LEBANON Mounting ECONOMIC Burdens on a MONITOR Crisis-Ridden Country Fall 2024 ?????????????????? ?????????????????? ?????????????????? Lebanon Economic Monitor Mounting Burdens on a Crisis-Ridden Country Des pressions accrues sur un pays rongé par la crise ‫تفاقم األعباء على بلد مأزوم‬ Fall 2024 LEBANON ECONOMIC Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region MONITOR Document of the World Bank The Delibera Depressi © 2024 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. 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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 3. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Special Focus: The Impact of the Conflict on the Lebanese Economy . . . . . . . . . . . . . . . . . . . . . 21 Annex I. Night-Time Lights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Annex II. Methodology of the Tourism Shock Projections for 2024 . . . . . . . . . . . . . . . . . . . . . . 35 iii List of Figures Figure 1 Real GDP Contraction Since 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Figure 2 Consumption and Net Exports are Positive Contributors to Real GDP Growth in 2023 . . . . . . . . . 4 Figure 3 Change in Luminosity between 2019 and 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 4 Changes in NTL at the First Administrative (i.e., Governorate) Level . . . . . . . . . . . . . . . . . . . . . . . . . .5 Figure 5 Real GDP and NTL Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 6 Overall and Primary Deficits are Projected for 2023 and 2024 (pre-September 2024 Conflict escalation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 7 Evolution of Public Finances in Nominal (LBP) and Real Terms, 2019 vs. 2024 (pre-September 2024 Conflict Escalation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 8 Increase in Nominal GDP Prompting a Slight Decrease in Debt-to-GDP in 2024 is Not Indicative of improved Debt Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 9 Despite Slightly Narrowing Current Account Deficit, Ratio to GDP Remains Similar to pre-Crisis Years in 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 10 Reserve Accumulation in 2024 Reversed Due to Escalating Conflict . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 11 Dollar Earners Benefitted During the Time of FX Subsidies and Only Experienced a 4.9 percent Inflation by September 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Figure 12 Exchange Rate Stability as of July 2023 Drives Deceleration in Inflation . . . . . . . . . . . . . . . . . . . . .16 Figure 13 CPI Subcategories’ Monthly Contribution to Headline Inflation (Aug 2019–Sep 2024) . . . . . . . . .16 Figure 14 Israeli Strikes and Casualties Across Lebanon, with a Concentration in the South and El Nabatieh Governorates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 15 Close to 80 Percent of IDPs are from the El-Nabatieh and South Governorates . . . . . . . . . . . . . . .22 Figure 16 Flights Arriving at Beirut International Airport are at a Fraction of their pre-Escalation Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 17 Losses in Travel Receipts (excluding Expat Spending) are Expected to Be Most Prominent in Q4-2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Figure 18 The Five Governorates Heavily Affected by the Israeli Strikes Accounted for 80% of Total Economic Activity in 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Figure 19 Lebanon: The Conflict Cut Real GDP Growth in Lebanon by 6.6 Pp in 2024 . . . . . . . . . . . . . . . . . 27 Figure 20 Real GDP and NTL in Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Figure 21 Real GDP and NTL Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 List of Tables Table 1 Fiscal Balance (2020–2025) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Table 2 Selected Economic Indicators (2015–2024) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Table 3 Losses in Q4-2024 Outweigh those Materialized Over the Year from Q4-2023 to Q3-2024 . . . . . 24 Table 4 NTL-Implied Administrative Level Economic Activity Relative to Total Economic Activity . . . . . . . . 25 Table 5 Shocks to Consumption (in US$ Million) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table 6 Total Losses in Net Exports and Consumption Due to the Conflict (US$ mln) . . . . . . . . . . . . . . . . 26 Table 7 Lebanon: Real GDP Estimates and Projections Under Alternative Conflict Scenario . . . . . . . . . . 26 Table 8 Estimates of the Inverse (reduced Form) Elasticity of Lights to GDP for Lebanon . . . . . . . . . . . . . 34 List of Boxes Box 1 Night-Time Lights and Economic Activity in Lebanon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Box 2 2025 Draft Government Budget Draft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Box 3 Measuring the Purchasing Power of Dollar Earners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Box 4 The Motives and Consequences of Lebanon’s Designation as a Jurisdiction under Increased Monitoring (i.e., Grey Listing) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Box 5 Comparing the Current Conflict to the 2006 Hostilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 iv LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ ACRONYMS AER Average Exchange Rate IDP Internally Displaced Person AML Anti-Money Laundering IOM International Organization for Migration ARMA Autoregressive Moving Average LBP Lebanese Pound BdL Banque du Liban LEM Lebanon Economic Monitor BNR Banknote Rate MIDAS Mixed-Data Sampling BoP Balance of Payments ML Money Laundering CA Current Account MoF Ministry of Finance CAS Central Administration of Statistics NTL Nighttime Light CFT Counter the Financing Of Terrorism OLS Operational Linescan System CPI Consumer Price Index PMI Purchasing Manager’s Index CRS Common reporting standards pp Percentage Points DMSP Defense Meteorological Satellite Program RBA Risk-based approach DNFBP Designated non-financial businesses and RD Restricted Default professions SIC Special Investigation Commission DRF Deposit Recovery Fund TF Terrorist Financing EdL Electricité du Liban UN United Nations EUR Euro currency US$ United States Dollar FATF Financial Action Task Force VAT Value Added Tax FX Foreign Exchange VIIRS Visible Infrared Radiometer Suite GDP Gross Domestic Product XM-2023 First X months of the year HFI High-frequency indicators yoy Year over Year IMF International Monetary Fund v PREFACE T he Lebanon Economic Monitor provides Analyst). The Lebanon Economic Monitor has been an update on key economic developments completed under the guidance of Eric Le Borgne and policies over the past six months. It also (Practice Manager), Norbert Fiess (Lead Economist), presents findings from recent World Bank work on and Jean Christophe Carret (Country Director). Zeina Lebanon. The Monitor places these developments, Khalil (Communications Officer) is the lead on com- policies, and findings in a longer-term and global con- munications, outreach, 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 product cation, please visit www.worldbank.org/lb. of the World Bank’s Lebanon Macroeconomics, To be included on an email distribution list for Trade and Investment (MTI) team. It was led by this Lebanon Economic Monitor series and related Dima Krayem (Senior Economist), Ibrahim Jamali publications, please contact Alain Barakat (abara- (Consultant), and Naji Abou Hamde (Economic kat@worldbank.org). For questions and comments Analyst). The Special Focus entitled Impact of the on the content of this publication, please contact Conflict on the Lebanese Economy was prepared Dima Krayem (dkrayem@worldbank.org). Questions by Dima Krayem (Senior Economist), Ibrahim Jamali from the media can be addressed to Zeina Khalil (Consultant), and Naji Abou Hamde (Economic (zelkhalil@worldbank.org). vii EXECUTIVE SUMMARY A s a direct spillover of the conflict in the unspent public sector surpluses. This strategy has Middle East, the conflict in Lebanon has temporarily curbed currency in circulation but at escalated sharply in September 2024 the cost of delaying critical investments needed for cutting real GDP growth by an estimated 6.6%. recovery and development. Rising post-conflict fund- Economic activity is projected to contract by 5.7% ing demands threaten to deplete remaining foreign in 2024 (compared to a 0.9% expansion under a reserves or increase currency in circulation, which no-conflict scenario). This contraction, equivalent would undermine exchange rate stability and intensify to a loss of US$4.2 billion in consumption and net inflationary pressures, highlighting the unsustainability exports, reflects the devastating impact of mass of the current approach to exchange rate stabilization. displacement, destruction, and reduced private Lebanon’s fiscal position is expected to consumption, which accounted for 134% of GDP in deteriorate further as ministries face urgent 2023. Key sectors such as tourism, a pillar of Leba- funding needs to support affected populations non’s economy, have suffered major losses in service and maintain essential services and support exports. The destruction of capital stock and skilled recovery efforts. These pressures are compounded labor migration further erodes Lebanon’s economic by reduced fiscal revenues, particularly from VAT. potential, posing significant risks to long-term growth The sovereign default since March 2020 restricts (see Special Focus). Lebanon to minimal humanitarian aid for internal The cumulative decline in real GDP since displacement and conflict response and comprehen- 2019 is now expected to exceed 38 percent by sive debt restructuring is needed to regain access to the end of 2024, deepening Lebanon’s pre-exist- international capital markets, enabling the country ing economic crisis. Key indicators—including GDP to tackle its multifaceted challenges. The current growth, inflation, fiscal balance, and trade deficits—are account deficit, already a chronic issue, is likely to increasingly skewed toward the downside. Although deepen. Imports of essential goods are expected the exchange rate has stabilized since August 2023, to remain high, barring disruptions to trade routes, this stability remains fragile and unsustainable, as it while declining exports and tourism receipts further is not underpinned by a robust monetary framework. strain Lebanon’s economic fundamentals. The cur- Instead, it depends on fiscal restraint and spending rent account deficit, for the most part, continues to restrictions imposed on public institutions’ accounts be financed by a heavily dollarized cash economy, at BdL, alongside increased revenue collection and undermining the prospects for recovery. ix This LEM also leverages innovative data lenges and highlights the urgent need for and contextual analyses to capture aspects of comprehensive reforms as the only viable path the Lebanon’s crisis that go beyond traditional forward post-conflict. Key priorities include achiev- economics. Night-time Lights (NTLs), a high-fre- ing macroeconomic stability, improving governance, quency and readily available tool to gain insights into enhancing public utilities, and bolstering human cap- Lebanon’s economic activity, points to a dramatic ital. The recent grey-listing by the Financial Action 62.3 percent decline in luminosity from 2019 to 2023, Task Force (FATF), which has heightened reputational reflecting the severe contraction in economic activity risks and may lead to increased transaction costs following the financial crisis. Comparing differences and delays in capital inflows, underscores the urgent in purchasing power between a hypothetical dollar need to strengthen supervision and compliance in earner and an LBP earner, the report finds dollar high-risk non-financial sectors to exit the grey list. Tar- earner whose income has been fully denominated in geted investments are critical to support sustainable USD since 2019 would have experienced a cumula- reforms, facilitate the recovery of essential services, tive 4.9 percent decrease in purchasing power from and rebuild Lebanon’s damaged capital stock. These September 2019 to 2024, albeit with significant efforts must also prioritize strengthening social safety year-on-year fluctuations. Despite these fluctuations, nets and restoring critical infrastructure. Unlocking this overall decline is dramatically lower than the stag- access to financing, particularly through comprehen- gering 5,970.7 percent cumulative inflation faced by sive reform including banking sector resolution and an LBP earner over the same period. debt restructuring, is vital to achieving these priorities The deepening economic contraction and providing the institutional support necessary for exacerbates unresolved macroeconomic chal- Lebanon’s recovery and long-term development. x LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ ‫ملخص تنفيذي‬ ‫والحفاظ عىل الخدمات األساسية ودعم جهود التعايف بعد الرصاع‪.‬‬ ‫وتتفاقم هذه الضغوط بسبب انخفاض إيرادات املالية العامة‪ ،‬ال سيام‬ ‫تلك التي يتم تحصيلها من رضيبة القيمة املضافة‪ .‬كام أن التخلف عن‬ ‫امتداد مبارش للرصاع يف الرشق األوسط‪ ،‬تصاعد الرصاع يف لبنان‬ ‫بشكل حاد يف سبتمرب‪/‬أيلول ‪ ،2024‬مام أدى إىل خفض منو‬ ‫إجاميل الناتج املحيل الحقيقي بنسبة تقدر بنحو ‪ .6.6%‬ومن‬ ‫ك‬ ‫سداد الديون السيادية منذ مارس‪/‬آذار ‪ 2020‬ال يتيح للبنان سوى الحصول‬ ‫املتوقع أن ينكمش النشاط االقتصادي بنسبة ‪ 5.7%‬يف عام ‪( 2024‬مقارنة‬ ‫عىل الحد األدىن من املساعدات اإلنسانية املخصصة للنزوح الداخيل‬ ‫بنموه بنسبة ‪ 0.9%‬يف ظل سيناريو عدم حدوث الرصاع)‪ .‬ويعكس هذا‬ ‫واالستجابة للرصاع‪ ،‬وهناك حاجة إىل إعادة هيكلة شاملة للديون الستعادة‬ ‫االنكامش‪ ،‬الذي يعادل خسارة قدرها ‪ 4.2‬مليار دوالر يف االستهالك وصايف‬ ‫القدرة عىل النفاذ إىل أسواق رأس املال الدولية‪ ،‬ومتكني البالد من مواجهة‬ ‫الصادرات‪ ،‬التأثري املدمر للنزوح الجامعي والدمار وانخفاض معدالت‬ ‫تحدياتها املتعددة األوجه‪ .‬ومن املرجح أن يتفاقم عجز الحساب الجاري‪،‬‬ ‫االستهالك الخاص‪ ،‬الذي شكل ‪ 134%‬من إجاميل الناتج املحيل يف عام‬ ‫وهو الذي ميثل مشكلة مزمنة بالفعل‪ .‬ومن املتوقع أن تظل واردات السلع‬ ‫ة أساسية‬ ‫‪ .2023‬وقد تكبدت قطاعات رئيسية مثل السياحة التي ت ُعد ركيز ً‬ ‫األساسية مرتفعة‪ ،‬ما مل تحدث اضطرابات يف خطوط التجارة‪ ،‬يف حني أن‬ ‫من ركائز االقتصاد اللبناين‪ ،‬خسائر كبرية يف صادرات الخدمات‪ .‬ويؤدي‬ ‫تراجع الصادرات وعائدات السياحة يزيد من الضغط عىل أسس االقتصاد‬ ‫تدمري مخزون رأس املال وهجرة العاملة املاهرة إىل املزيد من تآكل‬ ‫اللبناين‪ .‬وال يزال عجز الحساب الجاري‪ ،‬يف الجانب األكرب منه‪ ،‬مموالً من‬ ‫اإلمكانات االقتصادية للبنان‪ ،‬مام يشكل مخاطر كبرية عىل النمو طويل‬ ‫اقتصاد نقدي مدولر بدرجة عالية‪ ،‬مام يقوض احتامالت التعايف‪.‬‬ ‫املدى (راجع القسم الخاص من التقرير)‪.‬‬ ‫كام يعتمد هذا اإلصدار من تقرير املرصد االقتصادي للبنان عىل‬ ‫من املتوقع أن يتجاوز االنخفاض الرتاكمي يف إجاميل الناتج املحيل‬ ‫البيانات املبتكرة والتحليالت الخاصة بالسياق السائد لرصد أبعاد األزمة‬ ‫الحقيقي منذ عام ‪ 2019‬نسبة ‪ 38%‬بنهاية عام ‪ ،2024‬مام يؤدي إىل‬ ‫اللبنانية التي تتجاوز االقتصاد التقليدي‪ .‬وتشري األضواء الليلية (‪Night-‬‬ ‫تعميق األزمة االقتصادية القامئة يف لبنان‪ .‬ومتيل املؤرشات الرئيسية‪ ،‬ومنها‬ ‫‪ ،)time Lights‬وهي أداة عالية الرتدد ومتاحة بسهولة للتوصل إىل رؤية‬ ‫منو إجاميل الناتج املحيل‪ ،‬والتضخم‪ ،‬ورصيد املالية العامة‪ ،‬والعجز التجاري‪،‬‬ ‫أشمل عن النشاط االقتصادي يف لبنان‪ ،‬إىل انخفاض كبري بنسبة ‪62.3%‬‬ ‫بشكل متزايد نحو الهبوط‪ .‬وبالرغم من استقرار سعر الرصف منذ أغسطس‪/‬‬ ‫يف كثافة األضواء من عام ‪ 2019‬حتى عام ‪ ،2023‬مام يعكس االنكامش‬ ‫آب ‪ ،2023‬إال أن هذا االستقرار ال يزال هشاً وغري مستدام‪ ،‬نظرا ً لغياب‬ ‫الحاد يف النشاط االقتصادي يف أعقاب األزمة املالية‪ .‬ومبقارنة االختالفات‬ ‫اإلطار النقدي القوي الالزم لدعمه‪ .‬فهو يعتمد‪ ،‬بدالً من ذلك‪ ،‬عىل القيود‬ ‫شخص يحصل عىل دخل بالدوالر األمرييك وآخر‬ ‫ٍ‬ ‫يف القوة الرشائية بني‬ ‫املالية وقيود إنفاق مفروضة عىل حسابات املؤسسات العامة لدى مرصف‬ ‫يحصل عىل دخل باللرية اللبنانية‪ ،‬وجد التقرير أن الشخص الذي يكسب‬ ‫لبنان‪ ،‬إىل جانب زيادة تحصيل اإليرادات وفوائض القطاع العام غري املنفقة‪.‬‬ ‫دخله بالدوالر األمرييك والذي تم تقييم دخله بالكامل بالدوالر األمرييك‬ ‫وقد نجحت هذه اإلسرتاتيجية يف كبح الكتلة النقدية املتداولة بصورة‬ ‫منذ عام ‪ 2019‬كان سيواجه تراجعاً تراكمياً بنسبة ‪ 4.9%‬يف القوة الرشائية‬ ‫مؤقتة‪ ،‬لكن عىل حساب تأخري االستثامرات الحيوية الالزمة لتحقيق التعايف‬ ‫من سبتمرب‪/‬أيلول ‪ 2019‬حتى عام ‪ ،2024‬وإن كان ذلك مصحوباً بتقلبات‬ ‫والتنمية‪ .‬ويهدد تزايد متطلبات التمويل يف مرحلة ما بعد الرصاع باستنزاف‬ ‫كبرية عىل أساس سنوي‪ .‬رغم التقلبات‪ ،‬يبقى هذا الرتاجع أقل بكثري من‬ ‫االحتياطيات األجنبية املتبقية أو زيادة الكتلة النقدية املتداولة‪ ،‬األمر الذي‬ ‫التضخم الرتاكمي الهائل البالغ ‪ 5,970.7%‬الذي واجهه متقاضو األجور‬ ‫من شأنه أن يقوض استقرار سعر الرصف ويزيد من الضغوط التضخمية‪ ،‬مام‬ ‫باللرية اللبنانية خالل نفس الفرتة‪.‬‬ ‫يسلط الضوء عىل عدم استدامة النهج الحايل لتحقيق استقرار سعر الرصف‪.‬‬ ‫يؤدي تزايد معدالت االنكامش االقتصادي إىل تفاقم تحديات‬ ‫من املتوقع أن يزداد تدهور وضع املالية العامة يف لبنان‪ ،‬حيث‬ ‫االقتصاد الكيل التي مل تجد حلوالً حتى اآلن‪ ،‬كام يسلط الضوء عىل‬ ‫تواجه الوزارات احتياجات متويلية عاجلة لدعم السكان املترضرين‬ ‫‪xi‬‬ ‫االستثامرات املوجهة رضورية لدعم اإلصالحات املستدامة‪ ،‬وتسهيل‬ ‫الحاجة امللحة إلجراء إصالحات شاملة بوصفها السبيل الوحيد للميض‬ ‫استعادة الخدمات األساسية‪ ،‬وإعادة بناء مخزون رأس املال املترضر يف‬ ‫تحقيق‬ ‫َ‬ ‫قدماً يف مرحلة ما بعد الرصاع‪ .‬وتشمل األولويات الرئيسية‬ ‫لبنان‪ .‬ويجب أن تعطي هذه الجهود األولوية أيضاً لتعزيز شبكات األمان‬ ‫استقرار االقتصاد الكيل‪ ،‬وتعزيز الحوكمة‪ ،‬وتحسني أداء الخدمات واملرافق‬ ‫االجتامعي واستعادة خدمات البنية التحتية الحيوية‪ .‬ويعد تيسري حصول‬ ‫العامة‪ ،‬وتعزيز رأس املال البرشي‪ .‬وأدى إدراج لبنان عىل القامئة الرمادية‬ ‫لبنان عىل التمويل‪ ،‬ال سيام من خالل اإلصالح الشامل الذي يتضمن‬ ‫ملجموعة العمل املايل مؤخرا ً إىل زيادة املخاطر املتعلقة بالسمعة‪ ،‬وقد‬ ‫استعادة االستقرار يف القطاع املرصيف وإعادة هيكلة الديون‪ ،‬أمرا ً حيوياً‬ ‫يؤدي إىل ارتفاع تكاليف املعامالت والتأخري يف تدفقات رأس املال‪ ،‬مام‬ ‫لتحقيق هذه األولويات وتوفري الدعم املؤسيس الالزم لتحقيق التعايف‬ ‫يؤكد الحاجة امللحة لتعزيز إجراءات الرقابة واالمتثال يف القطاعات‬ ‫واألهداف اإلمنائية طويلة األجل يف لبنان‪.‬‬ ‫غري املالية عالية املخاطر بهدف رفع اسم لبنان عن هذه القامئة‪ .