Current Affairs

Lebanon is in a mess, but is it close to getting out of this mess? Lebanon’s economy decelerated by 37 percent between 2018 and 2021, real gross domestic production (GDP) has fallen by 2.6 percent in 2022. But the most pressing question for the Lebanese is whether the economy is starting to build an element of resilience that it did not have at the beginning of this crisis. 

There is very little good news for the Lebanese, but there are positives, especially as tourism has made a welcome return. The government have stopped trying to prop up the Lebanese pound (LBP) and have allowed it to bottom out. Though the LBP is still in decline, that decline is not moving as fast as it was. The economy is mainly reliant on US dollars and some are spending the currency as though it is being re-fashioned as the national currency. But the elderly dependent on the LBP for their pensions are the most vulnerable; people who have worked all their lives have found that their pensions are worthless and are having problems paying their rent, food and the very basic of necessities and some cannot even afford electricity. To put this into perspective, the LBP lost 98 percent of its value in the past three years, despite the initial actions of the Lebanese Central Bank trying to prop up the currency through foreign exchange interventions. In December 2021, the rate you would have to pay to exchange LBP for a dollar was LB£31,102, but since 2023 the LBP breached LB£140,000 to the dollar.

There was more bad news for the vulnerable and those who are paid in Lebanese pounds, and that is inflation, which linked to the currency has sky rocketed to 171.2 percent in 2022, primarily due to the devaluation of the Lebanese currency. This itself led to higher prices for food, which contributed to food inflation, (excluding alcohol and luxuries) reached 240 percent, but not as bad as January 2022, year on year reached 483 percent.

To give an indication of how the Lebanese are managing their lives is to look at expenditure against GDP. In 2020 expenditure decreased to 16.4 percent of GDP and in 2022 Lebanon became a record holder for one of the lowest levels of expenditure making up only 5.7 percent of GDP, which points to the state being hollowed out. But there are worries about the export market, which has declined by 10.2 percent, while imports have risen to 20.6 percent of GDP (thought to be caused by hoarding).

That is the bad news, apart from the banks who do not have the foreign exchange or wealth to manage their once predominant position as Lebanon’s most trusted institutions. The banks hold debt that is three times the GDP of the economy and all have been technically bankrupted and incapable of returning US$ depositors their money. But is there light at the end of the tunnel for Lebanon, have they made it through the worst of the economic pain that could beset a country. There are other factors that I have not mentioned such as Lebanon’s national debt

According to the World Bank report, Lebanon’s GDP is set to shrink by 0.5 percent in 2023, however this is less severe than initially thought and private consumption will grow in comparison to 2022, and there has also been better than expected narrowing of the current account, but politically the country is still not making the necessary decisions to bring in the reforms the economy so badly needs.

So the question has to be whether Lebanon in the future is in the same position as Argentina and Zimbabwe, where the economy has crashed and there seems to be little that the Lebanese can do. The World Bank questions whether the currency itself has any value and the economy is determined by the consumer spending dollars only. The question is whether this is the normalization of the economy, or the Lebanese economy is in decline and distant from stabilization.

Politically, the country needs a government willing to place arguments about the future path that Lebanon will take, its care taker government neither has the will or ability for the economy to move on another trajectory, without the backing of parliament. But what it has done, is weathered the disasters and has significantly turned the economy around from a polar economy in free fall to an economy that is 50 percent dependent on the US$ for its GDP.

The fact that the banking sector is largely insolvent, does not change the fact that fifty percent of all transactions have taken place using the US dollar, making the cash economy equivalent to half the GDP in 2022. Though those without US dollars will continue to have their living standards fractionalised by the devaluation of the Lebanese pound, the economy is determined by more of the consumers with dollars, which means that the question of a hard currency is not a difficulty for a nation that is foreign exchange poor. But the question is whether the levels of poverty will remain or if the amount of dollars and other currencies in the economy are pulling the economy into a shape that could or should persuade investors that Lebanon is a worthwhile risk.

Is the risk factor an element that is putting off investors or is it that the banks are unable to manage their own debt ceiling. If there are dollars in the economy and if the banks are once again capitalised, then the Lebanese economy is not that far from remaining on a neutral footing, which challenges the assumption of the World Bank that the spiralling debt of the banks, government and state itself will continue to place pressure on the economy, but if the risk is determined by an economy that is moving towards a neutral position, then the economy has returned to an investment positive economy, which in the next year should be evident.

The debt ceiling has been reached in the Lebanese economy, whether you agree with the assumption of the World Bank that the economy is spiralling and the LBP has further to go before it plateaus, there are positives for Lebanon, but the long term prospects for the economy is that it will have problems servicing the debt that has been built up over decades and as such the LBP will struggle for the foreseeable future, or until the government has placed the necessary agreements in place for its long term survival and that of the Lebanese.