We are now in truly unchartered territory. The coronavirus pandemic has cast its shadow over nations large and small, forcing the world in its entirety to an unprecedented standstill. Borders have slammed shut overnight, states of emergency declared, and militaries deployed on the streets. The world after coronavirus is certain to look very different to the world that preceded it.
For now, we can confidently say that the global economy has never experienced a shutdown and contraction of this scale. The International Monetary Fund’s (IMF) managing director, Kristalina Georgieva, recently described this as a “crisis like no other… way worse than the global financial crisis [of 2008]”. The point is well-illustrated by the unemployment figures coming out of the world’s largest economy, which have revealed that more than 22 million Americans have filed new claims for unemployment benefits since the shutdown began, with over 6.6 million claims filed in a single week in March. This staggering statistic paints a bleak portrait of impending economic catastrophe: the previous record of 695,000 for week-on-week unemployment claims was set in 1982. The fragility of the neoliberal economic order, of decades of deliberate underinvestment in public health and social security infrastructure, has been laid bare by scenes of abject misery and death, while the worst has momentarily been held at bay by the very people this system had derided for years: nurses, migrant workers, delivery drivers, and supermarket shelf stackers. Its social contract lies in ruins, belatedly but inevitably relegated to the annals of history, as even its most prominent exponents now admit.
The crisis places several Arab states at an unprecedented and critical historical juncture. Many were already struggling with the burdens of difficult social and economic conditions. Serious doubts now hang over their ability to withstand and absorb the shocks wrought by this pandemic, which threatens to be incandescently painful in the Global South. One crucial question is whether these states can implement the kind of monetary and fiscal stimulus measures and social protection schemes required to prevent wholesale financial collapse and protect the most vulnerable from the economic ramifications of a lockdown which has caused their incomes to evaporate overnight. For the purposes of this article, we will restrict our focus to the experiences and challenges of Lebanon and Jordan, though many of the same considerations are applicable to the wider region and indeed to emerging markets as a whole.
Jordan and Lebanon’s Coronavirus Containment Strategies
Jordan and Lebanon have followed similar approaches to dealing with the pandemic since its gravity became apparent, despite some differences in the severity of the measures adopted and the speed of their implementation. Both opted for strategies of immediate suppression rather than mitigation, perhaps in appreciation of the very real limits of their healthcare sectors’ capacity to absorb the pressures of widespread infection, as well as their lacking the necessary productive base to massively scale-up that capacity within a very short timeframe.
In Jordan, the government moved quickly to suspend all travel with Egypt, Palestine, Lebanon, and Syria from March 10, before announcing the closure of its borders entirely from March 19. A decision was taken before the closure to quarantine all arrivals immediately in hotels around the Dead Sea and Amman for an initial period of 14 days. On March 21, a total 24-hour curfew was announced, characterised at the time as being the most stringent measure to be applied nationally on a global scale. According to official figures, 2,700 individuals were arrested for breaching this curfew over a period of three days. Some of the most stringent restrictions were loosened over time while the government worked to put in place ambitious mechanisms to supply all ten million residents with immediate necessities of food, water, and medical supplies.
In Lebanon, the closure of schools and universities was announced on February 28, six days after the discovery of the first confirmed case of COVID-19. Over the first two weeks of March, as fears of community spread began to take hold, an unofficial lockdown accompanied by various containment measures was gradually instituted. On March 15, a state of medical emergency and ‘general mobilisation’ was declared, which would include the closure of land and air borders, followed some days later by the announcement of an evening curfew.
Social Protection Measures in the Wake of a Pandemic
So far, despite relatively quick public health mobilisations, the social protection measures taken by both countries to offset some of the economic costs of the lockdown have been limited and embryonic relative to the scale of the crisis.
In Lebanon, the Central Bank issued a decision (Circular 547) enabling the commercial banks to borrow from it at zero interest in order to fund the temporary suspension of their debtors’ maturities, with an eye to avoiding a tsunami of debt distress and insolvencies. The government has also announced plans to provide direct financial support in the value of LL400,000 [approx. US$150] to families most in need. Analogous measures have been taken in Jordan, where the Central Bank has also issued a series of decisions suspending debt maturities and supplying emergency liquidity, while the government has announced plans to provide direct financial support for the most vulnerable families as well as an order regulating payment of wages in the private sector over the course of the crisis.
