Reform delays threaten to plunge Lebanon's crisis-struck economy into darker depths

Lebanon must act swiftly to implement critical structural reforms or face further currency depreciation, worsening business sentiment, deteriorating consumer confidence and higher levels of inflation in an already crisis-riddled economy, analysts have said.

They warned that an ongoing political impasse is delaying the urgent reforms required to unlock billions of dollars in financial assistance, further prolonging and exacerbating economic woes, which means its plight will not be ending any time soon.

Topping the long list of necessary measures required to overhaul the economy is restoring confidence in the banking system and the Banque du Liban by instituting checks and balances, public accountability, transparency and disclosure, said Nasser Saidi, formerly Lebanon's economy minister and vice-governor of the central bank.

“It is incredible that there has been zero accountability of the BdL for the biggest financial crisis in history that has destroyed the Lebanese economy,” he said.

Lebanon is grappling with a financial crisis that the World Bank has called one of the worst globally since the middle of the 19th century.

The banking sector is facing more than $70 billion in losses, the currency lost more than 90 per cent of its value and the country defaulted on its debt in 2019 for the first time in its history.

Lebanon has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors, due to a lack of consensus among the political ruling class.

It has a caretaker cabinet led by Prime Minister Najib Mikati, but with limited powers. It also needs to elect a president after the six-year term of Michel Aoun ended at the end of October, but this requires the agreement of the political elite.

Lebanon on Friday marks the third anniversary of the deadly Beirut Port blast on August 4, 2020.

The explosion killed more than 200 people and injured about 7,000. It caused damage estimated at $15 billion as large areas of the capital were destroyed, leaving an estimated 300,000 people homeless.

It occurred after a stock of ammonium nitrate – stored at the port for years – caught fire.

This came as Lebanon was already grappling with a financial meltdown that started in 2019 and exacerbated by the Covid-19 pandemic. The economy has deteriorated further since, with triple-digit inflation rates and thousands of families facing poverty.

Lebanon's interim central bank governor Wassim Mansouri, who took on the role after Riad Salameh's 30-year tenure came to an end on July 31, last month urged the government to undertake long-delayed reforms to address the deep financial crisis.

Mr Mansouri stressed that BdL “must completely stop financing the government outside of a legal framework”. The Lebanese state has long been heavily reliant on the central bank to fund its expenditure.

“With a new acting governor at the central bank, the hope is for a faster rollout of policy reform, with support from the caretaker government,” Mr Saidi said.

“Credible financial restructure tops the list of reforms needed … in addition to a move towards flexible exchange rates and stopping all quasi-fiscal policies such as the financing of the state budgets.”

The political vaccuum at the top of Lebanon's political echelons has complicated efforts to implement the required financial measures to revive the long-battered economy.

“These necessary reforms are politically feasible but remain an uphill task in the current political backdrop,” Mr Saidi said.

“Any further delays will only lead to further exchange rate depreciation, a plunge in consumer and business sentiment and increase cash dollarisation alongside high levels of inflation,” he added.

Fitch Ratings forecasts that Lebanon’s inflation will accelerate from 171.2 per cent in 2022 to a nearly four decade-high of 255 per cent in 2023, it said in an April report.

“Our view is largely based on the sharp sell-off of the Lebanese pound on the parallel market, the significant devaluation of the currency on Banque du Liban-managed Sayrafa platform in February and March 2023 and the tripling of the custom tariffs,” the ratings agency said.

Fitch Ratings also forecast Lebanon’s GDP growth will decelerate from 3.5 per cent in 2022 to 1.5 per cent in 2023, remaining 34.1 per cent below its 2018 level, as the country continues to grapple with “high inflation, a collapse in the provision of public services and an unresolved banking crisis,” it said in a June report.

“We continue to rule out an IMF programme in 2023,” it said.

“Even though 2023 will mark the second consecutive year of positive growth, Lebanon has yet to recover from its economic collapse in 2019, which was also compounded by the Covid-19 outbreak and the Beirut Port explosion in August 2020.”