Over the past year, Lebanon has experienced an onslaught of multiple growth shocks including a banking and exchange-rate crisis, an outbreak of COVID-19, and an explosion that has claimed large swathes of Beirut’s commercial centre and a bulk of trade facilities.
These new shocks add to the longer-standing economic and financial crunch that have swelled Lebanon’s poverty rate at the upper, or moderate, national poverty line ($14/day), as well as the lower, or extreme, poverty line ($8.5/day) identified by the United Nations Development Programme and the Government of Lebanon. Since the start of this year, the moderate poverty head count is projected to have nearly doubled, and extreme poverty nearly tripled. At the same time, the mass of the middle- income and wealthy individuals, as estimated from the full distribution of incomes and wealth in Lebanon, has contracted due to the collapse of the banking system and out-migration.
This implies that the recent shocks have caused not only a humanitarian tragedy at the bottom of society, but also perilous attrition of physical, human and entrepreneurial capital higher up in the social ladder. This places hurdles in Lebanon’s course to lifting the downtrodden out of poverty and returning on a growth trajectory. Public, private and civic sectors need to coordinate to implement a comprehensive yet politically feasible policy response, and different socioeconomic groups must band together to assuage the devastation and deprivation among the least fortunate and the opportunity-trapped.
Since at least the mid 2010s, the Lebanese economy has been on a downward spiral due to exhaustion of the country’s growth model, which had been relying on inflow of remittances and speculative investments. The decline was partly related to the developments in the region at large: the influx of Syrian refugees; the drying out of remittance inflows in connection with the fall of Gulf oil prices; and a decline in tourism and private investment from the Gulf Cooperation Council (GCC) countries.
Remittance inflows fell from over 20 percent of GDP pre-2010 to around 13 percent in the years since 2017. Foreign direct investment fell from over 11 percent of GDP pre-2010 to less than 5 percent since 2017. These factors have added pressure to the balance of payments leading to a deteriorating fiscal position and a sovereign debt crisis. In Spring 2020, for the first time in Lebanon’s history, the country defaulted on its debt-service obligations.
Since August 2019, the Lebanese Lira (LL) to USD market exchange rate started deviating from the official pegged rate of 1,500 LL/USD. The market exchange rate reached 2,200 in January, and briefly as high as 10,000 LL/USD in July 2020.
In October 2019, the Lebanese economy suffered more because of heightened political instability and public demonstrations, which added pressure to the pegged exchange-rate and in turn on bank dollar reserves. The demonstrations persisted into January 2020, and only temporarily subsided with the election of the new government in January, and after that, the onset of the COVID-19 lock down.
The effects of the COVID-19 pandemic started bearing down on the Lebanese economy in February, as travel and shipping from East Asia and Southern Europe became restricted. Economic lock down was imposed in March starting with public institutions, but within weeks, extended to most establishments and public spaces. National land and sea borders and airports were closed from the middle of March to the end of June (beginning of September in the case of land borders), halting the inflow of raw materials, essential goods and foreign currency. Cargo imports through the port of Beirut, before the explosion, had already contracted by half.
During the lock down, the market exchange rate rose from 2,470 LL/USD on 1 March, to 8,600 LL/USD on 30 June. The internal lock down directly affected Lebanese households’ immediate consumption and capacity for income generation, and through multiplier effects even their longer-term consumption, investment and income. Aggregate demand collapsed. Because of the currency devaluation and the restriction of imports, consumer prices shot up, by 107 percent between December and August alone. In some categories prices more than quadrupled, including for restaurants and hotels (495% rise), food (317%), clothes (325%), alcohol and tobacco (324%), and furniture (567%).
On the heels of this retrenchment came the Beirut Port explosion, leaving the preeminent trade and shipping hub, as well as the neighboring industrial, commercial and residential zones in ruins. This will not only gobble up $4-5 billion for reconstruction and humanitarian assistance, but it will dampen Lebanon’s imports, exports, and other economic activity for months to come.
Impact across income groups
Given the unprecedented events in Lebanon in the first half of 2020, and their mutually reinforcing effects, the poverty rate according to the upper or moderate poverty line is projected to have near doubled from 28 percent in 2019 to 55 percent by May 2020. Correspondingly, extreme poverty near tripled from 8 percent to 23 percent. This brings the total number of poor among the Lebanese population to an estimated 1.1 and 2.7 million for the extreme and moderate poverty lines, respectively, even before the devastation brought by the Beirut Port explosion.
