The renminbi seems to be back in business as a Chinese tool of retaliation against US tariffs. A 1.5 per cent fall in the currency early this month in response to proposed new US tariffs was only a start. Since the middle of August the renminbi has weakened further, and the exchange rate is now 4 per cent weaker than at the start of the month. We may well see more of a ‘weaponized’ renminbi, but there are four good reasons why Beijing might be wise to think before shooting.

The first has to do with how China seeks to promote its place in the world. China has been at pains to manage the collapse of its relations with the US in a way that allows it to present itself as an alternative pillar of global order, and as a source of stability in the international system, not to mention moral authority. This has deep roots.

Anyone investigating the history of Chinese statecraft will quickly come across an enduring distinction in Chinese thought: between wang dao, the kingly, or righteous way, and ba dao, the way of the hegemon. Since Chinese thinkers and officials routinely describe US behaviour since the Second World War as hegemonic, it behoves Chinese policymakers to do as much as possible to stay on moral high-ground in their behaviour towards Washington. Only in that way would President Xi be able properly to assert China’s claim to leadership.

Indeed, China has a notable track record of using exchange rate stability to enhance its reputation as a force for global stability. Both in the aftermath of the Asian crisis in 1997, and of the Global Financial Crisis in 2008, Chinese exchange rate stability was offered as a way of demonstrating China’s trustworthiness and its commitment to multilateral order.

Devaluing the renminbi in a meaningful way now might have a different rationale, but the cost to China’s claim to virtue, and its bid to offer itself as a guardian of global stability, might be considerable.

That’s particularly true because of the second problem China has in thinking about a weaker renminbi: it may not be all that effective in sustaining Chinese trade. One reason for this is the increasing co-movement with the renminbi of currencies in countries with whom China competes.

As the renminbi changes against the dollar, so do the Taiwan dollar, the Korean won, the Singapore dollar and the Indian rupee. In addition, the short-run impact of a weaker renminbi is more likely to curb imports than to expand exports, and so its effects might be contractionary. 

An ineffective devaluation of the renminbi would be particularly useless because of the third risk China needs to consider, namely the risk of retaliation by the US administration. Of this there is already plenty of evidence, of course.

The US Treasury’s declaration of China as a ‘currency manipulator’ on 5 August bears little relationship to the actual formal criteria that the Treasury uses to define that term, but equally the US had warned the Chinese back in May that these criteria don’t bind its hand. By abandoning a rules-based approach to the definition of currency manipulation, the US has opened wide the door to further antagonism, and Beijing should have no doubt that Washington will walk through that door if it wants to.

The fourth, and possibly most self-destructive, risk that China has to consider is that a weaker renminbi might destabilize China’s capital account, fuelling capital outflows that would leave China’s policymakers feeling very uncomfortable.

Indeed, there is already evidence that Chinese residents feel less confident that the renminbi is a reliable store of value, now that there is no longer a sense that the currency is destined to appreciate against the dollar. The best illustration of this comes from the ‘errors and omissions’, or unaccounted-for outflows, in China’s balance of payments.

The past few years have seen these outflows rise a lot, averaging some $200 billion per year during the past four calendar years, or almost 2 per cent GDP; and around $90 billion in the first three months of 2019 alone. These are scarily large numbers.

The risk here is that Chinese expectations about the renminbi are ‘adaptive’: the more the exchange rate weakens, the more Chinese residents expect it to weaken, and so the demand for dollars goes up. In principle, the only way to deal with this risk would be for the People's Bank of China (PBOC) to implement a large, one-off devaluation of the renminbi to a level at which dollars are expensive enough that no one wants to buy them anymore.

This would be very dangerous, though: it presupposes that the PBOC could know in advance the ‘equilibrium’ value of the renminbi. It would take an unusually brave central banker to claim such foresight, especially since that equilibrium value could itself be altered by the mere fact of such a dramatic change in policy.

