Previous Quarterly Editions
Expropriation Risk: 70 71 71 70 ►Political Violence Risk:67 67 68 67 ► Terrorism Risk:50 50 50 50 ►Exchange Transfer and Trade Sanction Risk: 82 82 82 82 ►Sovereign Default Risk:92 92 92 92 ►
TREND ►
Protest intensity to date* 2022 2023 Very High Very HighUnrest risk in 2024**Cost of living: HighAnti-austerity: Very High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
Lebanon continues to be locked in a deep political and economic crisis that was triggered by the country’s political and economic crisis starting in 2019, which led to its inability to service international loans in March 2020. While foreign debt is not the only element in this crisis, it remains a key concern that has been compounded by the international post-COVID-19 debt crisis. The long-term solution suggested by the International Monetary Fund (IMF) involves political and economic reforms combined with debt restructuring. Debt can only be restructured if a new government and a new president implement political and economic reform.
Inflation has soared steadily since the outbreak of political protests in October 2019 and more sharply in 2023. After hitting the 155% mark in 2021, inflation surged to 171.2% in 2022. In January 2023, inflation more than doubled as consumers and companies continued to feel the effects of increased living expenses. This year alone, the Lebanese lira has lost close to one-third of its value. In May, the government set the official rate at 86,000 to the U.S. dollar, somewhat stabilizing black-market rates that had moved toward 140,000 to the dollar in previous months.
Devaluation has had a dramatic impact on consumer prices and public revenues. Monthly Consumer Price Index data showed an annual increase of 123.5%, primarily due to the high prices of communication, education and healthcare.
The political and social effects are tangible. Lebanon has been experiencing decreased employment, GDP, foreign exchange reserves and revenues with rising inflation. In 2022, the government cut fuel, medicine and food subsidies, leaving thousands in danger of starvation. Mistrust in politicians and bankers is now widespread among the population, and anger can be seen in the regular occurrence of armed bank heists, where desperate citizens demand their savings.
Public sector institutions are crumbling, as many employees cannot afford to drive to work. Essential services have been significantly reduced amid collapsing revenues and drastically reduced spending. Consequently, unemployment and poverty are at historic highs. Informal economic networks and an estimated US$1 billion in yearly remittances from the Lebanese diaspora are effectively keeping the economy from collapsing.
Expropriation risks are minimal. Expropriation due to the financial crisis and banking sector turmoil will not affect foreign investors, who are unlikely to use local banks; however, some Arab investors may choose to use Lebanese banks for direct transactions and business deals. Moreover, Lebanese clients could easily default due to the banking situation, exposing investors to risk. A complete banking sector collapse is possible, particularly considering ongoing uncertainty over the central bank and its embattled director.
The political and economic crisis is negatively affecting foreign direct investment, which has decreased sharply since 2019. From US$2.6 billion in 2018, such investment fell to US$2.1 billion in 2019 and decreased further in 2021 and 2022, despite brief spikes in late 2020 and 2022.
In March 2020, Lebanon announced its intention to default and restructure its nearly US$31 billion of dollar-denominated debt. Debt has since grown to US$34.5 billion. The ensuing downgrade of the country’s sovereign debt rating continues to affect investor and ratings firms’ confidence.
The international debt crisis has effects on regional powerhouses in the Gulf Cooperation Council countries and Turkey, with knock-on effects on Lebanese export and migrant remittances. The effect of the Syrian crisis and the inability of refugees to return home from Lebanon, the fragile macroeconomic situation, high unemployment, brain drain, energy supply shortages and regulatory obstacles all add to Lebanon’s stagnation.
The combination of COVID-19-related lockdowns, ongoing political logjam (with no government since May 2022 and no president since November 2022, although there are caretaker arrangements), and rampant currency devaluation has further weakened otherwise growing sectors in information, technology, higher education and industry and is hampering the potential of a Westernized and highly skilled workforce.
Green energy projects are waiting but need a political environment conducive to direct foreign investment. Greening from below, through direct import of solar cells, is occurring but in an unplanned and unsustainable manner. With no economic upturn in sight, Lebanon’s staggering foreign debt has receded to the background of political debates and will likely not resurface before the arrival of a reform-minded government.
