Israel-Gaza conflict to drag Lebanon back into recession, World Bank says
Lebanon’s economy, which had been on a recovery path after years of turmoil, is projected to be dragged back into a recession as a result of the Israel-Gaza war, the World Bank said.
The country was previously projected to post 0.2 per cent growth in its gross domestic product in 2023, after five years of being in the red, but that is now expected to turn into a contraction of between 0.6 per cent and 0.9 per cent, the Washington-based lender said.
Lebanon shares a border with Israel in the south and is at risk of being dragged into the conflict that broke out on October 7.
“While the country remains mired in a political and institutional vacuum, and a crippling socio-economic crisis for over four years, it has now been hit by another large shock: fear that the current conflict centred in Gaza could escalate further into Lebanon,” the World
Bank said. Its contraction estimates would hold up if there were no major escalations in border violence between Israel and Hezbollah through up to the end of this year, it said.
“A significant escalation of the conflict would also permanently scar Lebanon’s growth potential and carry grave economic implications,” the World Bank said.
Lebanon’s fragile economy last posted expansion in 2017 when GDP climbed 0.9 per cent. Since then, it has faced what the World Bank has called one of the worst global financial crises since the middle of the 19th century.
The country had its worst showing in 2020 – during the Covid-19 pandemic – when the economy dropped by an estimated 21.4 per cent, according to World Bank data.
But Lebanon improved markedly in the past two years, reducing its economic contraction to 7 per cent and 0.6 per cent in 2021 and 2022, respectively, underpinned by the key tourism sector and remittances from Lebanese working abroad.
“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,” said Jean-Christophe Carret, the World Bank’s Middle East country director.
Lebanon is already struggling with a highly polarised political landscape, a presidential vacuum, a caretaker government with restricted executive powers, an interim central bank governor and limited legislative action by Parliament, the World Bank said. The country’s “impaired macroeconomic framework is not only impoverishing a large share of the population and driving up inequality, but also preventing a sustainable development model from emerging”, it said.
“Without a crisis resolution plan, no long-term investment is feasible.”
Inflation is projected to accelerate to 231.3 per cent in 2023, mainly a reflection of the continued deterioration of the underlying macroeconomic environment, the lender said.
The acceleration of inflation is being primarily driven by the depreciation in the exchange rate, specifically during the first half of 2023, and the rapid dollarisation of economic transactions and, in particular, the components of the consumer price index basket.
Lebanon’s banking sector, meanwhile, remains insolvent, with a severely impaired balance sheet and losses at $72 billion, the lender said.
The banking sector’s losses as a share of GDP are “among the largest, if not the largest, in the world”, it said.
The country was earlier projected to post 0.2% growth in its 2023 gross domestic product