LEBANON Turning ECONOMIC the Tide? MONITOR Spring 2025 ?????????????????? ?????????????????? ?????????????????? Lebanon Economic Monitor Turning the Tide? Spring 2025 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region Document of the World Bank © 2025 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or fail- ure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immuni- ties of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photos courtesy of: (top) Everyonephoto Studio/shutterstock.com, (center left) Mohamad Azakir/World Bank, (center right) Mohamad Azakir/World Bank, and (bottom) Fadel Itani/World Bank. Further permission required for reuse. Publication design and layout by The Word Express, Inc. TABLE OF CONTENTS Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix ‫ ملخص تنفيذي‬. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xi Résumé analytique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii 1. The Policy Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 3. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Special Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 List of Figures Figure 1 Sustained Real GDP Contraction Worsened by Conflict in 2023–2024 . . . . . . . . . . . . . . . . . . . . . . .6 Figure 2 Government Consumption Was the Sole Positive Contributor to Real GDP Growth in 2024 . . . . . 6 Figure 3 Uncertainty Subdued in 2023 Q1–Q3, Markedly Increased in 2023Q4 and 2024 due to Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 4 Estimated Overall and Primary Surpluses for 2023 and 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 5 Evolution of Public Finances in Nominal (LBP) and Real Terms, 2019 vs. 2024 . . . . . . . . . . . . . . . .7 Figure 6 Increase in Nominal GDP Prompting a Decrease in Debt-to-GDP in 2024 is not Indicative of Improved Debt Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 iii Figure 7 Narrowing Current Account Deficit as a Percentage of GDP Driven by Higher Nominal GDP in 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 8 Increase of US$447 Million in Reserves in 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 9 Lebanon Has Registered a Trade-in-Goods Deficit Annually since 2002 . . . . . . . . . . . . . . . . . . . . .11 Figure 10 Wider Trade-in-Goods Deficit as a Percentage of GDP during Crisis Years . . . . . . . . . . . . . . . . . . 11 Figure 11 The US Was Lebanon’s 9th Largest Source of Imports in 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 12 The US Was Lebanon’s 4th Largest Export Market in 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 13 Exchange Rate Stability as of August 2023 Drives a Sharp Deceleration in Inflation . . . . . . . . . . 13 Figure 14 CPI Subcategories’ Monthly Contribution to Headline Inflation (2024) . . . . . . . . . . . . . . . . . . . . . . .14 Figure 15 Inflation in Lebanon Tracked Global Inflation in the Pre-Crisis Period . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 16 Nonetheless, Shocks to Global Inflation, Shipping Costs, and Oil Prices Account for Less than a Quarter of the Variation in Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 17 Inflation Moved in Tandem with the Bank Note Exchange Rate Fluctuations in the Post-Crisis Period… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Figure 18 …but the Explanatory Power of the Exchange Rate Fluctuations Dropped Off Sharply when the Exchange Rate Stabilized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 19 A Depreciating REER Did Not Lead to an Increase in Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 20 The Reform Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 List of Tables Table 1 Fiscal Balance (2020–2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Table 2 Selected Economic Indicators (2015–2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Table 3 Summary of Sectoral Key Reforms and Corresponding One Year Action Plans . . . . . . . . . . . . . . .29 List of Boxes Box 1 Impact of Rising Trade Uncertainty on Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Box 2 Dissecting Inflation: Pre- and Post-Crisis Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Box 3 Analyzing Lebanon’s REER: Trends and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 iv LEBANON ECONOMIC MONITOR – TURNING THE TIDE? ACRONYMS AMAN National cash transfer program, currently IDAL Investment Development Authority of financed by ESSNP Lebanon BdL Banque du Liban IMF International Monetary Fund BLOM-PMI BLOM Purchasing Managers’ Index ISA International Standards on Auditing CA Current Account LBP Lebanese Pound CAS Central Administration of Statistics MoA Ministry of Agriculture COLIBAC Lebanese Accreditation Council MoE Ministry of Environment CoM Council of Ministers MoPH Ministry of Public Health EMIS Education Management Information NCA National Competition Authority System PHCCs Primary Healthcare Centers ERA Electricity Regulatory Authority PIM Public Investment Management ESSNP Emergency Social Safety Net Program PM Prime Minister FATF Financial Action Taskforce PPA Public Procurement Authority GAFTA Grain and Feed Trade Association RDNA Rapid Damage and Needs Assessment GDP Gross Domestic Product SC Steering Committee HFIs High Frequency Indicators TRA Telecom Regulatory Authority ICJ International Court of Justice US$ United States Dollar WEs Water Establishments v PREFACE T he Lebanon Economic Monitor provides nomic Monitor has been completed under the guid- an update on key economic developments ance of Eric Le Borgne (Practice Manager), Norbert and policies over the past six months. It also Fiess (Lead Economist), and Jean Christophe Car- presents findings from recent World Bank work on ret (Country Director). Zeina El Khalil (Senior External Lebanon. The Monitor places these developments, Affairs Officer) is the lead on communications, out- policies, and findings in a longer-term and global con- reach, and publishing. text and assesses their implications on the outlook The findings, interpretations, and conclusions for Lebanon. Its coverage ranges from the macro- expressed in this Monitor are those of World Bank economy to financial markets to indicators of human staff and do not necessarily reflect the views of the welfare and development. It is intended for a wide Executive Board of The World Bank or the govern- audience, including policy makers, business leaders, ments they represent. financial market participants, and the community of For information about the World Bank and its analysts and professionals engaged in Lebanon. activities in Lebanon, including e-copies of this publi- The Lebanon Economic Monitor is a prod- cation, please visit www.worldbank.org/lb uct of the World Bank’s Lebanon Macroeconom- To be included on an email distribution list for ics, Trade and Investment (MTI) team. It was led by this Lebanon Economic Monitor series and related Dima Krayem (Senior Economist), Naji Abou Hamde publications, please contact Zeina El Khalil (zelkhalil@ (Economic Analyst) and Ibrahim Jamali (Consul- worldbank.org). For questions and comments on tant). The Special Focus entitled ‘Reform for Recov- the content of this publication, please contact Dima ery and Growth: A One-Year Policy Action Plan’ was Krayem (dkrayem@worldbank.org). Questions from prepared by a World Bank cross-sectoral team led by the media can be addressed to Zeina El Khalil Dima Krayem (Senior Economist). The Lebanon Eco- (zelkhalil@worldbank.org). vii EXECUTIVE SUMMARY L ebanon’s economic outlook for 2025 is on key fronts, particularly if reform momentum stalls shaped by a fragile stabilization in the polit- or security deteriorates. The unresolved financial cri- ical and security environment. This follows sis and a deeply impaired banking sector continue the end of the conflict and the resolution of a two- to impede large-scale financial inflows and private year political paralysis with the election of a president investment. and the formation of a reform-oriented government. Inflation is projected to moderate to While this renewed momentum presents an oppor- 15.2 percent in 2025, assuming continued tunity to begin addressing Lebanon’s overlapping exchange rate stability and subdued global infla- financial, economic, and institutional crises, the out- tion. However, risks remain, notably the impact of look remains highly contingent on sustained improve- heightened global trade uncertainty. In fact, grow- ments in the security situation and tangible progress ing uncertainty surrounding global trade could carry on key reforms. broader implications for Lebanon, as explored in Box 1. The real GDP contraction for 2024 has While direct effects may be limited, given that exports been revised downward to 7.1 percent, bring- to major markets account for only around 4 percent of ing the cumulative decline since 2019 to nearly Lebanon’s total goods exports, the indirect effects are 40 percent. The conflict and its aftermath have exac- more difficult to predict and will depend on how evolv- erbated poverty and vulnerability in Lebanon. Agri- ing global trade dynamics influence investment, infla- culture, commerce, and tourism, sectors accounting tion, and economic activity worldwide. for 77 percent of economic losses, are key income This edition of the LEM includes spe- sources for low-wage and informal workers now at cial analyses on inflation trends and real effec- risk. Reconstruction efforts remain slow, constrained tive exchange rate (REER) dynamics, presented by Lebanon’s ongoing financial crisis and a lack of in  Box 2 and Box 3, respectively. As highlighted external financing, which is unlikely to materialize in Box 2, Lebanon’s inflation broadly followed global without comprehensive reforms. trends prior to the crisis, though domestic struc- Real GDP is projected to grow by 4.7 per- tural factors also played a role. Since 2019, however, cent in 2025, supported by anticipated reform inflation has been driven largely by exchange rate progress, a recovery in tourism and consumption, depreciation, with varying impacts across price com- limited capital inflows, and a base effect. Nonethe- ponents depending on import content and tradability. less, the outlook remains highly sensitive to progress As further dollarization takes hold and the exchange ix rate remains stable, inflation dynamics may gradually nal balance estimates continues to be undermined by revert to pre-crisis patterns, though they are expected pervasive informality and a cash-based economy. to remain above global averages due to persis- Drawing on two decades of policy dialogue, tent domestic factors. Box 3 further examines REER technical assistance, and World Bank-financed trends, showing that while the REER appreciated until projects, the Special Focus offers a contribution 2019 and then depreciated sharply during the cri- to the government’s reform agenda by outlining sis, this did not translate into stronger export perfor- a targeted one-year policy action plan. The min- mance, reflecting underlying structural constraints isterial statement sets out four high-level overarching and the limiting effects of widespread dollarization. priorities: (i) halting financial and economic deteriora- The fiscal stance is improving supported by tion and identifying growth enablers; (ii) strengthening stronger revenue collection and a balanced 2025 social security; (iii) combating waste and corruption; budget approved by decree. This may provide lim- and (iv) preparing a fair parliamentary elections law ited space for increased public spending, particu- (the latter falls outside the scope of the Special Focus). larly on essential services and much-needed capital To support government reform, the Special Focus expenditures. Nevertheless, fiscal pressures remain offers a comprehensive one-year policy action plan elevated, and broader structural reforms are needed that brings together distills key lessons from years to support long-term fiscal sustainability. of World Bank engagement and policy dialogue in The external sector remains under signifi- Lebanon into a set of feasible, high-impact actions that cant strain, with a projected current account def- align with the government’s stated objectives and can icit of 15.3 percent of GDP in 2025. While this be implemented within its limited tenure. Proposed pol- marks an improvement from the previous year, the icy actions prioritized restoring macro-financial stabil- change largely reflects a rebound in nominal GDP ity; rebuilding citizens’ trust; and laying the foundation and tourism-related services. The accuracy of exter- for a new, successful economic development model. x LEBANON ECONOMIC MONITOR – TURNING THE TIDE? ‫ملخص تنفيذي‬ ‫اليقــن بشــأن التجــارة العامليــة ميكــن أن تكــون لــه تداعيــات أوســع‬ ‫نطاقــاً عــى لبنــان‪ ،‬كــا هــو مبــن يف اإلطــار ‪ .1‬عــى الرغــم مــن أن‬ ‫اآلثــار املبــارشة قــد تكــون محــدودة‪ ،‬حيــث ان الصــادرات إىل األســواق‬ ‫آلفاق االقتصادية للبنان لعام ‪ 2025‬يف ظل استقرار هش يف البيئة‬ ‫السياسية واألمنية‪ .‬بعد انتهاء الرصاع وانقضاء حالة الشلل السيايس‬ ‫الذي استمر عامني بانتخاب رئيس للدولة وتشكيل حكومة ذات‬ ‫ا‬ ‫الرئيســية تشــكل حــوايل ‪ 4%‬فقــط مــن إجــايل صــادرات لبنــان‬ ‫توجه إصالحي‪ ،‬يوفر الزخم املتجدد فرصة للبدء مبعالجة األزمات املالية‬ ‫الســلعية‪ ،‬فــإن التنبــؤ باآلثــار غــر املبــارشة يعــد أكــر صعوبــة‪ .‬وتعتمــد‬ ‫واالقتصادية واملؤسساتية املتداخلة يف لبنان‪ .‬ومع ذلك‪ ،‬فإن اآلفاق‬ ‫هــذه اآلثــار عــى كيفيــة تأثــر ديناميكيــات التجــارة العامليــة املتغــرة‬ ‫املستقبلية تعتمد بشكل كبري عىل استمرار التحسن يف الوضع األمني‬ ‫عــى االســتثامر والتضخــم والنشــاط االقتصــادي يف جميــع أنحــاء العــامل‪.‬‬ ‫وتحقيق تقدم ملموس يف اإلصالحات الرئيسية‪.‬‬ ‫يتضمــن هــذا اإلصــدار مــن املرصــد االقتصــادي للبنــان تحلي ـاً‬ ‫متــت مراجعــة تقديــر انكــاش إجــايل الناتــج املحــي‬ ‫خاصــاً عــن اتجاهــات التضخــم وديناميكيــات ســعر الــرف الفعــي‬ ‫الحقيقــي لعــام ‪ 2024‬إىل ‪( 7.1%‬مقارنــة بـــ‪ 5.7%‬وهي النســبة املقدرة‬ ‫الحقيقــي‪ ،‬كــا هــو مبــن يف اإلطاريــن ‪ 2‬و‪ 3‬عــى التــوايل‪ .‬وكــا يوضــح‬ ‫يف اإلصــدار الســابق للمرصــد)‪ ،‬ليصــل االنخفــاض الرتاكمــي منــذ عــام‬ ‫اإلطــار ‪ ،2‬كان التضخــم يف لبنــان يتــاىش بشــكل عــام مــع االتجاهــات‬ ‫‪ 2019‬إىل نحــو ‪ .40%‬يف الســياق ذاتــه أدى الـراع وتداعياتــه إىل تفاقــم‬ ‫العامليــة قبــل األزمــة‪ ،‬عــى الرغــم مــن أن العوامــل الهيكليــة املحليــة‬ ‫أوضــاع الفقــر والحرمــان يف لبنــان‪ .‬وتعــد قطاعــات الزراعــة والتجــارة‬ ‫لعبــت دورهــا أيضـاً‪ .‬لكــن منــذ عــام ‪ ،2019‬كان التضخــم مدفوعـاً إىل حد‬ ‫والســياحة‪ ،‬التــي تتســبب بـــ‪ 77%‬مــن الخســائر االقتصاديــة‪ ،‬مصــادر‬ ‫كبــر بانخفــاض ســعر الــرف‪ ،‬مــع تفــاوت اآلثــار عــى مســتوى مكونــات‬ ‫دخــل رئيســية للعــال ذوي األجــور املنخفضــة والعاملــن يف القطــاع غري‬ ‫األســعار تبعـاً ملحتــوى الــواردات وقابليتهــا للتبــادل التجــاري‪ .‬ومــع زيــادة‬ ‫الرســمي املعرضــن اآلن ملخاطــر‪ .‬وال تـزال جهــود إعــادة اإلعــار بطيئــة‬ ‫نســبة الدولــرة وبقــاء ســعر الــرف مســتقرا ً‪ ،‬قــد تعــود ديناميكيــات‬ ‫بســبب األزمــة املاليــة املســتمرة يف لبنــان ونقــص التمويــل الخارجــي‪،‬‬ ‫التضخــم تدريجي ـاً إىل أمنــاط مــا قبــل األزمــة‪ ،‬وإن كان مــن املتوقــع أن‬ ‫ومــن غــر املرجــح أن يتــم تحقيــق تقــدم دون تنفيــذ إصالحــات شــاملة‪.‬‬ ‫تظــل أعــى مــن املتوســطات العامليــة بســبب العوامــل املحليــة املســتمرة‪.‬‬ ‫مــن املتوقــع أن ينمــو إجــايل الناتــج املحــي الحقيقــي‬ ‫ويســتعرض اإلطــار ‪ 3‬بشــكل مفصــل اتجاهــات ســعر الــرف الفعــي‬ ‫بنســبة ‪ 4.7%‬يف عــام ‪ ،2025‬مدعومــاً بالتقــدم املتوقــع يف إطــار‬ ‫الحقيقــي‪ ،‬موضحــاً أنــه رغــم ارتفــاع ســعر الــرف الفعــي الحقيقــي‬ ‫اإلصالحــات املقــرر القيــام بهــا‪ ،‬وتعــايف قطــاع الســياحة وزيــادة‬ ‫حتــى عــام ‪ 2019‬ثــم انخفاضــه بشــكل حــاد خــال األزمــة‪ ،‬فــإن ذلــك‬ ‫االســتهالك‪ ،‬ومحدوديــة تدفقــات رأس املــال‪ ،‬وأثــر فــرة األســاس‪.