The World Bank released its Lebanon Economic Monitor (LEM) Fall-2021 report titled “The Great Denial” in which it showcases Lebanon’s major economic developments and policies over the past six months. In details, the report commented that the magnitude and scope of Lebanon’s deliberate depression are leading to the disintegration of key pillars of Lebanon’s economy. According to the World Bank, the Fall-2020 edition of the report titled “The Deliberate Depression” revealed that the depression was imposed on the general population by the elite that effectively captured the state and inhibited economic development. In this vein, the report revealed that said capture persists despite a crisis (financial crisis, the COVID-19 pandemic and the Beirut port explosion) which the World Bank ranked among the top three worst economic crises since the 1850s (April-2021 LEM report). The report stated in this respect that the elite’s preference in Lebanon has been to hold onto power which led to avoiding fundamental reforms to the unsustainable development model adopted after the civil war. In figures, and according to the World Bank, real GDP in Lebanon is estimated to have contracted by 10.5% in 2021 following an estimated economic contraction of 21.4% in 2020. The World Bank based its estimations for the 2021 contraction on the following assumptions: the COVID-19 conditions will carry-on through 2021, macro policy responses will remain inadequate, and that minimum political & security stability levels will prevail. Furthermore, GDP shrank by 58.1% from circa $52 billion in 2019 to a projected $21.8 billion in 2021 based on current market prices, representing the highest contraction among a list of 193 countries. The report mentioned that the depression has had a negative toll on the Lebanese economy and society, as evidenced by the failing basic public services and the rising migration of Lebanese, particularly those that are highly skilled. On the other hand, the report noted that the poor and middle income class are left to deal with the main burden of the crisis. From another perspective, the report stated that all GDP components (excluding net exports) are estimated to have hindered growth in 2021. More specifically, a rare source of growth is the trade in services balance which is led by the tourism sector. Delving into further details, tourist arrivals soared by 101.2% during the first seven months of 2021, while hotel occupancy rates increased by 23.7% y-o-y during the first five months of 2021. From another perspective, the report indicated that the exchange rate further deteriorated in 2021, citing the 211% y-o-y appreciation of the US Dollar against the Lebanese Pound during the first eleven months of 2021, surpassing on several occasions the LBP 22,000 per USD threshold, noting that it breached the LBP 30,000 per USD mark on January 4, 2022. In the same vein, the report commented that Lebanon is host to a multiple exchange rate system which includes the official exchange rate set at LBP 1,507.5 per USD, the BDL administered lower rates, and the black market exchange rate. More on the exchange rate front, the report uncovered that the World Bank Average Exchange Rate (AER) has depreciated by around 219% y-o-y during the first eleven months of 2021, resulting in soaring inflation levels that averaged 145% in 2021, which is the third highest in the world after Venezuela and Sudan. More specifically, inflation fell to 100.6% y-o-y in June 2021, before rising once more to 173.6% in October. The World Bank attributed the rise in inflation since June to the steady removal of foreign exchange (FX) subsidy on imported goods. The World Bank highlighted some improvement in public finance metrics as government spending fell faster than revenues. In figures, government revenues as a percentage of GDP is expected to drop from 13.1% in 2020 to 6.6% in 2021, the third lowest revenue ratio in the world, faring better than Somalia and Yemen only. The drop in expenditure was steeper, shrinking by 9.4% percentage points (pp) to 7% of GDP in 2021. This owes in part to the lower debt service following the Eurobonds default, not to mention the “favorable arrangement” with the Central Bank on domestic debt and the sizeable cutbacks in primary spending. The report projected the overall fiscal balance to reach -0.4% of GDP in 2021 in comparison with -3.3% of GDP in 2020 and the primary balance to reach 0.2% of GDP in 2021, from -0.8% of GDP in 2020. The estimated debt-to-GDP ratio is 183% in 2021, up from 179.1% in 2020. As per the World Bank, the sharp depreciation of the local currency translates to a lower counter value in US Dollar for domestic debt, thereby decreasing the Dollar counter value of total debt. On the other hand, the report warned that the country’s debt-to-GDP ratio is growing larger amid a lower GDP figure (partly due to the depreciation of the local currency against the US Dollar). As a result, the report noted that while rising inflation is quickly reducing the real value of domestic debt, the large depreciation of the local currency continues to make the country’s sovereign debt burden unsustainable. According to the World Bank, the abrupt halt in capital inflows and the sizeable current account (CA) deficit continued to eat up BDL’s FX reserves. In details, the CA deficit-to-GDP ratio remained mostly unchanged at an expected 9.8% in 2021 as strong remittances and tourism outweighed a wider trade deficit in goods (mainly driven by a rapid contraction in US Dollar GDP). The report indicated that the Central Bank of Lebanon’s gross FX reserves stood at $18.8 billion by September 2021, dropping by $5.3 billion since the end of 2020. Similarly, the required reserves on banks’ customer FX deposits is estimated at around $14.8 billion, noting that BDL’s net reserves are not published but are expected to be in negative territory. As a result, the World Bank reiterated the need for Lebanon to adopt and implement a comprehensive reform plan to avoid a total destruction of its social and economic network and to reverse the brain drain syndrome. Said plan should focus on the following measures:

-       A new monetary policy framework that would instill confidence and stability in the exchange rate

-       A debt restructuring program to achieve fiscal space in the short-term and ensure medium-term debt sustainability

-       A comprehensive restructuring of the financial sector in order to recover the solvency of the banking sector

-       An equitable fiscal adjustment directed towards regaining confidence in the fiscal policy

-       Growth enhancing reforms

-       Enhance social protection