Lebanon in a 'deliberate depression' and faces dire consequences, World Bank says

The collapse of Lebanon’s currency has caused inflation to soar to 137%

A woman withdraws money from an ATM machine at the entrance of a bank in Beirut on December 01, 2020. Lebanon's economy is sinking into a 'deliberate depression', the World Bank said citing the authorShow more

Lebanon is in a "deliberate depression," facing a brain drain and a grim future of rising poverty and unemployment, as its economy is set to contract 19.2 per cent this year, the World Bank said.

"A year into Lebanon’s severe economic crisis, deliberate lack of effective policy action by authorities has subjected the economy to an arduous and prolonged depression," the Washington-based lender said in a report on Tuesday.

The country faces a "dangerous depletion of resources, including human capital, with brain drain becoming an increasingly desperate option", it added.

A deteriorating economic environment that led to output shrinking 6.7 per cent last year and widespread protests by a jaded population unable to access their assets, forced the government to resign last year.

The inertia of the country's ruling political class led Lebanon to default on $31 billion of eurobonds in March with its currency sinking 80 per cent against the dollar in the black market. Inflation has since soared to 137 per cent while public debt, already a major overhang continued to rise and reached $94.8bn at the end of September.

“Lack of political consensus on national priorities severely impedes Lebanon’s ability to implement long-term and visionary development policies,” said Saroj Kumar Jha, regional director for the Mashreq at the World Bank.

Public debt is projected to reach 194 per cent of GDP at end-2020 with interest costs accounting for 10 per cent of economic output, according to the lender.

Capital inflows to the country, a traditional indicator of confidence have plunged, while poverty and unemployment have surged. Poverty is likely to engulf half of the population by 2021 unless its adopts a reform programme that improves social protection measures and widens the pension system, the bank said.

Total poverty reached 45 per cent of Lebanon's population in 2019, compared with a third in 2018 and from 27.4 per cent in 2011–2012, while extreme poverty reached 22 per cent in 2019, according to the bank.

"The harsh burden of financial adjustment is particularly focused on smaller depositors who lack other sources of savings, the local labour force that is paid in Lebanese lira, and smaller businesses," the bank said.

Lebanon's talks with the International Monetary Fund for a $10bn bailout package have stalled due to internal political bickering. That has been further complicated by the scuttling of a forensic audit of the country's central bank, due to the regulator's refusal to provide the necessary information for review citing bank secrecy laws from the 1950s.

The audit is supposed to show how funds borrowed by the government from the central bank have been used and the country needs the needs the financial assessment to secure IMF aid and another $11bn of pledges from international donors.

In an interview with Al-Hadath news channel late Tuesday, central bank governor Riad Salameh said new laws would need to be enacted to facilitate the sharing of bank account information.

The World Bank said the authorities have disagreed on the assessment, diagnosis and solution for its economic crisis, leading them to roll out a number of "uncoordinated, non-comprehensive, and insufficient policy measures that have worsened economic and social conditions".

It added that the country's macroeconomic fundamentals were weak even before the crisis and the failure to formulate adequate policies has only exacerbated the situation.

“A new government needs to quickly implement a credible macroeconomic stabilisation strategy with short-term measures to contain the crisis, as well as medium- to long-term measures to address structural challenges," Mr Jha added.

"This is imperative to restore the confidence of the people of Lebanon—particularly the youth—who have, time and again, shown resilience in the face of hardship, but who are currently suffering from the regressive burden of financial adjustments.”

Lebanon's economic woes worsened after a blast rocked a port in Beirut earlier this year, causing $4.6bn in damage to infrastructure and physical assets in the Lebanese capital while killing more than 171 people.

While many countries have provided assistance to help reconstruct Beirut, the World Bank said encouraging good governance and improving the business environment were as important as physical reconstruction. In order to rebuild, the country will require international aid and private investment.

"The extent and speed to which aid and investments are mobilised will depend on whether the authorities and the parliament can swiftly act on much needed fiscal, financial, social, and governance reforms," the bank said.

"Without reforms, there can be no sustainable recovery and reconstruction, and the social and economic situation will continue to worsen."

In his interview with Al-Hadath, Mr Salameh said the central bank can only finance subsidies for key imports such as fuel, wheat, medicine and other basic goods for another two months.