Until recently, Lebanon was dubbed the Switzerland of the Middle East. However, this has not been the case since fall 2019.
Lebanon has been enduring a severe economic and financial crisis that was followed by the COVID-19 pandemic and the Beirut Port explosion which resulted in more than 200 fatalities and left a significant swathe of the capital struggling to pick up the pieces.
According to government data, these crises caused the Lebanese pound to lose 90 percent of its value, annual inflation rate to reach 84.9 percent in 2020, and commodity prices to rise about four-fold in the past two years. Even worse, the misguided economic policies left the country heavily indebted and the central bank unable to support the local currency for lack of foreign cash flows.
Lebanon’s economy is now in a state of total collapse with the country left suffering from food, fuel, electricity, and medications shortages and unable to provide the basic services for citizens as is evidenced by the long queues of Lebanese people queuing for long hours to buy fuel. Given the high cost of imported fuel, power outages are frequent, extending from a few hours to 23 hours a day. This brought about a growing demand on private generators running on diesel and a consequent rise in diesel prices. In this article, we review the facets of the deterioration of the Lebanese economy and the implications of the economic and fuel crisis.
Lebanese Economy Indicators
According to the World Bank, Lebanon’s gross domestic product (GDP) declined by 20.3 percent in 2020, reflecting the economic downturn the country is facing. Likewise, the Purchasing Managers’ Index (PMI) – an indicator of economic health for the manufacturing sector – averaged 41.1 points in 2020 (PMI readings below 50.0 signal a deterioration within the manufacturing sector), the lowest reading since the index started to be published in 2013. The following figure shows the change in Lebanon’s GDP growth rates over a 10-year period (2010-2020).
Figure 1: The change in Lebanon’s GDP growth rates, 2010-2020
Source: International Monetary Fund (IMF)
As is shown in Figure 1, there has been a sharp decline in GDP growth rates over the last three years of the review period, shifting from positive to negative rates recording -1.9 percent in 2018, declining to -6.7 percent in 2019, and down to -20.3 percent in 2020.
Looking at the growth of different economic activities of the Lebanese economy, we find that, in the real estate sector, building permits and cement deliveries – two indicators indicative of future and ongoing construction activity – showed a year-on-year decline by 26.9 percent and 44.7 percent respectively during the first 10 months of 2020. Meanwhile, real estate sales flourished throughout 2020, with some depositors seeking taking full advantage of their non-convertible bank deposits. Real estate registration fees rose by 104.8 percent in 2020.
The financial crisis and the lockdown caused by the spread of COVID-19, caused the retail sector to experience great losses with net exports being the only driver of growth in 2020 in trade balance. According to data from the Lebanese Customs Administration (LCA), deficit in commodity trade decreased, year on year, by 54.8 percent during the first 11 months of 2020, benefiting from a year-on-year decline of 45.4 percent in imports despite a 4.2 percent decline in exports. This improvement in the merchandise trade balance was partially offset by a drop in the services trade balance.
Likewise, COVID-19 pandemic has greatly affected the tourism sector, where tourist arrivals dropped by 71.5 percent during the first five months of 2020 and hotel occupancy rate averaged 16.6 percent during the first nine months of 2020.
As for the private consumption rate (averaging 92.3 percent of GDP during the period 2015-2018), it was hard hit in 2020, as indicated by the IMF data, with the Byblos Bank/AUB Consumer Confidence Index (CCI) falling by 65.1 percent in the first nine months of 2020 compared to the same period in 2019.
Lebanon’s Energy and Electricity Sector
Lebanon’s energy sector has always been at the heart of Lebanon’s economic and financial challenges, adding to the fiscal and trade deficit due to the country’s high reliance on imports to cover its energy needs and the government providing significant subsidy to the energy sector; hence, incurring additional costs to make energy prices affordable for citizens. According to the International Energy Agency, petroleum products account for 97 percent of Lebanon’s total primary energy supply.
The energy sector inability to secure sufficient supplies of electricity to consumers has severely affected the socio-economic development in Lebanon. For decades, the electricity sector has been suffering a financial deficit where Lebanon’s electricity company (EDL) budget deficits went up recently from $1 to $2 billion. Over the past years, EDL cumulative deficits amounted to about $40 billion, accounting for a substantial share of the public debt.
