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Gaza war proves ‘another large shock’ for fragile Lebanon

Children on a street in Bourj Hammoud, northeast of Beirut. Lebanon has been hit hard by food price inflation Reuters/Yara Nardi
Children on a street in Bourj Hammoud, northeast of Beirut. Lebanon has been hit hard by food price inflation
  • World Bank issues warning
  • GDP forecast to contract again
  • Tourism gains reversed

Hopes that Lebanon’s economy could register its first annual growth in five years have been dashed by the impact of the Israel-Gaza conflict, according to the World Bank.

Its latest Lebanon Economic Monitor said the fighting and fears of an escalation were “another large shock” to the country’s precarious economy.

Before the outbreak of violence last October, Lebanon’s economy had been forecast to grow by 0.2 percent in 2023 – which would have been its first annual increase since 2018. The World Bank is now predicting a contraction of up to 0.9 percent in real GDP. 

“Lebanon remains entrenched in a socioeconomic and financial crisis, further exacerbated by institutional and political stalemate,” said Jean-Christophe Carret, Middle East country director at the World Bank.

Last year, Lebanon’s economy appeared to have reached a “temporary bottom”, according to World Bank analysts.

A growth in consumption was recorded, thanks to a strong summer tourism season, a sizeable inflow of remittances and the increasing dollarisation of salaries alongside signs of stabilisation in private sector activity. 

However, the Gaza conflict has led to a drop in tourism income and a reduction in investment in Lebanon. This, coupled with the absence of broader stabilisation measures from the government, is expected to reverse the small gains seen earlier in 2023.

The World Bank’s updated forecast of a 0.6 to 0.9 percent contraction assumes that “the current situation of containment of military confrontation to the southern borders persists”.

Significant military escalations could have a “severe” toll on the country’s economy and population, the report added. Since its publication in late December, the January 2 drone strike on Beirut, which killed a senior Hamas figure, has increased fears of a wider regional war.

Macroeconomic imbalances also persist in Lebanon, with the current account deficit equivalent to 13 percent of GDP. Tourism accounted for almost 26 percent of current account receipts in 2022.

The inflation rate, which has been in triple digits since 2021, is projected to accelerate to 231 percent in 2023, driven by exchange rate depreciation and rapid dollarisation of economic transactions. 

Lebanon was also one of the countries hardest hit by food price inflation in the first quarter of 2023 – it reached 350 percent year on year in April. This exacerbated difficult living conditions for the most vulnerable segments of the population. 

Tour guide at the Roman ruins of Baalbek. Tourism made up almost 26% of Lebanon's current account receipts in 2022Reuters/Issam Abdallah
Tour guide at the Roman ruins of Baalbek. Tourism made up almost 26 percent of Lebanon’s current account receipts in 2022

“While tourism has recently been a positive contributor to economic growth, the tourism sector alone cannot substitute for more comprehensive, sustainable and diverse growth drivers that are better placed to withstand shocks and help put the economy back on a solid recovery path,” Carret said.

According to the latest Lebanon Purchasing Managers’ Index survey, the contraction in Lebanon’s private sector economy slowed during November.

Business activity declined at the slowest pace in four months as new export orders recovered. Business confidence also improved, rising to its highest level in three months.

Dr Ali Bolbol, chief economist at BLOMInvest Bank, said the increase in exports was a sign that cheaper exchange rates were starting to make the private sector more competitive. 

The country’s central bank has initiated some reforms, the World Bank said, but “fundamental changes” to bank supervision and monetary and exchange rate policies have yet to be introduced. 

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