Informal dollarization of Lebanon’s economy curtails recovery: World Bank
Prices have skyrocketed in Lebanon as the local currency has shed nearly all of its value, in a situation largely ignored by financial elites and the political class
By News Desk - May 18 2023

(Photo credit: Getty Images)

The World Bank says that the booming dollarization of Lebanon’s crisis-hit economy is restricting the possibility of its recovery.

Lebanon’s informally dollarized economy is predicted to have reached a staggering $9.9 billion in 2022, almost half the size of its entire economy.

According to the Spring 2023 issue of the World Bank’s Lebanon Economic Monitor (LEM), which follows economic developments and evaluates the country’s economic outlook and risks, “the systemic failure of Lebanon’s banking system and the collapse of the currency” have resulted in an overall dollarized cash economy estimated to account for nearly half of its GDP in 2022.

“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,” the report added.

A significant factor for the shift “towards hard currency cash transactions” in Lebanon originated in the loss of confidence in the country’s banking sector due to liquidity issues, mismanagement, and massive corruption scandals.

According to the research, Lebanon’s economy is far from recovering, and the country’s policymaking continues to drain all types of capital, including human and social capital.

“As long as the economy is contracting and crisis conditions persist, living standards are set for further erosion, and poverty will continue to spiral,” said World Bank official Jean-Christophe Carret.

“Delays in implementing a comprehensive reform and recovery plan will only further compound human and social capital losses and render the recovery longer and more costly,” he added.

US-based Mercy Corps NGO revealed in December that remittances from the Lebanese diaspora made up more than half of Lebanon’s gross domestic product (GDP) in 2021.

Lebanon’s banking sector was the center of a Ponzi scheme established by Lebanon’s Central Bank Governor Riad Salameh that collapsed in October 2019.

Salameh and his brother established Forry Associates, which took some $330 million in fees for brokering the sale of Lebanese government bonds between 2002 and 2015, $200 million of which was allegedly transferred to Salameh’s personal accounts with various Lebanese commercial banks.

The liquidity crisis in the country led to widespread bank heists by desperate depositors to retrieve at least some of their savings. The spree of bank break-ins led to various banks in Lebanon shutting down their services for several days.

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