Complex Made Simple

Lebanon’s economic doom and gloom reaching record levels

The Lebanon financial and economic crisis is likely to rank in the top 10, possibly top three, most severe crises globally since the mid-nineteenth century

More than half the population is currently below the national poverty line Real GDP growth in Lebanon is estimated to have contracted by 20% in 2020 Firms reported a 74% drop in (real) demand for their products and services

The Lebanon financial and economic crisis is likely to rank in the top 10, possibly top three, most severe crises globally since the mid-nineteenth century.

This is a conclusion of the Spring 2021 Lebanon Economic Monitor (LEM) in which the Lebanon crisis is contrasted with the greatest crises over the 1857–2013 period. 

In fact, Lebanon’s GDP plummeted from close to $55 billion in 2018 to an estimated $33 bn in 2020, with GDP/capita falling by around 40%. 

Sadly, there appears to be no clear turning point on the horizon, given the disastrous policy inaction.

The social impact of the crisis could rapidly become catastrophic with more than half the population currently below the national poverty line.

Acute exchange market pressures in Lebanese markets are reflected by heavy fluctuations in the US$ banknote exchange rate, which temporarily breached LBP 15,000/$, before falling back down. This is within the context of a multiple exchange rate system, which includes the official exchange (LBP 1,507.5/$) as well as the Central Bank (Banque du Liban’s or BDL) platform rate set at LBP 3,900/$. 

Real GDP growth in Lebanon is estimated to have contracted by 20% in 2020, on the back of a 6.7% contraction in 2019. Tourist arrivals fell by 71.5% year-on-year (yoy), over the first five months of 2020. 

The sudden stop in capital inflows has implied a steady depletion of foreign exchange (FX) reserves at BDL, which exacerbates constraints on imports.  

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Impact on Firms 

The World Bank conducted an enterprise and follow-up survey in Lebanon in 2019/2020 to include the financial crisis, COVID-19, and the August 4th explosion at the Port of Beirut. 

It found that almost one out of five firms originally surveyed are confirmed or assumed permanently closed, manufacturing firms that remain open are operating at 35% of capacity and 16.6% of firms surveyed are confirmed or assumed permanently closed.

Four out of five firms say their sales declined significantly together with demand. 79% of firms surveyed reduced sales (nominal) by an average of 69%, with small firms bearing a greater impact. 

In reflection, firms reported a 74% drop in (real) demand for their products and services.

More than half of firms surveyed are experiencing liquidity challenges. Since the beginning of the financial crisis, 55% of firms experienced a decline in their cash flow and around 75% of firms decreased sales and purchases on credit. Only 13% of firms reported relying on banks or financial institutions to finance their liquidity shortfalls. Instead, 28% of firms are financing their needs through equity, and 8% through delayed payments.

“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. 

S&P Global: Trouble for Lebanese banks

More than a year after the Lebanese government defaulted on its foreign currency obligations, pressure on the banking system is still mounting. In a report titled “Calculating the cost of Lebanon’s bank-sovereign doom loop”, S&P Global Ratings says it estimates government debt restructuring and asset write-downs could cost Lebanese banks up to 134% of forecast 2021 GDP (before potential currency devaluation).

“With banks struggling to raise capital, we believe bailing in depositors, in some form, is likely if the banking sector is to absorb the high costs of restructuring,” said S&P Global Ratings credit analyst Dr. Mohamed Damak.

S&P believes the true extent of Lebanese banks’ losses will materialize only once government debt restructuring takes place. 

“Without a resolution, Lebanese banks could find it difficult to sustain their operations as deposit outflows continue and foreign correspondent banks sever relationships. Failure to restructure the financial system could leave Lebanon with banks unfit to support economic recovery,” Ms. Gupta added.