Has the Depreciation in the Lebanese Exchange Rate Led to Import Substitution and/or Export Promotion?

The Lebanese crisis has actually ‘scored a trifecta’ of crises, in that it combined an exchange rate crisis with debt and banking crises. The exchange rate crisis has been very severe, as the country saw its exchange rate depreciates by a whopping 5803.8% between August 2019 and August 2023. What is interesting is that concomitant to that exchange rate depreciations, prices have increased by a significant 4378.3% during the same period. But the fact that prices have deteriorated by less than the exchange rate depreciation should have given Lebanese producers a competitive edge or a cost advantage to expand exports and/or substitute for imports. To what extend has that happened? We intend to investigate this question in this short Economic Digest

Billion $201820192020202120222023*
FD or TS74.970.135.834.140.932.2
Percent %

*Projected; Source: GDP figures from IMF and trade figures from BDL


We start from the simple but fundamental beginning, which is the GDP identity:

GDP = C + I + X – M or GDP + M = C + I + X or TS = FD

GDP is of course Gross Domestic Product which measures domestic production and is equal to private and public consumption C plus private and public investment I plus exports X minus imports M. Alternatively, GDP + M is equal to total supply TS, since it reflects the sum of domestic and foreign output; and C + I + X is equal to final demand FD, since it reflects the sum of demand by locals and foreigners. And in equilibrium, TS and FD are of course equal.

Given the above, to measure import substitution, we have to look at the ratio of imports to total supply or M/TS: if this ratio falls, then imports would have declined in relation to output supplied and import substitution would have taken place; and vice versa. And as we can see from the table above, the ratio has in fact increased throughout the crisis years, rising from 26.7% in 2018 to 49.7% in 2023. And the reason is that imports have fallen (or even stayed the same!) by far less than output supplied; and this indicates the absence of any import substitution, even the opposite of it!

Two caveats are in order in relation to the result above. First, the needed drop in imports could have been forestalled by higher imported raw material prices during the period (for example, inelastic goods such as oil and gas) or by the higher preemptive buying of imports before the imposition of higher customs duties, as both would inflate the dollar value of imports. Second, the aggregate data could have hidden some import substitution taking place at the sectoral or sub-sectoral level (for example, in consumer goods and light manufacturing). However, and notwithstanding these two caveats, the fact remains that at the aggregate level the country is still as import dependent as before the crisis, if not more.

As to export promotion, we have to look at the ratio of exports to final demand or X/FD: if this ratio rises, then exports would have increased in relation to total demand and export promotion would have taken place; and vice versa. And as the table above shows, that is actually what has mostly happened: the ratio X/FD rose from 4% in 2018 to 11.2% in 2023 (with only a drop to 8.6% in 2022). And this can be explained by the fact that exports have held steady or even increased, despite the huge decline in total or final demand – a clear indication of export promotion or advancement. Additionally, note that the trade data used here covers goods only and excludes service; so, if services are included (for example, tourism and consulting), then export intensity would have been larger and the impact on the ratio X/FD would have been higher.

To conclude, the results from the aggregate ratios show that the country hasn’t taken advantage of its weaker currency to substitute for imports, though some import substitution could have happened at the sectoral level, but unfortunately the lack of sectoral data precludes the possibility of showing that. Alternatively, the results reveal that export promotion has actually taken place, though again we can’t tell whether new sectors or subsectors have been responsible for that happening. The tentative conclusion that can be drawn from the discussion is that weaker exchange rates haven’t yet engendered a structural transformation of the economy or haven’t enhanced sufficiently the competitive domains of the country. But, in reality, that is hardly surprising, as such achievements depend more importantly on a stable macroeconomic environment, a productive investment climate, and a good governance framework – factors that, sadly, are still missing for the Lebanese economy!


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