Riad Salameh, the central bank governor of Banque Du Liban (BDL), sat behind his desk at the BDL headquarters in Beirut on 31 July as news photographers captured him lighting a celebratory cigar. Smoke billowed throughout the office from which Salameh had consolidated tremendous power and ruled over Lebanon’s economic and financial system as if his own fiefdom. On that day, Salameh, wearing a freshly pressed navy suit and self-assured smile, would depart from the central bank for the final time as governor after 30 years in office as a small group of supporters outside showered him with applause. This picture of self-satisfaction lay in stark contrast to a scene that occurred two weeks before when a man named Edgar Awad walked into a local bank and threatened to douse the floor with gasoline and burn down the building if he was again prevented from withdrawing his own deposits. These disparate interactions offer a glimpse into an economic and financial crisis engulfing Lebanon of such magnitude that the World Bank has ranked it among the top three ‘most severe crises episodes globally since the mid-19th century.’
Millions of Lebanese people have been pushed into poverty as the country’s economy has been devastated by the collapse of its currency, hyperinflation, and mass unemployment. The mismanagement and corruption endemic to Lebanon’s financial and political elite reached such a shocking degree that the United Nations lambasted Lebanon’s central bank and banking sector for committing “human rights violations.” One of the more puzzling features of Lebanon’s current plight is that before the financial crisis, which began in 2019, the country was generally heralded for its currency stability and robust banking system. Salameh was lavished with praise throughout the world for his financial acumen and stabilizing presence.
How is it possible that a country that was once perceived to be on a path of relative growth and stability, albeit an inequitable one, could devolve so dramatically into economic ruin? How could Salameh, a man once subject to hagiography, come to be largely held responsible by the public for Lebanon’s current crisis and subject to numerous indictments over corruption and embezzlement charges?
A country under deep strain
I spent a month in Lebanon—a tiny country with a population of under six million people—with hopes of attempting to answer such questions. Before arriving in Beirut, I harbored certain expectations about the state of the country, conditioned by the abstract economic language of written accounts that coldly captured the dire consequences of the crisis. I imagined a once glittering, prosperous city nestled next to the breezy Mediterranean reduced to disarray and panic. What I discovered—after numerous discussions and interviews with academics, policy analysts, political activists, former bankers, and depositors who lost their life savings—was a far more complicated picture. Lebanon has become a country cleaving into two where a smaller, wealthier class with access to foreign currency from outside of Lebanon is largely insulated from the worst effects of the crisis. A second, larger segment has seen their real income dramatically cut by the devaluation of the Lebanese lira and their life savings disappear with the collapse of Lebanon’s banking system. Yet, the common thread I discerned is a society that is under tremendous strain with little hope for resolution and even less faith in its ruling class to act in its best interests.
Salameh, a longstanding member of this ruling class, was a once untouchable figure in Lebanese life. Now, he is the subject of arrest warrants issued by French and German authorities on charges related to ‘corruption, forgery, money laundering and embezzlement.’ Interpol has issued two red notices for Salameh, calling for his immediate detention and possible extradition should he leave Lebanon. Lebanese prosecutors have similarly charged Salameh with illicit enrichment and money laundering. More broadly, many blame Salameh for facilitating and overseeing a fundamentally unsound economic and financial model premised on short-term benefits that enriched an elite cadre at the expense of the country’s long-term sustainable and equitable development, and that ultimately collapsed under its own weight. Salameh has denied all charges of illegality.
While Salameh does not bear full culpability for Lebanon’s crisis, his legacy is indelibly linked to the country’s modern history. His career—spanning the booms and busts of Lebanon’s post-civil war period—offers an illuminating window into the trajectory of Lebanon’s tragic fate. As Hussein Cheaito, a development economist at the Policy Initiative, a Beirut-based think tank, told me, ‘Salameh is a representation of the whole system,’ referring to the financial, economic, and political establishment.
The rise of Riad Salameh
In 1993, after Lebanon’s fifteen-year civil war, Prime Minister Rafik Hariri appointed Salameh, who previously served as his private wealth manager at Merrill Lynch, to realize a vision for a free-market Lebanon reopened to the world. Lebanon’s political establishment had expanded in ranks following the war as a marriage between the old guard, local warlords from the civil war who shared political power under Lebanon’s sectarian system and a new class of Lebanese elite returning from Saudi Arabia took deep root in that system. To accommodate these new players, Salameh oversaw the construction of a highly privatized and financialized state premised on debt-fueled growth and the dominance of the banking and real estate sectors. Lebanon’s newly ascendent political class became deeply enmeshed in these rentier-based industries and Salameh’s economic and financial configuration made them fabulously wealthy to such an extent that Patrick Mardini, the CEO of the Lebanese Institute for Market Studies, described Salameh to me as ‘the accountant of the whole mafia.’
