Lebanon is almost three years into an economic and financial crisis that is among the worst the world has seen. Politically, Lebanon heads into parliamentary elections on May 15, which are highly anticipated in light of systemic failures in governance. The economic consequences of the war in Ukraine and associated sanctions are adding to Lebanon¡¯s plights, in particular given its critical net imports of wheat (quasi-exclusively from Russia and Ukraine) and oil.
Recent Developments
Real GDP is estimated to have declined by 10.5% in 2021, on the back of a 21.4% contraction in 2020 as policymakers have still not agreed on a plan to address the collapse of the country¡¯s development model. A scarce source of growth is the tourism sector, where tourist arrivals surged by 101.2%, from a low base, over the first seven months of 2021. Public finances improved in 2021, paradoxically, as spending collapsed faster than revenue generation. The exchange rate continued to deteriorate sharply in 2021, keeping inflation rates in triple digits. The share of the Lebanese population under the national poverty line is estimated to have risen by 9.1 percentage points (pp) by end-2021. Lebanon has witnessed a dramatic collapse in basic services, driven by depleting FX reserves.
Outlook
Subject to extraordinarily high uncertainty, real GDP is projected to contract by a further 6.5% in 2022 under the assumptions of continued inadequate macro policy responses and a minimum level of stability on the political and security scenes. Considering the scale and scope of Lebanon¡¯s financial and economic crisis, the negative impact of the economic consequences of the war in Ukraine and associated sanctions is of a different magnitude. It is nonetheless large and negative as Lebanon will have to quickly tap new alternatives for its wheat imports from Russia and Ukraine to guarantee food security. Additionally, surging energy prices will further exacerbate already existing crises related to exchange market pressures, highly elevated inflation rates, and likely reduce further the limited amount of electricity supplied by EdL.