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Chink of light shines on Lebanon’s economic gloom

There are tentative signs of recovery but inflation is still hampering the economy Reuters/Mohamed Azakir
WEF survey expects high inflation ranged from just 5% for China to 57% for Europe
  • Improvement in private sector conditions 

For nearly three years Lebanon’s economic meltdown has sunk the currency by more than 90 percent, spread poverty, paralysed the financial system and frozen depositors out of their savings.

But new research released today suggests tentative signs of an improvement in private sector operating conditions.

The August Blom Lebanon purchasing managers’ index (PMI) posted fractionally above 50 – signifying an improvement in private sector conditions – for the first time in more than nine years. 

Business activity broadly stabilised while new order intakes fell only fractionally overall. There was an increase in backlogs of work, which partly supported business activity, while employment fell slightly. 

Meanwhile, there was an acceleration in rates of inflation midway through the third quarter, amid reports of an unfavourable exchange rate against the US dollar pushing up operating costs.

In turn, selling prices were raised to a quicker extent than in July. 

Businesses remain downbeat as concerns towards the domestic political environment cloud the economic outlook.

The headline Blom Lebanon PMI rose to 50.1 in August, from 49.9 in July, to its highest reading since June 2013.

With a reading above the 50 no-change mark, the latest data signalled a small improvement in private sector operating conditions across Lebanon.

“The Blom Lebanon PMI at 50.1 in August, its highest in over nine years, is an important achievement, even a milestone in the recent life of the Lebanese economy,” Aline Azzi, research analyst at Blominvest Bank, said.

“It was driven by solid tourist and expatriate spending and perhaps deferred and pent-up spending by resident Lebanese. 

“But this result should be put in context, as it reflects adjustment of the Lebanese economy towards a ‘new normal’, which is not surprisingly much lower than the ‘old normal’ prior to October 2019.

“Only a determined implementation of an economic and governance reform and recovery programme tied with the IMF can pull the economy from its lower new normal to a better and higher standing.”

One supportive factor was backlogs of work, with survey data signalling an increase when compared to July.

Overall, the rate of backlog accumulation was marginal but the quickest since December 2014.

A slower reduction in new business was also recorded in August, with inflows of new work from overseas approaching stabilisation. 

Yet latest survey data indicates cost-cutting efforts at some private sector companies in Lebanon as employment, purchasing activity and inventories all fell. 

According to firms, an unfavourable exchange rate versus the US dollar pushed up operating expenses. 

Some companies also reported liquidity issues as a reason for lower buying activity. To protect margins, private sector firms in Lebanon raised their prices. 

Surveyed firms remain pessimistic towards the 12-month outlook, citing uncertainty towards domestic political developments.

The report comes days after the International Monetary Fund (IMF) told the Lebanese state its banking secrecy law has not resolved “key deficiencies,” urging officials to make new changes to their first attempt at financial reform.

The assessment, seen by Reuters and confirmed by a government official as accurate, is the IMF’s first comment on Lebanon’s steps toward completing a checklist that would grant it access to $3 billion to ease the country’s worst economic meltdown since the 1975-90 civil war.

Donor states want Lebanon to enact reforms to address root causes, including decades of state waste and corruption, before releasing aid.