Lebanese economy far from stability and reliant on cash spending, World Bank says
Lebanon’s economy is in steep decline and a long way from stability, the World Bank has said.
Its Lebanon Economic Monitor report said the collapse of the currency, which has lost more than 98 per cent of its value since 2019, and a largely insolvent banking sector have led to a dollarised cash economy.
Cash transactions, which account for almost half of the Lebanese economy, are a “major impediment to recovery”, the Washington-based lender said. Cash spending increased by 63 per cent to reach $9.9 billion last year from just over $6 billion in 2021.
The shift towards hard currency followed a “complete loss of confidence in an impaired banking sector and in the domestic currency”, it said.
It “threatens to compromise the effectiveness of fiscal and monetary policy, heightens the risk of money laundering, increases informality and prompts further tax evasion”, the lender added.
Inflation in Lebanon hit 264 per cent in March as the pound continued to lose value on parallel and official markets. It was devalued by 90 per cent in February, with the official exchange rate set at 15,000 to the dollar compared with the peg in place since 1997 of 1,507.50.
The pound was trading in the parallel market at 140,000 to the dollar last month.
Lebanon’s economic crisis is exacerbated by a political impasse that has blocked the formation of a new government and reforms required to access billions of dollars in aid from the International Monetary Fund and other donors.
While the decline slowed in 2022, the overall trajectory is unchanged, the World Bank said. It estimates that real GDP declined by 2.6 per cent in 2022 and will drop by 0.5 per cent this year.
Despite a modest improvement in private sector activity, the persistent widening of the current account deficit continues to impede growth prospects.
“A deceleration in the contraction of economic activity does not imply stabilisation,” the World Bank said.
The report was also critical of Lebanon’s regulators and decision makers for their crisis management, which it said undermined any recovery plan.
It said the Sayrafa platform, the Banque du Liban’s tool for stabilising the pound, “led to short-lived appreciations at the expense of dwindling reserves and a weakened balance sheet”.
Securing the IMF’s $3 billion package would unlock a further $11 billion pledged by international donors at a Paris conference in 2018.
“As long as the economy is contracting and crisis conditions persist, living standards are set for further erosion, poverty will continue to spiral,” said Jean-Christophe Carret, the World Bank’s Middle East country director.