Bank Audi sees crisis exit
conditional on will to reform

Annual report: $8.8 billion needed in funding

Exit from the current crisis is still possible and a soft-landing is still plausible if reform measures are implemented, according to a new report by Bank Audi. The country needs $8.8 billion in financing or ten times the International Monetary Fund (IMF)’s ceiling for Lebanon.

Bank Audi said in its fourth quarter ‘Lebanon Economic Report’: “Figures are still manageable at this point if a will proves to be there. If reforms are adequately implemented, Lebanon can still move into an era of gradual containment of risks and threats as a prerequisite for economic recovery in the medium to long term.”

According to the report, the new Cabinet has to address five main macro priority issues.

The first one consists of external adjustment to face the rise in imbalances exacerbated by a significant drop in inflows driven by the informal capital controls.

The second issue is to adjust public finance which is the most significant economic vulnerability at present. “While the fiscal deficit managed to decline in 2019 from its record high in 2018, the last few months of the year show circa 40 percent of revenue forgone amid recent political developments, derailing deficit to GDP from its budgeted target of 7.6 percent,” Bank Audi said.

The third adjustment pertains to monetary issues with the anticipated drop in the Central Bank’s reserves in light of substantial financing needs in foreign currencies. According to the report, Lebanon needs to secure funding from the IMF worth $8.8 billion which is equivalent to ten times its $880 million quota to Lebanon, to be disbursed on a quarterly basis starting 2021. BDL reserves are expected to undergo a sharp contraction in 2020 driven by foreign currency deficit financing and settlement of imports of basic products but could begin to recover starting 2021, the bank said.

The fourth issue to be addressed is at the level of banks. It consists of harmonizing the de facto capital control measures taken by the banks and carrying out further cuts in interest rates. “Such a move will ensure fairness and equal rights among depositors and at the same time an adequate legislative coverage for Lebanese banks,” the report said.

The fifth concern that the Cabinet must tackle is economic growth and job creation. “Lebanon’s economy has moved into a recessionary mode, with net contractions across a number of sectors of economic activity, especially in the aftermath of the October 17 nationwide developments. The so-called defensive sectors of Lebanon’s economy now start to lose steam, while the vulnerable sectors went further in the red,” the report said. BDL’s coincident indicator, a weighted average of the performance of a number of economic sectors, contracted by 4.3 percent year-on-year in the first eleven months of 2019 which shows that the economy was on the brink of recession. This compares with an average growth of 3.7 percent over the previous three years. “The real sector economy actually worsened further in the last couple of months of the year in the aftermath of the recent political developments,” Bank Audi said.