The Lollar is a frozen deposit in US dollars in Lebanese banks that can only be withdrawn in Lebanese pounds at a very reduced rate, considerably below the highly speculative black market rate.

Nadin Heinich: What were the main sectors of the Lebanese economy? The country hardly produces any goods …

Patrick Mardini: I think the claim that Lebanon hardly produces anything is exaggerated. We hardly export any goods, neither in the manufacturing industry nor in agriculture. The reason for this is the electricity problem. Without electricity, no machines can run, there is no irrigation, no cooling, etc. Lebanon was very competitive in the service sector, especially in education, health, and tourism, before and after the civil war. Many tourists came every year and billions of dollars flowed into the country.

Lebanon has also focused heavily on the banking sector. Attracting money from all over the world is not a bad thing in itself. In a country like Singapore, the whole country lives from banking services. What was negative was the corruption of our government, which borrowed a lot of money from the banks and did not invest it in infrastructure development, in a good electricity and water supply, in expanding the transportation network, etc., but wasted it. The problems did not originate in the banking sector. The banks bear a large part of the responsibility because they trusted the government too much.

Nadin Heinich: But the central bank created a pyramid scheme that was bound to collapse …

Patrick Mardini: The whole crisis we are experiencing today, the reasons for the collapse of the banks in 2019, go back to 2015, not the 1990s. From 2015 onwards, confidence in the state’s ability to repay its debts waned. Growth became very weak. Technically speaking, capital began to leave the country. This is also when the “financial engineering operations” began. Many politicians want to blame the 1990s so that no one in office today has to take responsibility.

In 1990, the civil war was over. The whole country was destroyed and had to be rebuilt. During this time, we have to distinguish between the banking sector and the government: During the civil war, the militia leaders who were fighting each other made a lot of money. Through bribery, they were convinced to end the war, join the government and earn even more money. Each of these militia leaders became a minister – with an open budget for his ministry. We bought peace with corruption. That was the model of the 90s.

Despite a corrupt government, the banking sector functioned well until 2015. To attract capital for reconstruction, interest rates were excessively high. But growth was good, the country grew. In 2009 and 2010, during the global financial crisis, Lebanon remained a stable financial center. The problem, the root of all evil, was that a large part of the capital went to the state. The reconstruction in the 1990s should have been done through private investment and not through state projects.

Nadin Heinich: What changed in 2015?

Patrick Mardini: On the one hand, we are increasingly feeling the effects of the Syrian civil war. By that I don’t mean the refugees who have entered the country, but the trade routes. Lebanon trades with the Arab world by transporting goods that arrive in the port of Beirut via the Mediterranean by truck through Syria. The war in Syria has blocked this route and made it more expensive. In addition, relations with the Gulf states have deteriorated. The tensions between Saudi Arabia and Iran meant that many investors from the Gulf states did not invest their money in Beirut due to the presence of the Iranian-affiliated Hezbollah militia. And while the financial markets were booming internationally, investors in this country sensed that the government would not be able to service its debts. The mismanagement of public funds was obvious. The mood changed and capital flowed out. Why invest money in Lebanon when there are better, lower-risk opportunities elsewhere?

Nadin Heinich: The central bank began with, as it put it itself, “banking outside the box”?

Patrick Mardini: The “financial engineering operations” began in 2015. The central bank knew that the government would not be able to repay its debts. It tried to reverse the capital outflow: The banks should not give their money directly to the government but invest it with the central bank. On the one hand, it used its reputation to promote this. Riad Salameh, head of the central bank from 1993 to 2023, was voted “Central Banker of the Year” in 2009. And it offered excessive interest rates for deposits in US dollars, higher than in other countries around the world (the Lebanese lira had been pegged to the dollar at a fixed exchange rate since the 1990s).

The banks lured their depositors with high interest rates, then deposited the money with the central bank at even higher rates and enjoyed the enormous profits. The central bank lent the money to the government, which, to put it simply, squandered it as before.

Nadin Heinich: Was nobody skeptical about these “financial engineering operations”, at least those who deal professionally with the financial market?

Patrick Mardini: There were skeptical voices, but they were in the minority. Many were attracted by the advantageous deals. The banks played on their credibility and the reputation of the central bank: ‘We have the best banking system. We have the best central bank in the world. Even during the war, we had no problems issuing money. People believed that. Especially as they were offered high interest rates.

