Lebanon is currently grappling with an economic crisis of unprecedented proportions, causing widespread disintegration of the country’s post-civil war political economy. The crisis, termed a “deliberate depression”, is characterized by the collapse of basic public services, severe political unrest, and a significant brain drain. Tragically, those hit hardest are the poor and the middle class who are bearing the brunt of the nation’s financial collapse.
The World Bank Lebanon Economic Monitor (LEM) in its Fall 2021 report, aptly titled “The Great Denial”, laid bare the orchestrated nature of this crisis. The report argues that Lebanon’s elite, who have held the country’s economic reins for years, continue to exploit state resources despite the mounting crisis—one of the top three most severe economic collapses worldwide since the 1850s. This unfortunate reality now threatens Lebanon’s long-term stability and social peace.
The post-war economic model of Lebanon, which once thrived on significant capital inflows and international aid in exchange for reform promises, has been declared bankrupt. The severity of the crisis is exacerbated by the country’s precarious geopolitical situation, making the need for swift and effective crisis management all the more urgent.
The LEM anticipates that Lebanon’s real GDP will drop by 10.5 percent in 2021, following a 21.4 percent contraction in 2020. In fact, Lebanon’s GDP has nosedived from nearly US$52 billion in 2019 to a projected US$21.8 billion in 2021, marking a drastic 58.1 percent contraction—the most significant among 193 countries.
The country’s monetary and financial turmoil continues unabated, with the Lebanese Lira enduring severe depreciation in 2021. The inflation rate is estimated to average 145 percent in 2021, ranking Lebanon third globally after Venezuela and Sudan. This rate of inflation has a disproportionately adverse effect on the poor, vulnerable, and pensioners who rely on fixed income. The situation is further worsened by food inflation, which is hitting poorer households the hardest, as they struggle to stretch their dwindling purchasing power.
Government revenues are predicted to almost halve in 2021, reaching 6.6 percent of GDP, making it the third-lowest ratio globally after Somalia and Yemen. The country’s gross debt is estimated to soar to 183 percent of GDP in 2021, positioning Lebanon as the country with the fourth-highest ratio worldwide, surpassed only by Japan, Sudan, and Greece.
Despite the gloomy economic scenario, tourism in 2021 provided a sliver of hope, helping maintain the deficit-to-GDP ratio.
However, the controversial termination of the foreign exchange (FX) subsidy in 2021 has had severe repercussions. The process lacked transparency and coordination, and unfortunately, the removal of subsidies has mostly profited importers and smugglers, while draining scarce FX resources.
Saroj Kumar Jha, World Bank Mashreq Regional Director, emphasized that Lebanon needs to adopt a comprehensive macro-financial stabilization and recovery plan urgently to prevent a total societal and economic breakdown. The World Bank reaffirmed its commitment to support Lebanon in addressing the needs of its people and the challenges affecting their livelihoods.
The proposed strategy for recovery includes a new monetary policy framework, a debt
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restructuring program, a comprehensive overhaul of the financial sector, a phased and equitable fiscal adjustment, growth-enhancing reforms, and enhanced social protection measures.
A critical component of this recovery plan is a comprehensive and quick reform of the electricity sector, which has long been a source of Lebanon’s economic and social woes. Additionally, there is a pressing need for Lebanon to ensure efficient and prompt delivery of social protection assistance to the poor and vulnerable households struggling under the ongoing economic crisis.
The LEM report also includes a special focus section titled “Searching for the External Lift in the Deliberate Depression”. It looks into the reasons for the weaker than expected increase in exports considering the Lebanese Lira’s sharp depreciation. The analysis revealed that Lebanon’s exports are being hampered by three main factors: pre-crisis economic fundamentals, global conditions, and the political/institutional environment.
In conclusion, as Lebanon navigates through this turbulent period, the need for a comprehensive, credible, and equitable recovery plan is clear. The path to recovery may be challenging, but it is not impossible. The nation needs to seize this moment to implement the necessary reforms and start the process of rebuilding. With international support and a united internal front, Lebanon can emerge stronger from this crisis.