It is widely hoped that Lebanon will receive financial assistance on concessional terms for recovery and reconstruction purposes. Recent, perhaps conservative, estimates put the assistance at $12.5 billion . These would come from multilateral financial institutions and official donors: $ 3 billion form the IMF, $3 billion from the World Bank, $4.5 billion from the GCC, and $2 billion from the EU; and they would be spent over 5 years, from end 2024 to end 2029.
In the meantime, despite the stability in the Lebanese exchange rate against the USD since July 2023, inflation in Lebanon hasn’t subsided. In 2024, the annual inflation rate stood at 18%. If we consider that world ‘imported’ inflation was 6% in 2024, then the domestic component of inflation was 12%. But given that during that year the USD appreciated against the Euro by 6%, and given that a third of Lebanon’s imports are from Europe then, assuming a prefect ‘pass through’, world ‘imported inflation should fall by 2% to 4%. Hence, Lebanon’s adjusted domestic inflation should be 14%. Of course, it is relatively high, and it was primarily caused by war and security issues, bottlenecks in air and land freight, and perhaps expectations of a weaker exchange rate, during that troubled year – in other words, it was mostly due to factors on the supply side.
But now, there could be potential concerns that inflation could be fueled by factors on the demand side, if and when assistance comes and is spent.
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Lebanon – If and When Financial Assistance is Received and Spent, Beware Accelerating Inflation!