Lebanon's battered economy dealt fresh blow after port blast hits 'Achilles heel'

by Reuters
Friday, 7 August 2020 18:03 GMT

* Warehouse explosion exacerbates battered economy's woes

* Economy expected to shrink by a quarter after blast

* Humanitarian aid pours in but no funding pledges

By Suleiman Al-Khalidi

AMMAN, Aug 7 (Reuters) - Lebanon's economy, already sinking before the explosion that knocked out its main port, could now shrink by double the rate previously forecast for this year, making it even harder to secure the financing the country needs to get back on its feet.

Economists say Tuesday's blast, which also damaged large parts of commercial Beirut, could lead to a GDP contraction of around 20-25% this year - far beyond the IMF's recent forecast for a 12% decline due to a deepening economic and political crisis.

Lebanese officials have estimated losses due to the blast, which killed 150 people, left thousands injured and rendered tens of thousands homeless, could run into billions of dollars.

A financial crisis had already led Lebanon to enter negotiations with the International Monetary Fund in May this year after it defaulted on its foreign currency debt, but those talks were put on hold in the absence of reforms.

Analysts say the blast highlights negligence in Lebanon's governance and puts more pressure on the government to speed up reforms in order to access aid to rebuild the economy.

While there has been an outpouring of sympathy for the country this week, there has been a notable absence of aid commitments so far, beyond urgent humanitarian aid.

"If reforms are not carried out, Lebanon will continue to sink," French President Emmanuel Macron said on Thursday as he toured the devastation in Beirut port.

Gulf states, which once helped Lebanon, meanwhile have baulked at bailing out a country where Iran-backed Hezbollah is powerful.

"It's highly unlikely that Lebanon will be able to unlock the financing that it needs to overcome its fundamental economic problems. Some partners may be reluctant to provide support given the influential role of Iran-backed Hezbollah in the Lebanese government," said Jason Tuvey, senior emerging markets economist Capital Economics.

Lebanon's financial crisis came to a head last October as capital inflows slowed down and protests erupted over corruption and bad governance, with a hard currency liquidity crunch leading banks to impose tight curbs on cash withdrawals and transfers abroad.

The blast has put renewed pressure on the Lebanese pound, which was trading at around 8,300 per dollar on the black market after the explosion, against a level of 8,000 beforehand, dealers say.

Economists predict more erosion in the purchasing power of the pound, which has lost nearly 80% of its value since October with skyrocketing inflation topping 56%, accentuating social tensions.

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

"We think the explosion could delay the reform process as the government tries to deflect blame, eating up the political capital necessary for difficult but urgently needed reforms," said Patrick Curran, senior economist at Tellimer, a UK based research firm.

Businessmen and economists say the port - one of the biggest in the eastern Mediterranean and where over 40% of transshipments went to Syria and the Middle East region - has already lost revenues and business since the blast to other rival ports as shipping lines divert transit cargo.

"The port turned out to be (Lebanon's) weakness," said Jawad Anani, a regional economic consultant and former Jordanian minister. "There was so much dependence on it, so when it was 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 close to the port area, saw them both destroyed by the blast.

"The government should have some mercy on us. I have nothing now," he said.

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

"It's a bleak outlook with infighting among a political class that lacks consensus on a way out and is unwilling to swallow the bitter pill," said Kamal Hamdan, director of Beirut-based Consultation and Research Institute (CRI). (Reporting by Suleiman Al-Khalidi Additional reporting by Tom Arnold; Editing by Susan Fenton)

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