Salameh’s strategy disincentivized the cultivation of domestic production and local industries that could export goods abroad. As a result, Lebanon required a steady flow of money – in remittances, external aid, and foreign investment – to keep the economy running. To ensure this flow, Salameh, with Hariri’s backing, made the decision in the 1990s to peg the value of the Lebanese lira to the US dollar at a fixed exchange rate. The peg was meant to engender investor confidence and attract foreign capital, acting as the central cog of the country’s post-war macroeconomy. For some, it was considered to be the crucial reason for Lebanon’s rapid economic growth for nearly two decades.
As Lebanon’s economy ascended from the rubble of war, so too did Salameh’s reputation. A certain mythology began forming around him, centering on what was believed to be his shrewd and competent ability to steer Lebanon’s economy through a volatile region and the harshness of a highly integrated global financial system. International media bathed him in an aura of invincibility and expertise. Salameh received the accolade of best central banker of the year from two trade magazines: Euromoney in 2006 and The Banker in 2009.
Prior to the 2019 crisis, Salameh was viewed with reverence within Lebanon as well. After weathering civil war, foreign occupation, and political violence, many people in Lebanese society found a degree of national pride in the stability of their currency and prestige of their banking system, which they associated with Salameh. Take for instance, a statement issued just before the crisis by Middle East Airlines’ Chairman Mohamad A. El-Hout: ‘Twenty-five years have gone by with that patient man leading our Lebanese monetary empire. He has broken all records and received all types of titles, posts, honors and salaries. A brilliant man. An architect of our present and our future.’
Lebanon’s fixed exchange rate also artificially inflated the value of the Lebanese lira. When asked why Salameh was beloved within Lebanon, Rayan Charara, a political activist, pointed to the increased purchasing power endowed by the currency peg. ‘We were getting a lot of loans and the Lebanese used to travel a lot. I bought my car on a loan so I actually benefited from the system. We all benefited on different scales,’ she told me.
The descent into crisis
This perception of Salameh as a pair of safe, soft hands guiding Lebanon’s economy was a fallacy. While Salameh may have provided a veneer of stability and vast wealth for a small, powerful and well-connected segment of Lebanon, he constructed a highly risky model that in essence operated as one large, unproductive financial bubble. Lebanon’s economy lacked sturdy foundations, heavily depended on foreign inflows of capital, and sustained itself through faith that it would be able pay back its debts. Should the country lose access to a steady flow of foreign currency or should confidence waver in its credibility, the bubble risked busting. ‘Everyone knew Lebanon was on borrowed time,’ said Sumra Altug, an American University of Beirut (AUB) economics professor. ‘The issue was when the plug would be pulled.’
Cracks in Lebanon’s system began to emerge in 2011 with the onset of the Syrian civil war, which diminished Lebanon’s trade and dampened tourism. The country’s access to foreign currency was further restricted by the souring of relations with its Gulf allies, previously generous patrons, and the slump in global oil prices in 2014 and 2015. This drying up of foreign capital raised alarms for the central bank and, in a last-ditch effort to hold the system together, Salameh orchestrated a form of financial engineering that has been widely deemed a Ponzi scheme. The central banker devised a strategy to draw in new international investors, foreign depositors, and Lebanese households into the country’s financial system. To do so, commercial banks offered generous interest rates, as high as 15 to 20 percent, to draw additional foreign currency deposits. The commercial banks would in turn lend this capital to the BDL, which would offer gratuitous interest rates of its own to the banks. The BDL would use this influx of new foreign currency to defend the value of the currency peg and finance government expenditure. The institution would be able to keep up with the exorbitant interest payments to the commercial banking sector, which experienced a windfall of profits, as long as new investment continued flowing into the scheme.
While Salameh’s financial engineering managed to delay the inevitable for several years, it ultimately amplified the pain and depth of the crisis as the entire system began to crumble in October 2019 with the rise of Lebanon’s thawra—a popular uprising against government corruption, draconian taxation, and failure to provide public services. Lebanon experienced a ‘Sudden Stop’ as international investors lost faith in country’s ability to service its debt and foreign capital stopped flowing into the country. Lebanon defaulted on its dollar-denominated debt in March 2020, sending the nation into the grip of full-blown crisis.
