World Economy

Lebanon Crisis Worsening

Lebanon Crisis Worsening Lebanon Crisis Worsening

Lebanon is in a state of economic paralysis. Crippled by political stalemate (the country has been without a president for two years), an inundation of refugees combined with a region-wide economic slowdown and a subsequent drop in remittances from its sizeable diaspora has hit a nation powerless to implement the reforms needed to change course.

The World Bank’s Spring 2016 Middle East and North Africa Economic Monitor puts Lebanon’s real gross domestic product growth last year at a “sluggish” 1.5%, downgraded from earlier estimates following an unexpected decline in economic activity in the third quarter, when thousands of people held prolonged protests over a rubbish crisis in Beirut that epitomized the country’s gridlock, Arabian Business reported.

Lebanon’s central bank, Banque du Liban, renewed a $1 billion stimulus package to shore up parts of the economy, in particular boosting tourism and private lending, said the World Bank.

However, the addition of 1.5 million Syrian refugees (according to the UN refugee agency UNHCR) is estimated to have cost Lebanon $7.5 billion since 2011, the World Bank claims, and the country’s historically healthy reserves are shrinking as it seeks to compensate for external drains on its resources.

Official figures show total assets in Banque du Liban stood at $95 billion as of May 15, 2016, while the debt-to-GDP ratio climbed to 148.7% in 2015, according to the World Bank.

  Downward Trend

Relations are souring with the (Persian) Gulf Cooperation Council states (comprising Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) and are expected to compound the situation.

Experts warn that as the Syrian crisis intensifies, and with it mounting tensions in Lebanon and elsewhere, the knock-on impact will be severe and growth could slow further to 1% or less in 2016.

“All the key indicators point to a downward trend,” says Keren Uziyel, an analyst and country risk service manager for MENA at the Economist Intelligence Unit.

“The uncertain domestic political scene and spillover from Syria’s civil war will continue to hinder investment, construction, financial services and private consumption.

“In the near term, low oil prices and the recent deterioration in relations with (P)GCC countries will further retard economic growth, owing to the negative impact on tourism and reduced financial inflows, including remittances and deposits from overseas. We expect growth to slow to just 0.7% in 2016 and make only a weak recovery thereafter.”

Lebanon’s bleak outlook is a result of a toxic combination of factors at a time when the country is fragmented.

  Sharp Decline in Remittances

One factor is Lebanon’s reliance on remittances from its expat population. Although there are estimated to be upwards of 13 million Lebanese nationals in the world, only about 4.3 million live in Lebanon, and remittances from abroad make up 16.2% of its total GDP (about $7.2 billion), according to the World Bank’s Migration and Development Brief, published in April.

Firas Abi Ali, senior principal analyst MENA at IHS Country Risk, says the large diaspora and Lebanon’s focus on services perpetuates the negative impact.

“Lebanon is driven by a political economy that focuses on investing in services and tourism rather than the productive [manufacturing-based] sectors,” he says. “One of the main results of this is that people buying such services, for example real estate, are priced out of the market in Lebanon. This drives a pattern whereby people migrate so they can make an income that allows them to buy what is on offer in Lebanon.

With the regional economic slowdown resulting from persistently low oil prices, remittances from Lebanese expats have taken a hit.

The World Bank revised its estimate of remittance inflows to Lebanon in 2015 by $340 million, from $7.5 billion to $7.16 billion, showing that inflows decreased by 3.3%. That was the steepest year-on-year contraction of the 15 largest recipients of remittances in developing countries last year, behind Morocco at -7.3%. Since 2013, remittances have fallen 11.4%.

The knock-on impact includes a payments deficit and tightened public finances. “The economy is generally reliant on foreign investment, and the freezing of bank transfers, particularly remittances, which total billions of dollars, is likely to increase pressure on the country,” associate analyst at Control Risks Andrew Freeman says.