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ViewpointOctober 9 2020

Overcoming Lebanon's economic crisis

Lebanon’s financial and economic crises can only be solved with meaningful reform, without which it faces a lost decade of mass migration, social and political unrest and violence.
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Violence and crises have shattered Lebanon’s pre-1975 civil war standing as the banking and financial centre of the Middle East. The country is currently engulfed in overlapping fiscal, debt, banking, currency and balance of payments crises, resulting in an economic depression and humanitarian crisis, with poverty and food poverty affecting some 50% and 25%, respectively, of the population. The Lebanese pound (LBP) has depreciated by some 80% over the past year; inflation is running at 120%, with hyperinflation a worrying prospect. The horrendous explosion at the Port of Beirut, combined with the Covid-19 lockdown, has created an apocalyptic landscape, aggravating these crises further. The cost of rebuilding, following the explosion, is estimated to exceed $10bn – more than 25% of current gross domestic product (GDP) – which Lebanon is incapable of financing. 

The economic and financial meltdown the country is facing marks the culmination of long-running unsustainable fiscal and monetary policies, combined with an overvalued fixed exchange rate. Persistently large budget deficits (averaging 8.6% of GDP over the past 10 years), structural budget rigidities, an eroding revenue base, wasteful subsidies and government procurement riddled with endemic corruption, have all exacerbated fiscal imbalances.

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