Lebanon

Lebanon has Lost Precious Time, Urgent Action Needed Now [EN/AR]

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The World Bank Group Adapts its Strategy to Support Lebanon's Emerging Needs, Dire Socioeconomic Challenges and Continued Political Instability

Beirut, May 30, 2022 - The World Bank Group's Board of Executive Directors approved on May 20 the Performance and Learning Review (PLR) of the Lebanon's Country Partnership Framework (CPF) which summarizes implementation progress under the CPF over fiscal years 2017-2022 and refines its objectives at a time when the country is experiencing one of the most catastrophic economic and financial crises in recent history. The PLR also extends the CPF period by one additional year (through fiscal year 2023) to advance urgently needed socioeconomic recovery programs targeting the poor and most vulnerable and support urgently needed macroeconomic and structural reforms.

Over the CPF period, Lebanon has been assailed by compounded and overlapping crises: a severe economic and financial crisis, the COVID-19 pandemic, the Port of Beirut explosion and most recently a food security crisis as a result of the war in Ukraine. According to World Bank analysis, nominal GDP plummeted from close to US$52 billion in 2019 to a projected US$21.8 billion in 2021, marking a 58.1 percent contraction. The exchange rate continued to deteriorate sharply, keeping inflation rates in triple digits. The crises have exacerbated social hardships, disproportionately impacting poor and vulnerable households and reinforcing inequality. Faced with political inaction, the unresolved crises have created long-lasting scars on the Lebanese economy and society: basic public services are failing, unemployment is rising unabatedly, and human capital is severely depleted. The private sector is severely constrained by a paralyzed financial system. Lower firm productivity and revenue generation have caused widespread layoffs and bankruptcies. Assuming continued no policy reform, real GDP is projected to contract by 6.5 percent in 2022.

Against this background of a collapsing economy and uncertain political set-up, the PLR updates the CPF by making it more people-centered, exercising more selectivity in a narrow set of sectors that directly benefit the poor and most vulnerable, including refugees, and preparing the ground for a reform program. The PLR revises the CPF priority areas and its results framework. The revision aims to strengthen the response to the crises and mitigate their socioeconomic impact and to prepare the ground for addressing underlying structural challenges in governance and the economic model.

Progress in achieving the CPF objectives has been modest on several fronts given the prevailing governance challenges and deliberate policy inaction by the political class. In response to emerging priorities and needs, the World Bank has restructured and reprogramed its portfolio by cancelling underperforming projects and proactively allocating resources to newly identified priorities through a response focused on relief, recovery, and resilience. This included: COVID-19 emergency support to equip hospitals for urgent care and COVID-19 vaccine roll out; targeted cash transfer program to support extremely poor and vulnerable households; support to small and medium businesses impacted by COVID-19 and Port of Beirut explosion; vouchers support to small scale farmers to sustain agricultural production; and emergency food security project to ensure availability and access to food grains for the poor and vulnerable including refugees.

The World Bank Group also harnessed its relations with the donor community, through its close coordination with the UN and the EU, to conduct a Rapid Damage and Needs Assessment (RDNA) immediately after the Port of Beirut explosion and established the Lebanon Reform Recovery and Reconstruction Framework (3RF), followed by the formation of the Lebanon Financing Facility (LFF) a multi-donor trust fund to channel financial support to implement 3RF priorities. The LFF has already kick-started several interventions that address the recovery needs of micro- and small enterprises, the social recovery needs of affected population groups, housing reconstruction and rehabilitation of cultural and creative industries in damaged neighborhoods and lately solid waste management interventions and environment recovery activities in areas affected by the explosion.

The PLR also seeks to learn from implementation experience to improve both the implementation of the existing portfolio and the quality of potential new projects. Among the main lessons learned is the need to support basic service delivery, allowing flexibility in project design, strengthening inter-agency coordination for reform implementation, forming strong partnerships, rebuilding the social contract through accountability and oversight of priority reforms, institutionalizing decentralized implementation mechanisms and maximizing the impact of third-party monitoring agents in project implementation.

"Despite early warnings, Lebanon has lost precious time and numerous opportunities to adopt a path to reform its economic and financial system. The cost of inaction is collosal not only on daily lives of citizens, but also on the future of the Lebanese people," said Saroj Kumar Jha, World Bank Mashreq Regional Director. "Two years and a half into the crisis, Lebanon has yet to embark on a comprehensive reform and recovery program to stop the country from further sinking. Continued deliberate delay in addressing drivers of the crisis represents a threat not only at the socio-economic level but also a risk of a systemic failing of state institutions and pressure on an already fragile social peace."

The PLR draws on the Systematic Country Diagnostic (SCD), the recent Lebanon Economic Monitors (LEMs), and the recent Risk and Resilience Assessment (RRA). It also benefited from extensive consultations with various stakeholders including government, civil society, private sector, and international community.

The overarching constraints to development in Lebanon identified in the SCD remain: elite capture behind the veil of confessionalism; and the exposition to conflict and violence. They have created a fragile and dysfunctional political system as well as a state that has not been able to insulate political conflict from its capacities to govern and exercise authority. The management of the crises exemplifies the extent to which governance capacities have eroded as well as the political paralysis elite capture has brought. In this context, the PLR draws on three potential scenarios in which a new political settlement can evolve---political gridlock, minimal consensus, and political shift. Each scenario imposes a different set of constraints and opportunities for World Bank engagement.

Going forward and as previously called for, Lebanon urgently needs to move forward with the adoption of a credible, comprehensive and equitable macro-financial stabilization and recovery plan and accelerate its implementation if it is to avoid a complete destruction of its social and economic networks and immediately stop irreversible loss of human capital. As detailed in previous issues of the LEM, this strategy would be based on: (i) a new monetary policy framework that would regain confidence and stability in the exchange rate; (ii) a debt restructuring program that would achieve short-term fiscal space and medium-term debt sustainability; (iii) a comprehensive restructuring of the financial sector to regain solvency of the banking sector; (iv) a phased, equitable, fiscal adjustment to regain confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection.

While Lebanon's governance continued to deteriorate during CPF implementation, certain institutional bright spots were able to provide a level of transparency and accountability to government services and inspire citizen trust. Examples include the Rafik Hariri University Hospital and IMPACT, the information technology platform of the Central Inspection. Going forward, building and strengthening institutional capacity is critical and requires investments in time, training, and financial support to strengthen public administrations and ensure sustainable development.

Substantial efforts are needed to push the governance reform agenda forward. This is all the more critical in order to renew the social contract and mend the broken citizen-state trust relationship particularly at this delicate juncture. Procurement reform, public financial management reform, strengthening parliamentary financial oversight, and the independence of the judiciary are some of the key areas on this front.

Women's rights remain subject to legal, institutional, and social hurdles reflecting overall high levels of exclusion. The PLR introduced a cross-cutting theme focused on economic opportunities to address the constraints women face in the labor markets and promote women's entrepreneurship. This will complement programs and efforts already underway in the context of the Mashreq Gender Facility.

While the World Bank continues to channel portfolio resources toward projects that directly contribute to saving lives, protecting the poor and most vulnerable, and preventing the collapse of basic services, it is also preparing a pipeline of strategic analytical and sector studies to inform reforms that can catalyze private-sector-led recovery and rebuilding Lebanon.

Contacts

Washington
Ashraf Al-Saeed
+1-202-473-1187
aalsaeed@worldbank.org

Beirut
Zeina El Khalil
+961-1-963-438
zelkhalil@worldbank.org