Lebanon’s economy continues to struggle despite international support

Exacerbating Lebanon’s challenges are cracks forming in the country’s once resilient banking sector.
Sunday 01/07/2018
Crumbling foundations. A woman walks outside of Lebanon’s Central Bank building in Beirut. (Reuters)
Crumbling foundations. A woman walks outside of Lebanon’s Central Bank building in Beirut. (Reuters)

Hit hard by political uncertainty, outside interference and the fallout from the debilitating Syrian civil war, the Lebanese economy has struggled to retain the resilience that once helped it achieve buoyant growth.

With $11 billion in economic assistance pledged and recent significant oil and gas discoveries, Lebanon would hope it is on the verge of tapping into its vast potential. However, low growth rates, widespread unemployment, rising poverty and the effects of the Syrian conflict combine with a highly uncertain political scenario to seriously endanger Lebanon’s economic future.

Prior to the Syrian civil war, Lebanon’s economic growth was touching an impressive 10%. This and next year’s economic growth is forecasted to be less than 2%, with fiscal deficits high at 7-10%. Tourism, real estate and construction, previously key contributors to the Lebanese economy, are suffering and its banking sector — the strength of which has traditionally allowed it to navigate severe shocks — may be losing its resilience.

Challenges lie across Lebanon’s economic landscape, with unemployment exceeding 30% and more than 1 million Syrian refugees in the country. The UN Development Programme said poverty in Lebanon has risen more than two-thirds since 2011.

Naturally, the outbreak of hostilities in Syria marked a major turning point for Lebanon’s economy as evidenced by its debt-to-GDP ratio, which climbed from 130% in 2011 to more than 150% today, making Lebanon the world’s third-most indebted country in the world. The International Monetary Fund (IMF) said Lebanon’s debt-to-GDP ratio could balloon to 180% by 2023, if underlying economic challenges are not addressed quickly enough.

Exacerbating Lebanon’s challenges are cracks forming in the country’s once resilient banking sector.

Attracted by high interest rates and buoyed by local confidence, a large Lebanese diaspora has deposited billions of dollars in the country’s banking system, allowing the central bank much-needed leverage and flexibility. Deposits from the Lebanese diaspora had accounted for as much as 40% of GDP but now, the IMF said, the rate of private sector deposit inflows has fallen below its historical average.

It is a trend that could, unfortunately for Lebanon, consolidate in the years ahead with political uncertainty unlikely to fade away.

When Saad Hariri unexpectedly resigned as prime minister last November, the Lebanese Central Bank’s foreign assets fell $1.6 billion and spreads on Lebanese Eurobonds jumped by as much as 300 basis points as depositors shifted their money into other currencies or even out of the country. A rise of 100 basis points in interest rates, estimates suggest, raise Lebanon’s cost of debt servicing, which eats up half of the government revenue, 7%.

The crisis was short-lived but the increasingly poor state of national finances has increased the risk that Lebanon might not weather a larger shock as well.

For so many reasons Lebanon, however, remains a key area of interest for peace and security in the Middle East and so its economic woes have drawn international attention. More than $11 billion of economic assistance was pledged to Lebanon in April, including $4 billion from the World Bank, $1.3 billion from the European Bank for Reconstruction and Development and the renewal of a $1 billion credit line from Saudi Arabia, conditional on economic reforms such as reducing the budget deficit.

Lebanon may also be in for a hydrocarbon boon. Seismic studies estimate it may hold around 700 billion cubic metres of gas, a game-changing scenario for the country.

Although the commercial viability of Lebanon’s oil and gas reserves are still to be ascertained and even if Israel is disputing rights in some contested waters, Lebanon has put in place agreements for drilling with the likes of Total, Eni and Novatek. Lebanese conditions require 80% of workers employed by exploration and drilling companies be Lebanese in addition to local companies being preferred for support services in the supply chain.

Alas, Lebanon’s economic destiny may not be in its own hands. The outcome of the conflict in Syria will be a major factor to determine the direction of Lebanon’s economy. The severe economic effects of even more refugees and a potential Israeli-Iranian face-off could mean the worst is yet to come.

Alternatively, some form of political settlement would generate a significant role for Lebanon in Syria’s reconstruction, potentially helping it recover from its economic slowdown and be a net gainer, economically speaking.

There is then the Iranian factor to which Hezbollah — and by extension Lebanon — is delicately but intricately linked. Lebanon’s first parliamentary elections in nearly 10 years delivered Hezbollah and its allies its biggest success at the polls while Hariri’s bloc lost almost one-third of its seats.

US-Arab sanctions quickly followed against Hezbollah and, while much remains to be seen about their longer-term effects, observers are watching closely to understand if Hezbollah could be pushed out of Hariri’s new cabinet in the national interest.