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Lebanon economic recovery postponed

4 June 2024

 

The visit to Lebanon by the IMF in May reveals a stark picture of an economy now in its fifth year of intense turmoil following its October 2019 exchange rate collapse, and one which now faces significant additional headwinds.

The IMF’s end-of-mission statement identified a lack of action on economic reforms as exerting a heavy economic toll, while flagging negative spillovers from fighting on the country’s southern border as an exacerbating factor for the already dire economic and social situation.

Yet, despite this apparent dismal assessment, Lebanon can legitimately claim to have turned a corner last year.

Implementing monetary and fiscal reforms has seen the phasing out of monetary financing, the termination of the electronic foreign exchange platform, tighter fiscal policy, and steps towards the unification of exchange rates.

These measures have helped contain exchange rate depreciation, stabilise the money supply and reduce inflationary pressure, the IMF said.

Nassib Ghobril, chief economist at Beirut-based Byblos Bank, agrees. “Last year was a very good year for Lebanon, the first year where the economy was on track to post a positive growth rate since 2017,” he says.

After the first nine months of 2023, Ghobril’s forecast for real GDP growth was 2%, driven by stellar tourism activity that so far that year had produced knock-on benefits for 14 sub-sectors, in addition to improved activity in the wider industrial, agricultural and services sectors.

“And then 7 October and 8 October happened, and that created a shock that put a hold on this momentum — and that’s continuing,” he says.

Contingent growth

Lebanon’s economic outlook now hinges largely on the outcome of the conflict in Gaza and the related violence between Hezbollah and the Israeli Defence Forces, which has forced widespread displacement of the southern population, besides disrupting agriculture and tourism.

Looking ahead, Ghobril predicts a continuation of the current status quo, which would result in a real GDP contraction of 0.5-1% in 2024, at 40% probability. If the conflict expands – also a 40% probability – then it could realise a more serious contraction of 15-20%.

On the other hand, says Ghobril, in a ceasefire scenario, which he puts at 20% probability, “the sooner it happens, we would have a rebound in growth based on the positive shock, the reconstruction of the south and better visibility”.

Tourism revival, important to Lebanon as a hard currency generator, is highly contingent on a stable security situation, even beyond the southern areas most impacted by the fighting.

Minister of Economy and Trade Amin Salam warned in February that it was unclear if visitors from the Lebanese diaspora and elsewhere, who injected about $5-7bn into the economy last summer, would come to the country this season. In Q1 2024, total passenger numbers at Beirut International airport decreased by 6.7% in year-on-year terms to 1.27 million, according to Banque Audi figures.

The conflict’s direct impact on the south has been stark. According to Banque Audi, more than 6,000 acres of forest and agricultural land have been damaged, up to 2,100 acres completely burned, and more than 60,000 olive trees destroyed.

Meanwhile, an estimated 93,000 people have been internally displaced, contributing to an estimated 75% decline in economic activity in the south. The sense that the Israel-Hamas war has stunted Lebanon’s recovery is hard to avoid, rolling back the progress seen in 2023.

Fiscal stabilisation

The IMF has nevertheless lauded the government’s measures to boost revenue collection from VAT and customs, which it said helped close the fiscal deficit to zero last year.

“Looking ahead, we anticipate the fiscal balance to remain close to zero in 2024, on limited financing options and improved revenue collection permitted by the exchange rate adjustment on custom duties and VAT. CPI inflation is expected to stabilise on lower unsterilised interventions of Banque du Liban,” says Thomas Garreau, an analyst at Fitch Ratings.

Balancing current spending looked to be within reach. The government’s budgeted figures for 2024 envisage public spending amounting to $3.4bn, matched by public revenues of $3.4bn, despite an increase in public sector wages of $40m a month.

Exchange rate stabilisation is a clear win for Lebanon. The pound has been stable at £Leb89,500 to the dollar since the end of July 2023 despite multiple security incidents not related to the conflict in the south of the country.

“That’s still ongoing because the central bank managed last year to sterilise liquidity and Lebanese pounds from the market to reduce the differential between the quasi-official exchange rate of the central bank and the parallel market rate, and to stop the speculation on the currency. So it managed to stop the depreciation of the currency,” says Ghobril.

Foreign exchange reserves, which eroded heavily in the post-2019 crisis period, appear to have steadied. The liquid foreign assets of the central Banque du Liban grew by $382m in Q1 2014, reaching $9.6bn.

As Banque Audi notes, the cumulative growth of $1bn in the central bank’s liquid foreign assets since the end of July 2023 is mostly linked to its refraining from any government finance.

Yet the more lasting changes needed to shift the dial on Lebanon’s economic narrative remain elusive.

Bank deposits are frozen, notes the IMF, and the banking sector is unable to provide credit to the economy, as the government and parliament have been unable to find a solution to the sector’s crisis.

Addressing the banks’ losses while protecting depositors is seen as indispensable to economic recovery.

It does not help that the country has been without a president since October 2022, leaving caretaker Prime Minister Najib Mikati without a full mandate to undertake reforms.

This matters because banking system recovery hinges on political will to implement reforms. Yet the vacuum at the presidential palace leaves little prospect of imminent progress on this front.

“Despite some politicians’ comments, I do not see prospects of an end to the political deadlock as long as the war is ongoing in the south. And even if it suddenly stopped, you would need several months for an overall settlement to materialise on the domestic political front,” says Ghobirl.

The present situation leaves Lebanon politically and economically hobbled, with fears of worse to come due to external events beyond its control.

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James Gavin

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    In a region where geopolitical turbulence has amplified by an order of magnitude, Jordan is managing to stand out as a beacon of relative stability, with the Hashemite kingdom’s banking sector acting as a case in point.

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    Liquidity banked

    Jordan’s banks look able to withstand further shocks, given solid capital positions and relatively strong earnings performances. Arab Bank, the largest lender, saw net profits grow 12% last year to $1.13bn, despite a highly charged geopolitical situation across Jordan and the neighbouring Palestinian territories.

    As Moody’s notes, Jordanian banks’ funding base remains stable, with banks mainly deposit-funded – with deposits at 67% of total assets as of December 2025 – mostly comprising well-diversified retail deposits. The ratings agency noted that banks retain the capacity to increase lending without relying on more volatile and costly external funding, as indicated by the 72% loan-to-deposit ratio.

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    “Profits should remain resilient, but we’re not expecting any significant improvement,” says Theofilou. “We have the challenging operating conditions, and the lower interest rates that have come down over the past few years. On the other hand, banks have had lower provisioning in the past 12 to 18 months compared to the period prior to that.”

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    “If we see a lot of these infrastructure projects requiring financing coming to the market, then we could see a bit of a pickup in lending growth as well,” says Theofilou.

    New lending opportunities will come from large corporates and infrastructure-related lending. Those will play the key role in any significant pickup in credit growth, says the Moody’s analyst, in contrast to the small- and medium-enterprise (SME) sector, which poses a different challenge for banks.

    “The SME segment does represent a potential growth opportunity and it’s supported by policy focus, however its expansion is constrained by the operating environment. The sector is exposed to high overall credit risks, and when conditions are challenging, banks tend to be more cautious in lending to the SME markets,” says Theofilou.

    So long as the regional conflict persists, banks will be inclined more towards caution than exuberance in their lending approaches. And yet that strong and stable inclination may be what serves them best in a notably turbulent year in the Middle East’s recent history.

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