‬وتعد‬ ‫‪xii‬‬ ‫– ‪LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY‬‬ ‫تفاقم األعباء على بلد مأزوم‬ RÉSUMÉ ANALYTIQUE C onséquence directe du conflit au Moyen- dépend des restrictions budgétaires et des limitations Orient, le conflit au Liban s’est fortement de dépenses imposées sur les comptes des institu- aggravé en septembre 2024, entraînant tions publiques à la Banque du Liban (BDL), ainsi une baisse d’environ 6,6 % de la croissance du que de l’accélération du recouvrement des recettes PIB réel. L’activité économique devrait se contracter et des excédents non dépensés du secteur public. de 5,7 % en 2024 (contre une expansion de 0,9 % dans Cette stratégie a permis de limiter temporairement la un scénario sans conflit). Cette contraction, qui équi- circulation des devises, mais au prix d’un retard dans vaut à une perte de 4,2 milliards de dollars en termes les investissements essentiels au redressement et au de consommation et d’exportations nettes, reflète développement. L’augmentation des demandes de l’impact dévastateur des déplacements massifs, des financement post-conflit risque d’épuiser les réserves destructions et de la réduction de la consommation de change restantes ou d’accroître la circulation des privée, qui représentait 134 % du PIB en 2023. Des devises, ce qui compromettrait la stabilité du taux de secteurs clés comme le tourisme, pilier de l’économie change et intensifierait les pressions inflationnistes, libanaise, ont subi des pertes importantes en termes soulignant le caractère non durable de l’approche d’exportations de services. La destruction du stock actuelle de stabilisation du taux de change. de capital et la migration de la main-d’œuvre qualifiée La situation budgétaire du Liban risque érodent encore plus le potentiel économique du encore de se détériorer, car les ministères doivent Liban, ce qui pose des risques importants pour la faire face à des besoins de financement urgents croissance à long terme (voir Special Focus). pour soutenir les populations touchées, mainte- La baisse cumulée du PIB réel observée nir les services essentiels et soutenir les efforts depuis 2019 risque désormais de dépasser 38 % de redressement. Ces pressions sont aggravées d’ici à la fin de 2024, ce qui aggravera la crise par la diminution des recettes fiscales, en particulier économique préexistante du Liban. Les indica- de la TVA. En situation de défaut souverain depuis teurs clés, notamment la croissance du PIB, le taux mars 2020, le Liban est limité à une aide humanitaire d’inflation, le solde budgétaire et les déficits commer- minimale pour les déplacements internes et la riposte ciaux, sont de plus en plus orientés à la baisse. Bien au conflit, et une restructuration complète de la dette que le taux de change se soit stabilisé depuis août est nécessaire pour rétablir l’accès aux marchés inter- 2023, cette stabilité reste précaire et non durable, nationaux des capitaux, ce qui permettrait au pays de faute d’un cadre monétaire solide. Au contraire, elle faire face aux problèmes multiformes auxquels il est xiii confronté. Le déficit du compte courant, déjà chro- est considérablement inférieure à l’inflation cumulée nique, devrait encore se creuser. Les importations vertigineuse de 5 970,7 % à laquelle a été confronté de biens essentiels devraient rester élevées, à moins un salarié rémunéré en livres libanaises au cours de que les voies commerciales ne soient perturbées, la même période. alors que la baisse des exportations et des recettes L’aggravation du ralentissement écono- touristiques continue de peser sur les fondamentaux mique exacerbe les problèmes macroécono- économiques du pays. Le déficit du compte courant miques non résolus et souligne l’urgence de continue, pour l’essentiel, d’être financé par une mettre en œuvre des réformes globales, seule voie économie monétaire fortement dollarisée, ce qui viable après la sortie du conflit. Les principales priori- compromet les perspectives de reprise. tés incluent la stabilité macroéconomique, l’améliora- La présente édition du Rapport de suivi tion de la gouvernance, le renforcement des services de la situation économique du Liban (Lebanon publics et le développement du capital humain. L’ins- Economic Monitor, ou LEM) de la Banque mon- cription récente du Liban sur la liste grise du Groupe diale s’appuie également sur des données et des d’action financière (GAFI), qui a accru les risques analyses contextuelles innovantes, permettant pour sa réputation et pourrait entraîner une hausse de saisir les aspects de la crise libanaise qui des coûts de transaction ainsi que des retards dans dépassent le cadre de l’économie traditionnelle. les entrées de capitaux, souligne la nécessité urgente La luminosité nocturne, ou Night-time Lights de renforcer la supervision et la conformité dans les (NTLs), un outil facilement disponible qui fournit des secteurs non financiers à haut risque afin de sortir de données à haute fréquence sur l’activité économique cette liste grise. Des investissements ciblés sont essen- du Liban, indique une baisse spectaculaire de 62,3 % tiels pour soutenir des réformes durables, faciliter le de la luminosité entre 2019 et 2023, reflétant le grave rétablissement des services essentiels et reconstruire ralentissement de l’activité économique consécutif à le stock de capital endommagé du Liban. Ces efforts la crise financière. En comparant les écarts de pouvoir doivent également donner la priorité au renforcement d’achat entre un travailleur hypothétique percevant des filets de sécurité sociale et à la remise en état des un revenu en dollars et un autre rémunéré en livres infrastructures essentielles. Le déblocage de l’accès libanaises (LBP), le rapport constate que le premier, au financement, en particulier par le biais d’une dont le revenu est entièrement libellé en USD depuis réforme globale comprenant la résolution de la crise 2019, aurait subi une baisse cumulée de 4,9 % de du secteur bancaire et la restructuration de la dette, son pouvoir d’achat de septembre 2019 à 2024, bien est essentiel pour atteindre ces priorités et fournir le qu’avec d’importantes fluctuations d’une année sur soutien institutionnel nécessaire au redressement et l’autre. Malgré ces fluctuations, cette baisse globale au développement à long terme du Liban. xiv LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ 1 THE POLICY CONTEXT S ince October 2023, and as a direct spillover Persons (IDPs) as of November 14th, primarily from of the conflict in the Middle East, military the South and El Nabatieh governorates, with close confrontations on the southern border with to a quarter residing in 1,027 government-designated Israel have escalated, evolving into a full-blown shelters across the country. By October 7th, 326,000 conflict by September 2024. Before this signifi- individuals had left the country, around half of whom cant escalation, confrontations largely contained to are Lebanese citizens.2 Universities and schools southern Lebanon had already resulted in hundreds struggle to resume the academic year, with many con- of casualties, injuries, and the displacement of over verted to shelters for the internally displaced, while 100,000 individuals. Tens of thousands of households healthcare systems face severe resource shortages. lost their livelihoods, and hundreds of homes were The Lebanon Interim Damage and Loss Assessment destroyed amid massive damage to local infrastruc- (DaLA)3 finds that damages to physical structures ture. Agricultural lands in the south were severely alone amount to US$3.4 billion and that economic affected, with substantial burning and contamination. losses have reached US$5.1 billion. The significant conflict escalation starting The conflict has introduced yet another in September 2024 has led to thousands of casu- shock to Lebanon’s already crisis-ridden economy alties, mass displacement, and unprecedented destruction. By mid-November 2024, the Ministry of 1 International Organization for Migration (IOM), Nov 14 Public Health reported over 3,500 deaths and 14,500 2024. DTM Mobility Snapshot – Round 62 – 14-11-2024. injuries. More than 1.2 million people, or a quarter of IOM, Lebanon. Lebanon’s population, have been displaced, marking 2 International Organization for Migration (IOM), Oct 07 2024. DTM Lebanon – Mobility Snapshot – Round 51 – one of the largest displacements in the country’s 07-10-2024. IOM, Lebanon. history and unravelling dire humanitarian needs. The 3 World Bank. Lebanon Interim Damage and International Organization for Migration (IOM),1 has Loss Assessment (DaLA): Assessment Report registered more than 880,000 Internally Displaced (English). Washington, D.C.: World Bank Group. Link. 1 and stalled political landscape. Prior to the conflict, Interpol issued red notices declaring him wanted by Lebanon remained mired in a crippling socio-eco- both the French and German authorities. The United nomic crisis for over four years, amidst political and States, United Kingdom, and Canada had also jointly institutional vacuum. A presidential vacuum for more sanctioned Salameh in August 2023. Salameh left his than two years, a caretaker government with restricted post after one of the largest financial crises in modern executive powers, an interim central bank governor, history, leaving the Central Bank and the financial and limited legislative action by parliament, all con- system with losses exceeding US$70 billion. Salameh tribute to a bleak outlook on sustainable economic has remained in detention since September; should recovery and comprehensive reform. This already his prosecution proceed to trial, it would represent precarious situation has been further compounded one of the rare cases of accountability faced by a by the conflict, straining the already limited resources senior Lebanese official. available to address urgent needs. The paucity of reliable economic data, On October 25, 2024, Lebanon was desig- likely worsened by the conflict, undermines sound nated by the Financial Action Task Force (FATF) policymaking, budget preparation, accountabil- as a jurisdiction under increased monitoring (i.e., ity, and transparency. This long-standing challenge placed on the “grey list”). While this designation recently prompted Fitch Ratings, an international is not expected to further impact Lebanon’s already credit ratings agency, to withdraw Lebanon’s sov- strained correspondent banking relationships, it ereign rating. Lebanon’s longstanding weaknesses poses reputational risks and may lead to higher in statistical capacity were already magnified by the transaction costs and delays in capital inflows. To 2019 economic and financial crisis. The financial exit the grey list, Lebanon must strengthen supervi- crisis left public institutions with inadequate human sion in high-risk non-financial sectors and enhance and technological resources, and the conflict has its understanding and mitigation of risks arising from further strained these limited capacities, hindering corruption. If Lebanon is blacklisted, it could face public servants’ ability to fulfill their duties. Over three severe restrictions on international transactions, lim- years of high volatility and multiple exchange rates ited access to foreign aid, and exposure to sanctions, have further complicated accurate reporting of fiscal further undermining its integration within the global aggregates and the publication of fiscal accounts. financial landscape (refer to Box 4). These persistent data gaps not only hinder economic On September 3, Former Central Bank gov- monitoring and analysis but also critically impair ernor Riad Salameh was detained, signaling a rare the ability to prepare budgets and formulate sound potential case of accountability if his prosecution policies, perpetuating uncertainty and inefficiency in proceeds to trial. This followed an interrogation by governance. On July 23, 2024, Fitch Ratings formally the Lebanese judiciary into allegations of corruption, withdrew Lebanon’s rating, citing the absence of embezzlement of public funds, and illicit enrichment. official fiscal and national accounts data since 2021. Salameh served as central bank governor for thirty Similarly, Standard & Poor’s, in its report on August years before leaving his position in July 2023. Even 19, 2024, highlighted the infrequent and limited data before his term ended, he was already under investi- disclosures in Lebanon as major factors contributing gation by several European countries for corruption to unusually high uncertainty in historical data and and money laundering allegations. In May 2023, economic forecasts. 2 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ 2 RECENT ECONOMIC DEVELOPMENTS Output and Demand primarily by a severe shock to tourism receipts—the main engine of economic growth—as well as The real GDP contraction has been revised down substantial declines in consumption due to mass to 0.8 percent in 2023, reflecting the conflict’s displacement and extensive disruptions to economic knock-on effects on economic growth in Q4 2023 activity (refer to special focus below). and weaker-than-expected high-frequency data. Data on high frequency indicators (HFIs) The conflict along Lebanon’s southern border, which and nowcasts of real GDP, corroborate the evi- began on October 8, 2023, dented the strong upward dence of a widening contraction in real GDP in trajectory in tourism starting in Q4-2023. While tour- 2023. On a year-on-year basis and using mean-level ist arrivals increased by 25.3 percent in 9M-2023 data, Night-Time Lights suggest a decline in economic relative to 9M-2022 (itself a record year following activity in October and December 2023.4 Indicators of COVID-19 restrictions), the upward trend reversed activity in the real estate sector offer mixed evidence. sharply in Q4-2023 with tourist arrivals decreasing Whereas cement deliveries increased by 10.8 percent by 24.1 percent, relative to Q4-2022. Moreover, sig- nificant destruction and internal displacement from 4 Full-year alternative data on Night-Time Lights, which South Lebanon and El Nabatieh governorates, have are examined in Box 1, do not suggest a contraction also weighed on consumption and economic activity. in economic activity in 2023. Although they contain The conflict led to an overall contraction of 1 percent information on economic activity, Night-Time Lights data in GDP relative to the pre-conflict baseline (i.e., a are imperfect proxies and time series predictors of real real GDP contraction of 0.8 percent in lieu of a tepid GDP growth, as discussed next, and must be interpreted with care. Hence, they cannot be relied upon as exclusive growth of 0.2 percent) (refer to special focus of the Fall predictors of real GDP growth. These alternative and 2023 Lebanon Economic Monitor). The contraction in higher frequency data are, therefore, considered and real GDP growth is expected to deepen significantly included as one of the HFIs in the nowcasting models of in 2024 as the conflict escalates and prolongs, driven real GDP growth. 3 Real GDP Contraction Since 2018 FIGURE 1 •  FIGURE 2 • Consumption and Net Exports are Positive Contributors to Real GDP Real GDP Growth (%) Growth in 2023 20 16.4 Real GDP Components 15 20 10.8 11.3 10.2 10 8.1 9.3 9.1 8.0 10 7.5 Percentage Point (pp) 6.4 5 3.8 3.9 3.9 3.4 3.8 0 2.7 2.5 2.5 1.6 1.1 1.7 1.5 0.9 0.6 0.9 Percent (%) 0 –10 –0.6 –0.8 –1.9 –0.8 –5 –20 –6.9 –7.0 –30 –10 –40 2013 2014 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e –15 –20 –21.4 Private consumption Government consumption –25 Gross fixed capital investment Net exports 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 2020e 2021e 2022e 2023e Statistical discrepancy Source: CAS and WB Staff calculations. Source: CAS and WB Staff calculations. (yoy) in 2023, construction permits fell by a notable 5 Imports of capital goods provide a proxy for investment 43 percent (yoy). The number of cleared cheques spending and are used by the Central Administration of Statistics to estimate investment. The set of HFIs in foreign and domestic currencies declined by, employed by the WB staff to gauge the state of the respectively, 84.9 and 56.1 percent (yoy). Other HFIs economy is enlarged to encompass these indicators. also point to a slowdown in economic activity in 6 A reading of the PMI that is below 50 suggests an 2023. Imports of machinery and electrical equipment, economic contraction, whereas a reading above as well as imports of vehicles, aircraft, vessels, and 50 indicates an improvement in economic activity. The increase in the PMI in June and July 2023 corresponds transport equipment (in net weight) decreased by to the buoyant tourism season in the summer of 2023. 41.2 and 42.1 percent, respectively.5 Except for June The PMI stood at 48.4 in December 2023. and July of 2023, two months in which it narrowly 7 The econometric models used to nowcast economic edged above 50, the BLOM-PMI index remained in growth since the 2019 financial crisis include: Mixed Data contractionary territory for the entirety of 2023 and Sampling (MIDAS) regressions with a large set of HFIs, a dynamic factor model, neural networks, and more recently has been trending downward since October 2023.6 elastic net and Least Absolute Shrinkage and Selection Additionally, nowcasts of real GDP for 2023—using an Operator (LASSO) regressions. Further details on the expanded set of HFIs and sophisticated econometric methodology employed to nowcast real GDP are provided in models7—indicate a deeper contraction in real GDP the Annex to the Spring 2023 Lebanon Economic Monitor: for 2023, supporting a downward revision in growth The Normalization of Crisis is No Road for Stabilization. projections. The set of HFIs is augmented to include construction permits and imports of capital goods. The results from From the demand side, private consump- the LASSO and elastic net regularization suggest that the tion and net exports positively contributed to real largest loadings on real GDP growth are associated with GDP growth in 2023. The contribution of private cleared cheques, the coincident indicator of BdL, imports consumption to GDP growth stood at 0.2 percentage of machines and electrical equipment, and construction points (pp). In a counterfactual scenario of absence permits. Due to potential model misspecification and uncertainty about individual HFIs, forecast combination of conflict, the contribution of private consumption to (or averaging) is employed. Additional information on real GDP growth would have been larger. The decline forecast combination is also offered in Annex to the Spring in imports contributed 0.2 percentage points (pp) 2023 Lebanon Economic Monitor: The Normalization of to real GDP growth, while exports made the largest Crisis is No Road for Stabilization. 