The scale and scope of Lebanon’s deliberate depression leads to the disintegration of the main pillars of Lebanon’s political economy after the civil war. This manifests itself in a collapse of the most basic public services; persistent and debilitating internal political discord; and massive brain drain. Meanwhile, the poor and middle class, who were never well served under this model in the first place, bear the main burden of the crisis.
According to the World Bank’s Lebanon Economic Monitor (LEM), Fall 2021″The great denial“, Lebanon deliberate depression is orchestrated by the country’s elite, which has long captured the state and lived off its economic rents. This uptake persists despite the severity of the crisis –one of the ten, if not three, worst economic collapses in the world since the 1850s; it has come to threaten the country’s long-term stability and social peace. The country’s post-war model of economic development, which thrived on large capital inflows and international support in exchange for promises of reform, is bankrupt. Furthermore, the collapse is occurring in a very unstable geopolitical environment, which makes the urgency to deal with the serious crisis even more pressing.
The LEM estimates that real GDP will shrink by 10.5% in 2021, following a 21.4% contraction in 2020. In fact, Lebanon’s GDP fell from nearly $52 billion in 2019 to $21.8 billion in 2021, a decrease of 58.1%. contraction-the strongest contraction of a list of 193 countries.
Monetary and financial turmoil continue to fuel crisis conditions, under a multiple exchange rate system that poses valuable challenges to the economy. The sharp deterioration of the Lebanese pound continued in 2021, with the US dollar banknote rate and the average World Bank exchange rate depreciating by 211 and 219% (year-on-year), respectively, over the past 11 first months of the year. The pass-through of the exchange rate to prices has led to a spike in inflation, estimated to average 145% in 2021—ranking 3rd in the world after Venezuela and Sudan. Inflation is a highly regressive tax, disproportionately affecting the poor and vulnerable, and more generally, people living on fixed incomes such as pensioners. Food inflation remains a concern as it accounts for a larger share of expenditure incurred by the poorest households who are struggling to make ends meet as their purchasing power deteriorates.
Government revenue is expected to nearly halve in 2021 to 6.6% of GDP, mark 3rd lowest ratio in the world after Somalia and Yemen. The contraction in spending was even more pronounced, driven in part by drastic cuts in primary spending, which reinforced the economic spiral. Meanwhile, gross debt is expected to reach 183% of GDP in 2021, taking Lebanon to 4and highest ratio in the world, preceded only by Japan, Sudan and Greece.
A relatively rare bright spot in 2021 has been tourism, which has helped keep the current account deficit-to-GDP ratio stable.
Beginning in the spring of 2021, a disorderly termination of the FX (FX) subsidy began and was in full effect by the summer. The authorities’ path to removing subsidies was opaque, insufficiently coordinated, and lacked timely pro-poor mitigation measures. As a result, the removal of subsidies mainly benefited importers and smugglers while precious and scarce foreign exchange resources were depleted.
“Deliberate denial during a deliberate depression creates lasting scars on the economy and society. More than two years into the financial crisis, Lebanon has yet to identify, let alone embark on, a credible path to economic and financial recovery,” said Saroj Kumar Jha, World Bank regional director for the Mashrek. “The Government of Lebanon must urgently move forward with the adoption of a credible, comprehensive and equitable macro-financial stabilization and recovery plan and accelerate its implementation if it is to avoid a complete destruction of its social and economic networks. and immediately stop the irreversible loss of human capital. The World Bank reaffirms its commitment to continue helping Lebanon meet the pressing needs of its people and the challenges affecting their livelihoods.
As detailed and requested in previous editions of the LEM, this strategy would be based on: (i) a new monetary policy framework that would restore confidence and exchange rate stability; (ii) a debt restructuring program that would ensure short-term fiscal space and medium-term debt sustainability; (iii) a complete restructuring of the financial sector to regain the solvency of the banking sector; (iv) gradual and equitable fiscal adjustment to regain confidence in fiscal policy; (v) growth-enhancing reforms; and (vi) enhanced social protection.
In particular, the launch of a comprehensive, well-structured and rapid reform of the electricity sector is essential to address the long-standing and complex challenges of this sector which is at the center of Lebanon’s economic and social recovery. In addition, Lebanon must redouble its efforts to ensure effective and rapid delivery of social protection assistance to poor and vulnerable households struggling with the persistent economic crisis.
The Special Focus section of the LEM »In search of the external lift in voluntary depression» examines the reasons for the weaker than expected increase in exports given the sharp depreciation of the Lebanese pound; it analyzes the inability so far of the external sector to benefit sufficiently from increased price competitiveness and to become a more robust engine of growth. The Special Focus finds that exports from Lebanon are inhibited by three factors (apart from the crisis itself): (i) (before the crisis) economic fundamentals; (ii) global conditions; and (iii) political/institutional environment.