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The different risks of Saudi and Iranian aid to Lebanon

By Hannes Baumann

Lebanon is a battleground of Saudi-Iranian rivalry. Both provide aid. While Iranian aid to Hizballah creates a military fighting force, Saudi aid is notable for its economic impact. Iranian aid is already widely discussed1 so this article will focus on the risk of Lebanon’s over-dependence on Saudi development aid funding.

The goal of Hizballah’s network of religious institutions, schools, youth associations, health clinics, women’s associations and of course its military wing is to build a ‘resistance society’. The all-encompassing range of services offered to Lebanon’s majority Shi’a community entrenches sectarianism. Hizballah funding is necessarily opaque.2 Iran is said to fund Hizballah through cash and charities, training and logistical support. Bashar al Assad’s Syria is a crucial geographic conduit for Iranian aid, which goes a long way to explaining the movement’s support for the regime’s survival. Another source of funding is from wealthy Shi’a donors within Lebanon and the overseas diaspora. Finally, Hizballah allegedly runs various licit and illicit business ventures inside and outside of Lebanon. Recent media reports suggested that the movement is facing financial difficulties due to the cost of fighting in Syria and Iran’s economic difficulties in the face of renewed US sanctions.3 

In the 1980s, Rafiq Hariri emerged as the main conduit of the Kingdom’s aid to Lebanon. After Hariri’s assassination in 2005 his son and current Prime Minister, Saad Hariri took over. Saad Hariri pursued no holistic goal such as ‘resistance society’. Hariri did not overcome political fragmentation within his own Sunni community as Hizballah did among the Shi’a, he simply put himself at the head of the disparate communal scene. The Hariri Foundation’s schools and health centres have played a role in parliamentary elections since 2000. Hariri became a typical confessional political boss, furnished with extraordinary resources through his own wealth and Saudi largesse. Saad Hariri’s military ambitions appear to have been limited to funding a largely ineffective force run under the guise of a private security company.4

Riyadh did not just sponsor Hariri’s clientelism but also Lebanon’s Central Bank. In the midst of the Israeli war with Lebanon in 2006, Saudi Arabia and Kuwait deposited $1.5 billion to support the Beirut Central Bank’s currency chest. In 2008 the Central Bank received another $1 billion from Saudi Arabia. These funds proved vital to the maintenance of the Lebanese pound’s peg to the dollar, which has been in place since 1997 but has come under increasing pressure. In 2017 Lebanon’s government debt stood at 153 per cent of GDP, the third highest rate in the world. Its current account deficit of 25 per cent of GDP was also among the highest globally. The country needs to constantly attract capital inflows to maintain the peg. But why do investors keep pouring money into this questionable financial proposition? A 2008 IMF working paper found that Lebanese investors perceive an ‘implicit -guarantee’ by donors – and Saudi Arabia has historically been the most prolific among them.5 The expectation that Saudi Arabia and other Gulf states would provide funds to stabilise the currency during a crisis has helped the country weather a succession of financial storms. 

A recent weakening of Saudi support for Lebanon’s economy therefore puts the country’s financial system in grave danger. Hariri seems to have fallen out of favour with Riyadh. His construction company Saudi Oger began to collapse in 2015 after a new guard of Saudi royals under now Crown Prince Mohammad bin Salman slashed state contracts and was wound up in 2017.6 This eroded Hariri’s ability to dole out patronage. Riyadh also created doubt over its commitment to support Lebanon’s financial stability when, in February 2016, it withdrew a promised $3 billion aid package to the Lebanese army over perceived Lebanese government unwillingness to distance itself from Iran.7 The Lebanese Central Bank had to turn to increasingly adventurous financial ‘engineering’, at one point offering 40 percent interest on a one-year loan to attract the foreign currency it needed to maintain the dollar peg.8

In November 2017, Saudi Arabia brought Lebanon to the brink of both military and economic crisis. Just when Hariri was in Riyadh to ask the Kingdom to support donor conference, the Saudi rulers appeared to strong-arm Prime Minister Hariri into a televised resignation, in which he accused Hizballah of plotting to assassinate him.9 The episode prompted fears of Riyadh forcing a confrontation of its local clients with Hizballah. Rumours swirled that Riyad was going to impose an economic blockade on Lebanon akin to the action taken against Qatar in 2017. This would have strangled Lebanon’s fragile economy. France worked to resolve the political crisis and Riyadh stepped back from the brink. At a donor conference in Paris in April 2018, Saudi Arabia restored a previously pledged credit line of $1 billion to Lebanon.10

To conclude, Saudi and Iranian aid to Lebanon is similar in some respects: Both countries finance the confessional clientelism of local allies. Yet Saudi Arabia also plays a pivotal economic role, creating a different kind of risk. While Iranian weapons increase the danger of military confrontation, Lebanon’s dependence on Saudi economic aid means that Riyadh can destabilise the Lebanese financial system at any time.

 

1. For an overview of Iran’s role in Hizballah’s history, see: Augustus Richard Norton, Hizballah: A Short History, 2007, Princeton: Princeton University

Press, pp. 29-46. For Hizballah’s view on the relationship, see: Naim Qassem, Hizbullah: The Story from within, 2007, London: Saqi: London, pp. 387-

393.

2. Matthew Levitt, Hezbollah finances: Funding the party of god, Washington Institute for Near East Policy, February 2005,

https://www.washingtoninstitut...

3. Ibrahim Bayram, Hezbollah turns to charity amid economic woes, An Nahar, August 2018, https://en.annahar.com/article/847815-hezbollah-turnsto-

charity-amid-economic-woes

4. Borzou Daragahi and Raed Rafei, Private force no match for Hezbollah, Los Angeles Times, May 2008,

http://articles.latimes.com/20...

5. Axel Schimmelpfennig and Edward H. Gardner, Lebanon - Weathering the perfect storms, IMF Working Paper, 08/17, January 2008,

https://www.imf.org/external/pubs/ft/wp/2008/wp0817.pdf

6. Matthew Dalton and Nicolas Parasie, With Saudi Ties Fraying, Lebanese Premier’s Construction Empire Crumbles, Wall Street Journal, November

2017, https://www.wsj.com/articles/w...

7. Tom Perry, Laila Bassam, Hezbollah signals no end to Saudi crisis; central bank reassures on currency, Reuters, 26 February 2016,

https://uk.reuters.com/article...

8. The Economist, Lebanon’s economy has long been sluggish. Now a crisis looms, August 2018, https://www.economist.com/midd...

2018/08/30/lebanons-economy-has-long-been-sluggish-now-a-crisis-looms

9. David Ignatius, Saudi Arabia forcibly detained Lebanon’s prime minister, sources say, Washington Post, November 2017,

https://www.washingtonpost.com...

2017/11/10/b93a1fb4-c647-11e7-84bc-5e285c7f4512_story.html?noredirect=on&utm_term=.f855aa7d2a8a

10. John Irish, Marine Pennetier, Lebanon wins pledges exceeding $11 billion in Paris, Reuters, April 2018, https://www.reuters.com/article/uslebanon-

economy-france/lebanon-wins-pledges-exceeding-11-billion-in-paris-idUSKCN1HD0UU

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