It is not enough to say that 2023 was a year to forget. With triple-digit inflation (285%), the Lebanese pound has lost 98 percent of its value, and more than 60 percent of the population is living below the poverty line. The crisis erupted in 2019, following decades of corrupt government, profligate spending, and financial mismanagement, and saw banks impose restrictions on withdrawals and transfers, although a capital controls law had not been adopted. In the beginning of 2024, fears of a spillover of the Israel-Gaza war into Lebanon would push its economy into an abyss and severely damage the country’s fragile infrastructure, analysts have warned. If the current status quo continues, it presents the largest risk to Lebanon’s economic and social stability, taking the country down an unpredictable road. Reforms are needed everywhere, especially in the central bank, which needs new policies on conflicts of interest, more autonomy from the government, and more accountability.
Lebanon is now five years into one of the worst financial collapses in modern history as government efforts to resolve the crisis have stalemated. The year 2023 witnessed the departure of the driver of this deadlock, Riad Salameh, until recently the governor of Banque du Liban (BDL), Lebanon’s central bank. Salameh is accused of many flagrantly illegal policies he enacted after October 2019, when the commercial banks defaulted on their obligations. According to Lebanon’s consolidated commercial banks’ balance sheet, total assets decreased annually by 31.82% to stand at $112.25B by October 2023 amid BDL’s adoption of a new exchange rate of LBP 15,000 per USD. Last month, ten Lebanese banks filed a Memorandum to ‘Tie-Up Litigation’ with the government, addressed to the Ministry of Finance. The memorandum demands that the government pay its USD loans and obligations back to BDL so that the latter can pay banks their deposits (with BDL). As such, banks can then pay customers back their deposits.
The main challenges Lebanon inherited from 2023 are still a recessive economy, a banking sector in limbo, and a rentier-based financial structure. It is still a wishful thing that immediate reforms are around the corner. Lebanon is still a failed state lacking major political and institutional changes, so redesigning the country’s economic model is no less urgent. The key to designing such a model as well as a new state guaranteeing a fairer distribution of resources is fiscal reform.
To be noted, Moody’s Investors Service, the international rating agency, published on December 13, 2023, a rating action on the Government of Lebanon, maintaining the country’s rating at “C” while changing the outlook from “No Outlook” to “Stable.” The “C” rating reflects that losses for bondholders are likely to exceed 65%, while the “Stable” outlook indicates that the rating is here to stay for some time given the unstable political environment, political stalemate, and feeble institutions, as well as the country’s exposure to the nearby conflict in Gaza (which upended tourism and economic activity). In details, Moody’s commented that Lebanon remains stuck in an intertwined economic, financial, and social crisis that the country’s weak institutions seem incapable of addressing, while also noting that external support hinges on enacting a set of reforms.
For a change, Lebanon has a timely 2024 budget; however, it has been criticized on several grounds, the most important of which are: it is not a reform-oriented budget; it allocates little to capital expenditures; it doesn’t specify the exchange rate used in the calculations; and the new taxes it imposes are either excessive or regressive, especially in a depression-like environment. At any rate, the budget estimates expenditures at 295.11 trillion LBP and revenues at 277.92 trillion LBP, with a deficit of 17.19 trillion LBP, or 5.82% of expenditures. The country has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors, due to a lack of consensus among the political ruling class.
The Lebanese authorities, with IMF staff support, have formulated a comprehensive economic reform program that might be taken as a road map for 2024, aiming to rebuild the economy, restore financial sustainability, strengthen governance and transparency, remove impediments to job-creating growth, and increase social and reconstruction spending. In this regard, their plan is based on five key pillars:
- Restructuring the financial sector to restore banks’ viability and their ability to efficiently allocate resources to support the recovery;
- Implementing fiscal reforms that, coupled with the proposed restructuring of external public debt, will ensure debt sustainability and create space to invest in social spending, reconstruction, and infrastructure;
- Reforming state-owned enterprises, particularly in the energy sector, to provide quality services without draining public resources;
- Strengthening governance, anti-corruption, and anti-money laundering/combating the financing of terrorism (AML/CFT) frameworks to enhance transparency and accountability, including by modernizing the central bank legal framework and governance and accountability arrangements;
- Establishing a credible and transparent monetary and exchange rate system
The plan has been lying dormant in the government. The interesting aspect of it is that it also looked forward to initiating a deposit recovery fund, another headline spurring controversy among the political junta.
