Lebanon’s economy is at a turning point, according to a report by the financial industry trade group the Institute of International Finance (IFF) released on Wednesday.
The country is currently grappling with one of the heaviest public debt burdens in the world, at 150 percent of GDP, combined with years of low economic growth.
The IFF report states that the economy is now at a “turning point”. In late August Fitch Ratings downgraded the country’s credit rating to CCC from B-. The agency said the downgrade reflected “intensifying pressure on Lebanon’s financing model and increasing risks to the government’s debt servicing capacity.”
Meanwhile, Standard & Poor’s Rating Agency has given Lebanon a six-month grace period before a rating change.
However, the IFF added that the country will not default on its debt, citing the country’s sizable international reserves, robust banking sector, and its history of never defaulting on foreign-currency debt.
Authorities have realized the gravity of the crisis, added the IFF. On Tuesday, Prime Minister Hariri said the government would announce, “a state of economic emergency,” and work on a plan to accelerate public finance reforms.
Hariri later pledged to keep the national currency pegged to the dollar and said that the government won’t consider an International Monetary Fund program which would leave the Lebanese pound’s value to markets. The currency has been pegged to the dollar since 1997.
The successful implementation of fiscal and structural reforms, said the IFF, could encourage donors to unlock the disbursement of the $11 billion in concessional loans that were announced in April 2018 at the CEDRE conference in Paris.
The IFF expects real GDP to contract in 2019 by 0.6 percent on the back of high interest rates, political issues, expenditure arrears, and disunity and delays in fiscal and structural reform.
But political stability, reform, and access to CEDRE loans could improve investment and net exports from 2020 onwards, the IFF said. The institute estimates real GDP growth of 2.5 percent in 2020.
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