Lebanon - Economy

Lebanon’s economy may shrink by a quarter after the August 2020 blast added to a collapse in output spurred by the pandemic, soaring inflation and a weakening currency, the Institute of International Finance said. The nation’s $52 billion gross domestic product may plunge by 24 percent, more than the previous 15 percent projection, the Washington-based trade group for financial institutions said in a report. Damage from the explosion in Beirut, which left more than 150 people dead and 6,000 injured, is likely to exceed $7 billion, or 14 percent of 2019 GDP.

Hassan Diab's government faced growing calls to resign after the currency lost 25 percent of its value in two days. The demonstrations from northern Akkar and Tripoli to central Zouk, the eastern Bekaa Valley, Beirut and southern Tyre and Nabatieh on 11 June 2020 were some of the most widespread in months of upheaval over a calamitous economic and financial crisis.

Tens of thousands of Lebanese lost jobs in the first six months of 2020 and hundreds of businesses were shuttered as a dollar shortage led the Lebanese pound to slide from 1,500 to $1 last summer - where it was pegged for 23 years - to roughly 4,000 for each US dollar in May 2020. But the slide turned into a freefall between 10 and 11 June 2020 when the pound plummeted to roughly 5,000 to $1 on black markets, which have become a main source of hard currency.

For Lebanon, the potential significance of gas exploration and development is great. Almost as soon as production were to begin, the national fuel bill would fall substantially, and the state-run Electricité du Liban (EDL) would be able to run some of its generating plants on gas, for which they were designed, rather than the more polluting, more expensive, and less efficient gas oil they currently use. Shortly thereafter, Lebanon’s improved economic prospects – and the reduction in political risks – would lower the cost of credit and make it cheaper to repay its large debt. Eventually, some of the gas produced could even be exported, providing the Lebanese government with new revenues which, if properly managed and invested, could help fight poverty, improve education, infrastructure, and spark a historic socioeconomic rebirth.

If Lebanon is able to move forward with the project to benefit from this wealth, it will get more than $5 billion annually over twenty years, in addition to the availability of the cost of importing hydrocarbons for electricity, which is no less than $3 billion annually, which contributes to Addressing the chronic public debt crisis, of which the annual loss in the electricity sector bears a large part, and achieving development in various sectors, especially health, education and infrastructure.

It is very important to recognize the enormous generosity and hospitality of Lebanon and the Lebanese people for hosting a number of refugees, which is very large in relation to the population of Lebanon. The refugees account for one fourth of the population. The Syrian and Iraqi conflicts alone led to 12 million people who are displaced, two thirds of them within the country and one third outside the country. Many of them have now settled and being hosted very generously by Lebanon, by Jordan, by Turkey in the region and, as a result, this has imposed an economic cost, a budgetary cost on those countries.

The UNDP launched the Lebanon Crisis Response Plan, which was a big proposal to try and help Lebanon deal with some of these costs with international support. Funding this effort turned out to be a challenge.

Lebanon, the tiny nation of five million, which borders a hostile Israel, is the world’s third most indebted country. Even before the 2020 novel coronavirus pandemic hit, the World Bank said Lebanon's economy had contracted last year. Now the virus could shrink it further by 12 percent, according to the International Monetary Fund (IMF). The policy of relying too much on debt to fund the budget created problems for the new government of Prime Minister Hassan Diab. The weeks-long curfew to stem the spread of the novel coronavirus exacerbated the already worsening economic outlook.

The impact of the coronavirus pandemic on remittances, the money expats send home to families in Lebanon, can add to the economic woes. Remittances make up about 12.7 percent of GDP, making Lebanon the second most remittance-dependent Middle Eastern country - only behind Palestine.

By 2017 the protracted conflict in Syria continued to dominate Lebanon’s outlook, with registered refugees now comprising over one-quarter of the population. The refugee presence is straining local communities, adding to poverty and unemployment, and placing further pressure on the economy’s already-weak public finances and infrastructure.