These numbers suggest that some 750,000 Lebanese fell into extreme poverty – and 1.35 million into moderate poverty – in the first half of 2020, compared to the reference pre-COVID-19 growth scenario for 2020 that saw the number of the extreme poor at 370,000 and the number of the moderate poor at 1.32 million.At the same time as the ranks of the poor have swelled, middle-income social groups have contracted from over 57 percent of the population in 2019 to less than 40 percent, projected as of May 2020, as living means withered. The real challenge facing Lebanon is that these groups, which represent the bulk of the country’s human and entrepreneurial capital, may shun the uncertain economic opportunities in Lebanon under an expected protracted recovery, and may emigrate to the Gulf or beyond, should opportunity arise.
Another indication of the magnitude of the economic shock brought on by the not-legalized banking controls, the currency devaluation and the COVID-19 measures, is that the income-affluent group (individuals with more than $34/day in income) is also projected to have shrunk significantly from 15 to 5 percent of the population. Moreover, the impacts of economic shock are not restricted to income and consumption flows during 2020, but extend to the stocks of available economic resources (even before the blow that the Beirut blast dealt to the capital city’s infrastructure). Households and firms have experienced depletion, devaluation and freezing of their productive assets, which heightens their present deprivation and affects their longer-term ability to cope and spring back.
Since poorer households are more likely to hold their wealth in the devalued local currency, and may need to sell off their assets (or fail to upkeep them) to fund their consumption, wealth inequality in Lebanon may increase. For reference, Lebanon has one of the most unequal wealth distributions in the region and the world, ranking twentieth worldwide with a wealth Gini coefficient of 81.9 percent, and one of the highest concentrations of billionaires per capita.
The top 10 percent of Lebanese adults owned 70.6 percent, or $151.4 billion, of all estimated personal wealth in the country in 2019. As of mid-2020, the wealthiest 10 percent are projected to hold $90.8 billion of wealth, 40 percent down year-on-year. This is a result of the banking crisis, the associated restrictions on access to financial wealth, and the expected drop in the value of high-end land, real-estate property and natural resources. The Beirut Port explosion is expected to further diminish firms’ and individuals’ holdings of real estate and other capital, and their capacity for trading and economic activity.
The existing conditions spell havoc for Lebanon’s ability to achieve economic recovery with an adequate supply of domestic investment and decent jobs, and retain its predominantly middle-income population status.
Scope for alleviation
Despite the enormity of the economic shocks and their ripple effects, Lebanon could rebound and close its poverty gap quickly if key markets successfully kick start, if macroeconomic stability is restored, and if necessary economic governance reforms are enacted by the incoming administration. A primary policy response toward solving the country’s humanitarian crisis should involve bolstering Lebanon’s food and health security and social protection. This should be achieved by ensuring adequate access to food, medication, unemployment benefits and cash.
The establishment of a national solidarity fund should bring the country closer toward alleviating extreme and even moderate poverty. In addition to reaching out to international donors in the post- COVID-19 and post-explosion environment, Lebanon should mobilize its own substantial resources, with a fair and progressive system of shared responsibility, supported by political will and strong institutional capacity to ensure social solidarity. With shared responsibility and societal solidarity in place, especially between the wealthiest top decile and the poor, the bulk of the poverty impact can be absorbed.
Based on the distribution of wealth in Lebanon projected as of May 2020, it appears that a solidarity fund financed solely or primarily by a modest levy on the wealthiest 10 percent of nationals would go far toward eradicating poverty in the country. To close the extreme poverty gap, the required levy would be around 1 percent of the total assets held by the richest 10 percent (compared to 0.2 percent in 2019). To close the moderate poverty gap according to the national poverty line, the corresponding levy would have to be approximately 3.6 percent of the total assets held by the richest decile (1 percent in 2019).
Enacting these fiscal policies should go hand in hand with the introduction of the necessary economic governance reforms. Enhancing transparency and accountability should allow the ministries of finance, social affairs and related institutions to improve poverty targeting practices.