The month of January 2021 witnessed a further deterioration of the economic conditions in Lebanon. Besides the usual suspects of exchange rate depreciations and liquidity constraints etc.., the country witnessed total lockdowns due to the worsening of the Corona epidemic. It is no surprise then that the BLOM Lebanon PMI fell to 41 in January 2021, signaling severe drops in output and economic activity, and continuing the trend observed in 2020 where GDP is expected to have fallen by 20% or higher.
On the monetary and exchange rate fronts, the preference for liquidity in the face of exchange rate depreciation continues, as currency in circulation increased to $21.5 billion by mid-January 2021 while it stood at $7 billion in the same period last year. Also, the dearth in capital inflows coupled with recurrent demands for foreign currency drove the LBP exchange rate vis a vis the USD to about 9,000 in the parallel market.
As to the external sector, the drain in BDL’s foreign assets continues, as they have reached $23.7 billion by mid-January 2021, close to $14 billion less than the same period last year. This loss of foreign reserves could be explained by covering for the (subsidized) trade deficits and by limited capital outflows. On the bright side, however, remittances into the country stayed at more than $7 billion in 2020, providing a window of relief to the FX market and the economy as a whole.
The fiscal side remains the most dormant in the economy, except for the submission by the MOF of a budget draft for the year 2021. The draft is labelled a “social budget” because it devotes close to $500 million to social spending, while envisioning a deficit of about $3 billion. It recommends the need for fiscal reforms, capital controls, and debt restructuring etc..; but it is not clear whether it will be approved by parliament because – among other things — it is prepared by a government that has officially resigned. In terms of debt levels, new data for November 2020 show total debt to have risen to $95.6 billion, 62% of which is domestic and 38% is foreign, with arrears due to the default on foreign debt at $4.6 billion.
Lastly, going forward, the latest WB report on Lebanon predicts GDP to grow at -13.2% in 2021 and to reach $26.2 billion, while inflation will be around 40%. The budget deficit will be 4.6% of GDP and the debt to GDP ratio will be 211.7%. As to the current account deficit, it will be 8% with the exchange rate against the USD oscillating between 10,000 (good scenario) and 15,000 (bad scenario). The title of the report is most interesting, called “The Deliberate Depression” and indicating that the country is doing it to itself by not taking any corrective reform action to avert the depression and the deepening crisis!
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