Only this time it was a pyramid scheme: the banks paid the high interest rates with the borrowed money – knowing full well that they would not be able to pay it back. For such a system to work, more and more people have to participate. Interest rates rose from year to year. In 2019, they stood at 15 percent for the dollar. In the meantime, Lebanon had accumulated 72 billion dollars in losses: Banks had invested a good 90 billion dollars with the central bank. The central bank had lent around 50 billion of this to the government, most of which it squandered. Around 20 billion were government bonds, which the government defaulted on repaying. Unrest spread. From August 2019, an exchange rate of the Lebanese lira to the dollar was established on the black market. The official rate of 1,500 lira to the dollar quickly became 1,550, 1,600, 1,700, 1,800, 1,900 and the rate continued to rise. The central bank played it down, but the crisis was unmistakable. In October, there were massive protests in Beirut and other cities across the country against corruption, for fair tax and financial procedures, for an end to sectarian quotas and for modern politics. In the course of the protests, the banks were closed for two weeks. When they reopened on November 1, 2019, no one had any confidence. There was a mass bank run.

Nadin Heinich: And then the Lollar was invented …

Patrick Mardini: In 2019, the banks began introducing capital controls. These gradually became stricter and stricter. Initially, you had to justify why you wanted to make a major purchase abroad, such as buying an apartment. Today, you are only allowed to withdraw 400 dollars from a bank account (unless it is fresh dollars). Above this amount, you can only withdraw the money in Lebanese lira, at a rate of 15,000 lira per dollar, around 80 percent below the black market rate. That means massive losses. What is this money, which is subject to capital controls, worth? Would you sell me an apartment today for a check for 500,000 dollars? No, because you can never withdraw that money. You don’t even know how long you can withdraw 400 dollars a month. Maybe at some point that won’t be possible either. So a dollar in the bank is worth less than a dollar in cash. A name has been invented for this, the Lollar. The value of this dollar correlates with the probability of getting the money back from the bank. At the beginning of the crisis, when we had about 35 billion dollars in foreign exchange reserves, the value was 70 percent of a real dollar. But the more the government squandered its foreign exchange reserves, the lower the value of these dollars became. Today, the foreign exchange reserves are around seven billion. This is probably not even enough to pay out 10 percent of the deposits. The value of the dollar is now only 10% of the dollar. This means that many people have lost a large part of their savings.

Nadin Heinich: How are the real estate industry and the banking sector linked?

Patrick Mardini: The real estate sector is special because it is very local. It doesn’t make sense to buy a house in the US if you want to live in Lebanon. The real estate sector has therefore benefited greatly from the capital that has flowed into Lebanon, especially before the financial crisis.

In the 1990s, the reconstruction of Lebanon offered enormous investment opportunities. The country was to become a tourism and financial center. The construction sector boomed with the development of real estate, major infrastructure projects, the reconstruction of Beirut airport, the port, etc. A lot of money flowed in, including from the Gulf States. In addition, the then Prime Minister Rafiq al-Hariri came from the construction industry. The center of Beirut became a place of luxury – wealthy people from the Gulf states, from Saudi Arabia, Kuwait, Qatar or Bahrain, were to be attracted. They were to buy real estate in Lebanon, store here in summer and winter, enjoy themselves and invest their money. In place of the traditional markets of the pre-war period, expensive shopping temples were built for the major international luxury brands, as well as elegant restaurants, cafés, exclusive nightclubs, etc. Internationally renowned star architects were hired to translate the new image into the cityscape.

This reconstruction was Hariri’s vision. He wanted to do better than before, attract wealth, create new prosperity. And it worked. Hariri was able to inspire people to realize his vision. But he was assassinated in 2005.

Nadin Heinich: What do you think about Hariri’s legacy for Beirut, for Lebanon?

Hariri was the one who lured the militia leaders with corruption and got peace in return. Is that good or bad? Basically, his vision was great. We needed him to drive reconstruction forward quickly. The problem was that only he could implement it. It collapsed with his death.

Nadin Heinich: How did the construction sector develop?

Patrick Mardini: The real estate boom peaked between 2011 and 2015, after which the real estate market slowed down. Due to the outflow of capital and because the central bank offered better returns, banks granted fewer loans. Prices did not fall, but the vacancy rate increased. Construction activity came to a standstill in 2019. More and more properties stood empty. At the beginning of the crisis, many project developers had loans from the banks. At the same time, many people had savings that they could only withdraw to a very limited extent following the introduction of capital controls. However, they were able to buy apartments with the frozen money. Some bought more than they needed. The first year of the crisis was very interesting for many. Project developers were able to sell their entire housing stock and were free of loans. But now, when those who bought more than they needed want to resell these apartments, they are finding it hard to find buyers. The problem has not been solved.

About: 

Patrick Mardini is CEO of the Lebanese Institute for Market Studies (LIMS). He works there with a team of experts to design economic reforms specifically for Lebanon, to raise awareness of their importance and to advocate for their implementation. The topics covered include subsidies, the banking crisis, hyperinflation, fiscal policy, electricity, competition and doing business. Mardini was previously responsible for investor relations at the Paris-based investment management company Modèles et Stratégies and held a professorship in economics and finance at the University of Balamand.