No one really knows precisely by what mechanism capital outflows from China have accelerated in recent years, but a very good candidate is tourism. The expenditure of outbound Chinese tourists abroad has risen a lot in recent years, and that increase very closely mirrors the rise in ‘errors and omissions’. So the suspicion must be that the increasing flow of Chinese tourists – nearly one half of whom last year simply travelled to capital-controls-free Hong Kong and Macao – is just creating opportunities for unrecorded capital flight.

This raises a disturbing possibility: that the most effective way for China to devalue the renminbi without the backfire of capital outflows would be simultaneously to stem the outflow of Chinese tourists. China has form in this regard, albeit for differing reasons: this month it suspended a programme that allowed individual tourists from 47 Chinese cities to travel to Taiwan.

A more global restriction on Chinese tourism might make a devaluation of the renminbi ‘safer’, and it would have the collateral benefit of helping to increase China’s current account surplus, the evaporation of which in recent years owes a lot to rising tourism expenditure and which is almost certainly a source of unhappiness in Beijing, where mercantilism remains popular.

But a world where China could impose such draconian measures would be one where nationalism has reached heights we haven’t yet seen. Let’s hope we don’t go there.

This article was originally published in the Financial Times.

There were several notable achievements during last week’s Spring meetings. The Fund’s frank set of forecasts for world GDP growth are a grim but valuable reminder of the scale of the crisis we are facing, and the Fund’s richer members will finance a temporary suspension on payments to the IMF for 29 very poor countries.

Most importantly, a boost to the Fund’s main emergency facilities - the Rapid Credit Facility and the Rapid Financing Instrument - now makes $100bn of proper relief available to a wide range of countries. But the core problem is that the vast bulk of the Fund’s firepower is effectively inert.

This is because of the idea of 'conditionality', which underpins almost all of the IMF’s lending relationships with member states. Under normal circumstances, when the IMF is the last-resort lender to a country, it insists that the borrowing government tighten its belt and exercise restraint in public spending.

This helps to achieve three objectives. One is to stabilise the public debt burden, to ensure that the resources made available are not wasted. The second is to limit the whole economy’s need for foreign exchange, a shortage of which had prompted a country to seek IMF help in the first place. And the third is to ensure that the IMF can get repaid.

Role within the international monetary system

Since the IMF does not take any physical collateral from countries to whom it is lending, the belt-tightening helps to act as a kind of collateral for the IMF. It helps to maximise the probability that the IMF does not suffer losses on its own loan portfolio — losses that would have bad consequences for the Fund’s role within the international monetary system.

This is a perfectly respectable goal. Walter Bagehot, the legendary editor of The Economist, established modern conventional wisdom about managing panics. Relying on a medical metaphor that feels oddly relevant today, he said that a panic 'is a species of neuralgia, and according to the rules of science you must not starve it.' 

Managing a panic, therefore, requires lending to stricken borrowers 'whenever the security is good', as Bagehot put it. The IMF has had to invent its own form of collateral, and conditionality is the result. The problem, though, is that belt-tightening is a completely inappropriate approach to managing the current crisis.

Countries are stricken not because they have indulged in any irresponsible spending sprees that led to a shortage of foreign exchange, but because of a virus beyond their control. Indeed, it would seem almost grotesque for the Fund to ask countries to cut spending at a time when, if anything, more spending is needed to stop people dying or from falling into a permanent trap of unemployment.

The obvious solution to this problem would be to increase the amount of money that any country can access from the Fund’s emergency facilities well beyond the $100bn now available. But that kind of solution would quickly run up against the IMF’s collateral problem.

The more the IMF makes available as 'true' emergency financing with few or no strings attached, the more it begins to undermine the quality of its loan portfolio. And if the IMF’s senior creditor status is undermined, then an important building block of the international monetary system would be at risk.

One way out of this might have been an emergency allocation of Special Drawing Rights, a tool last used in 2009. This would credit member countries’ accounts with new, unconditional liquidity that could be exchanged for the five currencies that underpin the SDR: the dollar, the yen, the euro, sterling and the renminbi. That will not be happening, though, since the US is firmly opposed, for reasons bad and good.

