- 22
- Dec.
- 2023
World Bank: Precarious Economic Growth in Lebanon
modified on 07 Oct. 2024 à 16:47 Read : 3 minute(s) A A A
The ongoing conflict in Gaza is a major shock to Lebanon's precarious growth model, as underscored in the latest World Bank report.
The latest World Bank report on Lebanon, the 'Lebanon Economic Monitor (LEM)' for Fall 2023, headlined "Caught in a New Crisis," underscores the fragility of a Lebanese economy, whose growth expectations have been diminished by the ongoing war in Gaza.
The fragility of Lebanon's economic growth is unsustainable in the presence of a prolonged conflict.
The mild growth forecasts were built upon a thriving tourist activity recorded last summer and an influx of remittances from the diaspora. Recognized as Lebanon's enduring lifeline, this last factor has operated as an implicit social safety net, fortifying a modest upswing in domestic consumption.
Prior to the current conflict, the World Bank had forecasted a 0.2% growth in the economy for 2023, marking the first positive growth since 2018. The Bank observed that the economy appeared to have temporarily hit a low point after years of significant contraction. However, following the outbreak of the Gaza War, the World Bank now depicts Lebanon as sliding back into recession.
Tourism and Remittances
The World Bank made it clear that neither the development of the tourism sector nor the substantial inflow of remittances can independently act as drivers for sustainable economic growth in Lebanon. Alone, they fall short of addressing the external financing needs, especially in light of the potential need for further tapping into foreign currency reserves due to the dual deficit in the current and budget accounts.
One of the Scenarios
With tourism contributing nearly 26% to current revenues in 2022, the growth and current account dynamics are highly susceptible to the ongoing conflict. Assuming the current containment of military confrontation in the southern borders continues, a scenario analysis assessing the impact of reduced tourist spending on economic growth indicates a contraction in real GDP by 0.6% to 0.9%. This represents a reversal from the pre-conflict positive baseline scenario, which anticipated a 0.2% growth in 2023.
Lebanon’s Central Bank
According to the World Bank report, Lebanon’s Central Bank has embarked on reforms that, although limited, hold promise, particularly against the backdrop of a relatively stabilized exchange rate. However, fundamental changes are yet to be made in banking supervision and the formulation of monetary and exchange rate policies. The persistent absence of an equitable banking resolution encompassing an initial allocation of losses, internal recapitalization, and restructuring remains a significant impediment to the prospects of economic recovery.
Sovereign Debt and Inflation
As for the sovereign debt, which reached 179.2% of GDP in 2022, its sustainability is compromised in the face of significant currency depreciation and economic contraction, particularly in the absence of a comprehensive debt restructuring.
In regards to the inflation rate, which has been persistently in triple digits since 2021, it is anticipated to surge to reach 231.3% in 2023. This escalation is driven by the depreciation of the exchange rate, particularly in the first half of 2023, and the swift dollarization of economic transactions. Moreover, Lebanon has reached the top of the list of countries most severely affected by nominal food price inflation in the first quarter of 2023, registering a staggering 350% year-on-year increase in April. This escalation has further exacerbated the already precarious living conditions of the poorest and most vulnerable populations.
Financial Market
Financial markets, acting as forward-looking indicators, naturally provide a barometer for changes in risk premiums.
Lebanese Eurobonds experienced a sell-off starting October 9, indicative of decreasing prospects for debt restructuring. In just one day, Eurobond prices saw a decline ranging from 0.6 to 0.8 percentage points below face value across all maturity dates.
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