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Lebanon Economic Monitor Summary - Spring 2021

Core Content

The Lebanon Economic Monitor (LEM) Spring 2021 edition provides a comprehensive analysis of Lebanon's ongoing economic and financial crisis, positioning it among the most severe global crises since the mid-nineteenth century. The report highlights the deepening socio-economic challenges, the impact of policy inaction, and the growing risks of social unrest.

Main Points

Economic Contraction

• Lebanon's GDP fell sharply from approximately US$55 billion in 2018 to an estimated US$33 billion in 2020, representing a 40% decline in GDP per capita.
• Real GDP growth contracted by 20.3% in 2020, following a 6.7% contraction in 2019.
• The tourism sector was heavily impacted, with tourist arrivals dropping by 71.5% in the first five months of 2020.
• Construction and real estate activity also suffered, with construction permits declining by 26.9% and cement deliveries by 44.7% in the first 10 months of 2020.

Inflation and Currency

• Inflation surged to an average of 84.3% in 2020, driven by exchange rate depreciation and currency in circulation.
• The World Bank Average Exchange Rate (AER) depreciated by 129% in 2020.
• The stock of currency in circulation increased by 197%, while broad money supply declined due to financial sector deleveraging.

Fiscal Situation

• Fiscal indicators showed an apparent improvement, but this masked a real deterioration.
• Revenues declined sharply due to economic contraction, while current expenditures fell even more.
• The overall fiscal balance improved by 0.7 percentage points to -4.9% of GDP, but the primary fiscal balance worsened by 2.3 percentage points to -2.8% of GDP.

Current Account and FX Reserves

• The current account deficit fell by 10 percentage points to 11% of GDP in 2020, down from a medium-term average of 22.5%.
• However, capital inflows ceased abruptly, leading to a steady depletion of foreign exchange reserves at the Banque du Liban (BdL).

Social Impact

• More than half the population is likely below the national poverty line.
• 41% of households reported difficulties in accessing food and other basic needs in late 2020.
• Healthcare access issues increased from 25% to 36% in the same period.
• Unemployment rose from 28% to nearly 40% among respondents.

Key Information

Policy Inaction

• The crisis is termed the "Deliberate Depression" due to inadequate policy responses.
• The root cause is political consensus failure and defending a bankrupt system that benefited a few.
• Lebanon has been in a third government formation process in under a year, with an institutional void lasting over 8 months.

Financial Sector Deleveraging

• The financial sector adjustment is highly regressive, affecting small depositors, labor force, and small businesses.
• De facto lirafication and dollar deposit haircuts are occurring despite official commitments to safeguard deposits.
• The banking sector is seeking state-owned assets, gold reserves, and public real estate to stabilize its balance sheets, which is inconsistent with restructuring principles that protect taxpayers and depositors.

Special Focus Areas

FX Subsidy Reform

• The FX subsidy is distortionary, expensive, and regressive.
• It exacerbates inflationary pressures and undermines purchasing power.
• A broad-coverage subsidy reform compensation scheme is proposed to mitigate negative impacts.
• The direct effect of removing FX subsidies is substantial inflationary pressure.

Public Service Delivery

• The crisis has undermined public services such as electricity, water, sanitation, and education.
• Electricité du Liban (EdL) faces severe shortfalls in revenue and maintenance contracts, leading to rolling blackouts.
• Water Establishments (WEs) experienced supply and revenue depletion, forcing citizens to rely on costlier alternatives.
• Sanitation breakdown risks spreading water-borne diseases.
• The education sector is under severe strain, with 54,000 students (11% of public sector students) switching to public schools and higher dropout rates among marginalized groups.

Outlook and Risks

• The economic outlook remains bleak, with no clear turning point in sight.
• Social unrest is a growing concern, with increased anger in demonstrations and disruptions to mobility and livelihood.
• Security risks are rising due to increased crime rates and potential infiltration of sinister groups.
• Institutional fragility and confessionalism are key constraints to development, with a symbiotic relationship between conflict and elite capture.

Conclusion

The Lebanon crisis is among the top three most severe global crises since the mid-nineteenth century, with severe economic, financial, and social impacts. The policy inaction and institutional weakness have exacerbated the situation, leading to regressive financial sector adjustments, deepening poverty, and increased risks of social and political instability. The FX subsidy reform and public service delivery are critical areas for addressing the crisis, with the need for inclusive and sustainable policy solutions.

Key Figures and Tables

• Figure 1: Real GDP contraction began in 2018 and accelerated in 2020.
• Figure 2: Net exports are expected to be the sole positive contributor to real GDP.
• Figure 14: Lebanon's real GDP is a more accurate reference for the start of the financial crisis than GDP per capita.
• Table 3: Crisis severity includes percent decline in GDP, duration of contraction, and years to full recovery.
• Table 4: Selected macroeconomic indicators for Lebanon (2016–2021).
• Table 5: Cost of FX import subsidy and impact of its removal.
• Table 6: Real GDP growth forecasts for 2020.
• Table 7: Candidate predictor variables for real high-frequency indicators.
• Table 8: Forecasts of real GDP growth for 2021 using real activity indicators.
• Table 9: Forecasts of real GDP growth for 2021 using real activity and financial indicators.

References

• Reinhart, Carmen M. and Kenneth S. Rogoff (2014): Recovery from Financial Crises: Evidence from 100 Episodes.
• World Bank (2016): Lebanon Systematic Country Diagnostic.
• Maalouf, Amin (2019): Le Naufrage des Civilisations.

Conclusion

The Lebanon Economic Monitor underscores the severity of the crisis, the policy failures, and the social and economic consequences. It calls for urgent and inclusive reforms to stabilize the economy, restore public services, and address the regressive impacts of financial sector adjustments.