So in the end the IMF and its shareholders face a huge problem. It either lends more money on easy terms without the 'collateral' of conditionality, at the expense of undermining its own balance sheet - or it remains, in systemic terms, on the sidelines of this crisis.

And since the legacy of this crisis will be some eye-watering increases in the public debt burdens of many emerging economies, the IMF’s struggle to find a way to administer its medicine will certainly outlive this round of the coronavirus outbreak.

This article is a version of a piece which was originally published in the Financial Times

The second wave of Arab uprisings that started in Sudan in December last year and extended to Algeria, Lebanon and Iraq this year have built on past experiences of political transitions during the Arab Spring, both its mistakes and achievements. Protesters from this new wave have already learned five lessons from previous transitions.

The first lesson is that toppling the head of a regime does not mean that the political regime has fallen.  In Tahrir Square on 11 February 2011, Egyptian protesters celebrated the decision of Hosni Mubarak to step down and left the square, thinking his resignation was enough to allow a democratic transition to take place. In contrast, in Sudan and Algeria, protesters continued to demonstrate after the resignation of Abdelaziz Bouteflika and the military-led ousting of Omar al-Bashir.

Protesters understood the lesson that the regime is found not only in the head of the state, but rather in the rules that govern the political sphere. By extension, political change requires changing the rules, not just the names of those in charge of implementing them.

The second lesson is that resorting to violence is the fastest way to end any hope for democratic change. Protesters who decided to take up arms offered their regimes the chance to reframe the political uprisings as civil war, as was the case in Syria. Even when armed groups manage to bring down the regime, their presence endangers the transitional phase afterwards, as is the case in Libya.

Although protesters in Sudan and Iraq have been faced with government violence and repression, they have insisted on their non-violent approach. In Sudan, the protesters responded to the massacre outside of the General Command of the Armed Forces on 3 June by organizing a mass demonstration on 30 June, which put pressure on the military to resume talks with the revolutionary forces.

The third lesson is that once the old regime has fallen, the transition period must be a collective decision-making process in which the opposition has, at least, veto power. The example of Tunisia after 2011 is a case in point. The Higher Authority for Realization of the Goals of the Revolution, Political Reform and Democratic Transition, which formulated the planned course of the transition, included representatives from across the political spectrum and civil society.

Although the military forces in Algeria and Sudan will not cease to play a political role any time soon, this does not have to mean exerting complete control over the transitional period. Sudan could offer a positive example in this regard, if it succeeds in implementing a power-sharing deal according to which a joint civilian-military sovereign council will govern Sudan during the transitional period.

The fourth lesson is that political transitions should achieve agreement on the rules of the game before proceeding to elections. In Egypt after 2011, rushed elections served to divide the political opposition and dramatically increase polarization in society. In this second wave, protesters have perceived elections as a trap which enable old regimes to reproduce themselves with new names.

In both Algeria and Sudan, protesters have resisted attempts by the military to hold elections as soon as possible. In Sudan, the agreement between the revolutionary forces and the military council postponed the elections until after the end of a three-year transitional period of technocratic rule. In Algeria, protesters are taking to the streets every Friday to demonstrate against the authorities’ decision to hold presidential elections in December.

The fifth and final lesson is that the call for change in the region goes beyond electoral democracy and extends to deep socioeconomic reforms. Iraq and Lebanon show this clearly: relatively free and fair elections have already been held but have served only to reinforce corrupt sectarian regimes.

According to the fifth wave of the Arab Barometer, the economic situation and corruption are perceived as the main challenge for Algerians (62.2%), Sudanese (67.8%), Lebanese (57.9%), and Iraqis (50.2%), while democracy is perceived as the main challenge for only 2.3%, 3.9%, 5% and 1.4% respectively.  The experience of the Arab Spring has shown people that democratic measures are only a means to an end.

