Chapter One: Introduction. 2

Overview of problem… 2

Need for the project 4

Problem statement 6

Significance of the project 9

Scope of study. 10

Chapter Two: Literature review.. 11

Literature Overview.. 11

Key terms. 12

Theoretical background on the causes of financial crisis. 12

Banking panic. 13

Credit and market freezing. 15

Currency problems. 16

Chapter Three: Methodology. 18

Chapter Four: Results. 20

Chapter Five: Conclusions and recommendations. 24


Chapter One: Introduction

Overview of problem

            A financial crisis is a situation in a country where the general supply of money does not meet the need for money from its citizens. Banks experience the largest impact of financial crisis because individuals will tend to withdraw any available amounts of money compelling banks to either sell their investments or close business. Ordinarily, the financial crisis causes a decrease to the value of assets, while it affects the ability of business organizations and consumers to pay their debts (Heather, 2019). As observed, a financial crisis is limited to banks, but this can be spread out to the whole economic situation to a country or region as a whole. Lack of proper policies to check the impact of a financial crisis can lead to a recession or depression with wide protests from citizens. Lebanon is a typical country in the middle East the is experiencing a financial crisis, this is not only threatening its future, but the entire region (Heather, 2019). Lebanese have taken to the streets to protests against the economic situation and this is worsening to a point where it has become uncertain.

Political turbulence, reducing levels of confidence and increasing structural problems have become a characteristic of the Lebanese economic situation. The economic growth of Lebanon stands at 1.4% from 2011, and this has even reduced to 0.3% in 2018 (Heather, 2019). Comparably, the situation is increasingly worsening compared to the pre-Syrian crisis where its economic growth was estimated to be 6.3% for seven years since 2003 (Heather, 2019). Similarly, the near one-year political vacuum that existed between May 2018 after the elections to January 2019 when a new government was formed negatively affected existing business confidence (Heather, 2019). Consequently, purchasing managers’ index is been segregated to contractionary territory in the last six years. On the other hand, the new government has committed itself in supporting reforms and crafting an agenda that will improve investors’ confidence, but this remains a pipe dream.

The fiscal deficit of Lebanon has increased to a double digit in the last two years forcing the public debt to increase above 150% of its national GDP (UNCTAD, 2017). Currently, the financial deficit has been found to be 27% of its GDP, which is a dangerous situation for financing. Particularly, the situation will reduce to the inflow levels of foreign deposits, and this worsened in 2019 (UNCTAD, 2017). According to the central bank in Lebanon, this problem will be contained because the currency is pegged to the USD, but the interest rates, country risk the volatility of the financial market have increased. However, the economic situation in Lebanon has resulted to several structural problems like loss making, unstable power sector, increased corruption and sovereign downgrades have faced a lot of economic pressure (Bauer, 2017). In the end, Lebanon economic crisis has resulted to wide protests in streets across the country, and this is threatening the political order and stability.

Business in Lebanon has become worse as owners are reducing salaries by half, while others are considering shutting down. Business have increased their advertisement strategies, but still they have failed to attract customers.  This is a clear sign of the Lebanese financial crisis that is slowly moving towards a disaster. For instance, banks have now restricted withdrawals of USD, politicians are facing protests that have made it difficult for them to contain the financial crisis. The debt ratio of Lebanon has increased rapidly to become the highest in the world estimated to be around USD 86 billion (UNCTAD, 2017). The government cannot undertake any development project, but instead its only capable of paying salaries, which has severely dealt a blow to infrastructure development. Alternatively, the government has resorted to increasing taxes to curb the deficit, and this has sparkled wide protests in major towns and cities in Lebanon (Bauer, 2017). The protests have now targeted political elites and have pointed to corrupt regimes and mismanagement as the leading factors to the prevailing financial crisis. Currently, the country is on its last breath towards a financial collapse. There is a need for this problem to be addressed urgently through forming a new government, but this faces a lot of problems especially in selecting the prime minster (Heather, 2019). Protestors want all politicians to resign and be replaced with non-political technocrats to fix the financial crisis. The Lebanese economic problem has its roots from the Syrian civil war, where political and economic decisions that plunged the country into a major crisis were made, and this is rapidly catapulting into a civil war that requires urgent attention.

