Lebanon and Israel have recently been at the precipice of war, but predictions of a full escalation have been false alarms. What has not been a false alarm, however, has been the free fall of Lebanon’s economy. A financial crisis that started about five years ago has plunged the country, which had previously been one of the region’s wealthiest, into stark poverty, with the Lebanese pound having lost 98 percent of its value.
Lebanon and Israel have recently been at the precipice of war, but predictions of a full escalation have been false alarms. What has not been a false alarm, however, has been the free fall of Lebanon’s economy. A financial crisis that started about five years ago has plunged the country, which had previously been one of the region’s wealthiest, into stark poverty, with the Lebanese pound having lost 98 percent of its value.
What’s the scale of Lebanon’s economic collapse? Are Hezbollah’s banks in better shape than the rest of Lebanon’s? What role does Israel play in Lebanon’s economy?
Those are a few of the questions that came up in my recent conversation with Foreign Policy economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: How severe is the collapse of Lebanon’s economy that began around 2019? And are there precedents for that degree of economic decline?
Adam Tooze: It’s a truly dramatic story. I mean, the World Bank says it’s the most severe, one of the most severe, crisis episodes globally since the mid-19th century, which essentially means in modern economic history. The collapse began, as you were saying, in the fall of 2019. It was financial and monetary. The currency collapsed. I mean, you cited the figure of 98 percent, which, in some sense, understates the collapse because essentially the Lebanese economy has become dollarized as far as possible. So the currency is not really functioning for most activities. That was on the back of massive local inflation. The banking system floated in 2020. The banks remained shut for years. Lebanese resorted to, you know, their armories of small arms to actually fight their way into banks, to extract their own money. Not to steal or rob, but literally just to gain access to their bank accounts.
The Lebanese government, in an act of real fecklessness, engaged in a hard default. So it didn’t announce to its creditors that it was going to be unable to pay and there would be an attempt to negotiate. It just stopped payment, which is very unusual as a mode of default. The net effect of this on GDP is not easy to measure, but the sort of fanciest measure of GDP, which is purchasing power parity, adjusted GDP, which allows for the cost of living and so on. The World Bank estimate says that at the beginning of the crisis, at $22,000 per head per year, Lebanon’s GDP per capita was well above the world average. Perhaps 20 percent above. And that in itself may be an underestimate.
What is clear is that today, Lebanon’s GDP per capita is probably closer to half the world average at 12k. And that doesn’t account for the huge inequality in the country, which has left a very large slice of the population in dire poverty and doesn’t account really either for the fact that basics like water and electricity are incredibly hard to get hold of. Unless you’re earning dollars and can pay hard cash, you end up relying on local militia and local political parties and businesses that are well-connected politically for the essentials. The power supplies essentially failed. And all of this is on top of the fact that Lebanon is sheltering millions of refugees from Syria. We don’t exactly know how many because the Lebanese government, in its wisdom, decided it was no longer politically opportune to count them. But it’s definitely millions. Lebanon, probably along with Turkey, shelters most of the Syrian refugees. And they, of course, are on the run from a country which since 2011 imploded into an ultra-violent civil war and whose economy has collapsed even more than Lebanon’s. So Lebanon and Syria, which used to form an affluent, urbanized—you know, they’re the classic hub of the Arab civilization and economy in the Mediterranean. Syria’s economy has probably imploded by 80 percent or more. So the two together form a zone of disaster, the scale of which is hard to exaggerate.
CA: Hezbollah’s banks are not connected to other Lebanese banks, which are themselves part of the global financial system. Have Hezbollah’s banks suffered for not being globally connected in that way?
AT: Yeah. I mean, it’s quite a story. I call them “shadow banks,” because the distinctive thing about Hezbollah’s financial operations is that they do not register as banks with the Lebanese authorities. Hezbollah’s financial arm, AQAH is the acronym, has been under sanctions from the Americans since 2007. So it’s not an actor that anyone in the legitimate dollar-based financial system in the world wants to engage with. But in Lebanon itself, it plays a critical role. And this is where really the cooperation with the other interests in Lebanon is quite marked, because Hezbollah runs the exchange houses. Other interests in Lebanon who have less antagonistic relationships with global financial regulators put the front end, if you like, of official banking, but Hezbollah runs the exchange houses, and it has an extensive network of contacts, of course, in the massive Shia interest in Iraq and in Iran, through which it has access to dollars. It has an extensive gold-smuggling operation. And it has powerful backers in the Arab League who are willing to place their financial institutions at its disposal for long-range dollar system-relevant transactions that it wants to conduct.
So Hezbollah’s financial system has thrived. It has, over the years, made billions of dollars of loans. If you’re a small-business operator, not just Shia in Lebanon right now, in many parts of the country, AQAH is where you go to get cash loans. You do them against deposits of securities in the form, notably, of gold, which then provides the AQAH system with a float on the basis of which it can actually then issue new credits. So it’s functioning like a bank, but, as it were, outside the bank system. And then with the implosion of the mainstream banking system in Lebanon since 2020, they’ve really become a key provider of day-to-day liquidity in cash. And they’ve set up ATMs, issuing unusually generous quantities of cash in dollars to people who need access to those. So both through its global network, through its acknowledged position within the ecosystem of the Lebanese financial sector, and then through the shocks of what’s happened since 2020, the Hezbollah financial operation has moved over to the fore.
And this is an interesting development because Hezbollah was always famous for the way in which it’s built its grip on Shia society in Lebanon through its welfare provision. Islamic welfare is a well-established tradition. You see it also in the Islamic Brotherhood movement. But Hezbollah was very powerful in developing both medical services and welfare provision. But this financial arm is really a rapidly expanding and novel component, and it digs Hezbollah ever more profoundly into Lebanon’s fabric. I mean, one paper I read was really interesting because, you know, if you’re short of electricity and your power supply is breaking down, what do you want? Well, what you want is solar power and batteries now, right? Because of the green energy revolution. And guess who will supply you with cheap Chinese solar panels, converters, batteries, and the credit to go with it? AQAH. So, you know, they really are building a kind of one-stop financial and energy supply business.
CA: I did want to ask about the regional influence in Lebanon’s economy. Iran is obviously a major player as Hezbollah’s main backer. Can Iran afford the assistance it’s giving to Hezbollah in Lebanon? And does it get a good deal from that assistance it’s giving?
AT: Iran’s GDP is estimated at over $400 billion, and it pays Hezbollah a couple of hundred million dollars a year. So, yes, the answer is Iran can afford the support it gives to Hezbollah. And it buys it, after all, an awful lot of attention and threat potential against Israel at relatively modest cost. So I think the answer there is, yes, it can afford it and probably it’s getting good value.
The post Why Hezbollah Is Rich and Lebanon Is Poor appeared first on Foreign Policy.