4 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ BOX 1. NIGHT-TIME LIGHTS AND ECONOMIC ACTIVITY IN LEBANON Background Night-time Lights (NTLs) offer a valuable alternative to traditional national accounts, providing a high-frequency and readily available measure of economic activity at the national and administrative levels. National accounts are prone to errors, subject to revisions, and often delayed. This is particularly true in countries with weak statistical capacity and longstanding data weaknesses, such as Lebanon. The 2016 Systematic Country Diagnostic highlights Lebanon’s poor statistical performance compared to countries at a similar level of development.a The 2019 financial crisis further exacerbated these challenges, with Lebanon’s score on the World Bank’s statistical capacity indicator dropping sharply from 51.1 in 2018 to 44.4 in 2019 and 2020.b NTL data are especially useful in countries with limited data availability, offering insights into local (i.e., subnational) economic activity. Existing research also indicates that NTLs can capture informal economic activity and are particularly effective in measuring economic performance in urban and metropolitan areas with large retail and service sectors. However, they are less effective in regions where agriculture dominates.c,d (For an in-depth analysis of the FIGURE 3 • Change in Luminosity between evolution of NTLs, refer to annex II.) 2019 and 2023 The Evolution of NTLs in Lebanon Data on Night-time Lights (NTLs) in Lebanon, collected by the World Bank’s data lab,e reveal a dramatic 62.3 percent decline in luminosity from 2019 to 2023, reflecting the severe contraction in economic activity following the financial crisis. Figure 3 demonstrates that luminosity in Lebanon has dimmed significantly since 2019. Using VIIRS data from Black Marble, NTL radiance decreased by about 62.3 percent from 2019 to 2023 (Figure 3). The decrease in NTL from 2019 to 2022 is spatially broad-based, with Lebanon’s governorates experiencing declines in luminosity ranging from 78.7 percent in Akkar and 75.4 percent in Baalbek El-Hermel to 48 percent in the Bekaa. Lebanon’s capital, Beirut, experienced a decline in NTL of 56.8 percent over the same period. Despite their spatial accuracy, NTL data may not detect electricity generable using renewable energy and power outages, particularly Source: WB Data Lab. during the height of fuel shortages of summer 2021, could affect the high frequency (i.e., quarterly) empirical relation between Changes in NTL at the First FIGURE 4 •  real GDP and NTL. Moreover, temporary shortages may not align Administrative (i.e., Governorate) with satellite imaging times, leading to potential overestimation Level or underestimation of economic activity. The empirical analysis of the relation between NTL and real GDP, offered next, employs data through 2020 and is less prone to the latter caveats. The dynamics of NTL growth suggest that the country-wide contraction in economic activity accelerated in 2021 and 2022 with the growth in NTL contracting by about 34.9 and 51.3 percent, respectively, relative to a decline of 21.5 percent in 2020. Except for Beirut in 2021, which experienced a modestly lower contraction in NTL growth of 31.7 percent, the administrative-level data corroborate the more precipitous decline in economic activity in 2021 and 2022 (Figure 4). In contrast, NTL growth turned positive between 2022 and 2023 suggesting a broad-based pick-up in economic activity (Figures 4 and 5). The decrease in nighttime radiance is due, in part, to the rolling blackout strategy that was adopted in the post-2019 period by Lebanon’s electricity utility, the Electricité du Liban (EdL), as propounded in the 2022 Public Finance Review. The lack of public service provision by EdL, which is due to its inability to secure cash and foreign exchange for fuel payments, was exacerbated by the massive loss in purchasing power that made households’ and business’ substitution to private electricity generation cost prohibitive and slow. In this context, Mercy Corps (2023)f notes that Source: WB Data Lab, (continued on next page) Recent Economic Developments 5 BOX 1. NIGHT-TIME LIGHTS AND ECONOMIC ACTIVITY IN LEBANON (continued) the disorderly removal of fuel subsidies in September 2021 was Real GDP and NTL Growth FIGURE 5 •  followed by a more rapid contraction in luminosity. Drawing on the results of a survey, Mercy Corps (2023) find that NTLs are positively 30 associated with income levels. Gauging economic activity from NTL 20 The relation between real GDP and NTL is examined using annual data for the period 2013 to 2020 for Lebanon. Figures 4 and 5 10 provide, respectively, the time series dynamics of real GDP and data on NTL (VIIRS from Black Marble) in levels and growth rates 0 for Lebanon (for an in-depth analysis of the methodology refer to Annex II). –10 The correlation between real GDP and NTL growth over the period 2013 to 2020 is 0.84. Despite the small sample size, the inverse –20 elasticity of output to lights of 1.16 is highly significant. Moreover, the growth in NTL explains about 71.1 percent of the change in GDP –30 growth. The latter estimate is biased due to measurement errors 2012 2013 2014 2015 2016 2017 2018 2019 2020 and not directly usable because it does not represent a structural elasticity of output to lights. However, the results suggest that the Real GDP Growth NTL Growth growth in NTL is a useful gauge of economic activity for Lebanon, despite the small sample. The structural estimates of the elasticity Source: WB Data Lab. reported in the literature, which fall within similar ranges, can be relied on to provide light-based estimates of real GDP growth in 2021, 2022, and 2023.g h The light-based estimates suggest a widening contraction in real GDP growth in 2021 and 2022. Light-based direct forecasts of real GDP growth for 2021 and 2022 corroborate the latter findings. a Indeed, the 2016 Systematic Country Diagnostic indicates that Lebanon fares only worse than Gabon in terms of statistical capacity for a group of comparators with a similar real GDP per capita in purchasing power parity terms. b The latter score places Lebanon in the lowest quintile of all countries for which data on the statistical capacity indicator was disseminated in 2020. c Hu and Yao (2022) write: “During economic downturns, formal economic activity disappears and informal economic activity springs up. While not recorded by official data, informal economic activity is captured by night lights. As a result, the new measure suggests higher growth than official data. Conversely, the flow of economic activity from the informal to the formal sector during economic upturns could make official GDP growth higher than the new measure”. d See, for example, Chen and Nordhaus (2019). An excellent review of the literature is provided by Gibson, Olivia, and Boe-Gibson (2020). e Data on NTL can be obtained from the Earth Observation Group of the Colorado School of Mines. However, the World Bank’s data lab relied on data from Black Marble, which employs different, and potentially more advanced algorithm to remove the effect of ephemeral light, for example, to process NTL data. f Mercy Corps (2023). Night-time light reflectance: Potential uses in Lebanon. Thematic report. g Henderson, Storeygard, and Weil (2012) provide estimates of the structural elasticity of elasticity of lights with respect to income that ranges from 1.034 to 1.72. Hao and Yu (2022)’s estimate the structural elasticity of nighttime lights to GDP to be around 1.3 whereas Beyer, Hu, and Yao (2022) estimates of the structural elasticity range from 1.46 to 1.64 for emerging markets and developing economies. Hao and Yu (2022)’s sample includes data for Lebanon. h More specifically, the elasticity of 1.55 provided by Beyer, Hu, and Yao (2022) for emerging markets and developing economies can be employed for Lebanon. positive contribution at 0.9 pp. In contrast, govern- to the escalation in conflict in September 2024. ment expenditures, which declined by 0.9 pp, were Increased revenues, resulting from the correction of the largest negative contributor to real GDP growth, exchange rate mis-valuations for customs and taxes, followed by investment, with a negative contribution and expenditure restraints in part driven by the lack of 0.2 pp. of a ratified budget in 2023, resulted in an estimated fiscal surplus of 0.5 percent in 2023, with revenues and expenditures at 13.7 percent and 13.2 percent Fiscal Developments of GDP, respectively. In addition, monetary financing of the budget has been halted since July 2023 due to The modest improvement in the fiscal stance of fiscal surpluses, eliminating the need for monetization. 2023, was expected to extend into 2024 prior The 2024 government budget, ratified in February 6 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ FIGURE 6 • Overall and Primary Deficits are FIGURE 7 • Evolution of Public Finances in Projected for 2023 and 2024 (pre- Nominal (LBP) and Real Terms, September 2024 Conflict Escalation) 2019 vs. 2024 (pre-September 2024 Conflict Escalation) 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 2024f –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. 2024, projected a zero fiscal balance with revenues approved a draft budget for 2025 prior to the escala- and expenditures at 13.6 percent of GDP (based on tion of conflict in September 2024, the budgeted World Bank GDP estimates for 2024). revenues, expenditures, and resulting fiscal outcomes A fiscal surplus (on a cash basis) of are expected to differ significantly from initial projec- 0.2 percent is projected for 2024, based on esti- tions due to the conflict (refer to Box 2). mates made prior to the escalation of conflict in Prior to the escalation of conflict, Lebanon’s September 2024. This figure excludes anticipated debt-to-GDP ratio was projected to decrease to revenue declines and potential increases in expen- 141.9 percent in 2024, although this decline does ditures in Q4 due to the conflict, which are likely to not indicate improved debt dynamics (Figure 8). worsen the fiscal stance (Figure 6). Revenues in 2024 The reduction is primarily attributed to a base effect are expected to exceed estimations of the ratified gov- from higher nominal GDP following the stabilization of ernment budget and reach about 15 percent of GDP; the exchange rate in August 2023, with minimal contri- LBP340,100 billion (US$3,800 million) in nominal bution from decreased interest expenses, as interest terms, representing a 44.1 percent nominal increase payments on Eurobonds have been halted since the from 2023. This is in part due to better-than-expected sovereign default in March 2020.8 Interest expenses are tax collection rates in 9M 2024. Expenditures, on the projected to be 0.3 percent of GDP in 2024, down from other hand, are expected to remain below collected 0.9 percent in 2023. However, the expected decline in revenues, reaching 14.8 percent of GDP in 2024, and nominal GDP due to the escalation of conflict is likely LBP334,602 billion (US$3,739 million) in nominal to increase the debt-to-GDP ratio. Lebanon’s debt terms, representing a 47 percent nominal increase remains unsustainable amid an ongoing sovereign from 2023 (Figure 7). Additionally, the escalation of default, and debt dynamics show no improvement. conflict in Q4-2024 has likely had a significant impact on revenue collection, adversely affecting the fiscal 8 Except for the concessional loans, the treasury has stance, especially as emergency fiscal spending resumed the settlement of external loans with maturities is allocated to meet urgent humanitarian needs for beginning in 2024 and cleared up some of the the remainder of the year. Although the government accumulated arrears on previous loans. Recent Economic Developments 7 BOX 2. 2025 DRAFT GOVERNMENT BUDGET DRAFT On September 23, 2024, the Council of Ministers (CoM) approved a draft budget for 2025. The draft was prepared before the escalation of the conflict and was sent to parliament within the constitutional deadlines, but it has not yet been discussed. Fiscal outcomes are expected to deviate significantly from the draft due to the conflict and its aftermath, which is likely to reduce revenues, increase expenditures, and widen the deficit. Clarity on the way forward remains limited. Parliamentary discussions may result in amendments to the draft without the authority to increase the overall spending envelope, meaning the expenditure limits will remain unchanged but could be reallocated. By the end of January, if parliament has not discussed the budget, it may be ratified by the Council of Ministers (CoM) and become effective. If the budget is neither ratified by parliament nor approved by the CoM, spending in 2025 will be governed by the 1/12th rule based on the 2024 budget. The current budget draft targets a zero fiscal deficita Revenues are projected to reach 21.8 percent of GDP, representing a 78 percent contraction in real terms compared to 2019.b Revenue projections in the ongoing crisis are primarily based on cash flow trends, with key aggregates including revenue cash flows in local currency (more than half of which come from import taxes), in addition to FX revenues from the ports and airport fees. In line with pre-crisis budgets, the draft relies heavily on indirect taxes and does not consider more progressive revenue measures. Tax revenues account for 81.2 percent of total revenues, predominantly composed of indirect taxes, standing at 64.9 percent of total revenues. To increase revenues, the draft also proposes increasing rates for various fees (such as licenses and official transactions) and penalties, primarily by adjusting their nominal values to align with inflation, thereby restoring the value of fees that had been eroded by years of triple-digit inflation. Some of the proposed increases in fees include (i) the transaction fees that are collected by the General Security; (ii) stamp fees for invoices issued by public institutions, municipalities in LBP, USD, and EUR; (iii) the penalty on the delay in executing death certificates; (iv) the annual dues on patents; and (v) import license fees. However, the draft budget notably allows the usage of e-stamps for official documents, which would potentially help curb the black market for stamps that arose after their shortage. The draft squanders another opportunity at more equitable taxation by proposing an extension of the Land Tax law, thereby continuing to favor the affluent. Expenditures are budgeted at 21.8 percent of GDP. Current expenditures account for 88.5 percent of expenditures, with salaries, wages, and social benefits (including pensions) amounting to 48.1 percent of expenditures. Interest payments constitute 7.1 percent of total TABLE 1 • Fiscal Balance (2020–2025) Budget Original Budget Modified Budget Budget Draft Actual Actual Budget WB Est. Draft WB Est. Draft Budget Draft Law (30/08) LBP Bln 2020 2021 2022 2022 2023 2023 2024 2024 2024 2025 Revenue 15,341 20,264 29,986 35,137 147,739 236,000 258,785 277,924 308,435 410,129 Expenditure 19,236 17,861 40,870 51,849 181,923 227,663 300,519 295,113 308,435 427,695 Fiscal Balance –3,895 2,403 –10,884 –16,712 –34,184 8,337 –41,734 –17,190 0 –17,567 Budget Original Budget Modified Budget Budget Draft % of GDP Actual Actual Budget WB Est. Draft WB Proj. Draft Budget Draft Law (30/08) 2020 2021 2022 2022 2023 2023 2024 2024 2024 2025 Revenue 13.1 7.5 5.2 6.1 8.6 13.7 13.2 14.2 15.1 20.1 Expenditure 16.4 6.6 7.1 9.0 10.6 13.2 15.4 15.1 15.1 21.0 Fiscal Balance –3.3 0.9 –1.9 –2.9 –2.0 0.5 –2.1 –0.9 0.0 –0.9 Budget Original Budget Modified Budget Budget Draft USD Mln Actual Actual Budget WB Est. Draft WB Proj. Draft Budget Draft Law (30/08) 2020 2021 2022 2022 2023 2023 2024 2024 2024 2025 Revenue 4,160 1,724 1,098 1,287 1,721 2,750 3,015 3,238 3439.4 4582.4 Expenditure 5,216 1,519 1,497 1,899 2,120 2,653 3,501 3,438 3439.4 4778.7 Fiscal Balance –1,056 204 –399 –612 –398 97 –486 –200 0.0 –196.3 * The 2025 GDP ratios are calculated using the World Bank’s estimated GDP for 2024, as the World Bank is not producing a 2025 forecast due to heightened uncertainty. (continued on next page) 8 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ BOX 2. 