Need for the project

October 17th 2019, thousands of Lebanese have marched to the streets to protest about the financial crisis in the country by blaming the politicians for corruption and mismanagement. This increasing protest were triggered by a government decision to increase taxes and other social problems that had affected citizens. Comparably to earlier protests in 2015, the current civil actions are decentralized and have a grassroot origination instead of being supported by political parties (Heather, 2019). The protestors want all government officials to resign, which has been achieved. Importantly, the protests have created an opportunity for Lebanese to discuss with each other and this has successfully incorporated women and young people. In this regard, protestors have outlined their long-term demand for better access to public services, good standards of living, availability of employment opportunities, security, housing and protection of civil liberties by the government. In the course of the protests, slogans like “All of them means all of them” is an indication that Lebanese still support their sectarian identities as a pillar of ‘unity in diversity’ and not a means to end long impending sectarian ideologies (Heather, 2019).

It is not clear whether the protestors are going to achieve all their objectives because of the increasing financial, economic and political crisis caused by the protests. Foreign countries have a major role in shaping the Lebanese political space like the Iran-Hezbollah partnership (Heather, 2019). As such, it is clear that, the demand to form a new government by the protestors will face a huge problem to unfold the financial crisis because of foreign political influence. Accordingly, the new government can decide to adopt the Algerian context where they believed the protests would lose momentum. Secondly, theirs is a possibility for calling a snap election to channel political energies and end protests from the streets, but the complexity is how the new players will gain political seats in parliament (Heather, 2019). Therefore, there is a need to establish a precondition before setting new elections.

Another option for the new government is through creating a roadmap for important financial reforms. This requires a consultative process that will oversee the changes to the election law, the constitution, decentralization and strengthening judicial independence. This project is important because it will point out short terms benefits that will accrue from government reforms like recovery of stolen revenues, better and efficient systems to tax collection, improving the judiciary and local councils (Heather, 2019). Therefore, this project will not only propose meaningful reforms to the impending problem, but will ensue sustainability of the Lebanese society through improving the level of service delivery and involving all citizens in making political decisions about their problems and future.

Problem statement

The current protests regarding the impending financial crisis in Lebanon is different from the initial mass demonstrations that have been observed in the country from 2005 until 2015 (Aseel, 2019). Considering the effects of the protests that started in October 2019 have distinct features that are unique to Lebanon. For instance, the current protests have achieved a popular support that has never been seen throughout the independent Lebanon from 1943. Importantly, the protests are not supporting a political camp against another, but it is an upsurge from the grassroots that have defied the legitimacy of the rule by political parties in the country (Aseel, 2019). The protests in Lebanon because of enduring financial times was triggered by political grievances that are founded on socio-economic basis. Initially, past protests were founded of need to regain sovereignty that had been taken away by the Syrian regime in 2005. In the 2015 version, protestors were complaining about ineffective governance and failure to deliver on promises especially on improving the socio-economic reforms. With the debt-to-GDP ratio having reached 150% and problems of the economy, it is clear that Lebanon has stumbled into a deep financial crisis after the announcement of tax on WhatsApp (Aseel, 2019).

Lebanese have identified that they share similar socio-economic problems irrespective of the political affiliation and social groups. As such, the current protests have become decentralized, and within a short period of time they had established a 170, 000-kilometer-long human chain (Aseel, 2019). This is a clear sign of solidarity and national unity that has never been witnessed in any jurisdiction in the world, notwithstanding the geographical location and religion. The decentralized nature of the protests has offered Lebanese with an opportunity to create a civic space that suffice as both state and society. Consequently, public for a has become an important opportunity for the public to express their cultural issues and civic discourse on important matters that affect Lebanese (Aseel, 2019). The camping style utilized in the protests have been sufficient to attract thousands of Lebanese to engage each other on better ways of promoting the uprising main objective. Here, professionals have used the opportunity to educate Lebanese about the issues affecting the economy and impending political concerns. As such, they are finding solutions to societal problems that politicians have failed to fix in a number of years.

In comparison, the 2005 demonstrations were characteristically centralized, framed and orchestrated by the ruling party whereas the later 2015 protests were sponsored by civil society (Malaeb, 2018). Therefore, both the political civil society did not anticipate the nature of the recent protests in Lebanon. Whereas leaders were not present in the current protests, it has not suffered any problems of leadership, but instead it has promoted an evolution of political parties and emerging civil society groups. In achieving this success, the protestors have used social media as the main basis of communication and coordination of their activities. Importantly, the social media platform is effective in achieving a quick and coordinated action, but it has also avoided escalation of violence even where demonstrators have been provoked by political factions (Malaeb, 2018).

