Lebanon’s private sector faced its sharpest decline since December 2021 in September, with the Purchasing Managers’ Index (PMI) dropping to 47.0 from 47.9 in August 2024. This marks the second consecutive month of decline, primarily due to the escalating Israeli-Hezbollah conflict, which has severely impacted economic activity. Output fell to its lowest level since December 2021, while new orders declined at the fastest pace since January 2022. Additionally, new export orders are experiencing their steepest drop in over three-and-a-half years. This downturn is largely due to international clients avoiding requests from conflict-affected areas because of rising shipping costs, while domestic demand remains limited to essential goods during wartime. The private sector remains pessimistic, anticipating no quick resolution to the conflict.
That said, the activity at Rafic Hariri International Airport has decreased in August 2024 for the 8th consecutive month due to the prolonged conflicts on the Lebanese southern border. As such, the cumulative count of passengers at Beirut International airport in 2024 dropped by 11.83% annually, reaching 4,412,434 passengers by August 2024. The breakdown of the airport’s statistics revealed that total arrivals declined by 12.34% year-on-year (YOY) to stand at 2,204,144 passengers by August 2024. Likewise, number of departing passengers decreased by 11.13% on yearly basis to reach 2,204,522 passengers by August 2024. Moreover, transit passengers dropped from 9,665 passengers in August 2023 to 3,768 passengers in August 2024. Similarly, the monthly statistics showed a decline of 11.43% of Airport Passengers from July to August 2024. In more details, arrivals dropped by 40.11% to record 246,344 passengers, transits fell by 51.14% to stand at 344 passengers, in contrast to an increase in Departures by 23.45% to 418,449 passengers by August 2024.
Additionally, total container activity including transshipment (TEU+TS) decreased by a yearly 6.14% to stand at 444,257 twenty-foot equivalent unit (TEU) for the month of July 2024, with transshipment activity (TS) lessened 21.49% YOY to 128,796 TEU, and container activity (TEU) rose by 2% on a yearly basis to 315,461 TEU by July 2024. On a monthly basis, total container activity decreased by 11.22% to stand at 72,298 twenty-foot equivalent units (TEU). In more details, container activity (TEU) increased by 23.26% for the month of July 2024 compared to same month last year to reach 53,767 TEU while transshipment activity (TS) dropped by 50.99% to 18,531 TEU for the month of July 2024, compared to 37,812 TEU in July 2023.
In addition, according to the Central Administration of Statistics (CAS), the Consumer Price Index (CPI), representing the evolution of goods and services’ prices consumed by households, revealed that Lebanon’s annual inflation rate fell to 35% in August 2024, from 35.37% in July 2024, recording its lowest level since March 2020. The decrease resulted from the increase of dollarization rates by businesses and to the stability of the exchange rate especially since August 2023. Meanwhile, the continued escalating political and military tensions in the Middle East and its effect on Red Sea sea-shipping traffic threatens to disrupt supply chains, which will increase shipping costs, and consequently lead to an increase in inflation. In details, it is worthwhile to note that Education (6.6% of CPI) increased by 587.67% YOY due to the dollarization of education fees and miscellaneous goods & services (4.1% of CPI) rose by 43.84% YOY during the same period.
According to the balance sheet of Banque du Liban (BDL), the central bank’s total assets declined by 9.44% annually, to reach $94.8B by the first half of September 2024, amid adopting the 89,500 LBP/USD official rate by BDL since February 1st 2024. The fall was mainly due to the 97.04% year-on-year (YOY) drop in other assets, which reached $205.28M by the first half of September 2024. Furthermore, the gold account, representing 25% of BDL’s total assets, increased by 34% yearly to reach $23.7B by the first half of September 2024. Moreover, BDL’s foreign assets, consisting of 16.66% of total assets, rose by 13.3% YOY and stood at $15.79B by the first half of September 2024. Additionally, BDL holds in its foreign assets $5B in Lebanese Eurobonds; note also that foreign assets increased by $83.78M in the first two weeks of September 2024. On the liabilities front, financial sector deposits, representing 91.73% of BDL’s total liabilities, decreased by 2.06% and reached $86.96B by the first half of September 2024 compared to last year, of which more than 90% are denominated in dollars. Moreover, public sector deposits, representing 6.09% of BDL’s total liabilities, dropped by 41.11% yearly and reached $5.78B by the first half of September 2024. Lastly, currency in circulation outside of BDL, consisting of 0.68% of BDL’s total liabilities, plunged by 84.29% annually to reach $640.78M by the first half of September 2024 amid adopting the 89,500 LBP/USD official rate by BDL.
