The uncertain road from a debt overhang to a new growth path
AUTHORS:
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Ishac Diwan, Research Director, Finance for Development Lab
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Henri Chaoul, Managing Partner, Levantine Partners
In partnership with:
Lebanon’s economy, mined with structural faults for decades, has been collapsing since 2019. GDP per capita has seen a significant decline from around $11,000 in 2018 to less than $4,000 in 2022 – one of the harsher economic adjustments ever experienced in a country not at war. By early 2023, the country was mired in: a debt crisis, with debt to GDP exceeding 180%; a banking crisis with depositors unable to access their funds; and a balance of payment crisis with the national currency depreciating by 98%. The pillars of the economy - tourism, education, healthcare - have experienced massive business closures and brain-drain.
Three successive governments have done little to stabilize the situation. The descent continues, now at a slower pace. Even if the economy stabilizes, the current path remains catastrophic for the future. The middle class is disappearing, corporate, human, and financial capital are evaporating, and infrastructure is decaying. The country is at risk of being stuck in a deep poverty trap, despite its rich potential.
A new FDL/ERF paper provides an account of the 2019 financial crisis in Lebanon. It then analyses a series of related questions. First, it considers the historical background and asks how the crisis could have been averted. Second, it reviews economic developments post-crisis and asks why it has been so severe. Third, it reviews the policy recommendations suggested to exit the crisis and asks if they need to be updated in view of recent developments. Fourth, it offers a vision of a new growth path for Lebanon, and it examines the implications for a recovery strategy. Finally, it discusses a revised donors’ strategy more adapted to current circumstances.
The full version of the FDL/ERF Policy Paper will be published here soon. In the meantime, a brief summary of the main findings is available here:
- The deep reason behind the Lebanese financial crisis is a currency peg maintained for too long. The collapse of the old model of living on the capital account is a rare occasion to rebuild the economy on a firmer more productive and sustainable footing.
- The depth and length of the current crisis is due to the unwillingness of the political elites to distribute losses and clean up the financial system. With no access to loans, firms have been unable to shift production to export. Capital flight has exacerbated the crisis.
- Besides the ongoing financial crisis, the social crisis, and the crisis of the state are equally damaging and require attention. This creates difficult financial trade-offs. But each of these crises can block a recovery if left unattended.
- A big push is the best way to exit the three crises simultaneously. This requires a convincing national program with broad national support and large external funding – a politically challenging task in current circumstances.
- In the meanwhile, a more balanced donor strategy is needed, included an effort to protect basic services, to keep the possibility of a revival of the Lebanese economy alive.