Uncertainty in presidential elections plunge Currency in circulation by 84.12% as BDL’s total assets decline by 12.91% annually
Uncertainty in agreeing on the new president election January 9th has sent more negative vibes on the market as figures by the World Bank released last week disclosed that Lebanon’s real GDP growth has been cut by an estimated 6.6% in 2024 as a result of the conflict, bringing the cumulative decline in real GDP since 2019 to more As than 38% by the end of the year, according to the latest World Bank Lebanon Economic Monitor (LEM). The deepening contraction reflects the devastating impact of mass displacement, destruction, and reduced private consumption. It further exacerbates unresolved macroeconomic challenges and highlights the urgent need for comprehensive reforms and targeted investments in critical sectors as the only viable path forward post-conflict. Lebanon’s annual inflation rate fell to 32.92% in September 2024, from 35% in August 2024, recording its lowest level since March 2020, according to the Central Administration of Statistics (CAS). The decrease resulted from the increase of dollarization rates by businesses and to the stability of the exchange rate especially since August 2023. Meanwhile, the continued escalating political and military tensions in the Middle East and its effect on Red Sea sea-shipping traffic threatens to disrupt supply chains, which will increase shipping costs, and consequently lead to an increase in inflation. In addition, the escalation of the war between Lebanon and Israel threatens to disrupt food and other basic needs imports, thus resulting in an increase in its prices. In addition, monthly inflation rate stood at -0.18%.
Banking stats
The Fall 2024 edition of the LEM titled “Mounting Burdens on a Crisis-Ridden Country” projects economic activity to contract by 5.7% in 2024, equivalent to a loss of US$4.2 billion in consumption and net exports. The Special Focus section of the report examines the impact of the conflict on the Lebanese economy by analyzing shocks to consumption and net exports, particularly service exports from tourism receipts, a core pillar of the Lebanese economy, following the significant escalation in mid-September 2024. It develops a counterfactual scenario where, in the absence of conflict, GDP would have grown, albeit tepidly, by 0.9% in 2024.
“The conflict has inflicted yet another major shock to Lebanon’s economy already in a severe crisis. It is a stark reminder of the urgent need for comprehensive reforms and targeted investments to avoid further delays in addressing long standing development priorities,” said Jean-Christophe Carret, World Bank Middle East Country Director. “As Lebanon embarks on developing its post conflict recovery and reconstruction plan, an economic stabilization program and an ambitious program of reforms that strengthen governance will be critical to attract the financing needed to put the country on a sustainable long-term recovery path.”
Lebanon key economic indicators—including GDP growth, inflation, fiscal balance, and trade deficits—are increasingly skewed toward the downside. It highlights the fragility of the exchange rate stability, observed since August 2023, which comes at a high opportunity cost. This stability relies on increased revenue collection, fiscal restraint, and spending restrictions, resulting in unspent public sector surpluses despite the growing demand for critical spending and investment. The conflict further threatens this fragile stability as increased spending is necessary to sustain public services and support recovery efforts. This could lead to increased currency circulation or further depletion of remaining liquid foreign reserves.
Signs of contraction were also recorded by the real estate sector. According to the data from the Orders of Engineers in Beirut and Tripoli, the total construction permits witnessed a year-on-year (YOY) decrease of 7.43% to reach 7,511 permits by September 2024.
Money markets
The BLOM Bond Index (BBI), which tracks Lebanese government Eurobonds (excluding coupon payments), fell by 1.93% this week to 12.67 points. This drop comes amid continued Israeli breaches of its ceasefire with Hezbollah. In addition, while meetings to elect a new Lebanese president on January 9, 2025 are still ongoing, no candidate has a clear majority yet. Despite this, some bond indices remain near their highest levels in more than two years as the ceasefire remains in place. A permanent end to the Israeli conflict, along with the election of a new president, could lead to needed reforms and possibly an agreement with the International Monetary Fund (IMF) to help lift Lebanon out of default. According to the balance sheet of Banque du Liban (BDL), the Central Bank’s total assets declined by 12.91% annually, to reach $93.75B by mid December 2024, amid adopting the 89,500 LBP/USD official rate by BDL since February 1st 2024. The fall was mainly due to the 96.08% year-on-year (YOY) drop in other assets, which reached $300M by mid December 2024. Financial sector deposits, representing 91.2% of BDL’s total liabilities, decreased by 3.89% annually and reached $85.5B by mid December 2024 compared to last year, of which more than 90% are denominated in dollars. Moreover, public sector deposits, representing 6.45% of BDL’s total liabilities, dropped by 51.21% yearly and reached $6.04B by mid December 2024. Lastly, currency in circulation outside of BDL, consisting of 0.67% of BDL’s total liabilities, plunged by 84.12% annually to reach $624M by mid December 2024 amid adopting the 89,500 LBP/USD official rate by BDL, though it increased by $67 million in the first two weeks of December 2024.