Unlike in 2011, when the Arab Spring revolts enjoyed broad international support, this second wave is taking place in a hostile environment, with stronger Russian and Iranian presences in the region and an indifferent international climate. But where protesters have the advantage is in experience, and across the region they are clearly adapting their tactics to lessons learned from the early part of the decade.

Summary

• North African integration is not a new idea. However, countries in the region have so far struggled to form a cohesive bloc with deep political, economic and social ties. Political instability has effectively deprioritized North African integration. A focus on thematic (political, economic and security) ‘synergies’ may provide a better framework for cooperation than seeking opportunities for all-encompassing ‘deep’ and ‘comprehensive’ integration.
• Governments of North Africa dedicate considerable resources to domestic security. Much of their efforts are conducted at the national-level and directed towards threats from terrorists, insurgents and militias. Improved security cooperation would achieve better outcomes and economies of scale, including efforts to tackle human trafficking.
• A new generation of jihadis has emerged in North Africa since 2011. Nearly 27 per cent of the 30,000 fighters who travelled to Syria are from the Maghreb. While government counterterrorism operations have been effective, countries have failed to address the root causes of radicalization.
• Border economies have suffered as a consequence of a security focus on terrorism and smuggling, which has rendered many previously accepted cross-border trade activities illegal. States have struggled to provide alternative livelihoods for those who have lost this source of income. Border forces tend to lack the right combination of capacity, training and equipment to secure borders and often resort to heavy-handed tactics.
• New thinking is required to develop a more human-centric and proactive approach to migration issues in the region, which continues to witness huge flows of migrants. The migration policy of Morocco, introduced through legislation in 2014, could be a model for North Africa.
• The countries of North Africa have varying economic profiles, ranging from economically diverse Morocco to oil-and-gas-dependant Libya. However, they all face similar challenges including unemployment (particularly among the young), poor public-service delivery, low FDI levels, an oversized public sector, ineffective tax collection, and high informality.
• Fostering entrepreneurship and the development of small and medium-sized enterprises (SMEs) are priorities for North African countries, particularly regarding job creation. Regulatory cooperation – such as harmonizing SME definitions, legislation and support institutions – across North Africa is an obvious area where further integration would encourage the development of start-ups and small businesses.
• With the advent of the fourth industrial revolution, North African governments must address their technological gaps and work to improve public–private cooperation. In some sectors, such as the fintech industry, North African countries can build upon nascent synergies that have developed organically, such as those of start-up incubators and angel investors that work across the region.
• Renewables, particularly solar energy production, are a promising development for North Africa. While regional initiatives, such as Desertec, have stalled due to political differences between countries, the sector has witnessed exponential growth in Tunisia, Egypt and Morocco, where the involvement of the private sector has proved successful.

There is a broad consensus that Libya’s rentier, patronage-based system of governance is a driver, and not only a symptom, of Libya’s continuing conflict. The dysfunction of Libya’s economic system of governance has been exacerbated by the governance split that has prevailed since 2014 whereby rival administrations of state institutions have emerged. Despite these challenges, a system of economic interdependence, whereby forces aligned with Field Marshal Haftar control much of the oil and gas infrastructure and the UN-backed Government of National Accord controls the means of financial distribution, has largely prevailed. Yet, at the time of writing, this is under threat: a damaging oil blockade is being implemented by forces aligned with Haftar and those state institutions that do function on a national basis are finding it increasingly difficult to avoid being dragged into the conflict.

This roundtable will bring together analysts and policymakers to discuss these dynamics and look at possible remedies. Jason Pack, non-resident fellow at the Middle East Institute, will present the findings of his latest paper on the issue which recommends the formation of 'a Libyan-requested and Libyan-led International Financial Commission vested with the requisite authorities to completely restructure the economy.' Tim Eaton, who has been leading Chatham House’s work on Libya’s conflict economy, supporting UNSMIL’s efforts in this field, will act as respondent.

Attendance at this event is by invitation only. 

Following the US strike on Qassem Solaimani and Abu Mehdi al-Muhandis, populist cleric Muqtada al-Sadr has violently cracked down on youth-led protests in Iraq.

