LEBANON The Normalization ECONOMIC of Crisis Is No MONITOR Road for Stabilization Spring 2023 Lebanon Economic Monitor The Normalization of Crisis Is No Road for Stabilization Spring 2023 Global Practice for Macroeconomics, Trade & Investment Middle East and North Africa Region LEBANON ECONOMIC MONITOR Document of the World Bank The Delibera Depressi © 2023 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 conclusions 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Résumé Analytique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv 1. The Policy Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. Output and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 B. Fiscal Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 C. External Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 D. Money and Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3. Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Special Focus: Gauging the Size of the Cash Economy in Lebanon . . . . . . . . . . . . . . . . . . . . . . . 21 Annex I. Few Winners, Many Losers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 iii List of Boxes Box 1 The Sayrafa Platform: The Cycle of Buying Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 List of Figures Figure 1 Lebanon’s Economic Contraction Has Extended for a Fifth Consecutive Year in 2022 . . . . . . . . . 4 Figure 2 Private Consumption is the Sole Positive Contributor to Growth in 2022 . . . . . . . . . . . . . . . . . . . . . .4 Figure 3 Evolution of Public Finances in Nominal (LBP) and Real Terms, 2018 vs. 2022 . . . . . . . . . . . . . . . .5 Figure 4 Public Finances Collapse Inducing Positive Fiscal Balance in 2021–2022 . . . . . . . . . . . . . . . . . . . .5 Figure 5 Sharp Decrease in Nominal GDP Prompts Erosion of Public Debt as a % of GDP to Pre Crisis Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 6 Current Account Deficit Widens in 2022, Registering a Ratio to GDP Similar to Pre-Crisis Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Figure 7 A Steady Depletion in the Gross Foreign Exchange Position at BdL . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 8 Increased Sayrafa Volumes (weakly) Associated with BNR Appreciation & Decrease in the Spread between BNR & Sayrafa Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 9 Increase of Volume of Transactions on Sayrafa Occurred in Tandem with a Precipitous Decrease in Remaining Gross Usable Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Figure 10 Increase of Volume of Transactions on Sayrafa Was Preceded by an Increase in Currency in Circulation Starting in April 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 11 Arbitrage Profits Using the Sayrafa Platform Exceed US$2.5 Billion . . . . . . . . . . . . . . . . . . . . . . . . .12 Figure 12 Exchange Rate Depreciation Drives the Surge in Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Figure 13 Inflation in Basic Items Has Been a Key Driver of Overall Inflation, Hurting the Poor and the Middle Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 14 Currency Depreciation and Local Factors Are Main Drivers of Inflation . . . . . . . . . . . . . . . . . . . . . .14 Figure 15 A Steady and Sharp Deterioration in Credit Performance as Measured by NPL Ratio for Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 16 A Severe Contraction in Loans and a Reduction in Deposits Shrinking Bank Balance Sheets 15 List of Tables Table 1 Selected Economic Indicators (2015–2023) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Table 2 Breakdown of the Components of the Cash Economy in 2021 and 2022 . . . . . . . . . . . . . . . . . . . . 25 Table 3 Size of the Cash Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 iv LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION ACRONYMS AA EU-Lebanon Association Agreement GNI Gross National Income (per capita) ABL Association of Banks in Lebanon IMF International Monetary Fund AER Average Exchange Rate LBP Lebanese Pound BdL Banque du Liban LEM Lebanon Economic Monitor BNR Banknote Rate MIDAS Mixed-Data Sampling BTA Beirut Traders Association MoF Ministry of Finance BoP Balance of Payments NPL(s) Non-performing Loan(s) CA Current Account PMI Purchasing Manager’s Index CAS Central Administration of Statistics Pp Percentage Points CPI Consumer Price Index SLA Staff-Level Agreement EU European Union TB(s) Treasury Bond(s) ERPT Exchange Rate Pass Through UN United Nations EdL Electricité du Liban US$ United States Dollar FEVD Forecast Error Variance Decomposition VAT Value Added Tax FX Foreign Exchange XM-2022 First X months of the year GDP Gross Domestic Product yoy Year over Year v PREFACE T he Lebanon Economic Monitor provides (Senior Economist), Ibrahim Jamali (Consultant), an update on key economic developments and Naji Abou Hamde (Economic Analyst). The and policies over the past six months. It also Lebanon Economic Monitor has been completed presents findings from recent World Bank work on under the guidance of Eric Le Borgne (Practice Lebanon. The Monitor places these developments, Manager), Norbert Fiess (Lead Economist), and Jean policies, and findings in a longer-term and global Christophe Carret (Country Director). Zeina Khalil context and assesses their implications on the (Communications Officer) is the lead on communica- outlook for Lebanon. Its coverage ranges from the tions, outreach, and publishing. macro-economy to financial markets to indicators of The findings, interpretations, and conclusions human welfare and development. It is intended for expressed in this Monitor are those of World Bank a wide audience, including policy makers, business staff and do not necessarily reflect the views of the leaders, financial market participants, and the Executive Board of The World Bank or the govern- community of analysts and professionals engaged in ments they represent. Lebanon. For information about the World Bank and its The Lebanon Economic Monitor is a product activities in Lebanon, including e-copies of this publi- of the World Bank’s Lebanon Macroeconomics, cation, please visit www.worldbank.org/lb Trade and Investment (MTI) team. It was written by To be included on an email distribution list for Dima Krayem (Senior Economist), Naji Abou Hamde this Lebanon Economic Monitor series and related (Economic Analyst) and Ibrahim Jamali (Consultant), publications, please contact Alain Barakat (abarakat@ with contributions from Lars Jessen (Lead Debt worldbank.org). For questions and comments on Specialist), Nadine Chehade (Senior Financial the content of this publication, please contact Dima Sector Specialist) and Peter Salisbury (Consultant). Krayem (dkrayem@worldbank.org). Questions from The Special Focus entitled Gauging the Size of the media can be addressed to Zeina Khalil (zelkhalil@ the Cash Economy was prepared by Dima Krayem worldbank.org). vii EXECUTIVE SUMMARY Recent Economic Developments 2022, pointing to a massive hollowing out of the state amid an unprecedented crisis.1 Lebanon’s long economic contraction continued Testament to the lack of economic stabili- in 2022, albeit at a slower pace than in previous zation, the Lebanese Pound (LBP) continues to years. The deceleration in economic contraction in depreciate sharply. By February 2023, the currency 2022 is largely owed to a base effect (referred to as lost more than 98 percent of its pre-crisis value. Despite a technical deceleration in economic contraction). the central bank (BdL)’s foreign exchange (FX) interven- Following a cumulative four-year contraction of tions to attempt to stabilize the BNR (i.e., the banknote 37.2 percent of GDP (2018–2021), real GDP is rate/parallel market) using its gross reserves starting in estimated to have declined by 2.6 percent in 2022. The December 2021, the BNR averaged 31,102 LBP/US$ BLOM-PMI index, which captures private sector activity, in 2022. The depreciation of the BNR has accelerated slightly improved to 48.4 in 2022, up from an average of since the beginning of 2023, breaching 140,000 LBP/ 46 percent in 2021 but nonetheless still representing a US$ amid rising tensions, bank strikes, and relatively contraction of activity (<50). A positive development is fewer FX interventions by BdL. A multiple exchange the growth in tourist arrivals (by 57 percent, 8M-2022). rate system persists, reflecting a variety of exchange Nonetheless, the widening current account deficit (see rates to buy and sell currency, set import and other tar- below), a long structural imbalance, continue to weigh iffs, and record internal accounts, creating economic down on growth prospects. The overall fiscal balance is estimated to have recorded a narrow surplus of 0.3 percent of 1 World Bank fiscal estimates are based on the latest GDP in 2022, down from 1 percent of GDP 2021. official Ministry of Finance statistics, and therefore Revenues are estimated to have declined from an do not include extra budgetary spending, including already low 13.1 percent of GDP in 2020 to 6.0 per- quasi-fiscal operations conducted by the Central Bank, arrears, usage of IMF SDR allocation for certain fiscal cent of GDP in 2022, one of the lowest rates globally. spending, among other expenditures not recorded This was more than offset by a larger decrease in total in official statistics-the fiscal balance is likely to be expenditures, which declined from 16.4 percent of significantly negative when taking the above-mentioned GDP in 2020 to a record low of 5.7 percent of GDP in expenditures into account. ix distortions, inaccurate accounts, and providing rent- the platform are only weakly correlated with improve- seeking opportunities. ments in the BNR/parallel market exchange rate. BdL, Inflation averaged 171.2 percent in 2022, facing hard currency supply constraints, has mostly one of the highest rates globally, primarily due relied on dwindling gross foreign exchange reserves to the depreciation of the LBP. Higher prices for to supply dollars through the platform to temporarily food and non-alcoholic beverages contributed the prop up the currency. More recently, BdL has taken most to inflation in 2022. Food inflation increased on to using printed local currency to buy US dollars on average by 240 percent throughout 2022, reaching a the parallel market before interventions on the Sayrafa maximum of 483 percent (yoy) in January 2022. platform, sharpening exchange rate volatility. Whether The current account deficit grew to at the expense of burning through remaining reserves, 20.6 percent of GDP on the back of higher imports or further depreciating the currency, such monetary and falling exports. Imports reached pre-crisis levels tools have proven ineffective and highly costly. Finally, in 2022, at a record US$19 billion. Exports declined initial analysis suggests that buy-side Sayrafa platform by 10.2 percent. Customs data for merchandise participants may have profited by as much as $2.5 bil- goods indicates that imports grew by 39.7 percent lion through arbitrage trades between the discounted year-on-year in 2022. Anticipated increases in the rate offered on the platform and the BNR since the customs duties exchange rate (“the customs dollar”), platform’s initiation. which increased to 15,000 LBP/US$ at the end of 2022, likely contributed to the substantive increase in imports of industrial goods (a year-on-year increase Outlook of 45.8 percent) as businesses and consumers hoard goods in anticipation of a price adjustment. Subject to high uncertainty, real GDP is projected The banking sector remains insolvent, as to contract by 0.5 percent in 2023. The less financial losses in the banking system exceed severe contraction in real GDP in 2023 relative to US$72 billion, equivalent to more than three 2022 is predicated on a continued, albeit modest, times GDP in 2022.2 Divergent views among key pick up in private consumption and a narrowing of stakeholders on how to distribute the financial losses the current account. Lack of political will to implement remains the main bottleneck for reaching an agree- adequate and equitable reforms is expected to ment on an equitable banking resolution. Delays in persist throughout 2023, markedly dampening the the day of reckoning with the magnitude and viable economic forecast for that year. A complete depletion distribution of financial losses is only compounding of FX reserves at BdL in 2023 is not expected, but human and social capital losses. the continued erosion of reserves remains a matter of The current account deficit continues to be deep concern. financed, for the most part, by BdL usable gross Inflation is expected to remain among the foreign reserves. BdL gross FX reserves declined highest globally, at a projected 165 percent. by US$2.6 billion in 2022 reaching US$15.2 billion Narrow money, inflation, and currency depreciation (including close to US$5 billion in foreign securities) will continue to shape unstable macroeconomic by end 2022. dynamics in the absence of a new exchange rate and The Sayrafa exchange platform, BdL’s pri- monetary framework. mary monetary tool for stabilizing the LBP, is not The current account deficit-to-GDP ratio is only an unfavorable monetary tool, but has also projected to slightly narrow in 2023 but remains morphed into a mechanism to generate arbitrage on an unsustainable path. The current account profits. The Sayrafa platform is in many ways a case study in the kind of weak, and often counterproduc- 2 Please refer to: World Bank (2022), Lebanon Economic tive, policies implemented by the Lebanese authorities Monitor, Fall 2022: Time for an Equitable Banking since the outbreak of the crisis. Trading volumes on Resolution. (Link). x LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION deficit is expected to narrow to 14 percent of GDP inequality with only a few (relative) winners and a large in 2023, driven by a decrease in imports and conse- majority of losers. quent decrease in the trade-in-goods balance relative to 2022. Against this backdrop, the normaliza- Special Focus: Gauging the Size tion of the state of crisis obscures the fact that of the Cash Economy the Lebanese economy remains in precipitous decline, markedly distant from a stabilization The systemic failure of Lebanon’s banking sys- path-let alone a recovery path. The longer the tem and the collapse of the currency have delay without a comprehensive, adequate, and equi- resulted in a large, dollarized cash-based econ- table recovery plan, the bleaker the available policy omy, worth an estimated US$9.86 billion or 45.7 options become as resources vital to that recovery are percent of GDP in 2022 (Special Focus: Gaug- eroded. A deceleration in the contraction of economic ing the Size of the Cash Economy in Lebanon). A activity does not imply a stabilization. In fact, a largely pervasive and growing dollarized cash economy is a insolvent banking sector and a national currency that major impediment to Lebanon’s economic recovery. has all but lost its main functions have induced a per- It not only threatens to compromise the effectiveness vasive dollarized cash economy equivalent to almost of fiscal and monetary policy, but also heightens the half of GDP in 2022, and further hindering prospects risk of money laundering, increases informality, and of economic recovery. For as long as the economy is prompts further tax evasion. Moreover, the increas- contracting and crisis conditions persist, living stan- ing reliance on cash transactions also threatens to dards are set for further erosion, poverty will continue completely reverse the progress that Lebanon made to spiral, and an overall precarious environment will pre-crisis towards enhancing its financial integrity by prevail. In short: the status quo ensures that capital instituting robust anti-money laundering mechanisms of all kinds is depleted, giving way to profound social in its commercial banking sector. Executive Summary xi ‫ملخص تنفيذي‬ ‫العملة يف السوق املوازية ‪ 31102‬لرية‪/‬دوالر يف عام ‪ .2022‬وتسارعت‬ ‫أحدث التطورات االقتصادية‬ ‫وترية انخفاض قيمة العملة منذ بداية عام ‪ ،2023‬حيث تجاوزت ‪ 140‬ألف‬ ‫لرية‪/‬دوالر وسط تصاعد التوترات‪ ،‬وإرضابات البنوك‪ ،‬وتراجع التدخالت‬ ‫واصل االقتصاد اللبناين انكامشه يف عام ‪ ،2022‬وإن كان بوترية أبطأ مام‬ ‫يف النقد األجنبي نسبياً من جانب مرصف لبنان‪ .