Lebanon from golden age to economic crisis, new data shows rise and fall: Report

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A slipping peg, foreign funding that slowed, and a hurting real estate sector, among other factors, all contributed to Lebanon’s collapse, previously unavailable data now helps illustrate.

Few in Lebanon were surprised when the economy began to rapidly deteriorate in late 2019. But as protests broke out against the economic conditions and lack of transparency in governance last October, Lebanon made international headlines – prompting many to try to understand what went wrong in the country.

The new dataset, released by the local software engineers collective Shinmimlam, documents the creation of businesses in Lebanon – a complicated process that requires navigating an antiquated system including visits to multiple government ministries.

For years, this knowledge, while it lived in suitcases at the commercial registry, was also held informally in the minds of Lebanese businessmen, politicians, and average Lebanese keen to understand connections between business owners and their political patrons.

The new concrete data sheds light on past time periods and can help trace the country’s history and demonstrate how Lebanon rose rapidly during its golden age and came to fall rapidly last year.

“These curves provide a remarkably truthful measure of the country’s formal economic activity. The end result is a graphic timeline showing the rhythm and increasingly tragic incongruities of Lebanon’s economic saga,” Synaps, a research network, said in its analysis of the data.

Synaps said the crash easily could have been foreseen – and mitigated – had previously unavailable data been public knowledge at the time.

In the years leading up to the crisis, however, the country’s central bank tried to mitigate the impending collapse beginning in 2016 through a series of financial engineering mechanisms.

Further, quarterly data from Lebanon’s Central Administration of Statistics shows that Lebanon entered a recession in the second quarter of 2018 – more than a year before the current economic crisis fell into full swing.

According to local data, Lebanon reported negative growth beginning in the first quarter of 2018. The country’s deficit was 11.5 percent of gross domestic product (GDP) in 2018.

Before then, the economy was sluggish through 2017; while GDP saw a 3 percent rise in the first quarter, the second quarter saw a -1 percent fall, followed by a mere 1 percent rise, and finished the year at a stagnant 0 percent in GDP growth.

World Bank data show that inflation averaged 6.1 percent in 2018 and 4.7 percent in 2017. Now, inflation continues to rise following a rather rapid increase that began in the last quarter of 2019.

Could the crisis have been mitigated as Synaps suggests? That remains unclear, but the data shows clearly how the creation of businesses in the country cluster around various geopolitical events over the last 70 years.

The Golden Age

During the 1950s and 60s – considered Lebanon’s golden age – new companies were registered grew at an average rate of 15 percent year-on-year.

The onset of the civil war in 1975 saw a downturn in economic activity, measured by Synaps as the number of new companies registered, as the number reflects “new opportunities or more available capital.”

“While an average of 1,200 businesses were registered annually in the 50s and 60s, that number jumps more than five-fold, to 6,700, between 1976 and 1990,” the report read.

Following a short-lived period of stability in the immediate aftermath of the war, between 1994 and 2008, activity decreases, with only 5,600 companies registered annually.

“This slow-down corresponds to a dramatic shift in the nature of the economy, ushered in by then prime minister Rafic Hariri. Indeed, 1994 marks the start of Lebanon’s rentier economy, with wealth concentrated in the hands of fewer companies that then redistribute through shareholders: The real estate magnate Solidere, founded that year, was and remains the flagship in a fleet of such vehicles,” Synaps reported based on the data.

Synaps analysis shows new companies registered in Lebanon. (Screengrab)
Synaps analysis shows new companies registered in Lebanon. (Screengrab)


In the early 1990s, Prime Minister Rafic Hariri was at the helm of a country emerging from war and sought to rapidly rebuild Lebanon. This period also gave rise to Solidere, the company tasked with rebuilding downtown. Some locals still refer to the downtown area as “Solidere,” and the firm is still heavily criticized in Lebanon.

Solidere’s business model was rent creation. While the company oversaw the reconstruction of Beirut’s downtown, they imposed harsh conditions on recuperating buildings which were destroyed during the reconstruction, according to Saree Makdisi in a 1997 article titled “Laying Claim to Beirut.”

The post-war model, which came to be known as Harirism, empowered a new class of business elites who were increasingly connected to the sectarian political establishment. A new class of wealthy elite emerged, and income inequality grew.

Lebanese Prime Minister Rafik al-Hariri (center) inspects February 2 restoration work at the Serail, the traditional government's headquarters since independence. The Serail is located in the central district of Beirut which was destroyed during Lebanon's 1975-1990 civil war and is being rebuilt by the country's biggest private company Solidere. (File photo: Reuters)
Lebanese Prime Minister Rafik al-Hariri (center) inspects February 2 restoration work at the Serail, the traditional government's headquarters since independence. The Serail is located in the central district of Beirut which was destroyed during Lebanon's 1975-1990 civil war and is being rebuilt by the country's biggest private company Solidere. (File photo: Reuters)

Until 1994, formally registered economic activity was predominantly single-person businesses; associations whose partners who are jointly, unlimitedly, and personally liable; “and structures specifically designed to bring together the capital of investors and the experience of managing partners, in medium-sized and often productive endeavors,” the report read.

