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Lebanon remains under pressure

Daniel Richards - MENA Economist
Published Date: 12 July 2021


The situation in Lebanon has continued to deteriorate through the first half of the year and the prospect for H2 is little better, barring a significant shift in direction. Despite headline-grabbing pleas for action by multilateral institutions and prominent international and domestic political figures, the political impasse in Lebanon continues unabated, and with it the country’s economic and financial crises. Without external support, either through the IMF and World Bank or else the Paris Club of lenders or friendly regional governments, Lebanon will struggle to right itself after the turmoil of the past 18 months and the decade of questionable policies prior to that. For now, though, this support will likely remain limited to the emergency supplies already provided, with the Lebanese Army having received food aid from countries including Qatar, Iraq and France. More substantial support will remain predicated on the implementation of economic reforms, but with no government still formed almost a year after elections, near-term prospects remain dim.

Real GDP growth, % y/y

Source: UN, Emirates NBD Research

The parallel market currency depreciation which began in earnest following the March 2020 debt default has continued in 2021, with the pound reportedly now trading for as little as LBP 19,000/USD – far off the official LBP 1,507/USD exchange rate. This is one of the starkest indicators of what the World Bank has labelled as ‘in the top 10, possibly top 3, most severe crises episodes globally since the mid-nineteenth century.’ The effect of this has been to keep inflation at seriously elevated levels, and while base effects have meant that it has slowed somewhat, with the currency continuing to fall, and all of the global price pressures on top of the local concerns around removing subsidies, it was still at  119.8% y/y in May. With unemployment reportedly over 40%, private consumption will be severely curtailed.

CPI inflation, % y/y

Source: Haver Analytics, Emirates NBD Research

Another salient effect of the currency collapse has been to push Lebanon’s debt levels into multiples of its GDP on the unofficial rate, making any eventual return to institutional borrowing even more challenging. As it stands, Lebanon’s debt load was at USD 97.3bn in the first quarter having grown by 5.2% y/y, making it equivalent to roughly 230% of GDP at the official exchange rate, itself by some distance the highest in the world.

Aside from the currency collapse, Lebanon has also had to contend with the coronavirus pandemic, and the effect that has had on both domestic demand and any prospect of tourism recovering. The currency collapse might otherwise have prompted a rush of visitors looking to take advantage of the cheaper prices, but with travel restrictions in place this has not materialised and occupancy levels at Beirut’s top hotels were just 27% in March. Case numbers have been comparatively muted compared to previous peaks of late, but they have been ticking up once again, and this will be a concern to authorities as there have been the first reports of the Delta variant in the country. Less than 10% of the population are fully vaccinated and drives to do marathon vaccination sessions have been disrupted by power outages. These power outages have been worsening, with reports in July that the two primary power stations had shut down as they awaited fuel shipments which were delayed because of lack of payment.

For now we will maintain our forecast for a real GDP contraction of -4.7% in Lebanon this year, following an estimated -27% contraction in 2020. Our projected contraction would be greater were it not for an anticipated decline in imports because of the currency collapse and diminished household spending power, and the risks remain to the downside.