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3. Who Destroyed Lebanon: Hezbollah or the Banks?

A “bloc” of lawmakers, political parties, media outlets, and non-governmental organizations are peddling a platform that distracts attention from the paramount importance of disarming Hezbollah and instead blames banks for the utter misery that Lebanon finds itself in. Such an argument is either too dumb, or its proponents are too complicit with the Iran-backed militia. Hezbollah’s arms are the alpha and the omega of Lebanon’s problems.

The tired argument blaming banks rests on the premise that Lebanon’s national debt, now at $102 billion, was all blown away by profits for banks and the corrupt practices of the country’s oligarchs and more minor politicians. To rectify the situation, banks should be restructured, merged, punished, and humiliated.

And Hezbollah’s arms?

According to the same fallacy, Hezbollah’s armament is the product of corruption. Therefore, Lebanon’s salvation starts with reforming the bureaucracy and fleecing Lebanon’s banks of all the profits that they made over the past three decades because banks are not supposed to make profits.

Before we counter the fallacious argument, it is good to remind its proponents that if corruption produced the Hezbollah militia, then how come only the Shia community produced a militia in Lebanon? If corruption was the vehicle of illicit armament, then why have not the Christians, the Druze, and the Sunnis reconstituted their civil war militias?

The answer is that while Hezbollah exploited loopholes in the Lebanese political and banking systems, the militia was not the result of corruption but of an imperial, ideological, Islamist Iranian project that swept nations, whether with established banking sectors – like Lebanon – or without banks, such as Gaza, Yemen, and Iraq. Hezbollah would have been there, with or without Lebanon’s corruption and with or without the banks.

Now to the more serious economics argument.

In the U.S., two indicators are scrutinized, year-round, to gauge the health of the economy: Economic GDP growth and employment. Recently, a third indicator – inflation – has come under the spotlight too.

In Lebanon, for some reason, the phrase “GDP growth” is never part of the economic debate. Instead, the Lebanese seem to be obsessed with arguments over the best course of action to attract rent – whether Gulf aid or foreign loans from the likes of the International Monetary Fund (IMF) and the World Bank (WB).

What is worse is that the IMF and the WB rarely present Lebanon with economic plans aimed at incentivizing growth but always suggest their one-size-fits-all recipe of shrinking the government and shirking social responsibility.

In 2001, I was reporting on the annual budget discussion in parliament. The IMF had suggested that Lebanon let go of pegging its Lira to the US dollar, a demand that many in Lebanon endorsed. But late Prime Minister Rafic Hariri refused these recommendations arguing that such a move would have “shaken social stability for no clear returns.” Hariri was right.

Hariri’s calculus, however, assumed that the economy would be growing, without which, pegging the Lira would rely on deficit and national debt and thus become unsustainable.

Hezbollah, whose leader Hassan Nasrallah became the icon of perpetual war in Lebanon and the region, was a repellent to foreign investments and an inhibitor of GDP growth. Hariri understood the problem and held rounds of talks with Nasrallah to convince him to surrender his arms and allow Lebanon to become normal and let its economy grow. In 2005, Hezbollah killed Hariri, according to the UN.

The peg made Lebanon a high-middle-income country. A policeman made $500 a month, higher than his peers in most neighboring countries. With inflated purchasing power, Lebanon’s current account remained deep in the red. Beirut hemorrhaged foreign currency faster than it could replenish.

The state, whose borrowing risk was set at high due to Hezbollah and its wars, funded its peg, deficit, and debt with bonds that local banks bought using FX reserves deposits, often remittances or diaspora money parked in Lebanese banks. As foreign currency sources started drying out, the Central Bank embarked on a slippery slope of hiking interests to feed the government’s growing debt and service it, until there were no more reserves left. Lebanon defaulted and its currency lost 98 percent of its value.

Today, the same “bloc” argues that banks “criminally” took risks by buying risky state bonds. But with the state’s high interest rates, any bank that opted for lower-yield investments would have risked becoming less competitive. Like in America’s subprime mortgage collapse of 2008, any single bank that stood against the flood would have been knocked out.

By 2020, the Lebanese formal economy had collapsed and given rise to an informal cash economy that better serves Hezbollah. To reverse the situation, the formal economy must be revived, a step that requires a growing GDP, which in turn requires stability that attracts investors. With Hezbollah’s arms, stability is impossible, hence why disarmament is the key to solving Lebanon’s problem, not vice versa.

Many in the “bloc” seem to have their eyes on becoming presidents and prime ministers and think that currying favor with Hezbollah requires diluting their attacks on the militia. The “bloc” is politicking, not speaking truth to power.