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Fear, turmoil in Lebanon as its financial crisis worsens

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Shutting down, cutting salaries
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Shutting down, cutting salaries

On one of Beirut's main commercial streets, store owners are cutting salaries by half or considering shutting down. Shops advertise sales, but still can't draw in customers. The only place doing a thriving business: the store that sells safes, as Lebanese increasingly stash their cash at home.

It's a sign Lebanese fear their country's financial crisis, which has been worsening for months, could tip over into disaster.

Banks have clamped limits on withdrawals of U.S. dollars. The Central Bank's sources for dollars are waning. Politicians are paralyzed, struggling to form a new government in the face of tens of thousands of protesters in the streets for the past month in an unprecedented uprising demanding the entire leadership go.

AP
Scared and concerned
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Scared and concerned

"People are scared," said Khalil Chehab, owner of Shehab Security, a store selling safes on Beirut's Hamra Street. "Since the middle of last month, business rose about 30%." As he spoke to The Associated Press, three customers were in his shop. Clients of all economic levels have been coming, he said - and the shop has safes for any budget, with prices from $35 to $15,000.

A jewelry shop nearby has also seen a bump in business from people in need of cash coming in to sell their valuables, said its owner, who asked to be identified only by his first name, Nabil.

AP
Highest debt ratios in the world
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Highest debt ratios in the world

Businesses and households have been thrown into disarray. Residents say they don't know how they will come up with dollar payments needed to pay for tuition, health insurance and housing loans. Companies are struggling to transfer salaries to staff, others have cut salaries or are simply laying off employees.

Lebanon has one of the highest debt ratios in the world, at around $86 billion or 150% of GDP. Much of the government's budget is sucked up by salaries in the sprawling public sector, while infrastructure has gone undeveloped for years. Struggling with the broken economy, the government began hiking taxes and taking other measures, prompting small protests early in the year.

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The protests
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The protests

But the protests exploded across the country on Oct. 17 in response to a new round of proposed taxes and evolved into a revolt against the country's entire political elite. Protesters blame the politicians for decades of systematic corruption and mismanagement that brought the country into its dire economic straits. The prime minister stepped down on Oct. 29, but political parties have been unable to agree on a government since.

One of Lebanon's biggest problems is that it has a dollarized economy. Since a crash in the Lebanese pound in the early 1990s, the currency has been pegged to the dollar. As a result, many things - from rents to cars to insurance premiums - are priced in dollars. Most Lebanese get their salaries in local currency, however.

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What went down
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What went down

Since 1997, the Central Bank has kept the pound stable at 1,507 to the dollar thanks to heavy borrowing at high interest rates. That encouraged the large diaspora of hundreds of thousands of Lebanese around the world to pump in hard currency, sending it to their families, buying property or depositing in local banks, keeping the local market liquid.

The economy boomed for three years starting in 2008, with annual growth of about 8%. Then came a series of blows. First, the war in neighboring Syria sent more than 1 million refugees to Lebanon since 2011, straining the country's capacities.

Then the flow of hard currency into the country dropped starting in 2016, in large because falling oil prices reduced remittances from Lebanese in Arab Gulf nations. Salameh, the central bank's chief, responded with a program of so-called "financial engineering," encouraging local banks to get dollars from their branches abroad by paying high interest rates.

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