Overcoming Lebanon’s Economic Crisis
Overcoming Lebanon’s Economic Crisis
Lebanon faces an unprecedented economic crisis, marked by a collapsing currency, soaring inflation, and a devastated banking sector. Work is required to mend the system and lift people out of poverty. Years of political instability and economic mismanagement have brought the nation to the brink of ruin, impacting millions.
Origins of the Crisis
Political Instability
Lebanon has faced leadership vacuums without a president in 1988, 2007, 2016, and 2022 after the end of the most recent president’s tenure. In June 2023, parliament failed to elect a president for the 12th time, prolonging a resolution. This creates a lack of direction, causing uncertainties among citizens and laying the groundwork for mismanagement.
Debt Overload
Lebanon has a debt-to-GDP ratio of 283%, one of the highest globally (Chart 1). This indicates that Lebanon’s economic output is not keeping up with its financial obligations, stressing the treasury thin and forcing spending cuts and further borrowing, perpetuating the cycle.
Chart 1 | Lebanon Debt-to-GDP
Currency Collapse
The Lebanese pound has lost over 90% of its value since 2019 as inflation hit a high of 221.3% in 2023 (Chart 2). Therefore, citizens have been using the US dollar as their currency, although over 90% of the population still earns their income in pounds. People are squeezed, causing unaffordability and unemployment.
Chart 2 | Lebanon Inflation Rate
Breaking Point
The final straw was the Beirut port explosion in August 2020, which caused damages up to $4.6 billion, with another estimate being as high as $15 billion. This strained resources on top of the pandemic struggles, causing additional unemployment and financial difficulties, as well as a continued decline in GDP (Chart 3).
Chart 3 | Lebanon Gross Domestic Product
Relief Measures
Foreign Aid
In August 2021, the United States announced an additional $100 million in aid to provide basic human needs and alleviate pandemic strains and the economic fallout of the explosion. Similarly, in March 2023, the EU announced €60 million of aid for the 4 million people in need. Around 80% of the Lebanese population lives in poverty, with 36% living in extreme poverty.
Solutions Needed
Banking Reforms
Although the interim central bank governor urged the government to make changes, the IMF says that the country’s economic reforms are insufficient. Bank deposits remain inaccessible, and credit has dried up, preventing a recovery. Reforms need to speed up and be consistent with global standards of deposits and lending.
Debt Management
The government needs to address its debt. In 2020, it defaulted on its obligations. As debt is mostly denominated in foreign currency, the reserves of the central bank have been declining as debt is serviced and inflows decline (Chart 4). Gold reserves have been rising, likely to preserve value.
Chart 4 | Banque du Liban Reserves
Recommendations
Create an Economic Vision
To overcome its economic crisis, Lebanon must establish a clear and comprehensive economic vision that promotes sustainable growth and stability and set a deadline for it. Priority areas include debt reduction, ensuring citizens can access deposits, using foreign aid for its intended purpose, and stabilizing the currency. Ensuring good governance will build public trust and attract foreign investment.
Address Brain Drain
Almost 80% of citizens surveyed considered leaving Lebanon, according to one study. The outflow of people can significantly hurt recovery efforts as labor exits. The country must retain its population by addressing local needs, such as education, healthcare, and jobs.
Facilitate Business
On average, it takes 15 days to establish a corporation in Lebanon with 15 or more employees, with no online option available. Registration is cumbersome and certification of documents is costly. Policymakers should expedite the registration process to allow domestic and foreign companies to prosper and grow the economy.
Develop Partnerships
Strengthening regional and international partnerships is crucial for Lebanon's economic recovery. Collaborating with neighboring countries and global partners can enhance trade opportunities, attract investment, and provide access to vital financial and technical assistance.
Participating in regional economic initiatives will help reintegrate Lebanon into the global economy, boosting exports and creating jobs. Additionally, seeking support from international financial institutions and development agencies can provide much-needed funding and expertise.
