Lebanon’s economic crisis shows few signs of abating. The value of the Lebanese pound continues to decline on the parallel market amid plummeting confidence in the government’s ability to resolve the country’s economic and financial difficulties or to attract financial support that could start to reverse the collapse.
A recent diplomatic rift with Lebanon’s traditional Gulf Arab backers makes the prospect of relief even more distant. The decline in the Lebanese pound’s value against the US dollar has stoked massive inflation that has further impoverished Lebanese residents, whose purchasing power has been decimated. Many now struggle to pay for ever more expensive goods and services including fuel, transport and food, and we expect Lebanon’s crisis to extend well into 2022.
Since end‑2019 the Lebanese pound has lost more than 90% of its value on the black market, and the currency remains highly unstable. Officially, it remains pegged to the US dollar at L£1,507.5:US$1; banks transact at a parallel rate of L£3,900:US$1, but this is a for a limited supply of dollars, and the main black‑market rate is far weaker. This means that even at the bank parallel rate of L£3,900:US$1, foreign‑currency savers are losing about 80‑90% of the value of their holdings if they withdraw funds.
The formation of a new government in September briefly improved confidence in the pound on the black market, with the currency strengthening to about L£15,000:US$1 over this period. However, the gains proved short‑lived, given the lifting of all fuel subsidies in mid‑October, ongoing political instability and rising sectarian and social friction, as well as a diplomatic dispute with Saudi Arabia. A deal between Banque du Liban (the central bank) and the Ministry of Economy and Trade to reimburse subsidised food imports, which began in May 2020, at a higher rate rate than importers originally paid is also putting pressure on the currency by depleting the country’s foreign reserves. At the beginning of November the exchange rate hovered at about L£20,800‑21,000:US$1. The lack of clarity over economic policy and ongoing instability suggest that currency volatility—and with it hyperinflation—will prevail for some time.
Hyperinflation continues
Prices for goods and services are rising—with consumer price inflation (CPI) reaching 144.1% year‑on‑year in September—while salaries continue to be paid at the official exchange rate and commercial banks restrict access to US dollar savings (for those that have them). The purchasing power of most Lebanese residents is therefore, in essence, non‑existent. Prices for basic goods have risen the most in recent months, affecting those on low or fixed incomes most severely. According to CPI data, between August and September food prices rose by 9.31%, prices for water, electricity, gas and other fuels rose by 18.86% and transport costs rose by 31.29%.
Fuel shortages and price increases have worsened the food crisis. With fuel already in short supply locally and with global demand high (leading to a surge in international oil prices), the end of subsidies in October caused the price of fuel to spike; a tank of petrol for a car now costs more than the country’s monthly minimum wage. Higher fuel costs have also driven up the price of food as the cost of producing electricity via private generators to maintain produce, and the fuel to fill the trucks to deliver it, has surged and shows no signs of declining soon.
Economic spiral to be difficult to escape
The country’s economic spiral is set to continue in the short term as Lebanon’s internal political squabbling and the increased prominence of Hizbullah causes international concern among donors and traditional allies. Potential foreign backers and multilateral agencies have continued to emphasise the need for Lebanon to enact reforms and show greater institutional oversight for how funds are allocated before a programme and disbursements can begin.
Lebanon seems to be locked in a spiral in which potential backers await signs of effort at stabilisation even as the lack of confidence and of hard-currency inflows further stokes negative sentiment toward the Lebanese pound. The continued battering of the pound in turn makes it difficult for the government of the prime minister, Najib Mikati, to enact any policy that can stem the economic crisis. After initial hopes when it took office in September that it would help to kick‑start a transition towards economic stabilisation, Mr Mikati’s government has been plagued by crises that have threatened to to topple it. These have been both domestic and, more recently, international, given the impact of Saudi Arabia’s anger over a Lebanese government minister’s critical comments about Saudi involvement in the war in Yemen.
New initiatives that could begin to alleviate conditions for the public are meanwhile being held up. Two long‑awaited social assistance programmes that are designed to provide aid to impoverished Lebanese and blunt the effects of rising costs have yet to be authorised and function. The first, the Emergency Social Safety Net loan, a US$246m World Bank-funded programme to provide cash to needy households, was approved by the multilateral organisation in January 2021. However, the deadlocked Lebanese parliament has yet to approve the law authorising it; the law was supposed to be considered in the late October parliamentary session, but was not, leaving the programme in limbo.
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The second programme, a “ration card” initiative, was proposed by the previous interim government, led by Hassan Diab. Under the cash assistance programme an estimated US$556m would be transferred to those eligible; however, it has been beset by delays and debates over funding and eligibility criteria. Beneficiaries were supposed to begin registering in mid‑September and the programme was supposed to be approved by the time subsidies were lifted weeks later, to blunt the impact of the move.
Ultimately, with no programme in place, subsidies removed, currency devaluation continuing and shortages of fuel, water, foodstuffs, and electricity ongoing, much of Lebanon’s population has been left in an even more precarious position than they were in September. There appears to be no clear path out of the crisis, and we do not expect meaningful international support to be forthcoming before elections are held and a new government is in place, which will be well into 2022 at the earliest.