Domestically, following a two-and-a-half-year impasse, Lebanon elected a president on October 31, 2016, and appointed a new prime minister soon thereafter. Consultations to form a new government are ongoing.

Growth remains subdued. Following a sharp drop in 2011, growth edged upward briefly to 2–3 percent, but has now slowed once again. IMF staff estimate that GDP increased by 1 percent in 2015 and project a similar growth rate in 2016. Lebanon’s traditional growth drivers—tourism, real estate, and construction—have received a significant blow and a strong rebound is unlikely based on current trends. In the absence of a turnaround in confidence, or a resolution of the Syrian conflict, growth is unlikely to return to potential (4 percent) soon. Inflation also declined sharply in 2016 on the back of lower oil prices, but should return to trend (about 2 percent) by early-2017.

On the fiscal side, low oil prices have helped secure a primary surplus of 1.4 percent of GDP in 2015, and staff project a similar surplus (1.1 percent) in 2016. But public debt is high (138 percent of GDP in 2015) and without decisive corrective action, Lebanon’s debt burden will increase further. Over the years, successive governments have borrowed heavily from domestic and foreign lenders. Around 50 percent of the state revenue goes to paying off the debt. At the same time, a major chunk is used to pay salaries of government employees, leaving very little for productive investments in sectors such as health and education.

Prime Minister Hassan Diab, who took office in January 2020, blamed Riad Salame, the central governor, for much of the present trouble. Salame had been the head of Banque du Liban since 1993. Under him, the central bank pursued a policy of high-interest rates for years, making it easier for the government to borrow money. This turned out to be a bounty for commercial banks, which lent to the government at a high rate and booked profits. In some of these banks, politicians hold shares, something that has added to the anger on the streets of Lebanon and Tripoli. But the deposits, including those from the foreign investors, attracted on the back of high interest rates instead of good economic performance, were a bad idea as once this money leaves, it leaves in droves.

The central bank kept the Lebanese pound rigidly pegged at 1,507 pounds to a US dollar. With the pound fixed at such a high artificial level when there was a shortage of dollars in the market, banks faced a barrage of withdrawals from depositors. On the black market, by 2020 the exchange rate was around 4,000 pounds to the dollar as business people, including importers chased the greenback. The capital controls, which limit how much foreign currency a depositor can be withdrawn, have added to the air of uncertainty.

In the context of Lebanon’s fixed exchange rate regime, foreign exchange inflows slowed in the first half of 2016, resulting in a drop in official international reserves. In response, during May–October the Banque du Liban (BdL) engaged in an unconventional financial operation which, among other objectives, helped boost reserves to above 2015 levels. At the same time, the operation also created sizable excess Lebanese pound liquidity and increased commercial banks’ exposure to the sovereign.

Downside risks dominate the outlook, but there are also significant upside risks. If remaining political milestones are met quickly, the recent election of a president and appointment of a prime minister could pave the way for much needed reform and adjustment, boost the economy, and help correct macroeconomic imbalances. A resolution of the Syria conflict would also significantly boost Lebanon’s economy. On the downside, however, foreign exchange inflows could decelerate, excess Lebanese pound liquidity and reduced banks’ foreign exchange liquidity could put pressure on the foreign exchange reserves, growth might remain subdued, and fiscal imbalances could widen.

The Syrian crisis and the associated inflow of refugees continue to dominate Lebanon’s short-term outlook, compounding long-standing policy weaknesses and vulnerabilities. Political paralysis set in, with virtually no progress on the structural front. Growth remained modest and insufficient to make a dent in rising poverty and unemployment.

Following a sharp drop in 2011, growth has crawled upward to about 2–3 percent but remained well short of potential. IMF staff estimated that GDP increased by only 2 percent in 2014 and projected a similarly modest growth rate in 2015. Lebanon’s traditional growth drivers—tourism, real estate, and construction—have received a significant blow and a strong rebound is unlikely soon. Lebanon’s return to potential growth (4 percent) before 2019 is now doubtful. Inflation also declined sharply in 2014 on the back of lower oil prices and other one-off factors, but should return to about 3 percent by end-2015.