2025 DRAFT GOVERNMENT BUDGET DRAFT (continued) expenditures. Foreign interest payments have been reinstated in the draft budget, accounting for 5.4% of total expenditures, primarily allocated to servicing foreign loans. Moreover, capital expenditure is allocated 11.5 percent of total expenditures. Once again, the draft budget is lacking much needed changes to fiscal and tax policies. Ambitious fiscal reforms require revamped tax policies; however, these efforts cannot succeed without addressing critical pre-requisites. Strengthening and capacity building of the tax administration is essential to enhance collection capacity, which has been severely undermined by multiple and prolonged crises. Equally important is addressing widespread non-compliance and the large informal economy, which significantly reduce the effectiveness of tax policies. Recognizing this, the Ministry of Finance (MoF) is currently focusing on these two foundational aspects before introducing more ambitious fiscal reforms. Without these pre-requisites, even best-practice tax policies would fail to deliver meaningful revenue enhancement or improve the overall fairness and equity of the tax system. In terms of policy recommendations, Lebanese authorities could mobilize revenues in a progressive manner by taxing offshore wealth and higher strata of income. Income inequality and concentration are among the highest in the world, with the top 1 and 10 percent of the adult population accounting for about 25 and 55 percent of national income, respectively.c Moreover, the income share of billionaires is among the top three relative to a group of comparator countries and is higher than in some of the oil-exporting countries of the Gulf Cooperation Council (Kuwait, Kingdom of Saudi Arabia, the United Arab Emirates). The latter estimates suggest that there is ample room for revenue mobilization in a highly progressive manner should the political will to do so exist.d Given that Lebanon participates in the common reporting standards (CRS) of the Organization of Economic Cooperation and Development, tax authorities could exploit the information provided through the CRS to gauge potential revenues from taxing offshore wealth. Beyond the urgent need for fundamental reforms in fiscal and tax policies, the prolonged conflict—with its devastating human, social, and physical toll—is expected to severely impact the fiscal stance in 2025. On the expenditure side, key ministries, such as the Ministry of Public Health, may require urgent and additional funds to support hospitalization and medical care, while the Ministry of Social Affairs will likely need resources to continue to assist a quarter of the population that remains forcibly displaced. On the revenue side, declines in economic activity, consumption, and tourism will depress revenues from the Value Added Tax, the government’s primary revenue source, as well as other direct and indirect revenues. As a result, the initially projected revenues and expenditures do not reflect the conflict-ridden environment, and significant primary and overall deficits could materialize in 2025. a The fiscal balance is calculated using the 2024 GDP projection as the World Bank is not producing forecasts for 2025 due to heightened uncertainty. b The inflation forecast for 2024 is used to compute revenues in real terms for 2025. c Assouad, L. (2023). Rethinking the Lebanese economic miracle: The extreme concentration of income and wealth in Lebanon, 2005–2014. Journal of Development Economics, 161, 103003. d There is a significant overlap between economic and political elites in Lebanon, which renders proposals for wealth taxation highly contentious and unlikely to be pursued by the ruling elites. As a case in point, property taxation, which is a function of revealed wealth, is subject to several loopholes and gaps. Increase in Nominal GDP Prompting a Slight Decrease in Debt-to-GDP in 2024 is Not FIGURE 8 •  Indicative of Improved Debt Dynamicsa Gross public debt 100 200 90 180 80 160 70 140 Percent of GDP (%) US$ Billion 60 120 50 100 40 80 30 60 20 40 10 20 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 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 primary surplus has narrowed from 1.4 percent substantial trade-in-goods deficit. Following a sharp of GDP in 2023 to 0.6 percent in 2024, while nominal rise to 34.6 percent of GDP in 2022, the CA deficit GDP growth—both in local and foreign currency terms— decreased slightly to 28.1 percent of GDP in 2023 and reflects price inflation and exchange rate fluctuations was projected to reach 20 percent of GDP in 2024 rather than actual economic growth. While surging before the escalation of conflict in September 2024 inflation has rapidly eroded the real value of domestic (Figure 9). In nominal terms, the CA deficit followed debt, the sharp currency depreciation continues to a downward trend, declining from a record 7.2 billion render Lebanon’s external and overall sovereign debt US$ in 2022 to 5.6 billion US$ in 2023, with a further burden unsustainable. The World Bank’s debt model projected decrease to 4.9 billion US$ in 2024, prior to assumes a stable foreign-denominated debt stock and the escalation. The contraction in the CA deficit in 2023 does not account for accumulated arrears. was mainly driven by a 7 percent reduction in imports. Debt restructuring remains critical to achieve Although exports also decreased by 8.3 percent in substantial debt reduction, restore fiscal space, 2023, it did not offset the narrowing trade-in-goods and regain market access to respond to the multi- balance, as imports remained four times the volume faceted challenges most recently compounded by of exports; consequently, the trade-in-goods balance the conflict. Four years into the default, the authorities decreased by nearly 6 percent. In 2024, the CA deficit have yet to initiate serious negotiations with external was expected to decrease slightly to 20 percent of creditors. With the median default spell, defined as the GDP, largely due to the “denominator effect” of a period from the start of the credit event to its conclu- higher nominal GDP rather than significant import sion with an agreement that cures the default for a compression, similar to trends in previous crisis years. period of 24 months, lasting seven years, Lebanon is Although conflict escalated in the last quarter of 2024, slowly nearing the entirety of the median seven-year ports and official trade routes into Lebanon, except for default spell without any action.9,10 Further, the expiry the Masna’ crossing, have remained open, thereby not of the statute of limitations in March 2025 (five years (yet) affecting import inflows.13 after the default), which is likely to trigger legal action by creditors, poses another immediate risk. Research 9 Graf von Luckner, C. M., Meyer, J., Reinhart, C. M., on sovereign defaults highlights that creditor losses & Trebesch, C. (2021). External sovereign debt (haircuts) alone do not guarantee significant debt relief, restructurings: Delay and replay. World Bank Blogs. 10 In the post-World War II period, the median default spell as they often apply only to a portion of debt. Without is shorter and stands at five years. sufficient debt relief, Lebanon risks “serial restructur- 11 The Jamaican experience provides a case in point ings,” where repeated debt exchanges provide limited of a successful debt restructuring. In fact, Jamaica long-term relief and lead to higher cumulative haircuts. succeeded, despite low economic growth, natural A quick, decisive, and significant decrease in the debt disasters and the COVID-19 pandemic, in reducing its burden, in part through a deep haircut, is crucial to debt-to-GDP from 144 percent in 2012 to 72 percent by 2023. This was achieved through fiscal rules, such as create fiscal space.11 An improved fiscal position and the Fiscal Responsibility Framework, which helped set access to international capital markets would enable clear debt reduction targets. For further information Lebanon to address its multi-faceted challenges, repair on the Jamaican example, please see Arslanalp, S., multi-year damage to capital stock via capital spend- Eichengreen, B., & Henry, P. B. (2024). Sustained debt ing and support social safety nets and other essential reduction: The Jamaica exception. Brookings Institution. services in the aftermath of the conflict.12 12 A decisive debt restructuring is one that allows a country to regain capital market access, and yields improved macroeconomic performance. Please see Reinhart, C. M., & Trebesch, C. (2016). Sovereign debt relief External Sector and its aftermath. Journal of the European Economic Association, 14(1), 215–251. Despite the ongoing economic crisis and sov- 13 The share of land trade is relatively small. While the ereign default, Lebanon continued to post a closure of informal trade routes reduced smuggling significant current account deficit, driven by a activity, this may have been offset by increased demand 10 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ FIGURE 9 • Despite Slightly Narrowing Current Account Deficit, Ratio to GDP Remains Similar to pre- Crisis Years in 2023 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) Total Imports Current Account (rhs) Sources: BdL, CAS and WB staff calculations. The trade in service surplus that material- net foreign asset position. The accumulation of liquid ized in 2023, despite the conflict, was expected to reserves was largely driven by: (i) the suspension persist in 2024 prior to the escalation in conflict. of the Sayrafa platform and cessation of monetary The persistent trade-in-goods deficits have historically financing of the government budget since July 2023, been partially buffeted by a trade-in-services surplus. and (ii) BdL’s purchase of foreign currency inflows, The decrease in tourism receipts, owing to the con- especially from the tourism sector. This approach flict, weighed down on trade-in-services in 2023 and has proven highly vulnerable to external shocks. The 2024, which declined to 3.5 percent (a surplus) and conflict has significantly reduced tourism receipts, –1 percent (a deficit) of GDP, respectively, vis-à-vis a undermining the viability of reserve accumulation surplus of 4.3 percent and 7.3 percent in 2021 and through surplus inflows. The central bank’s interim 2022, respectively. The latter decrease is a reflection balance sheet indicates a decrease in foreign reserve of the effects of the conflict on the export of tourism assets of US$ 391 million by the end of October services, which serve as a main engine for growth. compared to the end of September (Figure 10).14 This Historically weak BOP data, and the preva- decline partially reflects BdL’s additional payouts to lence of a pervasive dollarized cash economy are depositors during the conflict, as well as the disburse- likely to skew official estimates of hard currency ment of public sector salaries in US$. As the conflict inflows to Lebanon, potentially overstating the endures, BdL’s reserves face additional pressure from current account deficit. This is further compounded declining capital inflows and the increasing need to by the likelihood that Lebanon’s official imports serve finance emergency support. Overall, foreign reserve two countries (Lebanon and Syria); while imports are assets have declined by US$ 20.719 billion between recorded, the inflows from the re-exportation of these end October 2019 and end October 2024 (Figure 10). goods to Syria may not be accounted for, adding further distortion to the current account deficit. for formal imports, which could explain the absence of BdL’s recent trend of accumulating reserves significant import compression. in 2024 has reversed amid the escalation of con- 14 Foreign Assets was reclassified as “Foreign Reserve Assets” to only include non-resident and liquid foreign flict. Prior to the escalation of conflict, foreign reserve assets. The revision was introduced to the end-October assets (liquid reserves) increased by US$ 1,012 million interim balance sheet, and backwards from January to in 9M-2024, reaching US$ 10.654 billion. However, this September 2024 (latest available data) in the monthly rise did not reflect a sustainable improvement in the BdL published foreign assets and liabilities. Recent Economic Developments 11 Reserve Accumulation in 2024 Reversed Due to Escalating Conflict FIGURE 10 •  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 Foreign Currencies Foreign Securities Gross FX Reserves Compulsory FX Reserve Sources: BdL and WB staff calculations. Money and Banking 529.3 trillion (approximately USD 5.9 billion at an exchange rate of LBP 89,500 per USD) in public sector Following episodes of rapid depreciation and high deposits at the BdL, comprising LBP cash, USD cash, volatility, the BdL succeeded in stabilizing the LBP and pre-crisis USD-denominated balances (“lollars”). since August 2023, albeit at a high opportunity This represents a 236.5 percent year-on-year increase cost. The LBP depreciated sharply since October 2019 from 2023. The exchange rate stability has been largely and lost 98 percent of its value by August 2023. These maintained by reduced currency in circulation, driven episodes of depreciation, which were exacerbated by by increased revenue collection and the buildup of BdL’s own interventions in the foreign exchange market public sector surpluses at the central bank. However, via the Sayrafa platform, were accompanied by high any use of these surpluses and deposits risks increas- exchange rate volatility. The LBP stabilized in August ing currency in circulation, placing additional pressure 2023, following the termination of the Sayrafa platform on the exchange rate, or further depleting liquid foreign ushering in a new era of de-facto exchange rate currency reserves. While this strategy has supported stability. The exchange rate stability hinges on higher exchange rate stability, it carries a significant opportu- revenue collection by the Ministry of Finance following nity cost. The fiscal restraint and spending restrictions the correction of the mis-valuation in the exchange have severely limited ministries’ ability to invest in critical rate for customs’ collections starting in November infrastructure and capital projects, sustain public ser- 2022. Enhanced revenue collection in 2023, on a cash vices, support public sector recovery, and address the basis, decreased currency in circulation markedly (by escalating demands of the conflict and its aftermath. 31.2 percent in 2023), thereby significantly supporting Exchange rate stabilization since the sec- BdL’s efforts to maintain exchange rate stability. ond half of 2023 has driven a steady deceleration Exchange rate stability in Lebanon remains in monthly inflation. The acceleration of inflation to heavily dependent on fiscal restraint and spend- 221.3 percent in 2023, was primarily on account of ing restrictions imposed on public institutions’ the steep depreciation of the LBP in the first half of accounts, rather than a robust monetary frame- 2023. Since then, the exchange rate stabilization has work. This approach, while temporarily stabilizing led to a steady decrease in month-to-month inflation, the exchange rate, delays urgent investments and to an average of 1.2 percent between August and expenditures critical for the country’s recovery and December 2023 (excluding October that witnessed development. As of October 15, 2024, these mea- a six-fold increase in the education CPI component). sures have contributed to the accumulation of LBP Year-on-year inflation has also started to decelerate in 12 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ 2024, registering a double-digit figure for the first time 4.1, and 3.7 percent (Figure 13). The latter inflation- in March after recording triple-digit figures since July ary dynamics can be ascribed to the increasing 2020; yoy inflation has decreased to 32.9 percent in dollarization of prices across sectors, which drives September 2024 (Figure 12). Education has become domestic-currency inflation. As more components of the largest contributor to headline inflation in 9M-2024, the CPI basket become increasingly dollarized, and as the base effect recedes in other categories. Of the assuming exchange rate stability is maintained for other categories in the CPI basket, (i) owner occupied the remainder of 2024, annual inflation is projected housing costs (i.e., equivalent rent); (ii) food and non- to decline to double digits in 2024 (refer to Box 3. alcoholic beverages; (iii) health; and (iv) transportation Measuring the Purchasing Power of Dollar Earners for are the other main drivers of headline inflation with a discussion on Measuring the Purchasing Power of contributions standing at, respectively, 17.6, 11.4, Dollar Earners). BOX 3. MEASURING THE PURCHASING POWER OF DOLLAR EARNERS This box examines “dollar inflation”, which is defined specifically as the change in the purchasing power of a representative consumer, whose earnings are fully denominated in USD, and not a direct measure of inflation in USD. The analysis considers the purchasing power of a hypothetical dollar earner, whose wage has been fully denominated in USD since the onset of the 2019 financial crisis and finds that the representative dollar earner has experienced an overall decrease in purchasing power of 4.9 percent over the period September 2019 to 2024, which is markedly lower than the 5,970.7 percent cumulative inflation experienced by an LBP earner. The purchasing power of dollar earners has experienced significant year-on-year fluctuations. These include a 54% increase in 2021, followed by successive declines of 14% in 2022, 19.1% in 2023, and 26.6% in 2024. These declines are attributed to the removal of foreign exchange (FX) subsidies and the increasing dollarization across all sectors of the economy. The sharp deterioration in the currency has driven surging inflation, which remained in triple digits from July 2020 to April 2024. Inflation acts as a highly regressive tax, disproportionately impacting the poor, vulnerable populations, individuals on fixed incomes, and pensioners whose earnings are in LBP. In 2021, inflation averaged 155 percent, climbing to 171 percent in 2022, following the gradual removal of price subsidies, marking one of the highest inflation rates globally. Inflation peaked at 221 percent (year-on-year) in 2023, a testament to the economic hardships and deepening cost of living crisis for LBP earners, particularly as food inflation reached a peak of 350 percent (yoy) in April 2023. Inflation is measured by the Consumer Price index (CPI) reported by the Central Administration of Statistics (CAS), an aggregate price index denominated in national currency, and computed based on a fixed basket of goods and services (Laspeyres index). Although consumption patterns have likely shifted significantly since the 2019 financial crisis, potentially rendering the weights used to calculate the CPI and the consumption basket outdated,a the CPI still serves as a useful indicator of the cumulative loss in purchasing power and