After 1994, nearly half the companies created involve distributing shares and trading stock in larger, more connected corporations.

“In other words, the economy shifts in large part from entrepreneurs to shareholders, mirroring the expansion of the rent economy.”

The new model introduced mechanisms that helped lay the shaky foundation that Lebanon would operate on for years.

Policies like these gave rise to growing inequality in the country, and today Lebanon has one of the highest levels of income inequality. The top 1 percent receives 25 percent of national income on average, and the top 10 percent receives 55 percent of national income, according to data collected between 2005 and 2014.

The peg

Moving further into Synaps analysis, it says that in 1997, Lebanon’s currency, the lira, was pegged to the US dollar at 1,500 to $1, which served to anchor the rent-driven economy that had been established.

Read more: Lebanese lira plummets to half its official value

“On one hand, it became more profitable to import than to produce locally. On the other, investing capital in unproductive economic sector – namely Lebanese financial products and real estate – became increasingly attractive as the risk of devaluation receded,” the report said.

Now, Lebanon’s economy relies on dollars, and a currency crunch beginning in late 2019 has created a parallel exchange rate where the Lebanese lira has lost half of its value against the dollar in the parallel market. Importers have struggled for months to secure dollars to pay for goods and food, and hospitals are experiencing shortages of some supplies. Lebanon imports around 80 percent of its food, according to data from the Food and Agriculture Organization.

Read more: Coronavirus: New red tape, old economic problems could mean food shortages in Lebanon

Foreign funds stop flowing

Lebanon has historically relied on money and investment from abroad to fuel its economy, and the new data shows more precisely when and how the money stopped flowing from Arab neighbors.

“Specifically, FDI (foreign direct investment) appears closely linked to disruptions caused by instability and conflict elsewhere,” it said.

Countries in the region sought to inject money into the Lebanese banking system as they faced instability at home. For example, investments from Egypt peaked during the Arab Spring, and there was an uptick of Iraqi shareholders “follows the levels of violence in Iraq from the US invasion up to the oil crash.”

Foreign direct investment in Lebanon. (Synaps: Screengrab)
Foreign direct investment in Lebanon. (Synaps: Screengrab)

Additionally, international donors, have stopped funding the country’s reform programs without concrete progress made. In 2018, over $11 billion in loans and grants was promised at the CEDRE conference on the condition of reform across various sectors. One of those sectors is the country’s ailing electricity sector that fails to provide citizens with 24-hour power and drains state coffers annually. In 2018, the state-run utility company Electricite du Liban’s (EDL) deficit was $1.8 billion.

Real estate

The real estate sector – previously regarded as one of the only well-performing sectors – began slowing in 2018.

“This graph shows not a rise in real estate companies per se, but the fluctuating interest in buying, selling, and leasing properties on the part of companies of all kinds: Those featuring here incorporated in their description some reference to real estate transactions. This became a standard practice as the rent economy kicked in after the civil war, developing spectacularly despite the 2005 assassination of Hariri and the 2006 war with Israel, and climaxing between 2008 and 2014,“ the report read.

“Rising, artificially high prices made for a self-sustaining dynamic, diverting potential investments from more productive sectors of the economy.“

For years, the central bank subsidized housing loans via commercial banks and the real estate sector had been a major contributor to modest growth since 2012. It halted that program in March 2018, and in that year property transactions dropped by 17 percent year-on-year in the first quarter.

Way forward

A slipping peg, slowing foreign funding, a halting real estate sector combined with a post-war development policy that gave rise to income inequality have led Lebanon to its current predicament.

The Syrian war also had adverse effects on Lebanon. The countries economies have historically been interconnected, and Synaps finds a steep decline in the number of Syrian shareholders in Lebanese businesses beginning in 2013.

Now, deep in the throngs of economic uncertainty, the government must figure out how to pull Lebanon back from the brink.

The government is grappling with a faster declining economy spurred by the coronavirus lockdown. The country has recently said it would ask for financial assistance to alleviate the immediate effects of coronavirus, but Lebanon for years has struggled to attract international donors. Having defaulted on its Eurobond maturities last month, that prospect has become even slimmer.

Last week, a leaked document showed the government’s plan to reform the country's banking sector and gradually devalue the official exchange rate, but analysts were skeptical, and warned that even if the plan were successful, Lebanon may well lose a decade of development.

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