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Daniel Richards - MENA Economist
Published Date: 08 April 2021
With no end in sight to Lebanon’s multiple crises, and an ongoing deterioration in many indicators, we have revised our real GDP growth outlook for 2021 from a weak expansion to another sizeable economic contraction at -4.7% – albeit far less than the -27.3% we estimate for 2020. There has been no positive news on the economic front since our last report, and in addition to the other challenges facing the economy – the financial crisis, the depreciation of the pound, the aftermath of the Beirut blast – the Covid-19 pandemic has also been weighing on activity. Lebanon imposed a new lockdown in January in a bid to curb rising case numbers, only easing it two months later, but the Easter weekend saw another shutdown, and another is planned for Eid al-Fitr. With celebrations for these two major events curbed, and ongoing restrictions on opening times for hospitality and leisure venues, private consumption levels will remain depressed.
Source: UN, Emirates NBD Research
In any case, the household purchasing power of the Lebanese has been seriously constrained by the ongoing collapse of the pound on the parallel market. While the official peg for the currency remains at LBP 1,513/USD, in reality this level is being used for an increasingly diminished list of essential imports. For ordinary Lebanese, the pound has fallen as low as LBP 12,150 at points in April. As a result, inflation averaged 84.3% y/y in 2020, hitting 145.9% in December, while food price inflation hit 402.1% the same month. The pound’s freefall did not really begin in earnest until April last year (following Lebanon’s first debt default in March), and with the currency continuing to tumble even now, inflation will remain very high over this year also – we forecast an average of 55% y/y in 2021. Even at the official exchange rate, Lebanon’s GDP per capita in USD will have fallen by -21.9% by the end of this year compared with its level in 2019. At an exchange rate of LBP 12,000/USD, that fall in GDP per capita is more like -90.0% in two years, to just USD 1,200. Rising unemployment – as much as 40% at the close of 2020, with likely a large number of discouraged workers who have simply given up looking for employment under the present circumstances also – will also weigh on the economy.
Source: Haver Analytics, Emirates NBD Research
While the need for reconstruction of parts of Beirut will require sizeable investment, this is unlikely to be forthcoming under present circumstances. Construction sector indicators show an ongoing decline in activity through the course of 2020 (data up to October), and are unlikely to have picked up since. With the currency unstable there will be few private international investors looking at Lebanon, and government funding such as that promised in Paris three years ago will be withheld until there is tangible reform progress. Meanwhile, the government’s ability to spend is constrained by its wide fiscal deficit and a worsening credit profile after its default last year. For the private sector more generally, the PMI index has remained persistently under the neutral 50.0 level, indicating an ongoing decline.
Source: Bloomberg, Emirates NBD Research
While there have been increasingly strident and public recriminations between various actors as to who is responsible for the economic morass in which Lebanon is currently mired, there has been little to no progress on the political front. Despite repeated meetings between Prime Minister-designate Saad Hariri and President Michel Aoun there is still no cabinet formed some six months after Hariri was nominated to return to the helm once again in October, following Prime Minister Hassan Diab’s resignation after the Beirut port blast in August. Meanwhile President Aoun has been publicly laying the blame for the crisis at the door of the central bank in recent days. Until there is some progress on the political front, there can be little real progress on the economic front either – an effective government needs to be installed which can then start to implement the essential reforms that are a prerequisite of international aid and investment, which will be essential to Lebanon’s recovery. The street protests seen in March following the latest failure in negotiations indicate the social risks that are becoming more manifest as the stalemate continues.
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