BEIRUT (Reuters) – Lebanon’s financial meltdown is dragging the country towards mayhem at a quickening pace, forcing its feuding leaders to face a choice between finally doing something about the crisis or risking yet more chaos and insecurity.

The economic collapse that has caused Lebanese mounting hardship for two years hit a crunch point this month with fuel shortages paralysing even essential services and miles-long queues forming at gas stations with little or no petrol to sell.

Scrambles for fuel have sparked anarchic scenes which the bankrupt state’s security forces have struggled to contain. Soldiers have at times encountered gunfire when trying to keep order.

The country is running out of critical medicines, and the U.N. is warning of a looming water crisis, but meanwhile the ruling elite bickers over the seats in a new government.

The Shi’ite group Hezbollah’s recent decision to go it alone and import Iranian fuel here added a new element to the crisis.

Long part of Lebanon’s ruling system, the heavily armed group designated as terrorists by the United States says it only wants to ease the shortages.

But critics say it aims to expand its already deep sway and draw Lebanon deeper into Iran’s orbit, complicating the path ahead for a state hoping for Western aid and dealing another blow to its diminished authority.

The meltdown, stemming from decades of corruption in the state and unsustainable financing, has already pushed more than half of the population of some 6 million into poverty and reduced the value of the currency by 90%.

Lebanon passed a milestone on Aug. 11 when the central bank declared it could no longer finance fuel imports here at subsidised exchange rates because its dollar reserves had been so badly depleted.

The caretaker administration then decided on Saturday to raise fuel prices. But even the new higher prices are still only a fraction of the real price, with new borrowing from the central bank until the end of September making up the difference.

Economists say the move is no solution, as it leaves open a huge incentive for smuggling and hoarding.

An eventual rise to market prices seems inevitable as dollars run out. In the meantime, a black market has flourished where gasoline is sold in plastic bottles at hugely inflated prices.

Security incidents including hijackings of fuel tanker trucks have become a daily occurrence. Last week, at least 28 people were killed in northern Lebanon when a fuel tank exploded here during a scramble for its gasoline.

“There are many small groups that have started to realise they can seize any tanker on the road through force,” said a security official speaking anonymously. There have been at least eight incidents a day at gas stations or targeting tankers, the official said.

An international support group including France and the United States said on Friday the “fast-accelerating crisis underscores the utmost urgency of forming a government capable of taking the situation in hand”.

“How much worse can it get? All we can do is pray,” said Jihad Fakher Eddine after waiting for seven hours for gas.

GOVERNMENT SOON?

The state’s failure was encapsulated in a public row between the president and the central bank over fuel subsidies, with the bank’s governor Riad Salameh declaring that nobody was running Lebanon, where many of today’s politicians were warlords in the 1975-90 civil war.

President Michel Aoun, the Maronite Christian head of state, and the Sunni Muslim Prime Minister-designate Najib Mikati have yet to clinch a deal on the government to replace the administration that quit after the Beirut port blast a year ago.

The delay is over a couple of names, political sources say, more than enough to spoil the process in a system where cabinet deals are prone to being derailed by factional interests.

Alain Aoun, a senior member of the political party founded by the president and his nephew, said he believed a government would be formed soon. “The price of failure – a rapid descent into more chaos – is too high,” he told Reuters.

If a government is agreed, Mikati plans to resume talks with the International Monetary Fund, which wants to see reforms including bringing public finances into order, rehabilitating the banking system and restructuring public debt.

The ruling elite believe about $860 million worth of new IMF reserves should provide some breathing space.

But reforms are vital, and some doubt whether a new government can succeed where the outgoing cabinet failed.

Elections are due next spring, to be followed by a whole new round of government formation negotiations.

“Will there be the courage to undertake these reforms? I doubt it. The policymakers seem to be interested in tiding things over and kicking the can down the road until elections next year,” said Nasser Saidi, a former economy minister and central bank vice governor.

“You need immediate reforms. You need shock therapy to restore confidence,” he said.

Meanwhile, if Hezbollah can deliver steady supplies of Iranian fuel, the situation will become even more complex. Its opponents say the move could expose Lebanon to U.S. sanctions.

“While what they are doing now is symbolic with this barge of diesel, it could be a starting point for something bigger,” said Ghassan Hasbani, a former deputy prime minister and member of the Christian Lebanese Forces party.

“If it persists and they can carry on doing that at a larger scale, then we would be seeing a start of trying to fragment the country,” he told Reuters.

Hezbollah leader Sayyed Hassan Nasrallah said on Sunday that the group was not trying to replace the state and that a second Iranian fuel shipment would be sailing in the coming days.

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