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MENA Watch: Geopolitics pulls Lebanon back into economic doldrums

Many of Lebanon's leaders had been relying on travel and remittances to spur economic growth before the conflict to avoid making the changes necessary to get an IMF rescue package

In 2019, Lebanon experienced a prolonged economic crisis that resulted in triple-digit inflation and the collapse of the local currency. After 25 years of being fixed at 1,500 to the dollar, the value of the lira on the illicit market is at approximately 90,000.

Many of Lebanon’s leaders had been relying on travel and remittances to spur economic growth before the conflict to avoid making the changes necessary to get an IMF rescue package. In April 2022, Lebanon and the IMF came to an initial agreement for a USD 3 billion rescue package, but the majority of the measures needed to complete the contract had not been implemented.

After four years of economic and financial turmoil, Lebanon’s macroeconomic structure is still seriously compromised. Lebanon’s fragile development model is facing yet another significant shock as a result of the ongoing conflict centred in Gaza, according to the most recent World Bank Lebanon Economic Monitor.

Long-term investment is not possible without the implementation of a comprehensive crisis resolution strategy, and the nation’s natural, human, social, and physical capital will continue to decline.

An update on significant economic developments and an analysis of their consequences for the country’s prospects are provided in the Lebanon Economic Monitor (LEM) Fall 2023 issue, “In the Grip of a New Crisis.”

In light of a protracted political and institutional vacuum, the Special Focus section “The Impact of the Conflict in the Middle East on the Lebanese Economy” evaluates the effects of the ongoing conflict and its ripple effects on Lebanon’s economy and growth prospects.

Understanding The Messy Picture

The economy was expected to rise by 0.2% in 2023—the first expansion since 2018—before the ongoing conflict. After years of severe contraction, it appeared that the economy had reached a temporary low point. The main sources of volatility that contributed to the tepid growth were the robust summer tourism season, large remittance inflows, growing dollarisation of salaries, and indications of stabilisation in private sector activity.

The current economic projection for Lebanon is that it will experience another recession in 2023 due to the commencement of the conflict and the lack of wider economic stabilisation. The persistence of macroeconomic imbalances is evidenced by the substantial current account deficit, which stands at 12.8% of GDP.

After remaining in the triple digits since 2021, the inflation rate is expected to spike to 231.3% in 2023 due to the rapid dollarisation of economic transactions and the depreciation of the exchange rate.

In addition, Lebanon led the list of nations most severely affected by the nominal food price inflation in the first quarter of 2023 (at 350% year-over-year in April 2023), which made living conditions even more precarious for the most vulnerable and impoverished sections of the populace.

With 179.2% of GDP projected for 2022, sovereign debt is unaffordable in the face of severe economic contraction, substantial currency depreciation, and a lack of comprehensive debt restructuring.

According to Jean-Christophe Carret, the country director for the World Bank in the Middle East, “Lebanon remains entrenched in a socioeconomic and financial crisis, further exacerbated by institutional and political stalemate, with limited progress towards comprehensive crisis resolution.”

“The tourism industry cannot replace more comprehensive, sustainable, and diverse growth drivers that are better suited to withstand shocks and aid in putting the economy back on a solid recovery path, even though tourism has recently contributed positively to economic growth,” the official stated further.

The Central Bank has started a few modest but positive measures amid the currency rate’s relative stabilisation. On the other hand, significant adjustments to bank supervision and the way monetary and exchange rate policies are implemented are still pending. Recovery hopes are being hampered by the ongoing lack of a fair banking solution that includes bail-ins, restructuring, and an upfront allocation of losses.

The substantial remittance stream, which has long been Lebanon’s lifeblood, has supported a modest expansion in local spending and served as a dae facto social safety net.

Remittances by themselves, however, are insufficient to cover Lebanon’s demands for external finance, and in the absence of alternative funding sources, the country’s twin deficits in the current and fiscal accounts may necessitate additional depletion of the Central Bank’s foreign exchange reserves.

The impact of the ongoing conflict, which is in its fourth month, on the Lebanese economy is examined in the LEM Special Focus section. Growth and the dynamics of the current account are highly vulnerable to prolonged conflict since tourism accounted for about 26% of current account receipts in 2022.

A scenario analysis evaluating the impact of the decline in tourism spending on economic growth predicts that real GDP will contract by 0.6% to 0.9% in 2023, reversing the positive pre-conflict baseline growth of 0.2%, assuming that the current containment in the military confrontation to the southern borders holds.

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