Why Lebanon's Economy Is In A Financial Crisis : Planet Money : The Indicator from Planet Money Lebanon's economy is in freefall. The World Bank calls it one of the worst financial crises in a century. We look back at Lebanon's optimistic years, zooming in on the one key decision that started this house of cards. And we ask what this can teach us about booms and busts in general.

How WhatsApp Broke Lebanon

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When we speak on the phone with Sandro Kassas, he is driving in his car - a black Kia Rio.



Hi, Sandro. How are you?

HERSHIPS: Sandro is an engineer early in his career. He lives in Lebanon.

KASSAS: Right now, I'm on my way from work to home, but...

WOODS: Sandro is driving between towns outside of Beirut, looking for a working bank ATM.

KASSAS: I want to try my luck.

WOODS: What do you think the chances are that you will actually get money from this ATM?

KASSAS: I believe the probability is zero at best.

WOODS: Sandro visits ATMs every single day to try to withdraw the maximum limit allowed, which is not very much in Lebanon. He says it's the equivalent of about $50. In the last two weeks, he's found a working ATM only twice.

KASSAS: There are some bills that I need to pay this week, so...

HERSHIPS: Also, he needs to pay a guy who runs a backup electricity generator.

KASSAS: I need to pay him, also.

WOODS: But the bigger reason he needs to get his money out of the bank is that the value of the paycheck inside his bank account is eroding day by day. Every week, his Lebanese pounds are able to buy less and less because of prices rising so much. His savings are now worth less than half as much as they were a year ago.

HERSHIPS: This is THE INDICATOR FROM PLANET MONEY. I'm Sally Herships in for Stacey Vanek Smith.

WOODS: And I'm Darian Woods.

Lebanon has been in the grip of what the World Bank thinks could rank among the top three financial crises in modern history.

HERSHIPS: So today, we visit Lebanon, a country that once seemed like a beacon of Middle East economics. And we take a look at why policies designed to help the economy backfired.


HERSHIPS: Lebanon is a small country. It's right on the east of the Mediterranean Sea, wedged between Israel and Syria. It had a brutal civil war that ended in 1990. And after the war, there were decades of relative stability.

WOODS: And it was a place where east met west, where no single religion dominated and where nightclubs, bars, French-inspired cafes lined the streets of the big cities. Lebanon's capital of Beirut was sometimes called the Paris of the Middle East.

NISREEN SALTI: I'm just very attached to this place. I think that it has a lot of magic. It has a lot of incredible talent, some really wonderful people in it.

WOODS: Nisreen Salti is a professor of economics at American University of Beirut.

HERSHIPS: We reached Nisreen in her office and gave her our usual instructions - keep the background noise down when recording the interview, turn the fans or the AC off.

SALTI: Yes. Electricity's off, so...

WOODS: Oh, wow.

SALTI: But yeah.

WOODS: Gosh. Well, that's representative of the situation.

SALTI: Yeah (laughter). Yeah, pretty much.

HERSHIPS: Nisreen is astounded by how fast everything went downhill. In the mid-1990s after the Civil War, there was a lot of optimism about the future of Lebanon's economy. It had a strong banking sector, and there was talk that maybe Lebanon could even become a financial hub for the Middle East.

WOODS: One way to attract investors was to demonstrate stability, to make it easy to plan for the future. And one way that Lebanon chose to do this was around money itself - the exchange rate. They made a fixed exchange rate so Lebanese pounds would be pegged to the dollar. So, for example, an American investor's dollars, they would always be worth the same amount of Lebanese pounds. But Nisreen kind of thinks about this currency peg as Lebanon's original economic sin.

HERSHIPS: As with any big crisis, there are a heap of contributing factors. In this case, they ranged from failing infrastructure to fraying international alliances, corruption. There was also overdependence on imports and Lebanese abroad. But Nisreen says many of those problems are also related to the currency peg.