inflation experienced by LBP earners in both public and private sectors. The CPI, denominated in LBP, does not accurately reflect the purchasing power of a (limited) segment of society earning in US dollar. In other words, changes in the purchasing power of a representative consumer whose earnings are partially or fully in USD are mismeasured by the CPI. For simplicity, the analysis considers the purchasing power of a hypothetical dollar earner, whose wage has been fully denominated in USD since the onset of the 2019 financial crisis. The approach that is adopted is a simplified version of that used to compute the real exchange rate, and consists of dividing the CPI by the (market or Black-Note Rate) nominal exchange rate: CPItUSD = CPItLBP/et, where is the exchange rate measured as units of LBP per USD. The time series evolution of the CPI in USD is provided in Figure 11. Following the onset of the crisis, a dollar earner’s purchasing power markedly improved, increasing by 142.7 percent by August 2021 compared to September 2019 (Figure 1). In other words, dollar earners by August 2021, could buy more than double what they could before the crisis. Specifically, for every $1 they could spend in September 2019, by August 2021, they could buy goods and services worth about $2.43. This can be ascribed to: (i) the continuation of foreign exchange (FX) subsidies on crucial imports by BdL, through August 2021, which would have benefitted a dollar earner and (ii) the exchange rate pass-through not being perfect (i.e., equal to one) for most components of the CPI basket, as in changes in the exchange rate do not fully translate into proportional changes in the prices of most items in the Consumer Price Index (CPI) basket. However, starting in August 2021, the purchasing power of dollar earners began to steadily decline, with their gains fully eroded by March 2024. This decrease in the purchasing power of the dollar earner stems mainly from (i) the near complete removal of foreign exchange subsidies (fuel, medication, and subsequently wheat; please refer to for the dates of the removal of fuel and medication subsidies); (ii) the (continued on next page) Recent Economic Developments 13 BOX 3. MEASURING THE PURCHASING POWER OF DOLLAR EARNERS (continued) FIGURE 11 • Dollar Earners Benefitted During the Time of FX Subsidies and Only Experienced a 4.9 percent Inflation by September 2024 110 100% Increased 100 dollarization of CPI 80% 90 Removal components 60% Index (Sep 2019=100) of fuel 40% 80 subsidies 20% 70 0% 60 –20% 50 Removal of –40% medication 40 –60% 30 –80% Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24 Jun-24 Sep-24 USD CPI Index Yoy change (rhs) Sources: CAS and WB Staff calculations. gradual dollarization of the components of the CPI basket, and, in particular, the domestic services such as transportation, education, healthcare, and housing, water, electricity, gas and other fuels (including rents), and (iii) unmonitored price increases to hedge against future depreciation episodes.b The cumulative change in purchasing power of dollar earners obscures year-on-year (YoY) fluctuations, which reveal much sharper declines in recent years. From September 2020 to September 2021, the purchasing power of dollar earners increased by 54 percent following the termination of fuel subsidies. However, this improvement was followed by significant YoY decreases: 14 percent in 2022, 19.1 percent in 2023, and 26.6 percent in 2024. Cumulatively, the purchasing power of wage earners in USD has only declined by 4.9 percent from September 2019 to 2024, a much smaller reduction compared to the larger annual losses seen in the past three years. In contrast, wage earners in Lebanese pounds (LBP) experienced a staggering 5,970.7 percent cumulative inflation over the same period. Interestingly, in August and September 2024, the purchasing power loss in USD terms was nearly identical to the inflation rate in LBP. This convergence reflects the de facto stabilization of the exchange rate since August 2023, which has led to a similar purchasing power decline for wage earners in both currencies. a The CPI also suffers from other important drawbacks. Macroeconomists have long recognized that the CPI tends to overstate inflation relative to a Paasche index, like the GDP deflator. A Laspeyres index is a price index constructed from a fixed basket of goods and services whereas a Paasche index is constructed from a changing basket of goods and services. This partly reflects the substitution bias embedded in the CPI. That is, the CPI does not reflect the ability of consumers to substitute towards less expensive goods and services. See, for example, Shapiro and Wilcox (1996) and the Symposium on “Measuring the CPI” in the Journal of Economic Perspectives. b For more details on the unmonitored price increases, please refer to the Spring 2023 Lebanon Economic Monitor: Normalization of Crisis is no Road for Stabilization, World Bank, Washington DC. BdL continues to provide limited access to to foreign currency, deposit of cheques, or accounts encumbered pre-2019 financial crisis deposits and that have benefitted from operations on the Sayrafa focuses on a circular-centric management of the platform. The amount that is accessible under this cir- systemic banking crisis. With the lack of action on a cular is US$ 1,800 per annum, or US$ 150 monthly. BdL comprehensive crisis resolution plan, at the core of which restricted depositors from benefitting from both circu- is restructuring the banking sector, BdL persevered lars 158 and 166. The latter restriction was then relaxed, with its approach of adopting regulatory forbearance to allowing depositors who previously benefitted from manage the systemic banking crisis. The central bank circular 158 to benefit from circular 166, although not issued circular 166 on February 2, 2024, aiming to repay concomitantly.15 The depositor base benefitting foreign currency deposits that have been accumulated between October 31, 2019, and June 30, 2024, exclud- 15 For instance, if the ceiling for withdrawals under circular 158 ing those obtained via conversion from the domestic is exhausted, the depositor may benefit from circular 166. 14 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ from circular 166 was then widened to encompass under these circulars, a trend that is expected to persist individuals who exchanged domestic to foreign cur- if further payouts under circulars 166 and 158 continue.17 rency deposits after October 30, 2019, and to minors. Following the escalation of conflict in September 2024, 16 Intermediate circular 710, decision 13669, issued on BdL amended circulars 166 and 158 to permit, excep- September 25, 2024. 17 For instance, Bank Audi (2024) estimates that US$ 180 tionally, depositors to obtain three payouts in October to 200 mln were supplied by BdL to pay out the three 2024.16 As mentioned earlier, it is likely that the majority installments under circulars 158 and 166 in October of the US$ 391 million decrease in foreign reserve 2024. For more detail, see Bank Audi (2024), Lebanon assets in October 2024 is likely attributed to payouts Weekly Monitor, October 7–October 14, Week 41. THE MOTIVES AND CONSEQUENCES OF LEBANON’S DESIGNATION AS A JURISDICTION UNDER BOX 4.  INCREASED MONITORING (I.E., GREY LISTING) Justifications for Designating Lebanon on the “Grey List” Inadequate Legal Framework On October 25, 2024, Lebanon was placed on the Financial Action Task Force (FATF) grey list (as a jurisdiction under increased monitoring). The FATF report, which evaluates money laundering (ML) and terrorist financing (TF) risks, highlights major weaknesses in Lebanon’s anti-ML (AML) and Countering the Financing of Terrorism (CFT) frameworks. More specifically, corruption, customs smuggling, tax evasion, drug trafficking, and smuggling are identified as primary ML threats whereas a limited understanding of ML and TF risks in the unregulated financial sector (i.e., traders in precious metals and stones, the informal cash economy) and by designated non-financial businesses and professions (DNFBP) (i.e., real estate agents, dealers in precious metals and stones, notaries, casinos, among others), except notaries, is highlighted as a critical weakness. Lack of Enforcement The report underscores the lack of enforcement, and that investigations and prosecutions are not fully aligned with the country’s risk profile.a The regulatory oversight is found to overlook individual transactions in favor of a focus on companies. In addition to the laws designed to combat ML and TF being deficient, the resources for investigating financial crime are insufficient. The report also finds that the penalties for engaging in ML are small and reveals weaknesses in identifying the beneficial owners of economic transactions. Other Gaps Whereas the understanding of ML and TF risks by the banking sector and money transfer companies is deemed to be sound and due diligence is properly applied, the report uncovers that gaps pertaining to the definition of politically exposed persons remain. Further, the report finds that the confiscation of criminal proceeds is limited. The FATF report underscores that investigative efforts should not be confined to the SIC (Lebanon’s multi-function financial intelligence unit) and must include the cassation public prosecution, the internal security forces, tax, and customs authorities. Despite the weak enforcement, the risk-based supervisory approach of Banque du Liban (BdL) and the Special Investigation Commission (SIC) are found to be adequate. Expected Impact on Lebanon’s Financial Sector The key impact channels of grey listing include: (i) reputational damage, (ii) increased transaction costs, and (iii) potential delays in capital inflows. While grey listing often prompts correspondent banks to “de-risk” by restricting or severing relationships, this is less likely for Lebanon, as correspondent banks have already implemented enhanced due diligence following the financial crisis of October 2019. Another potential outcome could be disruptions in remittance inflows; however, the FATF report notes that Lebanese banks and money transfer companies are already applying a risk-based approach (RBA) for customer assessments, which they update periodically. Consequently, remittance inflows will likely face higher transaction costs, additional scrutiny, and more rigorous compliance requirements, leading to processing delays. Priorities Moving Forward To exit the FATF grey list, the report indicates that Lebanon should prioritize (i) strengthening supervision and compliance enforcement in high-risk non-financial sectors (DNFBPs) such as real estate, jewelry, law, and accounting, ensuring adherence to AML/CTF standards, and (ii) enhancing understanding and mitigation of risks arising from government corruption, local organizations, and the informal financial sector. Addressing these areas through rigorous monitoring, transparency improvements, and bringing informal activities into the formal sector would bolster Lebanon’s financial integrity and reduce vulnerabilities in its AML/CTF framework. (continued on next page) Recent Economic Developments 15 THE MOTIVES AND CONSEQUENCES OF LEBANON’S DESIGNATION AS A JURISDICTION UNDER BOX 4.  INCREASED MONITORING (I.E., GREY LISTING) (continued) Conversely, if no progress is made on the above priorities, being blacklisted by the FATF is likely to further restrict Lebanon’s ability to engage in global financial transactions, limit access to essential international aid, and potentially expose the country to sanctions. This designation brings increased scrutiny and reduced foreign investment, undermines Lebanon’s integration within the global financial landscape, and is challenging to reverse, as it requires a comprehensive overhaul of its anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks. a For instance, the findings are that ML investigations are largely focused on self-laundering and, hence, limited with regards to third-party and stand-alone laundering. Further, the report highlights that investigations related to major crimes such as drug trafficking, corruption, and tax evasion are inconsistent with the identified risks. FIGURE 12 • Exchange Rate Stability as of July 2023 Drives Deceleration in Inflation 7,000 6,000 5,000 Index (Aug 2019=100) 4,000 3,000 2,000 1,000 0 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23 Feb-24 Apr-24 Jun-24 Aug-24 World Bank average exchange rate Consumer Price Index Currency in circulation Sources: Lebanese authorities and WB staff calculations. FIGURE 13 • CPI Subcategories’ Monthly Contribution to Headline Inflation (Aug 2019–Sep 2024) 350 300 250 200 Percent (%) 150 100 50 0 –50 –100 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23 Oct-23 Dec-23 Feb-24 Apr-24 Jun-24 Aug-24 Food & non-alcoholic beverages Alcoholic beverages & tobacco Clothing & footwear Actual rent Owner occupied Water, electricity, gas and other fuels Furnishings, household equipment Health Transportation Communication Education Other Headline inflation growth Sources: CAS and WB staff calculations. 16 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ 3 OUTLOOK AND RISKS A bsent the conflict, the economic contrac- physical structures alone amount to US$3.4 billion, tion was forecast to bottom out in 2023 with almost 100,000 housing units partially or fully and 2024, following five years of cumula- damaged. These damages to the country’s capital tive contraction totaling 34 percent of real GDP. stock, along with human capital losses, are expected The conflict and its spillovers have had negative knock- to have lasting consequences on potential GDP for on effects on economic growth in 2023 and 2024, years to come. even prior to the escalation of conflict in Q4-2024. The With the conflict and in its aftermath, key primary channels of impact in 2023 and 9M-2024 are economic fundamentals—such as GDP growth, common: a fall in tourism receipts, the main engine of inflation, fiscal balance, and the trade balance— economic growth, as well as losses in consumption, are increasingly weighted toward the downside. yielding a contraction of –0.8 and –1 percent in 2023, Although the exchange rate has stabilized since and 2024 pre-escalation respectively. August 2023, the conflict and recovery needs pose Since Q4-2024, the escalation of conflict risks of renewed pressure and further depletion of has inflicted a severe human toll, mass displace- the remaining liquid reserves. Exchange rate stability ment, and extensive destruction, cutting real relies on fiscal restraint and spending restrictions GDP growth by an estimated 6.6% (refer to special imposed on public institutions’ accounts at BdL to focus below). By mid-November 2024, over 3,500 control currency circulation. This stability has been lives have been lost, with more than 14,500 injured. supported by increased revenue collection from the Although the primary economic impacts—declines in Ministry of Finance and other public entities, such tourism revenue and a substantial shock to consump- as EdL, which has reduced liquidity, and by unspent tion—remain unchanged, their severity has intensified significantly. The conflict has also caused widespread 18 World Bank. Lebanon Interim Damage and physical destruction; the World Bank Interim Damage Loss Assessment (DaLA) : Assessment Report and Loss Assessment (DaLA)18 finds that damages to (English). Washington, D.C. : World Bank Group. Link. 17 public sector surpluses held at BdL. However, with the The conflict is expected to drive the total conflict and in its aftermath, fiscal restraint and spend- cumulative decline in real GDP since 2019 to over ing restrictions on public entities are likely to become 38% in 2024, up from 34% in 2023 amplifying even more contentious. Line ministries are bound existing macroeconomic challenges rooted in the to request an increase in spending, in the domestic unresolved economic and financial crisis, now and foreign currency, to mitigate the humanitarian, intensified by a new external shock. Exchange rate physical, and sectoral effects of the conflict. Increased stability relies on fiscal restraint rather than a sustain- spending will either draw down central bank reserves able monetary framework, while unaddressed debt or expand currency in circulation, placing additional restructuring restricts Lebanon’s access to external pressure on the exchange rate, threatening the fragile financing, which is crucial to weather the conflict’s exchange rate stability achieved to date. impact and support recovery and reconstruction The conflict is expected to significantly efforts. Compounding this, a persistent current impact Lebanon’s fiscal position through the account deficit is financed by an opaque cash econ- remainder of 2024 and into 2025. Ministries will omy, heightening money laundering risks and skewing likely require urgent funding to address the immedi- official statistics away from reflecting economic reality. ate needs of displaced populations, sustain essential The conflict has only reinforced that public services, and support recovery efforts, while comprehensive reform remains the sole viable revenues are expected to decline due to reduced path forward. Key priorities include achieving economic activity, particularly affecting Value Added macroeconomic stability, improving governance, Tax, the government’s primary revenue source. This enhancing public utilities, and bolstering human situation necessitates a reevaluation of the 2025 bud- capital.19 Targeted investments are essential to get to better align with the country’s current realities support sustainable reforms, facilitate the recovery and urgent needs. Without progress on debt restruc- of essential services, and rebuild Lebanon’s dam- turing, Lebanon’s capacity to effectively respond aged capital stock. These efforts must also prioritize to and recover from the conflict will remain severely strengthening social safety nets and restoring critical constrained. The ongoing sovereign default means infrastructure. Lebanon’s institutions and public sec- Lebanon will be heavily reliant on limited international tor urgently require substantial assistance to prevent humanitarian assistance to manage internal displace- a collapse in service delivery and to address press- ment and respond to the conflict, while financing for ing citizen needs, especially as the conflict persists. post-conflict recovery and reconstruction remains Strengthening public institutions is key to restoring highly uncertain. and maintaining essential social services, laying the The impact on Lebanon’s current account groundwork for long-term resilience and state-building balance, which has faced a chronic deficit for once the conflict subsides. Literature highlights that decades, remains uncertain but could deteriorate effective governance and resilient institutions are further. While trade routes into Lebanon remain open, foundational for recovery in post-conflict settings significant import reduction is unlikely. However, any (World Bank, 2003; Paris, 2004).20 As Buvinic and closure of trade routes would be detrimental to a coun- try that imports the vast majority of its basic necessities, 19 In this vein, the Lebanon Systematic Country Diagnostic including food. Exports, are expected to decline due to outlines a strategy to tackle Lebanon’s critical challenges reduced economic activity, potentially worsening the and establishes realistic policy priorities: World trade in goods balance. The trade in services balance Bank. Lebanon – A Systematic Country Diagnostic is also likely to decline further, as tourism revenues (English). Washington, D.C. : World Bank Group. Link 20 World Bank. (2003). Reforming Public Institutions and continue to drop amid the conflict. Nonetheless, tour- Strengthening Governance: A Sourcebook. Washington, ism receipts are anticipated to rebound quickly once DC: The World Bank; Paris, R. (2004). At War’s End: the conflict subsides, as tourists, particularly expatri- Building Peace After Civil Conflict. Cambridge University ates, are expected to quickly return. Press. 