Government recovery plans
delayed by dispute with Gulf

Bank Audi: Return to GDP growth

is possible with IMF program and reforms

The emerging diplomatic crisis with Gulf countries will derail the adjustment and recovery efforts of the new Cabinet considering the deep-rooted relations these countries hold with Lebanon, Bank Audi said in ‘Lebanon Economic Report’ for the third quarter of 2021.

Annual exports to GCC countries total $1 billion and represent 30 percent of overall exports. Nearly 380,000 Lebanese expatriates working in the Gulf region send each year $3 billion in remittances which is equivalent to almost half the total of remittance inflows. More than 200,000 GCC tourists visit Lebanon annually.

“In the hope that such a diplomatic crisis settles in a peaceful manner, there is no doubt that it will leave severe imprints on a nation already in deep crisis and searching for a much needed exit to lessen the huge economic pressures on its population at large,” Bank Audi said.

Regarding economic performance, the report said that positive real GDP growth could materialize if an agreement is reached with the IMF, serious reforms are implemented, and international assistance is secured. “The success of the new Cabinet looking forward depends on the launch of serious structural, fiscal and financial reforms, a full-fledge program with the IMF (with the Fund acting as a watchdog over reform implementation) and the materialization of international assistance for Lebanon (given the leverage the IMF has over foreign donors at large),” the bank said. The low GDP base will impact the growth rate which will be fully driven by private consumption and investment demand. It will ultimately contribute to a relative improvement in socioeconomic conditions.

For an IMF program to be successful, certain conditions must be met, according to the report. These prerequisites include agreeing on the amount of losses caused by the crisis and their distribution on different economic agents, ensuring that the capital control law is ratified, unifying the different exchange rates, preparing a budget with a targeted deficit that does not exceed two percent of GDP, reforming the electricity sector, and adjusting the banking sector to enhance its governance and its ability to withstand pressures.

Concerning the distribution of losses, Bank Audi said that the State should bear a significant portion of the losses because it is responsible for the current conundrum. The banking sector also has to assume its share provided it maintains a minimum level of equity ranging between $7 billion and $8 billion after taking all the losses. In line with international capitalization standards, equity must not represent less than 15 percent of restructured assets.

“The minimum level of equity is crucial to enable the sector to support a recovery plan for the country that would be based on a sound macro picture, a sound banking sector and a sound confidence level that needs to be regained back. We need to both recapitalize the banking sector and reduce its size to sustainable size relative to the size of the economy (an asset-to-GDP ratio not exceeding 150 percent),” Bank Audi said.