Previous Quarterly Editions
Expropriation Risk: 64 65 65 69 ▲ Political Violence Risk: 67 67 68 68 ► Terrorism Risk: 45 45 45 48 ▲ Exchange Transfer and Trade Sanction Risk: 91 91 91 82 ▼ Sovereign Default Risk: 92 92 92 83 ▼
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Lebanon’s government recently enhanced the ambition of its greenhouse gas and renewable energy targets to be achieved by 2030 and aligned climate action with sustainable development, green recovery from COVID-19, and the green and blue economy.
The country’s Nationally Determined Contributions (NDC) to the United Nations Framework Convention on Climate Change commit Lebanon to expand its greenhouse gas emission reduction target relative to today from 15% to 20% as an unconditional target, and from 30% to 31% as a conditional target. Another part of these goals is to generate 18% of Lebanon’s electricity demand and 11% of its heat demand (in the building sector) from renewable energy sources in 2030, compared to a combined 15% in 2015.
Further ambitious NDC goals include the formulation of clear guiding principles and priorities for Lebanon’s adaptation strategy, synchronisation with the 2030 Sustainable Development Goals, and consideration of vulnerable groups, youth, and gender responsiveness in climate policy.
However, Lebanon’s current chaotic situation suggests it will struggle to meet these commitments. Hydropower is the most established renewable energy resource in Lebanon and contributes around 4.5% of the energy mix, with a nominal capacity of 280 megawatts (MW). Before the 2019 financial crisis stopped most policy initiatives, Lebanon planned to build and operate a hydroelectric plant. Overall, hydroelectric energy production has been inconsistent due to intermittent rainfalls and poor maintenance, but there is great potential to develop the sector.
The same is true of wind and solar power. Wind energy is an untapped resource in Lebanon, with extremely restricted production. Lebanon has the potential to produce approximately 5,400 MW of wind energy, as of 2010. A tender approved by the Ministry of Energy and Water in 2018 of 200MW in north Lebanon would allow the national electricity company (EDL) to sell power for around 145,000 households. Yet the project has stalled, while EDL is undergoing reform as part of Lebanon’s promised political reform package that will give the country access to International Monetary Fund (IMF) loans.
Until those reforms and loans materialise, the unchecked economic crisis will continue, with dire consequences for the environment. A depleted infrastructure, a decade-long waste removal crisis, and power generation largely dependent on carbon fuel, put large stress on the natural environment. Burning of waste in the countryside, contamination of ground water and sea water from putrid waste and worsening seasonal forest fires due to changing weather patterns in the eastern Mediterranean, have not been met with a coordinated government response.
Instead, local communities struggle with the impact of climate change and pollution. Unplanned urban development with bad sanitation infrastructure gradually reduces the unbuilt countryside. Climate advocacy and conservation groups provide the most coordinated response, protecting endangered coastal and mountain areas, pushing organic farming projects, and cleaning up contaminated habitats.
TREND ▲
Expropriation risks from the state are minimal. Expropriation as a direct result of 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. Moreover, Lebanese clients could easily default due to the banking situation, exposing investors to risk. In March 2022, one of Lebanon’s largest banks was closed following a judicial order. A complete collapse of the banking sector is not unlikely.
The political and economic crisis is affecting foreign direct investment (FDI) negatively. FDI decreased from USD2.6 billion in 2018 to USD2.1 billion in 2019, with further decreases projected for 2021 after a small increase in 2020. In March 2020, Lebanon announced its intention to default and restructure its nearly USD31 billion of dollar-denominated debt. The ensuing downgrade of its sovereign debt rating is affecting investor confidence.
Lebanon continues to suffer from the economic slowdown of the Gulf Cooperation Council, the effect of the Syrian crisis, the fragile macroeconomic situation, high unemployment, ‘brain drain’, energy supply shortages and regulatory obstacles.
The combination of COVID-19-related lockdowns, the legacy of the political logjam and rampant currency devaluation has further weakened otherwise growing sectors in information, technology and industry and is hampering the potential of a Westernised and highly skilled workforce.
Green energy projects are waiting in the pipeline but need a political environment conducive to FDI.
TREND ►
Political protests began in October 2019 but retreated in March 2020 due to the COVID lockdowns. Sporadic riots, gunfights over petrol and road blockages have become regular occurrences in recent months and are likely to increase.
Military leaders have publicly criticised officials for lacking a response to address the spreading social chaos resulting from the economic crisis. In areas of tight sectarian political control, most notably the Beqaa Valley and South Lebanon including the southern suburbs of Beirut, riots are less likely. Northern Lebanon and Beirut are particularly vulnerable to political violence.
Hezbollah has introduced their own financial institutions, food markets and pharmacies with parallel imports from Iran and Syria, to shelter their constituency from state breakdown. In other areas, particularly Tripoli and northern Lebanon, the lack of similar formalised 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 February 2021, the Lebanese Armed Forces arrested 18 Islamic State-linked suspects, raising concerns that the terrorist organisation is planning to regain a foothold in the country. The area of the arrests in the Arsal region on the eastern border with Syria was the focus of spill over from the war in Syria between 2012 and 2017, when several cells of Islamic militants carried out or were arrested for planning attacks.
Islamic State 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 army resources and could make it easier for militants to re-enter the Lebanese arena. The situation in Afghanistan- now that the Taliban controls that country again- may give Islamic State in the Middle East renewed energy and resources.
Since October 2019, the Lebanese financial sector has imposed ad hoc capital controls, preventing most Lebanese from transferring money abroad, despite 75% of accounts in Lebanese banks being denominated in dollars. Small savers have generally been restricted access while larger account holders with political connections have been able to transfer savings, leading to billions of dollars in capital flight.
Despite public prosecution of bankers involved in illegal capital transfers in 2020, the government has been unable to stop capital flight, or end capital controls as part of measures to tackle a severe liquidity crisis. Even with a new government in place, fiscal austerity, persistent capital controls, further devaluation and potential impairment applied to wealthy depositors to recapitalise the banking sector seem inevitable. This will affect Lebanon’s potential as a destination for foreign investment, degrading its position further in 2022.
Lebanon’s new government will be forced to reach an agreement with the IMF to stave off a complete economic collapse. IMF intervention could restore confidence in the currency by introducing a new monetary policy framework and a fiscal adjustment programme. The IMF has developed the framework for such reforms- economic reforms were made conditions for receiving loans. IMF talks are ongoing in early 2022 but are unlikely to lead to a formal agreement until after the May 2022 parliamentary elections.
The government led by Prime Minister Najib Mikati has been unable to meet any reform demand, stymied by political elites. Discussions between the central bank and the IMF stalled in December 2020 at the diagnostic stage and international donors may demand the replacement of some senior central bank personnel. Yet there is no agreement within the government on this course, which means that IMF talks have moved slowly.
The situation is increasingly desperate. Central bank reserves are low. Consumer prices are expected to rise drastically, especially now with the Russia-Ukraine crisis- Russia and Ukraine account for 70% of Lebanon’s wheat imports.
Ongoing public investigation of fraud in the banking sector is leading to bank closures and uncertainty about Lebanon’s main financial institutions, including the central bank. This creates a difficult environment for the IMF negotiations, especially since several government representatives in the negotiations come from the banking elite who are now in the limelight for embezzlement of public funds.
Much depends on the results of the May elections to bring about a new political leadership that is open to making the necessary concessions to the IMF.
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