Centuries of conflict between Germanic tribes and the Roman Empire are widely considered to have played a key role in the gradual demise of the empire. The Soviet Union collapsed a couple of years after the end of the Afghan War.
Being in a theater of war extracts its toll on any society.
When a state is occupied, rather than waging war in another land, there is less of a direct cost on treasury expense, but the indirect geopolitical instability is often even more costly, in terms of lost prosperity – due to capital flight, broken infrastructure, brain drain, poor investment climate, corruption, financial instability and immeasurable humanitarian loss.
Lebanon has been in a theater of war for over a century. Periods of geopolitical tension have eclipsed periods with stable ceasefires. The collapse of the Lira, the banks, and government debt can therefore not be decoupled away from the geopolitical reality surrounding Lebanon.
When the war ended in 90, Lebanon was placed under a Syrian mandate, backed by mutual understanding with KSA and the US, while the south remained occupied by Israel until 2000.
The Syrian mandate perpetuated administrative corruption by restricting political opposition and giving a free hand to the “peace cartel”. When Syrian troops left in 05, Lebanon entered into an unstable three-year period that culminated with the Doha Agreement in 08.
The benefits of stability are obvious when one sees that, from 2008-2010, Lebanon recorded a roughly $20bn balance of payments surplus thanks to large capital flows, which were also reacting to push factors from the global financial crisis.
The start of the Syrian war brought political uncertainty, was a factor in the two-year presidential vacuum and the double extension of MP terms, all of which translated into direct economic costs.
Syrian depositors temporarily boosted Lebanese banks and the real estate sector, though in the aggregate, the Syrian war led to infrastructure bottlenecks, closed trade routes east, which dropped real incomes, as growth neared 0% for many years.
Economic losses due to the war have been estimated by some at over $30bn, though the figure is disputed. The start of the civil war coincided with Lebanon’s debt-to-GDP ratio reverting its declining course in 2012, when it bottomed at 130% of GDP. Tax evasions, smuggling all increased creating fiscal pressures. The trade deficit topped over $15bn for the first time. Private savings imbalance almost doubled.
In addition, the decline of remittances in mid-2015, partly due to Iran-related sanctions, placed more pressure on the peg, led to the unsuccessful financial engineering and ultimately triggered capital outflows that brought liquidity and solvency down.
The causes behind geopolitical instability, factors driving it, and potential remedies to insulate Lebanon from conflicts will be discussed in future articles.