‬وال يزال نظام تعدد‬ ‫كانت عليه يف السنوات السابقة‪ .‬ويعود التباطؤ يف االنكامش االقتصادي‬ ‫أسعار الرصف سائدا ً‪ ،‬وهو يشمل مجموعة من أسعار الرصف لرشاء وبيع‬ ‫يف عام ‪ 2022‬إىل حد كبري إىل األثر األسايس (يشار إليه بتباطؤ تقني‬ ‫العملة‪ ،‬وتحديد رسوم االسترياد والرسوم األخرى‪ ،‬وتسجيل الحسابات‬ ‫يف االنكامش االقتصادي)‪ .‬ففي أعقاب انكامش تراكمي بلغ ‪%37.2‬‬ ‫الداخلية‪ ،‬مام خلق تشوهات اقتصادية‪ ،‬وعدم دقة يف الحسابات‪ ،‬وأتاح‬ ‫من إجاميل الناتج املحيل عىل مدى أربع سنوات (‪ ،)2021–2018‬تشري‬ ‫فرص ريعية‪.‬‬ ‫التقديرات إىل تراجع إجاميل الناتج املحيل الحقيقي بنسبة ‪ %2.6‬يف عام‬ ‫وبلغ متوسط التضخم ‪ %171.2‬يف عام ‪ ،2022‬وهو أحد أعىل‬ ‫جل مؤرش مديري املشرتيات يف بلوم‪ ،‬الذي يرصد نشاط القطاع‬ ‫‪ .2022‬وس ّ‬ ‫املعدالت عىل املستوى العاملي‪ ،‬ويرجع ذلك يف املقام األول إىل انخفاض‬ ‫الخاص‪ ،‬تحسناً طفيفاً إىل ‪ %48.4‬عام ‪ ،2022‬مرتفعاً من متوسط قدره‬ ‫قيمة اللرية‪ .‬وكان ارتفاع أسعار املواد الغذائية واملرشوبات غري الكحولية‬ ‫‪ %46‬يف عام ‪ ،2021‬لكنه ال يزال ميثل انكامشاً يف النشاط (<‪ .)50‬ومن‬ ‫هو األكرث مساهمة يف التضخم يف عام ‪ .2022‬وزاد معدل التضخم يف‬ ‫التطورات اإليجابية منو أعداد السائحني الوافدين (بنسبة ‪ ،%57‬خالل أول‬ ‫أسعار الغذاء يف املتوسط بنسبة ‪ %240‬طوال عام ‪ ،2022‬مسجال ‪%483‬‬ ‫‪ 8‬أشهر يف ‪ .)2022‬مع ذلك‪ ،‬ال يزال العجز املتزايد يف الحساب الجاري‬ ‫كحد أقىص (عىل أساس سنوي) يف يناير‪/‬كانون الثاين ‪.2022‬‬ ‫(انظر أدناه)‪ ،‬والذي يشكل خلالً بنيوياً طويالً‪ ،‬يؤثر عىل آفاق النمو‪.‬‬ ‫وزاد عجز الحساب الجاري إىل ‪ %20.6‬من إجاميل الناتج املحيل‬ ‫وتشري التقديرات إىل أن ميزان املالية العامة سجل فائضاً طفيفاً‬ ‫نتيجة الرتفاع الواردات وتراجع الصادرات‪ .‬وبلغت الواردات يف عام‬ ‫قدره ‪ %0.3‬من إجاميل الناتج املحيل عام ‪ ،2022‬مقابل ‪ %1‬من إجاميل‬ ‫‪ 2022‬مستويات ما قبل األزمة‪ ،‬مسجلة رقامً قياسياً قدره ‪ 19‬مليار دوالر‪.‬‬ ‫الناتج املحيل يف عام ‪ .2021‬كام تشري التقديرات إىل انخفاض اإليرادات‬ ‫وانخفضت الصادرات بنسبة ‪ .%10.2‬وتشري بيانات الجامرك عن البضائع‬ ‫من ‪ %13.1‬من إجاميل الناتج املحيل وهو مستوى منخفض أصالً‪ ،‬إىل ‪% 6‬‬ ‫إىل أن الواردات منت بنسبة ‪ %39.7‬عىل أساس سنوي يف عام ‪ .2022‬ومن‬ ‫وض‬ ‫يف عام ‪ ،2022‬وهي من أدىن املعدالت عىل املستوى العاملي‪ .‬وقد ع ّ‬ ‫املرجح أن الزيادات املتوقعة يف سعر الرصف الخاص بالرسوم الجمركية‬ ‫عن ذلك انخفاض أكرب يف إجاميل النفقات‪ ،‬الذي تراجع من ‪ %16.4‬يف املئة‬ ‫(الدوالر الجمريك)‪ ،‬الذي زاد إىل ‪ 15‬ألف لرية‪/‬دوالر يف نهاية عام ‪،2022‬‬ ‫من إجاميل الناتج املحيل يف ‪ 2020‬إىل مستوى قيايس منخفض قدره ‪%5.7‬‬ ‫من إجاميل الناتج املحيل يف ‪ ،2022‬مام يشري إىل تفريغ هائل للدولة يف‬ ‫‪ 3‬تستند تقديرات البنك الدويل املالية إىل أحدث اإلحصاءات الرسمية‬ ‫ ‬ ‫خضم أزمة غري مسبوقة‪.3‬‬ ‫الصادرة عن وزارة املالية‪ ،‬وبالتايل فهي ال تشمل اإلنفاق خارج‬ ‫ويشكل التدهور الشديد يف اللرية اللبنانية دليالً عىل غياب‬ ‫امليزانية‪ ،‬مبا يف ذلك العمليات شبه املالية التي يقوم بها البنك املركزي‪،‬‬ ‫االستقرار االقتصادي‪ .‬فبحلول شهر فرباير‪/‬شباط ‪ ،2023‬فقدت العملة‬ ‫واملتأخرات‪ ،‬واستخدام مخصصات صندوق النقد الدويل لحقوق‬ ‫أكرث من ‪ %98‬من قيمتها قبل األزمة‪ .‬وعىل الرغم من اإلجراءات التدخلية‬ ‫السحب الخاصة لبعض اإلنفاق‪ ،‬من بني نفقات أخرى غري مسجلة يف‬ ‫يف النقد األجنبي التي يقوم بها البنك املركزي منذ ديسمرب‪/‬كانون األول‬ ‫اإلحصاءات الرسمية ‪ -‬من املرجح أن يكون الرصيد املايل سلبي بشكل‬ ‫‪ 2021‬يف محاولة لتحقيق استقرار سعر رصف العملة الورقية (السوق‬ ‫ملحوظ عند أخذ النفقات املذكورة أعاله يف االعتبار‪.‬‬ ‫املوازية) باستخدام إجاميل احتياطياته‪ ،‬فقد بلغ متوسط سعر رصف‬ ‫‪xiii‬‬ ‫احتياطي النقد األجنبي يف مرصف لبنان يف عام ‪ ،2023‬غري أن استمرار‬ ‫ساهمت عىل األرجح يف الزيادة الجوهرية يف واردات السلع الصناعية‬ ‫تآكل االحتياطي ال يزال يشكل مصدر قلق بالغ‪.‬‬ ‫(بزيادة سنوية قدرها ‪ ،)%45.8‬حيث قامت املؤسسات واملستهلكون‬ ‫ومن املتوقع أن يظل معدل التضخم من بني أعىل املعدالت‬ ‫باكتناز السلع تحسباً لتعديل األسعار‪.‬‬ ‫عىل مستوى العامل‪ ،‬إذ يتوقع أن يبلغ ‪ .%165‬كام سيستمر تقييد حجم‬ ‫وال يزال القطاع املرصيف متعرثاً‪ ،‬حيث تتجاوز الخسائر املالية‬ ‫األموال ومعدالت التضخم وانخفاض قيمة العملة يف تشكيل ديناميكيات‬ ‫يف النظام املرصيف ‪ 72‬مليار دوالر‪ ،‬أي ما يزيد عن ثالثة أضعاف إجاميل‬ ‫االقتصاد الكيل غري املستقرة مع غياب سعر رصف وإطار نقدي جديدين‪.‬‬ ‫الناتج املحيل يف عام ‪ 4.2022‬وال تزال اآلراء املتباينة بني الجهات املعنية‬ ‫ومن املتوقع أن تتقلص نسبة عجز الحساب الجاري إىل إجاميل‬ ‫الرئيسية بشأن كيفية توزيع الخسائر املالية تشكل العقبة األساسية‬ ‫الناتج املحيل قليالً يف عام ‪ ،2023‬لكنها ال تزال عىل مسار غري مستدام‪.‬‬ ‫أمام التوصل إىل اتفاق بشأن تسوية منصفة إلعادة هيكلة القطاع‬ ‫فمن املتوقع أن يتقلص عجز الحساب الجاري إىل ‪ %14‬من إجاميل الناتج‬ ‫املرصيف‪ .‬ويؤدي التأخري يف اإلعرتاف بحجم الخسائر واالتفاق عىل آلية‬ ‫املحيل يف عام ‪ ،2023‬مدفوعاً بانخفاض الواردات وما يرتتب عليه من‬ ‫توزيعها بشكل عادل إىل تفاقم الخسائر عىل مستوى رأس املال البرشي‬ ‫انخفاض يف رصيد التجارة يف السلع مقارنة بسنة ‪.2022‬‬ ‫واالجتامعي‪.‬‬ ‫ويف ظل هذه الخلفية‪ ،‬يحجب التطبيع مع األزمة حقيقة أن‬ ‫ول‪ ،‬يف معظمه‪ ،‬مام تبقى من‬ ‫وال يزال عجز الحساب الجاري ُ‬ ‫مُي ّ‬ ‫االقتصاد اللبناين ال يزال يشهد تراجعاً حاداً‪ ،‬بعيداً بشكل ملحوظ عن‬ ‫إجاميل احتياطي النقد األجنبي القابل لالستخدام لدى مرصف لبنان‪.‬‬ ‫مسار تحقيق االستقرار – ناهيك عن مسار التعايف‪ .‬وكلام طال التأخري‬ ‫وانخفض إجاميل احتياطي النقد األجنبي لدى مرصف لبنان مبقدار ‪2.6‬‬ ‫يف اعتامد خطة شاملة ومناسبة ومنصفة للتعايف‪ ،‬ازدادت قتامة الخيارات‬ ‫مليار دوالر يف عام ‪ 2022‬ليصل إىل ‪ 15.2‬مليار دوالر يف نهاية العام ‪2022‬‬ ‫املتاحة عىل صعيد السياسات مع تآكل املوارد الحيوية لتحقيق ذلك‬ ‫(مبا يف ذلك حوايل ‪ 5‬مليار دوالر من األوراق املالية األجنبية)‪.‬‬ ‫التعايف‪ .‬وال يعني تباطؤ وترية االنكامش يف النشاط االقتصادي أن االستقرار‬ ‫إن منصة صريفة للرصف األجنبي‪ -‬وهي األداة النقدية‬ ‫بدأ يتحقق‪ .‬يف الواقع‪ ،‬أدى القطاع املرصيف املتعرث إىل حد كبري والعملة‬ ‫الرئيسية التي يستخدمها مرصف لبنان لتحقيق استقرار سعر رصف‬ ‫الوطنية التي فقدت الكثري من وظائفها الرئيسية‪ ،‬إىل نشوء اقتصاد نقدي‬ ‫اللرية‪ -‬ليست أداة نقدية غري مؤاتية فحسب‪ ،‬بل تحولت أيضاً إىل آلية‬ ‫مدولر يعادل نحو نصف إجاميل الناتج املحيل يف عام ‪ ،2022‬مام زاد من‬ ‫لتحقيق أرباح من عمليات املراجحة‪ .‬وتشكّل منصة صريفة‪ ،‬من نوا ٍ‬ ‫ح‬ ‫إعاقة آفاق التعايف االقتصادي‪ .‬وما دام االقتصاد آخذا ً يف االنكامش وأوضاع‬ ‫عديدة‪ ،‬منوذجاً للسياسات الضعيفة وغري املجدية غالباً‪ ،‬التي تعتمدها‬ ‫األزمة قامئة‪ ،‬فإن مستويات املعيشة ستشهد مزيدا ً من التآكل‪ ،‬وسيستمر‬ ‫السلطات اللبنانية منذ اندالع األزمة‪ .‬ترتبط أحجام التداول عىل املنصة‬ ‫الفقر يف االنتشار‪ ،‬وستسود بيئة عامة محفوفة باملخاطر‪ .‬باختصار‪ :‬يؤدي‬ ‫ارتباطاً ضعيفاّ بالتحسنات يف سعر الرصف يف السوق املوازية‪ .‬ويعتمد‬ ‫الوضع الراهن إىل استنفاد رأس املال بجميع أوجهه‪ ،‬مام يفسح املجال‬ ‫املرصف املركزي‪ ،‬الذي يواجه قيودا ً عىل املعروض من العمالت الصعبة‪،‬‬ ‫أمام تعميق عدم املساواة االجتامعية‪ ،‬حيث هنالك عدد قليل فقط من‬ ‫يف الغالب‪ ،‬عىل إجاميل احتياطي النقد األجنبي املتضائل لتأمني الدوالرات‬ ‫الفائزين (نسبياً) وغالبية كبرية من الخارسين‪.‬‬ ‫من خالل املنصة لدعم العملة مؤقتاً‪ .‬ويف اآلونة األخرية‪ ،‬لجأ مرصف لبنان‬ ‫إىل استخدام العملة املحلية املطبوعة لرشاء الدوالر األمرييك يف السوق‬ ‫املوازية قبل التدخل عىل منصة صريفة‪ ،‬مام أدى إىل زيادة تقلب أسعار‬ ‫قسم خاص‪ :‬قياس حجم االقتصاد النقدي‬ ‫الرصف‪ .‬وقد ثبت أن هذه األدوات النقدية غري فعالة ومكلفة للغاية‪،‬‬ ‫سواء عىل حساب االحتياطي املتبقي‪ ،‬أو ملا تؤدي إليه من زيادة يف تدهور‬ ‫أدى فشل النظام املرصيف يف لبنان وانهيار العملة إىل اقتصاد نقدي‬ ‫قيمة العملة‪ .‬وأخريا ً‪ ،‬يشري التحليل األويل إىل أن املشاركني يف منصة صريفة‬ ‫كبري مدولر يقدّ ر حجمه بنحو ‪ 9.86‬مليار دوالر أو ‪ %45.7‬من إجاميل‬ ‫من جانب الرشاء رمبا حققوا أرباحاً تصل إىل ‪ 2.5‬مليار دوالر من خالل‬ ‫الناتج املحيل يف عام ‪( 2022‬قسم خاص‪ :‬قياس حجم االقتصاد النقدي)‪.‬‬ ‫عمليات املراجحة بني السعر املخصوم املعروض عىل املنصة وسعر العملة‬ ‫وميثل االقتصاد النقدي املنترش واملتزايد بالدوالر عائقاً رئيسياً أمام‬ ‫يف السوق املوازية‪.‬‬ ‫دد باملساس بفعالية السياسة املالية‬ ‫التعايف االقتصادي يف لبنان‪ ،‬فهو ال يه ّ‬ ‫والنقدية فحسب‪ ،‬بل يزيد أيضاً من مخاطر غسل األموال‪ ،‬ويزيد من‬ ‫النشاط االقتصادي غري الرسمي‪ ،‬ويحفّز عىل املزيد من التهرب الرضيبي‪.‬‬ ‫اآلفاق املستقبلية‬ ‫عالوة عىل ذلك‪ ،‬يهدد االعتامد املتزايد عىل املعامالت النقدية أيضاً بعكس‬ ‫مسار التقدم الذي حققه لبنان قبل األزمة نحو تعزيز سالمته املالية من‬ ‫مع األخذ بعني اإلعتبار انعدام اليقني بدرجة عالية‪ ،‬يتوقع أن ينكمش‬ ‫خالل إنشاء آليات متينة ملكافحة غسل األموال يف القطاع املرصيف‪.‬‬ ‫إجاميل الناتج املحيل الحقيقي بنسبة ‪ %0.5‬عام ‪ .2023‬ويستند االنكامش‬ ‫األقل حدة يف إجاميل الناتج املحيل الحقيقي يف عام ‪ 2023‬مقارنة بعام‬ ‫‪ 2022‬إىل استمرار االنتعاش يف االستهالك الخاص‪ ،‬وإن كان متواضعاً‪،‬‬ ‫وتقييد الحساب الجاري‪ .‬ومن املتوقع أن يستمر غياب اإلرادة السياسية‬ ‫‪ 4‬يرجى الرجوع إىل‪ :‬البنك الدويل (‪ )2022‬املرصد االقتصادي للبنان‪ ،‬عدد‬ ‫ ‬ ‫لتنفيذ إصالحات مؤاتية وعادلة طوال عام ‪ ،2023‬مام يضعف بشكل‬ ‫خريف ‪ :2022‬حان الوقت للتسوية املرصفية املنصفة‪( .‬رابط)‬ ‫ملحوظ التوقعات االقتصادية لتلك السنة‪ .‬ومن غري املتوقع استنفاد كامل‬ ‫‪xiv‬‬ ‫‪LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION‬‬ RÉSUMÉ ANALYTIQUE Évolution récente de l’économie tombées par rapport au niveau déjà peu élevé de 13,1 % du PIB en 2020 à 6,0 % du PIB en 2022, soit L’économie libanaise a continué de se contracter l’un des taux les plus faibles observés à l’échelle mon- en  2022, bien que moins rapidement que les diale. Cette évolution a été plus que contrebalancée années précédentes. Ce ralentissement du rythme par une baisse plus importante du volume total des de contraction économique observé en  2022 est dépenses, qui a été ramené de 16,4 % du PIB en 2020 essentiellement dû à un effet de base (qualifié à leur niveau le plus faible jamais enregistré de 5,7 % de ralentissement technique de la contraction du PIB en 2022. Fait plus révélateur, les dépenses économique). Après une contraction du PIB de 37,2 % totales ont chuté de 17,6 milliards de dollars en 2018 cumulée sur une période de quatre ans (20182021), le (avant la crise) à 1,2 milliard de dollars en 2022, ce PIB réel aurait, selon les estimations, diminué de 2,6 % qui témoigne d’un rétrécissement considérable de en 2022. Établi par la banque BLOMINVEST pour le l’action publique dans le contexte d’une crise sans Liban, l’indice des directeurs des achats, qui évalue précédent.5 l’activité du secteur privé, s’est légèrement amélioré La livre libanaise continue de se déprécier pour atteindre 48,4 en 2022 contre 46 en moyenne fortement par suite de l’absence de stabilisation en 2021, mais indique néanmoins une contraction de économique. En février 2023, la monnaie avait l’activité (<50). L’augmentation du nombre de touristes perdu plus de 98 % de sa valeur d’avant la crise. entrant dans le pays (qui a augmenté de 57 % durant les 8 premiers mois de l’année 2022) est une évolution 5 Les estimations budgétaires de la Banque mondiale sont positive. L’accroissement du déficit du compte courant basées sur les dernières statistiques officielles du minis- (voir ci-après) et l’existence d’un déséquilibre structurel tère des Finances et n’incluent donc pas les dépenses persistant continuent néanmoins d’assombrir les extrabudgétaires, y compris les opérations quasi bud- perspectives de croissance. gétaires menées par la Banque centrale, les arriérés, l’utilisation de l’allocation de DTS du FMI pour certaines Le solde budgétaire global devrait, selon les dépenses budgétaires, ces dépenses n’étant pas enregis- estimations, être faiblement excédentaire (0,3 % trées dans les statistiques officielles. Le solde budgétaire du PIB en 2022, contre 1 % du PIB en 2021). est susceptible d’être considérablement négatif si l’on Toujours selon les estimations, les recettes seraient prend en compte ces dépenses susmentionnées. xv Malgré les interventions menées par la banque cen- rapport à l’année précédente), les entreprises et les trale (Banque du Liban) sur le marché des changes consommateurs constituant des réserves en prévi- depuis décembre 2021 dans le but de stabiliser le sion d’un ajustement des prix. cours du billet de banque en dollars (c’est-à-dire le Le secteur bancaire demeure insolvable, cours du billet par rapport au cours du marché paral- les pertes financières du système bancaire dépas- lèle) au moyen de ses réserves brutes, ce cours s’est sant 72 milliards de dollars, soit l’équivalent de établi en moyenne à 31 102 livres libanaises pour un plus du triple du PIB en 2022.6 Les divergences de dollar en 2022. Il se dégrade depuis le début de 2023 vues des principales parties prenantes sur la manière puisqu’il a dépassé 140 000 livres libanaises pour de répartir les pertes financières restent le principal un dollar dans un contexte caractérisé par la montée obstacle à la conclusion d’un accord sur une réso- des tensions, des grèves bancaires et une diminution lution équitable de la crise bancaire. Repousser le relative du nombre d’interventions de la Banque du moment de faire face à l’ampleur des pertes finan- Liban sur le marché des changes. Le pays continue cières et de procéder à une répartition viable de ces d’avoir un régime de taux de change multiples qui dernières ne fait qu’aggraver les pertes de capital donne lieu à l’application de toute une série de taux humain et de capital social. de change différents pour l’achat et la vente de Le déficit du compte courant continue devises, la fixation des droits d’importation et d’autres d’être financé, pour l’essentiel, par les réserves tarifs et la tenue des comptes internes ; ce système brutes de change de la Banque du Liban. Les se solde par l’apparition de distorsions économiques, réserves brutes de change de la Banque du Liban la présentation de comptes inexacts et la création de ont chuté de 2,6 milliards de dollars en 2022 pour possibilités de recherche de rente. s’établir à 15,2 milliards de dollars a la fin de l’année Le taux d’inflation a atteint, en moyenne, 2022 (dont près de 5 milliards de dollars sous forme 171,2 % en 2022, et a été l’un des plus élevés de titres étrangers). enregistrés dans le monde, essentiellement par La plateforme de change Sayrafa, principal suite de la dépréciation de la livre libanaise. instrument monétaire utilisé par la Banque du L’inflation a principalement été alimentée par la Liban pour stabiliser la livre libanaise, sert non hausse des prix des aliments et des boissons non seulement, à mauvais escient, d’instrument moné- alcoolisées en 2022. L’inflation des denrées alimen- taire, mais aussi, à présent, de mécanisme per- taires a augmenté de 240 % en moyenne en 2022 mettant de tirer profit d’opérations d’arbitrage. La pour culminer à 483 % par rapport à l’année précé- plateforme Sayrafa témoigne, à de multiples égards, dente en janvier 2022. des politiques faibles et souvent contreproductives, Le déficit du compte courant a augmenté mise en œuvre par les autorités libanaises depuis pour atteindre 20,6  % du PIB par suite de que la crise a éclaté. Il n’existe qu’une corrélation l’accroissement des importations et de la chute ténue entre les volumes négociés sur la plateforme et des exportations. Les importations ont retrouvé le l’amélioration du cours du billet de banque en dollars niveau qu’elles avaient avant la crise pour atteindre par rapport au taux du marché parallèle. La Banque la valeur record de 19 milliards de dollars en 2022. du Liban, dont les réserves en devises sont limitées, Les exportations ont diminué de 10,2  %. Selon les a eu principalement recours à ses réserves brutes de statistiques douanières, les importations de marchan- change, de plus en plus réduites, pour procurer des dises ont augmenté de 39,7 % en 2022 par rapport à dollars sur la plateforme de manière à temporairement l’année précédente. Le relèvement prévu des droits soutenir la livre libanaise. Elle a récemment entrepris de douane et la hausse du taux de change appliqué d’utiliser des billets en livres libanaises pour acheter à ces derniers, qui était de 15 000  livres libanaises pour un dollar à la fin de  2022 ont, selon toute 6 Voir Banque mondiale (2022), Liban, Bulletin de vraisemblance, contribué à la forte augmentation conjoncture, automne 2022 : L’urgence d’une résolution des importations de produits industriels (45,8  % par bancaire équitable. (Lien). xvi LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION des dollars sur le marché parallèle avant de