No longer a ‘cash cow’, Saudi squeezes Lebanon’s ruined economy

Beirut, Lebanon – It is close to two weeks since Saudi Arabia declared an all-out ban on imported goods from Lebanon after it came to light that a minor Lebanese minister had criticised the kingdom over the civil war in Yemen.

Though the comments were made before the minister took office, for Lebanon, the timing could not be more painful. Cash-strapped and sinking deeper into a two-year-old economic crisis, the import ban by the richest economy in the Arab world is kicking Lebanon’s tiny, embattled economy when it is already hopelessly down.

“The current ban from Saudi Arabia has now directly hit around $250m worth of exports. That’s huge for Lebanon. That’s a lot for Lebanon,” said Paul Abi Nasr, CEO of Polytextile and a board member of the Association of Lebanese Industrialists. “Look, to be very clear, on an industrial level this is a huge thing,” he told Al Jazeera.

Prior to the Saudi ban, Abi Nasr says that exports to Saudi Arabia were expected to double in 2022. “We were starting to take advantage of the Saudi ban on Turkish products – they are very big competitors,” he explained. “Our target for 2022 was to move to $500m in exports to Saudi Arabia.”

On an industrial level this is a huge thing

by Paul Abi Nasr, CEO, Polytextile

Lebanon continues to spiral ever downwards into an economic abyss it first tumbled into back in 2019.  Over the past two years, the Lebanese pound has lost around 90 percent of its value.  Almost three-quarters of the country’s population now lives in poverty. The country’s banks are on the ropes due to a shortage of US dollars – effectively wiping out the savings of millions of people –  while Lebanon’s once buzzing tourism industry struggles from skyrocketing overhead costs and a lack of COVID-wary clientele.

A new diplomatic row

Relations between Lebanon and Saudi Arabia have become strained over the past half-decade, especially following the 2016 election of Lebanese President Michel Aoun, who is allied to Iran-backed Hezbollah.

Riyadh once invested billions of dollars into the country and bolstered its luxury tourism economy.  Before Lebanon’s financial crisis took hold, former Prime Minister Saad Hariri said he had been in talks with Saudi Arabia and the United Arab Emirates to fund nearly two dozen development projects in Lebanon.

Now, a new diplomatic row – sparked by comments made by Information Minister George Kordahi about the war in Yemen during an interview a month before his appointment – has further strained ties.

After the comments were reported, the reaction from the Gulf was swift. Saudi Arabia, the UAE, Kuwait, and Bahrain recalled their envoys from Beirut, and banished Lebanese ambassadors. Bahrain and the UAE have called on their citizens to leave Lebanon. Yemen has also since recalled its envoy from Beirut.

On November 5, the head of the Council of Saudi Chambers, the federation of the kingdom’s 26 chambers of commerce and industry, took to Twitter to call on all Saudi “companies and businessmen to stop all dealings with Lebanon”.

اتحاد الغرف السعودية يدعو الشركات ورجال الأعمال إلى إيقاف جميع التعاملات مع لبنان@ajlnalajlan@CSC_SA#برنامج_سيدتي #روتانا_خليجية pic.twitter.com/Yx8kKn8Oci

— برنامج سيدتي (@sayyidaty) November 5, 2021

The recent blanket ban marks an escalation of tension that took root in April, when Saudi Arabia implemented an indefinite, targeted ban on Lebanese produce and agricultural products after foiling an attempt to smuggle 5.3 million pills of the illegal amphetamine Captagon that had been hidden in a shipment of pomegranates at Jeddah port.

At the time, the Saudi ambassador to Lebanon, Waleed Bukhari, tweeted that the kingdom had found more than 57 million illicit narcotic substances smuggled from Lebanon since the beginning of 2020.

From trade hub to marginalised

Some experts now fear that the UAE, Kuwait, and Bahrain might follow Saudi’s lead and implement similar blanket import bans on Lebanese products.

“That would account for about half of our total revenues from exports,” Nizar Ghanem, director of research and co-founder of Beirut-based researcher centre Triangle told Al Jazeera. “I think it’s definitely a legitimate concern.”

Meanwhile, in Riyadh, Lebanese businessmen say the tension has made operating more challenging. “We don’t feel comfortable to be in the middle of this crisis,” Rabih El-Amine, chairman of the Lebanese Executive Council in Riyadh told Al Jazeera.  “Yes we’re operating sort of normally, but it’s not easy.”

