Lebanon and Israel have recently been on the cusp of war, but predictions of absolute escalation are false alarms. What is not a false alarm, however, is the free fall of Lebanon’s economy. A financial crisis that began nearly five years ago plunged the country, formerly one of the region’s richest, into utter poverty, with the Lebanese pound losing 98 percent of its value.
Lebanon and Israel have recently been on the cusp of war, but predictions of absolute escalation are false alarms. What is not a false alarm, however, is the free fall of Lebanon’s economy. A financial crisis that began nearly five years ago plunged the country, formerly one of the region’s richest, into deep poverty, with the Lebanese pound losing 98 percent of its value.
What is the extent of Lebanon’s economic collapse? Are Hezbollah’s banks in better shape than the rest of Lebanon? What role does Israel play in Lebanon’s economy?
Those are just a few of the questions that came up in my recent conversation foreign policy Adam Toews, economics columnist on the podcast we co-host, Ones and Twos. Below is an excerpt, edited for length and clarity. For the full conversation, see Ones and Twos Wherever you get your podcasts. And check out Adams Substack Newsletter.
Cameron Abadi: How severe is the collapse of Lebanon’s economy starting around 2019? And are there precedents of that degree for economic collapse?
Adam Tooze: It is a really dramatic story. I mean, the World Bank says it’s one of the worst, most severe, crisis episodes globally since the mid-19th century, which means essentially in modern economic history. The fall started, as you were saying, in the fall of 2019. It was monetary and financial. The currency collapsed. I mean, you quoted a figure of 98 percent, which, in some sense, understates the collapse because essentially the Lebanese economy has been dollarized as far as possible. So currency is not really functional for most activities. It was behind massive domestic inflation. The banking system started in 2020. Banks remained closed for years. The Lebanese, you know, resorted to their arsenals of small arms, to fight their way into the banks, to withdraw their own money. Not to steal or rob, but literally just to get access to their bank accounts.
The Lebanese government, in an act of true callousness, engaged in hard default. So he did not announce to his creditors that he would be unable to pay and try to negotiate. He just stopped paying, which is very unusual as a default mode. The net effect of this on GDP is not easy to measure, but the fanciest measure of GDP, which is purchasing power parity, is adjusted GDP, which allows for cost of living and so on. A World Bank estimate states that at the beginning of the crisis, at $22,000 per capita per year, Lebanon’s GDP per capita was well above the world average. Maybe 20 percent up. And that in itself may be an understatement.
What is clear is that today, Lebanon’s GDP per capita is probably close to half the world average at 12k. And that doesn’t account for the vast inequality in the country, which has left a very large section of the population in abject poverty, and it doesn’t even account for the fact that basic things like water and electricity are incredibly difficult to get hold of. . Unless you earn dollars and pay hard cash, you will depend on local militias and local political parties and businesses that are politically well-connected for essentials. The power supply inevitably failed. And all this on top of the fact that Lebanon is sheltering millions of refugees from Syria. We don’t know exactly how many because the Lebanese government, in its wisdom, decided it was no longer politically expedient to count them. But it is definitely millions. Lebanon, along with perhaps Turkey, hosts the majority of Syrian refugees. And they are, of course, fleeing a country that has been embroiled in an ultra-violent civil war since 2011 and whose economy has collapsed even more than Lebanon’s. So Lebanon and Syria, which were becoming prosperous, urbanized—you know, a great center of Arab culture and economy in the Mediterranean. Syria’s economy has probably shrunk by 80 percent or more. So the two together form a disaster zone, the scale of which is hard to exaggerate.
CA: Hezbollah’s banks are not linked 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: Yes. I mean, that’s quite the story. I call them “shadow banks,” because what is unique 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 is not an actor that wants to be involved in the world’s legitimate dollar-based financial system. But it is in Lebanon that it plays a crucial role. And this is where the cooperation with other interests in Lebanon is really very marked, because Hezbollah runs the exchange houses. Other interests in Lebanon that have less adversarial relations with global financial regulators, if you like, put up the front end of official banking, but Hezbollah runs the exchange house, and has an extensive network of contacts, of course, in the wider Shiite interests. In Iraq and Iran, through which it reaches the dollar. He has extensive gold smuggling operations. And he has powerful supporters in the Arab League who are willing to put their financial institutions at his disposal for the long-term dollar system-related transactions he wants to make.
So Hezbollah’s finances have flourished. It has given billions of dollars in loans over the years. If you are a small-business operator, not just in Shia Lebanon, but in many parts of the country, AQAH is where you go to get a cash loan. You do that against deposits of securities in the form, specifically, of gold, which then provides the AQAH system with float based on which it can actually then issue new credit. So it functioned like a bank, but, it was outside the banking system. And then with the implementation of the mainstream banking system in Lebanon from 2020, they have really become the main provider of day-to-day liquidity in cash. And they have set up ATMs, dispensing unusually generous amounts of cash in dollars to those who need access to them. So both through its global network, through its accepted position in the Lebanese financial sector ecosystem, and then through the shock of what has happened since 2020, Hezbollah financial operations have advanced.
And this is an interesting development because Hezbollah has always been famous for building its grip on Shiite society in Lebanon through its welfare provision. Islamic welfare is a well-established tradition. You also see it in the Islamic Brotherhood movement. But Hezbollah was very powerful in developing both medical services and welfare provision. But this financial arm is actually a rapidly expanding and novel component, and it digs Hezbollah ever more deeply into the fabric of Lebanon. I mean, one of the papers I read was really interesting because, you know, if you have a power shortage and your power supply is breaking, what do you need? Well, now you want solar power and batteries, right? Because of the green energy revolution. And guess who will give you cheap Chinese solar panels, converters, batteries and credit to go with it? AQAH. So, you know, they’re really kind of building a one-stop financial and energy supply business.
CA: I wanted to ask about regional influence in Lebanon’s economy. Iran is obviously a key player as Hezbollah’s main backer. Can Iran afford the aid it is giving Hezbollah in Lebanon? And does he get a good deal from the help he provides?
AT: Iran’s GDP is estimated at over $400 billion and it pays Hezbollah hundreds of millions of dollars a year. So, yes, the answer is that Iran can afford the support it gives to Hezbollah. And it buys him, after all, the prospect of terrible attention and danger against Israel for a relatively nominal price. So I think the answer there is, yes, he can afford it and maybe he’s getting a good price.
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