Lebanon

Highlights

• Lebanon continues to sink into financial, economic and social crises. Currency depreciation has deepened, the government has yet to rein in the parallel foreign exchange market, inflation continues to spiral and external imbalances point to further economic decline.
• The pressure on financial resources is at a record high. The government is unable to access international financial markets following the March 2020 Eurobond default, remittances and foreign direct investment are minimal and foreign currency reserves have shrunk to record low levels.
• Progress on reforms in the past year has been negligible. Several reforms were stalled or undermined by political paralysis, as well as the Covid-19 pandemic and the implications of the Beirut port blast.

Key priorities for 2022

• Agreement on an International Monetary Fund (IMF)-supported stabilisation and structural reform programme remain the most immediate priority. An agreement would help rebuild credibility and improve access to much-needed external financing. Comprehensive banking sector restructuring needs to accompany fiscal and structural reforms.
• Comprehensive social safety nets are a pressing necessity in tandem with the reform programme. Economic hardship, record inflation and the Covid-19 crisis have led to alarming unemployment and poverty levels.
• Strong commitment is needed to carry on and expedite the forensic audit of Banque du Liban (BdL), retrieve stolen assets and combat corruption. Progress in these areas would help to restore credibility in Lebanese institutions and garner public support for any proposed reform agenda.

Main macroeconomic indicators %

Covid-19: macroeconomic implications

Lebanon is sinking further into multi-dimensional crises. The economy is estimated to have contracted by 25 per cent in 2020, reflecting dried-up fiscal resources following the Eurobond default in March 2020, almost no capital inflows, diminishing reserves and spiralling inflation on the back of a falling exchange rate that effectively wiped out purchasing power. Political inaction prolonged the economic crisis and exacerbated unemployment and poverty. The unemployment rate is estimated to be around 50 per cent, while more than 75 per cent of the population is estimated to have fallen below the poverty line in 2020. The situation is likely to be even worse in 2021, as the economic turmoil continues to worsen and households face greater challenges accessing food, electricity, water and medicine.

The currency has continued to depreciate and the central bank is struggling to manage the parallel foreign exchange market. The de facto official pegged exchange rate of 1,507.5 Lebanese pounds per US dollar has been abandoned de jure, with the BdL allowing banks to exchange at a rate of LBP 3,900 per US dollar in April 2021 through its Sayrafa platform. The BdL later introduced a different mechanism, whereby the rate for withdrawals of US dollar deposits (up to US$ 400) was raised to LBP 12,000 per US dollar. This remains well below the parallel market rate of LBP 21,000 per US dollar as of early November 2021, implying a 90 per cent depreciation. Meanwhile, inflation continued to spiral, reaching 157.9 per cent year-on-year in March 2021, before slowing slightly to 144.1 per cent in September, as the Lebanese pound continued to depreciate. Rebuilding efforts following the August 2020 explosion in Beirut have been derailed, as importing building materials is becoming increasingly difficult without fresh US dollars. Meanwhile, the foreign currency reserves of the BdL dropped by 38 per cent year-on-year to US$ 14.2 billion in August 2021, as they were used to subsidise a range of essential imports. The country’s actual net foreign assets are negative.

The ongoing political, economic and social crises, coupled with the external debt default, contributed to a narrowing of the fiscal deficit in 2020. Revenues declined by 14 per cent, with both non-tax and tax revenues dropping significantly due to the worsening economic crisis. Expenditures also fell, by 27 per cent, mainly owing to a 93 per cent decline in foreign debt service costs, traditionally the main expenditure component, and to a decline in transfers to Electricité du Liban, which are usually around 4 per cent of gross domestic product (GDP). Overall, a primary deficit of 0.2 per cent of GDP was achieved and public debt increased. Meanwhile, Lebanon is struggling to access capital markets and is opting for domestic borrowing.

External imbalances remain wide. The current account deficit was 27.6 per cent of GDP in 2019, one of the highest in the world. In 2020, it remained large, at 15.6 per cent of GDP, as both exports and imports declined, by 15 and 42 per cent, respectively. Remittances and non-resident deposits continued to decline in 2021.

The outlook remains highly uncertain and any recovery depends on the speed of reforms and the outcome of elections in March 2022. A further contraction of 10.0 per cent is expected in 2021 as a result of the ongoing economic, political and social crises, the government’s inability to borrow on international markets, delays in implementing critical reforms and the drying-up of financial resources. The economy is expected to record positive growth in 2022, at 3.0 per cent, conditional on an IMF-supported programme being successfully implemented by a reform-minded government, which would allow negotiations to resume with international partners.

Policy response to Covid-19

The vaccination campaign was rolled out in March 2021 and the uptake was initially slow. However, it is picking up pace as the government attempts to minimise damages to public health in light of the worsening economic crisis. As of early November 2021, more than 22 per cent of the population was fully vaccinated.

Structural reform developments

Efforts to reach agreement on an IMF-supported financing programme were derailed. Discussions with the IMF began in April 2020, but were placed on hold in July 2020. Resuming talks is conditional on the government agreeing a common approach towards – and starting to implement – reforms in key sectors. The Eurobond default in March 2020 further underlined Lebanon’s inability to access external financing without IMF support. Several conferences were held to attract support for crisis-stricken Lebanon and, while some participants offered immediate relief and aid to reconstruct the port of Beirut following the August 2020 explosion, these pledges were conditional on successful government formation, which only took place in September 2021, 13 months after the previous government had resigned following the explosion.