His paramilitaries and ‘blue hats’ –  supposedly created to protect protestors from state and allied parastatal security forces – sought to end the months-long demonstrations by attacking the places where protesters have camped since October. In Baghdad’s Tahrir Square, they successfully captured the famous Turkish restaurant which had become a symbol of Iraq’s ‘October revolution’. 

Once the champion of Iraq’s protest movement, Sadr has seemingly changed course and now leads the counter-protests. This reversal has mystified many, from Iraqis who saw Sadr as an ally in their struggle for reform against an impenetrable elite to foreign diplomats who hoped Sadr could help pushback against Iranian influence in Iraq. 

Yet this is not the first time that Sadr has drastically redefined his position. Since 2003, he has gone from Shia sectarian militia leader to pro-democracy reformist and Iraqi nationalist.

And in the past few months, he has given mixed signals, both supporting and criticising the protesters. The most recent incidents of Sadrist violence targeting demonstrators provoked a societal backlash, prompting Sadr to change tack once more and announce that he would disband the blue hats and investigate their crimes against protesters.

Sadr and the paramilitaries

Sadr’s latest change of course may seem to flow directly from the US assassination of Qassem Soleimani and Abu Mahdi al-Muhandis and the ensuing vacuum in the Shia paramilitary sphere. Prior to this move, the Sadrists were on the defensive, outflanked and outgunned by the growing coercive and political power of a constellation of Shia armed groups coalescing under Muhandis’s de facto leadership. Many of these groups competed for Sadr’s base, including Qais al-Khazali’s Asa’ib ahl al-Haq and Akram al-Kaabi’s Harakat Hezbollah al-Nujaba.  

With Muhandis out of the picture, Sadr could reclaim the space by pushing his own right hand, Kadhem al-Issawi (Abu Do’a), to be the new centre of the paramilitary field and forcing competitors, including Khaza’li and Kaabi, to rally around his leadership.

Iran, in the short term, appears to be going along with this solution to bring more coherence to its allied forces in Iraq as it seeks to counter what it regards as US aggression. Iran also hopes that bringing Sadr back in will help neutralize the protest movement which threatens its stake in Iraqi politics. 

The most visible sign of this Iran-brokered rapprochement was the 13 January meeting in Qom attended by Sadr, Issawi and several senior militia commanders including Laith al-Khazali (Qais al-Khazali’s brother). 

Following the Qom meeting, a pattern of tit-for-tat violence and assassinations between the Sadrists’ Saraya al-Salam and Asa’ib Ahl al-Haq – ongoing since the start of the October protests in Iraq – ceased.

A fragmented movement?

However, while the US strikes certainly changed Sadr’s political calculations, there are more persistent fundamentals at work that help explain his change of course. The first of these relates to long-standing fragmentation within the movement. This exists not only within Sadrist paramilitaries, but within the movement’s clerical networks, and also applies to the ties that bind the Sadrist leadership to its popular base. This fragmentation makes it difficult for Sadr to impose a coherent politics on his followers from the top down.

There are signs that Sadr’s recent shift in position has exacerbated this fragmentation. His attempt to reposition the movement’s base within the ‘resistance axis’ that supports the Shia militias in Iraq has only been partially successful. On 24 January, responding to the US assassinations, Sadr called for a million-man march focused on expelling US forces from Iraq. However, turnout was poor, especially given the huge logistical support for the march, and it lasted only a few hours.

Equally revealing, when Sadr called on his supporters to vacate the squares, many refused. One Sadrist protester in Baghdad’s Tahrir Square told the authors: ‘We’ve been camping with our brothers and sisters for four months. Why should we leave them to die?’

Meanwhile, fissures have also opened up within the Sadrists’ clerical elite. One senior Sadrist cleric, for example, is openly defying Sadr’s authority and siding with the revolutionaries in Nasiriyah. 

