Lebanon¡¯s macroeconomy is in dire straits due to compounded crises. On October 2019, the economy plunged into a financial crisis brought about by a sudden stop in capital inflows, which precipitated banking, debt (including sovereign default) and exchange rate crises. End-March 2020, the Government imposed a lockdown to counter COVID-19. Lastly, on August 4, 2020, a massive explosion rocked the Port of Beirut (PoB), destroying much of the port and severely damaging the dense residential and commercial areas within a 1- to 2-mile radius. Lebanon is in its third government in less than a year.
Real GDP is projected to decline by 19.2% in 2020. High frequency indicators support such a substantial contraction in economic activity. Subject to unusually high uncertainty, real GDP is projected to contract by a further 13.2% in 2021. This projection assumes the following key factors: COVID-19 effects carry through H1-2021, macro policy responses continue to be absent, and limited reconstruction and recovery efforts in the aftermath of the PoB explosion. We are not assuming runaway inflation, but it is a realistic downside risk.
Lebanon¡¯s recession is likely to be arduous and prolonged given the lack of policymaking leadership. Exchange market pressures will continue to stifle trade finance and corporate finance in the highly dollarized economy, constraining the importation of capital and final goods, and inducing disruptions all along the supply chain. This implies an inability to tap international markets for foreign financing, and an impaired banking system. As a result, capital controls will continue to be needed, but are also projected to become less effective over time, in line with international evidence.
Macroeconomic stabilization is a key prior action for Lebanon¡¯s recovery process. This necessitates a credible strategy that identifies measures along a number of dimensions, especially, the external, fiscal and financial sectors, social safety nets, a growth framework and the governance deficiency. A key risk is hyperinflationary. The Social impact already dire, could become catastrophic; half the population is falling below the poverty line, unemployment is rising rapidly. Currency deterioration and the resulting inflationary effects are highly regressive factors, disproportionally affecting the poor and middle class.