Beirut blast: Lebanon's economy, currency likely to weaken further

Revival of the Lebanese economy depends on the successful conclusion of the IMF economic package

The Lebanese economy, which was already in deep crisis amid political disputes, is likely to witness a major spike in inflation, further contraction in economy and weakening of its currency following the devastating Beirut port blast on Tuesday, analysts have said.
"Lebanon's crisis is becoming increasingly disorderly and its economy is likely to shrink by close to a third this year," said James Swanston, economist for the Mena region at Capital Economics.
Lebanon was already in the midst of an economic crisis before the coronavirus outbreak and, with International Monetary Fund (IMF) talks "on the verge of collapse", the country's economic, political and humanitarian problems will only get worse, he added.
The explosion at Beirut port - the country's largest - came at a time when Lebanon is facing its worst political and economic crisis in history. Tuesday's blast rendered Beirut port unusable and it will take many months, if not years, to rebuild and resume operations.
Swanston said the blast and the damage will inevitably lead to some disruption to international trade for Lebanon as around three-quarters of the country's imports enter via Beirut's port.
"There are also acute concerns about Lebanon's stocks of grain which have been depleted to less than one month's supply. The flip side is that the extensive damage to infrastructure means there will be some boost to near-term economic activity from reconstruction efforts, but this will come at a heavy fiscal cost. The governor of Beirut has estimated rebuilding costs at around $3 billion, equal to five per cent of GDP, which will add to the strains on the public finances. Given the current dire economic situation, some of this infrastructure may never be rebuilt, thereby permanently eroding Lebanon's capital stock."
Devaluation on cards
He said the Lebanese pound is trading at a discount of nearly 80 per cent on the parallel market. Capital Economics expects the official exchange rate will ultimately be devalued by a similar amount to 7,500 per dollar.
MR Raghu, head of research at Kuwait Financial Centre (Markaz), said Lebanon will need financial support from "friendly countries".
"From an economic impact point of view, it is still too early to quantify. However, I do expect international financial support from friendly countries can cushion the impact of the blast," said Raghu.
The levels of poverty have surged to as much as 50 per cent of the population - a key driver of the spread of violent protests that are likely to intensify.
Jihad Azour, director of the Middle East and Central Asia Department at the IMF, said Lebanon is enduring a severe crisis.
This has been compounded by the Covid-19 shock that also affected lives and livelihoods. IMF projected that Lebanon's debt level is expected to reach 183 per cent of GDP.
Vijay Valecha, chief investment officer of Century Financial, said the immediate impact might be felt on food security as the blast has made wheat stored in warehouses unusable.
He said revival of the Lebanese economy depends on the successful conclusion of the IMF economic package.
Mirna Sleiman, founder and CEO of Fintech Galaxy, said Lebanon was already suffering from an economic downfall with businesses closing, banking system falling apart and the coronavirus paralysing the overall economy.
"This explosion will exacerbate the situation and make it much harder for the country to recover. The middle class will disappear and the poor will get poorer. I honestly don't see any silver lining and it breaks my heart. My only hope is that this creates a major change in the rotten political system that criminalises those responsible, wakes up the international community and brings long overdue reforms to the country," she said.
- waheedabbas@khaleejtimes.com