‬‬ ‫مل يرتجــم إىل أداء أقــوى عــى مســتوى الصــادرات‪ ،‬مــا يعكــس القيــود‬ ‫ومــع ذلــك‪ ،‬ال تـزال اآلفــاق االقتصاديــة شــديدة التأثــر بالتقــدم املحــرز‬ ‫الهيكليــة األساســية واآلثــار املقيــدة التســاع نطــاق الدولــرة‪.‬‬ ‫عــى املســتويات الرئيســية‪ ،‬ال ســيام إذا تراجعــت وتــرة اإلصــاح أو‬ ‫ً‬ ‫يشــهد وضــع املاليــة العامــة تحســناً‪ ،‬مدعومــا بزيــادة‬ ‫تدهــور الوضــع األمنــي‪ .‬وتســتمر األزمــة املاليــة القامئــة‪ ،‬إىل جانــب‬ ‫معــدالت تحصيــل اإليــرادات واعتــاد موازنــة عامــة متوازنــة لعــام‬ ‫ضعــف القطــاع املــريف‪ ،‬يف عرقلــة التدفقــات املاليــة الكبــرة الوافــدة‬ ‫‪ 2025‬مبوجــب مرســوم‪ .‬وقــد يتيــح ذلــك حيـزا ً محــدودا ً لزيــادة اإلنفــاق‬ ‫واالســتثامرات الخاصــة‪.‬‬ ‫العــام‪ ،‬ال ســيام عــى الخدمــات األساســية والنفقــات الرأســالية التــي‬ ‫مــن املتوقــع أن يرتاجــع التضخــم إىل ‪ 15.2%‬يف عــام ‪،2025‬‬ ‫تشــتد الحاجــة إليهــا‪ .‬ومــع ذلــك‪ ،‬ال تـزال الضغــوط عــى املاليــة العامــة‬ ‫بافـراض اســتمرار اســتقرار ســعر الــرف وانخفــاض التضخــم العاملــي‪.‬‬ ‫مرتفعــة‪ ،‬وهنــاك حاجــة إىل إصالحــات هيكليــة أوســع نطاقــاً لدعــم‬ ‫ومــع ذلــك‪ ،‬ال ت ـزال هنــاك مخاطــر‪ ،‬ال ســيام تأثــر زيــادة حالــة عــدم‬ ‫اســتدامتها عــى املــدى الطويــل‪.‬‬ ‫اليقــن بشــأن التجــارة العامليــة‪ .‬ويف الواقــع‪ ،‬فــإن تنامــي حالــة عــدم‬ ‫‪xi‬‬ ‫وقــف التدهــور املــايل واالقتصــادي وتحديــد العوامــل املســاعدة للنمــو؛‬ ‫ال يــزال القطــاع الخارجــي يتعــرض لضغــوط كبــرة‪ ،‬حيــث‬ ‫(‪ )2‬تعزيــز الضــان االجتامعــي؛ (‪ )3‬مكافحــة الهــدر وتبديــد املــوارد‬ ‫مــن املتوقــع أن يبلــغ العجــز يف الحســاب الجــاري ‪ 15.3%‬مــن إجــايل‬ ‫والفســاد؛ (‪ )4‬إعــداد قانــون نزيــه لالنتخابــات الربملانيــة (لــن يتنــاول‬ ‫الناتــج املحــي يف عــام ‪ .2025‬وعــى الرغــم مــن أن هــذا ميثــل تحســناً‬ ‫الفصــل الخــاص يف التقريــر هــذه األولويــة)‪ .‬ودعـاً لجهــود اإلصــاح مــن‬ ‫مقارنــة بالعــام الســابق‪ ،‬فــإن التغــر يعكــس بشــكل كبــر انتعاش ـاً يف‬ ‫جانــب الحكومــة‪ ،‬يقــدم الفصــل الخــاص يف هــذا التقريــر خطــة عمــل‬ ‫إجــايل الناتــج املحــي االســمي والخدمــات املرتبطــة بالســياحة‪ .‬وال تزال‬ ‫شــاملة عــى مســتوى السياســات مدتهــا عــام واحــد تجمــع بــن الــدروس‬ ‫تقديـرات األرصــدة الخارجيــة غــر دقيقــة بســبب انتشــار االقتصــاد غــر‬ ‫الرئيســية املســتفادة مــن عمليــات وبرامــج وأنشــطة ومشــاريع البنــك‬ ‫الرســمي (االقتصــاد املــوازي) واالقتصــاد القائــم عــى النقــد‪.‬‬ ‫الــدويل عــى مــدى ســنوات والحــوار بشــأن السياســات يف لبنــان‪ .‬يــأيت هــذا‬ ‫باالســتناد إىل عمــل البنــك الــدويل يف لبنــان مــن خــال الحــوار‬ ‫يف إطــار مجموعــة مــن اإلجـراءات الفعالــة واملجديــة وعاليــة األثــر التــي‬ ‫بشــأن السياســات واملســاعدة الفنيــة واملشــاريع التــي مولهــا البنــك وذلــك‬ ‫تتــاىش مــع األهــداف املعلنــة للحكومــة وميكــن تنفيذهــا خــال فــرة‬ ‫عــى مــدى عقديــن مــن الزمــن‪ ،‬يعــرض الفصــل الخــاص مــن املرصــد‬ ‫واليتهــا املحــدودة‪ .‬وتعطــي اإلج ـراءات املقرتحــة عــى صعيــد السياســات‬ ‫مســاهمة يف برنامــج عمــل الحكومــة اإلصالحــي مــن خــال تحديــد‬ ‫األولويــة الســتعادة االســتقرار االقتصــادي الــكيل واملــايل؛ وإعــادة بنــاء ثقــة‬ ‫خطــة عمــل مســتهدفة للسياســات ملــدة عــام واحــد‪ .‬جديــر بالذكــر‬ ‫املواطنــن؛ وإرســاء األســاس لنمــوذج جديــد وناجــح للتنميــة االقتصاديــة‪.‬‬ ‫أن البيــان الــوزاري يحــدد أربــع أولويــات رئيســية رفيعــة املســتوى‪)1( :‬‬ ‫‪xii‬‬ ‫?‪LEBANON ECONOMIC MONITOR – TURNING THE TIDE‬‬ RÉSUMÉ ANALYTIQUE L es perspectives économiques du Liban rées et un effet de base favorable. Néanmoins, les pour 2025 sont marquées par une stabili- perspectives restent fortement sensibles aux progrès sation fragile de l’environnement politique réalisés sur les principaux fronts. Un ralentissement du et sécuritaire. Cela fait suite à la fin du conflit et à la rythme des réformes ou une détérioration de la situa- résolution d’une paralysie politique de deux ans avec tion sécuritaire pourrait compromettre cette reprise. l’élection d’un président et la formation d’un gouver- La crise financière non résolue et un secteur bancaire nement réformiste. Si ce nouvel élan offre la possibi- profondément affaibli continuent d’entraver les flux lité de s’attaquer aux crises financière, économique et financiers à grande échelle et l’investissement privé. institutionnelle qui se chevauchent au Liban, les pers- L’inflation devrait ralentir pour atteindre pectives restent fortement tributaires d’une améliora- 15,2 % en 2025, dans l’hypothèse d’une stabi- tion durable de la situation sécuritaire et de progrès lité continue du taux de change et d’une infla- tangibles dans la mise en œuvre de réformes clés. tion mondiale modérée. Toutefois, des risques La contraction du PIB réel pour 2024 a subsistent, notamment ceux liés à l’intensification été révisée à la baisse à 7,1  %, portant la baisse des incertitudes pesant sur le commerce mondial, cumulée depuis 2019 à près de 40 %. Le conflit et qui pourraient avoir des conséquences plus lourdes ses répercussions ont exacerbé la pauvreté et la vul- pour le Liban, comme expliqué dans l’Encadré 1. nérabilité au Liban. L’agriculture, le commerce et le Si les effets directs semblent limités — les exporta- tourisme, secteurs qui représentent  77  % des pertes tions vers les principaux marchés ne représentant économiques, constituent des sources de revenus qu’environ 4 % des exportations totales de marchan- clés pour les travailleurs à bas salaires et ceux du sec- dises du Liban —, les effets indirects restent plus diffi- teur informel, aujourd’hui particulièrement exposés. ciles à anticiper. Leur ampleur dépendra de l’impact Les efforts de reconstruction progressent lentement, de l’évolution des dynamiques commerciales mon- freinés par la crise financière persistante du Liban diales sur l’investissement, l’inflation et l’activité éco- et le manque de financement extérieur, qui reste peu nomique à l’échelle internationale. probable en l’absence de réformes d’envergure. La présente édition du Rapport de la situa- Le PIB réel devrait augmenter de 4,7 % en tion économique du Liban (ou LEM pour Lebanon 2025, soutenu par les avancées attendues en Economic Monitor) comprend des analyses spé- matière de réformes, la reprise du tourisme et de ciales sur les tendances de l’inflation et la dyna- la consommation, des entrées de capitaux modé- mique du taux de change effectif réel (TCER) xiii présentées respectivement dans les Encadrés 2 rant attendu à 15,3 % du PIB en 2025. Bien que ce et 3. Comme souligné dans l’Encadré 2, l’inflation au niveau représente une amélioration par rapport à l’an- Liban a globalement suivi les tendances mondiales née précédente, il reflète essentiellement le rebond avant la crise, bien que des facteurs structurels nationaux du PIB nominal et des services liés au tourisme. La fia- aient également joué un rôle. Depuis 2019, cependant, bilité des estimations de la balance extérieure conti- l’inflation a été largement alimentée par la dépréciation nue d’être affectée par la prévalence d’une économie du taux de change, avec des effets différentiés selon la informelle et fondée sur les transactions en espèces. part des importations et le degré d’échangeabilité des S’appuyant sur deux décennies de dialogue biens concernés. À mesure que la dollarisation pro- politique, d’assistance technique et de projets gresse et que le taux de change se stabilise, la dyna- financés par la Banque mondiale, la section Focus mique de l’inflation pourrait graduellement converger spécial contribue au programme de réforme de vers les tendances observées avant la crise, même si l’État en définissant un plan d’action politique elle devrait rester supérieure aux moyennes mondiales ciblé sur une période d’un an. La déclaration minis- en raison de facteurs intérieurs persistants. L’encadré 3 térielle identifie quatre grandes priorités de haut niveau analyse également les tendances du TCER, montrant : i) mettre un terme à la détérioration financière et éco- qu’après une appréciation jusqu’en 2019, suivie d’une nomique et recenser les facteurs de croissance ; ii) ren- forte dépréciation pendant la crise, aucun gain notable forcer la sécurité sociale ; iii) lutter contre le gaspillage de compétitivité à l’export n’a été observé — un résultat et la corruption ; iv) préparer une loi garantissant des qui reflète des contraintes structurelles profondes ainsi élections parlementaires équitables (ce dernier point que les effets limitants d’une dollarisation généralisée. ne relève pas du périmètre couvert par la section Focus La situation budgétaire montre des signes spécial). Pour soutenir la réforme de l’État, la sec- d’amélioration, soutenue par une progression tion Focus spécial propose un plan d’action politique du recouvrement des recettes et l’adoption, par annuel complet, fondé sur les enseignements tirés de décret, d’un budget 2025 équilibré. Cela pourrait l’engagement de longue date de la Banque mondiale offrir une marge de manœuvre limitée pour l’augmen- et du dialogue politique au Liban. Ce plan rassemble tation des dépenses publiques, notamment dans les un ensemble d’interventions concrètes et à fort impact, services essentiels et les dépenses d’investissement alignées sur les priorités affichées du gouvernement indispensables. Néanmoins, les pressions budgé- et pouvant être mises en œuvre dans les limites de taires demeurent élevées, et des réformes structu- son mandat actuel. Les actions politiques proposées relles de plus grande envergure sont nécessaires visent en priorité à rétablir la stabilité macro-financière, pour garantir la viabilité budgétaire à long terme. restaurer la confiance des citoyens et poser les fonde- Le secteur extérieur reste soumis à de ments d’un nouveau modèle de développement éco- fortes pressions, avec un déficit du compte cou- nomique performant. xiv LEBANON ECONOMIC MONITOR – TURNING THE TIDE? 1 THE POLICY CONTEXT A ceasefire between Lebanon and Israel risk.2 Reconstruction efforts have been slow following took effect on November 27, 2024, effec- the ceasefire agreement, and Lebanon remains heav- tively ending the conflict, although uncer- ily cash-strapped due to its unresolved sovereign debt tainties persist regarding its full implementation. and banking crises; in addition, foreign financial sup- The conflict has claimed over 3,500 lives, injured more port is unlikely to be forthcoming without comprehen- than 14,500, and displaced nearly 1.2 million peo- sive reforms. ple, over a quarter of Lebanon’s population. Beyond On a positive note, after more than two the heavy human toll, it has devastated the country’s years, Lebanon’s political paralysis has ended economy and capital stock, particularly in the south. with the election of a President and the appoint- The World Bank estimates physical asset damage at ment of a Prime Minister. A new government, the a staggering US$6.8 billion, with housing being the first since 2022, was formed and granted Parliamen- hardest hit sector with damages estimated at US$4.6 tary confidence in February. The ministerial state- billion. Economic losses, in the form of reduced pro- ment outlines four high-level priorities: (i) halting ductivity, foregone revenues, and operating costs are financial and economic deterioration (ii) strengthen- estimated at US$7.2 billion, and recovery and recon- ing social security; (iii) eliminating waste and corrup- struction costs amount to US$11 billion.1 tion, and (iv) drafting a fair parliamentary elections By the end of 2024, Lebanon’s cumulative law. It also reaffirms Lebanon’s commitment to U.N. GDP decline since 2019 approached 40 percent, resolutions, and pledges to uphold the cease-fire deepening Lebanon’s pre-existing multi-pronged crisis. The conflict and its aftermath are expected to 1 World Bank, 2025, Lebanon – Rapid Damage and deepen poverty and vulnerability in Lebanon. Agri- Needs Assessment (RDNA) (English). Washington, D.C.: culture, commerce, and tourism, sectors accounting World Bank Group. Link. for 77 percent of economic losses, are key income 2 World Bank (2025), Lebanon: Macro Poverty Outlook sources for low-wage and informal workers now at (MPO). Link. 1 and state sovereignty. It finally calls for dialogue with gram. The fact-finding mission was followed by a staff Syria, securing borders, facilitating the return of Syr- mission in June to initiate discussions on a reform ian migrants, and maintaining Lebanon’s neutrality in program. The end-of-mission press release under- regional conflicts. scored the criticality of rehabilitating the banking sec- Since gaining confidence, the Council tor while protecting depositors to the extent possible, of Ministers has finalized military and security achieving debt and fiscal sustainability, establishing appointments, including appointing a new army credible monetary and exchange rate policy frame- commander. It has also approved the 2025 budget works, strengthening governance and transparency, by decree. Prior to the escalation of the conflict in Sep- enhancing the Anti-Money Laundering and Combat- tember 2024, the outgoing government had approved ing the Financing of Terrorism (AML/CFT) regime, a draft 2025 budget aiming for a zero fiscal deficit, and reforming state-owned enterprises.4 with revenues and expenditures projected at 15.9 per- On March 27, 2025, the Council of Minis- cent of GDP. However, this draft budget, although ters appointed Karim Soueid as Governor of the submitted to Parliament, was never discussed. Con- Central Bank, a critical position that had remained sequently, the new government approved the budget vacant for nearly two years. This much-anticipated by decree, as permitted by the constitution. Approval appointment underscores the importance of the Cen- by decree aims to prevent reliance on spending tral Bank Governor’s role in addressing Lebanon’s according to the 1/12th rule, used in the absence of banking and sovereign debt crises and steering recov- an officially ratified budget, and to halt the practice of ery efforts. The position demands independence and continuous treasury advances which the authorities merit to guide comprehensive financial sector reforms relied on to maintain a minimal - and largely inade- and critically restore the Central Bank’s regulatory quate - level of public service provision. Although the and oversight functions. The Governor’s approach will budget does not reflect the post-conflict reality, espe- be pivotal in restructuring the banking sector, negoti- cially in terms of spending needed to address urgent ating with the IMF, and ensuring accountability. Bank requirements, it prevents disruptions to public spend- restructuring, in particular, must adhere to global best- ing, public services, and administrative procedures. practice principles by endorsing a banking sector res- This situation underscores the urgency for the govern- olution that recognizes and addresses the large losses ment to initiate comprehensive reforms in the 2026 in the sector upfront, respects the hierarchy of claims, budget, which include enhancing tax compliance protects small depositors, and limits recourse to pub- and reducing informality, overhauling the tax system, lic resources.5 Additionally, the Governor must focus implementing fairer revenue mobilization measures, on rebuilding a banking sector that fosters investment and creating fiscal space for rebuilding institutional and growth, removing Lebanon from the FATF grey capacities, public service