The World Bank’s semi-annual report for Spring 2023 “Normalization of Crisis is No Road to Stabilization” notably addressed the issues of cash economy, which is unlikely to promote growth and happens to be the flip side of the financial crisis. The report also brought attention to the importance of a comprehensive settlement of the banking sector crisis, and the development of a modern economic model for the land of Cedars.

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The World Bank’s semi-annual report on Lebanon has underlined that despite attempts to portray a sense of normalizattion amidst the ongoing crisis, the Lebanese economy continues to experience a severe downward spiral that is significantly deviating from any trajectory of stabilization, let alone recovery.

The slowdown of the economic contraction in 2022 and 2023 is, according to the report, a result of a deceleration arising from previous and consecutive severe contractions (base effect), and does not imply a stabilization. Instead, future contractions are to be expected as indicated by the dwindling foreign currency reserves, the intensification of rapid depreciation and the impaired functioning of the State. However, it is important to note that the current contraction is not irreversible.

GDP Contraction by 0.5% in 2023

The World Bank’s report defined ‘cash economy’ as the amount of dollars in circulation, mainly reflecting legal transactions in a heavily dollarized economy. The size of this cash-based economy increased from 26.2% in 2021 to 45.7% of GDP in 2022. This rise in cash economy would be mainly attributable to a slowdown in capital outflows, and a decrease in GDP calculated in dollars.

The cash-based economy represents a major obstacle to Lebanon’s financial recovery, and has negative repercussions on the implementation of monetary and fiscal policies. It increases the risk of money laundering and serves as a facilitator for the informal economy and tax evasion.

This economy has progressively replaced the banking sector. According to the World Bank report, the majority of financial transactions are settled in cash, and the credit lines offered by the banking sector are fully secured by cash collateral.

Given the high level of uncertainty, particularly due to repeated episodes of severe currency depreciation, the real GDP is expected to contract by a further 0.5% in 2023.

Furthermore, the inflation rate will continue to be represented by three digits at 165%, ranking among the highest rates in the world.

The ratio of the current account deficit to GDP is expected to remain significant in 2023, despite a slight decrease in 2022, reflecting a weak external position.