The World Bank released its MENA Economic Update report titled “How Transparency can help the Middle East and North Africa” in which it anticipates the region’s economic growth to contract to negative 1.1% in 2020, down from a growth of 0.3% in 2019, before increasing to 2.1% in 2021 and 2.8% in 2022. As per the World Bank report, the Coronavirus pandemic has affected all the MENA region countries, causing fear and uncertainty among citizens. In addition, the report mentioned that the MENA region was struggling with two distinct but related shocks. In details, and apart from the spread of the Corona Virus, the sizeable drop in oil prices has pressured incomes and fiscal accounts of oil exporters, and in the process largely affected developing economies in the region that depend on worker remittances, foreign direct investment, and transfers from high-income countries in the Gulf Cooperation Council.

On a local basis, the World Bank downwardly revised its previously expected economic growth estimate for Lebanon from 0.3% for 2020 to a negative 10.9%, due to a number of factors that affected the country, namely the COVID-19 pandemic, the exchange market pressures & the subsequent liquidity squeeze that constrained trade and corporate finance, the limited importation of capital and final goods, and the disruptions caused along the supply chain. According to the World Bank, real GDP is estimated to have declined by 5.6% in 2019, noting that said contraction was concentrated in the fourth quarter of the year. The report commented that the fiscal deficit for the year 2019 was estimated at 10.5% of GDP, compared to an average of 8.3% over the 2013-2018 period and a target of 7.6% in the 2019 budget law, noting that the collapse in economic activity has significantly affected revenue collection (as evidenced by the 16% y-o-y drop in VAT revenues). From another standpoint, the report mentioned that monetary conditions in Lebanon are reflective of a panic behavior and of BDL’s measures, citing in this context the imposed capital controls and the lowering of interest rates on LBP and USD deposits in the year 2019. In addition, the report mentioned a deviation in the performance of different monetary aggregates, with narrow money supply (M1) expanding by 42.5% in 2019 and broad money supply (M3) contracting by 6.7%, as a result of the capital outflows. The large growth in M1 can be attributed to several factors, namely the expansion in cash economy in LBP, a flight to safety as depositors with US dollar denominated deposits can only withdraw in LBP at the official exchange rate and are willing to accept the losses stemming from reconverting said amount withdrawn into US Dollars at parallel market rates, and a flight to quality as depositors with deposits denominated in LBP are converting their money to US Dollars at the official exchange rate. As a result, private sector deposits at commercial banks contracted by 8.6% in 2019, the equivalent of $15.6 billion. As per the report, and despite some large cash withdrawals, the banks’ informal capital & exchange control measures have successfully alleviated the impact on Lebanon’s FX reserves. As at January 15, 2020, BDL’s gross FX reserves stood at $37 billion, dropping by $1.5 billion since September 2019 and by $2.7 billion since end of 2018. The report added that BDL allows banks to access foreign currency liquidity by borrowing from the Central Bank at a 20% interest rate on the condition that said funds cannot be transferred outside Lebanon. The report mentioned that banks resorted to tapping their foreign assets with correspondent banks, as evidenced by the $5.2 billion drop in claims on non-resident financial institutions in 2019.

As per the World Bank report, the COVID-19 is expected to have a negative toll on some key sectors of the Lebanese economy over the first and second quarters of the year 2020, namely retail, restaurants, construction, real estate, and banking. On the other hand, the report highlighted that the large drop in global commodity prices can relieve some of the balance of payments’ pressures and partially relieve the surge in inflation resulting from the parallel exchange rate. The World Bank clarified that its assumptions are based on insufficient financial crisis policy responses, a parallel exchange rate, and a continued deleveraging in the financial sector, yet added that net exports will be the only positive contributor mostly due to the sharp contraction in imports caused by the COVID-19 lockdown and limited access to the US Dollar. Finally, the World Bank believes that Lebanon needs a credible crisis management strategy that identifies crisis stabilization and recovery measures over several dimensions (external, fiscal & financial sectors, social safety nets, a growth framework and governance deficiency).