Beirut, June 1, 2021 – Lebanon is enduring a severe and prolonged economic depression. According to the latest World Bank Lebanon Economic Monitor (LEM) released today, the economic and financial crisis is likely to rank in the top 10, possibly top 3, most severe crises episodes globally since the mid-nineteenth century. In the face of colossal challenges, continuous policy inaction and the absence of a fully functioning executive authority threaten already dire socio-economic conditions and a fragile social peace with no clear turning point in the horizon.
The Spring 2021 edition of the LEM, “Lebanon Sinking: To the Top 3” [see below] presents recent economic developments and examines the country’s economic outlook and possible risks. For over a year and a half, Lebanon has been facing compounded challenges: its largest peace-time economic and financial crisis, COVID-19 and the Port of Beirut explosion.
As The Deliberate Depression (LEM – Fall 2020) already laid-out, policy responses by Lebanon’s leadership to these challenges have been highly inadequate. The inadequacy is less due to knowledge gaps and quality advice and more the result of: i) a lack of political consensus over effective policy initiatives; and ii) political consensus in defense of a bankrupt economic system, which benefited a few for so long. With a history of a prolonged civil war and multiple conflicts— Lebanon is identified by the World Bank as a Fragility, Conflict & Violence (FCV) State— there is growing wariness of potential triggers to social unrest. The increasingly dire socio-economic conditions risk systemic national failings with regional and potentially global effects.
The World Bank estimates that in 2020 real GDP contracted by 20.3 percent, on the back of a 6.7 percent contraction in 2019. In fact, Lebanon’s GDP plummeted from close to US$55 billion in 2018 to an estimated US$33 billion in 2020, while GDP per capita fell by around 40 percent in dollar terms. Such a brutal contraction is usually associated with conflicts or wars. Monetary and financial conditions remain highly volatile; within the context of a multiple exchange rate system, the World Bank average exchange rate depreciated by 129 percent in 2020. The effect on prices have resulted in surging inflation, averaging 84.3 percent in 2020. Subject to extraordinarily high uncertainty, real GDP is projected to contract by a further 9.5 percent in 2021.
“Lebanon faces a dangerous depletion of resources, including human capital, and high skilled labor is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “Only a reform minded government, which embarks upon a credible path toward economic and financial recovery, while working closely with all stakeholders, can reverse further sinking of Lebanon and prevent more national fragmentation”…
World Bank Group
Spring 2021 :: 94 pages
THE POLICY CONTEXT
Lebanon faces a dangerous depletion of resources, including human capital since brain drain has become an increasingly desperate option. Over a year into the financial crisis, Lebanon has yet to identify, least of all embark upon, a credible path toward economic and financial recovery. In fact, Lebanon lacks a fully-functioning executive authority and is currently in the process of forming its third Government in a little over a year. Meanwhile, social discontent has spilled over to street action even under COVID-19 conditions; internal political discord and fragmentation continues; and geopolitical tensions complicate solutions. In consequence, highly skilled labor is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country.
Lebanese authorities and the IMF began discussions in May 2020. The discussions eventually stalled as differences and inconsistencies emerged within the Lebanon team regarding the Government’s financial recovery program. IMF discussions await the formation of new Government.
The burden of the ongoing adjustment/deleveraging in the financial sector is highly regressive, concentrated on smaller depositors, the local labor force and smaller businesses. Defacto Lirafication and haircuts on dollar deposits are ongoing despite BdL’s and banks’ official commitment to safeguarding deposits. The burden of the ongoing adjustment/deleveraging is regressive and concentrated on the smaller depositors who lack other source of savings, the local labor force that is paid in LBP, and smaller businesses. The banking sector is advocating for mechanisms that incorporate state-owned assets, gold reserves, and public real estate in order to overhaul their impaired balance sheets. This constitutes a bailout of the financial sector and is inconsistent with the restructuring principles that protect taxpayers. These principles include bail in solutions based on a hierarchy of creditors, starting with banks’ shareholders. Government can also apply a wealth tax (on financial and real assets) as a tool to progressively restructure the financial sector.
Lebanon urgently needs to adopt and implement a credible, comprehensive and coordinated macro-financial stability strategy, within a medium-term macro-fiscal framework. This strategy would be based on: (i) a debt restructuring program that would achieve short-term fiscal space and medium-term debt sustainability; (ii) comprehensively restructuring the financial sector in order to regain solvency of the banking sector; (iii) adopting a new monetary policy framework that would regain confidence and stability in the exchange rate; (iv) a phased fiscal adjustment aimed at regaining confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection…
Lebanon’s financial crisis stands out as a particularly arduous episode even when compared to some of the most severe crises observed since 1900. In estimating the R&R CSI for the Lebanon financial crisis, we make reasonable assumptions on its depth and duration. The results suggest that the Lebanon crisis is likely to be of the 10, possibly three, most severe global crises episodes, as observed and examined by Reinhart and Rogoff (2014) over a period surpassing a century and half. This is further confirmed when we compare select macroeconomic indicators for Lebanon with those for R&R’s relatively more recent crises.
As such, we expect the adjustment process to be more painful and to take longer, even with optimal policy measures in place. As it currently stands, however, the absence of a comprehensive and consistent adjustment strategy can only make this more difficult…