delivery, public sector wage list, and combating the cash economy. bill adjustment, which would contribute to more effec- The Council of Ministers amended the bank- tive public service provision, social protection pro- ing secrecy law, which was subsequently rat- grams, and limited capital spending. ified by Parliament on April 24. The amended law An IMF fact-finding mission visited Leba- is an essential reform to ensure that the banking sec- non in March, meeting with Lebanese authorities tor restructuring strategy includes the necessary safe- to exchange views and discuss the economic out- guards. The amendments expand the powers of several look. During the visit, the Lebanese authorities, includ- authorized bodies, including the Central Bank of Leb- ing the president and the new government, requested anon, Special Investigation Commission, appointed a new IMF-supported program to assist their efforts in addressing Lebanon’s crises. In its subsequent 3 Link. press release,3 the IMF welcomed this request and 4 Link. expressed readiness to support the authorities in 5 World Bank (2022). Lebanon Economic Monitor: Time developing a comprehensive economic reform pro- for an Equitable Banking Resolution. Fall 2022. Link. 2 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? auditors, and the Banking Control Commission, allow- oversee the full restructuring process, including ing them to lift banking secrecy to identify the holders the merger, liquidation, or recapitalization of banks. of bank accounts opened in Lebanon as part of their The law also establishes a clear hierarchy for the supervisory activities. The law also extends retroactivity distribution of financial losses, starting with share- to cover the past ten years and enables the conduct of holder equity and in accordance with international independent audits and asset valuations of banks. Par- standards, while enshrining the principle of limited liamentary approval of the reformed banking secrecy recourse to public assets. While entrusting the HBC law is necessary to align it with international stan- with the supervision of the restructuring of the bank- dards aimed at combating corruption and removing ing sector represents a step toward institutionalizing obstacles to effective banking sector restructuring and the process, cross-country experience suggests that supervision, tax administration, financial crime detec- separating supervisory and resolution functions and tion and investigation, and asset recovery. establishing an operationally independent restructur- The Council of Ministers has also adopted ing and resolution authority, rather than concentrat- the law on banking sector reform, marking a sec- ing them within the central bank, can help preserve ond major reform following the banking secrecy clarity of roles and minimize potential risks stemming law. The law focuses on regulating the status of from overlapping mandates. banks but does not address depositor compensation With these elections and appointments, or the distribution of financial losses, issues expected Lebanon has a critical opportunity to tackle its to be covered in a third, more contentious law known prolonged, multi-pronged crises through a com- as the “financial gap law,” which aims to restore finan- prehensive crisis-resolution plan. Such reforms cial stability and allocate losses. Importantly, the cur- are increasingly urgent given the immediate recovery rent law will only become effective once the financial needs facing the country, including the compounded gap law is ratified by Parliament. The banking sec- effects of a five-year financial crisis, the recent conflict tor reform law defines the powers and structure of with Israel, and the substantial reconstruction efforts the Higher Banking Commission (HBC), which will required in its aftermath. The Policy Context 3 2 RECENT ECONOMIC DEVELOPMENTS Output and Demand 18.9 percent over roughly the same period. But HFIs outside the real estate sector point consistently to The real GDP contraction for 2024 is now esti- slowing economic activity: The volume and value of mated to have been deeper than initially projected, cheques in LBP dropped by 38.9 percent and 41 per- with the figure revised from 5.7 percent to 7.1 per- cent, respectively, while the value of cleared cheques cent. The initial projection, presented in the Fall 2024 in foreign currency fell by 28.7 percent. Passenger Lebanon Economic Monitor, relied on measuring eco- arrivals decreased by 21.3 percent during H2-2024 nomic activity using night-time light data, gauging the and the BLOM-PMI fell to 45 in October 2024, its low- size of the shock to consumption across the five gov- est reading of the year, down from a peak of 49.4 in ernorates that have been heavily affected by the con- January and March.7 Meanwhile, the BTA-Fransa- flict, and measuring the losses in tourism receipts. bank Retail Trade Index signaled a sharp contraction However, the availability of up-to-date data from thir- in retail sales, declining year-on-year by 37 percent in teen high-frequency indicators (HFIs) for the entirety of nominal terms and 32.5 percent in real terms in 2024. 2024 has provided more comprehensive insights, par- ticularly concerning the economy’s performance during 6 The econometric models used to nowcast economic growth since the 2019 financial crisis include: Mixed H2-2024. Using econometric models that leverage the Data Sampling (MIDAS) regressions with a large set informational value of these HFIs, the revised estimate of HFIs, a dynamic factor model, neural networks, and reflects a sharper contraction in economic activity.6 more recently elastic net and Least Absolute Shrinkage The HFIs point to weaker-than-expected and Selection Operator (LASSO) regressions. Further economic activity in H2-2024 relative to the base- details on the methodology employed to nowcast real line, which already accounted for the potential GDP are provided in the Annex to the Spring 2023 Lebanon Economic Monitor: The Normalization of Crisis impact of the conflict. Data from the real estate sec- is No Road for Stabilization. tor are mixed, with construction permits declining by 7 A reading of the PMI that is below 50 suggests an 5.5 percent over the period July to November relative economic contraction, whereas a reading above to January to May and cement deliveries increasing by 50 indicates an improvement in economic activity. 5 Sustained Real GDP Contraction FIGURE 1 •  FIGURE 2 • Government Consumption Was the Worsened by Conflict in 2023–2024 Sole Positive Contributor to Real GDP Growth in 2024 Real GDP Growth (%) 20 Real GDP Components 16.4 20 15 11.3 10.8 9.3 10.2 10 10 8.1 9.1 8.0 Percentage Point (pp) 7.5 6.4 3.9 3.9 3.8 0 5 3.8 3.4 2.7 2.5 2.5 1.6 1.1 1.7 1.5 0.6 0.9 0.9 –10 Percent (%) 0 –0.8 –0.6 –1.9 –0.8 –20 –5 –6.9 –7.0 –7.1 –30 –10 –40 –15 2014 2013 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e –20 –21.4 Private consumption Government consumption –25 Gross fixed capital investment Net exports 2001 2011 1992 2002 2012 1994 1998 2000 2004 2008 2010 2014 1995 1996 1997 1999 2006 2007 2009 2016 2017 2018 2019 1993 2003 2005 2013 2015 2020e 2021e 2022e 2023e 2024e Statistical discrepancy Source: CAS and WB Staff calculations. Source: CAS and WB Staff calculations. Except for public consumption, all other below revenues, at 14.7 percent of GDP (US$ 3,824 demand-side GDP components contributed nega- million); this is despite increased spending needs aris- tively to real GDP growth in 2024. Private consump- ing from the conflict as well as adjustments and sup- tion exerted the largest drag on growth, with a negative plements to public sector wages that were enacted contribution of 5.5 percent. The intensification of the by the caretaker government in 2024. Expenditures conflict, particularly since September 2024, coupled with heightened uncertainty (Figure 3), weighed heav- 8 The global World Uncertainty Index (WUI) as well ily on net exports and investment.8 In fact, investment as the WUI for Lebanon are due to Ahir, Bloom, and and exports’ contribution to real GDP growth stood at, Furceri (2022). For further information, please refer respectively, –0.1 and –2.1 percent.9 In contrast, gov- to Ahir, R., Bloom, N., and Furceri, D., (2022), The ernment consumption contributed positively to real World Uncertainty Index, Working Paper No. 29763, National Bureau of Economic Research. The authors GDP by 0.7 percent. provide empirical evidence that innovations in the WUI foreshadow significant declines in output. The WUI is computed by counting the percent of word “uncertain” Fiscal Developments (or its variant) in the Economist Intelligence Unit country reports. For Lebanon, uncertainty was subdued from the A fiscal surplus of 0.5 percent of GDP is estimated first quarter to the third quarter of 2023 but increased markedly in the fourth quarter of 2023 and throughout for 2024 due to higher-than-expected revenues 2024, due to the conflict. The WUI averaged 0.08 in 2023 and restrained spending. Revenues are estimated and 0.27 in 2024. The WUI reached its peak in 2018, to have reached 15.3 percent of GDP (US$ 3,964 mil- prior to the onset of the 2019 financial crisis. lion) in 2024, driven primarily by stronger-than-antici- 9 The contribution of imports to real GDP growth in 2024 pated revenue collection in 9M-2024. This significantly is zero. exceeds the estimates of the ratified 2024 budget 10 Imports taxes are the main source of revenue and account for 42 percent of total revenues. Non-tax of13.2 percent of GDP, or US$ 3,439 million. Taxes are revenues in foreign currency, collected at the ports and the main source of revenue, accounting for 76.7 per- airport as well as by the Regie Libanaise des Tabacs et cent of the total.10 Total expenditures (on a cash basis) Tombacs and Casino du Liban account for 13 percent of are estimated to have remained for the second year total revenues. 6 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? Uncertainty Subdued in Q1–Q3-2023, FIGURE 3 •  1,847 million between January and December 2024. In Markedly Increased in Q4-2023 and tandem, BdL continued to enforce restrictions on for- 2024 due to Conflict eign exchange operations (i.e., conversion of LBP reve- World Uncertainty Index nues to USD) by public institutions while converting the 1.2 domestic-currency cash balances of the Treasury into foreign currency to shore up its reserves. It is important 1.0 to note that expenditures exclude the contingent liabili- ties arising from unpaid payments/swaps for Iraqi fuel. 0.8 The 2025 budget was approved on March 6 by the new government. The 2025 budget was sub- 0.6 mitted to parliament by the previous government before the escalation of the conflict. As the budget was 0.4 not discussed in parliament, it was approved by the new government by decree, as constitutionally permit- 0.2 ted. Additionally, a bill was passed to exempt individ- uals affected by the recent conflict from certain taxes 0.0 and fees. Finally, the Minister of Finance has been 2016q1 2016q2 2016q3 2016q4 2017q1 2017q2 2017q3 2017q4 2018q1 2018q2 2018q3 2018q4 2019q1 2019q2 2019q3 2019q4 2020q1 2020q2 2020q3 2020q4 2021q1 2021q2 2021q3 2021q4 2022q1 2022q2 2022q3 2022q4 2023q1 2023q2 2023q3 2023q4 2024q1 2024q2 2024q3 2024q4 tasked with reviewing the budget provisions related to Source: World Uncertainty Index. 11 With the Treasury’s financial position improving due to prudent fiscal management, the Ministry of Finance exceeded budgeted amounts, reaching 13.2 percent of cleared arrears to bilateral and multilateral donors, except for one final arrear to the Agence Française de GDP, or US$ 3,439 million owing to prudent fiscal man- Développement, and line ministries (using revenues agement.11 As a result, public sector deposits, which collected in foreign currency). Arrears to the National include deposits by public institutions and are not lim- Social Security Fund (NSSF), which are in domestic ited to the Treasury account, at BdL increased by US$ currency, are also being settled. Estimated Overall and Primary FIGURE 4 •  FIGURE 5 • Evolution of Public Finances in Surpluses for 2023 and 2024 Nominal (LBP) and Real Terms, 2019 vs. 2024 Fiscal aggregates (% of GDP) 5 400,000 3 0 300,000 –3 –5 200,000 –8 Percent (%) 100,000 –10 LBP billion –13 0 –15 –18 –100,000 –20 –23 –200,000 –25 –28 –300,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e –400,000 2019 Actual 2024 Actual 2019 Real 2024 Real Overall fiscal balance Primary fiscal balance, excluding interest payments Revenues Expenditures Fiscal balance Sources: Lebanese authorities and WB staff calculations. Sources: Lebanese authorities and WB staff calculations. Recent Economic Developments 7 the earmarking of revenues from the excise taxes on These reforms include mobilizing revenues progres- alcohol and tobacco to the Ministry of Public Health sively through measures such as enhancing property that were proposed by the previous government.12 taxation by eliminating the exemption for vacant proper- The 2025 budget targets a zero fiscal deficit, ties from the built property tax, abolishing the offshore with revenues and expenditures projected at 15.9 and holding companies’ regimes, modernizing the percent of GDP. Both are estimated at LBP 445.2 tril- corporate income tax, and taxing offshore wealth and lion (equivalent to US$ 4,974 million at the market rate), higher income brackets. Such tax reforms would more marking nominal increases of 30.1 percent in expendi- than offset any revenue shortfalls that could arise from tures and 25.5 percent in revenues compared to 2024 exempting conflict-affected households and individuals estimates, respectively (see Table 1 below). However, from taxes and fees as well as mitigate, due to the pro- since the budget was prepared before the escalation gressive nature, the negative social impact of taxation. of the conflict, it does not reflect the post-conflict real- ity, including urgent reconstruction needs and the min- 12 The Lebanese constitution does not permit the istries’ critical funding requirements to support affected earmarking of revenues. populations, maintain essential services, and drive 13 Reducing informality can be accomplished, for example, recovery efforts. Looking forward, it would be essential via introducing simplified or presumptive taxation regimes to broaden the tax base by improving compliance (i.e., for small (below the VAT threshold) and medium size combating evasion), more comprehensive income taxa- enterprises. Enhancing tax compliance can be achieved, tion (such as taxing income from rent), reducing informal- for example, by subjecting professionals to the real profits regime and withholding taxes on payments. For ity, and enhancing the audit and collection capacities of additional detail, please refer to International Monetary the tax administration.13 Furthermore, as already noted Fund (2023), “Lebanon Technical Assistance Report on in the Fall 2024 Lebanon Economic Monitor,14 the bud- Putting Tax Policy Back on Track”, Washington DC. get lacks essential reforms to fiscal and tax policies. 