For Lebanese banks 2024 will still be aa year to forget According to Lebanon’s consolidated commercial banks’ balance sheet, total assets declined by 7.82% on year over year (YoY) basis to stand at $103.88B by September 2024 amid BDL’s adoption of a new exchange rate of LBP 89,500 per USD effective 31/01/2024.
On the assets side, currency and deposits with Central Bank represented a high figure of 78.32% of total assets; they dropped annually by 3.71% to settle at $81.36B in September 2024. Deposits with the central bank (BDL) represented 99.91% of total reserves, and decreased by 3.01% YoY, to reach $81.29B in September 2024. Furthermore, vault cash in Lebanese pound declined by 89.48% on a yearly basis to stand at $72.11M by the same period. The drop is attributed to the calculation based on the new official exchange rate of LBP 89,500 per USD.
Claims on resident customers, constituting 4.85% of total assets, shrank considerably by 32.60%, to stand at $5.04B in September 2024. Moreover, resident securities portfolio, representing 5.2% of total assets, dropped by 11.87% in September 2024 to stand at $5.4B. More specifically, the Eurobond holding recorded a decline of 14.19% since September 2023, to reach $2.2B (net of provisions) by end of September 2024. Additionally, claims on non-resident financial sector shrank by 3.07% YoY to stand at $4.29B by September 2024.
That said, earlier this month, Goldman Sachs (GS) published a report titled Revisiting Lebanon Debt Recovery Values, in which it revisits its previous January 2019 estimates of Lebanese debt recovery values. In its base case scenario, GS expects Lebanese Eurobonds to be worth 24.6 cents, around double their current prices. The report presented various scenarios with bond prices ranging from 12.3 cents to 36.4 cents.
Depositors who lost more than $60 billion of deposits as a result of the country’s financial crisis are part of a 1.28 million households in Lebanon with each household composed of four persons on average. At the same time, there were 2.81 million bank-account holders in the country!!! Additionally, IMF data show that Lebanon had among the most salient deposit and loan penetration rates in the world with 620 depositors and 240 borrowers per 1,000 adults (16 years and above). In addition, there were 110 branches per 1,000 square kilometers and 24 branches per 100,000 adults; similarly, there were 186 ATMs per 1,000 square kilometers and 41 ATMs per 1000,000 adults. It is important to note that medium-and-large depositors are made of up individuals and, more importantly, institutional investors who represent trade and professional associations including the social security system.
Small depositors are defined in the Government Plan as those who have deposits equal to a maximum of $100,000. out entirely medium-and-large depositors and shareholders to the detriment of the entire banking system. What this misses out, though, is horizontal equity: in other words, why should not all involved be treated equally? More to the point, why should medium-and-large depositors be discriminated against, and their success and livelihood is penalized
Downsizing Lebanon’s Banking Sector
Since 2019, Lebanon has been grappling with an economic crisis that has significantly impacted various sectors. The country has witnessed severe inflation, a devaluation of the Lebanese pound, and widespread unemployment, all of which have reshaped the financial landscape. In particular the banking sector, which had long been a pillar of Lebanon’s economy, has been severely affected. data between December 2020 and December 2023, the number of bank branches in Lebanon dropped from 992 to 695, a 30% reduction. Beirut and its suburbs, the center of financial activity, saw the most significant decline, from 524 to 365 branches. This trend reflects cost-cutting measures taken by banks grappling with liquidity shortages, depositor withdrawals, and systematic mistrust. Internationally, Lebanese banks reduced their global presence, with foreign branches declining from 73 to 46.
The shrinking workforce further underscores the sector’s distress. Employment in commercial banks fell by 35% from 21,366 workers in 2020 to 13,848 in 2023. Both male and female employees were affected, with technicians and executives being most affected, losing over 5,000 positions. In contrast, general management roles remained relatively stable, with a modest decline from 203 to 178 positions,
The bottom line is that the Lebanese crisis is not only complicated but it is also unique. It is perhaps the only banking crisis where the problem does not lie with banks but with the Central Bank or BDL. While, we witness the Lebanese banking sector cutting cost by merging branches and shrinking their balance sheet, they should be audited to determine which banks are solvent and which are not. In fact, assets and liabilities of bad banks should be consolidated, small depositors fully paid, and all remaining assets auctioned off to protect larger depositors. All of these operations should be implemented in the hope of creating a smaller, leaner and healthier banking sector.
IMF salvation plan?
The one of the key solutions for the ailing economy is the implementation of the much needed IMF reforms but this is a long and painful process, if it’s ever achieved; but there is a hope that all reforms be implemented and pave the way to a steady and strong economy in Lebanon. While coming to an agreement with the IMF, new investments will generate additional cash flow; also, the unified exchange rate will relieve the Lebanese population from the high inflation that was witnessed in the last two years. However, we are still hesitant regarding the elimination of the corruption in Lebanon, as we expect the same political class to be re-elected in the parliamentary elections of May 2022.
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy.
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW
