Lebanon’s Economy Struggles with Decline in Capital Inflows

Overview

The Lebanese economy has been facing a significant decline in capital inflows, leading to a drop of over 10% in international reserves since May 2016. According to the International Monetary Fund (IMF), the country’s reliance on deposit inflows has increased, making it challenging for banks to maintain liquidity.

Challenges Facing the Banking System

Lebanese banks have high sovereign exposures, with public debt equivalent to 138% of GDP and medium-term fiscal deficits forecast at 9-10% of GDP.
Banks are heavily reliant on deposits and excess reserves at the Central Bank (BdL) to finance their activities, making them vulnerable to a decline in deposit inflows.
The report notes that Lebanese banks have minimal reliance on wholesale funding and secondary debt markets, which are not well developed.

Impact on the Banking System

Deposits have historically been stable, but growth has slowed in recent years, leading to concerns about the sustainability of the banking system.
Bank lending to the Lebanese private sector accounts for only a quarter of banks’ assets but is equivalent to 94% of GDP in 2015. Credit growth has slowed in recent years, but real estate-related sectors continue to pose risks to banks.

Risks and Challenges

Non-performing loans (NPLs) have risen to 10.4%, and the slowing real estate sector poses significant risks to banks.
The BdL’s economic stimulus program has provided interest rate subsidies for housing loans, which has helped maintain reported NPL ratios at low levels. However, loans to real estate developers show signs of distress.

Conclusions

While the BdL’s policies have managed systemic risks so far, there are limits to these measures.
Without fiscal adjustment and a reduction in financing needs, the BdL’s ability to function as a “policymaker of last resort” will become increasingly stretched.
The decline in capital inflows has significant implications for Lebanon’s economy, which is heavily reliant on foreign capital. The country must address its fiscal imbalances and develop a more sustainable model for growth to mitigate the risks associated with its fragile banking system.

Recommendations

Addressing fiscal imbalances through structural reforms and increased revenue mobilization.
Developing a more diversified and sustainable model for growth, including promoting non-real estate sectors.
Strengthening the BdL’s oversight and regulation of banks to improve their resilience and risk management practices.