Abu Dhabi, UAEMonday 28 September 2020

Sharp increase in Lebanon's inflation rate 'could get worse without government action'

Year-on-year consumer price inflation rose to nearly 90 per cent in June as devaluing pound makes food imports more expensive

People exchange Lebanese pound and US dollar notes in Lebanon's capital, Beirut. The currency has lost 75 per cent of its value on the black market this year. AFP  
People exchange Lebanese pound and US dollar notes in Lebanon's capital, Beirut. The currency has lost 75 per cent of its value on the black market this year. AFP  

A sharp increase in consumer price inflation is “a potent illustration of the severity of Lebanon’s crisis”, which could deteriorate unless the government takes urgent action, according to emerging markets research company Tellimer.

Official figures published earlier this week showed a year-on-year increase in consumer price inflation from 56.5 per cent in May to 89.7 per cent in June as the value of the Lebanese pound continued to fall, causing the prices of food and other basics to rise.

Although Lebanon officially maintains its currency peg at 1,507.5 pounds to the US dollar, its value on the black market has declined by 75 per cent so far this year. The currency fell by 50 per cent from the end of May, according to Patrick Curran, a senior analyst at Tellimer Research, with the pound currently trading at about 8,200 to the dollar.

“Lebanon’s US dollar peg has effectively subsidised imports since its inception in 1997, allowing Lebanon to consume beyond its means, but hollowing out industry in the process,” Mr Curran said.

He said the “economy is, thus, extremely import-dependent” and cited the most recent gross domestic product figures from 2018 that showed imports accounting for about 40 per cent of the household consumption.

“This figure is even higher for certain key categories, with a 2016 UN report estimating that the country imports 65 per cent to 80 per cent of its foodstuff needs. This highlights the immediate humanitarian impact of the [pound’s] devaluation, which has prompted a mass shortage of basic supplies [such as] food, medicine and diapers,” Mr Curran said.

Lebanon faces its worst financial crisis since independence in 1943, and its economy has deteriorated after talks with the International Monetary Fund stalled, the Institute of International Finance said in a report earlier this month.

The country asked the fund for a $10 billion (Dh36.7bn) rescue package in May but has not been able to agree on the terms of the bailout.

Food price increases were the main driver of higher inflation, official statistics show, with a 247 per cent year-on-year increase in June. Despite subsidies on some basic goods such as wheat and medicines, inflation pass-through from the parallel exchange rate has been about 50 per cent this year, Mr Curran said, which suggests the government's estimate that inflation will average 53 per cent this year looks "increasingly unrealistic".

“Based on a 50 per cent inflation pass-through and [the pound] staying flat at 8,200 per US dollar through [to] year-end, we expect inflation to reach circa 190 per cent, year on year, in July and to average 110 per cent for the year – double the government’s forecast," Mr Curran said.

In a research note on currency pegs in the Mena region on Thursday, Fitch Ratings said Lebanon’s pound would probably force a “significant adjustment of the current account in the near term through compression of imports, but significant structural constraints will hamper the emergence of sustainable export sectors”.

Updated: July 26, 2020 01:51 AM

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