ERASE, Currency Crisis, Inflation and Currency Devaluation, Economic Update

War in Gaza Raising Concerns on the Lebanese Economy

12:55 | 30 November 2023LIMS output
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War in Gaza Raising Concerns on the Lebanese Economy

The evolving security situation of the ongoing conflict in Gaza have reverberated across the Lebanese-Israeli borders, precipitating the displacement of approximately 30,000 residents in southern Lebanon and 80,000 in northern Israel. This development unfolds against the backdrop of Lebanon grappling with an unprecedented and protracted economic crisis spanning the last four years.

LIMS has sounded a cautionary note on the immediate economic fallout from the conflict, with a specific focus on its impact on the pivotal tourism sector, especially during the holiday season. Since the onset of hostilities, inbound flights to Lebanon have witnessed a sharp 33% decline, juxtaposed against a 28% upswing in outbound flights. Hotel occupancy rates languish below 10%. Projections suggest a potential 10% to 30% contraction in Lebanon’s tourism sector, translating to a 10% dip in the GDP. These figures depict a stark hypothetical economic downturn. As if compounding these challenges, investors, who had shown renewed interest in Lebanon as the crisis appeared to abate, are now reevaluating their plans in light of the resurging security instability.

Beyond the impact on businesses and investments, the wider conflict scenario propels individuals towards hoarding foreign currencies, shedding the Lebanese pound in favor of more stable reserves like the US dollar. This surge in demand for foreign currencies exerts additional pressure on the exchange rate of the Lebanese pound and foreign exchange reserves.

LIMS underscores that the current stability in the currency is attributable to the central bank’s (Banque du Liban – BdL) decision to refrain from financing the government deficit, thereby curbing the expansion of the money supply. However, BdL confronts a challenge in sustaining this stability as capital flight spurred by regional conflict necessitates a contraction in money supply.

Compounding these challenges is the staggering fiscal deficit faced by the state. Revenue shrinkage resulting from the recession and administrative closures leave borrowing from BdL as the solitary recourse to bridge this fiscal chasm. Amid this precarious landscape, there exists considerable uncertainty regarding whether the central bank will alter its stance on monetizing the deficit. These factors intensify pressure on the Lebanese pound, casting uncertainty on the duration of the current stability.

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