procéder Dans ce contexte, la normalisation de l’état à des interventions sur la plateforme Sayrafa, ce qui de crise masque le fait que l’économie libanaise n’a fait qu’accroître la volatilité du taux de change. continue de se dégrader extrêmement rapide- Ces instruments monétaires, dont l’emploi a pour effet ment, et se trouve sur une pente très éloignée d’absorber les réserves restantes ou de déprécier d’une trajectoire propice à la stabilisation et, a for- encore plus la monnaie, se sont révélés inefficaces et tiori, à la reprise. Plus la mise en œuvre d’un plan de extrêmement coûteux. Il semble, en première analyse, reprise global, adéquat et équitable se fera attendre, que les acheteurs sur la plateforme Sayrafa pourraient plus les options stratégiques pouvant être adoptées avoir dégagé des bénéfices à hauteur de 2,5 milliards seront réduites en raison de l’érosion des ressources de dollars en procédant à des opérations d’arbitrage essentielles à la relance. Le ralentissement du rythme entre le taux réduit proposé sur la plateforme et le auquel l’activité économique se contracte ne signifie cours des billets de banque en dollars, et ce depuis le pas que la situation se stabilise. En fait, le manque lancement de la plateforme. de solvabilité généralisée du secteur bancaire et l’impossibilité pour la monnaie nationale de remplir la plupart de ses principales fonctions se sont soldés Perspectives par l’apparition d’une économie dollarisée, représen- tant l’équivalent de près de la moitié du PIB en 2022, Selon les projections, aussi incertaines soientelles, ce qui assombrit encore plus les perspectives de le PIB réel devrait afficher une contraction de 0,5 % reprise économique. Tant que l’économie continuera en 2003. Cette contraction du PIB réel moins pronon- de se contracter et que la situation de crise durera, le cée qu’en 2022 repose sur l’hypothèse d’une reprise niveau de vie baissera, la pauvreté se généralisera, systématique, bien que modeste, de la consommation et les conditions demeureront, pour l’essentiel, pré- privée et d’une diminution du déficit du compte courant. caires. En d’autres termes, le maintien du statu quo Le manque de volonté politique nécessaire pour pour- garantira que les capitaux de toutes sortes sont en suivre des réformes adéquates et équitables devrait voie d’épuisement, ce qui crée de profondes inéga- persister tout au long de l’année 2023, de sorte que les lités sociales caractérisées par un petit nombre de perspectives économiques devraient être moins favo- gagnants (relatifs) et une vaste majorité de perdants. rables que prévu pour cette année. Les réserves de change de la Banque du Liban ne devraient pas être totalement épuisées en 2023, mais leur érosion persis- Dossier spécial : Évaluation de tante reste extrêmement préoccupante. l’ampleur de l’économie fondée sur Le taux d’inflation qui, selon les projec- l’argent liquide tions, pourrait atteindre 165 %, devrait demeurer l’un des plus élevés observés dans le monde. La défaillance systématique du système bancaire L’agrégat monétaire au sens étroit, l’inflation et la libanais et l’effondrement de la monnaie ont dépréciation de la monnaie continueront de favoriser provoqué l’apparition d’une vaste économie une dynamique d’instabilité économique en l’absence dollarisée fondée sur l’argent liquide, d’une valeur d’un nouveau cadre monétaire et de change. estimée à 9,86  milliards de dollars, soit 45,7  % Le ratio actuel du déficit du compte courant du PIB en  2022 (Dossier spécial : Évaluation au PIB devrait, selon les projections, légère- de l’ampleur de l’économie fondée sur l’argent ment diminuer en 2023 tout en continuant de liquide). Une économie fondée sur un recours suivre une trajectoire insoutenable. Le déficit du généralisé et grandissant à des billets de banque compte courant devrait être ramené à 14 % du PIB en dollars pour effectuer les paiements constitue en 2023, grâce à une contraction des importations un obstacle majeur à la reprise économique du qui permettra de réduire le déficit du commerce de Liban. Elle menace non seulement de compromettre marchandises par rapport à son niveau de 2022. l’efficacité de la politique budgétaire et de la politique Résumé analytique xvii monétaire, mais accroît aussi le risque de blanchiment le Liban avant la crise dans le cadre des efforts qu’il d’argent, renforce le caractère informel de l’économie avait déployés pour renforcer son intégrité financière et encourage la fraude fiscale. L’augmentation du en mettant en place de solides mécanismes de lutte nombre de transactions réalisées en liquide risque contre le blanchiment des capitaux dans le secteur également de réduire à néant les progrès réalisés par des banques commerciales. xviii LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION 1 THE POLICY CONTEXT S ince the end of the president’s term on the required upfront reforms. More recently, one of October 31, 2022, and following the the prior actions has been satisfactorily implemented: failure to elect a new president, Lebanon the special purpose audit of the Central Bank’s has entered an institutional vacuum. According foreign asset position. The final audit, however, is yet to article 75 of the constitution, upon a presidential to be published. While parliament has ratified amend- vacuum, parliament becomes an electoral body, not ments to the bank secrecy law, amendments fall short a legislative one, until a new president is elected. of ensuring that the relevant agencies have access to Parliament has failed to elect a president in 11 data on individuals’ transactions and deposits at the consecutive sessions since the end of the former client level. president’s tenure in October 2022. Attempts to Parliament has also ratified a govern- convene legislative sessions to pass critical laws ment budget for 2022; however, it only became under the premise of “extraordinary circumstances” effective six weeks before the end of 2022; the have also failed, due to lack of quorum. Despite budget was also inconsistent with IMF program opposition and limited executive authority, the parameters (including the exchange rate to be caretaker government has, however, convened several adopted). A capital controls law is at the level of times to approve decisions on social assistance, parliament and awaiting ratification; however, the law subsidies, and treasury advances-attempting to does not satisfy the parameters of effective regulation ensure a minimal yet insufficient functioning of the of capital flows. The draft law also includes articles state. Political tensions remain high, casting doubt on that suspend the implementation of all existing and a comprehensive political settlement that would put future judicial rulings against commercial banks in an end to political deadlock and institutional paralysis. Lebanon and abroad as a way to protect banks from One year after reaching a preliminary staff- multiple ongoing lawsuits against them. level agreement (SLA), an IMF program remains An IMF mission visited Beirut between in doubt as the authorities have yet to complete March 15–23, 2023, to conduct the 2023 Article 1 IV consultation, assess the economic situation, probes into the BdL governor, a domestic probe and discuss policy priorities. In its concluding state- against the governor has also resumed in February ment, the IMF warned against a ‘never-ending’ crisis 2023, following a freeze since June 2021. Political in the absence of rapid reforms.7 tensions, more recently fueled by undermining the Political tensions in the country are role of the judiciary and the principle of separation of mounting, most recently fueled by a judicial row powers, have contributed to yet another episode of over the Beirut Blast investigation, bank strikes, rapid currency depreciation. and domestic and European probes into the The Association of Banks in Lebanon (ABL) central bank Governor. At the end of January 2023, announced the resumption of the bank strike the Beirut Blast probe ground to a halt following a during March 14–22 in protest to what it considers judiciary row between the lead investigator and the arbitrary judicial rulings against it. In a statement top public prosecutor. The row ended with the public issued on March 9,8 ABL considered multiple judicial prosecutor releasing all detainees held in relation rulings to exhibit double standards-as more recent rul- to the probe and pressing charges against the lead ings have obliged banks to accept US$-denominated investigator, following more than a year of high-level pre-crisis debt to be paid by cheque or in local cur- political resistance to the inquiry. rency at the former pegged exchange rate of 1,507.5 More recently, commercial banks went on LBP/US$; while other rulings have obliged banks open strike (February 7–27, 2023) in protest to pay back pre-crisis US$ deposits in cash and in of the multiple lawsuits against them. As part of dollars. This is of course compounded by previous several domestic investigations, charges have been rulings that have seized banks’ assets. Commercial filed against several banks for money laundering after banks continue to demand the unification of the cri- they failed to lift banking secrecy on the accounts teria used for the repayment of loans and the payment of their board members and shareholders. To end of deposits and putting an end to multiple lawsuits the judicial-banking sector row, the Caretaker Prime against them. Minister has since intervened, while the public pros- ecutor has requested the suspension of proceedings against banks. As a result, the banking sector tempo- rarily lifted the banking strike until mid-March 2023. In 7 IMF staff concluding statement. addition to five ongoing money laundering European 8 Link. 2 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION 2 RECENT ECONOMIC DEVELOPMENTS Output and Demand Looking at GDP from the demand side, private consumption was the sole contributor to growth in Based on updated econometric techniques,9 2022 (Figure 2). The increase in private consumption real GDP is expected to contract by 2.6 percent is likely due to a stabilization in private sector activity in 2022 (down from a previous 5.4 percent and an increasing dollarization of wages. The growth contraction in the last run). Estimates for real GDP in the size of the cash economy in 2021 and 2022 for 2021 and 2020 remain unchanged (Figure 1). (see Special Focus: Gauging the Size of the Cash High frequency indicators (namely real estate, private Economy in Lebanon) is likely also a driver of the sector, and retail indicators) continue to support increase in private consumption. In the early years a steady economic contraction, that has however, of the crisis (2019–2021), net exports were a positive decelerated in 2022. The real estate sector continues contributor to growth, as domestic demand, which to improve from a COVID-19 induced low base of is historically concentrated on imported goods, col- 2020. Cement deliveries (a proxy for construction lapsed. Furthermore, the tourism sector had led an activity) increased by 10 percent in 9M-2022, on top of a 5 percent increase in 9M-2021. Nonetheless, 9 Access to reliable and up to date GDP data in Lebanon is cement deliveries remained 58 percent lower in challenging; official GDP numbers are typically reported by 9M-2022 compared to the 9M average over seven the Central Administration of Statistics at low frequencies years pre-crisis (2013–2019). The BLOM-PMI index and with a long lag. The last official national accounts data (capturing private sector activity) has inched up published was for 2020. High frequency indicators, which to 48.4 in 2022, up from an average of 46 percent can be used to gauge the state of the economy, are also in 2021 (<50 represents a contraction of activity). only available with a lag. Notwithstanding these caveats, the best information set available and sophisticated The retail sector continues to suffer sizeable losses econometric modelling techniques are used (both MIDAS since 2020—the BTA Fransabank retail trade index Regressions and Dynamic Factor Models) to nowcast the declined by 63 percent (in real terms) during H1-2022 real GDP growth rate for 2022 (see online annex published compared to H1-2021. with this issue for further details). 3 FIGURE 1 • Lebanon’s Economic Contraction Has FIGURE 2 • Private Consumption Is the Sole Extended for a Fifth Consecutive Year Positive Contributor to Growth in 2022 in 2022 Real GDP Growth (%) Real GDP Components 20 20 16.4 15 10 11.3 10.8 10.2 9.1 9.3 8.1 8.0 7.5 10 6.4 0 3.9 3.8 3.8 3.9 5 3.4 2.5 2.5 2.7 1.7 1.5 1.6 1.1 0.8 0.9 –10 0.6 0 –20 –0.8 –0.5 –1.7 –5 –2.6 –7.2 –30 –7.0 –10 –15 –40 2013 2014 2015 2016 2017 2018 2019 2020e 2021e 2022e –20 2020e –21.4 –25 Private consumption Government consumption 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 2021e 2022e 2023f Statistical discrepancy improvement in the trade in services balance in 2021. 2021 and 2022, obscures a near complete collapse However, this trend has reversed in 2022. Despite of public finances to the lowest rates globally, and to the continued rebound in the tourism sector in 2022, a fraction of pre-crisis levels. Revenues are estimated domestic demand on imported goods has increased to have declined from an already low 13.1 percent of to pre-crisis levels, with an adverse impact on the trade GDP in 2020 to 6.0 percent of GDP in 2022.11 in goods balance, resulting in net exports contributing Falling revenues were more than offset by negatively to growth. a larger decrease in total expenditures, which declined from 16.4 percent of GDP in 2020 to a record low of 5.7 percent of GDP in 2022, pointing Fiscal Developments to a massive hollowing out of the state amid an unprecedented crisis. To put matters in perspec- A slightly expansionary 2022 government budget tive, in real terms, public expenditures and revenues only came into effect six weeks before the end of in 2022 have witnessed a close to 7-fold and 11-fold the year, and thus had limited impact on public decrease respectively in real terms compared to 2018 finances in 2022. In the absence of immediate (Figure 3). In nominal terms, revenues and expendi- measures of fiscal consolidation and initiation of debt tures are estimated to be equivalent to a record low of restructuring in the context of a comprehensive crisis US$1.3 billion and US$1.2 billion, respectively in 2022 resolution plan, a passive approach to fiscal policy continues to drive a near complete collapse of public finances. The decline in primary spending has led to 10 See World Bank’s 2022 Lebanon Public Finance Review: an acute collapse in public service delivery,10 while (Link) the collapse in revenue generation has hindered 11 World Bank fiscal estimates are based on the latest financing meaningful wage corrections to offset the official Ministry of Finance statistics, and therefore dramatic erosion of public sector wages, allowances, do not include extra budgetary spending, including and pensions driven by inflation. quasi-fiscal operations conducted by the Central Bank, arrears, usage of IMF SDR allocation for certain fiscal The overall fiscal balance is estimated to spending, among other expenditures not recorded have recorded a narrow surplus of 0.3 percent of in official statistics-the fiscal balance is likely to be GDP in 2022, down from a surplus of 1 percent significantly negative when taking the above-mentioned of GDP in 2021. The narrow surplus sustained in expenditures into account. 