Lebanon is already reeling under an acute financial crisis. This will be further amplified due to the poor monetary policy and dependence on U.S. economy. Lebanon dollar-based economy will hamper recovery from recession says World Bank in its Lebanon Economic Monitor (LEM) report of Spring 2023.
According to this report by the World Bank, the predicted amount of dollars in 2022 in Lebanon’s economy is $9.9 billion, which represents approximately half of the country’s economy, which amounts to about 45.7% dependency on U.S. dollars.
According to the latest report, Lebanon is facing a systemic failure in its banking system and a collapse of its currency. This has resulted in a significant shift towards a dollarised cash economy, which now accounts for almost half of the country’s GDP in 2022.
This reliance on hard currency cash transactions has emerged due to a loss of confidence in the banking sector and is hindering Lebanon’s ability to improve its financial integrity by implementing anti-money laundering measures.
“The cash economy is far from a net contributor to growth. On the contrary, it threatens to compromise the effectiveness of fiscal and monetary policy, heightens the risk of money laundering, increases informality, and prompts further tax evasion,” said the report.
The report highlights that Lebanon’s economy is still far from recovery, and the country’s policymaking has been depleting various forms of capital, including human and social capital. The delay in implementing a comprehensive reform and recovery plan is exacerbating these losses and making the path to recovery longer and more expensive.
“As long as the economy is contracting and crisis conditions persist, living standards are set for further erosion, and poverty will continue to spiral,” stated the World Bank Middle East Country Director, Jean-Christophe Carret.
The report further reveals that Lebanon’s real GDP contracted by 2.6 percent in 2022, resulting in a total economic contraction of 39.9 percent of GDP since 2018. Additionally, the current account deficit has grown to 20.6 percent of GDP due to a decline in exports and an increase in imports.
Furthermore, the Lebanese local currency has experienced a depreciation of over 98 percent compared to its value before the crisis. Inflation has soared to 171.2 percent in 2022, making it one of the highest rates globally.
Lebanon dollar-based economy will hamper recovery from recession says World Bank. Understanding the size of the cash economy is crucial for comprehending the changing dynamics of transactions and evaluating the potential consequences of a widespread cash-based system on fiscal and monetary policies.
It is essential to emphasize that the cash economy does not contribute positively to overall economic growth. In reality, the transactions within the cash economy are already incorporated into the calculation of GDP. Therefore, although the method of settling transactions may have changed since the onset of the crisis, this shift does not stimulate economic expansion.
The prevalence of cash transactions significantly amplifies the risk of money laundering, promotes informality, and provides opportunities for additional tax evasion.
