Lebanon going back into a war economy, and the consequences will be disastrous

The recent crisis affecting Lebanon has been designated by several characteristics: “deliberate depression”, “economic crash following a ponzi scheme”, “mismanagement of the economy”, and so on. Yet what has been overlooked is in fact much more worrying: A gradual redistribution of wealth and social and economic outcomes similar to what war economies go through. An yes, Lebanon is witnessing yet another war, but this time it is waged by its ruling class against its people.

Since the end of 2019 the corrupt government supported by the cartel of ruling parties, backed centrally by Hezbollah, violently crushed a peaceful uprising which demanded an end to endemic corruption. The banking cartel in parallel decided to wage a financial war on citizens, instituting unlawful capital controls and causing through coordinated actions with the Central Bank an unprecedented monetary crisis that crippled the economy. Three years after, the Lebanese pound lost 98% of its value to the US dollar, inflation exceeded 200% per year and the ordinary Lebanese lost all of their purchasing power, savings, pensions and whatever hope they had for a better future.

Yet not all Lebanese have suffered from this crisis. In fact a minority has benefitted from it and continues to thrive on what could be called a new war economy.

The crisis has substantially increased poverty (with the national poverty rate increasing from around 33% in 2019 to more than 80% in 2022) and destroyed traditional income sources. A look at the distribution of households income and its evolution between 2018 and 2021 reveals a significant downward shift: In 2018 57% of households earned more than 1000$ per month, while in 2021 this share was down to only 2%. In parallel, while 18% of households earned below 400$ a month in 2018, their share dramatically increased to 92% in 2021.

Source: Author computations based on data from the Central Agency of Statistics and Human Rights Watch. LBP earnings have been adjusted to the prevailing average black market exchange rate in 2021.

This substantial decline in earnings mirrors the massive drop in the country’s Gross Domestic Product (GDP). World Bank estimates have put GDP at almost 21 billion USD in 2022, compared to 55 billion USD just four years before.

Data source: World Bank.

Yet one would expect that lifestyles and consumption trends would be affected by this massive (deliberate) depression. It turns out this is not true for everyone. A look at some import patterns reveals interesting, albeit not surprising, findings. Car imports for instance dropped significantly by 2020 (divided by 6 compared to their 2018 level), yet increased since then to reach a level in 2022 higher than 2018!

Source: Author computations based on Lebanese Customs statistics.

A similar trend can be found for meats imports, which dropped from 34 thousand tons in 2018 to about 21 thousand tons in 2020, yet increased again to 30 thousand tons in 2022.

Source: Author computations based on Lebanese Customs statistics.

Caviar imports also followed a U-shaped trend: declining significantly from 3.7 tons of imported caviar in 2018 to 0.5 tons in 2020 and 2021, and then dramatically increasing again to 3.2 tons in 2022.

Source: Author computations based on Lebanese Customs statistics.

So how is it that in an economy undergoing economy depression several commodities such as cars, meats, caviar and certainly many other commodities have been witnessing a reversed trend? While there are no new national detailed data about individuals’ expenditures, incomes and wealth distribution, these trends from commodity imports reveal a pattern of redistribution of wealth that is definitely at play.

As the formal economy composed of regular income sources from traditional economic sectors (such as government employment, services, and other formal private sector activities) is being shattered, it seems that Lebanon’s shadow economy is flourishing. A war-like economy based mostly on cash transactions where informal and shadow trading mostly governed by the USD currency is thriving.

A shadow economy is usually defined in terms of two major types of activities: illegal and legal. Illegal activities are linked to drug dealing and illegal trade in various goods and people trafficking; while legal shadow economy activities are mostly linked to tax evasion and avoidance.

Table source: Schneider (2017)

The estimates of the shadow economy for Lebanon related to legal activities range from 32% of GDP on average (1991-2017) (Medina and Schneider, 2019) to a more recent estimate of 36.61% of the country’s GDP in the year 2018, with a tax evasion share reaching 30.04% in 2018 (Dahdah Kareh 2020).

With respect to illegal activities, there are no formal estimates, but one could safely assume a range between 10% – 20% GDP. Various estimates have for instance put cannabis production at 3$ billion annually, and captagon production and trade at 1$ billion. There are no estimates for arms smuggling, illegal people trafficking, black market trade in currency, and many other illicit activities that are currently thriving.

All in all, the shadow economy estimates for Lebanon including legal and illegal activities could easily reach 50% of GDP. This would amount today to an estimated total of around 10 billion dollars annually. For comparison, the government’s annual revenues are now worth just $0.5 billion, twenty times less.

The shadow war economy is therefore taking over the country and dwarfing the role of the state. This could engender significant and irreversible damage on the Lebanese society and its survival, and it would require decades to build back what this war economy is currently destroying.