Lebanon

Still on the edge of the precipice

The Lebanese economy will continue to remain under severe stress despite an expected modest recovery in its growth performance in 2024 which will owe a lot to favorable base effects. But the war between Hamas and Israel will have depressive impacts mainly through a decline in tourism revenues and inflow of expatriates’ remittances (38% of GDP as of 2022). Even if our key expectation about the scale of the war is to remain contained within the Gaza Strip, it will weigh heavily on Lebanon’s tourism receipts, which rose an estimated 25% y-o-y in 2023, as security issues will impact foreign tourists’ decision to visit the country and the number of flights will be reduced. Growth in private consumption (around 100% of GDP), Lebanon’s traditional largest contributor to GDP, will remain subdued due to a lack of confidence, and still high inflation. The narrow fiscal space will weigh on public consumption (around 15% of GDP) and investment (10% of GDP). Weak infrastructure (limited electricity supply from Electricité du Liban), and poor business environment dominated by high level of perceived corruption and cumbersome bureaucracy will affect private investment negatively. Exports suffer from regional instability, and persistent operational and logistical challenges. Food and beverages exports to Syria remain restrained by limited production capacity. The ongoing economic crisis, on the other hand, puts pressure on domestic demand which relies heavily on imports, thus avoiding further widening of the negative contribution of foreign trade to growth.

Inflation will remain extremely high due to lack of effective monetary policy, rising (imported) food prices and further depreciation of the pound: by August 2023, its official rate had lost around 90% since the economy began unravelling in October 2019, while the central bank administered the Sayrafa rate used for customs and the parallel one were roughly 6 times higher than the official rate. The tripling of customs taxes, fees, and duties on all imported goods in March 2023 (customs taxes are calculated at 45,000 Lebanese pounds to the dollar compared with 15,000 pounds to the dollar previously) has also added to the inflationary pressures, but its impact will gradually fade, which will not be the case for shortages of basic goods. Persistent political uncertainty and rising negative sentiment due to war conditions will continue to increase dollarisation. Under these circumstances, and without a unification of the exchange rates, monetary policy is expected to remain ineffective in countering inflation.

Unsustainable twin deficits and debt stock

The current account deficit will remain sizable, although it is expected to narrow in 2024 due to a decrease in domestic demand and inflated GDP. Limited production activity will represent a drag on intermediate and capital goods imports. Moreover, high inflation and poverty (80% of the population) will weigh on consumer goods imports. However, the trade-in-goods deficit (around 60% of GDP) will continue to remain the key component of the unsustainable level of the current account deficit as the trade-in-services surplus (around 10% of GDP) cannot compensate. Remittance inflows, which rose around 1.5% yoy in 2022 to USD 6.4 billion, are expected to rise further as the economic crisis has caused a large exodus of well-educated and highly skilled workers to leave the country. The current account deficit will continue to be volatile and mostly financed by the dwindling international reserves of the central bank, standing around USD 15 billion as of May 2023. An unsustainable level of the exchange rate on the parallel market would result in increased interventions efforts from the Banque du Liban (BdL) on its managed Sayrafa exchange rate platform, as it seeks to keep them close to each other.

The fiscal performance will continue to remain weak due to low growth, as well as lack of implementation of fiscal reforms. The wage bill will continue to weigh on public finances (around 25% of total fiscal expenditures). However, in the absence of a ratified 2023 budget, fiscal spending will remain limited to one-twelfth of the annual amount allocated in the last approved budget as per the World Bank. Moreover, institutional collapse will limit the government's capacity to spend. On the other hand, failing restructuring reforms, public debt will continue to remain unsustainable, being partly financed by grants and domestic credits.

Fragmented political scene will weigh on reforms

The fragmented Parliament, which has been a care-taker government since the 2022 elections, and the absence of a President will continue to present a significant obstacle to the reform process. The fact that the central bank is run by an acting governor will continue to weigh on the monetary policy effectiveness. Lebanon's political dynamics will continue to be influenced by regional powers such as Iran (through its local Hezbollah proxy) and Saudi Arabia, which can exacerbate internal divisions and complicate efforts to find solutions.

Israel-Hamas war is expected to deteriorate further the current political collapse as the authorities have mentioned they cannot rule out an escalation of the war. The situation will depend on the implication of Hezbollah in the conflict. Moreover, the political and security situation in the broader Middle East, especially neighboring Syria, may have implications for Lebanon's stability and security, as well. Despite the presence of United Nations Interim Force in Lebanon (UNIFIL), recent tensions in Lebanon’s south may increase in the upcoming period. The presence of many Syrian refugees adds strain to Lebanon's resources and infrastructure, leading to social unrest and economic challenges. Insufficient funding for power production and food imports are also adding to social discontent.

Last updated: January 2024