Considering a political system where young people and women are chronically underrepresented, sit-ins and roadblocks are strategic avenues to make their concerns known. Failure to have a top-down organization is a clear indication that the current protests in Lebanon are surging for visibility. Young people are at the fore-front of the demonstrations and not the traditional activists or charismatic political leaders (Malaeb, 2018). Lebanon is an economy that hardly creates over 5000 job opportunities, but it has over 30, 000 graduates every year. Consequently, the level of youth unemployment and systematic isolation from politics leaves youth with no other option than engaging in the protests (Hall, 2019). Similarly, prominence of Lebanese women in the demonstrations is a clear indication of their resolve to participate in national issues. According to the World Bank survey (2017), it is estimated that 25% of Lebanese women are directly engaged in labour force. Worse still, only 5% of women hold political offices in both the municipal level, parliament and government. This are systematic problems that have seen Lebanon ranked at position 140 based on its 2018 Gender Gap Index (World Economic Forum, 2019). The nature and practice of patriarchal politics has resulted to exclusion and marginalization of women from public offices. Also, women have been consistently denied their fundamental civil rights. For example, it is not accepted in law for a Lebanese woman to pass their nationality to children (Dina, 2019; Sunniva, 2019; Mira, 2019).

The increasing levels of fear castigated by the decentralized protests because of a financial crisis shows a host of systematic problems in Lebanon. Whereas the financial crisis is the main motivator for the protestors, there are other problems of youth unemployment, corruption, women role in society and security that define the protests (Malaeb, 2018). Therefore, there is a need to properly examine the causes of the financial crisis, its impact and possible solutions so that the impending protests are averted and further losses are minimized.

Significance of the project

Protests because of the current financial crisis in Lebanon has yielded political demands, where Lebanese want an immediate and complete resignation of government officials. They propose a small government that has extraordinary powers, but must be comprised of technocrats that do not have any political affiliation (Malaeb, 2018). Secondly, they are championing for a speedy implementation of reforms and a snap election so that they can elect a substantive president. Basically, the intention demonstrated by Lebanese protestors imply that a need for accountability, youth employment, social justice and equitable access to public services is what is required, but the ruling party has failed to offer (Malaeb, 2018).

Lebanon is ranked among corrupt countries in the world at position 138, and as much as 77% of Lebanese nationals do not have trust with their political leaders (Malaeb, 2018)). This does not come as a surprise because a majority of Lebanese do not have social security, and many of them are suffering illnesses from environmental degradation. Concerning infrastructural development, Lebanon is ranked at position 113 among 137 countries, and it has the poorest quality distribution of electricity (Malaeb, 2018).  The economy has suffered negatively from severe power shortages, increased inefficiency and it cumulatively amounts to about 40% of its total debt. Whereas the situation requires an urgent redress, it is clear that political interests have shielded proper reforms, and the financial crisis has offered the real opportunity for these problems to be addressed.

Rich people in Lebanon account for only 1% of the population but receives 25% of the entire national income. Interestingly, 0.1% of the population is comprised of 3700 people who earn over 50% of the entire wage bill (Malaeb, 2018). These are people who are properly connected to politicians because of being relatives of business partners. In this regard, there is an urgent need for organic interdependence that exists between political and economic spheres must provide a new basis for allowing exercise of democratic principles, capability, cost-efficiency and government accountability on its activities. This project is important because it will show that administrative reforms are technical issues as opposed to politics. Secondly, development of a novel political spirit toward public institutions in Lebanon is connected to existence of political power (Malaeb, 2018). Thus, this project will serve as a pointer to governance issues, protection of human dignity and provision of citizenship rights provided by the political system. Lastly, the solutions provided by this project will inform policy reforms that target on reducing bankruptcy, unemployment and social justice (Malaeb, 2018).

Scope of study

This study will be presented in five sections. The introduction will cover descriptions about the causes of the financial and economic crisis in Lebanon. The second part of the study will cover the literature review about economic and financial crises in the world. Here, the literature review will cover evaluation of monetary and banking aspects that can be used to identify possibility of a crisis to occur (UNCTAD, 2017). The third section will cover the methodology of collecting data for analysis to support identification of causes leading to the development of the financial crisis. The fourth section will deal with discussion about the impacts caused by proposed financial policies on commercial banks and the Lebanese economy. Lastly, the project will cover better solutions through fiscal behavior that can be used to revert financial crisis. In completing the above-mentioned sections, this project will be guided by the following research questions:

  1. What is the state of economy in Lebanon?
  2. What are the causes of the financial crisis in Lebanon?
  3. What impact has the financial crisis created in Lebanon?
  4. What are the possible solutions to the financial and economic crisis?