Protests began in October 2019 but retreated in March 2020 due to lockdowns. Sporadic riots, gunfights over petrol, road blockages and bank heists have become regular occurrences and are likely to increase. In 2023, several large protests occurred over the dire economic situation. Military leaders have criticized officials for lacking a response to address the spreading social chaos resulting from the economic crisis.
In areas of tight sectarian political control, notably the Bekaa Valley and South Lebanon (including the southern suburbs of Beirut), riots are less likely. Northern Lebanon and Beirut are particularly vulnerable to political violence. The most desperate attempt to escape by boat, mainly from Tripoli, have led to many such migrant boats sinking on their way to Cyprus.
Hezbollah has introduced its own financial institutions, food markets and pharmacies with parallel imports from Iran and Syria to shelter its constituency from state breakdown. In other areas, particularly Tripoli and northern Lebanon, the lack of similar formalized patronage leaves many people in desperate situations. The poorest communities, including Syrian and Palestinian refugees, are the most likely to stage bread riots, which could become increasingly difficult to control. In the absence of a resolution to the political crisis over the presidency and government formation, political violence between rival groups is very likely.
Islamic State (IS) is known to stage a resurgence when central government is weak and when sectarian tensions can be exploited. Deteriorating living conditions, protests and the pandemic have depleted Lebanese army resources and could make it easier for militants to reenter Lebanon. The situation in Afghanistan, now that the Taliban is back in control there, may give IS in the Middle East renewed energy and resources.
Since October 2019, Lebanon’s financial sector has imposed ad hoc capital controls, preventing most Lebanese from transferring money abroad, despite 75% of accounts in Lebanese banks being dollar-denominated. While the international debt crisis did not create the situation, it has been exacerbated by the effects of rising food prices and currency inflation, which in turn has created a thriving parallel informal financial sector run by criminal networks and partly controlled by Hezbollah.
Prime Minister Najib Mikati’s interim government has been unable to stop capital flight nor put an end to capital controls as part of measures to tackle a severe liquidity crisis. Even if a new government is in place by the end of 2023 and a presidential candidate can be agreed on, fiscal austerity, persistent capital controls, further devaluation and potential impairment applied to wealthy depositors to recapitalize the banking sector seem inevitable. This will undermine Lebanon’s potential as an investment destination.
TREND ►A new government will be forced to reach an agreement with the IMF to stave off a complete economic collapse; fund intervention could restore currency confidence by introducing a new monetary policy framework and a fiscal adjustment program. The IMF has developed the framework for such reforms, where economic reforms were made conditions for loans. Talks have stalled and are unlikely to lead to a formal agreement until after a new Lebanese government is formed.
Meanwhile, although Russian and Chinese influence is growing, neither country has the political will or capacity to deliver significant funds to Beirut. Chinese regional diplomacy that led to better relations between Saudi Arabia and Iran in March 2023 has so far proven unable to translate into a breakthrough in government formation, as the respective Lebanese allies of regional powers bicker. France and Qatar continue to work on a deal, but as of October 2023 there is still significant intransigence from several parties who fear that they might lose influence or will be held accountable for Lebanon’s economic demise if they do not command control over key ministries. Heated political disagreements between Hezbollah and several Christian leaders in summer 2023 have raised the prospect of sectarian conflict.
The Mikati-led government has not been able to meet any reform demand, stymied by political elites. In July 2023, they put forward a bold restructuring plan that could be a starting point for meaningful economic reforms. Discussions between the central bank and the IMF stalled in December 2020 at the diagnostic stage, and international donors will now wait for a new government to back the central bank leadership’s proposals; however, representatives of the largest political movements will continue to block reforms that harm their own vested interests.
Absent reform, the economic situation is desperate. Central bank reserves are low. Consumer prices have risen further as a result of the Russian war in Ukraine, as Russia and Ukraine account for 70% of Lebanon’s wheat import. Ongoing public investigation of fraud in the banking sector is leading to closure of banks and uncertainty about the country’s main financial institutions.
Much depends on a new government and its ability to bring about a new political leadership that is open to making the necessary concessions to the IMF. While reformists surprisingly won 15 seats in the May 2022 elections, they have failed to unite. Hezbollah’s block, despite losing its majority, looks set to continue its domination, and it has attempted to push through its presidential candidate. While it has so far failed, no other candidate with significant broad backing has emerged. Lebanon looks set for a continuation of the traditional elite’s rule, which decreases the likelihood of political reforms and economic recovery.
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