Lebanon to sink deeper into recession

Lebanon's economy will shrink further and sink deeper into recession after the recent explosion at Beirut's port that caused massive destruction across the city, economists said.
Experts and analysts said that Beirut can receive more than $20 billion in loans and aids from global financial institutions as well as the GCC and other regimes outside the region only if the Lebanese government becomes disciplined and manages to tickle corruption in the country.
World leaders from more than 30 countries have pledged $300 million (Dh1.1 billion) in aid to Lebanon to help it recover from last week's major explosion. The UAE and other Gulf countries have also supplied Lebanon with humanitarian aid including medical, water, and food supplies.
"The blast will deepen the contraction in the economy from -15 per cent already envisioned for 2020 to -24 per cent. Given the large contraction in output and the massive depreciation of the parallel exchange rate, GDP could shrink from $52 billion in 2019 to $33 billion in 2020," said Garbis Iradian, chief economist for Mena at the Institute of International Finance (IIF).
On Monday, Lebanon's cabinet stepped down in the wake of the Beirut port explosion that triggered public fury. Lebanese prime minister Hassan Diab blamed corruption for the mess in the country, saying corruption is bigger than the state.
"The damage from the blast is estimated to exceed $7 billion, which is equivalent to 14 per cent of 2019 GDP," Iradian said.
More than 160 people died and around 5,000 people were wounded in the blast, and the devastation of large swathes of Beirut has dislocated at least 300,000 people from their homes.
Even prior to the blast, Lebanon was suffering from its worst financial and economic crisis since its independence in 1943. As a result of the economic mess, the country's inflation has spiked over the years, causing unrest in the country.
Inflation surges
IIF's Iradian estimated that the 12-month inflation rate has exceeded 110 per cent last month. Consequently, unemployment and poverty rates have reached new heights of 35 per cent and 50 per cent, respectively.
He noted that the new authorities' discipline would improve domestic and foreign investor confidence, paving the way for strong official capital inflows, including the $11 billion financial package negotiated at the CEDRE conference in Paris in 2018, $8.5 billion from the IMF, and possibly several billions from the Gulf Arab countries
"It is important to implement reforms so as to address the needs of the Lebanese people for the longer term," said Antonio Guterres, secretary-general of the UN, during a virtual briefing to the UN members.
"The resignation of the government of Lebanon in the wake of the recent explosion highlights the credit negative impact of sectarian fragmentation on political stability and on institutions and governance strength," said Elisa Parisi-Capone, vice-president and senior analyst at Moody's Investors Service
While the IMF and the international donor community have reiterated their commitment to financially support Lebanon to bear the costs of the disaster, over time, Moody's analyst expects that in the absence of key steps toward plausible economic and fiscal policy reform, sustained official external funding support to accompany a government debt restructuring will not be forthcoming.
- waheedabbas@khaleejtimes.com