14 Link. TABLE 1 • Fiscal Balance (2020–2025) Actual Actual Budget WB Est. Budget Draft WB Est. Budget WB Est. Budget (LBP Billion) 2020 2021 2022 2022 2023 2023 2024 2024 2025 Revenue 15,341 20,264 29,986 35,137 147,739 236,000 308,435 354,760 445,214 Expenditure 19,236 17,861 40,870 51,849 181,923 227,663 308,435 342,288 445,214 Fiscal Balance –3,895 2,403 –10,884 –16,712 –34,184 8,337 0 0 Actual Actual Budget WB Est. Budget Draft WB Est. Budget WB Est. Budget (US$ Million) a 2020 2021 2022 2022 2023 2023 2024 2024 2025 Revenue 4,160 1,724 1,098 1,287 1,721 2,750 3,439 3,964 4,975 Expenditure 5,216 1,519 1,497 1,899 2,120 2,653 3,439 3,824 4,975 Fiscal Balance –1,056 204 –399 –612 –398 97 0 139 0 Actual Actual Budget WB Est. Budget Draft WB Est. Budget WB Est. Budget (Percent of GDP)b 2020 2021 2022 2022 2023 2023 2024 2024 2025 Revenue 13.1 7.5 5.2 6.1 8.6 13.7 13.2 15.3 15.9 Expenditure 16.4 6.6 7.1 9.0 10.6 13.2 13.2 14.7 15.9 Fiscal Balance –3.3 0.9 –1.9 –2.9 –2.0 0.5 0.0 0.5 0.0 a World Bank AER is used to calculate fiscal outcomes in US$. b World Bank estimates of nominal GDP for each year are used to calculate fiscal outcomes as a percentage of GDP. 8 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? Despite these shortcomings, the budget’s Lebanon’s Eurobonds have rallied following approval ensures sound budgetary practices, pre- the election of the President and the formation of vents delays in public service delivery and admin- the government. Lebanon’s Eurobonds’ prices have istrative functions, and reduces reliance on the recorded a price appreciation of more than 50 per- 1/12th rule or treasury advances for spending. cent. Despite the positive sentiment, market-implied For decades, such practices have obscured public recovery values did not surpass 20 percent in January spending, undermined transparency and budget dis- 2025, implying large losses to Eurobond holders. Pri- cipline, and perpetuated short-term measures that vate sector estimates suggest that the haircut on Leb- hinder sustainable reforms. With an approved budget anese Eurobonds that is required to place debt on for 2025, the government can now focus fully on pre- sustainable footing is about 75 percent.16 Nonetheless, paring an overhauled 2026 budget that incorporates these estimates may be optimistic given the uncertainty both reform and recovery priorities. surrounding economic recovery prospects, potential Lebanon’s debt-to-GDP ratio is estimated to delays in implementing structural reforms, and com- have decreased to 176.5 percent in 2024 due to plexities inherent in the bank restructuring process that a denominator higher than nominal GDP. GDP in may carry a significant fiscal cost.17 nominal terms increased by almost 30 percent from 2023 to 2024 due to (i) an increase in the GDP defla- tor, and (ii) the stabilization of the exchange rate as of 15 As a result of this change, the debt stock increased by August 2023. The increase in the GDP deflator more about US$ 9.8 billion. than offsets the increase in the debt stock arising from 16 These are not World Bank staff estimates. See for an update to the World Bank’s debt model, which example, Goldman Sachs (2024), “Revisiting Lebanon now accounts for accumulated principal and inter- Debt Recovery Values”, CEEMEA Economics Analyst est arrears as well as IMF Special Drawing Rights.15 and J.P. Morgan (2025). “Lebanon: Politics and stability before economics” Domestic debt has been entirely eroded by years of 17 Fiscal outlays that are associated with systemic banking triple-digit inflation. Lebanon’s debt remains unsus- crises are provided in Laeven and Valencia (2013), tainable amid an ongoing sovereign default, and debt “Systemic banking crises database”, IMF Economic dynamics show no improvement. Review, vol. 61, No.2. Increase in Nominal GDP Prompting a Decrease in Debt-to-GDP in 2024 is not Indicative of FIGURE 6 •  Improved Debt Dynamicsa Gross public debt 100 250 90 80 200 70 Percent of GDP (%) US$ billion 60 150 50 40 100 30 20 50 10 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e External public debt (US$ bln) Domestic public debt (US$ bln) Gross public debt (US$ bln) Gross public debt as a percentage of GDP (rhs, %) Sources: BdL and WB staff calculations. a To convert domestic debt to US$, the World Bank Average Exchange Rate is used for 2020-2024, estimated at LBP 3,688, 11,755, 27,309, 85,828, and 89,500 per US$, respectively. Recent Economic Developments 9 The caretaker government suspended the trade in services balance, for the first time in decades, right to assert defenses on Eurobond maturities was due to the cessation of tourism services exports until March 9, 2028, thereby granting authorities following the escalation of the conflict. more time to complete the debt restructuring. The Despite the conflict and the large cur- looming expiration of the statute of limitations on Euro- rent account deficit, the nominal exchange rate bonds and the potential for a legal challenge by creditors remained stable, at the same time BdL accu- prompted the caretaker government to issue decision mulated foreign currency reserves. The dynamic No. 30 dated January 7, 2025, asserting the right of the underpinning exchange rate stability and reserve state to defenses (i.e., affirming the government’s right accumulation amid a large current account deficit to legally defend itself) for the expiring Eurobond maturi- is partly explained by the limited reliance of private ties. While this move grants to authorities’ additional time sector imports on domestic financial intermediation. to restructure Lebanon’s foreign-currency debt, it does Indeed, utilized domestic lines of credit for imports, not eliminate the risk of a legal challenge by creditors. fully collateralized since the onset of the 2019 crisis, amounted to merely US$ 73.4 million in 2024—a neg- ligible fraction of the total import bill. This indicates External Sector that private sector importers primarily relied on for- eign banking channels rather than local ones to The current account deficit narrowed to 22.2 per- finance their imports, significantly reducing pressure cent of GDP in 2024. Despite an 11 percent import on domestic foreign exchange reserves. compression relative to 2023, the current account def- The steady inflow of remittances was essen- icit increased by 2 percent in nominal terms to US$ tial to supporting Lebanon’s external financing 5.76 billion in 2024. The reduction in imports resulted needs in 2024. The net inflow of remittances stood in a 16 percent reduction in the trade in goods deficit at 18.7 percent of GDP in 2024 whereas inward remit- to 44.5 percent of GDP. However, the trade-in-services tances are estimated to have amounted to 26.6 percent surplus, which had traditionally mitigated Lebanon’s of GDP, one of the highest in the world. Nonetheless, large external financing needs, turned into a deficit the latter figure does not fully capture inflows through of 3.3 percent of GDP in 2024, slightly worsening the informal channels (such as cash carried by individuals current account deficit in nominal terms. The negative entering the country) and likely understates the actual FIGURE 7 • Narrowing Current Account Deficit as a Percentage of GDP Driven by Higher Nominal GDP in 2024 45 0 40 –5 35 –10 30 –15 US$ billion % of GDP 25 –20 20 –25 15 10 –30 5 –35 0 –40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Foreign reserves at BdL (excl. gold) Import of goods Current account (rhs) Sources: BdL, CAS and WB staff calculations. Note: The reduction in FX reserves shown in the chart (in 2024) is due to a revision of the series in 2024 to exclude BdL’s holdings of Eurobonds and its lending in FX to resident banks and financial institutions; therefore, it masks the accumulation of reserves in 2024. 10 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? FIGURE 8 • Increase of US$447 Million in Reserves in 2024a 40,000 35,000 30,000 25,000 US$ million 20,000 15,000 10,000 5,000 0 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 Jan-25 Foreign currencies Foreign securities Gross FX reserves Compulsory FX reserves Sources: BdL and WB staff calculations. a Foreign securities held by BdL were revised back to January 2024 to exclude its holdings of Lebanese Government sovereign bonds (Eurobonds). BOX 1. IMPACT OF RISING TRADE UNCERTAINTY ON LEBANON Growing uncertainty surrounding global trade policies is expected to have direct and indirect implications worldwide. While the full impact remains difficult to assess given ongoing policy shifts, this box examines the potential implications for Lebanon. Direct effects on the country are likely limited, as exports to the US represent only about 5.7 percent of total goods exports. However, indirect effects could materialize through global spillovers, such as weaker external demand or lower investments. A decline in commodity prices, particularly of oil, could improve the balance of payments and reduce input costs, given Lebanon’s status as a net oil importer. Lebanon’s Trade Balance Lebanon has long experienced a structural trade deficit, resulting in sizable and sustained current account deficits (Figure 9). The country has recorded annual trade-in-goods deficits since 2002, the year it began publishing Balance of Payments (BoP) data. Imports of goods FIGURE 9 • Lebanon Has Registered a Trade-in- FIGURE 10 • Wider Trade-in-Goods Deficit Goods Deficit Annually since 2002 as a Percentage of GDP during Crisis years 10,000 40% 5,000 20% 0 0% US$ million –5,000 –20% % of GDP –10,000 –40% –15,000 –60% –20,000 –80% –25,000 –100% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e Exports of goods Imports of goods Exports of goods Imports of goods Current account balance Current account balance Source: BdL and Staff calculations. Source: BdL and Staff calculations. (continued on next page) Recent Economic Developments 11 BOX 1. IMPACT OF RISING TRADE UNCERTAINTY ON LEBANON (continued) averaged 34.4 percent GDP between 2015 and 2020, rising sharply to an estimated 75.3 percent of GDP between 2021 and 2024. Meanwhile, exports of goods averaged 7.8 percent of GDP from 2015 to 2020, and increased to an average of 18.7 percent between 2021 and 2024, largely reflecting a shrinking GDP denominator. Lebanon’s Trade Balance with the US Market In 2024, the US was Lebanon’s ninth-largest source of imports, accounting for 3.4 percent of the total (Figure 11). China was Lebanon’s largest import partner (11.6 percent), followed by Greece, Switzerland, and Türkiye. On average, Lebanon sourced 4.16 percent of its imports from the US between 2022 and 2024, primarily importing (i) vehicles, vessels, and transport equipment, and (ii) machinery and electrical instruments. In 2024, the US was Lebanon’s fourth-largest export market, receiving 5.7 percent of Lebanon’s total exports (Figure 12). The UAE was Lebanon’s top export destination, accounting for 19.1 percent, followed by Iraq, Türkiye, and then the US. On average, 4.21 percent of Lebanon’s exports were directed to the US between 2022 and 2024. Lebanon’s main exports to the US included: (i) animal or vegetable oils and fats; (ii) prepared foodstuffs, beverages, and tobacco; (iii) chemical or allied industry products; and (iv) pearls, precious stones, and metals. Impact of Trade Uncertainty on the Lebanese Economy Direct Impact Lebanese exports to the US are subject to the baseline tariff of 10 percent, but the direct impact on Lebanon is expected to be limited in 2025. The US accounts for only a small share of Lebanon’s total goods exports and Lebanon has maintained a persistent trade deficit with the US, averaging about US$622 million annually over the past three years. Moreover, Lebanon’s exports to the US consist largely of specialty products such as olive oil and food items that cater primarily to the Lebanese diaspora, whose demand tends to be relatively price inelastic. This niche, culturally driven consumption pattern may help sustain export volumes despite the imposition of tariffs. However, the global trade environment remains fluid, and future changes to tariff regimes worldwide could alter the outlook. Indirect Impact Rising global trade uncertainty indirectly affects economies through several channels. It can reduce domestic and international investment, slowing growth and causing cyclical shifts in import demand and commodity prices. The process of reorienting trade toward alternative markets may also be prolonged and costly. Further indirect effects include disruptions in global supply chains and reduced demand from countries directly impacted by trade uncertainty. Much of the indirect effect on Lebanon will depend on how global policy shifts will unfold, but as an oil importer, Lebanon would benefit from lower oil prices. As an oil importer, Lebanon relies heavily on petroleum for electricity production, transportation, and other essential FIGURE 11 • The US Was Lebanon’s 9th Largest FIGURE 12 • The US Was Lebanon’s 4th Largest Source of Imports in 2024 Export Market in 2024 Share of Lebanon's 2024 total imports, by origin Share of Lebanon's exports, by destination, 2024 Egypt UAE Switzerland Jordan Switzerland 5.7% 5.6% Iraq USA China 4.3% 3.5% 6.6% 5.8% 5.7% 11.6% UAE Germany 3.0% 19.1% Korea Syria USA 3.4% 2.6% 3.4% KSA Turkey 5.2% Turkey 5.7% Egypt Greece 6.1% Italy Qatar 5.0% Kuwait 8.6% 5.1% 3.1% France 2.3% 2.4% Source: Lebanese Customs and Staff Calculations. Source: Lebanese Customs and Staff Calculations. 12 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? BOX 1. IMPACT OF RISING TRADE UNCERTAINTY ON LEBANON (continued) needs. Between 2022 and 2024, petroleum and its derivatives accounted for an average of 27 percent of the country’s import bill (US$ 4,871 million). Therefore, any drop in oil prices is expected to reduce Lebanon’s import costs, thereby decreasing its trade-in-goods and current account deficits. Econometric analysis reveals that a $1 decrease in the price of oil yields a contraction of about $16.4 million in Lebanon’s current account deficit. This implies that a US$ 13 decline in the price of Brent oil, as experienced over the period March to April 2024, would be expected to decrease Lebanon’s current account deficit by about US$ 213 million. The contraction in the current account deficit will, absent adverse shocks to Lebanon’s terms of trade and economic activity, have knock-on positive effects on real GDP growth. Rising global trade uncertainty may, however, offset some of the positive impacts from lower oil prices. These include weakened consumer confidence, lower foreign direct investment (FDI) inflows, reduced external demand, increased import costs, and renewed inflationary pressures. Lebanon is structurally dependent on imports to meet its demand for goods, so any increase in global inflation, or inflation in major trading partners, could translate into higher domestic prices (as outlined in Box 2). volume of remittances. As a result, a substantial por- ity in the market, easing downward pressure on the tion of Lebanon’s external deficit is also likely financed exchange rate. Nonetheless, BdL partially offsets this by remittances that remain unrecorded. sterilization by purchasing US dollars from the market, thereby re-injecting LBP into the economy. This allows it to manage currency in circulation while simultane- Money and Banking ously accumulating foreign reserves, which increased by US$447 million in 2024, reaching US$10.1 billion The Lebanese pound has remained stable at LBP in liquid reserves (excluding gold). Exchange rate sta- 89,500 per US$ since August 2023, following bility is also reinforced by the high degree of dollar- years of rapid depreciation. This continued stability ization in the economy, where demand for Lebanese is likely the result of improved revenue collection in pounds is largely limited to settling taxes, government Lebanese pounds, particularly from LBP-denominated fees, and small-scale transactions. taxes, and the subsequent accumulation of public-sec- With the accumulation of fiscal surpluses tor surpluses at BdL. Fiscal