Business,
Lebanon’s economy will shrink by 24 per cent this year, a far deeper contraction than the previous forecast of 15 per cent, as a result of last week’s Beirut port explosion, the Institute of International Finance said.
The explosion, which was caused by the ignition of 2,750 tonnes of ammonium nitrate stored in a warehouse at the port, killed at least 163 people and wounded about 6,000.
More than 300,000 people were left homeless and the damage is expected to exceed $7 billion (Dh25.7bn), about 14 per cent of the country’s gross domestic product last year, the institute said.
“Given the large contraction in output and the massive depreciation of the parallel exchange rate, GDP could shrink from $52bn in 2019 to $33bn in 2020,” said IIF chief economist for the Mena region Garbis Iradian shortly before Lebanon’s
government resigned on Monday.
“Wages are falling sharply in real terms as the pass-through effect from the large parallel exchange rate depreciation led prices to rise rapidly.”
Before the explosion, Lebanon was already facing its worst economic crisis since its independence in 1943.
It defaulted on $31bn in eurobonds in March, causing its currency, pegged to the US dollar, to lose more than 80 per cent of its value against the greenback on the black market. Inflation surged, forcing the government to turn to the International Monetary Fund for a $10bn (Dh36.7bn) bailout package in May.
With the IMF talks having stalled, inflation may have exceeded 110 per cent last month while the unemployment and poverty rates climbed to 35 per cent and 50 per cent, respectively, the IIF said.
“The government and parliament have wasted much time on debating the scale of losses of the banking system and on blaming opposition political parties and foreign governments for the lack of international financial support,” Mr Iradian said.
Though Lebanon received pledges of $300m at a donor conference organised by France and the United Nations on Sunday, there are food security concerns after the blast destroyed its primary grain silos at the port.
The country’s ports in Tripoli and Sidon are much smaller than the port in Beirut, which handled at least 70 per cent of imports.
Lebanon’s current account deficit is set to narrow from 22 per cent to 12 per cent due to the collapse in domestic demand, according to the IIF.
Official reserves are expected to decline by about $7bn to $12bn by the end of this year, it said.
Economic reform is an important prerequisite for Lebanon to secure IMF assistance and gain access to the $11bn pledged by donors at a 2018 conference. Reforming and limiting further deterioration will “require addressing Lebanon’s endemic corruption head-on”, Mr Iradian said.
“Doing so will require strong political will to create effective institutions that promote integrity and accountability throughout the public sector.”
The adoption of new technology could help strengthen important fiscal functions, including budget processes and revenue administration, as well as internal controls, according to the IIF.
“The independence of the Lebanese judicial system is often challenged by political interference. An anti-corruption legal framework should include legislation criminalising different types of corruption and provide a code of conduct and rules of disclosure for public officials,” Mr Iradian said.
“However, it is unlikely that the current leadership will approve the necessary laws to fight corruption.”
Until Lebanon forms a new government that meets the demands of protesters, the outgoing cabinet – according to the country’s political system – serves as a caretaker government but will not have a mandate to carry out any reforms or advance talks with the IMF.
The IIF said there are two scenarios that could play out in the medium term.
It assumed a 60 per cent probability of there being significant political change and real economic reforms. That includes the formation of a new government that is independent of sectarian allegiances, which have defined and held the country back from carrying out required reforms since the end of its last civil war in 1990.
Under this scenario, IMF reforms are put into effect, the aspirations of citizens are met and early parliamentary elections are held.
“The state also needs to reduce its footprint in the economy by adopting a hands-off approach to managing vital sectors such as electricity and telecoms and allowing private sector participation, including in the reconstruction of the Beirut port,” Mr Iradian said.
Under this scenario, the Lebanese pound could appreciate to below 6,500 pounds to the dollar by early next year on the parallel market, with inflation gradually declining.
The country would be able to secure access to donor funds and financial assistance from the fund, with the central bank shoring up its reserves, the IIF said.
“Without political change and real economic reforms, the country will continue to sink,” Mr Iradian said.
Given the “magnitude” of the Lebanon’s problems, the IIF said limited reforms would further reduce confidence while the currency depreciates and inflation remains high.
“With these headwinds, the economy will continue to contract, and debt will remain well above 120 per cent of GDP by 2024,” Mr Iradian said.