Economic Studies
Lebanon

Lebanon

Population 6.1 million
GDP per capita 9,251 US$
D
Country risk assessment
C
Business Climate
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Synthesis

major macro economic indicators

 

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 0.6 0.2 0.2 -13.0
Inflation (yearly average, %) 4.5 6.1 3.1 2.6
Budget balance (% GDP) -8.6 -11.0 -9.8 -11.5
Current account balance (% GDP) -25.9 -25.6 -26.4 -26.3
Public debt (% GDP) 149.0 151.0 155.1 161.9

(e): Estimate. (f): Forecast.

STRENGTHS

  • Long tradition of commerce
  • Important Diaspora money transfers
  • Close relations with the GCC countries, capacity of attracting financial aid
  • Touristic attraction
  • Natural gas potential

WEAKNESSES

  • Very high level of public debt, current account deficit
  • Crumbling political institutions faced with large protests
  • Weak business environment, fragile investors’ confidence
  • Large fiscal deficit, crowding out effect, high interest rates to attract foreign money and retain domestic money
  • Dependence on foreign funds to run economic activity
  • Large wealth and income inequality

Risk assessment

Political crisis, poor confidence, difficult times ahead

The Lebanese economy has been hit hard by the Syrian civil war that started in 2011. There are now an estimated 1.5 million Syrian refugees in Lebanon, out of which more than two-third lack a legal status. The deep political crisis that erupted in October 2019 has greatly accelerated the deterioration of local economic conditions. From the first half of 2019 onward, the economy has stagnated on the abstinence of the private sector to invest in new capacities, and been confronted to agencies‘ credit ratings downgrade. The economy is also expected to struggle because of subdued government and private consumptions. Indicators show manufacturing conditions have deteriorated while household confidence, already affected by higher taxes and tighter credit conditions, is crushed by lay-offs, salary cuts as well as limits to cash withdrawals and reduced business days by banks, all induced by the political crisis. Due to the large fiscal deficit, the government will lack scope to widen its consumption, not to mention its investment, which will remain low. Higher jitters have dampened confidence in the local currency, which in return will weigh on investors’ confidence and will delay the progress of offshore gas exploitation. Any improvement in Syria’s situation and domestic political crisis would be supportive of the economy, especially exports, as the current situation disrupts regional trade routes, deteriorates supply chains and deters foreign tourists.

 

High debt burden, dependence on external financing

Lebanon has one of the largest government debt-to-GDP ratios in the world that is due mostly to high budget deficits over the last decade. In mid-July, the country passed an austerity state budget for 2019 after months of deliberations and prevarications, aiming to reduce the deficit to 7.6% of GDP from 11% in 2018. This target is unlikely to have been met and the deficit is expected to grow this year, especially with the crisis persisting. Unless much needed structural reforms are implemented, the government is expected to post large deficits in the future, which will not help with the country’s dependence on external aid and capitals. The absence of progress in reducing the deficit is expected to restrain Lebanon’s capacity to attract capital inflows, while also increasing its debt servicing costs (over 9% of GDP for interests alone). Moreover, the USD 12 billion in aid aimed at infrastructures pledged by foreign donors at the Paris conference in April 2018 are to be withheld further. Anyhow, it mostly consists of loans (USD 10.2 billion) and not grants (USD 860 million), meaning Lebanon’s debt would increase more. Externally, the large deficit in the current account due to the trade deficit in goods (25% of GDP in 2018) should persist with dwindling tourism revenues balanced by subdued imports linked to receding domestic demand. Its financing has become much harder with non-resident deposits outflows coupled with slowing deposits of remittances from expatriates provoked by heightened security and political risks. This has translated into a currency crisis and US dollar shortage, which have materialized through a depreciated currency on the parallel market (-25% over its pegged rate to the dollar in December 2019) and formal capital controls. The country’s gross foreign exchange reserves were estimated to stand around USD 33 billion at end-2020, as per the IMF, covering 11 months of goods and services imports, but will be solicited.

 

Very high political challenges

Rising living costs and taxes, electricity ruptures, and discontent with the political and social situation unleashed mass protests in October 2019, leading Sunni Prime minister Saad Hariri to resign. In December former Sunni education minister Hassan Diab, after being sponsored by the Shiite majority in the Lower house was tasked by Christian President Michel Aoun to form a government. Although, Mr. Diab declared to be willing to select experts and independents, and act independently from political parties, answering a main demand of the people, it will be difficult for him or any other person to pull the country out of the crisis. Protesters have been lashing out at the ruling elite organized in confessional parties that are sharing political institutions, which, according to them, led to inefficiency, corruption and cronyism. Externally, there is still the risk for the country to be engulfed in regional problems, as well as antagonism between regional or global powers.

 

Last update: February 2020

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