4 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION FIGURE 3 • Evolution of Public Finances in FIGURE 4 • Public Finances Collapse Inducing Nominal (LBP) and Real Terms, Positive Fiscal Balance in 2021–2022 2018 vs. 2022 Fiscal aggregates (% of GDP) 40,000 5 3 30,000 0 –3 20,000 –5 –8 Percent 10,000 –10 –13 LBP Billion 0 –15 –18 –10,000 –20 –23 –20,000 –25 –28 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 –30,000 –40,000 Overall fiscal balance 2018 actual 2022 actual 2018 real 2022 real Primary fiscal balance, excluding interest payments Revenues Expenditures Fiscal balance Sources: Lebanese authorities and WB staff calculations. Sources: Lebanese authorities and WB staff calculations. (fiscal surplus equivalent to US$93 million), down spikes due to a collapse in real wages. Authorities from the 2018 pre-crisis revenues and expenditures have recently attempted to boost revenues by adjust- of US$11.5 billion and US$17.6 billion, respectively ing the former pegged exchange rate. The long-antic- (fiscal deficit of US$6 billion). ipated increase in the customs dollar exchange rate Primary spending continued to fall as a (the exchange rate used to calculate the customs percentage of GDP in 2022 to a record low of 5.1 value of imported goods) from 1,500 LBP/US$ to percent of GDP, while debt service payments are 15,000 LBP/$ came into effect in December 2022. To curtailed by the sovereign default. Although primary boost revenues further, amidst an unwavering depreci- spending is estimated to have increased by nearly 100 ation spiral, the customs dollar exchange rate was fur- percent in nominal terms (yoy), it was more than offset ther increased from 15,000 to 45,000 LBP/$ in March by an inflation-driven increase in nominal GDP in 2022 2023, prompting a further increase in the prices of (Figure 4). Between 2019 and 2022, interest payments imported goods with custom fees. Nonetheless, in a on foreign debt decreased by 97 percent as a result context of continued currency depreciation, govern- of the sovereign default, leading to a 56 percent fall ment revenues remain exposed to significant losses. in debt service over the same period. In the absence Quick and frequent adjustments to the exchange rate of a debt restructuring plan and fiscal consolidation, on tax revenues and custom duties to match currency the primary balance is estimated to have recorded a depreciation, are both costly and regressive in the narrow surplus of 0.9 percent of GDP in 2022, down continued absence of a stabilization plan (including from a surplus of 1.8 percent of GDP 2021. the restoration of crucial public services and wage Significant tax revenue losses and an infla- corrections) and daily erosion of purchasing power tion-driven increase in nominal GDP continue to only compensated for through ad-hoc and temporary drive a sharp decrease in revenues as a percent- salary increases. age of GDP. Tax revenues are particularly dampened Despite a marginal decrease in debt-to-GDP by economic contraction, tax evasion due to a signif- ratios in 2022, debt dynamics remain unsustain- icant shift to a cash-based economy, exchange rate able amid a sharp currency depreciation and mis-valuation of taxes and fees, and a severe weak- economic contraction. In 2022, the debt-to-GDP ening of tax administration capacity as absenteeism ratio reached 163 percent, a 6-percentage point Recent Economic Developments 5 FIGURE 5 • Sharp Decrease in Nominal GDP Prompts Erosion of Public Debt as a % of GDP to Pre Crisis Levels 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: Lebanese authorities and WB staff calculations. (pp) decrease from 172.5 percent in 2021. The slight In this reshuffling of the balance sheet, BdL decrease in the debt ratio is a result of the significant has effectively reduced the losses of the financial erosion of domestic debt due to currency deprecia- sector and possibly substantively increased tion (the numerator), outweighing the fall in nominal public debt, severely eroding already unsustain- GDP (the denominator), in nominal US$.12 Exchange able public debt dynamics. The MoF has not yet rate depreciation of 132 percent (yoy) has led to a indicated how it will treat this addition. 58 percent decrease in domestic debt, while nominal GDP only fell by 7 percent in 2022 compared to 2021. The World Bank debt model assumes a stable foreign External Sector denominated debt stock and does not include accu- mulated arrears. As nominal GDP in US$ continues A widening trade-in-goods deficit continues to to decline in the absence of comprehensive reform drive a substantive current account deficit in and economic stabilization, the debt-to-GDP ratio is 2022, reflecting historic external imbalances. projected to remain on its structurally unsustainable According to customs data for merchandise goods, path, similar to the pre-crisis era (Figure 5). imports grew by 39.7 percent (yoy) in 2022, combined Through a revaluation operation, BdL added with a 10.2 percent decrease in exports. In fact, imports $16.5 billion in assets under “loans to public to Lebanon reached US$19 billion in nominal terms in sector” in its balance sheet; the solvency issue 2022, close to pre-crisis levels. Anticipated increases of the sovereign-BdL nexus remains unchanged. in the customs duties exchange rate (“the customs The loans to the public sector reflect swaps carried dollar”), has likely contributed to the substantive out between BdL and the sovereign from 2007. In increase in imports of industrial goods (yoy increase exchange for US$ funding, the sovereign deposited of 45.8 percent) and have driven the hoarding of the equivalent in LBP at the former exchange rate of those goods in anticipation of a price adjustment. 1507.5 LBP/US$. However, along with its new official exchange rate of 15,000 LBP/US$, BdL has revalued those swaps in US dollars, and added them as an 12 To convert domestic debt to US$, the World Bank asset on its balance sheet, effectively considering Average Exchange Rate for 2020–2022 is used and is them a liability of the sovereign. estimated at 3,688; 11,755; and 27,309, respectively. 6 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION FIGURE 6 • Current Account Deficit Widens in 2022, Registering a Ratio to GDP Similar to Pre-Crisis Years 45 0 40 –5 35 30 –10 US$ Billion % of GDP 25 –15 20 15 –20 10 –25 5 0 –30 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Foreign Reserves at BdL (excl. gold) Total Imports Current Account (rhs) Sources: BdL, CAS and WB staff calculations. FIGURE 7 • A Steady Depletion in the Gross Foreign Exchange Position at BdL Gross reserves at BdL 50,000 45,000 40,000 35,000 30,000 US$ mln 25,000 20,000 15,000 10,000 5,000 0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 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 Foreign currencies Foreign securities Gross FX reserves Compulsory FX reserve Sources: BdL and WB staff calculations. The trade-in-goods deficit reached 72.2 percent of deficit. The widening trade-in-goods deficit has offset GDP in 2022, up from 42.2 percent of GDP in 2021 the continued improvement of the trade-in-services (a widening of the deficit by 59.5 percent in nominal balance driven by a persistent rebound in the tourism US$ terms). sector, and the improvement in current transfers The current account (CA) deficit’s ratio driven by the increase in remittances. Tourist arrivals reached 20.6 percent of GDP, almost the level have increased by 57 percent (8M-2022), on top of a of the pre-crisis medium-term average (2013– 140 percent increase in 12M-2021. Hotel occupancy 2019) of 22.6 percent of GDP (Figure 6). In nominal rates also support this rebound and have increased terms however, the CA deficit reached US$4.4 bil- by 8.7 percentage points in 11M 2022 compared to lion, 57 percent less than the pre-crisis medium term 11M 2021. The rebound in tourism has increased average of US$10.6 billion between 2011–2019. services receipts by an estimated 59% in 2022 (yoy), The widening CA deficit as a percentage of GDP increasing the trade-in-services surplus to 17.2 per- continues to be driven by a widening trade-in-goods cent of GDP. Recent Economic Developments 7 Lebanon is estimated to have received Bank-estimated Average Exchange Rate (AER)15 a record 31.7 percent of GDP in remittances averaged 27,309 LBP/US$ reflecting a shrinking in 2022, the 2nd highest ratio in the world.13 spread between both rates due to the (disorderly) ter- Remittance inflows have long been a backbone of mination of FX subsidies and pervasive dollarization the Lebanese economy, averaging US$6.5 billion, (or market value) pricing across the overwhelming between 2012 and 2021. As a percentage of GDP, majority of goods and services. remittances have increased from an average of 13 While the currency has been depreciating percent between 2012 and 2019, to 19.8 percent in for more than three years, episodes of rapid 2020, 26.4 percent in 2021, to 31.7 percent in 2022 depreciation intensified since February 2023, tes- respectively (largely owing to a denominator led effect tament to the continued atrophy of the Lebanese of a decrease in US$ nominal GDP). In nominal terms, economy. The judicial row over the Beirut blast probe, remittances have increased by 20 percent between coupled with repeated banking sector strikes, and 2021 and 2022 (to an estimated US$6.8 billion), only political tensions have fueled uncertainty. Persistently partially offsetting the deficit in the CA balance. In the high demand for foreign currency to fulfill import obli- current crisis, remittances have come to play a cru- gations and finance foreign currency-denominated cial role as a safety net for the majority of Lebanese expenditures, and continued speculative activity, families to finance household consumption and the are further increasing the frequency of episodes of provision of survival necessities. As the crisis has led rapid depreciation. While on average, the exchange to a large exodus of well-educated and highly skilled rate depreciated by five percent on a monthly basis labor, it is expected to contribute to a further increase in 2022, it depreciated by 47 percent in February in remittance inflow reliance as a safety net in the 2023 alone. near future. Bank strikes have contributed to the sharp The Current Account deficit continues to deterioration of the BNR as Sayrafa transactions be financed, for the most part, by the remaining via banks were put on hold by the strikes and usable gross reserves of BdL. Gross reserves are foreign currency withdrawals were restricted to gradually being depleted; between end October ATM withdrawal limits. Increased pressure on ATMs 2019 and end 2022, gross reserves have declined is not always met with adequate replenishment of by US$22,745 million, reaching US$15,194 million foreign currency. The BdL’s Sayrafa initiative, an elec- (including US$4,796 million in foreign securities). tronic currency trading platform for selling US dollars BdL’s gross position differs widely from its net at discounted exchange rates instituted in April 2020, reserves (i.e., gross FX reserves at the central bank has done little to stem the Pound’s decline (see net of FX liabilities to others) and contrary to most cen- Box 1). tral banks, BdL does not publish net reserves, which The rapid depreciation in the currency are estimated to be highly negative and in excess of continues to drive triple digit inflation (Figure 12). US$60 billion.14 13 Remittances Brave Global Headwinds, Migration and Development brief, November 2022, Knomad. Money and Banking 14 World Bank estimates, also see similar estimates in: “Mapping out the path to the Lebanese Economic The Lebanese Pound continues to depreciate Recovery”, Goldman Sachs International, 2021; “Fitch sharply, despite having lost more than 98 per- Downgrades Lebanon to ‘CC’”, Fitch Ratings, 2019; cent of its value since the onset of the crisis. Moubayed, A., & Zouein, G. (2020). 15 The AER is derived by applying consumption-based Between December 2021 and 2022, the Lebanese weights on the official, the platform and the US$ pound depreciated by 66.5 percent. The BNR (i.e., banknote exchange rates. For a detailed derivation the Banknote Rate; or parallel market rate) aver- please refer to: World Bank (2020), Lebanon Economic aged 31,102 LBP/US$ in 2022, while the World Monitor: The Deliberate Depression, Fall 2020. (Link). 8 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION BOX 1: THE SAYRAFA PLATFORM: THE CYCLE OF BUYING TIME The Sayrafa platform, BdL’s Electronic Exchange Platform, has become the central bank’s main foreign exchange market operations tool. The platform’s viability hinges on BdL’s ability to supply dollars from BdL’s remaining gross useable reserves. This box provides background on the platform and some empirical analysis of the relationship between the trading volume on Sayrafa, the Banknote (BNR) and Sayrafa rates. It also quantifies the arbitrage profits accruing to those with access to the platform. The foreign exchange interventions via Sayrafa reflect unfavorable monetary tools that led to short-lived appreciations of the LBP at the expense of dwindling reserves and a weakened BdL balance sheet, especially in the absence of a new exchange rate and monetary framework. More recently and starting in April 2022, the analysis suggests that BdL’s interventions via the Sayrafa platform have been preceded by a precipitous increase in currency in circulation likely indicating that BdL bought foreign currency in the parallel market to inject them on Sayrafa. Such interventions have contributed to episodes of sharp currency depreciation and volatility, and a further erosion of purchasing power of the LBP. The analysis concludes that the Sayrafa platform is not only an unfavorable monetary tool, but has also morphed into a mechanism to generate arbitrage profits reaching US$2.5 billion since its initiation. Platform Initiation and Intended Objectives Circular 149,a issued by Banque du Liban (BdL) on April 3, 2020, established the Electronic Exchange Platform, known domestically as Sayrafa. The circular also announced the establishment of a special unit at the central bank whose purpose is to trade foreign currencies. The central bank issued two additional circulars, 157b and 159,c on May 10 and August 17, 2021, which expand the trading on the Sayrafa platform to commercial banks and require banks to partake in foreign currency transactions solely on the Sayrafa platform. The establishment of the Sayrafa platform was a bid to bring order to the foreign exchange market. Foreign exchange rate bureaus and agents (many of whom are unlicensed) are the main dealers in the foreign exchange market. As the Lebanese Pound (LBP) continued to depreciate rapidly against the US$ amid a multiple exchange rate system engineered by BdL, the central bank invited legal foreign exchange offices to partake in trading on the Sayrafa platform for the transactions to be “clearly and transparently announced”, rather than undertaken in what was dubbed as the “black” or “parallel” market. The ultimate objective of the platform was to (i) arrest the deterioration of the banknote/ parallel market exchange rate, and (ii) formalize FX transactions at the market rate in a transparent manner, through the banking sector and official exchange dealers (ultimately cracking down on unofficial market transactions and speculation in the hope of driving down the BNR). Evolution of the Platform: Interpreting Sayrafa Volumes Sayrafa swiftly became the central bank’s preferred tool to conduct foreign exchange market interventions that aim to shore up the LBP. Following its inception, the trading volume on Sayrafa was very modest and average daily volume over the period July 26 to October 13, 2021, stood at US$1.3 million. Nonetheless, following episodes of rapid depreciation in the LBP, the central bank announced, on multiple occasions, its readiness to supply dollars on the Sayrafa platform without limit in a bid to stem the rapid depreciation of the LBP. In tandem, the BdL, as outlined in the Fall 2022 Lebanon Economic Monitor, removed, by issuing circular 161 dated December 16, 2021, all quotas on the monthly US$ liquidity that it provides to the commercial banking sector and expanded the access to Sayrafa to money transfer companies whose annual transactions volume exceeds US$50 million via circular 614 issued on February 21, 2022. These changes made the Sayrafa platform a more potent tool for exchange market interventions. The volume of transactions on Sayrafa largely depends on BdL providing an adequate level of US$ liquidity on the platform. The volume of transactions