BEIRUT: Lebanon will experience its worst inflation in history once the Central Bank’s subsidies are totally lifted on fuel oil and diesel, economists and experts warned.
The warning came as Prime Minister-designate Najib Mikati desperately struggles to overcome all the obstacles in the formation of a new Cabinet, which is expected to restore some confidence in the country as well all reduce the dollar exchange rate against the Lebanese pound.
Observers and international organizations are also closely monitoring the intensive discussions in the Lebanese parliament to approve the capital control law and the ration card.
The Central Bank is expected to lift all subsidies on fuel oil and diesel at the end of September 2021, a move that is expected to have a devastating impact on the already fragile economy if this action was not matched with the issuance of the ration card and serious attempts to implement reforms.
Marwan Barakat, group chief economist and head of research at Bank Audi, told The Daily Star that full subsidy removal is expected to have additional significant inflationary effects expected at close to 180 percent (On top of the 316 percent inflation reported between June 2019 and 2021).
“This additional inflation is driven by the direct effects of the increase in oil prices on transport cost and housing energy, but also on the indirect effects caused by this supply push inflation on all other sectors in the economy. It is yet worth mentioning that the subsidy lifting has become a necessary evil following the significant drop in BDL liquid reserves to $14 billion, which is equivalent to the required FX deposits of banks at the Central Bank,” Barakat explained.
He added that the the continuation of the subsidy would mean drawing on the banks required deposits at the Central Bank and ultimately putting at stake the quality of banks customer deposits.
“Last year, the cost of subsidy has hovered around circa $5 billion, fully financed by the Central Bank, notwithstanding $1 billion of EDL financing. The only way out looking forward is tied to a reinforcement of the stock of FX reserves at the Central Bank, which calls for the quick formation of a credible Cabinet, the launch of structural and fiscal reforms, the agreement on a program with the IMF and the materialization of international assistance for Lebanon,” he explained.
Barakat said as to the issuance of ration cards, it remains, despite its need, a partial temporary short term cure in the absence of the reforming alternative.
Policy and Research Specialist at Information International Mohammad Chamseddine drew a bleak picture of the Lebanese economy in case no real action was taken to steer Lebanon from this impending calamity.
Chamseddine noted that the Lebanese have already lost 92 percent of in the value of their salaries even before lifting of the subsidies on fuel oil at end of September.
According to this expert, the minimum wage which was calculated previously at LL1,515 is now worth only$35.
The minimum wage of the Lebanese is now almost equal to the minimum wage in Yemen, which is $33.
Nearly 70 percent of wages in both the private and public sector range between LL1.5 million to LL2.5 million.
The average salary of a university professor which was $2,500 based on the old rate of LL1,515 is now worth $211, or $9.4 per day.
The average salary of military personnel is now worth $74, or $3.3 per day.
The average salary of a judge has dropped from $3,500 to $275, or $11 per day.
“The ration card is not expected to be issued at the end of September and even if this card is issued without a real Cabinet and real reforms, the inflation will reach alarming levels,” Chamseddine told The Daily Star.
He added that even a salary of LL7 million a month will not be sufficient to support a family, especially after the lifting of the subsidies on fuel oil.
In his opinion, the best way to stimulate the economy is through the release of part of BDL’s foreign currency reserves to the depositors and the removal of the exclusive dealership.
“I think if BDL’s board of directors agreed to lower the mandatory reserves from the current 14 percent to less than 10 percent then this step will help contain the rise of the dollar.
In its last report on Lebanon, the World Bank said the multiple crises afflicting Lebanon have led to a severe deterioration in people’s standard of living.
“Basic rights are being denied as people are unable to afford or access basic goods and services including health, food, education, electricity, water and wastewater management,” the World Bank said.
It added that extreme poverty – also known as “food poverty” – increased three-fold from 2019 to 2020, rising from 8 percent to 23
“Meanwhile, GDP is estimated to have fallen by 20.3 per cent in 2020. In March 2021, 78 per cent of the Lebanese population (3 million people) was estimated to be in poverty. Extreme poverty has reached an estimated 36 percent of the Lebanese population (1.38 million). In parallel, according to the 2020 Vulnerability Assessment of Syrian Refugees in Lebanon (VASyR), 89 percent of Syrian refugee families (nine out of 10) live in extreme poverty, increasing from 55 percent only a year before, with even worse conditions for female-headed households.
“As the situation continues to deteriorate, an even greater number of people are falling into absolute poverty and food insecurity. In parallel, the situation has affected the availability of basic services such as fuel, electricity, health care and clean water, most of which were previously provided through the private sector.
With the economic crisis, an increasing number of individuals are seeking to access such services in the public sector, which is already overstretched and underdeveloped due to years of under-investment. Humanitarian needs are increasing among Lebanese and migrants across all sectors, including food security and nutrition, health, protection, education and WASH, according to the report.
It warned that the situation also threatens to trigger a substantial increase in irregular migration of all population groups via dangerous maritime routes, predominantly to Cyprus.
An increase in departure rates has already been noted, with frequent incidents observed in 2020 and 2021.
In addition to a significant increase in competition over employment, intra-communal tensions within Lebanese communities have worsened due to the shortage of basic essential goods and services. The World Bank noticed that tensions between host communities and refugees have similarly increased.
Reports indicate growing forced evictions and occurrences of refugees being denied access to shops selling subsidized goods or having to pay for basic goods at increased prices, among other discriminatory measures.
“Overall, increasing tensions and sporadic violence have diminished the operational space for humanitarian actors who face an increasing number of access challenges,” the report said.