Ever since Israel escalated its war on Hezbollah and Lebanon in mid-September and opened a flood of strikes, air raids, and fire on Lebanon’s cities and towns, the cost of the war has skyrocketed. As of November 12, the Lebanese Ministry of Public Health has recorded over 3,243 individuals killed by Israel’s aggression, and another 14,134 injured. Israel’s widespread bombing of southern Lebanon, the Beqaa, and the southern suburbs of Beirut has displaced over 1.2 million people from their homes, herding them onto the streets or into ill-equipped public schools. Many are left to find shelter on the private market where rents have soared from the lack of sufficient and affordable housing as both demand and rent have spiked. The human cost of Israel’s war on Lebanon is ultimately immeasurable, every life taken, maimed, displaced, or traumatized is a life changed forever. Israel’s full-scale war on Lebanon has irrevocably changed the lives of everyone residing in Lebanon for the worse.
Israel’s war on Lebanon could not have come at a worse time for a country reeling from a series of devastating economic crises orchestrated by its corrupt sectarian regime. Since the end of the Lebanese Civil War in 1990, successive governments, operating under a system of shared sectarian governance, have pushed the country to the edge of collapse. This form of governance was supposed to promote stability and avert conflict by ensuring that all groups had representation in governance, with each party holding seats in Parliament and the government. However, in reality, it has resulted in sectarian leaders exploiting state institutions for personal benefit, establishing patronage networks that allocate resources and jobs based on sectarian identity.
Today’s political elite have played key roles in triggering a financial crisis described as one of the largest Ponzi schemes in modern history. Experts estimate that roughly $100 billion, the accumulated wealth of the country’s depositors, had been wiped out by this financial meltdown. This crisis has devastated the savings of millions of Lebanese and plunged the country into a severe economic downturn, leaving 44 percent of the population living below the poverty line. According to a report by the World Bank, when costs of living expenses, education, and income are factored in, the actual percentage of Lebanese below the poverty line is at 73 percent, while 100 percent of non-Lebanese residents were found to also be below the poverty line. It also triggered a steep collapse of the Lebanese Lira (LBP), which was trading at 1,500 LBP to the dollar in 2019, to 89,500 LBP to the dollar today, losing roughly 98 percent of its value.
Remittances, or simply the act of the Lebanese diaspora sending money from abroad, are the major lifeline for thousands still residing in Lebanon today
The collapse of the Lira sped up the dollarization of the Lebanese economy as basic goods like electricity, medicine, and food were no longer priced by a constantly changing local currency and were now offered only in US dollars for consumers. This practice, coupled with the state removing subsidies on all imports (gas, medicine, and flour, among other things) and the increase in remittance transfers from abroad injecting fresh hard currency into the money market, effectively turned the country into a cash economy with the dollar being the main currency of circulation. Remittances, or simply the act of the Lebanese diaspora sending money from abroad, are the major lifeline for thousands still residing in Lebanon today. Lebanon’s successive crises have pushed many to emigrate abroad for greener pastures. Those who left continue to support their families they left behind through daily transfers of money back into Lebanon.
Prior to the war expanding in September, the Central Bank had managed to stabilize the local currency at 89,500 LBP/$ for over a year through a strategy that encompassed two tactics. The first was imposing taxes on all incoming transfers of fresh dollars, be they remittances or bank transfers from abroad. Second, the Central Bank limited circulation of the Lira in the market by using its own dollar reserves and by purchasing extra Lira liquidity from local exchange stores to keep the current number in circulation stable. These tactics calmed the Lira’s exchange rate for over a year, curtailing the monetary chaos of the early years of the crisis and somewhat slowing down inflation across consumables. With the Lira stable, people were more comfortable spending the local currency on daily purchases, though the country’s credit market remained minuscule.
The Israeli war on Lebanon threatens to derail the Central Bank’s efforts to keep the Lira stable
The Israeli war on Lebanon threatens to derail the Central Bank’s efforts to keep the Lira stable. Bloomberg’s Middle East Reporter Omar Tamo claimed on October 18 that the Central Bank’s dollar “reserves dropped by $344 million in the first half of October, a clear sign that [the Central Bank] is injecting dollars to protect the Lira.” The Central Bank’s extra spending to maintain the Lira’s stability has been prompted by the extra costs by the Lebanese government to manage the humanitarian crisis resulting from Israel’s war on Lebanon.
