The World Bank released its MENA Economic Update report titled “Trading Together: Reviving Middle East and North Africa Regional Integration in the Post-COVID Era” in which it anticipates the region’s economic growth to contract to negative 5.2% in 2020, down from a growth of 0.2% in 2019, before increasing to 1.9% in 2021 and 3.1% in 2022. The forecasted figure for the year 2020 is much worse than the ones projected in the April 2020 and October 2019 MENA Economic Updates, standing at -1.1% and 2.9% back then respectively, reflecting a more pessimistic outlook for the region. As per the World Bank report, the Coronavirus pandemic and the collapse of oil prices have affected all aspects of the economies in the MENA region. Furthermore, the report commented that the pandemic has heavily affected livelihoods and has resulted in several citizens falling into poverty and as a result, governments in the MENA region are now heavily spending on social protection to help the poorer households.

On a local basis, the World Bank downwardly revised its previously expected economic growth estimate for Lebanon from negative 10.9% for 2020 to negative 19.2%, due to a plethora of shocks that affected the country. Among these shocks, the World Bank report mentioned that the Lebanese economy dove into a financial crisis in October 2019 as a result of the abrupt halt of capital inflows which came before the banking, debt, and exchange rate crises. Soon after, the country had to face the COVID-19 pandemic starting the month of March 2020, prompting the government to impose a lockdown to contain its effects. Another shock that crippled the Lebanese economy was the Beirut Port explosion that took place on August 4, causing massive destruction to the port and surrounding residential and commercial areas within a 1 to 2 mile radius of the blast. The World Bank report also cited some 71.5% y-o-y drop in tourist arrivals during the first five months of 2020, compared to a 5.5% increase in the same period in 2019. The report also highlighted that the real estate sector has been subject to two offsetting factors, namely the facilitations provided by the banking sector to allow for real estate purchases using pre-October 2019 dollar deposits, and the y-o-y drop in construction permits (67.9%) and cement deliveries (55.7%). In addition, the report commented that total government revenues fell by 15.4% y-o-y during the first five months of 2020 owing to the 54.5% drop in telecom revenues, a 51.1% contraction in VAT revenues, and some 37.9% slump in customs revenues, tamed somehow a 15.5% drop in government expenditures. According to the World Bank, the drop in total government expenditures is primarily the result of interest payment cuts stemming from the government’s decision to default on Eurobond payments in March. In addition, the report mentioned that the monetary conditions reflect the crisis conditions induced by exchange market pressures notably in the black market, where the exchange rate that came close to the LBP 10,000/$ mark. More specifically, the report commented that Lebanon is home to a multitude of exchange rates, namely the official exchange rate (at LBP 1,515/$) and the BDL-backed lower exchange for critical imports. According to the World Bank, the effects of the exchange rates on prices has led to triple-digit inflation levels (CPI increased by 112% y-o-y in July). The report added that the discussions with the IMF have stalled as a result of the “highly publicized” differences between the government and the BDL (particularly with regards to debt and banking sector restructuring), or between the IMF and the BDL-government (regarding the exchange rate).

As a result of the high levels of uncertainty, the World Bank projects GDP to contract by an additional 13.2% in 2021, compared to a contraction of 6.3% in 2021 according to the April 2020 MENA Economic Update report. The World Bank attributed said contraction to several factors, namely the COVID-19 pandemic (whose effects are expected to carry through the first half of 2021), macro policy responses that remain absent, and the limited reconstruction and recovery efforts following the explosion of the Beirut port, not taking into account the runaway inflation (a realistic downside risk). The World Bank believes Lebanon’s recession will be difficult and prolonged, given the absence of policymaking leadership. Furthermore, the report commented that exchange market pressures will continue to constrict trade & corporate finance in the highly dollar-dependent economy, thereby limiting the import of capital & final goods, in addition to causing disruptions all over the supply chain. Said factors insinuate the inability to access foreign financing from international markets and a weakened banking system. Accordingly, the World Bank commented that capital controls will remain in need, yet believes that they will become less effective over time. From another angle, the World Bank further commented that the slowing capital inflows for a highly import dependent country and the inability to sufficiently produce substitute goods over the short term have implied a steady depletion of gross foreign currency (FX) reserves at BDL. In figures, the report stated that as at end of August 2020, gross FX reserves (including $5 billion in Lebanese Eurobonds) at BDL stood at $28.5 billion, representing an $8.8 billion drop since end of year 2019. The report also pointed out that a contraction in Lebanon’s real GDP per capita and the high levels of inflation recorded in 2020 will most likely lead to a sizeable hike in poverty rates that will affect all groups of the Lebanese population by means of different channels, namely the loss of productive employment, drop in real purchasing power, among others. Finally, the report urged Lebanon to make the protection of the poor and of the most vulnerable population groups a priority.