Lebanon is facing one of the most severe financial and economic crises of the past century. The country is caught in a vicious cycle of inflation after facing a currency shock that wiped out more than 95% of the value of the Lebanese Pound. Meanwhile, the financial sector is in ruins, with zombie banks only operating limited intermediation functions, allowing the cash economy to proliferate, estimated to constitute half of the economy in 2022. Moreover, while GDP contracted by 69% since the onset of the crisis, the state has lost around 85% of the value of its budget, paralyzing the work of the public administration and leading to extreme losses in state capacity.
Faced with this reality, very little has been done in the way of stabilization. The country has a staff-level agreement with the International Monetary Fund but failed to deliver on the pre-conditions that it outlines. Moreover, the country still does not have a 2023 budget, eight months into the year, with the proposed budget currently being discussed in government.
The breakdown of Lebanon’s fiscal policies is not new, however. In fact, the country’s notorious mismanagement of public funds, both in its treasury and central bank, are central drivers of its chronic twin-deficit and sit at the core of Lebanon’s present-day financial crisis. The dismal record of public finance management manifests most egregiously in the state’s failure to produce a budget law in 12 out of the past 20 years. As such, public trust in the government’s ability to manage resources is alarmingly weak, severely impacting the country’s social contract.
In this context, Lebanon’s current crisis is dependent on the government’s adoption of a fiscal policy that is not only part of a macroeconomic recovery framework, but also anchored in modern PFM systems that restore transparency and trust in public administrations.
