By Rebecca Anne Proctor

A day before the second anniversary of the Beirut port explosion on August 4, 2020, the World Bank has released a scathing report on Lebanon’s financial crisis and the alleged acts of deception that appear to have made the country’s economic collapse inevitable. .

Titled “Ponzi Finance?”, the report likens the Mediterranean country’s economic model since 1993 to a Ponzi scheme – an investment fraud named after Italian con man and con man Carlo Ponzi.

During the 1920s, Ponzi promised investors a 50% return within months for what he claimed was an investment in international courier coupons. Ponzi then used new investors’ funds to pay fake “returns” to previous investors.

The World Bank report claims that a similar act of deception has taken place in Lebanon since the end of the civil war, where public finances have been used for the capture of the country’s resources, “serving the interests of an economy entrenched politics, which instrumentalized state institutions using fiscal and economic tools.

The report says excessive debt accumulation has been used to create the illusion of stability and to boost confidence in the economy so that commercial bank deposits will continue to flow. The study analyzes “Lebanon’s public finances over a long horizon to understand the roots of fiscal profligacy and its eventual insolvency.

At the same time, according to the report, there has been a “conscious effort” to weaken the delivery of public services to the benefit of a very few at the expense of the Lebanese people. As a result, citizens end up paying double while receiving poor quality services.

The World Bank experts who wrote the report describe Lebanon’s financial crisis as “a deliberate depression” because “a significant part of people’s savings in the form of deposits in commercial banks have been misused and misused spent” over the past 30 years.

“It is important for the Lebanese people to realize that the central elements of the post-civil war economy – the economy of the Second Lebanese Republic – have disappeared and will never return. It is also important for them to know that this was deliberate.

The report adds: “It is expatriate income that is struggling abroad; they are retirement funds for citizens and perhaps the only resource for a dignified life; it is necessary funding for essential medical and educational services that successive governments have failed to provide; these are funds to pay for electricity in light of the colossal blackouts at Electricité du Liban.

Since 2019, Lebanon has been in the grip of the worst financial crisis in its history, which has been aggravated by the economic pressure of the COVID-19 pandemic and the country’s political paralysis.

In October 2019, Lebanese took to the streets in the short-lived “thawra”, or revolution, demanding political and economic change. Their hopes were quickly dashed by the trauma of the Beirut port explosion, which on August 4, 2020 killed 218 people, injured 7,000 and left 300,000 homeless.

These overlapping crises have sent thousands of young Lebanese abroad in search of safety and opportunity, including many of the country’s top health professionals and educators.

Lebanese economists and financial analysts largely agree with the World Bank’s Ponzi scheme analogy.

“Lebanon is the biggest Ponzi scheme in economic history,” Nasser Saidi, a Lebanese politician and economist who served as minister of economy and industry and deputy governor of China, told Arab News. Lebanese Central Bank.

Unlike financial crises elsewhere in the world throughout history, Saidi said the cause of Lebanon’s misfortunes could not be linked to a single calamity that was beyond the government’s control.

“In the case of Lebanon, it was not due to a real disaster, not to a sharp drop in export prices of raw materials, it is indeed man-made.

“The World Bank talks about Ponzi financing, and they are right to point out the fact that you have two deficits over several decades. One was a budget deficit caused by continued government spending more than revenue.

“The problem was that government spending was not for productive purposes. It was not about investing in infrastructure or building human capital. He went for running expenses. So you haven’t accumulated real assets. You had an accumulation of debts, but you did not accumulate assets in proportion or in comparison to the loan you had.

Since the end of the civil war, Lebanon should have experienced a period of reconstruction. However, spending on these infrastructure projects has remained low, with money seemingly diverted elsewhere.

“The necessary infrastructure – electricity, water, waste management, transport and airport restructuring – has been neglected,” said Saidi.

But it is not just physical infrastructure of this type that has been neglected. Institutions that would have improved and solidified governance, accountability and inclusiveness were also ignored, leaving the system vulnerable to abuse.

“Whenever you go through a civil war, you have to think about the causes of the war, and a lot of that is due to dysfunctional policies, political fragmentation and the breakdown of state institutions,” said Said.

“There was no rebuilding of state institutions and because of that budget deficits continued and a very corrupt political class started to own the state. They entered state-owned enterprises and government-related businesses and considered all state assets to be their possessions and not state possessions.

Lebanon’s “Ponzi scheme” was also driven by current account deficits and the overvalued exchange rate caused by the central bank’s policy of maintaining fixed rates against the dollar.

In economics, Saidi said, this is what you called the “impossible trinity”, which means that a state cannot simultaneously have fixed exchange rates, free capital movements and an independent monetary policy.

“If you fix your exchange rate, you no longer have any monetary policy freedom. Lebanon’s central bank attempted to defy the impossible trinity and attempted to maintain an independent monetary policy at a time when the exchange rate was becoming increasingly overvalued.

Lebanon’s central bank increased borrowing in an attempt to protect the currency and in 2015 bailed out the banking system, while insisting the system was sound and suppressing IMF reports to the contrary.

“The World Bank report spells out things that we have all been saying since the beginning of the crisis,” Adel Afiouni, Lebanon’s former minister of investments and technology, told Arab News.

“Of course, the crisis was predictable. The indicators had been there for years. The level of debt relative to GDP and the unsustainability of that debt relative to the level of GDP and the unsustainable deficit that kept growing, and the way (the central bank) handled public finances irresponsibly been a wake-up call for years.

“Countries generally respond responsibly by announcing a package of fiscal control measures to reduce deficit and debt. This did not happen in Lebanon. The current authorities ignored basic principles on how to avoid a crisis before 2019 and how to manage a crisis after 2019.”

In April 2022, Lebanon concluded a draft financing agreement with the IMF that would provide the equivalent of around $3 billion on a 46-month extended financing facility in exchange for a package of economic reforms. However, in June, the Association of Banks in Lebanon called the draft agreement with the IMF “illegal”, blocking the process.

“This is the first step that should have happened in the first weeks of the crisis, not two and a half years later,” Afiouni said. “Yet we still need to see sweeping reforms before we see the funding, and there is no indication now that we are anywhere close to seeing serious implementation of those reforms.”

The World Bank report calls for a comprehensive macroeconomic, financial and sector reform agenda that prioritizes governance, accountability and inclusion. According to him, the earlier these reforms are initiated, the less painful the recovery will be for the Lebanese people. But that won’t happen overnight.

“Even if the reforms and laws were passed, it will take time to recover and restore confidence,” Saidi said. “Trust in the banking system, in the state and in the central bank has been destroyed. Until that confidence is restored, Lebanon will not be able to attract investment and it will not be able to attract aid from the rest of the world.

And although Lebanon held elections in May, propelling several anti-corruption independents into parliament, Saidi doubted their influence would be enough to drive change.

“Some 13 new MPs have entered parliament, but they are unlikely to make the necessary changes,” he said. “Politically, business continues as usual. There is a complete denial of reality.