sterilization has played a over the past two years, the Ministry of Finance central role: public-sector surpluses deposited at BdL has built a modest buffer to weather shocks. How- have supported the reduction of excess LBP liquid- ever, continued reliance on fiscal restraint to preserve FIGURE 13 • Exchange Rate Stability as of August 2023 Drives a Sharp Deceleration in Inflation 7,000 300% 6,000 250% Index (Aug 2019 = 100) 5,000 200% 4,000 150% 3,000 100% 2,000 1,000 50% 0 0% Aug-19 Feb-20 Aug-20 Feb-21 Aug-21 Feb-22 Aug-22 Feb-23 Aug-23 Feb-24 Aug-24 Feb-25 World Bank average exchange rate Currency in circulation Inflation rate (% yoy), (rhs) Sources: Lebanese authorities and WB staff calculations. Recent Economic Developments 13 FIGURE 14 • CPI Subcategories’ Monthly Contribution to Headline Inflation (2024) Contribution to overall inflation in 2024, pp 50 40 30 20 10 0 Headline inflation growth Education Owner occupied Food & non-alcoholic beverages Water, electricity, gas and other fuels Health Transportation Actual rent Clothing & footwear Communication Alcoholic beverages & tobacco Furnishings, household equipment Other ources: CAS and WB staff calculations. exchange rate stability limits the government’s ability The banking sector remains impaired and to respond to pressing economic and social needs. interbank borrowing costs have soared to unprec- This underscores the importance of structural reforms edented levels in 2024. While some banks have in Lebanon’s monetary policy framework. been able to resume minimal lending, the banking The annual average inflation rate in 2024 sector is incapable of undertaking its financial inter- declined to 45.2 percent, a level not seen since mediation functions owing to losses that are estimated 2020. This stabilization, which was largely driven by to exceed US$ 72 billion. The interbank lending rates exchange rate stabilization since August 2023, led have soared to, respectively, 111.8 and 134.9 percent to a steady decline in month-to-month inflation, aver- in August and September 2024, which indicates that aging 1.2 percent between August and December some commercial banks are grappling with an LBP, 2023 (excluding October, when the education CPI and possibly also an USD, liquidity shortage.18 Restor- component surged six-fold), and 1.4 percent in 2024 ing the banking sector’s solvency remains critical for (Figure 14). Education was the largest contributor to channeling the significant capital inflows (financial inflation 2024, as the base effect receded in other cat- flows and foreign direct investment) that are required egories. Owner occupied housing costs (i.e., equiva- for reconstruction and investment. lent rent); food and non-alcoholic beverages; water, electricity, gas, and other fuels; and (iv) health also contributed to headline inflation with 14.3, 9.7, 3.5, and 3.5 pp, respectively (Figure 14). The latter inflationary dynamics can be ascribed to the increasing dollar- 18 Some banks have reportedly borrowed in LBP and undertook foreign exchange transactions to meet their ization of prices across sectors as well as domestic obligations under circulars 166 and 158. Interbank pricing factors, such as markup pricing, limited prod- lending rates declined markedly following the cessation uct market competition, and other factors detailed in of hostilities but remained in the double digits in Box 2, which drive inflation in domestic currency. December 2024 and Q1-2025. 14 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? BOX 2. DISSECTING INFLATION: PRE- AND POST-CRISIS DRIVERS Before the 2019 crisis, Lebanon’s inflation moderately tracked global inflation, though domestic structural factors played a key role. Since the crisis, exchange rate depreciation has been the main driver of inflation, with price responses varying widely across CPI subcomponents based on import content and tradability. Looking ahead, as the exchange rate stabilizes and one-off dollarization effects wane, inflation is expected to gradually revert to its pre-crisis dynamics and exhibit a closer correlation with global inflation—though it will likely remain elevated due to domestic factors. Inflation in Lebanon exhibited a moderate correlation with global inflation in the pre-2019 crisis period. The correlation between consumer price index (CPI) in Lebanon and global CPI inflation (measured as the first principal component of the CPI inflation rates of the G7 countries), was, on average, 0.47 over the December 2013 to October 2019 period (Figure 15). The correlation between US and Lebanese inflation is higher and stands at 0.7. Global and US inflation’s pass-through to inflation in Lebanon is discernible. In the pre-crisis period, a 1 percent increase in global inflation was associated with a 0.57 percent to 0.63 percent increase in inflation in Lebanon.a The latter is higher than for countries with a fixed exchange or flexible exchange regime in the MENA region.b Global inflation also appears to lead inflation in Lebanon.c Despite the elevated pass-through, the proportion of variation in inflation in Lebanon that is explained by variation in global inflation, or shocks to global inflation, the price of oil, and shipping costs, is modest (Figure 16). These findings suggest that, in line with the Spring 2023 Lebanon Economic Monitor, domestic factors, which could potentially include limited product market competition, oligopolistic market structures, domestic markup pricing, lack of regulatory oversight on domestic pricing as well as hedging are important drivers of domestic inflation.d The onset of the crisis precipitated a decoupling between global and Lebanese inflation rates, and exchange rate fluctuations emerging as the primary driver of inflation after 2019. A depreciation-inflation spiral, triggered by the 2019 financial crisis and fueled by a sharp increase in currency in circulation, drove inflation in Lebanon into triple digits.e In the post-crisis period, changes in the exchange rate account for more than two thirds of the variation in month-on-month inflation (Figure 18). Despite a 30 percent decrease in shipping activity through the Suez Canal and Bab El-Mandeb Strait, rising shipping costs do not appear to be associated with higher inflation. Moreover, global inflation’s explanatory power for inflation in Lebanon largely dissipates after 2019, indicating that exchange rate fluctuations have significantly greater influence on domestic inflation than global price trends. The exchange rate pass-through in Lebanon is higher than in both emerging and developed economies. The findings suggest that a 10 percent depreciation in the exchange rate is associated with a 5.74 percent increase in inflation, indicating a high degree of pass- through to consumer prices. This rate exceeds that observed in comparator countries, which is likely a reflection of the larger proportion of imported consumption out of total consumption. Nonetheless, around 26.6 percent of the variation in inflation remains unexplained by exchange rate changes, suggesting that domestic pricing factors continue to exert an impact on inflation, albeit to a much lesser extent than in the pre-crisis period. The explanatory power of exchange rate fluctuations declined sharply in October 2023 (Figure 18). This drop coincided with a period of exchange rate stability, as the Lebanese pound held steady at around LBP 89,500 per USD from August 2023 onward. Despite this stability, month-on-month inflation spiked in October 2023, driven by a rise in the education subcomponent of the CPI basket as educational services became increasingly dollarized. FIGURE 15 • Inflation in Lebanon Tracked Global Inflation in the pre-Crisis Period Month-on-Month inflation 2.0 1.5 1.0 0.5 0.0 –0.5 –1.0 –1.5 –2.0 –2.5 2014 2015 2016 2017 2018 2019 Global inflation Lebanon inflation Source: Staff calculations. (continued on next page) Recent Economic Developments 15 BOX 2. DISSECTING INFLATION: PRE- AND POST-CRISIS DRIVERS (continued) A closer look at the components of the CPI basket reveals substantial heterogeneity in their response to exchange rate depreciation. The subcomponents most sensitive to exchange rate fluctuations include health services, furnishing and household equipment, and alcoholic beverages, all of which exhibit contemporaneous pass-through coefficients exceeding 0.7—implying that a 10 percent depreciation leads to price increases of more than 7 percent. In contrast, the pass-through is weakest for communication and housing. Exchange rate changes explain roughly 80 percent or more of the variation in prices for foods and non-alcoholic beverages, alcoholic beverages, tobacco and narcotics, and furnishing and household maintenance items. Meanwhile, other subcomponents show varying degrees of sensitivity, with inflation in the education and communication categories showing no significant response to exchange rate movements. The heterogeneity in exchange rate pass-through across CPI subcomponents is proportional to the share of imports in total consumption. Domestic, and largely non-traded services, such as communication and education, have been largely unaffected by the depreciation of the Lebanese pound. In contrast, traded services, including those that benefit from tourism and spending by Lebanese expatriates (e.g., the restaurants and hotels subcomponent), exhibit a higher degree of pass-through. While the pass-through is partial for most CPI subcomponents—and negligible for education, which exhibits yearly one-off spikes due to increased dollarization of fees at the start of every school year, and communication, whose price is government-administered —it appears to be near complete for: (i) alcoholic beverages, tobacco, and narcotics; (ii) furnishing, household equipment, and routine household maintenance; and (iii) restaurants and hotels.f With the fading impact of one-off dollarization effects, and assuming continued exchange rate stability, inflation in Lebanon is expected to more closely track global inflation and revert to pre-crisis dynamics. Looking ahead, Lebanon’s inflation is projected to show a higher, albeit FIGURE 16 • Nonetheless, Shocks to Global Inflation, Shipping Costs, and Oil Prices Account for Less than a Quarter of the Variation in Inflation Variance decomposition of DOIL Variance decomposition of DBDI 100 100 80 80 60 60 40 40 20 20 0 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 DOIL DBDI Global inflation Inflation in Lebanon Variance decomposition of global inflation Variance decomposition of inflation in Lebanon 100 100 80 80 60 60 40 40 20 20 0 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 DOIL DBDI Global inflation Inflation in Lebanon Source: BdL and Staff calculations. (continued on next page) 16 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? BOX 2. DISSECTING INFLATION: PRE- AND POST-CRISIS DRIVERS (continued) Inflation Moved in Tandem with FIGURE 17 •  FIGURE 18 • …but the Explanatory Power of the Bank Note Exchange Rate the Exchange Rate Fluctuations Fluctuations in the Post-Crisis Dropped Off Sharply when the Period… Exchange Rate Stabilized Inflation and the change in the exchange rate Recursive R Squared 60 0.825 50 40 0.800 30 20 0.775 10 0.750 0 –10 0.725 –20 –30 2020 2021 2022 2023 0.700 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Inflation Change in the exchange rate 2023 2024 Source: BdL and Staff calculations. Source: BdL and Staff calculations. still moderate, correlation with global inflation, with domestic inflation trends increasingly mirroring global patterns. Nonetheless, as in the pre-crisis period, inflation in Lebanon is likely to remain above global averages due to persistent domestic factors. a The pass-through from US to Lebanese inflation is even higher and ranges from 0.66 to 1.09. b Global inflation’s pass-through to domestic inflation stands at 0.36 for Egypt (but is insignificant), 0.24 for Jordan, and is not statistically significantly different from zero the Kingdom of Saudi Arabia, the United Arab Emirates, Morocco, and Qatar for the same period. c The contemporaneous cross-correlation between global inflation and inflation in Lebanon is the largest. It is followed in magnitude by a cross-correlation of 0.29 between inflation in Lebanon and the first lag of global inflation. d Discriminating between the latter hypotheses requires more granular data on prices at the commodity level as well as detailed industry-level data which comprises measures of concentration. e For further information, please refer to the Fall 2020, Spring 2021, and Fall 2021 Lebanon Economic Monitor. f These findings suggest that (i) Lebanese firms have pricing power, and (ii) much in line with the international evidence (Yotzov et al., 2024), Lebanese firms’ response to inflation headlines and passing through of the exchange rate depreciation was swift. For more on firms’ speed of response to inflation, please see Yotzov, I., Bloom, N., Bunn, P., Mizen, P., & Thwaites, G. (2024). The speed of firm response to inflation (No. w32731). National Bureau of Economic Research. BOX 3. ANALYZING LEBANON’S REER: TRENDS AND COMPETITIVENESS The Real Effective Exchange Rate (REER) has undergone significant fluctuations from January 2010 to December 2024. Initially appreciating until March 2019, the REER indicated a loss of competitiveness, which reversed with the onset of the financial crisis. Despite the depreciation of the REER enhancing export (price) competitiveness, Lebanon did not experience a corresponding increase in exports due to various external and internal factors. The near complete dollarization of the economy further inhibits the benefits of a weaker REER. Moving forward, Lebanon needs to address the root causes of its lack of export competitiveness despite a sharp improvement in its price competitiveness to fully exploit the advantages of a potential flexible exchange rate regime. Defining the REER The Real Effective Exchange Rate (REER) measures the value of a country’s currency relative to a basket of other currencies, adjusted for differences in price levels between the countries.a It also incorporates trade weights to reflect the relative importance of each trading partner in the country’s overall trade flows. The REER is commonly used to assess whether a country’s nominal exchange rate is misaligned (continued on next page) Recent Economic Developments 17 BOX 3. ANALYZING LEBANON’S REER: TRENDS AND COMPETITIVENESS (continued) with its equilibrium value, which would indicate whether the currency is over- or under-valued.b A depreciation in the REER enhances a country’s export competitiveness by making its goods cheaper abroad, while an appreciation reduces external competitiveness. The REER is given by: REER = ∏ j=i ( ) Pi Ri wij , Pj Rj where Pi is the price level in Lebanon, Pj is the price level in Lebanon’s trading partner, Ri and are Rj the nominal exchange rates of Lebanon and country j, respectively, measured in US$ per local currency, and wij is the trade weight of country j with Lebanon. Trade-in-goods data are obtained from COMTRADE for the period January 2010 to December 2024.c Exchange rates and price level data were obtained from IMF’s International Financial Statistics database for the same period. Starting in September 2019, Lebanon’s Bank Note Rate (BNR) is used instead of the official exchange rate, to gauge the effect of the depreciation of the LBP on Lebanon’s competitiveness. Dynamics of the REER The dynamics of Lebanon’s REER for the period January 2010 and December 2024 can be delineated as follows: 1. January 2010 to March 2019: Lebanon’s REER was appreciating prior to the crisis, reaching its maximum (for the period under study) in March 2019. The REER increased by 107.4 percent between January 2010 and March 2019, indicating a significant loss of competitiveness compared to Lebanon’s trading partners. Consequently, as imports became cheaper, they increased from US$ 13.2 billion in 2010 to US$19.3 billion in 2018. 