of thousands of people, this was one of the biggest non-nuclear explosions the world has ever seen.

Following the incident, waves of unrest have been seen in the capital and beyond. While the explosion has been considered by many as the trigger of this unrest, the anger of the Lebanese seems to be deep-rooted and longstanding.

More than the detonator for the discontent and unrest, the explosion and the events leading to it are a clear reflection of the structural flaws of the wider Lebanese political system. These have allowed for widespread corruption, negligence and repression to flourish in the country. As a result, they have pushed Lebanese citizens against the government itself.

Tapis consulted our Lebanon expert, “Nassim”, about the tumultuous sociopolitical environment in Lebanon and the operational implications for businesses operating in the country.


THE PORT EXPLOSION: THE DETONATOR OF

UNREST?


While the blast intensified the Lebanese’s anger at the political elite, “the country was in a state of crisis long before the explosion took place” says Nasim. In the port alone, corruption, negligence and sectarian politics have been commonplace for decades. Reports have found a financial deficit close to $800 million a year and estimate the overall cost of corruption to be over $1 billion.

As of yet, the government has “failed to efficiently and transparently address the causes of the explosion” says Nassim. There are growing fears that port officials are not being entirely transparent in order to protect political leaders. Moreover, some of the ministries that have a record of corruption at the port have been tasked with overseeing the investigation.

Recent investigations into the events exposed evidence that the government had been warned about the ammonium nitrate stockpile as recently as July 2020. This reflects a familiar pattern of corruption and mismanagement that eventually ignited the Lebanese’s anger against authorities and pushed them to protest.

For a better understanding of the anger and frustration of the Lebanese against their government, an understanding of the Lebanese political system and its mismanagement of prior crises is key.

LEBANON’S POLITICAL SYSTEM: NO SMOKE WITHOUT A FIRE


Lebanon’s political system originated in 1943 after the end of the French rule in the country. It divided political power between the main sectarian communities in Lebanon; Christians, Sunni Muslims and Shia Muslims. This system has allowed political leaders to - both legally and illegally - allocate resources to their own sectarian communities. This helped them gain legitimacy and remain in power for decades.

An example of this is Hezbollah, one of the two main parties representing Shia Muslims in Lebanon (the largest sect in the country). Outside of Lebanon, it is considered by many countries to be a terrorist organisation. In Lebanon, however, it manages a vast network of social services, including infrastructure, health-care facilities and schools. It also controls most of the country’s weapons. It is part of what Lebanese protesters consider the political elite, and therefore one of the pillars supporting corruption in the country.

Lebanon’s government’s corruption, negligence and increasing repression of its people are what have pushed the Lebanese to protest against it. The structural flaws of Lebanon’s political system permeate all elements of society and have been exposed when crises have emerged in the country. Lebanon’s economic and banking crisis, the government’s management of the COVID-19 pandemic and its repression of citizens’ rights shed light on Lebanon’s systemic problem.



IS LEBANON’S BANKING CRISIS ACTUALLY A POLITICAL ONE?


Beginning October 2019, Lebanese citizens experienced severe restrictions on their ability to withdraw money from their bank accounts. Analysts argued this situation was a result of a “state-sponsored pyramid scheme” run by the Central Bank. It borrowed from commercial banks at above-market interest rates to pay back its debts and maintain the Lebanese pound’s fixed exchange rate with the US dollar.

“Nassim” explained that, as a result, “the Ministry of Finance and the Central Bank are currently not able to release citizens’ money to banks”, and therefore citizens are not able to access their own money. He calls this a “political, not a monetary crisis”.

Other reports point to the political elite’s decades-long involvement in public funds theft as to why citizens cannot access the money they had saved in banks. Some estimates argue that the cost of corruption in Lebanon is equal to 5$ billion a year, which amounts to 9 per cent of the country’s GDP. Lebanon is currently one of the nations with the highest public debt burden in the world, at 150% of its GDP.

THE FIRST OCTOBER REVOLUTION


The protests that erupted after the Beirut Port explosion are not the only ones Lebanon has witnessed in recent times. In 17 October 2019, unprecedented protests broke out across Lebanon after the Lebanese government announced new tax measures to address the economic crisis hitting the country.

Tens of thousands of protesters took to the streets calling for their social and economic rights, accountability of those in power and an end to the corrupt political system in the country. These protests were named the “October Revolution” and were the largest since Lebanon’s independence.

In return, Lebanese authorities responded with teargas, beatings and arrests. Journalists and activists became increasingly harassed by Lebanese authorities after protests spread nation-wide. Individuals were threatened with prosecution and pressured into signing illegal pledges to stop criticizing, organizing or protesting. Some of these individuals have themselves, in turn, pressed charges, including claims of torture – but the judiciary has to date failed to open any investigations into these claims.

As a result of the protests, minor changes to the political system were implemented and a new cabinet was appointed in January 2020. Nevertheless, the inherent flaws in Lebanon’s political system are still very much in place. Protests continued in early 2020, but the outbreak of the COVID-19 pandemic put a stop to them as lockdown measures were imposed in March.



COVID-19: HOW A GLOBAL PANDEMIC

REVEALED A NATIONAL PAIN


The pandemic curbed the protests but made the economic situation much worse. More importantly, it exposed the inadequacies of Lebanon's social welfare system. For instance, when lockdown measures were imposed, many businesses were forced to lay off staff or put them on furlough without pay.