on Sayrafa picked up rapidly following BdL’s announcement on December 15, 2021, that it stands ready to provide unlimited liquidity in US$ on the platform. Similar announcements were made on May 27, October 23 and December 27, 2022, precipitating a surge in trading volume.d Following episodes of rapid depreciation in the LBP in March 2023, the BdL increased Sayrafa rate again to 70,000 LBP/US$ on March 1 and to 90,000 LBP/US$ on March 23. The trading volume on the platform was adversely affected by several bank closures in February and March 2022. Econometric Analysis: Association between the volume on Sayrafa and the Spread between the Sayrafa and the Banknote Rate (BNR): The opaque nature of trading on Sayrafa and the complete absence of information on the buy and sell sides of transactions have led to it being perceived as a “black box”.e Nonetheless, using the available data, a simple empirical analysis of the association between the volume on Sayrafa and the Sayrafa and BNR rates is offered. The analysis demonstrates a statistical relationship between the overall volume of trade on the Sayrafa platform, the value of the Lebanese Pound, and the spread between the official and parallel, or BNR, rates. However, the relationship is a weak one and does not amount to an endorsement of the platform. Let st and st denote, respectively, the BNR and Sayrafa rates, expressed in terms of units of LBP per US$. The spread between the BNR and Sayrafa rates is spt = (st – st )/ st The latter computation circumvents non-stationarity in the exchange rates. First, the relation between the volume of transactions and the spread is examined graphically. The scatter plot suggests a negative (albeit weak) association between the spread and volume. (continued on next page) Recent Economic Developments 9 BOX 1: THE SAYRAFA PLATFORM: THE CYCLE OF BUYING TIME (continued) 0.5 0.4 0.3 SPREAD 0.2 0.1 0.0 –0.1 0 100 200 300 400 Volume Second, a Vector Error Correction model (VECM) comprising the natural logarithms of the BNR, Sayrafa rate and transaction volume is estimated.f The findings from estimating the VECM suggest that, except for the first lag, the volume on Sayrafa is negatively associated with the BNR and positively associated with the Sayrafa rate. Further, tests of Granger causality indicate that the volume on Sayrafa Granger-causes the BNR. Taken together, these findings point to a narrowing in the spread between the BNR and Sayrafa rates when the volume on Sayrafa increases. The Source of FX supply through the Sayrafa Platform Remaining FX Usable Reserves The survival of the Sayrafa platform hinges on the central bank’s ability to supply dollars. As the Sayrafa exchange rate has been consistently below the BNR, very few (if any) businesses, traders, and individuals have an incentive to sell US$ at the Sayrafa rate. Hence, the supply of dollars is likely to originate from BdL’s reserves and, because there are no economic incentives to offer US$ at a loss on the platform when they can be sold at a more favorable exchange rate in the parallel market, the functioning of the platform hinges on BdL provisioning US$ liquidity on the platform. For the period December 2021 to August 2022 the palpable increase in Sayrafa volumes (FX interventions by BdL) occurred FIGURE 8 • Increased Sayrafa Volumes (weakly) Associated with BNR Appreciation & Decrease in the Spread between BNR & Sayrafa Rates 150,000 355 130,000 305 110,000 255 US$ Million 90,000 205 LBP/US$ 70,000 155 50,000 105 30,000 55 10,000 5 26-Jul-21 26-Aug-21 26-Sep-21 26-Oct -21 26-Nov-21 26-Dec-21 26-Jan-22 26-Feb-22 26-Mar-22 26-Apr-22 26-May-22 26-Jun-22 26-Jul-22 26-Aug-22 26-Sep-22 26-Oct -22 26-Nov-22 26-Dec-22 26-Jan-23 26-Feb-23 26-Mar-23 Sayrafa Volume BNR Sayrafa Rate Sources: BdL and WB Staff Calculations. (continued on next page) 10 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION BOX 1: THE SAYRAFA PLATFORM: THE CYCLE OF BUYING TIME (continued) in tandem with a precipitous decrease in remaining gross usable reserves. Indeed, BdL gross reserves have decreased by US$4.82 billion over the period July 2021 to January 2023, likely indicating that the reserves were used, at least in part, to provide liquidity on the platform (Figure 9 below). BdL’s interventions, have thus led to short-lived appreciations in the BNR at the expense of depleting remaining gross usable reserves, ultimately weakening BdL’s balance sheet position. Buying Dollars from the Banknote Market The plateauing of the decrease in BdL foreign currency assets all the while BdL’s foreign exchange interventions via Sayrafa are still underway raises questions regarding the source of the liquidity on the platform.h Starting in April 2022, the significant increases in the volume on Sayrafa were preceded by surges in currency in circulation (Figure 10 below). The latter actions may be suggestive that BdL purchased foreign currencies outright FIGURE 9 • Increase of Volume of Transactions on Sayrafa Occurred in Tandem with a Precipitous Decrease in Remaining Gross Usable Reservesg 160,000 16 140,000 14 120,000 12 100,000 10 US$ Billion LBP/US$ 80,000 8 60,000 6 40,000 4 20,000 2 0 0 26-Jul-21 10-Aug-21 26-Aug-21 11-Sep-21 26-Sep-21 12-Oct -21 28-Oct -21 12-Nov-21 28-Nov-21 14-Dec-21 29-Dec-21 14-Jan-22 30-Jan-22 14-Feb-22 2-Mar-22 18-Mar-22 2-Apr-22 18-Apr-22 4-May-22 19-May-22 4-Jun-22 20-Jun-22 5-Jul-22 21-Jul-22 6-Aug-22 21-Aug-22 6-Sep-22 22-Sep-22 7-Oct-22 23-Oct -22 8-Nov-22 23-Nov-22 9-Dec-22 25-Dec-22 9-Jan-23 25-Jan-23 10-Feb-23 25-Feb-23 13-Mar-23 29-Mar-23 Sayrafa Interventions BNR Foreign Currencies at BdL Sources: BdL and WB Staff Calculations. FIGURE 10 • Increase of Volume of Transactions on Sayrafa Was Preceded by an Increase in Currency in Circulation Starting in April 2022 90 80 70 60 LBP Trilliion 50 40 30 20 10 15/07/2021 15/08/2021 15/09/2021 15/10/2021 15/11/2021 15/12/2021 15/01/2022 15/02/2022 15/03/2022 15/04/2022 15/05/2022 15/06/2022 15/07/2022 15/08/2022 15/09/2022 15/10/2022 15/11/2022 15/12/2022 15/01/2023 15/02/2023 15/03/2023 15/04/2023 Sayrafa Interventions Currency in Circulation Outside BDL Sources: BdL and WB Staff Calculations. (continued on next page) Recent Economic Developments 11 BOX 1: THE SAYRAFA PLATFORM: THE CYCLE OF BUYING TIME (continued) from the market to inject them on the Sayrafa platform. The increase in the currency in circulation has led to rapid episodes of steep currency depreciation, further exacerbating exchange rate volatility and far from succeeding in stabilizing the BNR. Arbitrage Opportunities The platform has also proven to be a mechanism to generate arbitrage profits, and provide subsidies to public servants, importers, and select individuals and corporations.i In fact, owing to access to foreign currency at subsidized rates, close to US$2.5 billion in arbitrage profits have accrued to those benefitting from access to Sayrafa since the initiation of the platform (Figure 11).j Arbitrage profits are computed as the spread between the BNR and the Sayrafa rate, multiplied by the Sayrafa volume, then divided by the BNR. Due to lack of granular data on buy and sell transactions on Sayrafa, it is assumed that the total volume of transactions reported are sell-side transactions, with most FX supply provided by BdL.k Arbitrage profits, therefore, are also losses to BdL’s balance sheet. Notwithstanding the sizeable volume of transactions on the platform, the goal of unifying exchange rates continues to be elusive due to the rationing and severe shortage in FX supply on the platform, and the lack of a credible macro-framework. In fact, the platform has added yet another exchange rate to a highly taxing multiple exchange rate system that continues to create distortions and rent-seeking opportunities. Conclusion The Sayrafa platform reflects a weak and inefficient monetary tool at best, with the ultimate objective of buying time in the absence of a new exchange rate and monetary framework. BdL’s interventions via the Sayrafa platform have only achieved short-lived appreciations in both the Sayrafa and the US$ banknote exchange rates, at the expense of dwindling foreign reserves and/or a rapidly depreciating exchange rate (prompting severe erosion in purchasing power), a testament to the unsustainability of such measures. Burning through foreign exchange reserves to temporarily prop up the national currency is an unsustainable monetary and quasi-fiscal tool that has proven to be costly, as it negatively affects Lebanon’s financial position, and long-term prospects of recovery. FIGURE 11 • Arbitrage Profits Using the Sayrafa Platform Exceed US$2.5 Billion 3,000 160,000 140,000 2,500 120,000 2,000 100,000 US$ Million LBP/US$ 1,500 80,000 60,000 1,000 40,000 500 20,000 0 0 26-Jul-21 26-Aug-21 26-Sep-21 26-Oct-21 26-Nov-21 26-Dec-21 26-Jan-22 26-Feb-22 26-Mar-22 26-Apr-22 26-May-22 26-Jun-22 26-Jul-22 26-Aug-22 26-Sep-22 26-Oct-22 26-Nov-22 26-Dec-22 26-Jan-23 26-Feb-23 Arbitrage Profits BNR (rhs) Sources: BdL and WB staff calculations. a Circular 149. b Circular 157. c Circular 159. d The announcement on December 27, 2022 was accompanied by a change in the Sayrafa rate to LBP 38,000 per US$. e See, for example, Article. f The Johansen (1988) methodology is employed to estimate the VECM. The Sayrafa and BNR are cointegrated and this cointegration relation is exploited in the model. g Burgundy lines represent announcements of BdL interventions that lead to an increase in the volume of transactions or the Sayrafa rate. h A distinction should be made between foreign currency reserves and assets at BdL. The difference between foreign currency assets and reserves is equal to BdL’s securities portfolio in foreign currencies. While foreign assets plateaued, foreign currency reserves continue to decrease, albeit the rate of decrease has slowed in 2021 and 2022. i Employees of the public sector are permitted to withdraw their salaries at the Sayrafa rate, effectively constituting an implicit tool to subsidize public sector wages. j The arbitrage profits estimate does not include those profits stemming from the spread between the Sayrafa rate and the preferential Sayrafa rate granted to public sector employees, which means that the estimated cumulative arbitrage profits are likely to be understated. k As mentioned earlier, as the Sayrafa exchange rate has been consistently below the BNR, very few (if any) businesses, traders, and individuals have an incentive to sell US$ at the Sayrafa rate. Hence, BdL is likely the main if not only supplier of FX liquidity on the platform. 12 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION Inflation averaged 171.2 percent in 2022 and is expected removal of FX subsidies on crucial imports by BdL, to remain in the triple digits in 2023. The rise in prices increased dollarization in the Lebanese economy17 and of food and non-alcoholic beverages in the consump- unmonitored price increases to hedge against future tion basket was the highest contributor to inflation in depreciation episodes. 2022, averaging a 240 percent increase throughout 2022, and reaching a maximum of 483 percent (yoy) 16 Please see online annex published with this issue in January 2022 (Figure 13). In fact, the exchange rate for further details on the exchange rate pass-through pass through,16 which measures the extent to which calculations. fluctuations in the exchange rate lead to changes in 17 The loss of confidence in the LBP has increasingly driven dollarization across several sectors, including tourism. aggregate prices (i.e., inflation), has averaged 133 More recently, all supermarkets have also been allowed percent in 2022, up from an average of 61 percent to price in US$, while customers can pay in dollars or between October 2019 and December 2021. This Lebanese pounds at the market rate published by each increase is mainly on account of the near complete supermarket. FIGURE 12 • Exchange Rate Depreciation Drives the Surge in Inflation 3,500 200% 180% 3,000 160% Index (Aug 2019=100) 2,500 140% Percent (%) 2,000 120% 100% 1,500 80% 1,000 60% 40% 500 20% 0 0% Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 US$ Banknote Rate WB Average Exchange Rate Inflation Currency in Circulation CPI-Exchange Rate Pass Through (rhs) Sources: BdL, CAS and WB staff calculations. Inflation in Basic Items Has Been a Key Driver of Overall Inflation, Hurting the Poor and FIGURE 13 •  the Middle Class Contributions to Overall Inflation in 2022 180 130 Percent (%) 80 30 –20 Headline Inflation growth Food & Non-alcoholic Beverages Transportation Water, Electricity, Gas, & Other Fuels Health Clothing & Footwear Furnishings, Household Equipment Communication Education Alcoholic Beverages & Tobacco Owned Occupied Actual Rent Other Sources: CAS and WB staff calculations. Recent Economic Developments 13 FIGURE 14 • Currency Depreciation and Local FIGURE 15 • A Steady and Sharp Deterioration in Factors Are Main Drivers of Inflation Credit Performance as Measured by NPL Ratio for Banks 600% 500% NPLs by Sector 400% 300% Total credit portfolio 200% 100% Consumption 0% Housing –100% –200% Financial intermediation –300% Retail trade –400% Wholesale trade 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 Contracting and construction BNR change Global food prices effect Processing industries Global energy prices effect Local effects 0% 10% 20% 30% 40% 50% 60% 70% CPI inflation Dec-21 Dec-20 Dec-19 Sources: CAS and WB staff calculations. Sources: Lebanese authorities and WB staff calculations. In addition to currency depreciation, local rate in the balance sheet of banks prompts the re- factors (such as hedging) have become dominant calculation of all banking sector assets denominated in drivers of core CPI inflation.18 Local factors refer LBP but converted to US$ at the former 1,500 rate to the to increases in headline CPI inflation that cannot be new rate of 15,000-hence, since banks have a sizeable attributed to global food or energy price increases or to amount of assets denominated in liras (that have to be changes in the BNR. Figure 14 provides a disaggrega- converted to US$ at the new rate)—banks will incur huge tion of headline CPI inflation, by global (namely, food losses in those assets. However, BdL has allowed banks and energy prices), exchange rate depreciation, and to (1) value their real estate assets at the “fresh dollar” local factors. Stripping out the short-lived (or transitory) rate and (2) adopt the Sayrafa platform rate of December effects of increases in global food and energy prices 31 of each year, and for five years, to value their real following the Russian invasion of Ukraine, the rapid estate assets in Lebanon and their long-term contribu- depreciation of the LBP was the largest driver of core tions and lending related to participations in banks and inflation in Lebanon until December 2021; however, financial institutions abroad bought or granted with BdL’s since January 2022, the weight of local factors in approval.19 The BdL has given banks five years to ‘recon- headline CPI inflation has increased. It is likely that the stitute’ losses in their balance sheets, which essentially residual increase in core inflation (local factors) is due to goes against the upfront realization of losses (as per hedging against future rapid episodes of depreciation, international best practice and IMF prior actions). and lack of price monitoring and control by the relevant Financial losses in the banking system authorities. exceed US$72 billion, equivalent to more than Effective February 1, 2023, BdL has adjusted three times GDP in 2022.20 Combined losses stem Lebanon’s official exchange rate to 15,000 LBP/ US$, a devaluation of nearly 90 percent from the 18 Core CPI inflation is defined as the rate of change in the former peg of 1,500 LBP/US$. The new exchange price of CPI basket excluding global food and energy rate replaces the former peg in the context of a mul- prices, two volatile components. Headline inflation, which tiple exchange rate system that persists. This system measures the change in the price of the entire CPI basket, typically exhibits larger volatility than core inflation. provokes distortions in the economy and creates rent- 19 Circular 659. seeking opportunities. The new official exchange rate 20 Please refer to: World Bank (2022), Lebanon Economic also applies to the withdrawal rates of pre-crisis deposits Monitor, Fall 2022: Time for an Equitable Banking (of circular 158 and 151). The change of the exchange Resolution. (Link). 