Lebanon's Economy Between a Promising Summer and the Desired Solution

In the wake of the report by the directors of the International Monetary Fund on the Lebanese economy, debate has returned to focus on the causes that brought the country and its economy to collapse, ways out of the crisis, and how to revive the national economy across all its productive and service sectors. At the same time, current economic activity, many of whose indicators, especially in trade and services, have regained their vitality, contradicts earlier economic forecasts, calling for closer scrutiny of the reality of this vitality and its potential to contribute to the recovery of the national economy and the restoration of the developmental role of its various sectors. This newfound economic vitality recalls the early 1990s and the economic conditions that prevailed then, notably the economic boom and growth that accompanied that period and encompassed most economic sectors to varying degrees. Yet that growth was akin to a bubble whose effects quickly dissipated, plunging the national economy into a tunnel of successive crises, particularly since growth did not include the productive sectors of agriculture and industry, and indeed came at their expense, as agriculture was neglected and the industrial sector did not receive the requisite care. While pegging the exchange rate from 1997 onwards stimulated foreign trade and expanded the service sector, the peg eroded the competitiveness of Lebanese industrial products not only in foreign markets, but even in domestic ones, and high interest rates prevented new productive investments from taking place. Although pegging the pound to the US dollar was an indispensable step to restore confidence in the local currency, the peg in return caused interest rates on the pound to track fluctuations in dollar interest rates regardless of the needs of the local money market, reaching nearly 20% in the summer of 2018. Even though pegging the exchange rate of the Lebanese pound against the dollar helped curb the nominal inflation rate, it drove up the pound's real exchange rate by nearly 100% against a basket of major currencies of countries with which Lebanon maintains active trade ties, inflicting severe damage on the Lebanese economy as a result of the sharp rise in the prices of Lebanese exports and the low prices of imported goods, with the attendant risks of dumping in the domestic market. Moreover, Banque du Liban's adherence to the policy of pegging the pound's exchange rate to the exclusion of other available monetary policies led it to sacrifice its core tasks, notably its role in curbing inflation and maintaining price stability, as well as facilitating investment to absorb labour in a way that helps lower the unemployment rate and achieve what is known as full employment in the economy without causing inflation. This constrained Lebanon's ability to control its monetary policies, which must align with its fiscal and economic goals, drove up the ratio of public debt to gross domestic product, and inflicted heavy losses on the country. On the other hand, pegging the exchange rate priced the pound above its real value, raising the purchasing power of residents' incomes and increasing their capacity to expand spending on both durable and consumer goods, and even serving as an incentive for them to borrow to meet that spending. Hotel services, restaurants, cafes, and trade in goods ranging from foodstuffs to all kinds of luxuries flourished, alongside strong Lebanese demand for outbound tourism, particularly to neighbouring countries whose costs were low compared with local costs. The pace of prosperity and growth rates dimmed and flared according to political wrangling and security tensions that were seldom absent from the national arena, preventing the positive gains of periods of growth and prosperity from accumulating and causing them to erode as a result of security conditions and political differences. Yet that did not stop the Lebanese from continuing to expand their consumer spending, reliant on imported goods, widening the trade deficit in the absence of government plans aimed at correcting the worsening economic imbalance. Higher average salaries and wages attracted foreign labour paid in hard currencies, and this rise in turn increased local production costs and posed an obstacle to the development of its sectors. Rather than encouraging productive investments and granting them suitable facilities to promote national output and create more jobs, the state refrained from taking the initiative, leaving the upper hand to the banking, commercial and hotel services sector, which summed up the indicators of the economy's vitality during that period and up until the onset of the crisis. While achieved growth was declining day after day, the financing of the state continued through public debt and in foreign currencies, after having previously been confined solely to the Lebanese pound. The banking sector managed to attract expatriate capital in return for high interest rates, providing abundant liquidity whose investment was overwhelmingly confined to short-term and consumer lending. This prompted some to consider that from the 1990s until the end of 2019, the Lebanese had been living in a situation closer to illusion than to reality. The same question is being repeated today amid brisk activity in certain economic sectors, especially services such as trade, tourism and other closely related activities, while the banking sector remains mired in its crisis, with negative repercussions across all sectors. Is the recovery in economic activity we are witnessing today real, or merely a surge that will end with the close of the summer season, when Lebanese expatriates return to Lebanon to visit their families and offer them moral and financial support? In 2022, this led to an injection of foreign currencies into the national economy estimated by the World Bank at $6.4 billion, placing Lebanon third regionally and offsetting part of the shortage in those currencies from which the money market has suffered since early 2019. Some observers may be right in refusing to regard the bustle seen in Lebanese restaurants and nightclubs as evidence that the economy has regained some of the vitality witnessed in Lebanon today, yet the rebound in import volumes during 2022 to near pre-crisis levels is a reality that cannot be ignored. Perhaps the resumption of imports of consumer goods, whether foodstuffs or other items, is the clearest expression of the trade sector regaining its vitality: after many goods disappeared from local markets, they have returned at real prices comparable to what they were before the crisis. For all the importance of expatriate remittances and their role in stimulating economic activity, they cannot end the economic crisis from which Lebanon suffers, nor can they provide suitable solutions to its causes merely by being channelled into the Lebanese economy. This is especially true since Lebanon's economic crisis is a structural crisis resulting from giving the trade and services sector absolute priority at the expense of other productive sectors, particularly industry, which is characterised by sustainability unlike other, seasonal economic activities. Amid the crisis Lebanon is living through today, these remittances should serve as an incentive for the relevant authorities and economic actors to find appropriate ways to make maximum use of them, by encouraging productive investments that contribute to increasing national output and curbing both the expansion of imports and the leakage of hard currencies abroad, as is happening today. For Lebanon's recovery from its setback requires diligent, cumulative work to secure a solid foundation as a launchpad for that recovery, and the opportunities available today may not be available in the future or may become unsuitable.

Translated from Arabic with AI. Read it in Arabic