The government does not have the means to cover hospital costs in normal circumstances, but the pandemic made the situation a lot worse. Due to the economic crisis, there are not enough government funds to protect the Lebanese people against the virus. The government has not been able to provide equipment for COVID-19 treatment such as ventilators. Moreover, drugs used in COVID-19 treatments have run out, and the government has made it clear that it won’t be able to provide any more.

The pharmaceutical market is another example of how favouritism present in the political system permeates all spheres of society. It is governed by exclusive import rights, which allow select importers to keep out competitors and resist reforms in specific sectors. The market has been controlled by some two dozen importers for decades.

Currently, a second lockdown is being enforced as hospitals have reached full capacity and infection rates among medical workers are rapidly growing.


THE WAY FORWARD


Lebanon’s economic crisis, crumbling social welfare system and growing political repression are symptoms of deeper flaws in the Lebanese political system. The port explosion exposed the system’s widespread corruption and negligence and fueled the anger of the Lebanese against their government.

Over a year after the October Revolution began, Lebanese authorities have still not addressed their economic and social rights demands. Moreover, rights to peaceful assembly and freedom of expression have been increasingly repressed and the COVID-19 pandemic has worsened the economic crisis in the country.

“Nassim” argues that “the protests will only stop if real change [in the political system] is achieved”. International organisations have called for the total reforms of various systems in Lebanon, including the financial and banking systems. They also demand social reforms, such as social protection to ensure the safety of the Lebanese people in exchange for their financial aid.


WHAT DOES THE OPERATIONAL ENVIRONMENT IN LEBANON LOOK LIKE?


The economic, political and social developments in Lebanon have already had a considerable impact on businesses operating in the country and will continue to impact the nation for some time. As “Nassim” put it, “the whole country is currently on stalemate”. These are some of the most crucial issues that businesses operating or looking to operate in Lebanon will have to consider.

The economic crisis in the country is severe. According to the head of the Beirut Traders Association Nicolas Chammas, 50% of Lebanon’s shops and businesses could close by the end of 2020. Caretaker Lebanese Minister of Labor Lamia Yasmine reported back in May that 30% of registered companies have already closed down in the country. An additional 20% have reduced their employees’ salaries by half.

The financial crisis has depreciated the Lebanese pound by more than 80%. The deepening volatile currency market and their inability of businesses to maintain prices. has caused major international businesses in Lebanon to cease their operations in the country.

Lebanon plans to introduce a digital currency next year to restore confidence in the banking sector and transition into a cashless system, Governor of Lebanon’s Central Bank Riad Salameh said. There are very few details on how this initiative will work, and no certainty on whether it will be effective, especially if no anti-corruption reforms are enforced.

Additionally, the country now faces a lot of political uncertainty, as former Prime Minister Saad Hariri was re-appointed on October 22nd with a slim majority in parliament. Hariri is the third person to be tasked with forming a government this year after Hassan Diab resigned in August and Mustafa Adib was unsuccessful later on. This is a blow for activists involved in protests against political corruption that led to the resignation of Hariri and his government in early 2020.

One of Hariri’s first tasks will be to form a cabinet. All of Lebanon’s sectarian political parties will have to be accommodated, in what has been deemed more of a balancing act than a democratic process. He has promised to form a government of non-partisan experts to implement economic and political reforms.

There are also concerns that civil unrest may escalate to more serious violence. Politicians and sectarian leaders are making both implicit and explicit calls to arms and there are increasing sectarian divisions in the country. “Nassim” argued that “violence [was] very likely to break out unless a new government [was] formed”.

The newly formed government could have appeased some of the protesters. The greater majority, however, see the new government as a continuation of Lebanon’s corrupt and sectarian political system that they see as the root of the problems faced in the country. A new set of lockdown measures imposed in November might mean that protests could die down as they did last spring.



Moreover, due to the current stalemate in the country, ports are only partially working, severely impacting exporting and importing businesses. There is no certainty regarding how long this will last. Several countries are offering to help with the reconstruction, but no country is likely to invest in the infrastructure before structural changes to the political system have been implemented. Therefore, the reconstruction process will almost certainly be hampered by the pace of reforms pertaining to the corruption that pervades the port’s management.


The COVID-19 pandemic is another major issue for businesses worldwide. In Lebanon, total lockdown during the first few months of the pandemic ensured infection cases remained in the single or low double digits. However, the absence and poor implementation of a long-term reopening strategy have led to a recent sharp increase in cases. Hospitals have reached full capacity and there is a great deal of uncertainty in terms of how the pandemic will evolve in the country.

According to “Nassim”, “people are trying to get visas or work permits outside Lebanon to leave the country”. After the port explosion, departures from Beirut airport increased by 36%, and there was a much higher number of visa requests. A shortage of qualified workforce may also be an issue for businesses as a result.


THE VALUE OF LOCAL INTELLIGENCE IN LEBANON’S CURRENT CONTEXT


The operational environment in Lebanon currently looks very difficult to navigate. Economic and political uncertainty coupled with a worsening COVID-19 crisis and frequent civil unrest will have a negative impact on businesses operating in Lebanon.

In an ever-changing business environment, with growing civil unrest and a global pandemic, local experts like “Nassim” have access to key insights to help decision-making. At these times of uncertainty, local intelligence can provide ground-truthed, timely insights on political, economic and social developments on the ground.



Tapis Intelligence sources local intelligence in over 120 countries. Visit tapisintelligence.com to learn more about our local consultants in Lebanon


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