By 2015 Lebanon’s economic conditions and prospects remain very challenging. Regional spillovers continued to dominate Lebanon’s near-term outlook and undermine investor’s confidence. The large inflow of Syrian refugees — accounting for more than one quarter of Lebanon’s population — strained local communities, and stressing the already weak public finances. International support helped, but remains insufficient in relation to the scale of the problem.

Real growth was estimated to remain below 2 percent in 2014 — a rate that was insufficient to have a material impact on Lebanon’s growing unemployment and increasing poverty. On the positive side, the fiscal position has improved compared to earlier expectations. A small primary surplus was projected for 2014. Public debt was projected to continue to rise and exceed 140 percent of GDP by the end of 2014.

The Lebanese economy recorded a sluggish performance in 2012 for the second consecutive year, though it continued to avoid a contraction in real terms and maintain monetary and financial stability. Many attributed the economic slowdown to spillover from the Syrian crisis into the domestic political and security environment, which discouraged investment and tourism and negatively affected some Lebanese exports. Since the Syrian war began, the number of tourists visiting Lebanon has fallen by more than a third. Tourism revenues are down by almost one-half. Nearly a half million Syrian refugees have streamed into Lebanon, putting a strain on government services, health care and infrastructure.

Some mitigating factors, such as an influx of returning Lebanese expatriates and increased spending by Syrians in Lebanon, helped to partially alleviate these negative trends. Some issues continue to cause frustration among local and foreign businessmen. Impediments include red tape and corruption, arbitrary licensing decisions, complex customs procedures, archaic legislation, an ineffectual judicial system, high taxes and fees, flexible interpretation of laws, and weak enforcement of intellectual property rights.

The IMF forecast a real GDP growth of two percent for 2012 and 2.5 percent for 2013. But due to the Syrian crisis, Lebanon's economy grew less than one percent in 2012, down from average annual growth of eight percent. Growth continued to be driven mostly by household consumption, as investors adopt a wait-and-see attitude, delaying major investment decisions. Financial inflows recorded a slight increase over the corresponding period of 2011, but for the second year in a row were not enough to offset the country’s rising trade deficit. Lebanon recorded a balance of payments (BoP) deficit of $1.85 billion over the first 11 months of 2012 – similar to the BoP deficit in 2011.

While the public deficit and public debt could be a major issue of concern for investors, the debt-to-GDP ratio has remained nearly stable over the last two years at close to 135 percent, reversing the downward trend that otherwise prevailed since 2006. Banking and economic organizations are worried about a worsening of the public deficit in 2013 due to an anticipated increase in public sector wages in the absence of corresponding revenue enhancement measures. Given the high liquidity in the domestic banking sector, the GoL should not face difficulties in rolling over sovereign maturities in 2013. The Central Bank publicly asserted that it will continue to maintain monetary and financial stability – reassuring investors that there will be no debt defaults and no currency depreciation.

Banking sources believe that prospects for the medium-term would be encouraging in the event of a settlement of the Syrian crisis and implementation of structural reforms. The expected launching of the first bid round for offshore oil and gas exploration in 2013 opens the door for foreign investment, and in the long-term has the potential to expand output levels and income per capital and reduce Lebanon’s public debt.

The 1975-91 civil war seriously damaged Lebanon's economic infrastructure, cut national output by half, and all but ended Lebanon's position as a Middle Eastern entrepot and banking hub. Peace has enabled the central government to restore control in Beirut, begin collecting taxes, and regain access to key port and government facilities. Economic recovery has been helped by a financially sound banking system and resilient small- and medium-scale manufacturers, with family remittances, banking services, manufactured and farm exports, and international aid as the main sources of foreign exchange.

