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The Lebanese pound has continued to plummet, exacerbating the country’s struggles with unemployment, poverty, and fuel shortages. Since 2019, the currency has lost more than 90% of its value as the country has been hit by high debt. What are the main causes of the Lebanese Economic Crisis? How have the country’s economy and citizens been affected? And most importantly, what can Lebanon do now to recover? In this article, you will find out all the relevant Lebanese economic crisis facts.
The Lebanese economic crisis is an ongoing crisis in Lebanon that was most pronounced in 2019. It was triggered by the shortage of the US dollar – one of the country’s trading currencies.After the civil war in 1990, LebaLebanon’snomy relied mainly on the services sector. About 60% of the country’s GDP comes from trade, tourism and financial services.
Commercial activities in Lebanon are supported by the Port of Beirut, which is the most important port in the Arab world and a major source of national income before conflicts erupted in the region. Tourism in Lebanon also flourished due to its strategic location with mild climatic conditions and breathtaking landscapes of mountains, valleys and the sea.In addition, Lebanese banks have been wildly successful in raising international capital to support regional development. In 1996, some banks raised more than $2 billion in the international bond markets. The attractive interest rates set by the Lebanese Central Bank were the driving force behind this success. To compensate for the lack of domestic goods, Lebanon also imported many goods from overseas. In these transactions, the main currency is the US dollar. This contributed to the country’s considerable foreign capital funds.With the dominance of the services and banking sectors, the Lebanese economy became heavily dependent on the US dollar for nearly two decades. It was used interchangeably with the Lebanese pound in many transactions.
In 2011, wars broke out in Syria, Lebanon’s immediate neighbour. Fearing to invest their money so close to the war zone, many foreign investors transferred their funds from Lebanese banks to other countries. As a result, Lebanon suffered from a shortage of US dollar cash. The situation worsened in the following years and led to the biggest economic crisis in LebaLebanon’story.
What were the causes of the Lebanese economic crisis?
The US dollar is one of the most important currencies in Lebanon. Its inflows from international trade and investment enable the country to pay debts and carry out daily transactions. For many years, since the service and banking sectors dominated Lebanon, the US dollar was used as a medium of exchange for the Lebanese pound. People could easily withdraw US dollars from local stores or supermarkets.
The abundant inflows of the US dollar came from the service sector (trade, tourism, banking) and remittances from Lebanese working abroad. The Lebanese government has also engaged in financial engineering – a series of mechanisms to offer banks attractive returns on new dollars – to attract foreign investment and flush more foreign currency into the government’s funds.
Around 2011, however, the US dollar inflow began to wane. This occurred when wars broke out in Syria, LebaLebanon’sghbour, causing foreign investors to withdraw their money from Lebanese banks for fear of losing capital. As a result, US dollar liquidity in Lebanon fell for the first time in a decade. In the years that followed, reserves of US dollars were nearly depleted. Banks had to restrict cash withdrawals in US dollars because they no longer had sufficient funds to meet demand. Faced with a lack of foreign capital, the Lebanese pound depreciated, and the country fell further into debt.
To salvage the situation, the government exchanged its public debt in Lebanese pounds for Eurobonds, then exchanged for other currencies. However, this only temporarily helped to solve the problem. Soon, the country’s debt expanded.
The economic crisis has serious consequences for the Lebanese economy. The growing debt, poverty and unemployment deeply affected the government and the citizens.
Figure 1. Lebanese GDP per capita fell sharply after the peak of the economic crisis in 2019. Created with data from data.worldbank.org - StudySmarter Originals
As we can see in Figure 1 above, the economic crisis hit the Lebanese economy hard. GDP per capita plummeted from around $7,600 to $5,000. This figure shows how much the standard of living has fallen in Lebanon, especially as the government struggles to provide its citizens with everything they need.
Figure 2. USD to LBP Market Exchange Rate. Created with data from Lirarate - StudySmarter Originals
Figure 2 above shows the exchange rate of the US dollar to the Lebanese pound. The decline in the value of the Lebanese pound shows how uncertain investors are about the Lebanese economy. Although a depreciation of the currency leads to cheaper exports, imports become more expensive. This further exacerbates the supply shortage in Lebanon and causes inflation to rise.
To help resolve the crisis in Lebanon, the World Bank Group, the EU, and the UN have recommended the 3R framework – reform, recovery, reconstruction in the short and medium-term. The recovery should be people-centred, transparent, inclusive, and accountable.
Short-term approaches include restructuring the debt and financial sectors and redesigning the monetary and fiscal framework. In the medium term, the country should focus on building better institutions, better governance, and a better business environment.
As we have seen, the Lebanese economic crLebaLebanon’siggest crisis in Lebanon’s history. It has dealt a severe blow to both the economy and the living standards of its citizens. Many people are struggling with poverty, fuel shortages and unemployment, while the government faces the consequences of enormous debts and dwindling public trust. It will take a long time for Lebanon to fully recover from the effects of the economic crisis.
The crisis arises from the shortage of the US dollar, which is one of the main trading currencies in Lebanon.
The causes are the government’s financial engineering and the political unrest in the Middle East regions.
The crisis has led to a sharp drop in the value of the Lebanese pound, rising inflation, unemployment rate, government defaulting on its public debt, and a shortage of fuel and other key imports.
The World Bank, the EU and UN recommended that Lebanon recover in the short and medium-term through the 3Rs framework – reform, recovery, reconstruction.
Lebanon Economic Monitor reported the Lebanese financial crisis is among the top ten most severe crises since the 19th century. From 2018 to 2021, the GDP dropped from $55 billion to $20.5 billion. (World Bank).
The causes are the government’s financial engineering and the political unrest in the Middle East regions.
Yes. The Lebanese economic crisis is ongoing and was most pronounced in 2019.
The Lebanese economic crisis is an ongoing crisis in Lebanon that was most pronounced in 2019. The shortage of the US dollar – one of the country’s main trading currencies – triggered the crisis. The crisis has resulted in a sharp drop in Lebanese pound value, rising inflation and unemployment rate, the government’s default on public debts, as well as a shortage of fuels and other important imports.
After the Civil War, Lebanon received a great inflow of foreign currencies from tourism, imports, remittances by Lebanese working abroad and foreign aids, and the government’s financial engineering scheme, which offers investors attractive returns on their foreign currency, posits. As it broke out, foreign clients withdrew their money, and the inflow of the US dollar in Lebanon declined. Since Lebanon relied heavily on the US Dollar for most transactions, the shortage of foreign currency leaves the country in a currency crisis and spells disasters for its economy.
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