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What caused the 2020 Beirut explosion? Analysing a broken system

September 14, 2021
Editor(s): Ben Griffiths
Writer(s): Chamindu Athauda, Jade Chen, Morgan McDonagh, Stephen Kanavoutsos

On August 4th 2020, a massive explosion in Beirut Port killed more than 200 people and caused approximately $4.6 Billion USD worth of damage. This explosion was triggered by technical problems in a shipment of ammonium nitrate and resulted in legal consequences. Several ministers were subsequently charged for negligence. The scale and severity of this tragedy sent Lebanon into mourning, while catalysing a systemic government breakdown as many blamed poor governance and corruption for the accident.

Following the harrowing aftermath of the explosion, Lebanon’s precariously maintained financial and economic stability was further undermined by the absence of a fully empowered government and a fragile sectarian power-sharing system. Moreover, real GDP has fallen 20% in 2020 compared to the 6% decline in 2019, while the economy has been plagued with triple digit inflation (100% in September 2021, peaking at 150% in March). Public sector debt has increased to such a substantial level that the government is on the precipice of default as the banking sector – which lent three-quarters of deposits to the government – has become functionally bankrupt and increasingly illiquid.

This dramatic increase in government debt can be linked to mismanaged fiscal policy funded by inefficient spending which has fundamentally destabilised the economic system. Hyperinflation, outlined above, is a prominent dimension of the crisis as food prices soar over 400% Dramatic inflation on core consumer goods has a disproportionate impact on lower socio-economic status individuals, which worsens existing inequality.

Since the Beirut Port disaster and the weaknesses it further exposed, residents have suffered power cuts, job loss, and a significant downturn in their quality of life. Reeling from the devastation of an explosion fuelled in part by government mismanagement and corruption, the people of Lebanon have been plunged into a financial crisis with long-lasting ramifications far beyond narrow economic metrics.  


Applying an institutional lens


Many of the challenges and issues that exist in the state of Lebanon today, are either exacerbated, or are in fact symptomatic of the governmental system. The government’s inability to address issues and crises is directly attributable to its sectarian structure.  The National Pact, established in 1943, asserted the independence of Lebanon from France through a power-sharing agreement, whereby the presidential powers and the cabinet itself are divided into the religious groups of the population. As such, cronyism is often used to further parochial motivations in government. This situation worsened following the Lebanese Civil War (1975-1990), where the establishment of a Second Lebanese Republic increased the power of religious groups within parliament, with warlords from the civil war period becoming legitimised as political figures through the Taif Accord.

Lebanon’s geopolitical significance in the Middle East further complicates the administration of the country. The country has been the site of proxy conflicts between nations such as Iran and Saudi Arabia, with each nation seeking to influence Lebanese religious groups such as Hezbollah, which is both a political and militant group in Lebanon. Hence, the warring Shi’ite and Sunni Muslims, as well as resistance to Western influence creates further instability within Lebanese society. Such opposing influences have worked to undermine the autonomy of the Lebanese government.


Economic context


The ineffectiveness of the Lebanese governance results from a noted absence of accountability and transparency. The lack of accountability within the Lebanese governmental system is most immediately evident in the resignation of the entire cabinet following the explosion, with no one held to account for the blast. Further, government meetings are not disclosed to the public, and the judicial branch is often subservient to the executive, or the interests of powerful individuals. The undermining of the separation of powers has fostered the growth of corruption in Lebanon, with 91% of citizens believing corruption is rife within the public sector, while Transparency International assigns Lebanon a score of 25/100 in the Corruption Perceptions Index.

Despite being entrenched in pervasive corruption, Lebanon’s economy, at least by headline numbers, was not always in the dire state it is in today. From 1990 to the early 2010s, the nation’s GDP saw growth comparable to its wealthier neighbors such as Israel and Cyprus. For much of that period, Lebanon experienced considerable financial stability as seen through growing capital inflows and exchange reserves primarily due to remittances, manufactured and farmed exports, and international aid. However, in a dramatic reversal of fortunes, the Lebanese economy began to rapidly unravel in 2017, recording annual contractions exceeding its neighbours due to the latest financial crisis and political uncertainty. 

