Lebanese economy in decline with no stabilisation in sight, World Bank says

The Lebanese economy is in a steep decline and is a long way from any path towards stabilisation, according to the World Bank.

The collapse of the local currency, which has lost more than 98 per cent of its value since 2019, and a largely insolvent banking sector, have led to a pervasive dollarised cash economy estimated at $9.9 billion in 2022, the World Bank said in its latest Lebanon Economic Monitor report (LEM).

The cash economy, which accounts for almost half the Lebanese economy, is a "major impediment to economic recovery", the World Bank said.

The lender found that the proportion of cash transactions has increased greatly over the past three years, with a 63 per cent increase between 2021 and 2022 to reach $9.9 billion, soaring from $6.06 billion in 2021.

The shift towards hard currency cash transactions followed a "complete loss of confidence in an impaired banking sector and in the domestic currency", the Washington-based lender said.

The cash economy "threatens to compromise the effectiveness of fiscal and monetary policy, heightens the risk of money laundering, increases informality and prompts further tax evasion", it added.

Inflation in Lebanon hit an annual rate of about 264 per cent in March as the Lebanese pound continued to lose value on the parallel and official markets since it was devalued by 90 per cent at the start of February.

Lebanon's central bank devalued the pound/lira in early February, with the official exchange rate changing to 15,000 to the US dollar, compared with the peg in place since 1997 of 1,507.50 to the greenback.

This led to the Lebanese pound trading in the parallel market at about 140,000 to the dollar in April.

Lebanon's economic crisis is being exacerbated by a political impasse that has blocked the formation of a new government and the enactment of reforms required to unlock billions of dollars in aid from the International Monetary Fund and other international donors.

Slowed economic decline but no stabilisation

While the pace of Lebanon’s economic decline slowed in 2022, the overall trend and trajectory of the economy is fundamentally unchanged, the World Bank said.

It estimates that real gross domestic product declined by 2.6 per cent in 2022 and is projected to contract by 0.5 per cent this year.

Despite a modest improvement in private sector activity, the persistent widening of the current account deficit continues to impede growth prospects.

"A deceleration in the contraction of economic activity does not imply a stabilisation," the World Bank said.

The report is also critical of Lebanon's regulators and decision makers for their ad hoc crisis management decisions, which it said undermined the development of a comprehensive recovery plan.

Specifically, it pointed out the shortcomings of the Sayrafa platform, the Banque du Liban (BdL)'s primary monetary tool for stabilising the Lebanese pound.

"In an analysis of the platform, the LEM finds that the Sayrafa platform reflects unfavourable monetary tools that led to short-lived appreciations of the [Lebanese pound] at the expense of dwindling reserves and a weakened BdL balance sheet, especially in the absence of a new exchange rate and monetary framework," it said.

Lebanon's political elite have yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the IMF.

Securing the IMF funds would pave the way for an additional $11 billion in assistance that was pledged by international donors at a Paris conference in 2018.

“As long as the economy is contracting and crisis conditions persist, living standards are set for further erosion, poverty will continue to spiral,” said Jean-Christophe Carret, World Bank's Middle East country director.

“Delays in the implementation of a comprehensive reform and recovery plan will only further compound human and social capital losses and render the recovery longer and more costly," he added.