Chapter Two: Literature review

Literature Overview

There are several discourses that have been advanced to mitigate the Lebanese economic crisis. Demonstrators believe the worsening situation is caused by political elites who have intensified exploitation of state resources to benefit their individual gains (Malaeb, 2018). Lebanon is not dominated by a single ruler, but it is managed by several leaders using the sectarian approach. Job opportunities are given to individuals through quotas among its 18 sects with equal distribution to both Muslims and Christians (Bauer, 2017). This system is at fault because it has enhanced looting in government. Secondly, the fractured nature of politics in Lebanon is prone to foreign interference that has enhanced the domestic crisis. The ruling elite have in the past been involved in decisions that have not considered an increased level of poverty and a tax rate that only focuses on promoting inequality. Basically, the government is at fault in this crisis because it has not addressed increasing cases of corruption and foreign exchange currency crisis (Le Borgne & Jacobs, 2016).

Key terms

Lebanon has not addressed the real issues affecting the financial crisis, and this is rapidly transforming to a real crisis after the Lebanese Lira (LL) to the dollar is likely to fall.  The financial crisis has been advanced by Banque du Liban (BDL) policy (UNCTAD, 2017). In this BDL policy, they offered generous interests that are payable to banks because of dollar deposits. The rates exceeded the international exchange rates leading to huge losses. The crisis conditions have been influenced by increasing fiscal deficits and a government debt that result from uncontrolled government spending on basic items as opposed to capital items. The major effect of BDL policy is negative net reserves.

Theoretical background on the causes of financial crisis

In any country, financial and monetary policies are created with the sole purpose of improving efficiency and equitable resource allocation. According Rajan and Zingales (1998), it has been established that financial development is linked to economic growth and efficiency. However, eruption of a financial crisis in a particular country is sufficient enough to generate extreme disruption to desired functions and services of the established financial and monetary policies. This is a common phenomenon that has happened throughout history of the world, and a lot of global financial systems have been affected. In the last 10 years, the world has observed melting down of outstanding financial institutions across the world like in the US and Europe (Malaeb, 2018). Consequently, they have experienced a drastic reduction in lending and commercial activities, which has created a lot of concerns to the European Monetary Union. In many nations, a need to identify the causes of financial crisis, proposing strategies for policy makers and solving economic crises have become a top priority (Malaeb, 2018). The recent economic problems across the world have presented a new basis for identifying the causes of financial crises. In this regard, policy makers need to understand the theories about financial crisis so that it guides in the analysis of a particular case study. This is important for addressing current challenges and advising on a better way to design a reliable financial system for the future. According to Goldstein and Razin (2012), a financial crisis can be triggered by three important factors as; banking panic, credit friction and market freezing, and currency depletion.

Banking panic

Diamond and Dybvig (1983) are the leading scholars across literature of banking panics in creating a financial crisis. Naturally, banks have a responsibility of providing finance to long-term assets through allowing short-term deposits. Here, they create an advantage of share the risks with investors from certain problems of early liquidity requirements. On the other hand, such a responsibility exposes the bank to risks of a bank run, where a lot of creditors will opt to withdraw money early contrary to an earlier arrangement. Basically, this results to a coordination failure, which is at the pinnacle of fragility of the entire banking system. For instance, in a situation where depositors withdraw all their monies from commercial banks, it is highly possible that the bank will fail. As such, it prompts other depositors to withdraw their money.

The problem of bank runs has been a common problem for many years (Calomiris & Gorton, 1991). Policy proposals made in the start of the 20th century compelled banks to take insurance of banks, which reduced possibility of such problems occurring. Whereas these policies have offered a better platform, bank runs are still a major leading cause of financial crisis in the world, especially insurance is limited or does not exist. Majority of bank runs problems have been identified in east Asia and nations in the Latin America region. Recently, the Northern Rock Bank is a clear example of a commercial bank in the UK that has experienced a financial crisis because of bank runs (Shin, 2009). In this particular example, investors lined up in large numbers to withdraw all their monies. Secondly, the repo market is another example of bank runs because of a financial crisis that made it difficult for investment banks to obtain finance for financing short term activities of customers (Gorton & Metrick, 2012). In the end, financial institutions like Bear Stearns or the Lehman Brothers collapsed. Bank runs are also evident in money-market funds whereas assets are majorly backed by the paper market (Schroth et al., 2012). According to Chen et al. (2010), the level of fragility caused by poor coordination is a public problem to open-end common funds.