According to the data published by the Association of Lebanese Banks’ (ABL), the total number of cleared checks in the Lebanese financial system decreased remarkably from 327,135 checks by August 2023 to 138,241 checks by August 2024. However, the cumulative value of cleared checks in local currency increased from LBP 41,237B by August 2023 to LBP 54,708B by August 2024. This upsurge in value of Lebanese checks reflects a larger percentage of discounting Lebanese checks in the market. However, the cumulative value of cleared checks in foreign currency dropped from $ 2,590M by August 2023 to $950M by August 2024. Moreover, the volumes of cleared checks in Lebanese Pounds and foreign currencies witnessed substantial yearly drop of 49.62% and 83.67% respectively to settle at 125,504 and 12,737 checks, by August 2024. Accordingly, the dollarization rate of checks in terms of volume fell from 23.85% in August 2023 to 9.21% in August 2024. Notably, the number of returned checks dropped substantially by 71.32% YOY to stand at 775 checks. Moreover, the value of returned checks in foreign currency decreased by 75.79% by August 2024 to reach $39.47M; additionally, the value of returned checks in local currency decreased by 21.95% YOY to reach LBP 409B in August 2024. On a monthly basis, a total number of 3,463 fresh checks were issued in August 2024, below the previous month’s figure of 3,486.
Furthermore, according to market sources, Lebanese car market expanded by 48.01% by August 2024 and recorded 5,759 cars. On a monthly basis, 447 cars were sold in August 2024 in which European cars grasped the lion’s share with a stake of 33%, followed by Japanese and Korean cars (24% each). Lebanon’s car sector has undergone some fluctuations in the last 4 years, and sales of passenger vehicles were significantly lower than 2019 levels when cars were still being purchased through discounted checks at the beginning of the crisis. Currently, the demand for new vehicles is restricted by the absence of financing options, exacerbated by the lower purchasing power of the people.
On a different note, some developments are also worth mentioning. First, the escalating Israeli-Hezbollah conflict is poised to significantly impact Lebanon’s GDP. Research by Azar, Bolbol, and Mouradian (2020) shows that the growth rate in BDL’s Coincident Indicator (CI) is a reliable predictor of GDP growth. Historical data indicates that during the 2006 war, CI fell by 32.9%, leading to an estimated GDP contraction of 15.6% in 2024. If Lebanon’s GDP is around $20 billion in 2024, this decline translates to a loss of approximately $3.1 billion. Additionally, with a capital-output ratio of about 4, the reduction in capital stock could reach $12.4 billion. These estimates assume the current conflict will be as destructive as in 2006; however, if it proves less intense or shorter, the negative impact may be overstated. Ongoing tensions since October 2023 have already begun to affect GDP.
Second, in 2024, Lebanon still faces implications of the 2019 financial crisis, particularly regarding the pass-through effect of exchange rates on prices. The inflation rate stands at 35.4%, a decrease from the previous years of triple-digit inflation, while the exchange rate saw a depreciation level of -0.3%. Historically, the pass-through effect has varied significantly. For example, in 2022, inflation soared to 251.5%, far exceeding the pass-through effect of 164%. This discrepancy indicates that factors beyond exchange rate changes are driving inflation. Despite a slight improvement in the exchange rate this year, high operational costs and inadequate market regulation continue to pressure prices. While inflation has slowed down compared to prior years, the complex relationship between exchange rates and prices highlights the need for ongoing monitoring and intervention to foster economic stability.
Third, the MOF published its draft proposal for the 2025 Budget with a 38.7% increase on the 2024 Budget. The draft budget is designed to ‘keep business as usual’, not a transformative budget aimed at redesigning the economic scene and helping to pull the country out of its current crisis. It is expected, according to the draft budget, that the deficit will be financed from domestic loans, though it is interesting that no domestic loans were undertaken in 2024 as the budget was presumably balanced. Also interesting, is that the tax increases and higher exchange rate valuations in 2024 and 2025 have paid off in terms of higher revenues; and, in reality, this seems to be one of the most important purposes of the budget.
In conclusion, the current Purchasing Managers’ Index (PMI) reflects a troubling reality for Lebanon’s economy, as the outlook remains negative amidst intensifying war tensions and as the private sector anticipates no quick resolution to the conflict. Unfortunately, even after the conflict ends, it will take a long time for the economy to recover because many sectors have been badly damaged. Tourism will need time to bounce back as safety concerns remain, while the infrastructure has suffered significant damage that will require extensive rebuilding. Agriculture has also been affected, particularly due to the use of white phosphorus. Moreover, mass displacement creates many complicated challenges that will slow down recovery efforts. While the economy may not be the country’s main concern right now, it will inevitably become one in the future.
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