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Lebanon faces a tough start to 2022

Daniel Richards - MENA Economist
Published Date: 14 January 2022


We expect that Lebanon’s economy will return to growth in 2022, though this will in large part be attributable simply to base effects following a parlous four years of contraction rather than due to any marked improvement in the outlook. We forecast real GDP growth of 2.9%, following an estimated -4.7% last year. If realised, this would mark the fastest pace of growth since 2013. There are substantial risks to this outlook in both directions, as an uncertain political outlook continues to weigh on the recovery. Should there be a rapid solution to the ongoing political impasse, then there could be a far stronger expansion should IMF and foreign funding start to flow in. Going by the past several years, however, the likelihood of this remains slim in the first half of 2022 at least.

Real GDP growth, % y/y

Source: UN, Emirates NBD Research

Inflation continues to rise

At the start of 2022 the crisis in Lebanon shows no signs of abating, and the pressures on households and businesses are perhaps even more pronounced than they were at the start of last year. The pound has continued its collapse, now trading at levels around LBP 30,000/USD on the parallel market, compared to an official exchange rate of LBP 1,507/USD. The government removed more subsidies through the final months of 2021 (those on fuel were removed in August, followed by medication in November), and these subsidy removals have exacerbated the inflationary effects of the currency depreciation. Price growth has trended sharply higher once more, hitting 201.1% y/y in November, for an average of 143.9% over the first 11 months of the year.

CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

This price growth, which will remain in play through 2022, will serve to constrain household spending as the rapid price rises in essentials have obliterated any ability to purchase discretionary goods. This is especially the case as mounting numbers of Lebanese find themselves either unemployed or else still tied to their positions but not being paid. There will be similar constraints on businesses, and the PMI survey for Lebanon has remained resolutely in contractionary territory, averaging 46.0 last year. Fuel shortages will also take their toll with the central bank no longer subsidising imports, while the long-troubled electricity sector continues to underperform; electricity generation in September was down -62.8% y/y. Meanwhile, Lebanese exports – an increasingly important source of FX as portfolio inflows have dried up and tourism remains constrained – have been impacted by a ban by Saudi Arabia and other Gulf states.

Any way out?

The depth of the crisis now means that there is no easy way out for Lebanon. What began as a financial crisis in March 2020 as the country defaulted on its foreign debt has become something far more destructive, with the World Bank calling it one of the worst economic crises in history. There will be no quick solution, and President Michel Aoun has cautioned that it will take six to seven years for Lebanon to emerge from this. Nevertheless, there remain avenues open to Lebanon to secure foreign funding, which have up to now remained off the table. Bodies such as the EU and the IMF repeatedly stress their desire to help, but this remains incumbent on Lebanese policymakers taking steps such as reform of the banking sector and an investigation into the August 2020 Beirut port blast.

At present, the political stalemate shows no real signs of progress. Prime Minister Najib Mikati has been unable to move forward as disagreements over the judge presiding over the port blast investigation has led to political factions boycotting cabinet. While the removal of subsidies might have demonstrated a government keen to improve its fiscal position, the IMF will likely want to see more concrete steps forward by the government before it entertains the idea of entering into a funding programme with Lebanon. Once this happens, the IMF support and policy anchor should encourage greater support from other bodies as well, and potentially see the release of the CEDRE funding pledged in 2019. These steps forward could encourage greater private investment to follow. However, as things stand, this appears an unlikely prospect in the near term.

Recovery will take time

The crisis in Lebanon has become so protracted and all-encompassing that it risks throwing the country’s development off course by a generation. More than 80% of the population now live under the poverty line, with around a third in extreme poverty, and this is prompting many Lebanese to seek opportunities elsewhere. Those with the ability and means to do so are looking for jobs abroad, leading to a new brain drain for the country, while many others are paying people smugglers to take them on dangerous illegal crossings of the Mediterranean. Meanwhile, a generation of children and young adults are having their education compromised as unpaid schoolteachers strike and students in university are unable to either source petrol to get to class or do not have enough electricity for remote work as power shortages continue. Even a rapid closure of a deal with the IMF in 2022 would leave much progress to be made in recouping what has been lost.