Lebanon’s struggle for stability amid economic and geopolitical challenges

Lebanon finds itself trapped in a profound political, economic, financial, and social crisis, the effects of which have echoed across its public services and societal fabric for half a decade. This multifaceted crisis has created a stark escalation in poverty levels, marking a troubling descent in the standard of living for almost half the population. Concurrently, the efficacy of public sector institutions has faded, with service provision faltering under the strain of fiscal constraints and administrative inefficiencies.

Inflation and workforce exodus

At the heart of this turmoil lies a relentless inflationary spiral, driving up prices and eroding the purchasing power of ordinary citizens. However, in the first quarter of 2024, inflation showed signs of slowing down while the exodus of skilled workers from the public sector, lured by more promising prospects in the private sector or abroad, continues.

Armed conflict and damages

The situation is further aggravated by ongoing conflicts, notably the war along Lebanon’s Southern border in conjunction with the war in Gaza. This ongoing conflict has taken a heavy toll on the country’s physical infrastructure, destroying houses, roads, and agricultural lands with extensive forest fires and the destruction of thousands of acres of farmland, and soil damage due to the use of white phosphorus bombs. Moreover, since 8 October 2024, over 90,000 people have been displaced from southern Lebanon, further exacerbating the humanitarian crisis, and highlighting the severe impact of the regional instability on civilian lives.

Syrian refugee crisis

Lebanon hosts more than two million Syrian refugees who have fled their homes in search of safety due to the civil war, marking the highest per capita globally. This influx has placed a severe strain on Lebanon’s resources and infrastructure. Syrian refugees often work without permits, do not pay taxes, and do not pay for electricity. Even before the Syrian refugee crisis began in 2011, Lebanon faced a shortage in electricity production relative to consumption. Over the past five years, the number of refugees has increased significantly, leading to a surge in electricity consumption. This has exacerbated the strain on Lebanon’s already struggling power grid, leading to more frequent and prolonged power outages. Additionally, a large number of refugees are involved in criminal activities, and more than half lack residency status, exacerbating social tensions and straining the country’s infrastructure. The burden is particularly evident in public services. There is an overload on healthcare services, schools are operating in two shifts to accommodate the influx of refugee children, and roads and other infrastructure are under significant pressure.

Furthermore, the security services are weakened due to inadequate wages and resources, making them less effective in dealing with ordinary crime. The proportion of Syrian detainees compared to the overall prison population is higher than that of Lebanese detainees. Despite efforts by Lebanese authorities, the international response, particularly from Europe and the United States, has been inadequate, ignoring the calls for facilitating the refugees’ return to safe zones
in Syria.

‘Lebanon faces an uphill battle to salvage its economic vitality and restore normalcy for its population amid these challenges.’

IMF Negotiations

Since May 2020, Lebanon has been in negotiations with the International Monetary Fund (IMF) for a rescue package that would help stop the deterioration of its macroeconomic outlook. An initial Staff Level Agreement (SLA) was signed between Lebanon and the IMF in April 2022 for a four-year extended fund facility that envisioned restructuring the financial sector, undertaking fiscal reforms, and strengthening governance. However, progress in implementing the actions mandated by the 2022 agreement has been extremely slow. In such a scenario of limited progress, the IMF has warned that continued inaction and weak willingness for reform could lead to a ‘never-ending crisis’.

World Bank initiatives

The World Bank has initiated several projects to support Lebanon’s recovery. One major initiative is the US$34m Fiscal Management Project in February 2024, aimed at restoring core fiscal management functions to support revenue mobilisation and ensure the accountable use of public resources. This project focuses on stabilising revenue administration, enhancing tax compliance, and upgrading ICT systems for tax and customs functions. It also seeks to restore fiscal controls, improve budget preparation and fiscal reporting, and strengthen oversight and accountability mechanisms.

Currency stability

Despite the challenging environment, the Lebanese pound (LP) maintained a stability against the US dollar on the parallel FX market due to:

1. high dollarisation as Lebanon’s economy heavily relies on the US dollar for transactions and savings;
2. convergence between official and parallel exchange rates: Since mid-February 2024, there has been a relative convergence between the official exchange rate and the parallel market rate for the Lebanese pound against the US dollar;
3. growth in BDL’s liquid FX buffers: The Banque du Liban (BDL), Lebanon’s central bank, has experienced continuous growth in its liquid foreign exchange (FX) reserves; and
4. due to quasi-balanced public and external accounts: Lebanon’s public finances (government revenues and expenditures) and external accounts (foreign trade and financial transactions) were somewhat balanced or stable.

Conclusion

Lebanon faces an uphill battle to salvage its economic vitality and restore normalcy for its population amid these challenges. Continued efforts towards fiscal reforms, international support, and effective governance will be crucial for its recovery.

Law Offices of Naoum Farah as a law firm deeply invested in Lebanon’s future, we are committed to supporting legal reforms that promote transparency, accountability, and sustainable development. We believe that through strategic legal interventions and robust policy frameworks, Lebanon can overcome its current challenges and build a more stable and prosperous future.