Last month, Lebanon’s prime minister, Saad Hariri, resigned in Saudi Arabia — only to later rescind his resignation. This sparked fear of a Saudi-backed war against Hezbollah, Iran’s Lebanese ally. Riyadh has few local military assets to confront the Shiite movement but could strangle Lebanon’s small open economy. Lebanon is deeply reliant on capital inflows from the Gulf. The immediate crisis of Hariri’s premiership is over, but Lebanese economic dependency persists. It is dangerous if the country must stay in Riyadh’s political good grace to avoid economic crisis.
Three Gulf countries accounted for 76 percent of new foreign direct investment projects in Lebanon from 2003 to 2015. Remittances averaged about 20 percent of the country’s GDP annually over the past 10 years — with an estimated 60 percent coming from Gulf countries. How Lebanon came to rely on these inflows is key to understanding its dependency on the Gulf and Saudi Arabia in particular.
Gulf tycoons and reconstruction
The 1970s oil boom enriched contractors in the Gulf, among them Rafiq Hariri (father of the current prime minister), Najib Miqati and Issam Fares. When the Lebanese civil war ended in 1990, this “contractor bourgeoisie” returned: The former two became prime ministers, the latter deputy prime minister. Rafiq Hariri was the most successful politically — not because he was the wealthiest, but because he acted as Saudi Arabia’s local ally, first in civil war diplomacy, then from 1992 as prime minister.
Riyadh did not dictate postwar reconstruction, but it empowered Hariri to open the door for fellow Gulf investors. The tycoon rebuilt central Beirut as a luxury real estate project drawing in Gulf funds. Hariri-appointed economists in the central bank and finance ministry pegged the Lebanese currency to the U.S. dollar in 1999. Maintaining this signal of macroeconomic propriety required high interest rates, which inflated government debt. Inflows of Gulf capital are crucial to debt servicing.
Exorbitant debt and loyal investors
By 2016, Lebanon’s government debt skyrocketed to 144 percent of GDP — only topped by Japan and Greece. Lebanon relies on continuous inflows of outside capital to maintain the peg.
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