18 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ Morrison (2000)21 note, investing in public institutions 21 Buvinic, M., & Morrison, A. R. (2000). Gender and Post- not only improves service delivery but also fosters Conflict Reconstruction: A New Vision for Addressing social cohesion and stability over time. Unlocking the Challenges of the 21st Century. In Reconstruction, access to financing, particularly through comprehen- Development and the Role of Women. Washington, DC: sive reforms including debt restructuring, is critical for World Bank. enabling the investments needed to achieve these pri- orities and provide the institutional support necessary for Lebanon’s recovery and long-term development. TABLE 2 • Selected Economic Indicators (2015–2024) Pre- Post- Escalation Escalation 2015 2016 2017 2018 2019 2020 Est. 2021 2022 2023 2024 Proj. 2024 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 –1.0 –5.7 Real GDP per Capita* –1.5 4.0 3.6 1.0 –3.9 –20.1 –7.3 –1.1 –1.3 –1.5 –8.9 (Share of Real GDP) 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 45.7 45.7 Public Finance (percent of GDP, unless otherwise specified) Revenue 19.2 19.4 21.9 21.0 20.8 13.1 7.5 6.1 13.7 15.0 16.7 o/w Tax revenue 13.7 13.7 15.5 15.4 15.6 9.0 5.6 4.9 10.0 12.0 13.3 Expenditure 26.9 28.7 28.6 32.0 31.4 16.4 6.5 9.0 13.2 14.8 16.7 Current expenditure 21.7 23.2 23.6 26.0 26.1 14.3 5.8 7.8 11.5 10.6 11.8 o/w Interest payment 8.9 9.3 9.4 9.9 10.1 2.5 0.9 0.4 0.9 0.3 0.4 Capital expenditure 1.4 1.4 1.5 1.7 1.3 0.4 0.1 0.2 0.2 0.9 1.0 Overall fiscal balance –7.7 –9.3 –6.7 –11.0 –10.6 –3.3 1.0 –2.9 0.5 0.2 0.0 Primary balance 1.2 0.0 2.7 –1.2 –0.5 –0.8 1.9 –2.5 1.4 0.6 0.4 External Sector (percent of GDP, unless otherwise specified) Current Account Balance –17.1 –20.5 –22.9 –24.3 –21.5 –8.8 –14.7 –34.6 –28.1 –20.0 –25.3 Trade balance –22.9 –23.7 –24.8 –24.8 –25.1 –20.3 –31.0 –55.0 –53.2 –42.8 –50.7 o/w Export (GNFS) 39.7 37.3 36.1 35.7 35.7 28.2 44.9 60.1 52.7 44.0 45.8 Exports of goods 8.0 7.7 7.6 7.0 9.4 12.9 19.9 21.5 20.6 16.7 18.6 Exports of services 31.7 29.6 28.5 28.7 26.3 15.3 24.7 38.6 32.1 27.2 27.2 (continued on next page) Outlook and Risks 19 TABLE 2 • Selected Economic Indicators (2015–2024) (continued) Pre- Post- Escalation Escalation 2015 2016 2017 2018 2019 2020 Est. 2021 2022 2023 2024 Proj. 2024 Proj. o/w Import (GNFS) 62.6 61.0 60.9 60.5 60.8 48.5 75.9 115.1 105.9 86.8 96.5 Imports of goods 35.2 35.1 34.8 34.4 35.3 33.4 55.4 86.4 83.9 59.0 65.5 Imports of services 27.4 25.9 26.1 26.1 25.5 15.1 20.5 31.3 21.9 27.8 30.9 Factor services and transfers 5.8 3.2 1.9 0.5 3.0 11.0 18.5 22.3 25.1 22.8 25.4 o/w Net remittance inflows 7.2 6.7 5.2 4.2 6.1 11.9 17.8 21.9 21.2 19.1 21.3 Total Public Debt Total debt stock (US$ million)b 70,315 74,959 79,530 85,139 88,900 56,813 39,903 37,718 36,090 35,966 36,027 Debt-to-GDP ratio (percent) 140.8 146.6 150.0 155.1 172.3 179.2 172.5 179.7 179.7 141.9 158.0 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 2,267,706 2,040,425 Exchange rate, average 1,508 1,508 1,508 1,508 1,554 3,688 11,755 27,309 85,828 89,500 89,500 (LBP/US$) Nominal GDP (US$ million)b 49,929 51,147 53,028 54,902 51,606 31,712 23,132 20,992 20,079 25,337 22,798 a Per-capita calculations are based on population estimates produced by 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 The WB-AER is used to calculate the total debt stock and nominal GDP in US$ million for 2019–2024. 20 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ SPECIAL FOCUS: THE IMPACT OF THE CONFLICT ON THE LEBANESE ECONOMY T he significant escalation of the conflict country (Figure 14). The conflict has triggered one between Lebanon and Israel that started of the largest displacements in Lebanon’s history, mid-September 2024, is estimated to with nearly 1.2 million people—over a quarter of the have cut real GDP growth in Lebanon by 6.6 per- population—displaced. The International Organization cent, or a loss of US$ 4.2 billion in consumption for Migration (IOM), has registered close to 881,000 and net exports for the crisis-stricken economy. Internally Displaced Persons (IDPs) as of November Economic activity for 2024 is thus projected to con- 14, 2024, primarily from the South and El Nabatieh tract by 5.7 percent in 2024 (against a no conflict governorates, with close to a quarter residing in scenario where activity would have expanded by 1,027 government-designated shelters across the 0.9 percent). The primary transmission channels for country (Figure 15).22 The cost of physical damages the conflict’s impact on the Lebanese economy are and economic losses from the conflict in Lebanon is shocks to consumption and net exports in 2024. estimated at US$8.5 billion, with damages to physical structures alone amounting to US$3.4 billion.23 While it is too early to fully assess the shock’s impact on Situational Analysis Lebanon’s capital stock, the destruction is expected to materially decrease the country’s potential GDP. Military confrontations between Lebanon and Israel escalated into a full-scale conflict by September 2024, resulting in a devastating 22 International Organization for Migration (IOM), Nov 14 human toll, mass displacement, and widespread 2024. DTM Mobility Snapshot – Round 62 – 14-11-2024. IOM, Lebanon. physical destruction. By mid-November, the death 23 World Bank. Lebanon Interim Damage and toll has exceeded 3,500, with more than 14,500 Loss Assessment (DaLA): Assessment Report injured and over 10,000 attacks recorded across the (English). Washington, D.C.: World Bank Group. Link. 21 FIGURE 14 • Israeli Strikes and Casualties Across Close to 80 Percent of IDPs are FIGURE 15 •  Lebanon, with a Concentration from the El-Nabatieh and South in the South and El Nabatieh Governorates Governorates Internally Displaced Persons, by Governorate of Departure 2% 4% 13% 28% 12% 41% South El Nabatieh Mount Lebanon Baalbek El Hermel Beirut Bekaa Sources: ACLED, accessed October 7th, 2024, and WB Data Lab. Source: International Organization for Migration (IOM), October 28th, 2024. Real-time high-frequency data on flight activ- severely impacted tourism—one of Lebanon’s main ity indicate a sharp decline in key services sectors, growth pillars—resulting in substantial losses in service particularly tourism, which is a primary driver of exports. These losses have been further aggravated economic growth, due to the recent escalation of by the prolonged conflict in 2024. The conflict has the conflict. Alternative data on cancelled, landed, triggered a significant consumption shock due to wide- diverted, scheduled, and completed flights to Lebanon spread displacement and mass destruction, severely reveals severe travel disruptions post September 23, weighing on economic activity. As private consumption, 2024 (Figure 16). These disruptions are consistent with which accounted for 134 percent of Lebanon’s real international carriers cancelling their flights to Beirut GDP in 2023, is the largest component of the economy, following the escalation of the conflict. Lebanon’s assessing the impact on both consumption and tourism national carrier remained as the sole company that provides a comprehensive view of the conflict’s overall continued to operate flights in and out of Beirut’s inter- impact on the economy in 2024. national airport post September 23, 2024.24 While the conflict is likely to have a devas- tating effect on Lebanon’s capital stock across sectors, and particularly fixed capital formation, Assessing the Impact of the Conflict profoundly impacting potential GDP, this analysis does not account for the destruction of the capi- The Counterfactual Scenario tal stock. Heightened uncertainty and the conflict are likely to lead to a decrease in investment further The impact of the conflict on the Lebanese econ- contributing to the erosion of the capital stock. Without omy in 2024 is assessed by analyzing shocks to public and private investment and the availability net exports and consumption, particularly following of financing for the reconstruction of the affected the significant escalation in mid-September 2024. The analysis uses an expenditures-based approach to 24 Continuity of operations by Lebanon’s national carrier, evaluate losses in the economy’s two main aggregates: Middle East Airlines, was made possible due to the Consumption and net exports, which are crucial drivers Council of Ministers’ decision to cover the airline’s of real GDP growth. Starting in Q4-2023, the conflict insurance premium. 22 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ FIGURE 16 • Flights Arriving at Beirut International Airport are at a Fraction of their pre-Escalation Levels Daily Arrivals to BEY 250 Temporary shutdown of Israeli strikes in Start of 200 Lebanese airspace between Southern Lebanon the full 7AM and 1PM blown 150 Nr Flights conflict 100 50 0 07 Jan 2024 21 Jan 2024 04 Feb 2024 18 Feb 2024 03 Mar 2024 17 Mar 2024 31 Mar 2024 14 Apr 2024 28 Apr 2024 12 May 2024 26 May 2024 09 Jun 2024 23 Jun 2024 07 Jul 2024 21 Jul 2024 04 Aug 2024 18 Aug 2024 01 Sep 2024 15 Sep 2024 29 Sep 2024 Flights Date Active Landed Scheduled Unknown Cancelled Diverted Number of Conflict Events Source: World Bank Data Lab based on flight data from AviationStack and conflict events from ACLED. governorates, the capital stock will continue to depre- tourist arrivals under a counterfactual scenario of ciate, and the impact of its destruction on potential absence of conflict and the elasticity of receipts output will persist for years.25 The analysis assumes from travel services to tourist arrivals (refer to that remittance inflows will remain unaffected, with a annex I for methodology). The total losses in travel steady stream of remittances similar to that seen dur- receipts for 2024 are estimated at US$ 756 million, ing the crisis years continuing to serve as a de facto with more than 60% of the losses materializing in Q4, safety net for households recently impacted by the due to the escalation of conflict (Figure 17). devastating conflict. However, receipts from travel services are To isolate the impact of the conflict on the likely to underestimate actual tourism spending. Lebanese economy in 2024, a counterfactual This is due to (i) the prevalence of cash transactions scenario was developed. This scenario assumes no in the economy, and (ii) some Lebanese expatriates, conflict as of Q4-2023, and projects a continued upward particularly those who have left the country recently, trajectory in tourist arrivals. In the absence of conflict, being misclassified as residents. To better estimate the scenario assumes that this growth in tourism would lost tourism receipts, the lost spending by Lebanese have extended through 2024. It also assumes the con- expatriates is accounted for as follows: average tinuation of pre-conflict consumption trends, which had spending per tourist in Lebanon is first computed and been contributing positively to economic growth. Due then multiplied by the difference between the counter- to a lack of comprehensive data, night-time lights (NTL) factual number of Lebanese expatriates under the no data are used as a proxy to gauge relative economic conflict scenario and the actual number of Lebanese activity and consumption across Lebanon’s geography. expatriates who visited the country in Q4-2023 and The computation of the consumption shock is detailed in the following sections. 25 Public investment is curtailed by the severely limited Absent the conflict GDP would have fiscal space. In fact, capital expenditures declined grown, albeit tepidly, by 0.9 percent in 2024. markedly in the post-reconstruction era and amounted to less than 2 percent of GDP since 2001. As a result, the capital stock declined to less than 50 percent of Assessing the Tourism Shock in 2024 GDP since 2010, owing to significant dis-investment. Private investment will also not be forthcoming absent a Losses in travel receipts due to the conflict favorable investment climate and should uncertainty and in 2024 are computed based on forecasts of instability persist. Special Focus: The Impact of the Conflict on the Lebanese Economy 23 Losses in Travel Receipts (excluding FIGURE 17 •  Because of their spatial accuracy, Night- Expat Spending) are Expected to Be time lights (NTL) data are used to gauge relative Most Prominent in Q4-2024 economic activity across Lebanon’s geography.28 600 NTL-implied estimates suggest that the five gover- 500 norates most affected by the conflict account for 80 percent of total economic activity in the post 400 2019 financial crisis period (Table 4). NTL-Implied US$ Million 300 Administrative Level Economic Activity relative to Total Economic Activity and Figure 18). Theses gov- 200 ernorates are Baalbek-El Hermel, Mount Lebanon, 100 South Lebanon, El Nabatieh, and the Bekaa. In fact, 0 displacement from South Lebanon and El Nabatieh Q1-2024 Q2-2024 Q3-2024 Q4-2024 (accounting for close to 22 percent of total economic Losses activity in 2023) account for around 78 percent of total Actual/Predicted Travel Receipts, with Conflict displacement across the country (Figure 15. Close to Predicted Travel Receipts under the Counterfactual of no Conflict 80 percent of IDPs are from the El-Nabatieh and South Source: BdL and World Bank Staff Calculations. governorates.), a testament to the significant shock to economic activity in those governorates.29 NTL- H1-2024.26,27 When factoring in losses from expatriate implied estimates indicate that the southern suburbs spending, total losses in travel receipts are estimated of Beirut (Dahieh area) accounts for 2.82 percent of at US$ 1.2 billion for 2024 (Table 3. Losses in Q4-2024 outweigh those materialized over the year from 26 The data source for expatriate arrivals is CAS. Spending Q4-2023 to Q3-2024). by Lebanese expatriates is computed as tourist spending in 2022 from BLOMINVEST’s BRITE database in 2022 divided by actual or projected tourist arrivals. It is Gauging the Consumption Shock assumed that 70% of total Lebanese arrivals consists of expatriates who exhibit the same spending patterns as Beyond the heavy human toll, the conflict is inflict- tourists whereas 30 percent are residents returning home. ing mass internal displacement and significant 27 Given that the actual number of Lebanese expatriates physical destruction, which continues to severely visiting Lebanon under the baseline (i.e., conflict) weigh on consumption and economic activity. scenario is not available in H2-2024, a forecast is With the conflict escalation since September 2024, produced using a well-specified time series model, which economic activity has been severely dented in five accounts for seasonality, using data up to H1-2024 to capture conflict dynamics. In contrast, the arrivals of out of eight governorates, and internal displacement Lebanese expatriates under the counterfactual (i.e., no across all governorates has had knock-on effects on conflict) scenario are generated from a well-specified consumption and economic activity. time series model, which accounts for seasonality, using data up to 2023Q3 (i.e., prior to the onset of the conflict) Losses in Q4-2024 Outweigh Those TABLE 3 •  to capture pre-conflict trends. Materialized Over the Year from 28 The existing research suggests that Defense Q4-2023 to Q3-2024 Meteorological Satellite Program (DMSP) data lack spatial accuracy, but Visible Infrared Radiometer Suite (VIIRS) Losses in Tourism Receipts (including expat NTL data are far more spatially accurate and, hence, Spending)-Million US$ can be used to gauge economic activity geographically. Q1-2024 186.6 The analysis of administrative-level geographic activity, Q2-2024 66.3 provided, employs VIIRS NTL data from Black Marble that is collected by the World Bank’s data lab. Black Q3-2024 102.9 Marble employs a potentially more advanced algorithm Q4-2024 907.9 for NTL data collection. This superior algorithm removes, for example, the effect of ephemeral light. Total (2024) 1,263.7 29 Link. 24 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ TABLE 4 • NTL-Implied Administrative Level Economic Activity Relative to Total Economic Activity 2017 2018 2019 2020 2021 2022 2023 Mount Lebanon 46.4 45.2 45.3 43.4 41.8 41.6 39.5 Bekaa 10.2 10.6 10.8 11.8 12 11 14.9 South Lebanon 9.6 9.7 9.5 10.5 12.5 15.9 12.7 El Nabatieh 7.3 7.7 7.7 8.5 8.3 8.9 8.8 Baalbek-El Hermel 4.5 5.3 5.8 6.7 7.4 3.7 3.8 North Lebanon 13.3 12.5 11.7 10.9 10.6 11.01 11.9 Beirut 5.3 5.2 5.3 4.4 4.6 6.3 6.1 Akkar 3.1 3.4 3.6 3.3 2.4 1.3 2 the economic activity in Mount Lebanon.30 The latter destruction, and economic activity has ground to a area has seen substantial displacement amid mass complete halt at the end of September 2024. Taking into account the significant escala- FIGURE 18 • The Five Governorates Heavily tion in conflict since September 2024, the size Affected by the Israeli Strikes Accounted for 80% of Total of the shock to consumption implied from NTLs Economic Activity in 2023 for 2024 is US$ 2,937 million (Table 5. Shocks to Consumption (in US$ million)). For the first nine months NTL Implied Governorate's Contribution to Total Economic Activity of 2024, and given that the conflict and displacement 50 was largely contained in the South and El Nabatieh gov- 40 ernorates, the shock to consumption derived from NTLs is only computed in those governorates.31 The losses in 30 20 30 The latter estimate is produced using NTL data at the third administrative level, the most granular and detailed 10 level for areas outside of Beirut and uses the Caza of Baabda to proxy for Beirut’s southern suburb. The 0 population density in Beirut’s southern suburb is the Baalbek-El Hermel North Lebanon South Lebanon El Nabatieh Akkar Mount Lebanon Bekaa Beirut highest in all Baabda and Mount Lebanon. 