FocusEconomics Lebanon

Lebanon Economic Outlook

Lebanon Economic Outlook

Economy continues to tumble off economic cliff amid political paralysis

The economic and political situation in Lebanon has continued to worsen over the last month in the wake of the port explosion. The private-sector PMI plunged further into contractionary territory in August, while inflation clocked an excruciating 112% in July due to the collapse of the pound in the parallel market, crushing purchasing power. Moreover, surging Covid-19 cases led to lockdowns being reimposed in late August. Furthermore, recent political developments do not bode well for a quick resolution to the crisis, and our panel of leading forecasters are highly downbeat on economic prospects ahead. 

There is currently a political vacuum at the top due to the resignation of Hassan Diab’s government in August. While German ambassador Mustapha Adib has been named as prime minister designate, he must now form a cabinet, which could be a drawn-out process given the sectarian nature of Lebanese politics. The lack of political direction is delaying already-stalled talks with the IMF over a crucial bailout, which is in turn a necessary step to unlock further funding pledges by foreign partners.

Even once the new government is formed, it will still need to reach a consensus with the banking sector over reform measures in order to reignite IMF talks: the banks had opposed Hassan Diab’s rescue plan, arguing the financial sector would be made to shoulder a disproportionate share of the fiscal burden.

Maya Senussi, senior economist at Oxford Economics, argues that further changes to Diab’s proposals will be needed:

“The new government will have to prioritise redrafting the May economic rescue plan to incorporate the new reality, not just the damage inflicted by the Beirut explosions but also more realistic assumptions regarding key variables. These include the exchange rate for instance; the current LBP rate on the parallel market is over double the government’s old projection of LBP3,500 to the US$. The steps to restore debt sustainability and reach the previously-targeted debt ratio of under 100% of GDP will now have to be more decisive, particularly as any primary surpluses will now be narrower.”

Regarding the content of a future IMF agreement, Daniel Richards, economist at Emirates NBD, comments:

“What seems increasingly likely is that any deal with the IMF will necessitate a recognition that the official exchange rate is no longer tenable, with a devaluation towards the parallel market rate probable.”

The incoming administration will face a plethora of other vast challenges, chief among them leading reconstruction efforts in Beirut, where damages are estimated to run into billions of dollars and hundreds of thousands have been made homeless. However, the new government will likely be politically fragile and vulnerable to social discontent, while the country’s poor track record of reform means the prospect of a broad overhaul of the economy seem fairly slim.

Our panelists are extremely pessimistic about the country’s economic prospects. In the September edition of the Lebanon Consensus Forecast report, our panelists downgraded their outlook for this year and next, and now see contractions of 16.9% and 3.4% respectively.

As Daniel Ricards states:

“Adib faces an uphill task in righting the Lebanese economy given the myriad of crises in the country in 2020, just one of which alone could have been sufficient to push the economy into a recession. Barring an unexpected rapid resolution in terms of securing an IMF deal, we project that the contraction will run as deep as -30.0% this year.”

Due to the sinking pound, panelists now see inflation averaging 66.8% this year and 37.0% in 2021, with these figures likely to be revised upwards in subsequent publications in light of the latest inflation data, and the Central Bank’s recent announcement that it may lift subsidies on basic items.

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The economic and political situation in Lebanon has continued to worsen over the last month in the wake of the port explosion. The private-sector PMI plunged further into contractionary territory in August, while inflation clocked an excruciating 112% in July due to the collapse of the pound in the parallel market, crushing purchasing power. Moreover, surging Covid-19 cases led to lockdowns being reimposed in late August. Furthermore, recent political developments do not bode well for a quick resolution to the crisis, and our panel of leading forecasters are highly downbeat on economic prospects ahead. 

There is currently a political vacuum at the top due to the resignation of Hassan Diab’s government in August. While German ambassador Mustapha Adib has been named as prime minister designate, he must now form a cabinet, which could be a drawn-out process given the sectarian nature of Lebanese politics. The lack of political direction is delaying already-stalled talks with the IMF over a crucial bailout, which is in turn a necessary step to unlock further funding pledges by foreign partners.

Even once the new government is formed, it will still need to reach a consensus with the banking sector over reform measures in order to reignite IMF talks: the banks had opposed Hassan Diab’s rescue plan, arguing the financial sector would be made to shoulder a disproportionate share of the fiscal burden.

Maya Senussi, senior economist at Oxford Economics, argues that further changes to Diab’s proposals will be needed:

“The new government will have to prioritise redrafting the May economic rescue plan to incorporate the new reality, not just the damage inflicted by the Beirut explosions but also more realistic assumptions regarding key variables. These include the exchange rate for instance; the current LBP rate on the parallel market is over double the government’s old projection of LBP3,500 to the US$. The steps to restore debt sustainability and reach the previously-targeted debt ratio of under 100% of GDP will now have to be more decisive, particularly as any primary surpluses will now be narrower.”

Regarding the content of a future IMF agreement, Daniel Richards, economist at Emirates NBD, comments:

“What seems increasingly likely is that any deal with the IMF will necessitate a recognition that the official exchange rate is no longer tenable, with a devaluation towards the parallel market rate probable.”

The incoming administration will face a plethora of other vast challenges, chief among them leading reconstruction efforts in Beirut, where damages are estimated to run into billions of dollars and hundreds of thousands have been made homeless. However, the new government will likely be politically fragile and vulnerable to social discontent, while the country’s poor track record of reform means the prospect of a broad overhaul of the economy seem fairly slim.

Our panelists are extremely pessimistic about the country’s economic prospects. In the September edition of the Lebanon Consensus Forecast report, our panelists downgraded their outlook for this year and next, and now see contractions of 16.9% and 3.4% respectively.

As Daniel Ricards states:

“Adib faces an uphill task in righting the Lebanese economy given the myriad of crises in the country in 2020, just one of which alone could have been sufficient to push the economy into a recession. Barring an unexpected rapid resolution in terms of securing an IMF deal, we project that the contraction will run as deep as -30.0% this year.”

Due to the sinking pound, panelists now see inflation averaging 66.8% this year and 37.0% in 2021, with these figures likely to be revised upwards in subsequent publications in light of the latest inflation data, and the Central Bank’s recent announcement that it may lift subsidies on basic items.

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– Compare forecasts from 100+ sources

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forecasts from leading experts