Lebanon: Slow progress on essential reforms

There have been some glimmers of improvement in Lebanon’s economic situation in recent months, but overall the outlook remains weak amidst ongoing policy paralysis and we have downgraded our growth forecasts once more since our last quarterly report. We now forecast a real contraction of -5.5% which would mark the fifth consecutive year of economic shrinkage (following a lacklustre 2.6% pa growth averaged over the eight years prior to that run). Next year we project a modest return to GDP growth at 2.3%, though this view is predicated as much on base effects following an extended period of decline rather than a particularly more bullish outlook. Upside risk stems from a meaningful adoption of the IMF’s requirements by parliament, the signing of a new deal, and a resultant uptick in interest from other partners and private investors as the economy stabilises. For the time being, however, this appears some distance off.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

On the positive front, the BLOM PMI survey for the country turned expansionary at 50.1 in the August reading, rising above the neutral 50.0 line for the first time in since 2013, indicating marginal growth in the private sector. There has also been robust growth in visitors to Lebanon this year, with the 3.4mn arrivals recorded over January to August more than double the figure recorded in 2021 (but still down around 40% compared to pre-pandemic and economic collapse of 2019). Inflation has been slowing as it fell to an 11-month low of 161.9% in August.

However, the negative side of the balance remains the heavier one. With price growth still firmly in triple digits, consumers remain under significant pressure as incomes are eroded while many are unemployed. The bulk of households have been tipped into poverty and the population has become increasingly reliant on food and fuel aid from regional neighbours and multilateral bodies including Turkey, Qatar, Saudi Arabia and the UN and World Bank. Industrial action is becoming more prevalent, with judges, port workers teachers and civil servants amongst the professions that have mounted picket lines over the summer months, and in a negative signal for future growth there has been a mounting brain drain as those with the means to leave have done so.

For any significant turnaround in Lebanon’s fortunes, more meaningful progress on the country’s political impasses is required, which would help free up promised funding from the IMF and partner countries. However, as things stand, there has been little indication that the prerequisites required in terms of progress on reform of the banking sector, the investigation into the Beirut port blast, or other issues, have been met. Following a visit in September, the IMF said that progress so far had been ‘very slow.’

In terms of the currency, the long-held exchange rate peg of LBP 1,507/USD, which has been in place since 1997, looks set to be adjusted this month. With the parallel market rate trading closer to LBP 40,000/USD, and very few sectors left with access to the official rate, it was increasingly moot in any case. The new official rate is to be set at LBP 15,000/USD from November, provided the financial recovery plan is approved. On this basis, Lebanese GDP/capita has fallen from some USD 8,000 prior to 2020 to just USD 2,850. Going by the current black-market rate, this would be closer to USD 1,120.