Inflation in Lebanon soars to 120% in August as crisis continues

Lebanon’s gross public debt reached $94 billion at the end of July and the country faces potential civil strife if the economic crunch worsens

A man stands next to graffiti at the damaged area following the massive explosion at Beirut's port. The blast has exacerbated the country's economic crisis. Reuters

Inflation in Lebanon, which is facing its worst economic crisis since the end of its 1975-1990 civil war, continued to accelerate in August following a massive explosion at the Port of Beirut last month, according to official data.

Consumer prices increased to an annual 120 per cent in August after rising to 112.4 per cent in July, according to the latest figures from the Central Administration of Statistics. Food prices surged 367 per cent compared with 336 per cent in July, while clothing and footwear rose 413 per cent and furnishings and household equipment soared 664 per cent.

“The cumulative surge in inflation in the first eight months … is due in part to the inability of authorities to monitor and contain prices, as well as to the deterioration of the Lebanese pound’s exchange rate on the parallel market, which has encouraged opportunistic wholesalers and retailers to raise the prices of consumer goods disproportionately,” Byblos Bank said in a note on Tuesday.

Emirates NBD economist Ed Bell said the latest figures also reflect the effect of the August 4 Beirut port blast, which killed more than 190 people and wounded over 6,000. The explosion “will have exacerbated the inflationary effects of the currency collapse ongoing through the course of the year”, he said.

Separately, Lebanon’s gross public debt reached $94 billion as of the end of July, a 2.1 per cent increase from the end of 2019 and up 9 per cent from July of last year.

The central bank, Banque du Liban, holds about 42.5 per cent of the debt at the end of July, commercial banks account for 28.4 per cent, foreign financial institutions 8.1 per cent, foreign investors 18.8 per cent, while multilateral institutions and foreign governments hold 2.2 per cent.

The central bank’s foreign currency reserves are estimated to have declined by a monthly average of $1bn since the beginning of the year, Goldman Sachs said in a report last week.

"Lebanon’s FX reserves are falling faster than we had been expecting, despite a sharp narrowing of the current account deficit," the investment bank said.

The drawdown and dwindling of reserves because of the financing of trade, weaker remittance inflows and capital flight could lead to the lifting of the pound's peg to the US dollar, which has been in place since 1997. The currency has lost more than 80 per cent of its value on the black market since October.

The Lebanese pound has lost more than 80% of its value in the black market against the dollar since last October. Reuters

The central bank’s reserves may be wiped out in the coming 12 months if they continue to decline at the same rate they have been over the past three months, Goldman Sachs said.

If the central bank's reserves are depleted, "the consequences for the Lebanese economy would be severe", the investment bank said.

The impact could result in the complete dismantling of what’s left of the pound's peg, a further depreciation of the currency, acceleration of inflation, an erosion of living standards, and greater scarcity of basic goods, it said.

Under such a scenario, risks to "social and political stability would rise further, a particularly worrying situation given the country’s deep sectarian divisions and history of internecine strife”.

The August 4 Beirut port explosion in Beirut may shrink the economy 24 per cent this year, according to the Institute of International Finance.

The government, which defaulted on Eurobonds worth $31bn in March, turned to the IMF for a $10bn bailout in May but talks stalled due to haggling among the country’s political class. Prime minister-designate Mustapha Adib has yet to form a new government.

In July, Moody's Investors Service downgraded Lebanon's issuer rating to C, its lowest grade and said there is a high probability of significant losses for private creditors. Lebanon's debt-to-GDP ratio is projected to increase to about 200 per cent this year, from about 155 per cent of GDP last year, according to the ratings agency.