World Bank: Lebanon’s GDP to contract 9.5% in 2021

Lebanon’s economy has sunk into a deep recession and experienced its worst hyperinflation as the main political parties still bicker over the formation of the new Cabinet

  
The skyline of Beirut is seen during sunset, amid the coronavirus disease (COVID-19) outbreak, in Dbayeh, Lebanon, January 22, 2021.

The skyline of Beirut is seen during sunset, amid the coronavirus disease (COVID-19) outbreak, in Dbayeh, Lebanon, January 22, 2021.

REUTERS/Mohamed Azakir

BEIRUT: The World Bank projected that Lebanon’s GDP to contract by 9.5 percent in 2021 due to various political and economic factors.

“Subject to unusually high uncertainty, we project real GDP to contract by a further 9.5 percent in 2021. Our projection assumes that COVID-19 effects carry through 2021, while macro policy responses remain inadequate. We also assume a minimum level of stability on the political and security scenes (i.e. formation of government) and refrain from assuming runaway inflation-depreciation, which is a realistic scenario,” the World Bank said in a new report released Monday.

Lebanon’s economy has sunk into a deep recession and experienced its worst hyperinflation as the main political parties still bicker over the formation of the new Cabinet.

The World Bank feared that Lebanon’s recession is likely to be arduous and prolonged given the lack of policymaking leadership and reforms. Lebanon’s GDP/capita has fallen by around 40 percent over the 2018-2020 periods and is expected to decline further.

“Hence, Lebanon’s World Bank income classification is likely to be downgraded from an upper middle income economy, which should enjoy a GNI per capita of between $4,046 and $12,535—to a lower-middle income status,” the report said.

It stressed that macroeconomic stabilization is a key prior action for Lebanon’s recovery process. “This necessarily includes comprehensive restructurings of the public debt and the financial sector, a new monetary policy framework and a fiscal adjustment program,” the report explained.

It noted that discussions with the IMF have stalled and remain at the diagnostic stage.

A contraction of real GDP per capita and high inflation in 2020 will undoubtedly result in substantial increase in poverty rates affecting all groups of the population in Lebanon through different channels such as loss of productive employment, decline in real purchasing power, and so forth, the World Bank warned.

“Tracking population well-being on a regular basis and protecting the poor and the most vulnerable is an urgent priority for the country. Lebanon also continues to host the largest number of refugees on a per capita basis globally. With poverty levels exceeding those of the host population, their vulnerability has increased with the compounding effects of the economic and health crises in the country.”

The World Bank indicated that Lebanon is enduring a severe and prolonged economic depression in part due to inadequate policy responses to an assailment of compounded crises—the country’s largest peace-time financial crisis, COVID-19 and the port of Beirut explosion.

Real GDP growth contracted by 20.3 percent in 2020 while inflation reached triple digits and the exchange rate keeps losing value. Poverty is rising sharply.

Lebanon lacks a fully functioning executive authority as it attempts to form its third government in a little over a year.

“Monetary and financial turmoil continue to drive crisis conditions, with interactions between the exchange rate, narrow money and inflation a key dynamic. A multiple exchange rate system includes the official exchange (LL 1,515/$), Central Bank (BDL)-backed lower rates for critical imports, as well as a highly volatile US$ bank-note exchange rate,” the report said.

It added that the banknote rate depreciated by about 50 percent over March 12-16, 2021.

Overall, the World Bank Average Exchange Rate (AER) depreciated by 129 percent in 2020.

Currency in circulation (CIC) surged by 227 percent, while inflation rates are in the triple digits, averaging 84.3 percent in 2020. “Regression estimates suggest a coefficient of 0.8 for the impact of growth in CIC on inflation. The banking sector, which informally adopted severe capital controls, has ceased lending and does not attract deposits.”

The World Bank said that deleveraging is also facilitated by netting out bank positions between assets (loans) and liabilities (deposits).

The burden of the ongoing adjustment/deleveraging is highly regressive concentrated on the smaller depositors and SMEs.

“The social impact, which is already dire, could become catastrophic; more than half the population is likely below the upper income poverty line, higher shares of households are facing challenges in accessing food, health care and other basic services and unemployment is on the rise.”

Inflationary effects are highly regressive factors, disproportionally affecting the poor and middle class.

Inflation in the food and nonalcoholic beverages category averaged 254 percent in 2020 and has been a key driver of overall inflation.

“Those paid in lira—the bulk of the labor force—is seeing potent purchasing power declines. Phone surveys conducted in November-December by the World Food Program found that 41 percent of households reported challenges in accessing food and other basic needs.”

The share of households having difficulties in accessing health care rose from 25 percent (July-Aug.) to 36 percent (Nov.-Dec.).

According to the report, the unemployment rate also rose among the respondents, from 28 percent in February (pre-COVID) to nearly 40 percent in Nov-Dec.

Violent street action has erupted across the country even under COVID conditions. Real GDP is estimated to have declined by 20.3 percent in 2020.

High frequency indicators support a substantial contraction in economic activity.

The BLOM-PMI index, which captures private sector activity, averaged 41.1 in 2020 (

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