Source: Al-Wafd Newspaper
Prof. Dr. Ali Mohammed Al-Khouri
Over the past half-century, the global economic system has witnessed a sustained wave of banking, currency, and sovereign debt crises. The International Monetary Fund’s databases have recorded more than 150 banking crises, 236 currency crises, and dozens of sovereign debt crises since the 1970s, revealing the fragility of the global financial system’s structure and the recurring cycles of collapse and reconstruction. At the heart of these transformations, the relationship between economic collapses, currency devaluations, and rising inflation rates appears not as a series of isolated incidents, but rather as part of a broader logic explained by political economy theories of crises. These theories range from models of capital flight and currency collapse to analyses by philosophers and thinkers concerning the erosion of state legitimacy when its ability to protect living standards diminishes and a trust gap emerges between society and its institutions.
When an economy enters a state of structural collapse, the first thing to be shaken is confidence in its currency. Declining growth, widening fiscal deficits, and a deteriorating balance of payments all drive investors and depositors to flee the local currency for more stable currencies or physical assets, thus initiating a cycle of capital flight that leads to a sharp decline in the currency’s value. In many cases, as the experiences of Latin American and Asian countries demonstrate, governments resort to expanding the money supply to finance the deficit. This transforms the fiscal deficit into inflation, and inflation into hyperinflation, as happened in Venezuela when annual inflation rates reached hundreds of thousands of percent at the height of the crisis in 2018 and 2019. Here, inflation is not merely a matter of rising prices; it becomes the mechanism that begins to dismantle the social system itself, as wages lose their meaning and savings become worthless figures.
Lebanon’s trajectory in recent years provides a relevant example within the Arab region of this structural link between financial collapse, currency devaluation, and the eruption of social unrest. The country witnessed a sharp decline in the value of the Lebanese pound, which lost more than 98 percent of its value in less than a year and a half between the beginning of 2023 and the beginning of 2024. This was accompanied by annual inflation exceeding 200 percent in 2023 before declining to around 45 percent in 2024. Against this backdrop, the World Bank recorded a surge in unemployment rates from about 11 percent before the crisis to nearly 30 percent in 2022, with more than half the population falling below the poverty line. This clearly illustrates what political economy literature warns against: when a state fails to manage its resources and financial institutions, the economic crisis quickly transforms into a crisis of political and social legitimacy.
Sri Lanka’s experience serves as a stark reminder of the vulnerability of middle-income economies to debt accumulation and structural imbalances. At the height of the crisis in 2022, inflation soared to nearly 70 percent before falling to less than 6 percent in early 2024 following IMF intervention and the implementation of a stringent reform program. This sharp shift from collapse to “imposed stability” highlights a recurring debate in dependency theories: to what extent do financial bailouts truly offer a solution, and to what extent do they perpetuate a dependent economic model that remains susceptible to crises whenever the terms of external financing change?
In the Arab world, this dilemma is embodied in a stark contrast between countries possessing vast reserves of oil, gas, and foreign currency, and those living in a state of near-permanent crisis. Gulf economies, for example, have successfully absorbed major shocks thanks to their ability to utilize financial surpluses to build sovereign wealth funds and stabilize exchange rates. However, they remain highly sensitive to energy price cycles and fluctuations in global demand. Conversely, other countries in the region operate within a precarious triangle of weak productive infrastructure, scarce reserves, and persistent political and security pressures, making their currencies more vulnerable to depreciation and their prices more susceptible to volatility with every external or internal shock.
These crises, according to the logic of financial instability theories developed by the American thinker Henry Minsky, reveal the accumulation of risks in the pre-collapse periods, when growth appears stable while governments and institutions expand their borrowing and long-term obligations. When the cycle reverses, these obligations become an unsustainable burden, triggering a series of bankruptcies and restructurings, accompanied by currency collapse and a decline in confidence in the banking sector. The experiences of Venezuela, Lebanon, Sri Lanka, and others demonstrate that this collapse translates into a sharp decline in the level of public services, a weakened capacity to provide medicine and food, and a large-scale emigration of skilled workers.
From another perspective, these crises reveal that debates about “monetary policy independence” have become inherently sovereign debates. While theories such as the “impossible third” in international economics assert the impossibility of combining a fixed exchange rate, full capital liquidity, and an independent monetary policy, recent crises demonstrate that small and fragile economies often pay the heaviest price when they choose an unsustainable combination of these elements. For many Arab countries, the challenge remains finding a balance between currency stability and allowing sufficient room for monetary and fiscal policies that support real growth, without falling into the trap of perpetual dependence on short-term capital inflows or conditional aid.
On a socio-political level, the issue of currency collapse cannot be understood in isolation from the erosion of the political system’s social base. High inflation, especially when it exceeds tens of percent annually and persists for years, does not simply mean rising prices; it effectively signifies a hidden transfer of wealth from savers and those with fixed incomes to those who possess tangible assets or the ability to hedge against them. With each such wave of inflation, the gap widens between a protected minority and a vulnerable majority, increasing the likelihood of protests and social unrest. This, in turn, fosters the growth of political movements that capitalize on public discontent and resort to short-term solutions that only exacerbate the problem.
Faced with this reality, it is not enough to speak of “financial reforms” or “debt restructuring” in their narrow sense. International experience indicates that the economies that have succeeded in escaping the spiral of collapse are those that have combined fiscal discipline, banking sector restructuring, and building a broader productive base based on competitive and exportable sectors, along with profound reforms in governance and the fight against corruption.
As for the Arab world, there is an important regional dimension, which lies in the absence of effective Arab economic coordination and the modest volume of intra-regional trade, which means that each country faces its crises individually, while building joint solidarity and financing mechanisms could have provided a greater safety net for the entire region.
Ultimately, economic crises reveal another troubling but crucial truth: the value of a currency is not a technical matter to be solely determined by the central bank, but rather the responsibility of the state as a whole. The state, as the entity that reflects the strength of the economy, the credibility of its institutions, and the robustness of the structure that binds the state’s legitimacy to its citizens, is responsible for this. When all these elements are threatened, the focus shifts from halting currency collapse or curbing inflation to determining the development path that nations should adopt.
Here, it becomes clear that economies relying on temporary growth engines lacking solid foundations remain vulnerable to prolonged collapses that weaken both society and the state. The future requires a more robust and sustainable economic model, built on a genuine production structure and institutional capacity that protects society from shocks. The stability of this structural transformation is of paramount importance, its impact extending beyond the economic sphere, as it shapes the political landscape of the state and the limits of the hopes and aspirations available to future generations, both within the Arab world and beyond.