As Lebanon’s economy spiraled out of control, Salameh’s Ponzi scheme reached its final phase. The politically powerful and well-connected shipped their money overseas for safe harbor while ordinary citizens, including the new depositors who entered the system, found their bank accounts locked and savings gone. This process resembled a case of insider trading where a banker profits off of non-public information. Banks ‘conducted selective capital controls to allow influential people to pull their money out. They jumped ship right before the crisis began,’ Ali Abboud, a professor at AUB, told me. In 2020, the Financial Times reported that Lebanese bankers and other elite ‘smuggled’ at least $6 billion out of the country in the run up to the crisis. Salameh is alleged to have taken part in this smuggling. An investigation conducted by the Organization for Crime and Corruption Reporting Project in August 2020 found that offshore companies controlled by Salameh had moved assets worth almost $100 million outside of Lebanon. Similarly, in November 2020, Swiss officials alleged that Salameh and his brother embezzled over $330 million of funds previously controlled by the BDL between 2002 and 2015.
An uncertain path forward
Early signs are emerging that Salameh might begin to face the consequences of his legacy. On August 10, the United States, Canada, and United Kingdom sanctioned Salameh and four of his associates. A few days later, Wassim Mansouri, the Lebanon’s interim central bank governor, froze Salameh’s accounts in the country’s financial institutions. However, given the vast scale of his disastrous policies and alleged criminality, Salameh remains relatively unscathed. ‘He exists in another dimension of knowledge and awareness. I think this comes with power,’ Mr Cheaito, the development economist, told me. ‘He doesn’t really care. He is untouched by these outcomes.’
The World Bank estimated that Lebanon’s total financial losses have reached at least $72 billion, roughly three times the country’s GDP, and will continue to grow as a political solution to the crisis remains elusive. Lebanon’s currency has lost 98% of its value and inflation has reached over 200% at its peak. The pain of the crisis is palpable. Throughout conversations with residents of Beirut, I heard stories of lifetime’s-worth of retirement funds disappearing and public sector employees quitting their jobs because the costs of transportation exceeded their salaries. Young adults are frequently forced to support their parents while grappling with the painstaking decision of whether they should leave Lebanon and build a life abroad.
A crucial question moving forward is how these losses will be distributed throughout Lebanese society. Thus far, what has occurred is a socialization of losses amongst the most vulnerable while the most privileged managed to pull their money out of the country with impunity. For the most part, those who kept their money in Lebanese banks before 2019 have only been allowed to access $400 in cash and 400 Lebanese lira, which has lost considerable value, per month. The central bank imposed these restrictions to preserve the country’s dwindling foreign currency reserves. ‘I need around 16 years to get all my money from the bank’ because of the capital restrictions, Samia Sibaii, a public-school teacher from Tripoli and administrator for the Depositor’s Outcry Association, told me. She added, ‘before the crisis, I used to get paid $1,500 per month. Now in July 2023, I got paid $91 only. This is so, so, so little.’ It was Ms. Sibaii who told me the story of Edgar Awad, the gasoline-bearing bank customer, one of many Lebanese depositors to have attempted to retrieve their money through force.
Lebanon is starting down a grave and uncertain path. The interim governor Mansouri takes over a central bank with roughly $9 billion of reserves, a meager amount that is shrinking by the day. Should the BDL exhaust these final reserves, Lebanon would experience even greater levels of hyperinflation and currency devaluation, and it could claim to be a centralized state in appearance only. In April 2022, the Lebanese government and the International Monetary Fund reached a staff-level agreement for a $3 billion relief package, but these funds are unlikely to be released anytime soon as Lebanese officials continue to delay the necessary political reforms.
If there is a lesson to be drawn from Lebanon’s plight, it must be, as Professor Abboud noted, that a country’s financial sector has to, at least to some extent, underwrite concrete and real growth. For far too long, Lebanon’s financial sector extracted wealth from Lebanon’s real economy and depended on an addictive relationship with foreign capital and debt, the costs of which the country will be reckoning with for years to come. Lebanon’s crisis should also be a cautionary tale about constructing a precarious economic model that is especially susceptible to the whims of a complex and interconnected global economy, as well as the actions of a seemingly infallible financial wizard with tremendous political and policy latitude.