14 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION FIGURE 16 • A Severe Contraction in Loans and a Reduction in Deposits Shrinking Bank Balance Sheets 280 70 260 65 60 240 55 220 50 US$ Billion US$ Billion 200 45 180 40 35 160 30 140 25 120 20 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Commercial Banks Balance Sheet Deposits at Commercial Banks Outstanding Credit to Private Sector (rhs) Sources: CAS and WB staff calculations. from (1) a sovereign that is in default on its public with BdL in the form of deposits, while the remaining debt of approximately US$35 billion (163 percent 6.8 percent are in government securities (TBs and of GDP in 2022);21 (2) a central bank, Banque du Eurobonds) and claims on the public sector. As of Liban (BdL) that has US$60 billion (259 percent of end 2022, 77 percent of banks’ liabilities are private GDP) in negative net foreign exchange reserves—by deposits (only down from 90 percent at the onset of far the largest negative reserves of all central banks the crisis) despite the deposit lirafication scheme.24 across the world;22 and (3) substantive losses in the The domestic credit portfolio has further contracted private sector credit portfolio rendering the oversized by US$8 billion as of end 2022; this is on top of a con- banking system insolvent, against pre-crisis equity traction by US$8.6 billion in 2021 (Figure 16), bringing of US$21 billion.23 As early as November 2019, the the total credit contraction to about 61 percent since financial sector introduced discretionary and informal the onset of the crisis in 2019. Figure 15 portrays the capital controls, to conserve their liquidity and capital, sharp deterioration in the banking sector’s lending as depositors struggled to access the full value of portfolio as measured by the ratio of nonperforming their pre-crisis deposits. A multiple exchange rate loans (NPL). system was put in place, governed by ad-hoc Central As outlined in the Fall 2022 Lebanon Bank circulars, in lieu of a new monetary exchange Economic Monitor, divergent views among key rate framework grounded in the full realization of stakeholders on how to distribute the financial financial losses. Since June 2021, BdL has formally allowed for a gradual withdrawal of deposits, a 21 Based on World Bank estimates; The World Bank debt lirafication scheme that has resulted in haircuts on model assumes a stable foreign denominated debt deposits between 60–80 percent. The burden of the stock. ongoing adjustment and deleveraging in the financial 22 Based on World Bank estimates, also see similar sector is highly regressive, falling hardest on smaller estimates in: “Mapping out the path to the Lebanese depositors. Economic Recovery”, Goldman Sachs International, Despite ongoing regressive deleveraging 2021; “Fitch Downgrades Lebanon to ‘CC’”, 2019; Moubayed, A., & Zouein, G. (2020). schemes for more than three years, the banking 23 Source: BdL. sector balance sheet remains impaired. As of 24 About 77 percent of total deposits (US$98 billion) are January 2023, 70.1 percent of banking assets are in FX; most of them (98 percent) are estimated to be in in sovereign securities, 63.3 percent of which are pre-crisis dollars. Recent Economic Developments 15 losses remains the main bottleneck for reaching future government revenues to bail-out the financial an agreement on an equitable banking resolution. sector. The magnitude of the holes in the intertwined Global best-practice principles endorse a financial balances sheets of the Central Bank, the banking sector rehabilitation strategy that recognizes and sector and the Sovereign, dwarfs the current and addresses the large losses in the sector upfront, future assets that the sovereign could realistically respects the hierarchy of claims, protects small mobilize for a bailout. Not only is Lebanon’s banking depositors, and refrains from recourse to public system too big to bail, but a bailout of the financial resources. Key stakeholders in Lebanon, however, sector by taxpayers would redistribute wealth from remain strongly opposed to such a resolution, calling poorer to richer households, as the public would on the State to bear responsibility for the ongoing be asked to compensate bank equity holders and crisis and to privatize public assets and/or draw on wealthy depositors. 16 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION 3 OUTLOOK AND RISKS S ubject to extraordinary high uncertainty On the fiscal front, given the significant particularly in the context of repeated delay in ratifying a government budget for 2023, episodes of sharp currency depreciation, we assume that the 2022 budget will continue real GDP is projected to contract further by 0.5 to have considerable impact on public finances percent in 2023.25 The less severe contraction in in 2023.26 As budget 2022 reflects a slightly expan- real GDP in 2023 owes to a continued, albeit modest, sionary fiscal policy, the fiscal balance is estimated pick up in private consumption and a narrowing of the to record a deficit of 0.5 percent of GDP for the first current account deficit relative to 2022. Further, milder time since 2020. The primary balance is projected contractions in investment and gross fixed capital to also record a deficit of 0.3 percent of GDP. As a formation are also expected to contribute to lessening result, probable monetization of the fiscal deficit will the economic contraction relative to 2022. Projections (Table 1) pay heed to persistent lack of political will 25 Given the lack of data to inform 2023 projections, our for comprehensive reforms, and institutional vacuum, projections for the economic growth are based on expected to prolong throughout the whole of 2023. dynamic forecasts from the econometric models that are A complete depletion of FX reserves at BdL is not outlined in the online Annex published with this issue. Due to parameter and model uncertainty, these forecasts expected in 2023. are subject to considerable uncertainty. Inflation is expected to remain in triple 26 In the absence of a ratified 2023 budget, spending digits, at 165 percent, persistently amongst the follows the 1/12th rule based on the last approved highest rates globally. Monetary and financial turmoil budget law, i.e. spending in 2023 will be based on the are expected to continue to drive crisis conditions. In budget law of 2022 until a 2023 budget comes into our next run, our inflation estimates will be revised to force. The 1/12th rule stipulates that for each month of the new year that passes without an updated budget, the account for ongoing episodes of steep currency depre- government can spend one-twelfth of the annual amount ciation-and the persistent sharp interaction between the allocated in the last approved budget. With inflation in exchange rate and inflation shaping unstable dynamics triple digits, the 2022 nominal LBP budget numbers, (as outlined in Money and Banking section). translate in a sharp contraction in real terms for 2023. 17 have implications on the narrow money supply and impedes prospects of economic recovery. The preva- exacerbate the inflationary environment. Nonetheless, lence of cash transactions not only heightens the in real terms, both expenditures and revenues in 2023 risks of money laundering and tax evasion, but also are on a steep downward trajectory, reflecting an aggravates informality and has adverse implications 88.8 and 84.3 percent decrease respectively, since on the ability to conduct monetary and fiscal policy. 2018, a reality that points to a massive hollowing out Should BdL’s gross foreign exchange reserves run of the state. Debt dynamics are expected to remain out, a fully dollarized economy whose size will be unsustainable as a result of both economic contrac- dictated by foreign exchange inflows will ensue. tion and currency depreciation, with the debt-to-GDP Persistent lack of political will for com- ratio projected at 183.5 percent of GDP in 2023. prehensive and adequate reforms stems from a The current account deficit to GDP ratio is policy of preservation of interests of a narrow elite expected to remain sizeable in 2023, although base. While Lebanon’s pre-crisis unsustainable devel- slightly lower than in 2022, reflecting a chronically opment model has benefited a few at the expense of weak external position. The current account deficit the rest of the population, ad-hoc crisis management is expected to narrow to 14 percent of GDP in 2023, decisions have also favored an unequal economic down from a record 20.6 percent of GDP in 2022. The adjustment that is setting the premise for long term materialization of the anticipated increase in the custom inequality and a new economic configuration. duties exchange rate was among the main drivers of the Across all economic pillars, ad-hoc crisis record increase in imports in 2022, and the consequent management decisions continue to undermine a worsening of the trade-in-goods deficit. Following the just and comprehensive recovery plan, ostensibly introduction of the changes to the exchange rate of because of the persistent political deadlock. As the custom duties prompting further increases in the outlined in detail in annex I, the continued socializa- price of imported goods, a slight improvement in the tion of financial losses through a multiple exchange trade-in-goods balance in 2023 is projected, driven by rate system, ad-hoc monetary policy and the mon- a projected decrease in imports. Nonetheless, the cur- etization of fiscal deficits have prompted a deeply rent account deficit continues to reflect historic external regressive inflation-depreciation spiral that has only imbalances and continues to deplete the remaining further depressed economic output and deepened usable foreign exchange reserves of BdL. the calamities of Lebanon’s residents. In fact, piece- Against this backdrop, the Lebanese meal interventions, and short-sighted decisions in economy is markedly distant from a stabilization isolation of a well-carved out comprehensive strategy, path, despite the ostensive normalization of crisis have shifted the burden of the economic adjustment conditions. Economic contraction deceleration in to the most vulnerable segments of the population 2022 and 2023 respectively, is owed to a technical and the majority of the local labor force who earn in deceleration tied to consecutive steep contractions in national currency and are witnessing a daily, often previous years (base effect) and is not an indication of a double-digit erosion to their purchasing power. This stabilizing economy. To the contrary, further economic is further compounded by a near complete collapse contraction cannot be discounted as foreign reserves of public finances, driving an acute collapse of public run dry, the inflation-depreciation spiral accelerates, service provision and state institutions atrophy with and the core functions of the state are further depleted. devastating consequences on state building moving Therefore, even the technical deceleration in economic forward. The winners in this case are few. contraction witnessed is far from sustainable. As repeatedly called for, Lebanon needs to Under current conditions of ever-present urgently adopt a domestic, equitable, and com- financial and monetary turmoil, compounded prehensive solution that is predicated on: (i) a new by political uncertainty, a heavily dollarized and and credible exchange rate and monetary framework, cash economy prevails. As outlined in the Special (ii) comprehensive bank restructuring addressing Focus below, the pervasive dollarized cash economy upfront the balance sheet impairments, restoring 18 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION liquidity, and adhering to sound global practices of depositors, (iii) a medium-term fiscal strategy to restore bail-in solutions based on a hierarchy of creditors debt sustainability, and (iv) key structural and sector- (starting with banks’ shareholders) that protects small level reforms to enhance governance (see Annex I). TABLE 1 • Selected Economic Indicators (2015–2023) 2015 2016 2017 2018 2019 2020 2021 Est. 2022 2023 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 –2.6 –0.5 Real GDP per Capita a –1.7 3.8 3.4 0.7 –4.2 –19.7 –5.8 –0.8 –0.5 (Share of Real GDP) Agriculture 3.7 3.8 4.3 4.4 4.7 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 12.8 Services 72.0 71.7 71.8 72.2 73.9 76.9 78.6 78.6 78.6 Net Indirect Taxes 11.6 11.7 11.6 11.4 10.6 4.3 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 84.3 154.8 171.2 165.0 Public Finance (percent of GDP, unless otherwise specified) Revenue 19.2 19.4 21.9 21.0 20.8 13.1 7.5 6.0 6.3 o/w Tax revenue 13.7 13.7 15.5 15.4 15.6 9.0 5.6 4.8 5.0 Expenditure 26.9 28.7 28.6 32.0 31.4 16.4 6.5 5.7 6.8 Current expenditure 21.7 23.2 23.6 26.0 26.1 14.3 5.8 5.2 5.8 o/w Interest payment 5.7 6.0 6.1 5.8 6.0 2.3 0.9 0.6 0.2 Capital expenditure 1.4 1.4 1.5 1.7 1.3 0.4 0.1 0.1 0.2 Overall fiscal balance –7.7 –9.3 –6.7 –11.0 –10.6 –3.3 1.0 0.3 –0.5 Primary balance 1.2 0.0 2.7 –1.2 –0.5 –0.8 1.9 0.9 –0.3 External Sector (percent of GDP, unless otherwise specified) Current Account Balance –17.1 –20.5 –22.9 –24.3 –22.0 –9.3 –12.5 –20.6 –14.0 Trade balance –22.9 –23.7 –24.8 –24.8 –25.1 –20.3 –31.0 –46.8 –41.4 o/w Export (GNFS) 39.7 37.3 36.1 35.7 35.7 28.2 44.9 61.3 68.3 Exports of goods 8.0 7.7 7.6 7.0 9.4 12.9 20.1 21.4 22.3 Exports of services 31.7 29.6 28.5 28.7 26.3 15.3 24.7 39.9 46.1 o/w Import (GNFS) 62.6 61.0 60.9 60.5 60.8 48.5 75.9 108.1 109.8 Imports of goods 35.2 35.1 34.8 34.4 35.3 33.4 55.4 79.2 76.1 Imports of services 27.4 25.9 26.1 26.1 25.5 15.1 20.5 28.9 33.7 Factor services and transfers 5.8 3.2 1.9 0.5 3.0 11.0 18.5 26.2 27.5 o/w Net remittance inflows 7.2 6.7 5.2 4.2 6.1 11.9 17.8 24.0 25.9 (continued on next page) Outlook and Risks 19 TABLE 1 • Selected Economic Indicators (2015–2023) (continued) 2015 2016 2017 2018 2019 2020 2021 Est. 2022 2023 Proj. (annual percentage change, unless otherwise specified) Total Public Debt Total debt stock (US$ million)b 70,315 74,959 79,530 85,139 88,900 56,813 39,903 35,047 32,948 Debt-to-GDP ratio (percent) 140.8 146.6 150.0 155.1 172.3 179.2 172.5 162.6 183.5 Memorandum Items Nominal GDP (LBP billion) 75,268 77,105 79,939 82,764 80,196 116,954 271,916 588,617 1,509,308 Exchange rate, average 1,508 1,508 1,508 1,508 1,554 3,688 11,755 27,309 84,068 (LBP/US$) Nominal GDP (US$ million)b 49,929 51,147 53,028 54,902 51,606 31,712 23,132 21,554 17,953 a We base our per-capita calculation 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 We use the WB-AER to calculate the total debt stock and nominal GDP in US$ million for 2019 onwards. 