The Lebanon Economic Monitor (LEM) Fall 2023 “In the Grip of a New Crisis” provides an update on key economic developments and analyzes their implications for the country’s outlook. The Special Focus section titled “The Impact of the Conflict in the Middle East on the Lebanese Economy,” assesses the impact of the current conflict and its spillover on Lebanon’s economy and its growth prospects amid a prolonged political and institutional vacuum.
Prior to the current conflict, economic growth was projected to expand in 2023, for the first time since 2018, by 0.2 percent. The economy seemed to have found a temporary bottom, following years of sharp contration. Tepid growth was predominantly caused by volatile drivers: a growth in consumption due to a strong summer tourism season; sizable inflow of remittances; increasing dollarization of salaries; and signs of stabilization in private sector activity. With the onset of the current conflict and in the absence of broader economic stabilization, Lebanon’s economy is now projected to be back in recession in 2023. Macroeconomic imbalances also persist, as the current account remains in sizeable deficit of 12.8 percent of GDP.
The inflation rate, which has been in triple digits since 2021, is projected to accelerate to 231.3 percent in 2023, driven by exchange rate depreciation (specifically during the first half of 2023) and the rapid dollarization of economic transactions. Furthermore, Lebanon topped the list of countries hardest hit by nominal food price inflation in the first quarter of 2023 (at 350 percent year-on-year in April 2023), exacerbating the precarity of living conditions for the poorest and most vulnerable segments of the population. Sovereign debt, at 179.2 percent of GDP in 2022, remains unsustainable amid a sharp currency depreciation and economic contraction, and in the absence of comprehensive debt restructuring.
“With limited progress towards comprehensive crisis resolution, Lebanon remains entrenched in a socioeconomic and financial crisis, further exacerbated by institutional and political stalemate,” said Jean-Christophe Carret, World Bank Middle East Country Director. “While tourism has recently been a positive contributor to economic growth, the tourism sector alone cannot substitute for more comprehensive, sustainable and diverse growth drivers that are better placed to withstand shocks and help put the economy back on a solid recovery path.”
The Central Bank has initiated limited but encouraging reforms, amid the relative stabilization of the exchange rate. However, fundamental changes to bank supervision and the conduct of monetary and exchange rate policies have yet to be introduced. The continued absence of an equitable banking resolution that comprises an upfront allocation of losses, bail-ins and restructuring continues to undermine prospects for recovery.
The sizeable inflow of remittances – Lebanon’s longtime lifeline – has acted as a de-facto social safety net and supported modest growth in domestic consumption. However, remittances alone are not sufficient to meet external financing needs, and absent other financing sources, Lebanon’s twin deficits in the current and fiscal account may require a further draw down in the Central Bank’s foreign currency reserves.
The LEM Special Focus section examines the impact of the ongoing conflict – now into its third month – on the Lebanese economy. As tourism accounted for almost 26 percent of current account receipts in 2022, growth and current account dynamics are very sensitive to the ongoing conflict. Assuming that the current containment in the military confrontation to the southern borders persists, a scenario analysis assessing the effect of the drop in tourism spending on economic growth finds that real GDP will contract by 0.6 percent to 0.9 percent (reversing the positive pre-conflict baseline of 0.2 percent growth in 2023).