IIF: Lebanon’s Economic activity to contract by 24% in 2020, outlook depends on reforms

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It expected external financing to be limited to emergency aid from the conference organized by France and the United Nations on August 9, 2020.

by TK Maloy -Source: Annahar

A shot of the heavily damaged port area. (Annahar /Paula Naufal)

BEIRUT: The Institute of International Finance projected Lebanon’s real GDP to contract by 24% in 2020, following a previous forecast in May 2020 of a contraction of 15%, Lebanon This Week, Byblos Banks economic newsletter reported.

The IIF is a global association of financial institutions and banks.

It attributed the significant downward revision to the recent massive explosion at the Port of Beirut, which took place against the backdrop of the country’s worst economic and financial crisis since its independence in 1943.

It estimated the damage from the explosion to exceed $7bn, or the equivalent of 14% of last year’s GDP. Also, it said that, given the damage to the Port of Beirut, which is the entry point for 75% of Lebanese imports, maritime traffic to and from Lebanon will now increasingly depend on the country’s other two smaller ports in Tripoli and Sidon.

It anticipated that Lebanon’s GDP could shrink from $52bn in 2019 to $33bn in 2020, due to the large contraction in output and the significant depreciation of the Lebanese pound on the parallel market.

Further, it said that the International Monetary Fund, the World Bank, and other official donors have been holding back financial support to Lebanon, mainly due to the repeated failure of the political class to implement much-needed reforms, including the approval by Parliament of the law that guarantees the independence of the judiciary, the appointment of an independent regulatory authority for the electricity sector, as well as the ratification of the public procurement law.

The IIF considered that Lebanese authorities could reach a deal with the IMF by forming a new competent economic team and through concrete support in Parliament for the implementation of critical reforms.

The IIF looked at two scenarios that assess Lebanon’s economic prospects over the medium term. It indicated that Scenario A takes into account significant political change, including the formation of a new government that is independent from sectarian allegiances, followed by early parliamentary elections to defuse an escalating political crisis.

It added that this scenario assumes that authorities will proceed with the implementation of the reforms highlighted by the IMF and included in the government’s economic program. It also stressed that the Lebanese State needs to reduce its footprint in the economy, particularly in the management of key economic sectors such as electricity and telecommunications, as well as allow domestic and foreign private sector participation.

The group noted that discipline and commitment to reforms by authorities will improve domestic and foreign investors’ confidence, as well as pave the way for strong official capital inflows, such as a potential financial package of $8.5bn from the IMF, the $11bn financial package pledged at the CEDRE conference in Paris in 2018, and other financial support from Gulf Council Cooperation countries. Further, it said that under such a scenario, Banque du Liban (BdL) will be able to unify the multiple exchange rates by mid-2021, foreign currency reserves will increase, the economy will recover significantly, the fiscal and external balances will improve, and the public debt level will be on a sustainable downward path.

The IIF assigned a 60% likelihood for the materialization of this scenario.

In parallel, the IIF said that Scenario B assumes modest economic reforms and no major political change. It expected external financing to be limited to emergency aid from the conference organized by France and the United Nations on August 9, 2020. It anticipated that the modest reforms will cause investor confidence to continue to deteriorate.

Under this scenario, it projected the Lebanese pound to further depreciate on the parallel market, which will maintain the inflation rate at high levels and deplete BdL’s liquid foreign currency reserves by the end of 2022.

As a result, it expected the public debt level to remain on an unsustainable upward trajectory, and to be significantly above 120% of GDP by the end of 2024. Scenario B. has a 40% likely hood.

The groups forecast comes on the face of a collapsed government and political chaos, continued high inflation for food supplies and other common goods, and an already ruinous devaluation of the Lebanese Lira.

Any organized assessment of damage to the Port of Beirut or to the decimated sections of East Beirut has yet to begin.

 

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