2. April 2019 to July 2020: The trend reversed with the onset of the crisis, as the REER depreciated before embarking on an appreciating trend later. The REER began depreciating in April 2019, reaching its lowest (maximum competitiveness) in July 2020, 78 percent lower than its (highest) level in March 2019. The LBP’s depreciation between April 2019 and July 2020 outpaced inflation, leading to a depreciation of the REER. During that period the BNR depreciated by 475 percent, while prices grew by 112 percent. Imports decreased from US$ 16.1 billion in 2019 to US$ 9.8 billion in 2020.d Simultaneously, exports of goods decreased from US$ 3.8 in 2019 to US$ 2.9 billion in 2020. 3. August 2020 to August 2023: The REER almost doubled over the period August 2020 to August 2023 due to the rapid and massive depreciation in the LBP. The increase in the REER was brought about by inflation outpacing LBP depreciation. During that period, inflation increased by 1,953 percent, while BNR grew by a lower 1,092 percent. The increase in prices was mainly due to the removal of subsidies and the gradual dollarization of prices. 4. September 2023 to December 2024: Lebanon’s competitiveness gains during the crisis continue to be eroded. Since August 2023, REER has been appreciating due to rising domestic prices while the exchange rate is stable. The LBP has stabilized since August 2023 for the first time since the peg was dislodged in September 2019. However, inflation was persistent despite slowing down, as prices increased by 42 percent over the period September 2023 to December 2024. This resulted in the REER for March 2024 being almost four times its July-2020 low. The REER and External Competitiveness Contrary to theoretical expectations, Lebanon did not reap the rewards of a weaker REER in terms of export competitiveness. While the REER depreciation led to a compression in importse, exports did not increase. The lack of external lift during the financial crisis is driven by constrained access to destination markets in the Arab gulf, the turmoil and ensuing closure of trade routes through Syria, subdued global demand amid the COVID-19 pandemic, and a weak business enabling environment and high costs (particularly in electricity). The absence of external lift during the financial crisis is thoroughly discussed in the Fall 2021 Lebanon Economic Monitor.f Going forward, the near complete dollarization in the Lebanese economy will inhibit the export competitiveness that stems from a weaker REER. Under sticky prices, US$ costing and pricing, Calvo pricing,g or oligopolistic market structures, it is unclear that a depreciation in the REER would spur goods or services exports. Hence, a weaker REER would not necessarily pass-through to Lebanese exports, particularly the export of tourism services.h (continued on next page) 18 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? BOX 3. ANALYZING LEBANON’S REER: TRENDS AND COMPETITIVENESS (continued) FIGURE 19 • A Depreciating REER Did Not Lead to an Increase in Exports 250 400 350 200 300 Index (Jan 2010 = 100) 150 250 US$ million 200 100 150 100 50 50 0 0 201001 201006 201011 201104 201109 201202 201207 201212 201305 201310 201403 201408 201501 201506 201511 201604 201609 201702 201707 201712 201805 201810 201903 201908 202001 202006 202011 202104 202109 202202 202207 202212 202305 202310 202403 202408 Exports of goods (rhs) REER index Source: CAS, IFS, and Staff calculations. a For a thorough discussion on the alternative definitions and construction of the REER, see Chinn, M. D. (2006). “A primer on real effective exchange rates: determinants, overvaluation, trade flows and competitive devaluation”, Open Economies Review, 17, 115-143. b Models that use the real exchange rate include Purchasing Power Parity (PPP) and the Samuelson-Balassa model. In the latter model, differences in productivity between the tradable and non-tradable sectors drive the REER. See, for example, Chinn, M. (2012). “Macro approaches to foreign exchange determination”, Handbook of Exchange Rates, 45-71. c Trade-in-services was excluded from the calculations due to unavailability of monthly data for Lebanon through COMTRADE. d This decrease in imports, however, cannot be completely ascribed to the REER depreciation, as this period coincided with the multipronged crisis Lebanon faced (economic and financial crisis, Port of Beirut explosion, and the COVID-19 pandemic). e The compression in imports can also be ascribed to restrictions on cross-border transfers. f See also Cali, Harakeh, Hassan, and Struck (2015), The impact of the Syrian conflict on Lebanese trade, World Bank, Washington DC. g Calvo pricing is a widely used concept in macroeconomics to model price stickiness; that is, why and how prices in the economy do not adjust instantly to changes in supply and demand. See Calvo, Guillermo A. (1983). «Staggered Prices in a Utility-Maximizing Framework.» Journal of Monetary Economics, 12(3), 383–398. h In a Samuelson-Balassa world, the tradables sector, which comprises tourism services, would benefit more than the non-tradable sector from a weaker REER. This effect may be substantially weaker in a highly dollarized economy, like Lebanon. Recent Economic Developments 19 3 OUTLOOK AND RISKS I n 2025, the end of the conflict and the reso- roeconomic and financial frameworks will be fully lution of political paralysis have generated a resolved. sense of cautious optimism. However, this opti- Reconstruction inflows, if realized, could mism remains heavily contingent on improvements significantly bolster economic activity by creating in the security situation which remains fragile despite jobs, increasing consumption, enhancing produc- the ceasefire agreement. It also depends on mean- tivity, and stimulating supply chain growth.19 Each ingful progress in long-awaited reforms, now further dollar spent would generate a multiplier effect, ampli- complicated by growing uncertainty in global trade, fying the overall economic impact. Reforms aimed as highlighted in Box 1. at reducing informality would also serve to increase The new government’s reform plans, a the public expenditure multiplier and boost growth. rebound in tourism and consumption, and (albeit Accordingly, if reforms progress and capital inflows limited) capital inflows for reconstruction and rise, growth could exceed projections and necessitate recovery are expected to drive real GDP growth to an upward revision of forecasts. On the other hand, if 4.7 percent. This growth is also supported by a base reforms stall, capital inflows fail to materialize, and the effect, following a nearly 40 percent cumulative GDP security situation deteriorates, growth may fall short contraction during the crisis period. The increase of projections. A key caveat remains the impaired in consumption is attributed to improved consumer banking sector, which continues to pose a signif- sentiment, which raises the marginal propensity to icant obstacle to large-scale financial inflows and consume and amplifies the consumption multiplier. investments. A successful bank restructuring, which Consumption is expected to be sustained by remit- tances, tourism exports, and stronger overall eco- 19 For theoretical and empirical accounts of the relation nomic activity in 2025, provided a stable or improving between informality and public expenditure multipliers, security situation. While the growth forecast depends please see Colombo, E., Furceri, D., Pizzuto, P., & Tirelli, on the prospects for reform, it does not assume, given P. (2024). Public expenditure multipliers and informality. the government’s short tenure, that the impaired mac- European Economic Review, 164, 104703. 21 comprises bank recapitalization, would significantly current spending relative to 2024, while still maintain- boost the consumption multiplier.20 ing a balanced budget. With most components of the CPI bas- Lebanon is expected to continue to record ket now dollarized and assuming continued a significant current account deficit in 2025, pro- exchange rate stability, inflation is projected to jected at 15.3 percent of GDP, primarily driven by decline to 15.2 percent in 2025. This forecast a trade-in-goods deficit. The reduction in the cur- reflects the average month-to-month increases in infla- rent account deficit as a percentage of GDP, from tion during 2024, a period marked by exchange rate 22 percent in 2024 to 15 percent in 2025, is primarily stability, while excluding the months of conflict esca- attributed to the denominator effect of a larger nom- lation, which saw slightly higher inflation likely driven inal GDP. Although tourism receipts declined due to by supply shortages. As outlined in Box 2. Dissecting the conflict, resulting in a trade-in-services deficit of Inflation: Pre- and Post-crisis Drivers, and contingent –3.3 percent of GDP in 2024, the trade-in-goods def- on ongoing exchange rate stability, inflation in Leba- icit is projected to be partially offset by a trade-in-ser- non is expected to more closely track global inflation. vices surplus in 2025. This anticipated improvement However, it will remain higher on average due to per- is driven by higher service exports, fueled by expec- sistent domestic factors. Should policy or trade uncer- tations of a robust tourism season amid a more favor- tainty reignite global inflation, domestic inflation may able political and security environment. Nevertheless, rise accordingly, given the established correlation as previously noted, historically weak balance of pay- between global and local inflation dynamics. As ana- ments (BOP) data, along with the dominance of a per- lyzed in Box 3. Analyzing Lebanon’s REER: Trends vasive dollarized cash economy, are likely to distort and Competitiveness, the real effective exchange rate official estimates of the current account deficit. (REER) has experienced significant fluctuations in the Immediate policy actions and reforms are past. Looking ahead, because much of the economy essential to build momentum and establish a foun- is dollarized, Lebanon’s exchange rate will have lim- dation for sustainable recovery, as comprehen- ited ability to adjust in response to changes in global sive reform remains the only viable path forward. trade conditions, making the economy more exposed To support the government’s priorities outlined in its to external shocks. ministerial statement, the Special Focus presents a As noted earlier, exchange rate stability has one-year policy action plan aimed at addressing Leba- been supported by improved revenue collection non’s most pressing challenges with urgency. Derived in Lebanese pounds (LBP taxes) and the accumu- from sector-specific policy notes, this plan is designed lation of public sector surpluses at the BdL. Over to deliver immediate benefits while paving the way for the past year, the BdL has prioritized reserve accumu- broader, long-term reforms. By prioritizing actionable, lation by utilizing fiscal surpluses. In 2025, however, high-impact measures, Lebanon can tackle critical with competing demands related to recovery and issues and move toward sustainable recovery. reconstruction efforts, the fiscal restraint and prudent fiscal management pursued by the authorities could become more tenuous and increased fiscal flexibil- 20 The increase in the consumption multiplier would be driven by the interlinkages between households and ity would be warranted, particularly as surpluses have banks’ balance sheets. For a theoretical and empirical already reached a sizeable level. Improved revenue account, please see Faria-e-Castro, M. (2024). “Fiscal mobilization, as projected in the ratified 2025 budget, multipliers and financial crises”, Review of Economics is expected to expand fiscal space and enable higher and Statistics, 106(3), 728–747. 22 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? TABLE 2 • Selected Economic Indicators (2015–2025) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Proj. (Annual percentage change, unless otherwise specified) Real Sector Real GDP 0.5 1.6 0.9 –1.9 –6.9 –21.4 –7.0 –0.6 –0.8 –7.1 4.7 Real GDP per Capita a –1.5 4.0 3.6 1.0 –3.9 –20.1 –7.3 –1.1 –1.3 –7.6 4.0 Agriculture 3.7 3.8 4.3 4.4 4.7 6.0 6.0 6.0 6.0 6.0 6.0 Industry 12.7 12.8 12.3 12.0 10.7 12.8 12.8 12.8 12.9 12.9 12.9 Services 72.0 71.7 71.8 72.2 73.9 76.9 78.6 78.6 78.4 78.4 78.4 Net Indirect Taxes 11.6 11.7 11.6 11.4 10.6 4.3 2.6 2.6 2.6 2.6 2.6 (Annual percentage change, unless otherwise specified) Inflation (Consumer Price Index) –3.7 –0.9 4.5 6.1 2.9 84.3 154.8 171.2 221.3 45.2 15.2 Public Financeb Revenue 19.2 19.4 21.9 21.0 20.8 13.1 7.5 6.1 13.7 15.3 15.9 o/w Tax revenue 13.7 13.7 15.5 15.4 15.6 9.0 5.6 4.9 10.0 11.7 12.9 Expenditure 26.9 28.7 28.6 32.0 31.4 16.4 6.6 9.0 13.2 14.7 15.9 Current expenditure 21.7 23.2 23.6 26.0 26.1 14.3 5.8 7.8 11.5 10.3 10.7 o/w Interest payment 8.9 9.3 9.4 9.9 10.1 2.5 0.9 0.4 0.9 0.3 0.1 Capital expenditure 1.4 1.4 1.5 1.7 1.3 0.4 0.1 0.2 0.2 0.9 1.8 Overall fiscal balance –7.7 –9.3 –6.7 –11.0 –10.6 –3.3 0.9 –2.9 0.5 0.5 0.0 Primary balance 1.2 0.0 2.7 –1.2 –0.5 –0.8 1.8 –2.5 1.4 0.9 0.1 (Percent of GDP, unless otherwise specified) External Sector Current Account Balance –17.1 –20.5 –22.9 –24.3 –21.5 –8.8 –14.7 –34.6 –28.1 –22.2 –15.3 Trade balance –22.9 –23.7 –24.8 –24.8 –25.1 –20.3 –31.0 –55.0 –53.2 –44.5 –30.5 o/w Export (GNFS) 39.7 37.3 36.1 35.7 35.7 28.2 44.9 60.1 52.7 40.2 40.0 Exports of goods 8.0 7.7 7.6 7.0 9.4 12.9 19.9 21.5 20.6 16.3 13.9 Exports of services 31.7 29.6 28.5 28.7 26.3 15.3 24.7 38.6 32.1 23.9 26.1 o/w Import (GNFS) 62.6 61.0 60.9 60.5 60.8 48.5 75.9 115.1 105.9 84.7 70.5 Imports of goods 35.2 35.1 34.8 34.4 35.3 33.4 55.4 86.4 83.9 57.5 46.4 Imports of services 27.4 25.9 26.1 26.1 25.5 15.1 20.5 31.3 21.9 27.1 24.2 Factor services and transfers 5.8 3.2 1.9 0.5 3.0 11.0 18.5 22.3 25.1 22.3 15.2 o/w Net remittance inflows 7.2 6.7 5.2 4.2 6.1 11.9 17.8 21.9 21.2 18.7 15.5 Total Public Debt Total debt stock (US$ million)c 70,315 74,959 79,530 85,139 91,922 62,567 46,881 44,312 43,976 45,851 47,664 o/w External debt 27,089 28,114 30,391 33,496 35,751 38,095 38,959 40,976 42,906 44,825 46,641 Debt-to-GDP ratio (percent) 140.8 146.6 150.0 155.1 178.1 197.3 202.7 211.1 219.0 176.5 152.4 (continued on next page) Outlook and Risks 23 TABLE 2 • Selected Economic Indicators (2015–2025) (continued) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Proj. Memorandum Items Nominal GDP (LBP billion) 75,268 77,105 79,939 82,764 80,196 116,954 271,916 573,282 1,723,308 2,324,462 2,799,560 Exchange rate, average (LBP/ 1,508 1,508 1,508 1,508 1,554 3,688 11,755 27,309 85,828 89,500 89,500 US$) Nominal GDP (US$ million)** 49,929 51,147 53,028 54,902 51,606 31,712 23,132 20,992 20,079 25,972 31,280 a Per-capita calculations are based on population estimates produced by the UN population division. These estimates have been significantly revised down for Lebanon, to 5.5 million from 6.7 million in 2022. This change has a prominent effect on Real GDP per capita growth and Nominal GDP per capita. b Fiscal accounts are reported on a cash basis. c The WB-AER is used to calculate the total debt stock and nominal GDP in US$ million for 2019-2025. 