Lebanese industrialists have tried to circumvent the Saudi ban by exporting from other countries where they have operations, including Egypt and the UAE. But that workaround eats into revenues that would otherwise be collected by Lebanon’s government.

The import ban also places the prospects for Lebanon’s long elusive economic recovery even further from reach.

We’ve become the marginalised place

by Nizar Ghanem, Triangle

Since the end of its civil war in 1990, the bulk of Lebanon’s economic activity has been concentrated in banking, tourism and real estate, while more productive sectors have failed to thrive. The government wants to diversify the country’s economy and increase revenue from exports. But it now faces obstacles from some of its most important export markets.

At the same time, Ghanem said Lebanon is losing major economic opportunities, while business is flourishing in the region.

“With everything happening with Gulf, Egypt, and Israel – there is a full trade zone blooming – and Lebanon is completely out of it,” Ghanem told Al Jazeera. “Historically, Lebanon was the trade hub that connected the Arab world. Now, we’ve become the marginalised place, with militias, collapsing rule of law and a massive financial crisis”

Ghanem and others fear that Saudi Arabia and other Gulf countries could squeeze Lebanon even further by freezing or limiting financial flows.

Lebanon for years has relied on remittances from millions of expatriates living in its diaspora, especially in the Gulf, to replenish hard currency. Some 43 percent of remittances come from the Gulf, according to the World Bank.

Now, that vital lifeline for Lebanon’s ailing economy could be in jeopardy.  El-Amine describes remittances as the “last artery to Lebanon’s body”.

A political problem

“We consider that these actions are too broad and they affect everyone instead only those they have an issue with,” said CEO Abi Nasr. “[But] we understand why they would take such actions, even though for us it’s too much.”

Abi Nasr and El-Amine both believe that Lebanon has not done enough to address the security and political issues Saudi Arabia has raised.

The kingdom and other Gulf countries for example have expressed concerns about illicit drugs smuggled to their countries via Lebanon.  They have also expressed concerns about Hezbollah’s growing influence in the region. The Iran-backed political party has become a major military player in Syria, Iraq and Yemen, where it backs Houthi rebels against a Saudi-led coalition.

“Saudi Arabia told us they have no problem with the private sector, but as a country, they can only deal with the government of Lebanon,” Abi Nasr said. “The Lebanese government did not take action – they thought time would fix it.”

The Lebanese authorities last spring vowed to tackle drug smuggling more aggressively. They have since foiled several smuggling attempts from the Beirut port to ship tonnes of Captagon and hashish to Saudi Arabia, Greece and a handful of other countries.

the Gulf countries are saying we’re not the cash cow anymore

by Nizar Ghanem, Triangle

But that has not been enough to assuage Riyadh’s political concerns.

Lebanon had long managed to walk a tightrope on Saudi-Iran tensions, effectively side-stepping regional crises to maintain economic stability. But researcher Ghanem said current economic and political realities make that balancing act impossible.

“In the past, you could have just dealt with a paralysed government for years because we have the [US dollar] peg to the lira, and the inflow of money coming through remittances,” he said. “Now we’re completely bankrupt, and there needs to be a complete reinvention of Lebanon’s foreign policy and economic model, but the political class doesn’t seem to see that.”

Ghanem says the role of Hezbollah in the region, especially in Yemen, and its negative discourse against Gulf countries has further exacerbated the situation.

“This is what the Gulf countries are saying: we’re not the cash cow anymore, you can’t get free money from us anymore” he explained. “You cannot disconnect this from our political stance in the region.”

The Lebanese government has not met in almost a month, due to squabbles over Beirut port blast investigator Judge Tarek Bitar, as well as disagreement over the Kordahi incident. Hezbollah and some of its allies have praised Kordahi’s comments, while Prime Minister Najib Mikati and President Aoun have hinted that he should resign.

The Lebanese government has called for dialogue with Saudi Arabia, with the Arab League trying to mediate.

“We hope this crisis would end, but unfortunately the Lebanese authorities are living in a different world,” El-Amine says. “We can’t play two-face anymore where we have a country and government, but also six or seven political parties that do their own thing. This won’t work anymore with the GCC or any country in the world.”

Abi Nasr and other industrialists have urged the Lebanese authorities to quickly restore ties, but he does not sound optimistic.  “The government told us that it’s in the process of being fixed. What does that mean? I have no clue.”