The World Bank In Lebanon

For nearly three years, Lebanon has been assailed by the most devastating, multi-pronged crisis in its modern history. The unfolding economic and financial crisis that started in October 2019 has been further exacerbated by the dual economic impact of the COVID-19 outbreak, and the massive Port of Beirut explosion in August 2020.

Of the three crises, the economic crisis has had by far the largest (and most persistent) negative impact. The Spring 2021 Lebanon Economic Monitor found that Lebanon’s economic and financial crisis ranks among the worst economic crises globally since the mid-nineteenth century. Nominal GDP plummeted from close to US$52 billion in 2019 to an estimated US$23.1 billion in 2021. The protracted economic contraction has led to a marked decline in disposable income. GDP per capita dropped by 36.5% between 2019 and 2021, and Lebanon was reclassified by the World Bank as a lower-middle income country, down from upper middle-income status in July 2022.  Such a brutal contraction is usually associated with conflicts or wars.

The banking sector, which informally adopted strict capital controls, has ceased lending and does not attract deposits. Instead, it endures in a segmented payment system that distinguishes between older (pre‐October 2019) US Dollar deposits and minimum new inflows of “fresh dollars.” The former is subject to sharp deleveraging through de facto “lirafication” and “haircuts” (up to 85% on dollar deposits). The burden of the ongoing adjustment and deleveraging is highly regressive, falling hardest on smaller depositors and Small and Medium Enterprises (SMEs). The decline in average income coupled with triple-digit inflation and a severe currency depreciation are immensely curtailing purchasing power. Inflationary effects are highly regressive factors, disproportionately affecting the poor and middle class. The social impact, already dire, could become catastrophic; more than half the country’s population is likely already below the poverty line. Unemployment increased from 11.4% in 2018-19 to 29.6% in 2022.  Lebanon has witnessed a dramatic collapse in basic services, driven by depleting foreign exchange (FX) reserves since the onset of the compounded crisis. Severe shortages of fuel items resulted in the national electric grid experiencing more than eight rolling blackouts as public electricity supply averages one to two hours per day. Fuel shortages have also hindered access to healthcare and clean water, while food supply shops, transport service providers, and telecom network operators face severe disruptions to their supply chains. Lebanon has also had to deal with the COVID-19 pandemic through intermittent lockdowns and other measures to mitigate the impact of the virus both on people and on the already weak health system. Vaccination, launched in February 2021 with initial financing from the World Bank, progressed according to the National COVID-19 Deployment and Vaccination Plan, with the aim to vaccinate 70% of the total population, citizens and non-citizens, in a multi-phase rollout by the end of 2022.

Beyond the human tragedy, the impact of the Port of Beirut explosion has had implications at the national level, despite its geographical concentration. These add to Lebanon’s long-term structural vulnerabilities, which include low-grade infrastructure—a dysfunctional electricity sector, water supply shortages, and inadequate solid waste and wastewater management—as well as weak public financial management, large macroeconomic imbalances, and deteriorating social indicators. 

Immediately after the explosion, the World Bank Group, in cooperation with the United Nations (UN) and the European Union (EU), launched a Rapid Damage and Needs Assessment (RDNA) to estimate the impact of the blast on residents, physical assets, infrastructure and service delivery. The RDNA followed a “whole of Lebanon approach,” engaging public authorities, institutions, and civil society organizations. The assessment found the value of damage was in the range of US$3.8 to US$4.6 billion, with losses to financial flows of US$2.9 to US$3.5 billion. The impact has been particularly severe in key sectors vital for growth, including finance, housing, tourism, and commerce. Through to the end of 2021, the costs of recovery and reconstruction are expected to total US$1.8 to US$2.2 billion. 

Building on the recommendations of the RDNA, in December 2020 the World Bank Group, EU and UN launched the Reform, Recovery and Reconstruction Framework (3RF) to address Lebanon's immediate- and short-term needs. The 3RF outlines a costed, prioritized framework of actions needed to support recovery and reconstruction in Lebanon. Its aim is to “build back better” by adopting an integrated approach focused on people-centered recovery and preparing the ground for medium-term reconstruction, and on initiating key structural reforms based on the principles of transparency, inclusion, and accountability. 

The Lebanon Financing Facility (LFF) was formally established on December 18, 2020 to kickstart the immediate socio-economic recovery of vulnerable populations and businesses affected by the explosion, and to support the Government of Lebanon in catalyzing reforms and preparing for medium-term recovery and reconstruction. The LFF provides an important means to pool grant resources and strengthen the coherence and coordination of financing, in alignment with 3RF priorities. It adopts flexible implementation modalities and strong fiduciary monitoring and oversight. 