The government so far has spent billions in Lebanese pounds to rehabilitate public schools and other spaces turning them into shelters and has been paying for the costs of medical treatment for the wounded. The excess spending of Lira by a bankrupt government, coupled with the displacement of 1.2 million people has majorly disrupted the country’s labor force. Experts currently estimate the total cost of Israel’s war on Lebanon to be $20 billion—an unfathomable number for a bankrupt country already $100 billion in the hole with no end in sight for the war.
On the heels of these major financial shocks, news broke on October 25 that Lebanon will be placed on the ‘Grey List’ by the Financial Action Task Force (FATF). The Paris-based international organization, self-described as a global watchdog for money laundering and financial crimes, releases a yearly report rating states requiring varying degrees of monitoring for potential financial fraud. In 2023, the FATF described Lebanon’s efforts to combat money laundering and financial crime as “low.”
The single gravest consequence of the designation is that it is set to make it more difficult for Lebanese abroad to send remittances back to family members in the country
The single gravest consequence of the designation is that it is set to make it more difficult for Lebanese abroad to send remittances back to family members in the country. Remittances, estimated to constitute 30.7 percent of GDP in 2022, are a major source of income for thousands residing in Lebanon and an important stabilizing force for the local currency. Leila Dagher, a Lebanese economist quoted by the Financial Times claimed that the designation meant that “banks would likely face heightened scrutiny, higher compliance costs and delays, making the already fragile banking channel even less reliable for remittances.” Lebanese living abroad will be heavily scrutinized by the local banks about sending money back to Lebanon as foreign banks have to comply with highly stringent rules and monetary scrutiny. These additional hurdles on remittances and wire transfers will both increase the costs of transfers and slow them down altogether.
The FATF’s current president Elisa de Anda Madrazo tried to calm fears of the designation having a negative impact on relief efforts during the war by noting that “Lebanon’s status on the grey list should not impede relief efforts. We are working to make sure that channels of humanitarian aid remain open.” Mardazo also stated that Lebanon will be given an additional year to resolve the issues which landed it on the grey list.
These assurances, however, will fall on deaf ears. The designation is a cruel measure that effectively punishes Lebanese citizens and residents for the crimes of its elites while hindering efforts to manage the material and human calamity brought forth by Israel’s war. Lebanon’s economy is held together today by foreign transfers from abroad, and the FATF designation will make it harder for people to do just that. Those residing in Lebanon require cash transfers of hard currency from abroad today more than ever. Though the international community, particularly France, Gulf states, and UN agencies, have stepped up their relief efforts in recent weeks, what people desperately need is money to purchase food, pay rent, and take care of their families.
Once the war is over, massive cash injections need to be made in order to deal with the ever-mounting cost of the war. A report by the Washington Post released on October 31 showed that Israel had damaged or destroyed more than 5,000 structures in southern Lebanon, or nearly a quarter of all buildings in 25 municipalities on the border with Israel. More villages have been destroyed since. Experts still have not accounted for the cost of devastation in Beirut’s southern suburbs, or the Beqaa, the country’s agricultural heartland and important source of agricultural production.
The situation was pretty dire without the FATF making the means within which the crisis can be managed even more precarious. Indeed, many of the changes the FATF wants to see are hard to undertake in the best circumstances, in a non-conflict context. Under conflict circumstances, these are almost impossible. The best course of action would be for the FATF to reverse course or grant Lebanon an extension to accomplish the desired reforms attached to a date after the war.
Though the daily arrival of humanitarian aid has helped meet Lebanon’s food and medicine needs, what people living in Lebanon require right now is cash support from international agencies to pay for rent, food, medicine, and gasoline. These cash injections will also help keep the Lebanese economy afloat and the Lira stable while the government spends its own money to manage the crisis. Anything short of that and the Lebanese would be condemned to financial misery as the bombs continue to fall on their heads.
Zeead Yaghi is a Nonresident Fellow at TIMEP focusing on governance, politics, and economy in Lebanon. He is also the institute’s second Mohamed Aboelgheit Fellow.