LEBANON

Lebanon’s political system is dominated by the need to preserve the fragile balance among the main religious groups. The president has to be a Maronite Christian, the premier a Sunni Muslim and the speaker of the National Assembly a Shia Muslim. However, this arrangement has encouraged patronage and limited the effectiveness of policymaking. Outright sectarian hostilities were relatively contained until the Syrian civil war spilled over the common border and further polarized political and religious divides. Overall, stability and security are fragile.

To add to this, an economic and financial crisis has built up since 2017. Lebanon had consistently run huge fiscal and current account deficits for decades, which were mainly financed by remittances from expats and aid flows from the Gulf region, making the country highly dependent on capital inflows. That financing model collapsed in 2017-2019 as confidence in both the fragile political system and the banking system was unravelling rapidly, resulting in increasingly frequent non-resident (expat) deposit outflows. In 2019, Banque du Liban (BdL, the central bank) began to repay maturing Eurobonds on behalf of the Lebanese government. At the same time, large-scale, partly violent nationwide rallies against the perceived failures of government economic policies, ongoing dollar shortages, new taxes, corruption and poor services forced then prime minister Saad Hariri to resign on 29 October 2019. In order to halt the drawdown of BdL’s reserves, a new government eventually pulled the emergency brake and stopped repaying maturing Eurobonds in March 2020. That sovereign default for Lebanon combined with the impact of Covid-19 aggravated the ongoing economic and financial crisis. Since then, the political deadlock has continued and periodic public protests persist. There is also a risk of state failure, which would further increase the likelihood of violence and internal conflict.

Real GDP already decreased  by -1.7% in 2018 (the first decline since 1999) and -7.3% in 2019 in the wake of the emerging economic crisis. Then it plunged by -25% in 2020 owing to the full-blown sovereign debt and financial crises, as well as economic disruptions from the Covid-19 pandemic, including lockdowns, business closures, travel restrictions and curfews. We expect the recession to continue in 2021-2022 owing to the absence of a funtioning political framework, which will prevent any government in the next two years from implementing the needed comprehensive fiscal and structural reforms that would ultimately restore investor confidence. Real GDP is unlikely to return to the pre-recession level of 2017 before 2030. Moreover, the deep recession combined with a drastic currency devaluation imply that GDP per capita in USD terms (about USD9,600 in 2019) has contracted substantially.  

The Lebanese pound (LBP) has been pegged at 1507.5 LBP per USD since December 1997. For now the BdL has maintained this official rate but a de facto devaluation has occurred via the emergence of multiple parallel rates, with the weakest being the black market rate that arose in August 2019. That black market rate is highly volatile, fluctuating between 13,000 and 19,000 LBP per USD in Q3 2021, for example. Sooner or later, the official exchange rate is likely to be devalued.

The de facto severe currency depreciation has led to hyperinflation: Headline consumer price inflation soared from an average annual 2.9% in 2019 to 85% in 2020 and is forecast at around 135% in 2021 and 50% in 2022. Food prices (especially for imported food) have surged in particular, posing the risk of a food security crisis, which could be another trigger for renewed public protests.