Building a better Lebanon requires swift and decisive action, particularly on reform. In the immediate term, Lebanon needs to adopt and implement a credible, comprehensive and coordinated macro-financial stability strategy within a medium-term, macro-fiscal framework. This strategy would be based on: (i) a debt restructuring program aimed at achieving debt sustainability over the medium-term; (ii) comprehensive restructuring of the financial sector toward regaining the solvency of the banking sector; (iii) new monetary policy framework aimed at regaining confidence in the exchange rate and its stability; (iv) phased fiscal adjustment aimed at regaining confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection. 

Over the medium-term, Lebanon has to prioritize building better institutions, as well as good governance and a better business environment, alongside physical reconstruction. However, given Lebanon’s state of insolvency (sovereign, banking system) and its lack of sufficient foreign exchange reserves, international aid and private investment will be essential to its recovery. The extent and speed to which aid and investments are mobilized will depend on whether the authorities and the Lebanese Parliament can act swiftly on the much-needed fiscal, financial, social and governance reforms. Without these, recovery and reconstruction cannot be sustainable, and the social and economic situation will continue to worsen.

Last Updated: Nov 02, 2022

The World Bank Group’s Country Partnership Framework (CPF) (FY17–FY22) for the Lebanese Republic was launched on July 14, 2016. Informed by a broad range of consultations with members of the government, parliament, private sector, and civil society, the CPF focuses on: (i) scaling up access to and the quality-of-service delivery; and (ii) expanding economic opportunities and increasing human capital. Within these areas, the Bank Group aims to help Lebanon mitigate the economic and social impact of the Syria crisis, safeguard its development gains, and improve its chances of stability and development. Cross-cutting themes of governance and renewing the social contract, were included to help regain the trust of citizens, and improve the quality of public services. The CPF mainstreamed gender, particularly through expanding economic opportunities and increasing human capital. 

In May 2022, the World Bank completed a Lebanon Performance and Learning Review (PLR) which summarizes progress under the FY17–FY22 Country Partnership Framework (CPF) and proposes revisions to the CPF and its priority areas to address the impact of the crises on the poor and vulnerable and to steer the country’s economy towards recovery. The PLR also introduced women’s economic empowerment as a cross-cutting theme to contribute to a more enabling environment for women’s economic participation and facilitate women’s entrepreneurship. The PLR extended the term of the current CPF by one year and will serve as a bridge to the preparation of Lebanon’s next CPF (FY24-FY29).

As of October 2022, the World Bank’s total commitment in Lebanon amounts to US$1.5 billion, consisting of 20 active projects (loans and grants) covering a range of sectors, including water, transport, education, health, poverty targeting, social safety nets, food security, environment, and Small and Medium Enterprises.  These projects are financed from a variety of sources, including special mechanisms, such as the Global Concessional Financing Facility (GCFF) and the Lebanon Financing Facility (LFF). In 2016, Lebanon also obtained US$100 million in financing from the International Development Association (IDA), whose funding is normally reserved for Low-Income Countries, to support the Reaching all Children in Education (RACE) II Program (US$196 million).

The Lebanon program is complemented by a number of Advisory Services and Analytics that aim to provide important economic and social, evidence-based diagnostics, which serve as data platforms to inform project design and stakeholders. 

Full list of World Bank-funded Projects in Lebanon

Response to Lebanon’s compounded crises

Over the past years, the World Bank has mobilized efforts and resources to help save lives and livelihoods and address the dire needs of the Lebanese people reeling under the pressure of the multi-faceted crises affecting their country. To that effect, the Bank has approved new projects and redirected financing under the portfolio to address more pressing and urgent needs.

In the health sector, the Lebanon Health Resilience Project  (US$120 million) was restructured twice to incorporate a new component to respond to the COVID-19 pandemic by assisting in preparedness and response capabilities through the training of health workers and frontline responders, covering the cost of hospital care for COVID-19 patients, and supporting the urgent procurement of goods and equipment to strengthen the capacity of public hospitals, as well as purchasing and deploying COVID-19 vaccines. 

The Roads and Employment Project (US$200 million) was restructured with US$10 million reallocated to support small farmers impacted by the crises, with inputs and materials to help them  continue with their planting and animal production, and thus support their ability to contribute to food security.

An Emergency Crisis and COVID-19 Response Social Safety Net Project-ESSN (US$250 million) became effective in July 2021 to provide emergency cash transfers and access to social services for extremely poor and vulnerable households, in addition to top-up cash transfer to children between the ages of 13 and 18 years, who may be at risk of dropping out of school. The project AMAN also supports the development of a comprehensive, national social safety net system through DAEM, the social registry developed on the IMPACT platform for citizens to register for social assistance.

In May 2022, the World Bank approved a US$150 million Wheat Supply Emergency Response Project to finance immediate wheat imports to avoid disruption of supply over the short term and help secure affordable bread for poor and vulnerable households. The project, which is supported by concessional financing through the GCFF, aims to help Lebanon face the impact of the war in Ukraine as the country imports nearly 80% of the wheat it consumes. The project will also help strengthen the governance capacity in the wheat sector and help position the sector on a pathway toward recovery and greater resilience.