According to scholars, it is clear that bank runs problems are caused by poor coordination. Therefore, it is important to investigate on the possible solutions to coordination failures and bank runs to working financial systems of a country. As identified above, insurance is an approach that can be used to manage this concern, but it has severe implications to moral hazards. Consequently, every country should re-look into its deposit insurance regulation. Basing on economic theory and the global-games model, it is possible to analyse the significance of insurance to properly manage bank runs and its effect of moral hazard (Goldstein & Pauzner, 2005).

Credit and market freezing

Many markets experience credit friction and market freezing that points on the evolution of a financial crisis. This is determined by the behavior of depositors or creditors during different times in the economic market. Majority of problems in the financial market evolve from the context of the balance sheet. Importantly, the quality of loans given by banks is influenced by a state of equilibrium and possible friction that force commercial banks to reducing lending to avoid any possibilities of bad outcomes. According to Stiglitz and Weiss (1981), they offered a basic rationale that can be used to explain existence of a credit rationing in the commercial market. Considering the basic theory of economy, an equilibrium forces financial institution to adjust their prices so that they are able to satisfy the demand and supply to avoid any possibility of rationing. Ordinarily, this situation is shown that it will not occur in the credit market because of an endogeneity demonstrated by the quality of a loan. In this regard, two important kinds of friction that influence the level of rationing exists as moral hazard or hostile selection.

Extensive literature has focused on establishing the impact of credit frictions to level of lending and moral hazard. Holmstrom and Tirole (1997), postulated a model of canonical representation where a borrower is capable of diverting resources on behalf of their creditor. In this instance, it implies that creditors will be reluctant to provides money to borrowers. In order to have a smooth flow of credit, it is imperative to have a borrower to have enough at stake to ensure that the project becomes a success. In doing this, he needs to ensure that he is limited with the incentives to reallocate resources. In the end, it will create a limit to the level of credit, but this can be amplified through worsening economic situation in the market, and build up to a major crisis.

Forces from credit freezing have become common in the global market, especially in creating world economic recession in 2008. Basically, this are manifestations that result from extended economic shocks enhanced by friction in how credit is provided in the market. Several efforts have been provided to link credit frictions and the existence of problems in the macro-economic models. According to Bernanke and Gertler (1989), they found out that credit frictions utilize credit frictions to extend and increase the impact of economic shocks in a particular market. According to recent studies, introduction of a financial-intermediary sector to conform with macroeconomic models is important for proposing policies to improving a situation of economic crisis (Gertler and Kiyotaki, 2011; Rampini & Viswanathan, 2011).

Currency problems

A major pillar in creating a financial crisis is governmental inputs that causes collapse of its own policies. This can be through a tax regime or an exchange-rate arrangement. For example, the Bretton Woods currency crisis that existed in 1970s evolved from a systematic desire for the government to maintain a fixed exchange-rate, but this was not supportive to its own policy objectives. This resulted to a sudden collapse of the political regime (Goldstein and Razin, 2012; Krugman, 1979; Food and Garber, 1984).  Considering the theory of currency crisis, a country has three policy options as free oversees capital flows, monetary autonomy and stabilizing the exchange rate. European countries have focused on achieving both he first and third goals, but have put in little focus on achieving the second objective. As such, these countries have limited their ability to deal with economic shocks that are required to maintain a national debt, and this will end by triggering a financial crisis. Coordination problems created by investors and speculators will increase and aggregate a financial crisis and this explains the reason why some countries opted out of the Monetary union.

Extensive studies on currency crisis have been based on the role of government alone in creating a financial crisis. Considering the third-generation models, it is clear that bank crisis and credit frictions will automatically lead to a financial crisis (Chang & Velasco, 2001; Goldstein, 2005). This is a typical concern to the financial situation that was experienced in east Asia in the 1990s. Here, both the exchange-rate regime and financial sector collapse at once. This is a clear indication that government and financial institutions are ripe in imposing an existing financial system to a high level of fragility.

