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Lebanon: An unsustainable trend


Given the worsening political and economic environment since 2011, the slowdown in banks’ deposit growth has made deficit financing more and more difficult. The deterioration of the economy has been accelerated by the recent political events. Only a strong external support will prevent a default.

TRANSCRIPT // Lebanon: An unsustainable trend : December 2019



François Doux: Three questions on Lebanon where there is unrest on the streets.

Pascal Devaux, hello.


Pascal Devaux: Hello François.


François Doux: Let’s discuss the economy. Ratings agencies have downgraded Lebanon’s rating; the Lebanese economy is on the brink of a default. Tell us about it.


Pascal Devaux: The Lebanese economy is in a position of structural deficit, at several levels. The productive base is weak, hence the need for high levels of imports, and fiscal receipts are also limited and thus the government deficit is mounting up.

So there are two deficits. A current account deficit in its external accounts, and a fiscal deficit, both of which need to be financed thus creating debt. At present, debt is equal to around 150% of GDP. This is one of the highest levels in any emerging economy.

Bank deposits from non-residents, mainly the diaspora, provide the main means of financing this debt. So long as these deposits grow slightly faster than the deficits, Lebanon can finance itself and the wheel turns round.


François Doux: But that is not really the case. What triggered the deterioration of the Lebanese economy since 2011, since the Arab Spring?


Pascal Devaux: On top of the structural factors, two external factors have been to blame. First, in 2011, the Arab Spring and the influx of Syrian refugees to Lebanon provoked an increase in public spending and a slowdown in growth.

Then, in 2015-16, with the fall in oil prices, GCC countries (Gulf Cooperation Council) consumed less, through a fall in tourist visits and a reduction in purchases of real estate assets in Lebanon, which had been a significant resource for Lebanon’s economic activity and its external balances.

As a result, deficits increased, confidence in the country’s economic prospects declined and the inflow of deposits started to slow. Thus the resources needed by the Lebanese economy started to dry up in 2017-18.


François Doux: Third and last question, Pascal Devaux. In 2019, what provoked this economic blockage in Lebanon?


Pascal Devaux: In 2019, we have seen an acceleration in this loss of confidence, and, most importantly a political crisis that has completely blocked the economy. This has had the notable consequence of a fall in bank deposits, particularly from non-residents, and thus a lack of resources to finance the Lebanese economy. From this position there are two solutions: either reducing outflows, for example through capital controls and a reduction in imports (although this would not be tenable for long, as it would suffocate the economy); or finding other resources. The most likely source of these are the Gulf countries, whose financial support (which would need to be substantial) could help Lebanon avoid full-blow economic crisis and a default.


François Doux: Pascal Devaux, thank you. One more to watch. As for us, we’ll see you in 2020 for another edition of EcoTV.

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