Sadr’s attempt to dominate the paramilitary sphere is also unlikely to prove any more successful than his many previous failed attempts since 2003. He is neither trusted nor respected by the leaders of other groups. The Iran-brokered rapprochement is already showing signs of weakness. Two recent assassinations of Saraya al-Salam leaders in Basra and Maysan indicate a potential renewal of power struggles between the Sadrist militia and Asa’ib Ahl al-Haq.  

Sadr is not a revolutionary

Sadr has never been a revolutionary, but someone who seeks to leverage a role as both ‘spoiler’ and ‘stabilizer’ to maximise his political leverage. This strategy is ultimately oriented towards sustaining Iraq’s extant political system, not its overthrow. Forced to choose between the roles of revolutionary or maintainer of the status quo, he has opted for the latter. 

The protests that erupted in 2019 were not the same movement that Sadr led from 2015. The 2015 protests were an elite-driven phenomenon, integrated into the political field and carefully calibrated to exert pressure on the elite towards gradual reform. 

By contrast, the 2019 demonstrations spring from a youth-led, bottom-up mobilization that rejects politicization and seeks a more radical form of change. Chatham House surveys in a forthcoming paper reveal that the protesters are younger that those who protested in 2015-16. Fewer have permanent employment. Instead of demanding better services or jobs, they are focusing wholesale transformation of the post-2003 political system.

A Sadrist official told the authors that their movement initially joined the protests in October 2019 expecting a similar reform-orientation to the protests which Sadr had previously led. However, according to him, the protesters failed to come forward with reasonable demands or alternative names for prime minister. He believed the protests would fade, and many would regret the ‘wasted time and blood’. 

Sadr’s relations with Iran

A final long-term factor at play is Sadr’s receding autonomy from Iran. Ever since his movement’s electoral victory in May 2018, Sadr came under enormous pressure to reconcile with the political wing of the Iranian-allied parastatal armed groups in the formation of a new government acceptable to Iran.

Over the last year, Sadr has moved even closer to Iran, spending more time in Qom. Iran has offered Sadr security from his paramilitary rivals (such as Asa’ib ahl al-Haq), convincing Sadr that he is safer in Iran than Iraq. Moreover, Sadr is undertaking religious training in Qom, and may see this as a chance to enhance his standing in the Shia religious field as many look towards a future beyond the elderly Najaf-based marja Ali al-Sistani.

By keeping Sadr in Qom, Iran appears to be trying to isolate him from what they regard as negative influences. As tensions between the Sadrists and other protest groups intensified, efforts were made by some protest leaders and allied political groups to reach Sadr in Qom and try to persuade him to change course or restrain the worst abuses of his forces. However, this delegation was unable to make contact with Sadr. Those involved told the authors they have resorted to communicating with local Sadrist leaders in Najaf, Babil, Basra and Baghdad. 

Crossing a line

This is a transformative moment for the Sadrists. Sadr is now defying the popular sentiments driving protests across central and southern Iraq. The sense of betrayal among former allies and friends of the Sadrists is palpable. One senior activist involved in cooperation with the Sadrists wrote that, no matter what moves Sadr makes next, the cleric has ‘terminated all partnership with the protesters,’ and ‘shattered the framework for cooperation’. A line has thus been crossed that Sadr cannot reverse; he will not be able to recover what he has now lost. 

Iran, also, does not see Sadr as a dependable ally, and will look to isolate and side-line the cleric when the opportunity arises. Thus, in seeking to exploit a crisis for short-term gain, Sadr may well have sealed his fate – in the long term – as a declining force in Iraqi politics.

To understand Lebanon’s financial collapse, look to its politics.

The country has been deeply damaged by an increasingly dysfunctional political system. A series of compromises have alienated it from its main markets in the Gulf and strangled its economy; anyone that has glanced at fluctuations in Lebanese bank deposits over the last 10 years can see the correlation.

Imagine if Boris Johnson or Donald Trump were obliged to form joint governments with Jeremy Corbyn or Bernie Sanders. The result would be paralysis and lack of accountability as each party pulls the country in opposite directions and blames the other for the state of limbo. This has been the state of affairs in Lebanon since the Doha agreement of 2008. 