Chapter Three: Methodology

The main limitation in choosing a methodology that can be used to evaluate a financial crisis is influenced by the impacts of isolating issues that result into the crisis. In the case of financial crisis in Lebanon, there is a systematic methodological problem in isolating the socio-economic effects created by the crisis from factors located both Lebanon and foreigners. Whereas the financial crisis in Lebanon has a long history, its decentralized nature observed in the recent protests is a new concept. As such, it does not offer a longer period which can offer an opportunity to assess facts on how the financial crisis has resulted to a decentralized nature of the protests. Similarly, it is not easy to access both qualitative and quantitative data relating to actual factors causing the financial crisis (Saunders et al., 2007).

In order to collect information and reduce the above concerns, it is important that the limitations in methodology are adequately addressed. This study will adopt both a qualitative and quantitative approach in research so that it can provide a different perspective about the causes of the financial crisis. A qualitative approach will enable this study to understand the actual insights and emotions that were behind the protests (Saunders et al., 2007). However, a quantitative approach will create a broader perspective in understanding the reals issues causing the financial crisis. On the contrary, combining both qualitative and quantitative approach will result to conflicts in the methodology because of opposing perspectives (Saunders et al., 2007). Since the recent protests in Lebanon have focused on using social media, this project will rely on an online research to identify both qualitative and quantitative information from secondary sources.

The findings of the study will be collected through secondary sources of information. In this regard, the data will be collected from literature review, expert interviews, and reports sent by reputable organizations and government entities about the financial crisis in Lebanon.

Here, the researcher will focus on existing information to identify the causes of the crisis and its impact. Reliable materials from the Central Bank of Lebanon, books, journal article and other online materials will be used to collect data for this study. The secondary data collection is important because it is fast and cost effective to undertake. Similarly, secondary sources are not affected by bias, and will provide a high level of accuracy to the findings (Saunders et al., 2007). The main ethical consideration in this study will be obtaining consent from commercial organizations to use their data to evaluate the impact of the crisis.

Chapter Four: Results

The information gathered has clearly indicated that political turbulence has lowered the level of confidence, which had resulted to negative structural problems. Economic growth that was initially stagnant at 1.4% has reduced to 0.3% in 2018 and this is even by far worse that its figure during the pre-Syrian crisis (Malaeb, 2018). According to experts, the dwindling economic growth was influenced by a political vacuum the existed in Lebanon between May 2018 and January 2019, and this lowered the level of business confidence. We also found out that the new regime has proposed several reforms, but the level of investors confidence is still limited to contractionary territory. Importantly, the public debt has hit 150% of its GDP in 2018, with the account deficit being 2% of the GDP. This has slowed deposit inflows, which have even become negative because of reduced financing in 2019. According to the protestors, the financial crisis being experienced in Lebanon has resulted from increased loss making, power outages, corruption and sovereign downgrades (Malaeb, 2018).

One of the notable demands from the protestors was the government to be dissolved. The pressure created by the protests and sit-ins was enough to force the prime minister out of office, but reinvigorating the important reform agenda still remains a concern for the new government. The new regime is guided by the Paris conference proposal for implementing its stabilization, growth and employment strategies. According to the Capital Investment Plan that was provided by the World Bank, the new regime is depending on donors to obtain USD 11 billion to reduce the public debt (IMF, 2018). The government argues that this cannot be achieved easily because political interference.

Fiscal sustainability is another important issue that will provide a basis of understanding the financial crisis in Lebanon. According to statistics from secondary sources, the fiscal deficit has reached double digits at 10.9% of its entire GDP in 2018 (IMF, 2018). This situation has forced Lebanon use its revenue to offset the debt, electricity is costing another 15%, but the level of expenditure is rigid and influenced by alteration of interest rates and oil prices in the global market. The level of pensions has become expensive and have not been distributed equitable because it only forms 2.5% of the GDP. As such, only 2% of the population has been served by the government over a period of ten years (World Bank, 2018). The presence of many refugees in Lebanon have also increased pressure on provision of social services.

Another issue identified in the literature is the unsustainable nature of the public debt. The debt-to-GDP of Lebanon has increased to over 150% since 2018 making it one of the highest across the world (IMF, 2018). According to the finance minister, the Lebanese government crafted a plan to restructure its debt, but this is believed to be the main reason that initiated the credit default exchanges. For example, this decision prompted Qatar to purchase USD 500 million from the allocated government bonds (IMF, 2018). This was supported by a hasty indication from Saudi Arabia that calmed the markets. In the end, it only served a temporary basis, but left a major blow to the Lebanese public finance.