20 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION SPECIAL FOCUS: GAUGING THE SIZE OF THE CASH ECONOMY IN LEBANON A complete loss of confidence in an impaired gradually replace the banking sector. Indeed, the banking sector has precipitated a rapid shift bulk of financial transactions are settled in cash and towards hard currency cash transactions. lines of credit offered by the banking sector are fully This Special Focus offers estimates of the size of cash-collateralized. the cash economy over the years 2020 to 2022. Sizing the cash economy is essential to The US$ cash economy is defined as total US$ understanding the evolving nature of transactions cash in circulation and reflects, for the most part, and assessing the potential implications of a per- legal transactions in a highly dollarized economy. vasive cash economy on the conduct of fiscal and The analysis indicates that the cash economy has monetary policy. A growing cash economy implies increased in size from 26.2 percent in 2021 to 45.7 that fiscal policy is less potent. On the one hand, a percent of GDP in 2022. The bulk of the increase pervasive cash economy would be detrimental for in the size of the cash economy in 2022 (vis-à-vis tax buoyancy and effort. On the other hand, the cash 2021) can be ascribed to a slowdown in capital economy creates incentives for tax avoidance. Further, flight and a decrease in GDP in US$ - a denominator the prevalence of cash transactions complicates the effect. In the absence of adequate reforms and crisis conduct of monetary policy given that the conduit for resolution measures, a growing cash economy is a maintaining a nominal anchor and exchange rate sta- major impediment to Lebanon’s economic recovery, bility is the banking sector. Because the cash economy as it has adverse implications on conducting fiscal replaces banking transactions, monetary policy will and monetary policy, significantly heightens the also become less effective. risks of money laundering, increases informality, and The root cause of a pervasive cash economy facilitates tax evasion. is the loss of confidence in the insolvent banking sector. Unlike other countries, where cash transactions are mostly driven by tax avoidance (or in which cash Background and Rationale may have originated from illegal activities), the cash economy in Lebanon reflects a loss of confidence in an In the wake of Lebanon’s unprecedented insolvent banking sector. This reality has implications on financial crisis, a cash economy has come to measuring the size of the cash economy, as contrary to 21 other countries, cash transactions are part and parcel of Prior to 2020, the difference between GDP both illicit and informal activities as well as the majority from the expenditures side and GNDI published by of transactions in the formal (i.e., legal) economy. Central Administration of Statistics (CAS), peaked at US$2.8 billion in 2015.28 In 2020, the difference between GNDI and GDP stood at US$4.5 billion. The Measuring the Size of the Cash size of the cash economy is estimated as the difference Economy between GNDI and GDP in both years. Following the indirect approach, this provides a lower bound for the The US$ cash economy is defined as total US$ size of the cash economy in 2020. cash in circulation. For the period 2020 to 2022, the Owing to the lack of national accounts and US$ cash in circulation (a flow variable) is estimated. other data that can be helpful in estimating the In that sense, the cash economy in Lebanon refers size of the cash economy in 2021 and 2022, the to, for the most part, legal transactions occurring in a methodology of Pickhardt and Sarda (2012),29 which highly dollarized economy. the authors propound to circumvent the difficulties Empirical methodologies to estimate the associated with estimating the size of the cash economy size of the legal cash economy can be classified econometrically, is adapted to Lebanon’s unique case.30 into direct and indirect approaches (Medina and For 2021–2022, measuring the size of Schneider, 2018; Schneider and Buehn, 2018).27 The the US$ cash economy requires identification indirect approaches proxy for the size of the cash and accounting for the different sources of cash economy using the discrepancy between national in US$. Six sources of US$ cash in circulation are expenditures and income as well as the difference identified. These are: (i) withdrawals of pre-crisis between the official and actual labor forces. In addi- foreign currency denominated deposits, and BdL tion, the transaction, currency demand and multiple foreign exchange (FX) interventions from remaining indicators, multiple causes approaches offer an indirect reserves, including through the Sayrafa platform, as method to measure the size of the cash economy. The dictated by various BdL circulars; (ii) US$ remittances direct approaches rely on surveys of company man- from abroad; (iii) US$ cash hoarded at homes since agers and labor markets to gauge the size of the cash the onset of the financial crisis; (iv) US$ cash entering economy. The data limitations in Lebanon constrain the via official and unofficial entry points; (v) humanitarian use of the econometric techniques that may be useful to gauge the size of the cash economy. Nonetheless, the discrepancy between 27 Medina, L., & Schneider, F., (2018). Shadow economies the income and expenditure sides of the national around the world: What did we learn over the last 20 accounts can be used to establish a lower bound years?, IMF working paper, WP/18/17, Washington DC. on the size of the legal cash economy in Lebanon Schneider, F., & Buehn, A. (2018). Shadow economy: for 2020: Estimation methods, problems, results and open questions. Open Economics, 1(1), 1–29. 28 More specifically, the difference between GNDI and GDP Starting from the identities of the national accounts, stood at US$ 1.38, 1.78, 1.63, 1, 0.25 and 1.56 billion Gross National Income (GNI) is: in 2013, 2014, 2016, 2017, 2018 and 2019, respectively. 29 Pickhardt, M., & Sardà, J. (2011). Cash, hoarding and GNI = GDP + NFI the underground economy, Discussion Paper No. 56, Centrum für angewandte Wirtschaftsforschung Münster where NFI is net factor income from abroad. Gross (CAWM), Universität Münster. 30 Pickhardt and Sarda (2012) argue that their proposed National Disposable Income (GNDI) is: method accounts for cash hoarding which may arise because of “fundamental distrust in the banking system”. GNDI = GNI + TR, As such, their approach would be the most relevant to where TR are net transfers from abroad. Lebanon. 22 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION and development cash assistance provided by issuance of circular 158 in 2021.31 This amounts international organizations (including to refugee com- to US$ cash withdrawals of US$288 million.32,33 munities); and (vi) post-crisis bank deposits in US$, i.e The latter figure is netted out from the net-of- “fresh” US$ deposits that are not subject to the bank- loans cumulative decrease in deposits over the imposed informal capital controls (i.e., restrictions on period July to December 2021 and a discount withdrawals and international transfers.); fresh US$ rate of 30 percent is applied to the balance,34 deposits mostly consist of salaries and international which effectively is assumed to be converted into transfers that are assumed, for the most part, to be US$ cash via discounted cheques. Further, the accessible quickly and withdrawn by depositors. average discount rate of 30 percent is applied Gauging the size of the cash economy in to net-of-loans deposits for the period January to Lebanon for 2021-2022 presents several chal- June 2021. lenges. First, data on the exceptional cash withdrawals 4. Under the assumption that the same number of in foreign currency since the issuance of basic circular accounts benefited from the provisions of circular 158 on June 8, 2021, are not available. Second, while 158 in 2022 as in 2021; US$ cash withdrawals the total volume of transactions on Sayrafa is available, related to circular 158 are therefore estimated more granular data on buy and sell transactions are at US$576 million in 2022. A discount rate of not. Third, estimates of cash hoarding at homes or cash 20 percent is applied to the balance of the net- being brought in by individuals via official or unofficial of-loans deposits, effectively assuming that they border crossings are highly speculative and subject to are converted into US$ cash via discounted considerable uncertainty. cheques.35 Several assumptions are required to esti- 5. Remittances are assumed to flow directly into the mate the size of the cash economy in 2021 and cash economy (and are therefore not saved). As 2022. These include: mentioned earlier, the unprecedented financial crisis has made Lebanon even more reliant on 1. Currency in circulation is exchanged into remittances to finance household consumption and US$ at the prevailing banknote rate (BNR) for precautionary demand motives. As the national currency has lost its function as a store of 31 https://www.bdl.gov.lb/news/index/8/251 and https:// value (and, to a certain extent, as a medium of www.bdl.gov.lb/files/circulars/158_en.pdf. exchange), it is assumed that, in an economy 32 Circular 158, issued on June 8, 2021, allows depositors to withdraw US$800 on a monthly basis split between undergoing rapid dollarization, cash in LBP is US$400 in US$ banknotes and US$400 in LBP at an immediately exchanged for US$ to preserve exchange rate of 12,000 LBP/US$, which was amended purchasing power. to be 15,000 LBP/US$ as of February 1st, 2023. (Link) 2. The substantial (non-cash) deleveraging in the 33 Those withdrawals are assumed to have taken place banking sector is accounted for by netting out between July and December of 2021. The starting date foreign currency claims/loans (both resident and of July for the withdrawals supposes that depositors require three weeks to comply with the stipulations non-resident) from foreign currency deposits. of circular 158 and become eligible for withdrawals 3. The remainder (i.e., deposits that are net of according to it. The withdrawals in US$ cash according loans) of the foreign currency deposits are to circular 158 is also assumed to only apply to resident either withdrawn according to circular 158 and deposits while non-resident deposits are converted into channeled to the cash economy or withdrawn US$ cash via discounted cheques. through discounted cheques and channeled to 34 The average cheque discount rate for 2021 is 30 percent (source: lebaenselira.org). the cash economy. More specifically, according 35 It should be noted that the LBP portion of the withdrawals to information provided by the Banque du according to circular 158, and all withdrawals according Liban (BdL), 120,000 accounts benefitted from to circular 151 would be reflected in currency in circular 158 in the first three months following the circulation. Special Focus: Gauging the Size of the Cash Economy in Lebanon 23 the provision of necessities. Net remittances (i.e., US$ cash economy for that year.37 Although remittance inflows minus outflows) obtained from admittedly an imperfect proxy for capital flows, BdL’s data on the balance of payments is included. the existing studies (IMF, 2019; Bank of Iceland, 6. The portion of the reserves that is injected into the 2005)38 suggest that an increase in net errors and economy is computed as the change in reserves omissions is indicative of capital outflows. that are net of essential subsidies (i.e., wheat, fuel and chronic medication). That is, for both years Building on these assumptions, the size (2021 and 2022), the portion of reserves that is of the cash economy for both 2021 and 2022 is used to import essential goods is netted out, as estimated as: these funds are not channeled to the cash economy. As no granular data on Sayrafa transactions exist, t =0 DCt + St =0 Dt + REMT + St =0 DRt + HAT + TST – CFT, ST T T it is assumed that the net reserves includes both FX interventions of BdL in the market and via the where Ct is currency in circulation in US$ in month t, Sayrafa platform. Withdrawals in cash US$ are computed by dividing currency in circulation by the also netted out in accordance with circular 158 BNR, C0 is currency in circulation in US$ in the base from BdL’s remaining reserves (article 5 of circular period, Dt are net-of-loans foreign currency (resident 158) to avoid double counting. and non-resident) deposits that are converted into 7. Non-Lebanese tourists bring in cash that must US$39 and REMT are net remittances at year end, Rt be accounted for as part of the cash economy. and R0 are, respectively, net-of-essential subsidies Lebanese tourists are assumed to be withdrawing foreign currency reserves at the BdL in month t and from their bank accounts (or exchanging dollars, the base period, HAT is humanitarian assistance in which would appear in currency in circulation). cash US$ at year end, CFT denotes capital flight at Spending of non-Lebanese tourists is measured by multiplying non-Lebanese tourist spending in 2020 by the year-on-year growth in tourist 36 The estimates are derived from various humanitarian spending as obtained from BLOMINVEST’s and development programs across different response BRITE database. frameworks in Lebanon, namely: Lebanon Crisis 8. In principle, the portion of “fresh” US$ deposits Response Plan (LCRP), 3RF, the UN Emergency (i.e., that are not subject to the ad-hoc capital Response Plan (ERP), and cash programs under other control imposed by the banks or post-2019 frameworks. The estimates also include cash assistance provided to Lebanese households as part of the World US$ deposits) which is withdrawn must be Bank financed Emergency Social Safety Net Program accounted for. However, the data provided by (ESSN) for 2022. The estimates only include those BdL does not include a delineation between pre- programs disbursing cash assistance in US$; cash crisis and fresh US$ deposits. Further, the size assistance disbursed in LBP is assumed to be included of fresh deposits making their way into the cash in currency in circulation. economy is likely to be small relative to the above- 37 Capital flight in 2022 is likely to be negligible. Our method for establishing a lower bound for 2020 accounts for mentioned sources. Therefore, the latter are not capital outflows. included in the computations. 38 Bank of Iceland (2005). Monetary Bulletin, 2005–3. 9. Humanitarian and development cash assistance A Quarterly Publication of the Central Bank of Iceland. disbursed in US$ to refugee communities and International Monetary Fund (2019). Analysis of net errors Lebanese poor households are estimated at and omissions. Thirty-Second Meeting of the IMF Committee US$127.8 million in 2021 and US$340 million in on Balance of Payments Statistics, Thimphu, Bhutan. 39 The dollarization rate of deposits exceeded 80 and 2022.36 77 percent in 2021 and 2022, respectively. Hence, foreign 10. Net errors and omissions of the balance of currency deposits account for the bulk of the deposit payments for 2021 are assumed to be indicative base. It is assumed that the withdrawals in local currency of capital flight and are thus deducted from the deposits will be reflected in currency in circulation. 