Lebanon’s business conditions improve in June to highest levels since 2016

People queue at a bakery to buy bread in Lebanon's southern city of Sidon, as fuel and wheat are particularly scarce across the nation. AFP

Lebanon's private sector activity improved in June to the highest levels since January 2016 on slower declines in output and new orders, while employment rose at its fastest pace since February 2018.

The Blom Lebanon Purchasing Managers' Index rose to 49.1 in June, from 48.6 in May, marking the highest reading recorded in more than six years.

But it remained below the 50 mark that separates growth from contraction.

The higher reading in June reflected "the post-elections positive impact in the country and indicating lighter pressure and a softer deterioration in private sector activity," said Aline Azzi, research analyst at Blom Invest Bank. "Despite the PMI being below 50, an environment of 'cautious optimism' in Lebanon began to be felt as a result of a promising summer.

"The private sector is trying to cope with a situation that may drag in the future in light of the continuous political and security developments in the country and the region.”

In the elections in May, Iran-backed Hezbollah and its allies lost a parliamentary majority, paving the way for a greater political stalemate and delays in passing the much-needed economic reforms .

Lebanon's economy collapsed after it defaulted on about $31 billion of eurobonds in March 2020, with its currency sinking more than 90 per cent against the US dollar on the black market.

Public debt, already a major overhang, continued to rise, reaching $100bn, or about 212 per cent of the country's gross domestic product, in 2021. That ranks Lebanon as the country with the fourth-highest debt-to-GDP ratio in the world, surpassed only by Japan, Sudan and Greece, the World Bank says.

A political vacuum and failure to form a new government is expected to exacerbate the country's economic crisis.

While private sector companies reported slower declines in output and new orders in June, they also saw reduced purchasing power among domestic clients amid challenging financial, economic and political conditions.

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  November 1, 2019: Banks implement capital controls after shutting for two weeks. Reuters

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  March 2020: Lebanon defaults on its sovereign debt for the first time in its history, amid protests in the country. AFP

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  April 2020: The government of Hassan Diab, prime minister at the time, pictured with President Michel Aoun, approves a financial recovery plan. Reuters

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  May 1, 2020: Mr Diab's government requests assistance from the International Monetary Fund. The Association of Banks in Lebanon rejects the plan. Reuters

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  May 20, 2020: the ABL presents an alternative plan. Reuters

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  July 1, 2020: a Parliamentary fact-finding committee backs the ABL. The IMF suspends negotiations with Lebanon. AP

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  August 10, 2020: Mr Diab resigns following a devastating explosion at Beirut’s port, in which at least 232 people died and 7,000 were injured. AP

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  September 10, 2021: Najib Mikati, fourth from right, forms a government. AFP

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  January 2022: Lebanon re-starts negotiations with the IMF. Reuters

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  April 7, 2022: The IMF and Lebanon reach a staff-level agreement. AFP

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  May 15, 2022: Lebanon holds parliamentary elections. EPA

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  May 20, 2022: Mr Mikati’s government approves a new financial recovery plan. Reuters

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  May 24, 2022: The ABL rejects the plan. The local currency hits the record low of 34,000 Lebanese pounds to the dollar – 95 per cent lower than the official rate. Reuters

The PMI data highlighted continued inflationary trends across Lebanon in June amid exchange rate pressure. Inflation in the country reached a high of 211.43 per cent in May 2022 up from 119.83 per cent in May 2021.

Unfavourable exchange rates underpinned rising business costs, according to surveyed companies. Purchase cost inflation accelerated to a six-month high in June. Staff expenses also rose amid a rise in employment. Some companies noted higher salaries due to increasing living costs.

In response to greater cost pressures, prices charged by private sector companies in Lebanon increased in June.

Overall, the rate of inflation was the fastest since July 2021, the report said.

Companies also reported tighter liquidity and problems acquiring US dollars in June. Amid cashflow challenges, the data signalled a reduction in purchasing activity at the end of the second quarter.

Private sector employment across Lebanon grew in June following a fractional decline in May. Overall, the rate of job creation was the strongest since February 2018.

Meanwhile, amid higher staffing levels, the data showed an increase in spare capacity as backlogs of work fell, though at a softer pace.

"Tourism activity is expected to start the season on the right footing, especially after its improved performance in the first quarter. As a result, the [country's] employment index rose, but pushing staff costs higher, and new orders jumped signalling slower declines in business conditions," Ms Azzi said.

Private sector businesses in Lebanon remained “pessimistic” about improvement in business conditions over the next 12 months amid continued uncertainty, particularly in political developments, the report said.