Base effects will drive growth in 2022

After Lebanon defaulted on its international debt in March 2020, the economic situation deteriorated sharply, and the national output contracted further in 2021. Despite the formation of a government in September 2021, which ended a 13-month standstill, serious challenges persist amid hyperinflation, shortage of necessities such as medicine, electricity cuts, weak tourism revenues, and lack of U.S. dollars weighing on private consumption and investment. Only 27% of the population had been fully vaccinated by the end of 2021, leaving the economy exposed to a new round of lockdowns, which may dampen business activity in 2022. From a shallow base, the economic recovery should be prolonged and gradual. Private consumption, around 90% of GDP in 2019, will be the critical driver of growth in 2022; this growth will be subdued as rising financial and fiscal pressures will drag. On the other hand, the inflows of remittances (20% of GDP in 2020, according to the World Bank) will be crucial, as they can support residents’ incomes. Cash remittances are also weak due to the closure of the borders and the Lebanese diaspora’s unwillingness to visit the country. The investment will remain weak due to financial and political uncertainties and worsening operational conditions. The low-key recovery in domestic demand will restrain import growth. Moreover, Banque du Liban is expected to lift most of the subsidies provided on imports through its selective exchange rates, but the impact will depend on the exchange rate used. In August 2021, the Banque said it would no longer open lines of credit for fuel imports or subsidize its purchases. As a result, fuel importers have had to buy U.S. dollars from the black market where the Lebanese pound was standing, at that time, at around 20,000 versus USD, far above the central Bank’s official rate of 1,500. The very few goods exports (USD 4.8 billion in 2020, out of which one-third consisted of precious metals and jewelry) will continue to suffer from regional instabilities. Inflation will remain high due to the ailing local currency (a weakening of 90% vs. USD on the parallel market since late 2019) and the surge in fuel prices.

Enduring twin deficits and high debt

In April 2021, the fiscal deficit narrowed by 62.4% from a year earlier as government spending declined by 36% year-on-year (y-o-y), while revenues rose by 5%. The fall in Treasury transfers to Electricité du Liban (EdL) and subsidies contributed to this trend. Nevertheless, the public accounts will remain in a high deficit in 2022 until the adoption of fiscal reforms to contain public sector wages. To unlock international support, which has become minimal, the government said in October 2021 that it had resumed interactions with the IMF. However, partners will wait for the conclusion of an agreement with the IMF, which is not expected before the second half of 2022.

The low vaccination rate will deter inbound tourism (around 18% of GDP in 2019), thus reducing tourism revenues. Coupled with limited export performance, this will contribute to the current account deficit, which will remain double-digit in 2022. Banque du Liban’s assets in foreign currency declined by 27% YoY to USD 18.7 billion as of end-October 2021, mainly due to the subsidies on essential goods. This is despite the IMF’s allocated special drawing rights (SDR) of USD 1.135 billion in September 2021. Although removing most of the subsidized exchange rates will help the Bank restore its reserves partly, they will remain low due to the large external financing gap.

Challenging political scene amid rising regional tensions 

As a condition for resuming talks with the IMF, forming a government after a 13-month impasse was a positive step towards much-needed international financial aid. However, the government must update its economic recovery plan to conclude a financing program with the IMF. The government may opt for cautious progress on requested reforms to maintain its popularity ahead of the parliamentary elections set to be held in March 2022.

Rising geopolitical tensions may also add to negative pressures on the Lebanese economy. A video (circulated in late October 2021) showing an old interview of a Lebanese minister criticizing the Saudi-led military intervention in Yemen prompted Saudi Arabia, the United Arab Emirates, Kuwait, and Bahrain to recall their envoys from Beirut. Saudi Arabia has also banned all imports from Lebanon and forbidden its citizens to travel to Lebanon. This will weigh further on Lebanese exports and aggravate the shortage of U.S. dollars.