Lebanon's economy has made impressive gains since the launch of "Horizon 2000," the government's $20 billion reconstruction program in 1993. Real GDP grew 8% in 1994 and 7% in 1995. Real GDP grew at an average annual rate of less than 3% per year for 1997 and 1998 and only 1% in 1999. During 1992-98, annual inflation fell from more than 100% to 5%, and foreign exchange reserves jumped to more than $6 billion from $1.4 billion. Burgeoning capital inflows have generated foreign payments surpluses, and the Lebanese pound has remained relatively stable. Progress also has been made in rebuilding Lebanon's war-torn physical and financial infrastructure. Solidere, a $2-billion firm, is managing the reconstruction of Beirut's central business district; the stock market reopened in January 1996; and international banks and insurance companies are returning.

However, the government nonetheless faces serious challenges in the economic arena. It has had to fund reconstruction by tapping foreign exchange reserves and boosting borrowing. Reducing the government budget deficit is a major goal of the LAHUD government. More importantly, the stalled peace process and ongoing violence in southern Lebanon could lead to wider hostilities that would disrupt vital capital inflows. Also, the gap between rich and poor has widened in the 1990s, resulting in grassroots dissatisfaction over the skewed distribution of the reconstruction's benefits and leading the government to shift its focus from rebuilding infrastructure to improving living conditions.

Lebanon's inability to attract significant foreign aid to rebuild after the civil war slowed its recovery effort. The government began to accumulate debt which by 2001 was $28 billion which coincided with weak economic performance. Unemployment was estimated at 14% for 2000 and 29% among the 15-24 year age group, with preliminary estimates of further increases in 2001. Still, the government is committed to consistant economic growth and has identified three key reforms that will stabilize the country: To engage in fiscal consolidation and structural improvement in public sector finances, focus on Monetary, financial, and price stability, and to use the private sector as the engine of growth.

The government also maintained a firm commitment to the Lebanese pound, which has been pegged to the dollar since September 1999. In late 2000, the government substantially reduced customs duties, adopted export promotion schemes for agriculture, decreased social security fees and restrictions on investment in real estate by foreigners, and adopted an open-skies policy, with positive effects on trade in 2001. Nonetheless, the relative appreciation of the Lebanese currency has undermined competitiveness, with merchandise exports falling from 23% of GDP in 1989 to 4% in 2000.

In 2001, the government turned its focus to fiscal measures, increasing gasoline taxes, reducing expenditures, and approving a value-added-tax that became effective in February 2002. Slow money growth and dollarization of deposits have hampered the ability of commercial banks to finance the government, leaving more of the burden to the Central Bank. This monetization of the fiscal deficit has put enormous pressure on Central Bank reserves, mitigated only slightly with the issuance of new Eurobonds over the past 2 years. The Central Bank has maintained a stable currency by intervening directly in the market, as well as low inflation, and succeeded in maintaining investors' confidence in debt. It has done so at a cost, however, as international reserves declined by $2.4 billion in 2000 and by $1.6 billion in the first half of 2001.

In 2002, the government put primary emphasis on privatization, initially in the telecom sector and electricity, with continued planning for sales of the state airline, Beirut port, and water utilities. The government pledged to apply the proceeds of sales to reducing the public debt and the budget deficit. In addition, it projected that privatization will bring new savings as government payrolls are pared, interest rates decline, and private sector growth and foreign investment are stimulated. The government also is tackling the daunting task of administrative reform, aiming to bring in qualified technocrats to address ambitious economic programs, and reviewing further savings that can be realized through reforms of the income tax system. The Lebanese Government faces major challenges in order to meet the requirements of a fiscal adjustment program focusing on tax reforms and modernization, expenditure rationalization, privatization, and improved debt management.

The U.S. enjoys a strong exporter position with Lebanon, generally ranking as Lebanon's fourth-largest source of imported goods. A number of U.S. companies have also opened office in Lebanon including Microsoft, American Airlines, Arthur Andersen, Coca-Cola, FedEx, UPS, General Electric, Parsons Brinckerhoff, Cisco, Eli Lilly, and Pepsi Cola.