31 Forecasts of NTLs for El Nabatieh and South Lebanon governorates are produced for Q4-2023 to Q3-2024 2021 2022 2023 using data up to September 2023 to capture pre-conflict Source: World Bank staff Calculations based on Black Marble VIIRS Night-Time Lights dynamics. These forecasts serve as the counterfactual data collected by the World Bank’s Data Lab. scenario of absence of conflict. TABLE 5 • Shocks to Consumption (in US$ Million) South Lebanon El Nabatieh Baalbek Bekaa Mount Lebanon (Baabda; Dahieh) 2024Q1 132.7 107.1 — — ­— 2024Q2 89.4 31.2 — — ­— 2024Q3 154.4 178.4 — — ­— 2024Q4 689.6 477.8 206.3 809.7 60.4 Total 2024 1,066.1 794.5 206.3 809.7 60.4 Total 2024 across Governorates 2,937 Special Focus: The Impact of the Conflict on the Lebanese Economy 25 consumption for the South and El Nabatieh governor- Total Losses in Net Exports and TABLE 6 •  ates for 9M-2024 amount to 693 US$ million.32 With the Consumption Due to the Conflict (US$ mln) escalation of conflict in Q4-2024 and the further mas- sive displacement from the South, El Nabatieh, Bekaa, 2024 Baalbek El-Hermel, and Beirut’s southern suburb, con- Losses in Tourism Receipts (including expats) 1,263.7 sumption in these governorates or areas is assumed to Losses in Consumption 2,937 be considerably larger in Q4-2024. The relative weight Total 4,200 of each governorate in total economic activity and an estimate of aggregate consumption are employed to obtain forgone or lost consumption in Q4-2024 (Table 5. on real GDP growth, GDP per capita, and macro- Shocks to Consumption (in US$ million)).33 economic aggregates.35 Civil wars are found to lead to a decline of 2.3 percent, on average, in real GDP Impact of the Conflict on Lebanon’s GDP growth per conflict year. A key takeaway from existing For 2024, the conflict is estimated to have cut Lebanon’s real GDP growth rate by 6.6 percentage 32 First, the difference in NTLs between the baseline (i.e., points due to the combined shocks to tourism and conflict) and counterfactual (i.e., no conflict) scenarios is translated into an output effect using the structural consumption. With the conflict escalating to a full- elasticity of NTLs to GDP of 1.55 that is provided in: blown conflict since September 2024, the significant Beyer, R. C., Hu, Y., & Yao, J. (2022). Measuring quarterly shocks to both tourism and consumption are estimated economic growth from outer space. Policy Research at $4,200 million (Table 6. Total Losses in Net Exports Working Paper 9893, World Bank, Washington DC. The and Consumption due to the Conflict (US$ mln)). As a computations employ mean NTLs as opposed to the sum result, real GDP is now projected to contract by 5.7 per- of NTLs. Second, the latter difference is multiplied by the relative weight of each governorate in total economic cent in 2024. In a counterfactual scenario without conflict activity and an estimate of aggregate consumption. in 2024, real GDP growth would have been 0.9 percent. 33 Displacement to other receiving governorates could have When combining the impact of the conflict in increased consumption, particularly with the humanitarian 2023 and 2024, real GDP growth has cumulatively aid offered by several countries. Nonetheless, it is contracted by 7.6 percent. As outlined in the special assumed that this increase in consumption is completely focus of the Fall 2023 Lebanon Economic Monitor, the offset by the decrease in economic activity in these governorates resulting from the war. conflict has reduced Lebanon’s real GDP growth by 1 per- 34 Further details on the methodology and measurement of centage points to a contraction of 0.8 percent in 2023.34 the shocks to consumption and tourism in 2023, please In a counterfactual scenario without conflict, real GDP refer to the Fall 2023 Lebanon Economic Monitor. growth would have been 0.2 percent in 2023 (Table 7). 35 See, for example, the following non-exhaustive list of references, which the discussion draws upon. Collier, P., & Hoeffler, A. (2004). Greed and grievance in civil war. Oxford economic papers, 56(4), 563–595. Conclusion and Looking Ahead Novta, N., & Pugacheva, E. (2021). The macroeconomic costs of conflict. Journal of Macroeconomics, 68, 103286. Our estimates are in line with recent research’s Thies, C. F., & Baum, C. F. (2020). The effect of war on estimates of the impact of civil conflicts and wars economic growth. Cato Journal, 40, 199–212. TABLE 7 • Lebanon: Real GDP Estimates and Projections Under Alternative Conflict Scenario Fall 2024 Estimates Counterfactual (no conflict) Total Impact of Conflict 2023 2024 2023 2024 2023 2024 Est. Proj. Est. Proj. Est. Proj. Real GDP (%) –0.8 –5.7 0.2 0.9 –1.0 –6.6 26 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ Lebanon: The Conflict Cut Real FIGURE 19 •  In addition, the reduction in Lebanon’s human GDP Growth in Lebanon by 6.6 pp capital stock due to the conflict is another significant in 2024 concern, though it is still too early to fully assess 2 the extent of the damage. Prolonged mass internal 1 displacement is likely to create further social strains 0 and tensions, especially as the economy grapples with –1 a multifaceted crisis, limited financing, and restricted Percent (%) –2 fiscal space for humanitarian, relief, and social services. –3 The conflict has caused more than ten thousand casual- –4 ties and disrupted education and health outcomes, with –5 –6 thousands of children out of school and many health –7 facilities severely strained or damaged. Additionally, a 2023 2024 critical issue yet to be evaluated is the anticipated wave Losses of skilled worker departures, which could further erode Current projections - Fall 2024 the country’s human capital. As of October 7th, 326,000 No-Conflict estimates individuals have left the country, around half of whom Source: WB Staff Calculations. are Lebanese citizens.39 This number is expected to rise as the conflict continues, with little information available work is that intensity is an important determinant of the on the qualifications, education, and skills of those who macroeconomic impact of conflicts.36 The empirical have left, or whether they will return, potentially leading evidence suggests that GDP per capita and consump- to long-term erosion of Lebanon’s human capital. tion are 28 percent and 25 percent lower ten years following the onset of a conflict. Existing research also 36 A commonly employed dataset in the literature is the suggests that consumption, investment, exports, and Uppsala Conflict Data Program. As discussed in Novta imports tend to decrease during and several years and Pugasheva (2021), political scientists have commonly used a threshold of 1,000 battle-deaths and above to following the conflict.37,38 The findings for Lebanon are determine whether a country has undergone a major consistent with those of the existing literature on the conflict. Thies and Baum (2020), who examine the effects macroeconomic effects of conflicts, particularly since of war on economic growth, classify conflict intensity the significant escalation of the conflict in the fourth on a scale or magnitude of 1 to 7, based on thresholds quarter of 2024. While economic activity was affected related to the number of battle deaths. Magnitude 6 and in all quarters of 2024, the impact of the conflict has 7 conflicts or wars have respectively, 1,001 to 10,000 and 10,000 and more battle-deaths (Thies and Baum, been primarily concentrated in Q4-2024. 2020). Nonetheless, Novta and Pugacheva (2021) make As estimated, the economic and sectoral the important point that, for the purpose of assessing a tolls of the conflict are severe and continue to conflict’s economic effect, conflict intensity should be escalate. As mentioned earlier, the effects of the con- considered in context and be country and population-size flict in terms of destruction in the capital stock (or gross specific. The authors argue in favor of measuring conflict fixed capital formation) have not yet been accounted incidence based on the share of the population killed. The authors define a conflict event-year as any event with more for. Incorporating losses in gross fixed capital formation than one hundred casualties in any given year. would likely lead to a significant decrease in Lebanon’s 37 In contrast, Novta and Pugasheva (2021) find that public potential GDP. As mentioned in Box 5. Comparing the consumption increases during and after the conflict. This Current Conflict to the 2006 Hostilities, the absence of is consistent with higher spending to accommodate the domestic financing implies that the post-war recovery effect of a conflict, establish social safety nets, provide would hinge on external financing, which is, contingent assistance with healthcare and education, and other forms of aid. In Lebanon, the severely limited fiscal space on geopolitical conditions. The severe infrastructure would preclude such an increase in public spending deficiencies, exacerbated by the conflict, coupled with without budget support from the international community. the absence of financing, are detrimental to total factor 38 Novta and Pugasheva (2021). productivity and potential growth. 39 Link International Organization for Migration (IOM). Special Focus: The Impact of the Conflict on the Lebanese Economy 27 COMPARING THE CURRENT CONFLICT TO THE 2006 HOSTILITIES BOX 5.  As highlighted in the Fall 2023 Lebanon Economic Monitor,a the 2006 hostilities between Lebanon and Israel serve as a benchmark for the potential effects of the current conflict, with several caveats to consider. The conflicts differ in terms of (i) human toll, physical damage, duration (ii) baseline macroeconomic environment, and (iii) geopolitical environment determining international financing appetite for reconstruction. Human Toll, Physical Damage, Duration In addition to the heavier human toll, the current conflict is expected to result in greater damages than the 2006 conflict which led to US$2.3 billion in forgone output (about 10.5% of nominal GDP, US$33.1 billion) and US$3.2 billion in direct and indirect damages. While the 34-day conflict in 2006 primarily destroyed major infrastructure such as roads, bridges, airports, and power plants, the current conflict has predominantly caused extensive damage to housing units and non-residential infrastructure, including public buildings, water facilities, and educational institutions. In The cost of physical damages and economic losses from the conflict in Lebanon as of end-October 2024, is estimated at US$8.5 billion, with damages to physical structures alone amounting to US$3.4 billion.b The death toll, already surpassing 3,500, is more than triple that of the 2006 hostilities, while injuries have also more than tripled, exceeding 13,500. Displacement has also been more severe, affecting six out of Lebanon’s eight governorates and reaching a quarter of the population. Finally, the current conflict has already exceeded the 34-day duration of the 2006 conflict, and damages are expected to compound further as the conflict prolongs. Baseline Macroeconomic Environment Given Lebanon’s current vulnerabilities, the economic impact of the conflict is estimated to materially exceed that of the 2006 hostilities, owing to markedly different initial macroeconomic conditions prior to the conflict. The current conflict erupted against a backdrop of a cumulative sharp contraction reaching 34% of real GDP in the past five years, sovereign default, systemic banking crisis, limited capital expenditures and investment flows, and severely curtailed public service provision. The impaired macroeconomic framework and limited fiscal space will curtail the authorities’ ability to provide emergency assistance. Moreover, Lebanon’s insolvent banking sector is incapable of extending credit to the productive sectors of the economy or to finance reconstruction and investment. The decrease in real GDP due to the current conflict is unlikely to be short-lived given the country’s binding financing constraints within the context of the financial crisis, and particularly amid sovereign default. In contrast to the negative growth projected due to the current conflict, real GDP growth in 2005 and 2006 remained positive despite the significant financial and economic strains following Prime Minister Hariri’s assassination in February 2005 and the hostilities in July 2006, standing at 2.7% and 1.6%, respectively. Lebanon had also benefitted, in the lead-up to these two shocks, from a program of fiscal adjustment, which restrained the primary deficit and provided interest relief, following the Paris II donors conference in 2002. In these two episodes, deposit outflows of US$2 billion and US$ 3 billion, respectively, were quickly reversed.c In 2006, deposits from Saudi Arabia and Kuwait totaling US$1.5 billion played a pivotal role in stabilizing the banking sector and maintaining the currency peg. Additionally, fiscal costs from the 2006 conflict were offset by donor support from the Paris III conference, which was crucial for achieving a record 9.3% economic growth in 2008. Moreover, unlike the rapid reversal of capital outflows following the 2006 hostilities, the conflict is expected to halt and ultimately reverse the limited investment and capital inflows into the country. The increased risk premiums associated with the conflict will raise the required return on capital, already elevated due to the sovereign default and banking crisis, making investment in Lebanon unattractive. Additionally, investor sentiment is likely to be severely impacted, and the chances of identifying viable investment opportunities in a country facing significant infrastructural, institutional, and economic declines will be minimal. The conflict will also likely disrupt any ongoing stabilization in private sector activity for an extended period. While the BdL maintained a fixed exchange rate regime in 2006, the fragile exchange rate stability achieved since August 2023 is likely to come under increased pressure with the conflict and possibly in its aftermath. Unlike 2006, when external supportd bolstered exchange rate stability, this conflict occurs against the backdrop of a severely weakened currency, which has lost 98 percent of its value, and witnessed significant volatility between 2019 and 2023. After years of instability exacerbated by BdL’s interventions through the Sayrafa platform, exchange rate stability was achieved in August 2023, driven by increased fiscal revenue collection and spending restrictions on public entities which generated unspent public sector surpluses held at the BdL. However, the conflict will likely undermine the fragile exchange rate stability as fiscal authorities would need to expand spending to sustain public services and effectively respond to the conflict and support recovery efforts, risking increased currency in circulation or further depletion of limited liquid foreign reserves. Geopolitical Environment Unlike the aftermath of the 2006 hostilities, international aid and investment post-conflict remain highly uncertain. In fact, the output loss from the 2006 hostilities turned out to be smaller than anticipated, and the infrastructure was rapidly repaired due to significant bilateral and multilateral funding in the immediate aftermath of the conflict.e Significant bilateral and multilateral financing in the post-conflict period—similar to the situation following the 2006 conflict—remains uncertain due to geopolitical considerations. This financing will largely depend on the feasibility of achieving a comprehensive political settlement involving both internal and external (continued on next page) COMPARING THE CURRENT CONFLICT TO THE 2006 HOSTILITIES (continued) BOX 5.  