These measures, while necessary, are clearly not sufficient to ward off the potentially ruinous consequences of an economic shutdown of this scale. Compared with the massive and unprecedented interventions made by advanced economies – which themselves do not appear sufficient to address the monumental challenges posed by this crisis – they appear almost negligible. Those interventions, despite clear disparities in their distributive effects and relative emphasis on protecting corporations or workers, have been guided by the assumption that this pandemic will involve a painfully deep but temporary slowdown in trade and production. Consequently, the priority has been to provide the necessary support to allow fundamentally viable firms to bridge across the period of disruption, and to support workers and the vulnerable in meeting their essential needs over the same period. The hallmarks of these rescue packages have therefore been government loan guarantees, employment retention schemes, measures designed to incentivise bank lending and emergency liquidity provision to firms, mortgage holidays, and direct financial support to households and small businesses.
By way of illustration, the United States Congress has passed a US$2 trillion fiscal rescue package involving loans and financial assistance for large corporations and smaller businesses alongside some direct payments to households, while the Federal Reserve has unleashed an ‘unlimited’ asset purchase plan and instituted various new lending facilities in an attempt to pump liquidity into the financial system and support the flow of credit to consumers and businesses. Even in fiscally conservative Germany, constitutional constraints on budget deficits have been suspended to make way for the approval of a EU€1.1 trillion rescue package, with a noticeably greater focus on protecting workers through employment retention schemes than its American counterpart.
The Coronavirus Funding Dilemma
Lebanon was already in the midst of a deep and painful economic crisis prior to the emergence of the pandemic. Its massive popular uprising of October 17 had finally triggered the collapse of a structurally deformed financial order, resulting in widespread (and entirely unlawful) capital controls enforced arbitrarily by the powerful banking sector on its depositors. On March 8, the government announced that – for the first time in its history – it would be defaulting on its Eurobonds and seek to restructure its debts. The Prime Minister announced that the spiralling financial crisis had left its foreign currency reserves in a dire state, and those funds were needed to finance essential imports. The dollar peg has de facto collapsed and the Lebanese Lira’s value has tumbled from an official rate of 1,507 against the dollar to a market rate upwards of 2,800 to the dollar, made doubly painful by an essentially dollarized economy.
The situation was not so dire in neighbouring Jordan, which was fortunate enough not to be facing its own sovereign debt and balance of payments crises when the pandemic hit. Nevertheless, given background concerns around its debt sustainability and an official unemployment rate of 19% – soaring to upwards of 37% among its youth population – Jordan finds itself in a vulnerable position and at risk of suffering painfully under the weight of the global shutdown, which will hit its poorest and most vulnerable groups the hardest. A new UNESCWA report estimates that a further 8.3 million people may fall into poverty across the Arab region as a result of the pandemic, resulting in a total of 101.4 million people in the region in poverty and 52 million suffering from undernourishment.
Ultimately, Jordan and Lebanon, and other similarly situated states, face a clear dilemma in mounting their economic response to the crisis. The funding for massive social protection interventions akin to those in advanced economies must invariably come from one of two sources: increasing the tax base, or increased public borrowing. For advanced economies, this has not yet posed a substantial problem. Interest rates on assets such as US, UK and German Treasuries are effectively zero or negative, owing to their status as safe and crisis-resilient assets, which in turn allows them to borrow at will to fund such measures (though to varying degrees). The same privileges do not extend to peripheral states such as Jordan and Lebanon, for whom neither option is plausible in these circumstances.
First, given an unprecedented slowdown in production, the ordinary production-linked tax base (comprising income, corporate, and sales taxes) will automatically constrict. Any attempt to increase the tax burden from these sources is likely to further deepen the depression rather than relieve it.
Second, emerging markets generally are facing enormous difficulties in securing financing for public borrowing during this crisis. The past several weeks have seen emerging market assets dumped on a scale that has never before been seen, as investors scramble towards US dollars and (to a lesser extent) Treasuries, widely regarded as the only truly crisis-proof assets. Indeed, such is the gravity-defying power of the dollar that the crisis in 2008 saw an analogous rush for dollars notwithstanding the fact that the American financial system was itself the very source of the crisis.