One constant for the Lebanese economy, however, seems to be substantial levels of income inequality. In a country where a quarter of total income is concentrated among the top 1%, the promising headline economic figures of previous decades are unlikely to have meaningfully benefited the poor and the middle class. The nation’s health system, for instance, is particularly fragile, with nearly half of the population lacking access to formal health insurance or the financial capacity to afford  high medical expenses. Indeed, the World Bank has described the country’s social security systems, including public health systems, as “weak, fragmented and poorly targeted”.

Furthermore, the decades of high government borrowing to fund reconstruction, which easily surpassed the growth in GDP, undoubtedly favoured the wealthy. This can be seen through the emphasis on  prestige projects and luxury property developments rather than addressing critical infrastructure needs, such as the country’s failing electricity infrastructure. Yet, as debt piled up to 170% of GDP and the risk of default increased, it is the middle and working class Lebanese people who must bear the economic and financial burden. These regressive economic effects have pushed more than 50% of Lebanese households to poverty, leading to an increasing share of households struggling to afford basic items. 

However, the response of the Lebanese ruling class to widespread economic hardship has been particularly inadequate. Last year, negotiations with the IMF broke down after the government – allegedly under pressure from political brokers and vested interests – abruptly rejected the proposed financial and economic reforms. The obvious neglect of policymakers, coupled with political uncertainty in the nation, has therefore amplified the need for external aid.


International responses


International aid and loan packages have been a recurrence for Lebanon since the political, financial, and security shocks experienced by the country during the Lebanese Civil War.

Recently, Lebanon’s financial and social crises intensified the need for international aid, which had since included the United Nations providing humanitarian support to 1.1 million Lebanese and refugees in dire circumstances. In particular, $4 million (USD) was donated to acquire fuel supplies necessary for the maintenance of increasingly precarious essential services and electricity supply concerns. This is in conjunction with the United States Agency for International Development’s provision of $100 million in humanitarian assistance to support the Lebanese population currently suffering from the COVID-19 pandemic. Additionally, food has been provided to 1.4 million people as well as access to drinking water for 175,000 Syrian refugees in meeting the needs of the current refugee population in Lebanon. 

Similarly, Lebanon has typically been a net-receiver of foreign remittances, which has led to dependencies by certain Lebanese families for survival, given the unprecedented circumstances in the country. Furthermore, due to the above issues, Lebanese expats around the world are packing their suitcases with essentials such as medication before returning to Lebanon. The primary aim has been to assist their family and friends who currently do not have access to these resources due to the lack of supply, or are also struggling financially due to salary depreciation. 

Nonetheless, it is also crucial to address that Lebanon needs forms of aid beyond solely “cash handouts and food parcels”. Facilitating future international aid effectiveness involves structural changes such as transparency in donations and aid agreements that are politically untied. Specifically, international aid should include assistance to reconstruct infrastructure and economy. It is with these policies in mind that stronger and more resilient governmental institutions can be fostered in partnership with the Lebanese people.

Consequently, understanding Lebanon’s current predicament is essential to help reconstruct and recondition Lebanon’s state of emergency across economic, social, political and financial dimensions. Currently, urgent crises range from poverty and inequalities to government debt, inflation and other geographical complications. All the issues raised require both domestic action in Lebanon to rebuild its government and infrastructures, and international endeavours to assist in Lebanon’s slow but gradual recovery. 

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Ben Griffiths
Editor

My name is Ben Griffiths and I’m currently a 4th year Bachelor of Commerce (Economics) and Diploma in Languages (French) student at the University of Melbourne. I’m passionate about policy, public health, climate change, international collaboration, and finding ways to combine these interests to make a tangible impact. In my spare time I like to play guitar, learn more about the world, hang out with friends, and write articles. You can find more of my current and previous writing at Cainz, ESSA Unimelb, Melbourne Microfinance Initiative, Strive Student Health Initiative, and LSE International Development Review.

Chamindu Athauda
Writer

I am a Bachelor of Commerce student who is interested in Macroeconomics, Finance and Policy. I enjoy working with like-minded peers to produce Economics related material that are both interesting and informative for readers.

Jade Chen
Writer
Morgan McDonagh
Writer

I'm a first year Bachelor of Commerce student majoring in Finance and Economics with a passion for writing and research. My key interests are primarily public policy and macroeconomics. Outside of university commitments, I enjoy playing guitar, chess and watching Formula One.

Stephen Kanavoutsos
Writer

Stephen is a first-year Bachelor of Commerce student, majoring in Accounting and Finance, with an interest in macroeconomic trends and government policy. In his spare time, you can find him swimming at the pool or beach.