24 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? SPECIAL FOCUS Reform for Recovery and Growth: intended to help anchor economic recovery and sus- A One-Year Policy Action Plan tain growth beyond 2025 (Figure 20). The framework consolidates existing and past reform recommenda- The new government has pledged a reform agenda tions into three core pillars, each critical to driving and outlined four high-level objectives in its minis- recovery and long-term development. These pillars terial statement: (i) halting financial and economic are: (i) restoring macroeconomic and financial sta- deterioration (ii) strengthening social security; bility, (ii) rebuilding citizen trust through improved (iii) eliminating waste and corruption, and (iv) draft- governance, and (iii) investing in human capital ing a fair parliamentary elections law. To support and expanding economic opportunities.21 While the government reform, this special focus offers a com- agenda spans a broad set of sectors, all recommen- prehensive one-year policy action plan. The action dations are designed to be actionable and achievable plan draws on more than two decades of the World within a one-year timeframe. The reform proposal also Bank Groups’ engagement and policy dialogue in serves to support a structured public debate around Lebanon and reflects key lessons from core diagnos- reform priorities. tics, technical assistance, and sectoral projects of Macroeconomic and financial stability are the World Bank in Lebanon. Recommendations are the bedrock of the reform framework and serve designed to deliver impact within 12 months, focus- as a prerequisite for all other reforms. Without ing on restoring macro-financial stability; rebuilding macro-financial stability, structural reforms cannot citizens’ trust; and laying the foundation for a new, take root, public services cannot be restored, and successful economic development model. economic recovery cannot be sustained. This should The one-year policy action plan aims at translating the high-level reform priorities articu- lated by the authorities into concrete and feasi- 21 The proposed reforms draw on the World Bank’s institutional memory and reflect a bottom-up approach ble high-impact actions that can be implemented to sectoral reform, shaped by years of engagement and within the government’s short tenure. The pro- dialogue with Lebanese counterparts. For example, posed framework builds on over two decades of policy discussions around energy sector reform span World Bank Group engagement in Lebanon and is more than two decades. 25 be the government’s most urgent priority. While the private sector development, entrepreneurship, and bank restructuring process remains complex and economic diversification. politically sensitive, the authorities have made some The core principle of the reform framework headway, as noted earlier, by enacting amendments is that all components must be treated as inter- to the banking secrecy law and adopting a bank- connected elements of a strategic whole, rather ing sector reform law—though the latter still requires than as isolated actions. The reforms outlined parliamentary ratification. For the strategy to remain under the three pillars must be pursued simultane- on track, it is essential that the financial gap law be ously and comprehensively, reinforcing one another. adopted and ratified, as it establishes the framework This approach addresses an important lesson from for allocating the large losses in the banking sector. Lebanon’s past, where piecemeal reforms often failed Without it, the banking sector reform law cannot come to produce sustainable outcomes. Only a holistic into effect. These steps are also critical to restoring reform implementation strategy can ensure that mac- credibility, as emphasized under Pillar II. roeconomic stability translates into improved gov- Building on this prerequisite, the sec- ernance, strengthened public services, and robust ond pillar focuses on restoring trust through private sector-led growth. Collectively, these intercon- improved governance and effective service provi- nected reforms can generate the necessary momen- sion. Institutional credibility and social stability hinge tum for lasting economic recovery and sustainable on strengthening governance, enhancing transpar- long-term development. ency, and ensuring reliable service delivery. Enforcing the rule of law, addressing corruption, strengthening state institutions, and responsibly managing public From Challenges to Reforms resources are crucial to rebuilding trust in govern- ment, both among Lebanese citizens and with inter- Pillar I: Restoring Macroeconomic and national investors and development partners. Financial Stability The third pillar supports the foundations of a new development model by investing in human Lebanon’s economy is marked by macroeco- capital and expanding economic opportunities nomic instability, an unsustainable debt burden, through private sector development. A sustainable and an insolvent financial sector. Despite recent recovery must be inclusive and equitable, ensuring exchange rate stabilization, prolonged currency Lebanon’s workforce is equipped with the necessary depreciation has eroded purchasing power, fueled tri- skills and opportunities to drive long-term growth. This ple digit inflation, and deterred investment. The bank- requires targeted investments in health, education, ing sector remains in distress and insolvent, with an and social protection, as well as job creation through unresolved financial crisis that has eroded confi- dence, paralyzed credit markets, and left depositors unable to access their savings. A growing cash-based FIGURE 20 • The Reform Framework economy has worsened financial integrity risks, lead- ing to Lebanon’s Financial Action Taskforce (FATF) grey list placement. Pre-Requisite: Pillar I: Restoring Macroeconomic Urgent reforms include restructuring and and Financial Stability rehabilitating the banking sector as well as estab- lishing a credible exchange rate and monetary Pillar II: Pillar III: Restoring Citizen Strengthening Human Recovery & framework. A public debt restructuring strategy must Trust through Capital and Expanding Sustainable be agreed upon with domestic and external creditors Enhanced Governance Economic Economic and Service Provision Opportunities to restore fiscal sustainability. Fiscal consolidation Growth should be supported through multi-year budget plan- ning and a more equitable tax regime. Comprehen- 26 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? sive banking sector restructuring, including audits, Pillar III: Strengthening Human Capital resolution mechanisms, and legal reforms, must be and Expanding Economic Opportunities completed, while FATF-aligned AML/CFT frameworks are strengthened. A robust regulatory system for dig- Lebanon’s human capital is eroding due to declin- ital payments and non-bank finance is also essential. ing education quality, a healthcare system in crisis, Enhanced fiscal discipline and greater transparency and a fragile social safety net. Youth unemployment about fiscal targets would contribute to rebuilding and informality are high, and the private sector, cru- trust, a key requirement under Pillar II. cial for job creation, is constrained by limited access to finance, outdated investment laws, and weak com- Pillar II: Restoring Trust through petition. The agrifood sector suffers from fragmented Governance and Public Service Delivery land ownership, broken or limited regional value chain integration, export barriers, and climate and conflict- Institutional capacity is severely undermined related damage. The authorities could enhance the by corruption, poor financial governance, and a agrifood sector’s export competitiveness by enact- shrinking, underpaid public workforce. Public ser- ing reforms that target value chain development, food vices, including electricity, water, and transport, suffer safety enforcement, and modernization of trade and from mismanagement, inefficiency, and years of under- inspection systems. Contingent on continued stability investment. Digital government remains fragmented. in the security environment, the ongoing improvement The procurement system is weak and non-transparent. in the political environment that resulted from the elec- Environmental degradation and outdated telecommu- tion of a President and formation of a reform-minded nications regulation further hamper service delivery. government coupled with regional geopolitical changes Governance reforms include adopting a would alleviate the uncertainty—a historically significant revised public accounting law, launching civil ser- impediment cited by Lebanese enterprises—facing the vice restructuring, and enhancing transparency private sector and reestablish access to regional desti- through digital systems and public oversight bod- nation markets, which is essential for generating cash ies. In electricity, priority reforms target loss reduc- flows and inward investments. The authorities could tion, billing cycle efficiency, and scaling up low-cost also explore, with international and regional partners, supply. In water, passage of the national water strat- bridge financing mechanisms that are specific to the egy and modernization of infrastructure and gover- private sector to allay the financing constraint. Opera- nance are critical. Transport reforms focus on port law tionalizing the Competition Law, passing insolvency implementation and public transport system design. legislation, and enhancing the role of the Investment Procurement and telecom reforms must ensure inde- Development Authority of Lebanon (IDAL)’s role would pendent oversight, enforcement of existing laws, and also support a private sector led growth model. digital upgrades. Restructuring the civil service, by removing redundant and ghost employees, would provide the necessary fiscal space to recruit qualified 22 The authorities can create fiscal space by prioritizing such high impact (yet low cost) initiatives that enhance staff for critical functions at the Ministry of Finance revenue collection. For instance, the Value-Added Tax and finance the informational technology systems that (VAT) Directorate, Revenue Directorate and Lebanese are essential for revenue collection.22 Enhanced fiscal Customs Administration are critically understaffed. The space would also permit gradually increasing wages operational efficiency of the Large Taxpayers’ Office across the public service, which in turn enhances pro- could be enhanced and revenue directorates combined ductivity and government effectiveness. Moreover, the and streamlined (IMF, 2023). These reforms to the tax administration would strengthen revenue collection and decrease in principial and interest expenditures from create further fiscal space. For further information, see a successful debt restructuring would create space to IMF (2023), “Lebanon Technical Assistance Report – address the chronic underinvestment in the electricity, Tax and Customs Administration: An Urgent Need for transport, and waste management sectors. Intervention”, Washington DC. Special Focus 27 Lebanon’s education, health, and social financing for cash transfers that are currently disbursed protection systems are ailing, undermining human to 150,000 extreme poor Lebanese household under capital development and social stability. The edu- the World Bank financed Emergency Social Safety Net cation sector is struggling with declining quality, Project (ESSN)-AMAN program, recertification of ben- underfunding, and the erosion of its qualified teaching eficiaries, and implementation of the graduation pillar. force, leaving many students without access to proper learning opportunities. The health sector is experienc- ing a severe financial and operational crisis, with hos- Translating the Reform Framework pitals and primary care facilities struggling to procure into Action medical supplies, retain staff, and provide adequate services due to the multi-pronged crisis. The social The reform framework is operationalized through protection system remains fragile and constrained in a detailed policy action plan, identifying the most its ability to comprehensively protect and enhance pressing challenges that must be addressed imme- the resilience of the poor and vulnerable, with chal- diately. This comprehensive, one-year action plan, lenges in securing adequate financing beyond grants developed based on sector-specific policy notes, aims and borrowing. Deteriorating labor market conditions, to achieve maximum immediate benefits while estab- due to rising unemployment, informality, and eco- lishing the groundwork for broader and more extensive nomic inactivity, are also leading to underutilization of reforms. By concentrating on clearly defined, action- human capital. able steps with significant potential impact, Lebanon The authorities have scope to undertake can effectively tackle its most critical issues and build sector-specific reforms—which do not all necessi- a solid foundation for sustained recovery and long- tate significant financing—that yield rapid and sig- term development. Table 1 summarizes key reforms nificant impact. Health reforms should institutionalize and the corresponding policy action plans for each procurement transparency, expand access through sector under each pillar. To ensure implementation updated benefit packages, and rationalize curative and impact, the proposed policy reform actions align care spending. Education reforms include school reha- with government priorities, are deemed feasible within bilitation, skills-based training, and teacher workforce 12 months, and are considered sufficiently robust to management. Social protection requires sustainable remain effective over the longer-term. 28 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans Pillar Sector Key Reforms One-Year Policy Action Plan Pre-Requisite Macroeconomy 1. Monetary Stabilization Establish a new and credible Exchange Rate & Monetary Framework: (Stabilization) A new monetary policy with a clear focus on targeting inflation would Pillar I: Restoring provide a nominal anchor for economic activity macroeconomic and financial stability Full Assessment of the financial position of Banque du Liban (BDL) Initiate Governance Reforms in BDL to strengthen financial sector supervision and control 2. Public Debt Adopt a Public Debt Restructuring Strategy: Agree on external and Restructuring domestic debt restructuring plans and on losses with creditors, subject to equitable burden sharing 3. Fiscal Framework Timely ratification of consecutive government budgets with immediate Formulation corrective revenue mobilization and spending measures Adopt a Medium-term Fiscal and Debt Strategies and Fiscal Consolidation Plan. This can include the preparation of multi-year budgets, targeting a smaller primary deficit, and which possibly include principles of performance-based budgeting. A multi-year debt management strategy is also essential to maintain debt on a sustainable footing after the completion of the debt restructuring. Banking Sector 1. Restructure and resolve Ratify the banking sector reform law in parliament while maintaining distressed banks adherence to best international practices. To execute the strategy, conduct an independent audit and valuation of banks. Proper implementation of the bank secrecy law is critical for independent audits and valuations of banks. Based on the findings of the independent audit and valuation, implement bank resolution measures with legal protections, operational independence, and alignment with Financial Stability Board (FSB) key attributes. 