stakeholders. In the wake of the 2006 hostilities, international donors had a strong appetite to invest in Lebanon, channeling funds into reconstruction and development initiatives. In fact, record inflows into the country spurred real GDP growth rates of 9.3, 9.1, and 10.2 percent in 2007, 2008, and 2009, respectively.f In contrast, without a comprehensive crisis resolution and political settlement, foreign aid is likely to focus on humanitarian assistance and emergency relief during the current conflict and its aftermath, rather than on long-term development projects. a To access the Fall 2023 Lebanon Economic Monitor, please see this link. World Bank. Lebanon Interim Damage and Loss Assessment (DaLA): Assessment Report (English). Washington, D.C. : World Bank Group. Link. This discussion is based on the figures and analysis offered in Schimmelpfennig and Gardner (2008). Schimmelpfennig, A. & Gardner, E. H., (2008). Lebanon—Weathering the perfect storms. IMF Working Paper WP/08/17, International Monetary Fund, Washington DC. Please refer to the prior discussion on the deposits by the Kingdom of Saudi Arabia and Kuwait at BdL following the 2006 hostilities. The Paris III conference that was held on January 25, 2007, succeeded in raising US$ 7.6 bln of multilateral funding thereby sustaining economic growth in 2007. Direct investments in Lebanon were US$ 4,002.1 mln and US$ 4,485.1 mln in 2008 and 2009, respectively. The direct investment in 2009 was, in nominal terms, the highest over the period 2002 to 2023. Portfolio investments of US$ 3,708.2 mln in 2009 were also the highest on record (in nominal terms) for the period 2002 to 2015, prior to the advent of the ‘financial engineering’ operations of BdL. These flows reflected a positive economic and political outlook following the election of President Michel Sleiman in 2008. Direct investments and portfolio flows of US$ 3,131.7 mln and US$ 1,665.5 mln in 2006 were essential in dampening the effect of the 2006 hostilities on real GDP growth and reflected part of the support for the reconstruction efforts. Special Focus: The Impact of the Conflict on the Lebanese Economy 29 ANNEX I. NIGHT-TIME LIGHTS Night-Time Lights as an Alternate In addition to their potential effectiveness in Measure of Economic Activity gauging overall economic activity, existing research also suggests that NTL data are useful in captur- The first-generation low light imaging NTLs have ing informal economic activity and appear to be a been—and continue to be—collected by the U.S. Air better gauge of economic activity in geographic or Force’s Defense Meteorological Satellite Program metropolitan areas with larger retail and services (DMSP) Operational Linescan System (OLS) since the sectors but less effective in areas where agriculture 1970s.40 A second generation of NTL data, known as is dominant.42,43 Despite being potentially eclipsed the Visible Infrared Radiometer Suite (VIIRS), became 40 Data on DMSP-OLS lights are available since 1992. available in April 2012. Although not extensively used Hu and Yao (2022) and Henderson, Storeygard, and Weil in the existing literature on the measurement of eco- (2012) propound that DMSP satellites circle earth 14 times nomic growth, the latter VIIRS data, gauged from the per day and overpass a specific location between 7 pm Day Night Band onboard the Polar Orbiting Satellite and 9 pm. NTLs are obtained as low light imaging data System, are superior to their predecessors and offer where electric light emissions are observed. (i) a higher resolution owing to much improved low light 41 For further information, please refer to Beyer, Hu, and Yao (2022) and Elvidge et al. (2023). Gibson et al. imaging, (ii) high spatial accuracy, and (iii) temporally (2021) note that DMSP data suffer from blurring, coarse comparability.41 Hence, the VIIRS NTL data, despite resolution, no calibration, low dynamic range, unrelated being an imperfect measure of man-made lights, pro- sensor amplification, which hinders comparability vide a better measure of the radiance of light coming spatially and across time. VIIRS and DMSP data can be from earth and a potentially better proxy of overall and affected by cloud cover and gas flaring, which are not local economic activity. Gibson et al. (2021) under- cause for concern in the Lebanese context. 42 Hu and Yao (2022) write: “During economic downturns, score the lower noise and overall superiority—widely formal economic activity disappears and informal established in the remote sensing literature prior to the economic activity springs up. While not recorded by use of light data in economics—of VIIRS data vis-à-vis official data, informal economic activity is captured by DMSP data in measuring economic activity. Nonethe- night lights. As a result, the new measure suggests less, both VIIRS and DMSP data do not appear to be higher growth than official data. Conversely, the flow of useful gauges of economic activity in low population economic activity from the informal to the formal sector during economic upturns could make official GDP density rural areas (Gibson et al., 2021) and the time- growth higher than the new measure”. series predictive ability of VIIRS and DMSP data has 43 See, for example, Chen and Nordhaus (2019). An been called into question by Nordhaus and Chen excellent review of the literature is provided by Gibson, (2015) and Chen and Nordhaus (2019). Olivia, and Boe-Gibson (2020). 31 by background noise, NTL data could be useful 44 More specifically, Hu and Yao (2022) write: “Both GDP even in countries with low electrification (Hu and and night lights contain measurement errors that vary Yao, 2022) and offer a better alternative to electric- across countries and over time, and the relationship ity consumption as measure of economic activity between night light growth and true GDP growth is (Henderson, Storeygard, and Weil, 2012).44,45 Further, unknown. For countries with low levels of electrification— while DMSP data lack spatial accuracy, VIIRS data are most of which are in Africa—night lights reflective of economic activity may be eclipsed by background noise. far more spatially accurate and, hence, can be used to However, if official measures of GDP growth in those gauge economic activity geographically.46 countries are poor, night lights can still serve as a useful proxy for economic activity in spite of the noise”. 45 While the predictive power of electricity consumption Gauging economic activity from NTL appears to be on par with that of NTLs, the limited availability of data on electricity consumption makes NTL data more appealing (Henderson, Storeygard, and Weil, An inherent challenge in using NTL data is to infer 2012). changes in economic activity from changes in 46 For a detailed technical discussion of the reasons luminosity.47 A sizeable literature, starting with the underlying the lack of spatial accuracy of the DMSP light contribution of Henderson, Storeygard, and Weil data, please refer to Gibson et al. (2021). (2012), addresses the latter challenge by estimating 47 Chen and Naurdhaus’ (2011) initial study offered the elasticity of lights with respect to income (or real only limited support for the usefulness of light data in measuring economic activity. Subsequent studies, GDP).48 The difficulty in gauging the (‘true’) relation starting with Henderson, Storeygard, and Weil (2012) between NTLs and GDP stems, in particular, from provided ample support for measuring GDP growth the fact that both variables are measured with errors. using NTL and, in particular, VIIRS data. This, in turn, implies that, although readily estimable, 48 Another early contribution to the literature, which casts the reduced form elasticity is a biased estimate of the doubt on the usefulness of NTLs in gauging economic ‘true’ structural elasticity of lights to GDP.49 activity except for countries with very poor statistical capacity, is Chen and Nordhaus (2011). However, In a classical measurement error in national more recent research has rendered a more positive accounts context, GDP and NTL growth are related as: assessment of NTLs’ ability to gauge economic activity. Zit = Yit + ezit,(1) 49 GDP and income are used interchangeably in the text. 50 Estimating the specification in equation (3) using Xit = bYit + ezit,(2) growth rates is more adequate for Lebanon in view of the sizeable informal sector. Chen and Nordhaus (2011) assume that the measurement error is in the where Yit is the growth (log difference) in true real GDP, level of output whereas Henderson, Storeygard, and Zit is the growth of real GDP in the national accounts Weil (2012)’s assumption is that the measurement error (which is measured with error), Xit is the growth in is in the growth rates. Hao and Yu (2022) discuss the observed light, and b is the elasticity of lights with different assumptions pertaining to the measurement respect to income. The measurement errors in GDP error: “The past literature has assumed measurement errors to be either in output levels (Chen and Nordhaus, and light growth are assumed to be uncorrelated, 2011) or in growth rates (Henderson et al., 2012). If the cov (ex , ez) = 0. true measurement error is in levels, the structure of A regression of growth of income on growth of measurement error in growth rates might be complex, lights, 50 including possibly serial correlation. On the other hand, if GDP levels are consistently mis-measured over time, ^ X + e ,(3) Zit = j such as in the case when an economy has a sizable jt jt informal sector, assuming measurement errors in growth rates is more appropriate”. Econometrically, is a common starting point for the empirical analysis estimating the regression in growth rates is desirable in the literature but yields a reduced form inverse to circumvent non-stationarity in the levels of the of real elasticity which is a downward biased estimate of the GDP and NTL. 32 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ Real GDP and NTL in Levels FIGURE 20 •  Real GDP (LCU) NTL 88,000 280,000 84,000 260,000 80,000 240,000 76,000 220,000 72,000 200,000 68,000 64,000 180,000 60,000 160,000 12 13 14 15 16 17 18 19 20 12 13 14 15 16 17 18 19 20 inverse structural elasticity, b (Henderson, Storeygard, levels and 21 provide, respectively, the time series and Weil, 2012; Hu and Yao, 2022). Identifying the dynamics of real GDP and data on NTL (VIIRS from structural elasticity requires additional identifying Black Marble) in levels and growth rates for Lebanon. assumptions.51 Estimates of the structural elasticity The correlation between real GDP and NTL have been generally consistent among studies and, growth is 0.84. Equation (3) is estimated using therefore, can be leveraged for gauging economic the growth rates of NTL and GDP.53 The results are activity in Lebanon from NTL data.52 reported in Table 8. Estimates of the inverse (reduced The relation between real GDP and NTL is form) elasticity of lights to GDP for Lebanon. examined using annual data for the period 2012 to 2020 for Lebanon. Figure 20. Real GDP and NTL in Hu, and Yao (2022) estimates of the structural elasticity range from 1.46 to 1.64 for emerging markets and 51 Henderson, Storeygard, and Weil (2012) employ additional developing economies. Hao and Yu (2022)’s sample assumptions on the ratio of signal to total variation in includes data on Lebanon. measured GDP growth to identify the structural elasticity. 53 Estimating the specification in equation (3) using In their framework, they make a distinction between growth rates is more adequate for Lebanon in view countries with good and bad measurement in national of the sizeable informal sector. Chen and Nordhaus accounts, which yields additional moment conditions that (2011) assume that the measurement error is in the permit identifying the structural elasticity parameter. Beyer, level of output whereas Henderson, Storeygard, and Hu, and Yao (2022) exploit additional data on the number Weil (2012)’s assumption is that the measurement error of nightly observations for each country in each quarter to is in the growth rates. Hao and Yu (2022) discuss the identify the structural elasticity. Their findings suggest that different assumptions pertaining to the measurement overestimation of GDP in the national accounts is positively error: “The past literature has assumed measurement correlated with a lower level of development, lower errors to be either in output levels (Chen and Nordhaus, statistical capacity, and lower voice and accountability 2011) or in growth rates (Henderson et al., 2012). If the as measured by one of the dimensions of the World true measurement error is in levels, the structure of Bank’s Worldwide Governance Indicators. Hu and Yao measurement error in growth rates might be complex, (2022) employ a nonparametric identification strategy in including possibly serial correlation. On the other hand, conjunction with assumptions on the exogeneity of lights. if GDP levels are consistently mis-measured over time, 52 Henderson, Storeygard, and Weil (2012) provide such as in the case when an economy has a sizable estimates of the structural elasticity of elasticity of lights informal sector, assuming measurement errors in growth with respect to income that ranges from 1.034 to 1.72. rates is more appropriate”. Econometrically, estimating Hao and Yu (2022)’s estimate the structural elasticity of the regression in growth rates is desirable to circumvent nighttime lights to GDP to be around 1.3 whereas Beyer, non-stationarity in the levels of the of real GDP and NTL. Annex I. Night-Time Lights 33 Real GDP and NTL Growth FIGURE 21 •  Estimates of the Inverse (reduced TABLE 8 •  Form) Elasticity of Lights to GDP 30 for Lebanon 20 Dependent Variable: NTL Growth 10 Constant 7.257** 0 Standard Error 2.524 –10 Real GDP Growth 1.167*** –20 Standard Error 0.129 –30 R2 0.711 2012 2013 2014 2015 2016 2017 2018 2019 2020 Notes: Newey and West (1987) Heteroskedasticity and autocorrelation consistent Real GDP Growth NTL Growth standard errors are in parentheses. *** and ** denote, respectively, statistical significance at the 1% and 5% levels. References Gibson, J., Olivia, S., Boe-Gibson, G., & Li, C. (2021). Which night lights data should we use in economics, Beyer, R. C., Hu, Y., & Yao, J. (2022). Measuring and where? Journal of Development Economics, 149, quarterly economic growth from outer space. Policy 102602.‫‏‬ Research Working Paper 9893, World Bank, Wash- ington DC. Henderson, J. V., Storeygard, A., & Weil, D. N. (2012). Measuring economic growth from outer space. Ameri- Chen, X., & Nordhaus, W. D. (2011). Using lumi- can Economic Review, 102(2), 994–1028.‫‏‬ nosity data as a proxy for economic statistics. Proceedings of the National Academy of Sciences, Hu, Y., & Yao, J. (2022). Illuminating economic growth. 108(21), 8589–8594.‫‏‬ Journal of Econometrics, 228(2), 359–378.‫‏‬ Chen, X., & Nordhaus, W. D. (2019). VIIRS nighttime Mercy Corps (2023). Night-time light reflectance: lights in the estimation of cross-sectional and time- Potential uses in Lebanon. Thematic report. series GDP. Remote Sensing, 11(9), 1057.‫‏‬ Newey, W., & West, K. (1987). A simple, positive Elvidge, C. D., Baugh, K. E., Zhizhin, M., & Hsu, F. C. semi-definite, heteroskedasticity and autocorrelation (2013). Why VIIRS data are superior to DMSP for map- consistent covariance matrix. Econometrica, 55, ping nighttime lights. Proceedings of the Asia-Pacific 703–708. Advanced Network, 35(0), 62.‫‏‬ Nordhaus, W., & Chen, X. (2015). A sharper image? Gibson, J., Olivia, S., & Boe‐Gibson, G. (2020). Night Estimates of the precision of nighttime lights as a lights in economics: Sources and uses. Journal of proxy for economic statistics. Journal of Economic Economic Surveys, 34(5), 955–980.‫‏‬ Geography, 15(1), 217–246. 34 LEBANON ECONOMIC MONITOR: MOUNTING BURDENS ON A CRISIS-RIDDEN COUNTRY – ‫تفاقم األعباء على بلد مأزوم‬ ANNEX II. METHODOLOGY OF THE TOURISM SHOCK PROJECTIONS FOR 2024 Q uarterly forecasts of tourist arrivals for The latter forecasts serve as the projected Q4-2023, H1-2024 and Q3-2024 are pro- tourist arrivals under the counterfactual scenario of duced using a well-specified time series absence of conflict. models which account for seasonality whereas The absence of data on actual tourist arriv- the elasticity of receipts from travel services to als in H2-2024 complicates the estimation of the tourist arrivals is estimated using a standard time losses. To delineate the baseline (i.e., conflict) and series regression in logarithms. counterfactual (i.e., no conflict) scenarios in H2-2024, The elasticity of receipts from travel services forecasts of tourist arrivals and travel receipts are pro- to tourist arrivals is estimated using quarterly data for duced assuming the pre- and post-conflict trends persist. the period Q1-2012 to Q3-2022. Because data on actual tourist arrivals (which Receipts from travel services are a component embed conflict dynamics) are available only through of the current account. From the national income H1-2024, an estimate of travel services for H1-2024 accounting identities, GNDI = Cp + IFp + Cg + IFg + IN + under the conflict scenario is generated using data CAB, where Cp is private consumption IFp is private fixed on tourist arrivals and the elasticity of travel receipts investment, Cg is government consumption, IFg is govern- to tourist arrivals. ment fixed investment, and IN is inventory investment. In contrast, owing the unavailability of tourist The current account balance is CAB = X – M + arrival data beyond H1-2024, time series forecasts NFI+ TR, where X are exports, M are imports, NFI is of travel receipts for the conflict scenario are gener- net factor income from abroad and TR are transfers ated using a well-specified time series model (which from or to abroad. accounts for seasonality) for H2-2024 to capture Projections or forecasts of travel receipts are conflict dynamics. obtained from a well-specified Autoregressive Moving Travel receipts under the counterfactual (i.e., Average (ARMA) models, which accounts for the no conflict) scenario are generated for H2-2024 using seasonal pattern in tourist arrivals and travel receipts. a time-series forecast of tourist arrivals using data up Formal econometric tests (using seasonal dummy to 2023Q3, which is a period that precedes the erup- variables) confirm that tourist arrivals and receipts tion of the conflict (i.e., based on pre-conflict trends), from travel services exhibit a seasonal pattern. and the elasticity of travel receipts to tourist arrivals. 35 1818 H Street, NW Washington, DC 20433