Lebanon

major macro economic indicators

(e): Estimate (f): Forecast *General government gross debt

Risk assessment

Still on the edge of the precipice

The Lebanese economy will continue to remain under severe stress despite a recovery in its growth performance in 2024 amid favorable base effects, a rebound in inbound tourism (estimated at 15% of GDP in 2024) and inflow of expatriates’ remittances (38% of GDP as of 2022). However, growth in private consumption (around 100% of GDP), Lebanon’s traditional largest contributor to GDP, will remain subdued due to lack of confidence, and durably high inflation in line with sharp local currency depreciation: at August 2023, its official rate had lost around 90% since the economy began unravelling in October 2019, while the central bank-administered Sayrafa rate used for customs and the parallel rate were roughly six times higher than the official one. Weakening inflation expectations may cause further official devaluation of the Lebanese pound. The narrow fiscal space will weigh on public consumption (around 15% of GDP) and investment (10% of GDP). Weak infrastructure (limited electricity supply from Electricité du Liban) and a poor business environment dominated by a high level of perceived corruption and cumbersome bureaucracy will negatively affect private investment. Exports suffer from regional instability, and persistent operational and logistical challenges. Food and beverages exports to Syria remain constrained by limited production capacity. The ongoing economic crisis, on the other hand, puts pressure on domestic demand which relies heavily on imports, thus avoiding further widening of the negative contribution of foreign trade to growth. Growth in tourism revenues is expected to be around 10% in 2024, which is lower than the 25% rise estimated for 2023, on back of security concerns that may impact foreign tourists’ decision to visit the country. Inflation will remain extremely high due to a lack of effective monetary policy and rising (imported) food prices. The prevailing political uncertainty and eroded confidence will increase dollarisation, thereby fuelling inflation. The tripling of customs taxes, fees and duties on all imported goods in March 2023 – customs taxes will be calculated at 45,000 Lebanese pounds to the dollar, compared with 15,000 pounds to the dollar previously – has also added to inflationary pressures but its impact will gradually fade, which will not be the case for shortages of basic goods. Under these circumstances, and without exchange rate unification, monetary policy is unlikely to be able to counter inflation.

Unsustainable twin deficits and debt stock

The current account deficit will remain sizable, although it is expected to narrow in 2024 due to a decrease in domestic demand and inflated GDP. Limited production activity will represent a drag on intermediate and capital goods imports. Moreover, high inflation and poverty (affecting 80% of the population) will weigh on consumer goods imports. However, the trade-in-goods deficit (around 60% of GDP) will continue to remain the crux of the unsustainable current account deficit as the trade-in-services surplus (around 10% of GDP) cannot compensate. Remittance inflows, which rose around 1.5% yoy in 2022 to USD 6.4 billion, are expected to rise further given that the economic crisis has prompted a large exodus of well-educated and highly-skilled workers to leave the country. The current account deficit will continue to be volatile and mostly financed by the central bank’s dwindling international reserves, which stood at around USD 15 billion in May 2023. An unsustainable exchange rate on the parallel market would result in increased interventions from the Banque du Liban (BdL) on the Sayrafa exchange rate platform it manages, in an attempt to keep them close to each other.

The fiscal performance will continue to remain weak due to low growth, as well as lack of the implementation of fiscal reforms. The wage bill will continue to weigh on public finances (around 25% of total fiscal expenditures). However, in the absence of a ratified 2023 budget, fiscal spending will remain limited to one-twelfth of the annual amount allocated in the last approved budget endorsed by the World Bank. On the other hand, in the absence of restructuring reforms, public debt will continue to be unsustainable.

A fragmented political scene will weigh on reforms

The fragmented Parliament, which has been a caretaker government since the 2022 elections, and the lack of a President will continue to act as a significant brake on the reform process. The fact that the central bank is run by an acting Governor will continue to weigh on the monetary policy effectiveness. Lebanon's political dynamics will continue to be influenced by regional powers such as Iran (through its local Hezbollah proxy) and Saudi Arabia, which can exacerbate internal divisions and complicate efforts to find solutions. The political and security situation in the broader Middle East, especially neighboring Syria, may have implications for Lebanon's stability and security. Despite the presence of the United Nations Interim Force in Lebanon (UNIFIL), recent tensions on Lebanon’s southern border over Israel’s annexation of the northern part of the village of Ghajar in the Golan Heights may worsen in the upcoming period. The presence of a large number of Syrian refugees will add strain to Lebanon's resources and infrastructure, leading to social unrest and economic challenges. Insufficient funding for power production and food imports will also fuel social discontent.

Last updated: October 2023