Over the first 11 months of 2020, EDL’s generating capacity for electricity production had already fallen significantly by 19 percent (year-on-year). If the Parliament fails to approve extrabudgetary allotments of LBP 1500 billion (i.e. $996 million) to EDL, more power outages will be expected.
At present, EDL’s revenues are decreasing due to the technical, commercial, and bill collection losses, which have been exacerbated by stability in tariff rates since 1994. In 2020, bill collection losses amounted to 20 percent relative to 2019 whereas the company’s cash flow dropped by 50 percent. The situation is likely to get worse and power outages might increase amid EDL efforts to manage the cash flow shortage.
Further, EDL’s fragile situation is exacerbated by the severe shortage in foreign currency needed for maintaining power stations. Given the EDL’s increasing reliance on power outages to manage cash flow and the dwindling electricity supply over the past year, consumers had to increase their reliance on the costly highly polluting diesel generators which have an estimated operation cost of $0.30 kWh.
However, amid the continued deterioration of the economic crisis and the depletion of foreign exchange reserves of Banque du Liban (BDL), the government is seriously considering abolishing diesel subsidies, which will increase the cost of private generators. This would place more economic pressures on consumers causing them to reduce the use of private generators which, in turn, would affect the industry’s workforce estimated at 13,200.
International Institutions’ Support for Lebanon
In cooperation with the United Nations (UN) and the European Union (EU), the World Bank Group (WBG) launched the Beirut Rapid Damage and Needs Assessment (RDNA) to assess the impact of the Beirut Port explosion on population, physical assets, infrastructure, and service delivery. The Beirut RDNA adopted a “Whole of Lebanon” approach to ensure building on feedback from public authorities and civil society. Damages of the explosion were estimated at between $3.8-4.6 billion whereas losses in financial flows were estimated at $2.9-3.5 billion. The damage was particularly severe in key vital sectors, including finance, housing, tourism, and trade. According to the IMF data, priority recovery and reconstruction needs are estimated at $1.8 -2.2 billion.
Based on the RDNA recommendations, The Lebanon Reform, Recovery and Reconstruction Framework (3RF) was launched to meet Lebanon’s immediate and short-term needs. The 3RF is geared towards “building back better” by adopting a people-centered recovery and reconstruction framework that focuses on addressing the urgent needs of the people in the medium term and introducing major structural reforms based on principles of transparency, inclusiveness, and accountability.
These efforts gave rise to the official establishment of the Lebanese Finance Fund, a multi-donor trust fund aimed at providing immediate social and economic recovery for the most vulnerable populations and businesses affected by the Beirut Port explosion and supporting the Lebanese government in stimulating reforms and preparing for medium-term recovery and reconstruction. The fund will serve as an important means to pool and align grant financing for the 3RF, under the strategic guidance of the WBG, UN, and EU, adopting a variety of flexible, nongovernmental implementation modalities combined with strong fiduciary monitoring and oversight.
In August 2021, grants were arranged to support the Building Beirut Businesses Back and Better (B5) Fund, endorsed in April 2021 by the Partnership Council of the Lebanon Financing Facility (LFF). The B5 Fund grants are estimated at $25 million aimed at supporting the recovery of 4300 targeted micro and small enterprises (MSEs) with the ultimate objective of preserving the private sector jobs, reducing business closure and layoffs, and supporting the immediate socio-economic recovery of vulnerable people and businesses impacted by the Port of Beirut explosion.
Overall, expectations for an improvement in Lebanon’s economic growth rates are more complex and subject to greater uncertainty in the absence of any optimistic economic indicators and the lack of positive developments at the political level. There is a need for Lebanon to take urgent measures to avoid a complete collapse of the electricity sector in the near future.
In the short term, the EDL cash shortfall should be addresses to avoid further power outages. Despite international efforts to support the Lebanese economy, the failure of political parties to reach an accord stands as a stumbling block in the way of developing effective economic policies that could take the economy indicators to pre-crisis levels and address the economic issues radically, given their social impact with more than half of the population falling below the national poverty line.