Lebanon is in a Deliberate Depression with Unprecedented Consequences for its Human Capital, Stability

A new World Bank report analyses the root causes of Lebanon’s ongoing social and economic crises and calls for formation of a reform-minded government to urgently implement a comprehensive reform agenda.

Beirut, December 1, 2020 – A year into Lebanon’s severe economic crisis, deliberate lack of effective policy action by authorities has subjected the economy to an arduous and prolonged depression, according to the World Bank Lebanon Economic Monitor (LEM) released today. Lebanon is suffering from a dangerous depletion of resources, including human capital, with brain drain becoming an increasingly desperate option. The harsh burden of financial adjustment is particularly focused on smaller depositors who lack other sources of savings, the local labor force that is paid in Lebanese Lira, and smaller businesses.

The Fall 2020 edition of the LEM, “The Deliberate Depression”, discusses recent economic developments, analyses the various elements of the crisis, and presents an overview of the country’s economic outlook and possible risks. For over a year, Lebanon’s macroeconomy has been assailed by compounded crises, beginning with an economic and financial crisis, followed by COVID-19 and lastly the explosion at the Port of Beirut. Of the three crises, the economic crisis has had-by far-the largest and most persistent negative impact. Real GDP growth is projected to sharply decelerate to -19.2 percent in 2020, on the back of a -6.7 percent contraction in 2019. The collapse of Lebanon’s currency has led to triple-digit inflation rates. Inflation acts as a highly regressive tax, affecting the poor and vulnerable disproportionately, as well as people on fixed incomes such as pensioners. The sudden stop in capital inflows has implied a steady depletion of foreign exchange reserves at Banque du Liban (BdL). De facto lirafication and haircuts on dollar deposits are ongoing, despite the official commitment of BdL and commercial banks to safeguard deposits.

Poverty is likely to continue to worsen, engulfing more than half of the population. A contraction of the Lebanese GDP per capita in real terms and high inflation will undoubtedly result in a substantial increase in poverty rates and will affect the population through different channels such as the loss of productive employment, decline in real purchasing power, and stalled international remittance. High skilled labor is increasingly likely to take up potential opportunities abroad, constituting a permanent social and economic loss for the country.

“Lack of political consensus on national priorities severely impedes Lebanon’s ability to implement long-term and visionary development policies”, said Saroj Kumar Jha, World Bank Mashreq Regional Director. “A new Government needs to quickly implement a credible macroeconomic stabilization strategy with short-term measures to contain the crisis, as well as medium- to long-term measures to address structural challenges. This is imperative to restore the confidence of the people of Lebanon-particularly the youth-who have, time and again, shown resilience in the face of hardship, but who are currently suffering from the regressive burden of financial adjustments.”

Authorities have disagreed between themselves on the assessment, diagnosis, and solutions for the crisis. The result has been a slew of uncoordinated, non-comprehensive, and insufficient policy measures that have worsened economic and social conditions. Government has failed to formalize a fiscal policy consistent with a credible medium-term macroeconomic framework. The banking sector has been advocating a bailout of the financial sector which is inconsistent with the restructuring principles that protect taxpayers. Monetary authorities have failed to address the exchange rate crisis and high inflationary conditions. Government has yet to introduce necessary poverty alleviation measures to deal with the social implications of the crises on poor and vulnerable households through enhancing social safety nets.

As the Lebanon Economic Monitor shows, in the lead up to the economic crisis, Lebanon’s macroeconomic fundamentals were weak compared to select groups of global crises comparators. Therefore, the adjustment process is expected to be more challenging, even with optimal policy measures in place. One year into the economic crisis, such policies have not yet been decided, let alone implemented. As a result, Lebanon’s economic crisis is likely to be both deeper and longer than most economic crises.

Over the medium term, Lebanon will have to prioritize building better institutions, good governance, and a better business environment alongside physical reconstruction. However, given Lebanon’s state of insolvency and its lack of adequate foreign exchange reserves, international aid and private investment will be essential for comprehensive recovery and reconstruction. The extent and speed to which aid and investments are mobilized will depend on whether the authorities and the Parliament can swiftly act on much needed fiscal, financial, social, and governance reforms. Without reforms, there can be no sustainable recovery and reconstruction, and the social and economic situation will continue to worsen.

The Special Focus of the LEM puts forth a comprehensive reform agenda for discussion. The proposed agenda aims to address the root causes of the economic crisis and could set the stage for a more equitable, efficient, and resilient economy. To do so, the agenda puts governance and accountability reforms at the forefront, alongside macroeconomic stabilization as it seeks to rebuild trust.

The proposed reform agenda compromises five pillars: I) A Macroeconomic Stabilization Program; II) A Governance and Accountability Reform Package; III) An Infrastructure Development Reform Package; IV) An Economic Opportunities Reform Package; and V) A Human Capital Development Reform Package. The agenda has one pre-requisite: the commitment of Lebanese policymakers to rebuild a more productive, equitable, and resilient economy.

This Special Focus of the LEM is meant to feed into an open discussion among the Lebanese people and between them and their government. Its aim is to contribute to the debate that must take place on the path out of the ongoing crisis, the sequencing of reforms, and the long-term development vision – all of which are connected, and all of which require financing. Before any financing for an economic recovery can take place, however, Lebanon must restore the trust between government and citizens, between government and investors, and between government and donors.

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