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Financial Regulation Updates 2022: Lebanon Faces Prolonged Economic Crisis
Lebanon’s Economy on Brink of Collapse
The Lebanese economy continues to struggle with one of its worst crises in history, as discord among key stakeholders hinders progress on a comprehensive reform plan. An unprecedented institutional vacuum is further exacerbating the situation, leaving the Lebanese people in dire need of economic relief.
Dire Economic Outlook
A recent update from the Lebanon Economic Monitor (LEM) Fall 2022 highlights the country’s dire economic outlook and risks, emphasizing the need for an equitable distribution of financial losses to put Lebanon on a recovery path. The report estimates that real GDP will contract by 5.4% in 2022, assuming continued political paralysis and no implementation of a recovery strategy.
Economic Contraction
- Real GDP has contracted by 37.3% since 2018
- This contraction has wiped out 15 years of economic growth
- The country’s potential for recovery is being severely impacted
Inflation and Currency Depreciation
The sharp depreciation of the Lebanese Lira persists (145% over the first 10 months of 2022), driving surging inflation that is expected to average 186% in 2022.
Inflation Rates
- Expected average inflation rate: 186%
- Sharp currency depreciation: 145% over the first 10 months of 2022
Financial Sector Bailout Unviable
The LEM argues that a financial sector bailout is unviable due to the lack of sufficient public funds and would not be equitable, as it would imply redistributing wealth from poorer households to bank equity holders and wealthy depositors. Instead, a bail-in solution together with comprehensive structural reforms is the only realistic option for Lebanon to turn the page on its unsustainable development model.
Bailout Alternatives
- Bail-in solution
- Comprehensive structural reforms
World Bank’s Response
“This prolonged crisis is reducing Lebanon’s potential for growth as its physical, human, social, institutional, and environmental capital are rapidly and potentially irreparably being depleted,” said Jean-Christophe Carret, World Bank Mashreq Country Director. “Lebanon needs to urgently adopt an equitable, comprehensive solution that restores the stability of the financial sector and sets the economy on a recovery path.”
Additional Reports
The LEM also includes two Special Focus sections:
Fragile and Conflict States
- Assessing the severity of Lebanon’s crisis by comparing it to a select group of Fragile and Conflict States
- Understanding the impact of conflict on economic development
Dollarization in Lebanon
- Analyzing the current trend towards dollarization in Lebanon
- Examining its implications for the economy and financial sector