On March 19, the trade-weighted dollar index burst to a 50-year record high as the dollar-crunch unravelled at an astonishing pace. The Federal Reserve has responded by reviving its liquidity swap lines with 14 other central banks, providing much needed dollar liquidity to those countries and easing some of the strain on the dollar, as it did in its critical response to the 2008-9 crisis. Going even further, it has established a new repo facility which enables central banks with an account at the New York Fed to temporarily raise dollars by selling US Treasuries to the Fed and agreeing to buy them back at the maturity of the repurchase agreement. This has eased some of the pressure on the dollar, but is highly unlikely to be extended to countries like Lebanon and Jordan, not least for the geopolitical considerations that apply to the former.
One consequence of this dollar crunch is that financing existing dollar-denominated debts – whether public or private – has become increasingly difficult. This in turn threatens to unleash a wave of debt distress and insolvencies in states such as Jordan and Lebanon with substantial dollar liabilities. The Lebanese Lira will continue in its unrelenting downward spiral, making financing crucial imports – including medical equipment – even more difficult, while Jordan will have to focus its monetary policy on protection of the dollar peg and will therefore be constrained in providing any monetary stimulus in response to the crisis.
A second consequence is that it will be near impossible to borrow from the international markets on the scale required to fund urgently needed rescue packages. Adam Tooze and Moritz Schularick compellingly argue that this phenomenon can already be seen in the contrasting fiscal responses of Germany and Italy. Germany, which has thus far avoided the brunt of the crisis, was able to quickly pass the EU€1.1 trillion rescue package mentioned above. By contrast, Italy, the worst-affected country in Europe, was able to muster only EU€28 billion for its immediate response, primarily because it lacks the fiscal leeway to do more. And if Italy is struggling to finance fiscal rescue packages in the face of widening yield spreads, one need only imagine the position of a small peripheral economy like Jordan, or recently defaulted and financially crippled Lebanon. Resort to the IMF, at least for support in meeting immediate dollar financing needs, now appears inevitable. At least 102 countries have already approached the IMF for emergency assistance, well over double the number that sought such assistance in 2008.
What is to be Done?
This is not to suggest that Jordan and Lebanon are left with no choice but to submit to the inevitably painful ramifications of this crisis and the whims of the global financial markets. The only credible option which remains is a massive mobilisation of existing national wealth and productive capacity, with a view to protecting public health and meeting the social and economic needs of the most vulnerable classes.
In Spain, private hospitals and healthcare providers have already been nationalised to support the government’s response to the pandemic. Authorities have announced their intention to introduce a universal basic income to ease the economic pressure on households and individuals, and have stated that they intend for this to become a ‘permanent instrument’ extending beyond this crisis. Elsewhere, a wave of nationalisations of critical industries appears inevitable, both to avoid a stream of insolvencies and to provide the state with the necessary resources to respond forcefully to the crisis.
The Mashriq states should be no exception to such measures. In these profoundly unequal societies, substantial wealth taxes must be levied to fund urgent social protection measures for the poorest, not least on the tiny proportion of Lebanese shareholders and depositors that have reaped unfathomable profits exploiting a fundamentally disfigured financial system. Wherever possible, existing productive industries should be directed to mobilise their capabilities to produce medical necessities. In the face of a wholly unprecedented state of emergency, now is not the time for timidity.
This pandemic has vividly demonstrated the true scale of our social interdependence. In a single crushing blow it has struck down the various delusions of a fading political and economic order. But against this background, it may represent a unique opportunity to construct a new social contract and an economic order premised upon the universal provision of basic needs and a deep sense of social solidarity and common human dignity. The fragile old order is dead – we must now build another.
Keywords: Lebanon, Jordan, Pandemic, Crisis, Financial support
 For the distinction between suppression and mitigation, see “Impact of Non-Pharmaceutical Interventions (NPIs) to Reduce COVID-19 Mortality and Healthcare Demand”, Imperial College Epidemiological Study, 16 March 2020