SALTI: That peg that was started in the mid-'90s has been maintained way past its healthy life.

WOODS: What happened was something that the government hadn't planned for. It was that a lot of Lebanese people took a look at the exchange rate and said, hey, this is a pretty good exchange rate for U.S. dollars, and I trust the dollar is going to keep its value more than the Lebanese pound. So give me the dollars. And the government, to meet that demand, had to borrow a whole bunch of dollars from other countries.

SALTI: If you had to keep the sort of - the myth going, you have to back it with dollars. And the only way that the economy was able to attract the dollars needed was this debt pump.

HERSHIPS: By some measures, Lebanon's government became the third most indebted in the world relative to the size of their economy.

WOODS: Over the last couple of decades, Lebanon has edged towards the brink of financial disaster, but it's always been saved at the very last minute. One thing that's kept the system afloat is that many Lebanese people abroad sending their money back home in U.S. dollars. Also, neighboring countries have pitched in with loans to kind of save Lebanon's economy from disaster.

SALTI: Saudi Arabia, Kuwait, the UAE, Qatar - when we were close to collapse, there had been international effort to sort of keep the whole thing floating.

HERSHIPS: Of course, no loan is without conditions. The countries offering loans demanded things like reducing public servant wages, raising taxes. And in spring 2019, the Lebanese government proposed something to make good on cleaning up its fiscal house. They proposed raising taxes on gasoline, on tobacco, plus charging a monthly tax for using the messaging service WhatsApp.

WOODS: Nisreen says that this tax on WhatsApp was the straw that broke the camel's back. It sparked a huge amount of anger and massive protests.

HERSHIPS: The taxes, the protests, the fact that the government couldn't pass a reform - this all led to a loss of confidence in Lebanon more generally.

SALTI: The reality is that the structure was on the verge of collapse. This was a house of cards, and the ingredients for collapse were ripe.

WOODS: And as people stopped believing that the exchange rate peg would hold, many tried to get their money out of Lebanese pounds as fast as possible, and a black market soon emerged. And to compound disaster upon disaster, there was that massive port explosion, which led to the government resigning but staying in power in the interim.

And Sandro, our engineer, he was watching all of this happen. And it just cemented the idea that there was no help coming in from the government.

HERSHIPS: He thought, I need to convert my Lebanese pounds into other currencies or spend it as fast as possible. And because his salary goes into his bank account, he's still trying to get pounds out every opportunity he has.

WOODS: On our trip, he went to two ATMs, and then we stayed on the line for a third.

KASSAS: I'm going to try right now.

HERSHIPS: He gave it one last try.

KASSAS: The machine is off (laughter).

WOODS: This machine is off as well. That is so frustrating.

KASSAS: Yes (laughter).

HERSHIPS: And in this situation, where the government and banks limit people's access to their own money, put caps on how much you could withdraw each day, somebody had to lose big. And the question was, who would bear those losses? Would it be everyday people, or would it be the banks? And even though the peg stays in place, it's really hard to actually use that official exchange rate. Nisreen, the economist, says people withdrawing their Lebanese pounds, converting them to dollars got a much worse deal.

SALTI: These everyday people with their, you know, lifetime savings often and full pensions all deposited in banks have borne a huge portion of the loss. It's just that they've managed to mitigate a lot of these losses precisely by shouldering their depositors with a big chunk of this loss.

WOODS: And Sandro, the engineer, he's also frustrated. He used to live in Beirut. But he thought, what's the point of being close to bars, nightclubs and French-inspired cafes if you can't afford them anymore? So he and his girlfriend moved out of town for cheaper rent and better views, and they got an apartment by the ocean.


KASSAS: Yeah, to the sound of the sea.

WOODS: And now they're looking at how to leave the country.


WOODS: This episode of THE INDICATOR was produced by Brittany Cronin with help from Isaac Rodrigues. It was edited by Alex Goldmark. And THE INDICATOR is a production of NPR.

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