The World Bank released its Lebanon Economic Monitor (LEM) report titled “The Deliberate Depression” in which it showcases Lebanon’s major economic developments and policies over the past six months. According to the report, Lebanon has been facing 3 major crises for almost a year, starting with an economic & financial crisis, having the largest effect as per the World Bank, followed by the COVID-19 pandemic and lately the Beirut port explosion. In details, the report mentioned that the Lebanese economy fell in a financial crisis resulting from the abrupt halt in capital inflows, which translated into a systemic failure on the banking, debt and exchange rate fronts, including the government’s decision to default on the March 7 Eurobonds redemption of $1.2 billion. On the COVID-19 front, the report stated that the government imposed a lockdown just 11 days after the default in order to ward off the pandemic, which included the closure of borders and public & private institutions. Then came the August 4 explosion at the Beirut port that left both the port and the surrounding residential & nearby commercial areas in ruins and had a sizeable economic impact on the national level, always according to the report. Delving further into details, the report noted that the exchange market pressures are curbing trade and corporate finance in Lebanon thereby limiting the importation of capital & final goods. In addition, the report stated that foreign exchange (FX) shortages are manifested by the presence of multiple exchange rates that resulted in the depreciation of the Lebanese Lira by around 80% when compared to the US dollar. The report also commented that the Eurobond default prohibits access to international markets for foreign financing. In figures, the World Bank projects real GDP growth to plunge by 19.2% in 2020, compared to a contraction of 6.7% in 2019. According to the report, the Lebanese tourism sector was hit hard mainly as a result of the COVID-19 pandemic, noting that tourist arrivals have been on the decline since October 2019 due to the worsening economic conditions. The report commented that the real estate sector has been the subject of two counterbalancing factors, on the one hand the financial sector’s facilitations that permit real estate purchases using pre-October 2019 US dollar deposits subject to capital controls, and on the other the sizeable y-o-y drops in construction permits (60%) and cement deliveries (52%) by end of June. From another standpoint, the report stated that the prevailing conditions in Lebanon are severely affecting the country’s fiscal position, with revenues expected to drop considerably as tax and non-tax revenues are anticipated to decline as a result of the deteriorating economic activity. However, the contraction in revenues was more than offset by the large drop in interest expenditures owing to the government’s decision to suspend the payments on the foreign currency denominated debt and to the discontinuation of coupon payments on treasury bonds held by the Central Bank. In this vein, the World Bank projects the fiscal deficit to improve by 4.7 percentage points to attain 5.9% of GDP. On the monetary side, the severe market pressures are reflected by large fluctuations in the black market exchange rate, which at one point has surpassed the LBP 10,000 per US dollar mark. The report also mentioned that the exchange rate pass through effects on prices have resulted in high levels of inflation, with the 12-month inflation rate increasing from 10% in January 2020 to 120% in August. In parallel, the report highlighted that the large economic contraction has resulted in a proportional drop (50% YTD August 2020) in imports which in turn led to a decrease in current account deficit. In this vein, the World Banks expects a 7 percentage point decline in the current account deficit to 14.4% of GDP in 2020, in comparison with a 22.8% average deficit over the 2013 to 2018 period. In this respect, the report commented that the abrupt stoppage of capital inflows has resulted in a steady depletion of FX reserves at the Central Bank, which will place additional constraints on imports. From another angle, the report expects poverty in Lebanon to worsen even more, exceeding half of the population by 2021. More specifically, the report stated that a drop in GDP per capita, coupled with a high inflationary environment in 2020 will surely lead to a colossal increase in poverty rates that would affect all population classes by means of several channels namely loss of productive employment, a drop in real purchasing power, among others. From another viewpoint, the report mentioned that the macroeconomic fundamentals of Lebanon were already weak even before the economic crisis, especially when compared to other countries, noting in this respect that the World Bank expects the adjustment process in Lebanon to take more time and to be more painful even if optimal policy measures were taken. The report added that even one year into the crisis, the appropriate policy measures are yet to be decided. As per the World Bank, the lirafication and haircuts on dollar deposits are still ongoing with banks providing their customers with dollar deposits in LBP at an exchange rate below the one adopted in the black market. The report also commented that haircuts are taking place in the sense that LBP is being used to either purchase goods & services whose prices are increasing or to exchange them for dollar bank notes at the black market exchange rate. The report cited in this respect the ongoing adjustment/deleveraging in the Lebanese financial sector which is weighing on smaller depositors who lack sources of savings, the labor force which is being paid in LBP and smaller businesses. In a final note, the LEM report outlined a comprehensive reform agenda to tackle the root causes of the crisis, preparing Lebanon for a more efficient & resilient economy by placing governance reforms and macroeconomic stabilization at the forefront. The aforementioned reform agenda centers upon 5 pillars, each broken down into several elements. The World Bank also provided some urgent & immediate reforms meant to “jump start” the Lebanese economy and rebuild trust. The first pillar (Macroeconomic Stabilization) comprises 6 elements, namely monetary stabilization, public debt restructuring, financial sector restructuring & resolution, fiscal deficit reduction, social protection & pension reform and consensus on an economic recovery & growth plan. The second pillar (A Governance and Accountability Reform Package) consists of 6 elements, namely public procurement reform, public financial management & public investment management reform, reinforcing public debt management, open government, anti-corruption & judicial reform and reforming municipalities. The third pillar (Infrastructure Development Reform Package) is composed of 5 elements, namely electricity, telecommunications, port system, transportation and water. The fourth pillar (An Economic Opportunities Reform Package) has 3 elements, namely setting financial sector foundations, enabling a nation of entrepreneurs and promoting agriculture resilience. The fifth pillar (A Human Capital Development Reform Package) comprises 5 elements, namely education, health, housing, environment and social sustainability & inclusion.

The table below showcases the urgent and immediate reforms that are broken down into 7 actions, 5 programs and 3 reviews:

The report also went on to estimate the Average Exchange Rate (AER) under two scenarios, a bad scenario and a worse-case scenario since a good case scenario “remains unjustified” under the prevalent policy making environment. The AER is based on three exchange rates namely the official LBP 1,507.5/USD rate which serves as a base for calculating the price of highly critical imported goods (fuel, medicines and wheat), the e-board LBP 3,900/USD exchange rate which remains an anchor for pricing of goods selected by the Ministry of Economy and Trade, and the highly volatile black-market exchange rate. In details, the report projects the black-market exchange rate to attain LBP 10,000/USD by January 2021 under the bad case scenario, and remaining almost flat thereafter, lifting the AER to LBP 5,303/USD (i.e. 49% depreciation). As far as the worse-case scenario is concerned, the black-market rate is expected to depreciate through the year 2021 to attain LBP 15,500/USD by December 2021, with the AER consequently reaching LBP 6,465/USD (82% depreciation).