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This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 28 November 2022.
Lebanon is facing a myriad of still worsening socio-economic pains, including severe fuel and food shortages, mass unemployment and migration, and a disjointed exchange rate that has diminished savings and pulled many into poverty over the last year. A cholera outbreak is now spreading to major cities.These issues are both caused and compounded by the country lacking a government for most of this year. We are maintaining our moderate crisis risk level for the country, meaning a high-impact crisis in the next year is probable.
With all that, the safety and security environment appears to be worsening yet further. Our contacts in Beirut tell us that there has been an increase in petty crime, including muggings and bag snatching. Local press reports also suggest an increase in more violent and organised crime in rural areas. And a series of attempted and successful bank robberies by people wanting to withdraw their savings points to a partial breakdown in law and order. These issues will probably worsen next year, particularly with the political vacuum looking likely to persist.
We doubt that a unifying candidate for the presidency will emerge before the end of the year. The Lebanese parliament on 24 November failed, for the seventh time, to elect a president. The number of spoiled ballots outnumbered the 42 votes that Michel Moawad, an independent lawmaker (perceived by Hezbollah as a US ally), received. In each of the last seven parliamentary sessions, MPs from the Hezbollah-aligned bloc walked out before the second round of voting. This indicates that the various factions are still far from reaching an agreement.
Against this backdrop, the caretaker government is highly unlikely to be given the mandate to pass or enact any reforms. Despite there being a constitutional process that would have transferred the executive powers of the outgoing president to the government, on his last day as president, Aoun declared the government ‘resigned’ – reaffirming its caretaker capacity. Lebanon is now in the unprecedented position of having neither a fully functioning government nor a president; the formation of the government cannot take place without a president.
As this stalemate persists, we have laid out the three possible scenarios over the medium term. The last time Lebanon elected a president, Michel Aoun in 2018, it took 46 attempts and two years of backroom negotiations. But the dire economic situation, which probably pushed Hezbollah to tacitly approve of a maritime deal with Israel earlier this year, has some potential to shorten the time frame.
Due to the nature of backroom negotiations to elect a president and form a government, these scenarios are focused on the timing of that decision rather than who the president is and how the factions agree. This also means there are few reliable observable indicators to monitor progress on government formation. As such, to support planning, our scenarios provide an assessment of the likely impact of each on unrest, infrastructure, and crime risks.
A political stalemate stretching into 2023 appears the most likely scenario, on current indications. The presidential selection process requires months of negotiations and backroom deals involving domestic, regional and international actors, previous presidential selections have shown. The lack of a government also means that political factions stand to gain more from any transactional arrangements over ministerial appointments, further disincentivising them from reaching a quick compromise.
This scenario would heighten the risks of a more acute crisis. The inability to pass meaningful reforms would almost certainly delay, or at best reduce the size or scope of an IMF bailout. Lebanon and the IMF reached a staff-level agreement, subject to reforms, for a $3-$4bn bailout earlier this year. Ongoing issues such as price increases and shortages, ailing public infrastructure and services, and increasing crime would very likely worsen in 2023. As such, a resurgent protest movement becomes more likely in this scenario despite a period of relative calm since the parliamentary elections earlier this year.
The economic crisis would almost certainly worsen, leading to increased crime, sporadic hardship protests and the potential for sectarian violence as leaders competing for ever-shrinking resources incite tensions. It would also entail a degradation of law and order. Wider grievances tied to the state’s absence in delivering key services will probably lead to increased use of violence to solve personal disputes and in other settings such as at banks, hospitals and fuel stations; there have been over 20 armed (perceived and actual) bank robberies this year involving people wanting to withdraw their savings.
Once a president is selected, it is reasonably possible that efforts to form a government would also face delays. This would be particularly the case if Gebran Bassil or a comparably divisive politician is appointed president. Bassil and the caretaker prime minister have been at odds for months and both have made public their staunch opposition to each other. The president has the final say on the formation of a government.
The formation of a new cabinet would be unlikely to take more than several weeks or a couple of months, based on previous rounds of government formation. During this time, the president is likely to use his executive powers to press ahead with some of the reforms that have already been tabled, such as the new banking laws, but not with any new ones. With that, the selection of a president will likely give the international creditors enough confidence to press ahead with aid relief and loan deals.
However, political infighting over ministerial positions would probably further derail any efforts by government departments to improve the quality of public services. Although these departments are usually dysfunctional, a protracted government formation stalemate will highly likely worsen the already-high infrastructure risks facing the country. The operational risks associated with ailing public services include fuel shortages, power outages, capacity at public hospitals, and the response times of emergency services.
In this scenario, which is the least likely, an agreement would be expedited by the urgency to address the economic crisis. The selection of a president would then prompt the caretaker prime minister, Najib Mikati, to submit parliamentary approval for a cabinet shortly after, with both the legislative and executive branches of government filled by the new year. Suleiman Frangieh, the incumbent leader of the pro-Hezbollah Marada Movement, and the head of the Lebanese army, Joseph Aoun, are the presidential contenders around whom this scenario would be most likely to unfold. Although both will probably have some support from Hezbollah, there is no evidence that both currently have enough cross-party support.
The government would be better positioned to negotiate with international partners for fiscal support. The Lebanese government would then be likely to quickly press ahead with some economic reforms with the aim of expediting a $4bn IMF bailout and other international aid. Such reforms would likely aim to address: closing the gap between the official and black market exchange rate, a credible 2023 budget, restructuring public debt and adopting new banking laws.
Still, we doubt that it would be able to bring down poverty levels or improve socio-economic conditions in the near term. On the contrary, the likely calibration of the exchange rate would probably significantly reduce local currency deposits and push up the general cost of imports. However, based on the relative calm with respect to protest activity since the parliamentary elections, would-be protesters are likely to continue to adopt a wait-and-see approach with the formation of a new government serving as a positive indicator for improved governance.