World Bank warns:
Lebanon is sinking

One of the top three crises in 170 years

Lebanon Economic Monitor-Spring 2021

GDP is projected to contract by a further 9.5 percent in 2021 under extraordinarily high uncertainty after shrinking by an estimated 20 percent last year, the World Bank said in its ‘Lebanon Economic Monitor (LEM)’ for the spring of 2021.

“The Lebanon financial and economic crisis is likely to rank in the top ten, possibly top three, most severe crises episodes globally since the mid-nineteenth century,” read the ‘Lebanon Sinking (To the Top 3)’ LEM. It said that the recession is likely to remain arduous and to linger “given the lack of policymaking leadership and reforms.”

“Lebanon faces a dangerous depletion of resources, including human capital, and high skilled labor is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “Only a reform minded government, which embarks upon a credible path toward economic and financial recovery, while working closely with all stakeholders, can reverse further sinking of Lebanon and prevent more national fragmentation,” he said.

GDP had plunged to $33 billion in 2020 from $55 billion in 2018. GDP per capita plummeted by around 40 percent over the years 2018-2020. It is expected to decline further. According to the World Bank income classification, the country would be downgraded from an upper-middle income economy to a lower-middle income status.

“Such a brutal and rapid contraction is usually associated with conflicts or wars. Even prior, the World Bank has long identified Lebanon as a ‘Fragility, Conflict & Violence’ (FCV) state, and as such, the dire socio-economic conditions risk systemic national failings with regional and potentially global consequences,” the World Bank said.

The social impact of the crisis could rapidly become catastrophic as more than half the population is likely below the national poverty line. A survey by the World Food Program conducted at the end of 2020 had shown that 41 percent of households reported challenges.

The country’s fiscal position is expected to deteriorate further compared with 2020 as revenues are estimated to have dropped sharply driven by the severe economic contraction. “The fiscal trajectory is contingent on the Central Bank (BDL) having sufficient reserves to continue to finance the government,” according to the report. It said: “An ostensible improvement in some fiscal indicators (as a percentage of GDP) masks an actual deterioration.”

The foreign exchange subsidy that is being provided by BDL is distortionary, expensive, and regressive, according to the report. “Its elimination and possible replacement with a more effective and efficient pro-poor (targeted) program would improve Lebanon’s balance of payments, meaningfully extend the time-till-exhaustion of remaining BDL reserves, and help cushion the impact on Lebanon’s poor and middle class,” the World Bank said. If BDL unilaterally halts the subsidy without adequate coordination with the political and security authorities, it will carry the political cost while the political class may pass on the blame and feel somewhat relieved, according to the report.