That agreement followed an 18-month siege that paralyzed Beirut and an attack on the city by Hezbollah’s ‘black shirts’. The Doha formula imposed governments of national unity between Prime Minister Saad Hariri’s pro-Saudi camp and Hezbollah’s pro-Iran camp and their respective internal allies.

The pattern was set: each period of subsequent paralysis was followed by further compromise as the tug of war pulled the country away from its principal economic partners, the Arab Gulf states, with the regional balance of power tilting towards Hezbollah. 

It was not supposed to be like this. The Baabda Declaration in June 2012, reached after a process of national dialogue, was meant to secure Lebanon’s neutrality in regional conflicts, with both sides promising to hold back on external alliances and coexist despite difference over major regional issues like the war in Syria, the standoff between the US and Iran or relations with Israel or the Gulf states.

This has worn away. The Baabda declaration itself became a sham when Hezbollah inserted itself into the war in Syria in support of the Assad regime and overtly got involved in Iraq and Yemen as an Iranian proxy. This was followed by Saudi opposition to concessions by Hariri that led to the election of General Michel Aoun, an ally of Hezbollah, as president in October 2016; again, after a political paralysis that lasted 29 months with no active government and no head of state.  

The Saudis were also furious when President Aoun’s son-in-law, Foreign Minister Gebran Bassil, abstained from condemning the burning of the Saudi embassy in Tehran at an Arab League meeting in Cairo in January 2016, citing the need to preserve national unity.

Fearing that he was simply providing Hezbollah with protection in the guise of compromise, the Saudis pressured Hariri to resign in November 2017 during a trip to Riyadh, but he later challenged that by retracting on his resignation when back in Beirut. Lebanon was caught between two sides, and as the regional conflict intensified from tension to open confrontation, neutrality was no longer an option.

Gulf connections

An estimated 350,000 Lebanese expats live and work in Saudi Arabia, the UAE, Qatar and Kuwait. These countries are also the main clients for Lebanese contractors, consultants and advertising companies, some of which have offices there. The domestic tourism industry relies heavily on Arab Gulf visitors and they are a principal source of foreign investments especially in the real estate sector.

Lebanon also enjoyed a certain degree of political and economic protection from the US and the Gulf, and Hezbollah benefited indirectly from that protection, as it also shielded it to a certain degree from sanctions.

The deterioration of relations meant that the country was cut off by its Gulf partners. This was manifested in travel bans for Gulf Cooperation Council (GCC) nationals to Lebanon and a decrease in investments and bank deposits, as well as a decrease in remittances from Lebanese expats, partly because of economic crisis in the Gulf countries themselves.

Saudi Arabia withdrew $4 billion of aid to the Lebanese army and internal security forces, and no aid or deposits were forthcoming as the economic and financial situation deteriorated. 

The costs to the Lebanese economy include the opportunity cost created by the annual threat of war with Israel, after which trips are cancelled and projects postponed. Hezbollah also controls a section of Beirut port where it pays no duty or taxes. Add to that the economic fallout from the war in Syria, such as the impact on exports, the inflow of refugees and the cost of Hezbollah’s involvement.

The burden of these political factors is difficult to estimate but it constitutes the ransom that the Lebanese economy bears as a cost of the compromise. This is not to absolve Lebanese politicians from corruption or bankers of mismanagement but to add that political factors cannot be ignored.

The cumulative cost and economic impact of being cut off from its main economic partner eventually bankrupted the country. The fiscal and financial aspects, with Lebanon’s inability to service its debt, are but a reflection of these political factors. In the long run, the key to avoiding complete collapse is to restore relations with the GCC and free Lebanon from that very costly grip.