Currently, Lebanon’s commercial banks do not have enough liquidity to pay back depositors, the Association of Banks says. They had approximately $86.6 billion deposited at Lebanon’s Central Bank as of mid-February and a net negative position with correspondent banks of $204 million as of January 31, 2023, the source states.
Also Lebanon needs to work over 2024 to address deficiencies in policing corruption identified by an evaluation report by the Middle East and North Africa Financial Action Task Force (MENAFATF). The evaluation is a crucial step towards regaining or further degrading trust in Lebanon’s financial system, which has been in a tailspin since 2019. Lebanon scored as only partially compliant in several categories, including anti-money laundering measures, transparency on beneficial ownership of firms, and mutual legal assistance in asset freezing and confiscation.
On top of the priorities of the coming year is also a controversial renewed taxation policy. Lebanon should design a general and progressive income tax, one that taxes all sources of income together as opposed to separately, and should increase the top marginal tax rates applied to the highest incomes. The top marginal tax rates in Lebanon are quite low by international and historical standards.
Lebanon should institute a one-time wealth tax on the richest Lebanese for the purpose of funding much-needed emergency relief. An exceptional 10 percent tax on billionaires would yield 2–3 percent of the national income, which is more than what the progressive income tax currently collects from all Lebanese combined.
Over and above the one-time wealth tax, it is essential that Lebanon levy an annual tax on wealth in all its forms, in particular on built property, in order to increase revenue.
Another key problem Lebanon has to solve in 2024 is the massive amount of accumulated debt. It should be noted that Lebanon cannot tap international markets after its Eurobonds default. In figures, Moody’s uncovered that Lebanon’s pre-crisis debt-to-GDP ratio of 170% has worsened (external debt-to-GDP ratio of 319.6% in 2022) given the sharp economic contraction (real GDP dropping by 2.6% in 2022), and that annual inflation stood at 215.4% at the end of October 2023 and at 122% at the end of the year 2022.
A World Bank report revealed that net debt inflows to Lebanon stood at a negative $1.68 billion in 2022, in comparison with a negative $4.84 billion in 2021. This can be attributed to the significant decrease in long-term debt flows from negative $5.49 billion to negative $2.36 billion in 2022, which outweighed the increase in short-term debt flows from positive $0.65 billion in 2021 to positive $0.68 billion in 2022. Lebanon’s external debt stock increased by 0.31% in 2022 to $67.11 billion, mainly driven by the 20.67% rise in short-term external debt to $15.52 billion, up from $12.86 billion in 2021. As far as net equity inflows are concerned, FDI inflows to Lebanon narrowed during the past year, reaching $247 million compared to $597 million in 2021. According to the World Bank report, Lebanon’s external debt to exports ratio dropped from 616.6% in 2021 to 513.6% in 2022, with the reserves to external debt ratio falling from 52.4% in 2021 to 48.4% in 2022.
Lebanon can still count on its tourism sector in 2024. According to figures released by the Lebanese Ministry of Tourism, the number of tourists arriving in Lebanon fell to 102,690 during the month of October 2023, down from 175,418 arrivals in September and 210,458 in August. On a cumulative basis, however, Lebanon’s tourism season was more vibrant and promising during the first ten months of 2023 when compared to the same period in 2022. More specifically, the number of tourists arriving in the country increased by 21.15% year over year to 1,507,458 YTD in October 2023, compared to 1,244,329 tourists during the same period in 2022.
It should be noted that Beirut recorded the lowest average occupancy rate (48.0%) in the hospitality sector among the nine covered Middle Eastern capitals during the first nine months of 2023. Beirut’s 4- and 5-star hotels charged the fourth highest average room rate of $148, outperforming Amman ($146), Cairo City ($141), and Muscat ($123), among others. On the other hand, Riyadh recorded the highest average room rate of $185, followed by Kuwait City ($169) and Manama ($153).