THE main feature of Beirut’s skyline is not minarets or church steeples, but construction cranes. From the roof of a posh downtown hotel you can see 17 of them, throwing up luxury apartments that cost up to $1m each. Wealthy Lebanese sip wine on their terraces and discuss investment opportunities. They rub shoulders with Gulf tourists drawn by Beirut’s libertine nightlife. Lebanon’s economy relies on tourism, construction and finance for growth. All three seem to be thriving.

That, however, is an illusion. The country is tipping into a property slump—and perhaps a banking crisis that threatens its currency. An economic crash could destabilise a country already swamped with refugees and plagued by sectarian divides. Trouble in the banking sector, which draws investors from around the region, might be felt beyond Lebanon’s borders.

Start with tourism, which was bouncing back from a period of regional unrest. Arrivals hit a five-year high in 2017. But they are still below their peak of 2010 and the industry is fickle. In November Saudi Arabia briefly detained the prime minister, Saad Hariri, and forced him to resign (a move he later reversed). Hotel occupancy plunged by 14 percentage points within a month. Saudi visitors, who account for the biggest share of tourist spending, are down by 19% this year. Investment is sluggish. Kafalat, a firm that guarantees loans for small and medium enterprises, handled 117 tourism projects last year, a 6% drop from 2016. Annualised figures from the first half of 2018 show a further 18% decline.

More worrying is the construction industry, which accounts for nearly one in ten jobs. Despite the cranes dotting Beirut, construction is slowing. The number of permits issued in the first half of 2018 was 9% lower than in the same period last year. Property transactions dropped by 17% year on year in the first quarter.

Developers fear a deeper slump is coming. For years the central bank subsidised mortgages, offering 30-year loans with interest rates as low as 3%. In March it abruptly halted the scheme. Bankers say it was abused. Instead of buying houses, some borrowers put the principal into higher-interest savings accounts to turn a profit. Many young couples cannot afford unsubsidised loans, which carry rates of 8-9% and shorter repayment periods. Some have cancelled their weddings as a result.

From bad to worse

Lebanon’s economy was already struggling. Annual GDP growth was 8% in 2010, before neighbouring Syria plunged into civil war. Since then it has averaged less than 2%. The slowdown in the housing market will drag it down further. In Hamra, the commercial hub of west Beirut, electronics stores are almost empty despite deep discounts. Fewer new homeowners means less demand for refrigerators. Many shops have cut salaries or fired staff to get by. “This is the worst it’s been in 40 years. Everything is coming to a halt,” says Rafi Sabounjian, a small-business owner.

On paper, at least, the banking sector looks solid. Commercial banks hold $200bn in deposits, four times as much as Jordan, which has more people. The central bank (the Banque du Liban or BdL) sits on $44bn in assets, excluding gold, enough to cover more than two years of imports. Its governor, Riad Salamé, says everything is fine. He points to the months after Mr Hariri’s detention, when the central bank spent $1bn to prop up the Lebanese pound, which is pegged at 1,500 to the dollar. Reserves recovered almost immediately. But those numbers are misleading. In 2016 the BdL pioneered something called “the swap”, a complicated scheme in which it borrows foreign-currency holdings from commercial banks. It uses the dollars to maintain the currency peg. The banks get eye-popping returns, raking in 40% for a one-year loan. With no economic growth, the swap works only if it can attract ever-larger sums. “It’s a pure pyramid scheme,” says Jean Tawile, a banker and adviser to Kataeb, a political party. The BdL does not publish its net reserves. Toufic Gaspard, its former head of research, wagers that “swapped” deposits are worth $65bn—meaning net assets are already negative. Fearing a devaluation, banks are increasingly desperate to attract foreign currency. Interest rates even for short-term deposits are at their highest level in nearly a decade. High rates mean small firms cannot obtain credit. A decade ago commercial lending in Lebanon grew by 15-20% annually. This year it is shrinking. The currency peg has been a pillar of the economy since 1997. Receipts are printed in dollars and pounds; shoppers use the two interchangeably. This is starting to look unsustainable. Devaluation would be painful for a country that imports so heavily. It would be good for exporters—but Lebanon hardly has any. Last year it exported $2.8bn worth of goods, about half as much as Iceland. The current-account deficit is more than 20% of GDP.

Lebanese politicians made a fortune from the banking boom. Of its 20 biggest commercial banks, 18 are wholly or partly owned by politicians or well-connected families. Now they seem oblivious to the looming crash. Instead they float fanciful schemes for growth. Some hope Lebanon will become a hub for rebuilding post-war Syria. That plan faces many obstacles, not least that nobody knows who will foot the estimated $200bn bill for reconstruction.

Foreign donors pledged $12bn in aid at a conference in Paris in April. But most of this is loans, not grants, and Lebanon can ill afford more debt. The IMF expects its debt-to-GDP ratio, currently about 150%, to hit 180% in five years. By then debt service will burn through three-fifths of government revenue, leaving almost nothing for capital expenditures (already quite low).

In May voters went to the polls for a long-delayed parliamentary election. Mr Hariri took a beating, losing 13 seats, 40% of his total. Still, he will probably remain prime minister—if he ever forms a government. Instead of discussing reforms, lawmakers are haggling over cabinet posts, which they use to disperse spoils. With the economy heading for a crash, there may not be much to hand out.