On April 15, 2022, LIMS CEO, Dr. Patrick Mardini joined the Advocata Institute-Sri Lanka for a 90-minute online podcast session. Sri Lanka seems to be heading toward an economic meltdown similar to the one observed in Lebanon. Therefore, the purpose of the podcast was to learn from the lessons of Lebanon’s economic crisis.
During the session, Dr. Mardini explained that like in Sri Lanka, Lebanon has been piling up imbalances because the government has been spending beyond their means for many years. This situation has led to a very large public debt (170% of the GDP) financed by the Lebanese banking system. Banks managed to continuously attract foreign dollar-denominated deposits mainly from the Lebanese diaspora and from wealthy people from neighboring Arab countries.
In 2012, banks started doubting the government’s ability to service debt, so the central bank stepped in and started financing the government. By doing so, Lebanon broke the concept of the impossible trinity, as the country had simultaneously a fixed exchange rate, free movement of capital, and an active monetary policy. The central bank started losing foreign exchange reserves that were actually dollar-denominated deposits made by financial institutions at the central bank. This system continued until 2019, when the central bank exhausted most reserves and banks were unable to attract new capital inflows to the country. As a result, the system crashed, the Lebanese pound started a sharp devaluation, and the central bank made the problem worst by increasing money in circulation by 9-fold, which led to hyperinflation. Hyperinflation substantially reduced people’s purchasing power and banks were unable to meet withdrawal demands. This is when Lebanon asked for the International Monetary Fund’s support.
Dr. Mardini also addressed the problem facing the energy sector in Lebanon, which is also common with Sri Lanka. He explained that the government’s monopoly over the production, transmission, and distribution of electricity is the real problem. The government should put a legal framework in place that would attract investors to the energy sector. Every investor should be able to open an independent power production company and sell to the public without government intervention. The same principle applies to telecom and the airline industry. Reforms can be achieved through dismantling all government monopolies and allowing competition to enter those industries.