Lebanon’s battered economy dealt another blow after port explosion hit ‘Achilles heel’

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AMMAN (Reuters) – The Lebanese economy, already sinking before the explosion that destroyed its main port, could now shrink by double the rate previously forecast for this year, making it even more difficult to obtain the financing of which the country needs to get back on its feet.

FILE PHOTO: A view shows damage at the site of Tuesday’s blast in the port area of ​​Beirut, Lebanon August 7, 2020. REUTERS / Hannah McKay / File Photo

Economists estimate Tuesday’s explosion, which also damaged large parts of commercial Beirut, could cause GDP to shrink by around 20-25% this year – well beyond recent IMF forecasts of a decline by 12% due to a worsening economic and political crisis.

Lebanese officials have estimated that losses from the explosion, which killed 150 people, injured thousands and left tens of thousands homeless, could run into billions of dollars.

A financial crisis had already led Lebanon to start negotiations with the International Monetary Fund in May this year after defaulting on its foreign currency debt, but these talks were suspended in the absence of reforms.

Analysts say the explosion highlights neglect in Lebanese governance and puts more pressure on the government to speed up reforms to access aid to rebuild the economy.

While there has been a wave of sympathy for the country this week, there has been a notable lack of aid commitments so far, beyond emergency humanitarian aid.

“If the reforms are not carried out, Lebanon will continue to sink,” French President Emmanuel Macron said Thursday as he visited the devastated port of Beirut.

The Gulf states, which once helped Lebanon, meanwhile refused to bail out a country where Iran-backed Hezbollah is powerful.

“It is highly unlikely that Lebanon will be able to unlock the funding it needs to overcome its fundamental economic problems. Some partners may be reluctant to lend their support given the influential role of Iranian-backed Hezbollah in the Lebanese government, ”said Jason Tuvey, senior economist, Emerging Markets Capital Economics.

The financial crisis in Lebanon came to a head last October as capital inflows slowed and protests erupted against corruption and bad governance, with a hard currency liquidity crisis leading banks to impose strict restrictions on withdrawals and cash transfers abroad.

The explosion put further pressure on the Lebanese pound, which was trading at around 8,300 to the dollar on the black market after the explosion, from a previously 8,000 level, according to dealers.

Economists predict a further erosion of the purchasing power of the pound, which has lost nearly 80% of its value since October with inflation soaring to 56%, accentuating social tensions.

The most urgent reforms that need to be implemented to revive talks with the IMF include tackling a runaway budget, growing debt and rampant corruption, economists say.

“We believe the explosion could delay the reform process as the government tries to deflect the blame, devouring political capital needed for difficult but urgent reforms,” ​​said Patrick Curran, senior economist at Tellimer, a research firm. based in the UK.

Businessmen and economists say the port – one of the largest in the Eastern Mediterranean and where more than 40% of transshipments have gone to Syria and the Middle East – has already lost revenue and business since the explosion to other rival ports as shipping companies divert cargo in transit. .

“The port has turned out to be (Lebanon’s) weakness,” said Jawad Anani, regional economic consultant and former Jordanian minister. “There was so much addiction to it, so when it got demolished it turned out to be their Achilles heel.

David Sabella, who opened an Italian restaurant and bar, “Spicy No7”, 18 months ago in Gemmayze near the port area, destroyed them both by the explosion.

“The government should have mercy on us. I have nothing left now, ”he said.

Rising political tensions since the explosion will only make matters worse and complicate efforts to accelerate reforms, pushing the country into uncharted territory.

“It is a grim outlook with infighting between a political class that lacks consensus on an outcome and that is unwilling to swallow the bitter pill,” said Kamal Hamdan, director of the Institute for Consultation and research (CRI) based in Beirut.

Reporting by Suleiman Al-Khalidi Additional reporting by Tom Arnold; Edited by Susan Fenton

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