The World Bank has warned that the already dire economic crisis in Lebanon could become catastrophic as unemployment is rising rapidly and half of the population is falling below the poverty line.
Currency deterioration and the resulting inflationary effects are highly regressive factors, disproportionally affecting the poor and middle class, the World Bank said in a new research note.
It added that inflation in the food and non-alcoholic beverages category has averaged 142.2 percent over the first seven months in 2020, and has been a key driver of overall inflation.
Lebanon’s inflation rate soared to 120 percent year-on-year in August amid an economic meltdown, the latest official data showed. As such, Lebanon became the first country in the region to suffer from hyperinflation in July, according to Steve H Hanke, Professor of Applied Economics at Johns Hopkins University.
According to the World Bank, Lebanon’s real GDP is projected to decline by 19.2 percent in 2020, with a further 13.2 percent contraction in 2021 due to the impact of Covid-19, a continued absence of macro-policy responses, and limited reconstruction and recovery efforts in the aftermath of the Port of Beirut explosion.
The World Bank said Lebanon’s recession is likely to be “difficult and protracted” given the lack of policy-making leadership, adding that exchange market pressures will continue to stifle trade finance and corporate finance in the highly dollarised economy, constraining the importation of capital and final goods and inducing disruptions all along the supply chain.
The sudden halt in capital inflows to an economy with a high import ratio to its consumption basket, and an inability to produce substitute goods sufficiently in the short term, implied a steady depletion in foreign exchange (FX) reserves at Lebanon’s Central Bank, the report added.
Riad Salame, governor of the central bank, told the government at his last meeting that it has around $2.3 billion left to subsidise basic goods and will rationally spend it to last longer than three months. In addition, the central bank and the Ministry of Finance are working on a plan to reduce subsidies instead of lifting them in one shot.
The World Bank said it believes that the contraction of Lebanese GDP per capita in real terms and the two-digit inflation in 2020 will undoubtedly result in a substantial increase in poverty rates affecting all population groups in Lebanon.
Tracking the wellbeing of the population on a regular basis and protecting the poor and the most vulnerable is an urgent priority for the country today, it added.
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