2. Strengthen the AML/ Amend Anti-Money Laundering (AML) and Combating the Financing CFT regime and its of Terrorism (CFT) laws in line with the Financial Action Task Force enforcement in the (FATF)’s recommendations and ensure effective implementation. financial sector Track progress on the implementation of the FATF Action Plan. 3. Adopt a robust Adopt comprehensive payment regulations, draft a national payment regulatory framework systems law, establish a fast payment system, and strengthen oversight for payments, digital and supervision of payment services. financial services, and non-banks Pillar II: Restoring Citizen Public Sector 1. Strengthening Public Finalize the consultations pertaining to the Public Accounting Law Trust through Enhanced Financial Management (PAL) and submit it to the Council of Ministers and parliament for Governance and Service (PFM) ratification. The public procurement law (Law 244/2021), ratified Provision in 2021, streamlines and unifies the previously fragmented and inconsistent procurement framework. The law, which came into effect on July 29, 2022, adheres to international best practices. Despite that, modernizing the PAL, which dates to 1963, is essential for improving budget preparation and execution. Public Investment Management (PIM): Consolidate the PIM governance framework via: (i) Creation of a steering committee (SC) chaired at the highest level of government to lead, facilitate and report on the progress of the PIM reform; (continued on next page) Special Focus 29 TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans (continued) Pillar Sector Key Reforms One-Year Policy Action Plan Pillar II: Restoring Citizen (ii) Institutionalization of a PIM unit by the Government; Trust through Enhanced Governance and Service (iii) Streamline functions and processes with/within the Ministry of Provision (continued) Finance for capital budgeting Timely publication of fiscal data to increase public trust and enhance fiscal transparency. 2. Implement a Merit-Based Initiate a civil service census in line with international best practices. Civil Service Reform to Enhance Efficiency and Transparency Adopt a credible reform plan for civil service management and wage bill. Initiate the establishment of an integrated HR IT system and payroll IT system. 3. Strengthen Anti- Adopt the income and asset declaration system. Corruption & Public Oversight (including Judicial Reform) Enforce access to information law through adopting a Right to Information law requiring proactive publication of government data (budgets and financial reports, information on public services, etc.). Ratify the amended law of the Court of Accounts Establish a dedicated parliamentary budget office. Establish a National Taskforce for Judicial Reform Procurement 1. Ensure public Creation of the Procurement Complaint Authority: procurement respect nomination of president and members of main principles of fairness, transparency, Issuance of related decrees for operationalization fit-for-purposes and value-for-money. 2. Strengthen public Endorsement of Decrees related to implementation of the public procurement institutional procurement law 244/ 2022: oversight for proper nomination Public Procurement Authority (PPA) members reporting on the performance of the Issuance of priority decrees for implementation of the law system. Digital Development 1. Transition to citizen- Approval of National E-Government Strategy to enable a trusted, centric and resilient coordinated, and interoperable deployment of digital services. digital government Approval of National Data Hosting and Cloud Strategy to enable the efficient, cost-effective, and green delivery of highly available digital services. 2. Strengthen digital trust Submission of Personal Data Protection Law that regulates the use and foundations handling of personal data. Implementation of E-Signatures: operationalization of the Lebanese Accreditation Council (COLIBAC) and implementation of the framework for certification of trust service providers, to enable digital signing of public official documents, reduce paperwork, and improve efficiency. (continued on next page) 30 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans (continued) Pillar Sector Key Reforms One-Year Policy Action Plan Pillar II: Restoring Citizen Approval of the National Cybersecurity Strategy to improve Lebanon’s Trust through Enhanced cybersecurity posture, defend critical infrastructure, and eliminate Governance and Service cyberthreats. Provision (continued) Sector Key Reforms One-Year Policy Action Plan Electricity Sector 1. Achieve Reliable and Implement Électricité du Liban (EDL) Cost Recovery Plan, approved in affordable grid electricity July 2024, including urgent measures to: service • Reduce technical and commercial losses from 40% to 20% • Streamline protracted billing cycle from 12 to 3 months • Increase low-cost supply including: (i) utility-scale solar PV plants, (ii) gas and electricity imports, and (iii) rehabilitate transmission networks and hydro power plants (HPPs). 2. Establish Transparent Operationalize the Cash Waterfall Mechanism and disclose regular and predictable payment reports on payment execution. execution Establish EDL opening balance as per International Standards on Auditing (ISA). Disclose EDL audited financial statements on yearly basis. 3. Adopt an effective Establish the Electricity Regulatory Authority (starting with the regulatory framework appointment of ERA commissioners by COM). Review sector legal and regulatory framework Prepare for EDL Corporatization, starting with functional unbundling. Water Sector 1. Optimize supply Approval of national water sector strategy and subordinate decrees infrastructure and including: (i) (a) well overhauling requests, (b) well licensing and the systems to bridge the use of groundwater, and (c) annual reports of Water Establishments water supply-demand (WEs) by the Council of Ministers (CoM); (ii) internal procedures for the gap to improve water use national water council by the PM; (iii) (a) water infrastructure licenses efficiency for wells, (b) adoption of the strategy, (c) water rights, (d) judicial police, (e) water users association, (f) oversight of non-public Waste Water installations by the CoM. Transport Sector 1. Adopt structural Enact and Implement the Port Sector Law to enable public-private reform of the port partnership projects, particularly for the reconstruction of Port of Beirut. sector to support trade facilitation, improved border compliance, and adequate national digital infrastructure 2. Create a sound legal and Adopt a public transport reform plan including institutional institutional framework arrangements to enable the development of an integrated public for good public transport transport system. governance Environment 1. Advance the Pilot the implementation of the Cost Recovery Law for Solid Waste implementation of Management in additional municipalities ongoing Reforms in the Solid Waste Sector 2. Establish an efficient Digitalization of the Ministry of Environment (MoE)’s processes of the system for processing safeguards instruments to allow all parties to obtain needed guidance environmental and social and response safeguards instruments (continued on next page) Special Focus 31 TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans (continued) Pillar Sector Key Reforms One-Year Policy Action Plan Telecom 1. Improve the legal, Enabling the Telecom Regulatory Authority (TRA) by appointing TRA regulatory, and Board members and ensuring the TRA is fully functional, independent, institutional framework autonomous, transparent, and accountable. for telecom Pillar III: Strengthening Health Sector 1. Support Health Service Prepare the first version of a unified National Health Benefits Package Human Capital and Coverage and Financial to be discussed with relevant stakeholders Expanding Economic Protection Opportunities Directly contract Primary Healthcare Centers (PHCCs) using an updated provider payment mechanism funded by the Ministry of Public Health (MoPH) budget to improve access to essential services for vulnerable populations identified through a transparent targeting mechanism 2. Strengthen the Institutionalize and expand the digital tracking systems for medicine Governance of the procurement and dispensing (Aman and Meditrack) Ministry of Public Health (MoPH) Develop and issue the implementation decrees for the Lebanon Drug Agency law enacted in 2022 Update the MoPH organigram to reflect current needs and fill critical vacancies to restore operational capacity of MoPH. Re-establish and activate the Central Public Health Laboratory 3. Implement Measures Update the list of services covered by MoPH to rationalize MoPH for Cost Containment spending on curative care and optimize use of limited resources. and Efficiency Gains Upgrade the physical infrastructure and technical capacities of public hospitals to expand access and improve service quality, positioning them as the primary providers of hospital care for MoPH-covered patients, thereby reducing overall healthcare costs. Develop Standard Bidding Documents for public procurement of medicines and update the National List of Essential Medicines, while prioritizing the procurement of generic medications where possible Education Sector 1. Mitigate learning losses Establish temporary learning structures where needed and rehabilitate and reconstruct schools damaged in the conflict to return all children to in-person learning as soon as possible Issue a Ministerial Decision to implement the Teaching at the Right Level approach during regular school hours for the 2025–26 and 2026–27 academic years Implement standardized learning assessments for numeracy and literacy at the end of the primary school cycle 2. Enhance Youth Introduce short, market-relevant skills trainings in universities linked to Employability through industry certification, focusing on high-demand sectors (e.g. digital and Skills Training ICT) to improve youth employability. Initiate development of a national Technical Vocational and Education Training (TVET) skills development strategy that includes skills planning, prioritization, and forecasting; a national skills recognition, certification, and accreditation framework; and strong public-private partnerships Use human and financial Issue a Ministerial Decision requiring (i) the recording of civil servant resources more efficiently teachers’ teaching hours; (ii) raising the minimum number of weekly teaching hours for contractual hours; (iii) instituting objective contractual teacher hiring criteria; and (iv) requiring contractual teachers to pass a standardized exam. (continued on next page) 32 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans (continued) Pillar Sector Key Reforms One-Year Policy Action Plan Pillar III: Strengthening Issue a decree related to the Teachers Internal Regulation (‫)النظام الداخيل‬ Human Capital and with a clarification of the Nisab (effective working hours) for Primary Expanding Economic and Secondary teachers Opportunities (continued) Initiate the development of an Education Management Information System (EMIS); issue a decree to establish an IT unit under the Minister of Education and Higher Education Sector Key Reforms One-Year Policy Action Plan Social Protection and Improve and Allocate government budget to the ESSN-AMAN program,a mobilize Labor institutionalize Social donor support to, at a minimum, ensure keep the same level of Safety Nets coverage, and develop a sustainable financing plan. Introduce key program and system improvements: (1) DAEM Social Protection Information System; (2) digital payments; (3) targeting to re-open registration, recertify existing beneficiaries, and adjust caseload to poverty; and (4) advance the provision of social services through the ESSNP. Establish and operationalize the governance of Social Safety Net programs, bringing together government, partners and donors, to support the implementation of the National Social Protection Strategy. Implement policies and Develop an action plan to operationalize the graduation pillar of the programs to promote National Social Protection Strategy for enhanced delivery of cash inclusive job access transfers under the ESSN-AMAN project. The expansion and unification of cash transfers was made possible by the establishment of a modern social registry (DAEM), which currently holds data on about 45% of the population. DAEM can be leveraged for multiple social programs and easily expanded, building on the implementation and evaluation of the ongoing economic inclusion pilots. Approve amendments to the labor code for gender equality. Private Sector 1. Implement an Effective Draft and pass implementation regulations for the new Competition Law. Competition Policy Establish the National Competition Authority (NCA) Board. 2. Improve the Business Establish a Business Environment Reform Committee to coordinate and Environment monitor the development and implementation of business environment reform agenda. Develop and approve a comprehensive Business Environment Action Plan. Enact the draft Insolvency and Insolvency Practitioner Laws and draft and approve executive regulations for both laws. 3. Enhance Investment Amend the Investment Law No. 360 to cover key areas for investors in Policy and Promotion a more comprehensive and investor-friendly manner. Strengthen the Investment Development Authority of Lebanon (IDAL) by improving institutional representation and oversight, and greater decision-making flexibility. Agrifood 1. Incentivize Local Implement decision 1/950: Registration and technical inspections of Production Agri-food factories. 2 Strengthen Agrifood Revise Law No. 778 Agriculture Quarantine and Plant Health Measures Systems and Trade to align reform of the Inspection Procedures of the Wheat Value Chain Facilitation with International Practices (GAFTA). (continued on next page) Special Focus 33 TABLE 3 • Summary of Sectoral Key Reforms and Corresponding One Year Action Plans (continued) Pillar Sector Key Reforms One-Year Policy Action Plan Pillar III: Strengthening Enforce the Food Safety Law No. 35 (enacted in 2015) and Law Human Capital and No. 224: The Food Safety Law passed in 2015 remains largely Expanding Economic unenforced, resulting in a fragmented and inefficient national food Opportunities (continued) safety system that complicates access to international markets. Enforcing the existing laws is essential for strengthening agricultural and agri-food exports’ access to destination markets. The World Bank can support the authorities in terms of technical regulations and the related conformity procedures by providing technical assistance to the Ministry of Agriculture in terms of setting up the Food Safety Lebanese Commission, including pending implementation decrees and procedures to ensure effectiveness of to strengthen traceability systems. a The ESSN is a US$ 246 million World Bank financed Emergency Social Safety Net Project (ESSN) under which cash transfers are provided to 150,000 extreme poor Lebanese households. The ESSN is also known as AMAN. Disbursements of cash transfer under the ESSN began in March 2022. Support under the ESSN was scaled up by US$ 300 million in 2023. One of the goals of the ESSN-AMAN project is the development of a social registry, known as DAEM, that can be integrated with the Social Protection Information System (SPIS) as per the needs of the government. 34 LEBANON ECONOMIC MONITOR – TURNING THE TIDE? 1818 H Street, NW Washington, DC 20433