The currency peg on the dollar is a major factor in providing stability Lebanese economy. According to findings, the Lebanese pound has for a long time been pegged to the USD. According to Banque du Liban, pegging its pound to the USD has resulted to stability of the economy because it has increased credibility (Bassem, 2019). Considering the current situation, the real exchange rate will be changed, and this is likely to exert more pressure to reserves. Lebanon has seen a decline of its gross foreign reserves to about USD 39.7 billion in 2018, and the currency conversions have also reduced because of political uncertainties (IMF, 2018). Also, the Lebanese international investment has been estimated at 130% of its GDP because of its foreign direct investment (IMF, 2018). Accordingly, the extended current account deficit has shown that the Lebanese market is non-competitive. With a current account deficit of 27% to the GDP, it is obvious that large goods will be affected because reduction of exports and imports.


In the current financial crisis, Lebanon has a rigid structure of its expenditures, which require an improved structural revenue policy. Here, it is clear that implementing a new tax reform can be handy in improving the revenue collection. For example, in 2017, the Lebanese government had initiated a first tax reform that involved gradual increases of VAT, certain new taxes to financial institutions, income tax, gambling exercise duty on alcohol and tobacco products (IMF, 2018). However, the main challenge to this strategy was that negatively affected by an increase in the public sector pay. In order to improve the level of revenue collection, it is imperative that better ways of compliance be implemented and increasing the base of VAT. This is likely to generate an increase of about 3% GDP (IMF, 2017).

Banks in Lebanon have been comparably stable and resilient to the financial crisis for a considerably long period of time. The economy had assets valued at 440 of its GDP, indicating that is banking sector was large (Bassem, 2019). Basically, the financial system of Lebanon is comprised of banks that have proper capital bases with the capital adequacy ration estimated at 17%. This signifies that banks have realized profits for quite some time. Through proper policy regulations, banks in Lebanon have enjoyed positive reputation from foreign investors, but they have been faced with several risks. These include; maturity mismatch, dollarization of deposits and they are exposed to risks of public sector and central bank policies. This implies that the quality of assets in the private sector have worsened for Lebanon. The current macroeconomic situation observed in the real estate market is a clear indication of a reduction of asset quality. For example, the level of non-performing loans increased to 5.7% to the amount of gross loans given throughout Lebanon in 2017 (Bassem, 2019). This project failed to obtain sufficient data on housing prices, but it is clear that NPLs are supported by loans. Therefore, there is a need to ensure capital restoration to minimize impact on growth, interest rates and increasing prices of real estate assets (IMF, 2017). This strategy is consistent to the Basel Accord that requires banks to adopt best practices and promote sustainable restructuring to minimize sovereign risks.

The current financial crisis in Lebanon has caused political, socio-economic and civil rights concerns. However, the situation is likely to be worsened with the current impasse of agreeing on a new composition of the government (Bassem, 2019). It is highly likely that Lebanon will be faced with severe transformations that have negative impacts to both politicians and financial institutions. The protestors are demanding a government of technocrats in contrast to an inclusive government comprising of all sects. From a political point of view, a techno-political government is ideal for Lebanon (Bauer, 2017). The limitation is based on the fact that reconciling political parties to agree on a prime minister will be a regional issue. Here, the Hezbollah-Iran partnership is focused on creating a government at the height of increased US sanctions and deteriorating legitimacy.

Politics is the major concern of the protestors following the increased level of protests. However, the impending economic crisis is a real threat that has dire consequences to the economy and civil rights of its citizens. According to the Work Bank (2018), the level of poverty in Lebanon is likely to increase to over 50% if the situation will not be addressed quickly. On the other hand, even with a new government in place, there is a need to fast address the debt concern and implement other tangible financial and fiscal policies (Bassem, 2019). This can be achieved through implementing a three-year budget that is focused on reducing deficit by balancing it out and not through increasing taxes as was the case with WhatsApp. Similarly, the new administration must focus on minimizing wastage in government through curbing tax evasion, dealing with corruption and proper allocation of staff (Bauer, 2017). Considering the banking sector, it is a difficult task for the new government to punish their constituent lesser evils. During the financial crisis, the Lebanese pound has depreciated in value and the level of confidence within the banking sector has plummeted leading to an exodus of capital to other countries. Presently, banks are considering capital controls to remedy the situation, but this has resulted to bank runs from depositors. Either way, the government has no option but to act decisively.