24 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION TABLE 2 • Breakdown of the Components of the Cash Economy in 2021 and 2022 2021 2022 US$ Cash from Deposit Withdrawals (US$ Billion) Resident Deposits Minus Claims in Foreign Currency 0.734 0.634 Non-Resident Deposits Minus Claims in Foreign Currency 0.523 0.185 1.261 0.819 Other Sources of US$ Cash (US$ Billion) Currency In Circulation 0.926 0.809 Net Remittances 4.25 4.53 Change In Reserves Net of Essential Imports 1.81 2.18 Tourist Spending 1.46 1.18 Humanitarian Assistance 0.12 0.34 Capital Flight (3.77) 0 Total (US$ billion) 6.06 9.86 TABLE 3 • Size of the Cash Economy Year Estimated Size of the Cash Economy Percent of GDP 2020 US$ 4.5 billion (lower bound) 14.2% 2021 US$ 6.06 billion 26.2% 2022 US$ 9.86 billion 45.7% year end and TST is an estimate of non-Lebanese the cash economy is larger in 2022 than in 2021. tourist spending at year end. The base period for the Based on the nominal GDP projections, the size of the computations (t=0) is December of the previous year. cash economy stood at 26.2 percent and 45.7 percent Abstracting from the cash inflows via official and of GDP in 2021 and 2022, respectively. The bulk of unofficial points of entry, the latter computation provides the increase in the size of the cash economy in 2022 an approximation for the size of the cash economy. (vis-à-vis 2021) can be ascribed to a slowdown in Table 2 provides a detailed breakdown of capital flight. In fact, BoP data for H1-2022 show that, the components of the cash economy for 2021 for the very first time since the onset of the crisis, net and 2022. errors and omissions are close to zero. Therefore, the Table 3 provides a summary of the esti- assumption that most of the capital flight occurred mates size of the economy in 2020, 2021 and in 2020 and 2021 is plausible, particularly that 2022 2022 in nominal US$ terms and as a percent of generally witnessed tighter informal controls. The size GDP in US$. of the cash economy relative to GDP is also noticeably larger in 2022 than 2021 owing to the decrease in GDP—a denominator effect. Conclusion It is important to underscore that the cash economy is not a net contributor to growth. In fact, The cash economy increased in size in 2021 and transactions in the cash economy are reflected in 2022, albeit the year-on-year increase in the size of GDP. That is, while the nature of settling transactions Special Focus: Gauging the Size of the Cash Economy in Lebanon 25 did change since the onset of the crisis, this change and will likely compound longstanding weaknesses does not prop up economic growth. in Lebanon’s tax code as they pertain to property, The prevalence of cash transactions capital gains and income taxes (IMF, 2023).41 Cash significantly heightens the risk of money laun- transactions exacerbate the distortions in the lump dering, increases informality, and creates space sum regime for business profits and facilitate tax eva- for further tax evasion. An increasing reliance on sion. This, in turn, erodes the tax base and diminishes cash transactions threatens to completely reverse tax buoyancy, effort and compliance. the progress that Lebanon made towards enhancing its financial integrity by instituting robust anti-money laundering controls in its commercial banking sector (IMF, 2017) before the current crisis.40 Cash econo- 40 International Monetary Fund (2017). Lebanon: Financial System Stability Assessment, IMF Country Report No. mies make it easier to conceal the source of funds for 17/21, Washington DC. illicit and illegal activities. Cash economies also incen- 41 International Monetary Fund (2023). Lebanon: Technical tivize informality by small and micro businesses, lower Assistance on Putting Tax Policy Back on Track, IMF productivity due to the absence of economies of scale Country Report No. 23/8, Washington DC. 26 LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION ANNEX I. FEW WINNERS, MANY LOSERS 27 28 Equitable & Comprehensive Macroeconomic Stabilization Plan Pillars Expected Outcome Substitute Ongoing Crisis Resolution Measures Winners and Losers I. Exchange Rate and Monetary Policy New Exchange Rate & Monetary Framework: 1. Preservation of BDL remaining usable 1. Multiple Exchange Rate system put in place: Winners: Financial sector that benefits from lower than market value Gradual free floating of the exchange rate, FX reserves A. Creates arbtirage opportunities & encourages withdrawal exchange rates of pre-crisis deposits-regressive unified exchange rate & a new monetary speculative activities deleveraging schemes-to dissolve financial losses policy with clear objectives of reducing B. Prompts huge distortions and losses inflation. C. Depletes remaining FX reserves as BDL intervenes unsustainably to prop up the currency 2. Correction of real exchange rate 2. Creation of a Sayrafa Platform managed by BDL as main Exchange Rate Bureaus, money exchangers & speculators misalignment vehicle of intervention in the FX market: No granular data (especially those with inside information on monetary policy) on buy & sell transactions, and exchange rate setting- platform became a vehicle for arbitrage profits and public wage subsidization. 3. Current Account Deficit on a structurally 3. Distortionary & regressive subsidy scheme for crucial Smugglers, business & individuals with access to subsidized sustainable path imports (2020–2021)* exchange rates earning higher profits Heavily Indebted businesses & individuals who repaid their FX loans at the former pegged exchange rate (substantive decrease in the real value of their debt) 4. Medium-term improvement of Losers: Bussinesses with lack of access to credit; Industries (due competitiveness, boosts production & to hindered competitiveness); Small and medium sized Exports depositors. The bulk of Lebanon’s residents, as they grapple with a multiple exchange rate system Adoption of Formal Capital Controls A vehicle that would have limited capital Informal Capital Controls, prompting unequal treatment Winners: Individuals, elites, corporations, shareholders with influence outflows, and sustained foreign currency across depositors and select individuals/entities and power, who were able to engage in capital flight in the country in defense of the exchange ability to engage in capital flight. LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION rate, and in preservation of Central Bank Losers: The bulk of the depositors-the more capital flight, the less FX reserves. FX resources there is to protect small and medium sized depositors Full Assessment of the financial position of BDL Restores the Central Banks capital, Political decision to hinder audits at BDL resulting in the Winners: Powerful political and economic elites with vested interests in and ensures ability to conduct effective lack of transparency in financial sector losses in BDL prohibiting a comprehensive bank restructuring strategy, and monetary policy moving forward. balance sheet BdL restructuring/governance reform. Governance Reforms in BDL-strengthening financial Strengthening AML/CFT Frameworks to No reform-governing through ad-hoc BDL circulars. Losers: All depositors, and the majority of the local labor force sector supervision and control (including AML/ enhance transparency & accountability struggling with daily erosion of purchasing power as a result CFT regime) of an ensuing inflation-depreciation spiral. SMEs, businesses adversely affected by the lack of capital markets and financial stability. (continued on next page) (continued) Equitable & Comprehensive Macroeconomic Stabilization Plan Pillars Expected Outcome Substitute Ongoing Crisis Resolution Measures Winners and Losers Enhance Macroprudential Policy and Regulatory Delineate financial sector regulatory The main financial regulatory oversight responsibilities Oversight in the Financial Sector oversight responsibilities and segregate, remain with the Banking Control Comission, the to the extent possible, regulatory oversight Special Investigation Committee and the Capital from the conduct of monetary policy-to Markets Authority-all three are overseeen by BdL’s foster financial stability and the use of governor. capital markets. II. Public Debt Sustainability Implementation of a Public Debt Restructuring Restores debt sustainability & Instills Unstructured default on foreign debt (eurobonds); Commercial Winners: Commercial banks who sold their eurobond portfolios, vulture Strategy (for both domestic debt (treasury bills) & Credibility banks who held the majority of the eurobond porfolio, funds abroad. foreign debt (eurobonds, that requires negotiations sold off holdings to foreign investors & vulture with foreign investors) funds giving foreign creditors more leverage in the restructuring discussions as they effectively hold a blocking stake and may file potential lawsuits against the Lebanese state that may take years to resolve.** Lebanon reaccesses international financial Continued payments of interest on domestic debt (treasury Losers: Rest of the population, that is subject to possible litigation, is markets in the medium-term bonds) to commmerical banks-interest payments often axed from financial markets, and is faced with zombie banks. financed through monetization. Vulnerable and Poor families disproportionally affected as monetization of debt servicing is inflationary, and inflation is a regressive tax. III. Financial Sector Comprehensive Restructuring Adoption and Implementation of a Bank restructuring Restoration of banking sector solvency, Socializing of Financial Losses: Instilling a pre-crisis Winners: 1. Financial sector that benefits from lower than market value strategy that: (i) addresses upfront the balance that is pivotal for recovery and sustainable deposit lirafication scheme (financial sector regressive withdrawal exchange rates of pre-crisis deposits-to dissolve sheet impairments & financial losses, (ii) economic growth deleveraging) that has disproportionally burdened financial losses restores liquidity, and (iii) adheres to sound small and medium depositors and implied haircuts on 2. Bank Shareholders whose capital was not wiped out based global practices of bail-in solutions based on deposits reaching 80 percent. on a hierarchy of creditors (best practice) a hierarchy of creditors (starting with banks’ 3. Big Depositors, bank shareholders, and powerful elites that shareholders); Strategy to be supported by an Protection of small and medium depositors, Monetization to finance withdrawal scheme prompting an have vested interest in recourse to public assets to cover effective bank resolution framework in dollars and in cash unwavering Inflation-Depreciation Spiral (increase in (even if not viable) financial losses. currency in circulation, that has an inflationary- depreciation impact) Initiation of an externally assisted bank-by-bank Identification of financial losses per bank, Severe delay in bank by bank audits, in the context of Zombie evaluation for the 14 largest banks to inform to support mergers, acquisitions, and Banks banking sector restructuring liquidations Recapitalization of Viable Banks Inject fresh capital, bail-in solutions (continued on next page) Annex I. Few Winners, Many Losers 29 30 (continued) Equitable & Comprehensive Macroeconomic Stabilization Plan Pillars Expected Outcome Substitute Ongoing Crisis Resolution Measures Winners and Losers Limit any recourse to public assets and resources Fostering equitable burden sharing, The pending bank restructuring strategy includes the Losers: 1. Small and medium sized depositors who have endured preserving shared resources for creation of a Deposit Recovery Fund (DRF). The DRF 60–80 percent haircuts to their deposits as a result of the generations to come aims to compensate depositors by issuing bonds/ regressive deleveraging scheme. securities that will be partly financed through banks’ 2. The majority of the local labor force, pensioners, and assets (such as Central Bank Certificate of Deposits), retirees who have witnessed a severe erosion of state assets, and potential future government purchasing power as a result of the inflation-depreciation revenues. spiral. 3. Generations of Lebanese citizens to come, who may Governance Reforms: strengthening the banking Maintain a sound banking system and Lack of any governance reforms, and changes to bank be potentially rid of public goods and assets to recover supervision, resolution and deposit insurance restore confidence in it. supervision governance. financial losses. frameworks 4. SMEs, businesses, corporations,individuals who suffer from Reformed bank secrecy law to bring it in line with Fight corruption and remove impediments Passing of amendments to the banking secrecy law by lack of financing in the banking sector (zombie banks) international standards to effective banking sector restructuring parliament in October 2022—amendments fell short and supervision, tax administration, as well of international standards, and several shortcomings as detection and investigation of financial still need to be overcome to ensure that the banking crimes, and asset recovery. restructuring strategy has necessary safeguards. IV. Fiscal Reform Timely ratification of consecutive government A. Preservation of government revenues to 1. Near complete collapse of public finances, resulting in an Winners: 1. Private providers of public services (private generators for budgets with immediate corrective revenue and provide basic public services, through acute collapse of public service provision. example) spending measures correct valuation of exchange rate in all 2. Ad-hoc and piecemeal measures on both the Expenditure 2. Political elite providing basic services in their areas revenue components & tax valuations and revenue side of government budget: strengthening clientelist networks B. Preservation of public sector human capital, a. Financing fiscal deficit through monetization and avoiding state atrophy through b. Ad-hoc temporary social assistance to provision of immediate and sustainable civil servants (also partly financed through financial support to crucial civil monetization) that fail to protect against erosion servants. of purchasing power due to rampant inflation c. Misvaluation of VAT, customs, excises, and lack of correction for inflation in specific excises LEBANON ECONOMIC MONITOR: THE NORMALIZATION OF CRISIS IS NO ROAD FOR STABILIZATION resulting in losses to revenues equivalent to 5.6 percent of GDP in 2022 (IMF, 2023).*** Medium-term Fiscal Strategy: Fiscal Consolidation Achieves equitable economic adjustment and Losers: 1. Civil servants, pensioners, retirees, whose wages have Plan burden-sharing (creates fiscal space for been eaten up by inflation. additional social and infrastructure 2. The entirety of the Lebanese population (and consecutive spending while ensuring fiscal generations) as a result of state atrophy and collapse of sustainability.) public services. Improves efficiency and effectiveness of public expenditure and identifies possible avenues for spending prioritization and streamlining. (continued on next page) (continued) Equitable & Comprehensive Macroeconomic Stabilization Plan Pillars Expected Outcome Substitute Ongoing Crisis Resolution Measures Winners and Losers Expenditures Side-Medium Term Reforms: • Potential savings identified through Public Sector reform, consistent with a. Public Sector Census to target wage bill the effective delivery of Public services reduction • Complete review of pension and b. Pension Reform retirement schemes for civil servants c. Tackling NSSF Arrears and private employees d. Reforming Transfers to SOEs • Developing rules and procedures for e. Creating fiscal space for Social Safety new procurement methods Nets f. Support public procurement Revenues Side-Medium Term Reforms: Moving towards a progressive tax system that offsets income and wealth inequality a. Broadening Tax Base b. Improving tax collection c. Abolishing tax exemptions (including property taxation) benefitting well-off individuals and corporations d. Reforming income tax V. Governance & Sector Specific Reforms (top two reforms) Electricity Sector Reform Restores electricity production, distribution, Rise of a ‘generator economy’ that is costly, pollutative, Winners: A largely unregulated private generator industry amassing and tarrif collection. Electricity sector no and unregulated. substantive profits: the supply-demand gap allowed diesel longer a drag on Lebanon’s public finances. generator owners to expand their subscription-based Supports transition to renewable energy businesses, creating a complex informal economy that has alternatives. been resistant to regulations and government oversight. Losers: • Poor and vulnerable households rid of very basic access to electricity, and unable to afford private generators. • Most of Lebanon’s residents grappling with skyhigh energy bills Independence of the Judiciary Protection of public funds, holding corrupt Consistent undermining of the principle of the Winners: Powerful Entities and individuals evading fair trials officials, organizations, and entities to seperation of powers (between the judiciary and account, and preserving citizen rights. executive branches) resulting in blocked lawsuits Losers: The entirety of the Lebanese population whose rights are and cementing a culture of impunity and lack of undermined by the lack of independence of the judiciary. accountability remains far from independent. a Subsidy Reform Note. b In 2019, out of $86 billion in government debt, only between 5–11% of total public debt was held by foreign entities; thus, domestic debt restructuring with commercial banks and BDL was a viable option prior to the Eurobond sell-off to foreign investors. c Technical Assistance on Putting Tax Policy Back on Track, IMF. Annex I. Few Winners, Many Losers 31 1818 H Street, NW Washington, DC 20433