Summary

• China’s presence in the Maghreb has increased in recent years, raising concerns among Western powers. China has focused on bilateral relations with these countries while also working within the Forum on China–Africa Cooperation (FOCAC) and the China–Arab States Cooperation Forum (CASCF). However, this engagement has limited strategic value compared to relations China has with Saudi Arabia or the United Arab Emirates.
• Since the launch of the Belt and Road Initiative (BRI) in 2013, China has shown greater interest in the Maghreb as an entry point to European and African markets. China has pursued commercial relations over political influence in the region. Morocco and Tunisia are still dependent on France, their former colonial power, and the European Union, which exert great political, economic, security and cultural influence over the two countries.
• The Maghreb countries’ economic relations with China have grown exponentially, with Algeria forming the closest relationship. However, Morocco and Tunisia are keen to attract China’s investment and involvement in major construction and infrastructure projects to boost industrial and economic development. While China’s investments in Morocco and Tunisia remain at a low level, trade relations with both countries have grown steadily. Politically, China’s policy of noninterference in domestic affairs appeals to Maghreb states, which resent Western interference.
• China’s influence in the Maghreb remains minimal. Its soft power push has struggled to promote advantages of strong relations with China beyond economics. Furthermore, Morocco and Tunisia’s populations have generally scant knowledge about China’s politics and culture. China has tried to address this lack of familiarity through the establishment of Confucius Institutes and other cultural activities. However, language and cultural barriers still impede the development of close relations, compared to those China has with other countries in Africa.

At this webinar, part of the Chatham House MENA Programme Online Event Series, experts will explore how the coronavirus pandemic is impacting the economy, state-society relations and healthcare throughout the Middle East and North Africa. How are governments handling this crisis and what measures have they put in place to stop the spread of the virus? Why are some governments withholding information about the number of cases? What has the response from the public been so far? How is this affecting the region and how does it compare to the global picture?

The event will be held on the record.

Ever since independence, the Moroccan monarchy has used political parties to legitimize the country’s authoritarian political process and structure, and to absorb social and political anger. The palace puts successive governments and other elected institutions, such as local and regional councils, at the frontline of public blame, and replaces them once they fail this function.

In a recent article, MENA Programme Associate Fellow, Mohammed Masbah, examines how the Moroccan monarchy has used this strategy with the ruling Justice and Development Party (PJD) so that the palace remains the centre of political power, while the PJD – and other political parties before it– takes responsibility for coping with the mounting socio-economic crisis.

In this webinar, part of the Chatham House project on The Future of the State in the Middle East and North Africa, the article’s author will discuss the risks this approach presents for the long-term stability of Morocco and what reforms are needed to increase citizens’ dwindling confidence in the political process.

You can express your interest in attending by following this link. You will receive a Zoom confirmation email should your registration be successful.

Yemen suffered from the excessive control of the central government prior to the current conflict. Federalism has been put forward by many Yemeni political parties since the National Dialogue Conference (NDC) as the supposed magic cure for this significant problem. Today, Yemen is more fragmented than ever, its state central institutions have been scattered and lack leadership and the state has lost most of its sovereignty. The prevailing narrative that decentralization through federalism is Yemen’s inevitable path post-conflict often fails to acknowledge that there are prerequisites for effective local governance, beyond political will.  

In a recent article, Osamah Al Rawhani addressed how the weakness of central state institutions is the key challenge to proceeding with federalism in Yemen and highlighted prerequisites and contextual factors that need to be addressed before reforming the structure of the state. He argued that the viability of decentralization relies on the presence of a functioning, representative central government that is capable of devolving power but also able to keep the state from further fragmentation. 

In this webinar, part of the Chatham House project on The Future of the State in the Middle East and North Africa, the article’s author will discuss recent developments in Yemen, where shifting frontlines and regional divisions are fragmenting the country in new ways. The speaker will explore alternative approaches to pursue the path of federalism that recognize the current realities and the critical need for strong central institutions. He will also survey the internal and external factors that must be considered to rebuild a stable state in Yemen.

You can express your interest in attending by following this link. You will receive a Zoom confirmation email should your registration be successful. Alternatively, you can watch the event live on the MENA Programme Facebook page.