Chapter Five: Conclusions and recommendations

As an overview, the economic position of Lebanon is likely to worsen as the protests increase. Protests have followed a financial crisis that has its roots on the decision by the government after the Lebanese Civil war (Bauer, 2017). The government decisions created a complicated fiscal environment that has perpetuated the crisis. considering that Lebanon imports more goods than it exports, changes in the fiscal policies have a greater influence (Bauer, 2017). According to the findings in this project, the main problem facing the Lebanese economy is the huge debt burden created by inefficiencies, wastage and corruption. On the other hand, the political turmoil in Syria has aggravated the financial crisis in Lebanon by limiting capital inflows (Bassem, 2019). Also, the findings have demonstrated a shortage of dollar in the exchange market, and this is a concern because the Lebanese pound is pegged on the dollar. As such, exchange of money within the financial system has been hampered (Bauer, 2017). Another concern established from the findings is a high interest rate in the Lebanese market that has restricted inflows leading to scarcity of the dollar. In the end, prices of basic commodities have increased, while the citizens have suffered poor infrastructure and youth unemployment (UNCTAD, 2017)

The main constraint in evaluating a policy is how to incorporate credit frictions to the market economy. In the context of Lebanon, the initial regime suffered from economic problems created by coordination failure, incentive concerns, existence of asymmetrical information and government shortfall. Considering these issues into the context of a macroeconomic model, it is possible to provide a quantitative output for defining an optimal mix and proper financial policies. In many cases central banks will apply models solve problems caused by existing macroeconomic models. According to empirical studies, this project has identified that financial crisis are caused by banking panic, credit friction and market freezing, and currency depletion (Bassem, 2019).

In conclusion, this project can state that, the financial crisis in Lebanon has been caused by several factors as banks, credit frictions and currency depletion. First, the Banque du Liban (BDL) fiscal policy that promoted borrowing has resulted to inflation. Here, banks have been left to depend of deposits from rich Lebanese who earn large interests than a majority of locals leading to income inequality. Secondly, exploitation of state resources by politicians for self-gain is another major cause of the financial crisis. The government of Lebanon is controlled by a sectarian approach that allocates job opportunities based on quotas and religion. As such, this system of government has enhanced opportunities for looting, foreign interference and rampant corruption a

The protests in Lebanon are a threat security to Lebanon and its neighbors. The protestors are not satisfied of the proposal offered by the government to revert the problem. Therefore, there is a need to investigate these issues so that responsive policies that will satisfy the protestors are identified.  Also, this project is needed to provide solutions to avert any major problems that are likely major negative effects. The financial crisis in Lebanon has resulted to social and economic effects (Bauer, 2017). As the protests increase, more refugees have entered Lebanon piling pressure to the provision of social services and financial wellbeing. Secondly, poverty levels in Lebanon have increased because of reduced access to financial services. Thirdly, the level of inequality has increased on the basis of political space, job opportunities and human rights. Fourthly, the financial crisis has created a security threat to Lebanon and its neighbors like Syria.

This project has shown that, the financial situation in Lebanon is very unstable and requires reforms. Political stability and high-level systems of governance are the main proposal for the new regime to tackle the financial crisis in Lebanon.  To mitigate the real issues causing the financial crisis, it is fundamental to implement reforms that will combine currency, banking and credit frictions. Therefore, this project proposes, the government should reduce its excessive borrowing so that it can allocate some to provision of socials services. Hiring of employees based on the sectarian perspectives should be stopped to improve the level of transparency in political appointments (Bauer, 2017). Thirdly, there is a need to create a foreign policy that will reduce the number of refugees in Lebanon to minimize the burden on social resources. Similarly, we propose “one-time tax” on financial institutions to ensure that a better working environment can be created for Lebanese to do business. As a remedy to reduce expenditure, it is prudent for the government to cut salaries of its highly paid employees and minimize corruption. Basically, the overall solution to the financial crisis in Lebanon is through capital control, employment creation, devaluation and reducing tax rates. As a recommendation for future studies, a similar study should be undertaken to determine external factors that would have aggravated the financial crisis in Lebanon.