In support of the Education sector, the World Bank and the UK Foreign, Commonwealth and Development Office (FCDO) repurposed US$37 million under the Lebanon Syrian Crisis Trust Fund (LSCTF) to provide financial incentives to public school teachers suffering from the severe economic and financial crisis in Lebanon to ensure they can purchase fuel to travel to work during academic year 2021-2022.

One year after the Port of Beirut explosion, the first LFF financed project was approved: The US$25 million Building Beirut Businesses Back Better Fund (B5) aims to support the recovery of targeted MSEs and sustain the operations of eligible Micro-Finance Institutions (MFI)s. Implemented by Kafalat, the B5 Fund provides grants to approximately 4,300 businesses and/or entrepreneurs, of which 30 percent will be Women Owned or Led businesses.

Under the LFF, three other operations were approved in 2022. The Beirut Housing Reconstruction and Cultural and Creative Industries Recovery project (US$12.75 million, implemented by UN-Habitat) will help facilitate the return of socio-economically vulnerable households to neighborhoods damaged by the Port of Beirut explosion through historical housing rehabilitation and will sustain the livelihoods of affected cultural entities and practitioners. The Support for Social Recovery Needs of Vulnerable Groups in Beirut project (US$7.8 million, implemented by the International Rescue Committee) will provide immediate social recovery support to vulnerable groups impacted by the aftermath of the explosion. The Beirut Critical Environment Recovery, Restoration and Waste Management Program (US$10 million, implemented by UNDP) will help Lebanon mitigate the environmental and health impacts of the Port of Beirut explosion on neighboring population and support the development of a strategic plan for greening Beirut’s reconstruction. 

In the environment sector, the World Bank is also supporting Lebanon in paving the way for Building Back Better and Greener by mainstreaming the Green, Resilient, Inclusive Development (GRID) approach in the recovery plan currently being developed in consultation and coordination with various stakeholders. Efforts also include a number of interventions to address environmental pollution resulting from the discharge of untreated wastewater, mismanagement of municipal solid waste, industrial pollution, water contamination from agro-chemicals, and hap-hazard discharge of hazardous wastes.

International Finance Corporation (IFC) 

Prior to the current crisis, IFC’s investment program in Lebanon included commitments of US$218 million in Long Term Finance (LTF) and US$2 billion in Short Term Finance (STF). As of July 31, 2022, IFC’s committed exposure in Lebanon stands at US$250 million, with a net exposure of around US$95.3 million (post-write-off of commercial bank equity investments). The financial crisis led to a significant country risk premium that resulted in a significant drop in exposure, particularly under IFC’s Global Trade Finance Program (GTFP). The largest part of IFC’s exposure remains in the financial sector representing 96%, followed by the construction and retail sectors representing 4%. The financial crisis and lack of financial sector reforms, including informal capital controls, have led to a rapid devaluation of the local currency against the US$ and the creation of a large informal sector. This has negatively affected the performance of IFC’s overall portfolio, with the ratio of non-performing loans (NPLs) standing at 98.9% as of July 31, 2022.

Notwithstanding the challenging environment, IFC has been a pioneer DFI in selectively identifying leads to support the Lebanese private sector, which has remained resilient.

Despite high uncertainties, fragility, and multiple crises facing the country, IFC has maintained an opportunistic approach by identifying selective cross-border investment opportunities in the real sector with export potential clients focused on manufacturing, disruptive technologies, and funds from Lebanon. IFC’s FY20-FY21 commitments in this space have reached US$30 million, and the upcoming pipeline of activities could reach around US$133 million. In parallel, IFC continues to explore/extend upstream/advisory services interventions in several themes and cross-cutting areas in Lebanon, such as Climate, Corporate Governance, and Gender, as well as client-specific interventions such as MFIs and private equity funds.  IFC is also conducting sector-focused studies to assess means to provide support to MSMEs, particularly when it comes to ESG compliance, Legal and Regulatory Aspects of Movable Asset Based Lending (ABL), and Supply Chain Finance (SCF). 

Multilateral Investment Guarantee Agency (MIGA) 

Until June 30, 2022, MIGA’s outstanding exposure in Lebanon stood at US$35 million related to guarantees for an electricity distribution service provider under a PPP contract with the national utility, Electricité du Liban. The project was signed in FY14 and extended for an additional four years in FY18, expiring in FY22. In recent years, many of the political risks that MIGA covers—including sovereign default, currency restrictions and civil disturbances—have been witnessed in Lebanon. At the same time, Lebanon’s ongoing crises have adversely affected the operating environment for foreign investors in the country, limiting foreign direct investment and in turn, demand for MIGA’s political risk insurance products. The adoption of critical and overdue structural and sectoral reforms, which can develop pathways out of Lebanon’s crisis and improve the operating environment, will be important to generate foreign direct investment, thereby enabling a greater role for MIGA to support Lebanon’s recovery alongside the World Bank and IFC.

Last Updated: Nov 02, 2022