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Lebanon: Economic reforms still stalled

Daniel Richards - MENA Economist
Published Date: 27 June 2022

 

Five weeks on from elections held in mid-May, Nijab Mikati was designated as Lebanese prime minister once again on June 23, but a government is yet to be formed. As Lebanon has been effectively rudderless in the intervening period, there has been scant progress made on implementing the essential economic reforms that are required to ensure support from the IMF and various partner states. At the same time, while there has been a dearth of data releases so far this year, conditions have likely deteriorated still further as the country has been affected by the fallout from the Russian invasion of Ukraine. As such, we have downgraded our 2022 real GDP growth forecast from a modest expansion of 2.9% to a contraction of -1.7%. This would mark a fifth straight year of economic contraction (following three years of anaemic growth) and leave GDP -39.4% smaller in real terms compared to 2017 by our estimates. In 2023 we forecast a modest return to growth at 2.4%, but this is as much a product of base effects following the recent troubles as any expectation of a marked improvement in conditions – though the chance of a new IMF deal offers significant upside risk.

Lebanon has been struggling with multiple crises since defaulting on its debt in March 2020 (even before the Covid-19 pandemic throttled the global economy) and is deeply in need of external support. There was some positive movement in this regard in April as the IMF published a ‘staff-level agreement on economic policies with Lebanon’, which was effectively a pre-agreement agreement that laid out measures that the Lebanese authorities had to take in order to enter into a new programme with the Fund (see ­­­­Lebanon: IMF lays out requirements for new deal). However, before any meaningful progress could be made on any of the eight action points Lebanon went to the polls, and as of the end of June there is still no government in place. Incumbent Nijab Mikati has now been designated as premier once again, but he likely has an uphill battle ahead of him in building a cabinet.

Real GDP growth, % y/y

Source: UN, Emirates NBD Research

With still no direction from government, any progress on the IMF’s action points remains unlikely, especially given the various competing interests that will be affected by any steps forward – not least with regards the problematic issue of the financial system’s collapse, and who will shoulder the burden of this. The losses are believed to be in the region of USD 73bn at present. Fixing the pound at a single exchange rate will also prove a challenge, but what is also clear is that the ‘official’ rate of LBP 1,507/USD is ineffective as the parallel rate has traded upwards of LBP 30,000/USD.

This has contributed to runaway inflation which has averaged 217.4% y/y over the five months to May. While some of the price pressures related to the currency’s collapse will start to pass through the base, Lebanon has been exposed to the rise in wheat prices precipitated by the conflict in Ukraine which will keep price growth elevated. Households have become increasingly impoverished over the past several years with over 80% now living in multidimensional poverty (compared with 42% in 2019) and reliant on food handouts and emergency support from the World Bank, which has deemed Lebanon’s crisis one of the worst in history. Higher fuel prices are also hitting the economy, with fuel shortages dampening activity still further, and the PMI survey has remained consistently contractionary over recent years, averaging 47.5 over the year to May.

CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

Meeting the IMF’s pre-conditions could precipitate a marked improvement in the outlook if a reform programme and emergency funding followed. Progress on reforms and the policy anchor provided by the IMF would likely also encourage deeper engagement by other partners, with potential for the release of USD 11bn in CEDRE funding pledged several years ago. However, for the time being the political situation does not indicate a rapid turnaround of this nature, and the damage done to the economy in the meantime could take decades to undo as a generation struggles to finish their education, while those with the means to do so are increasingly leaving the country, resulting in a renewed brain drain.