March 12, 2020 / 10:28 AM / 3 months ago

Starved of dollars and drowning in debt, Lebanon's economy sinks fast

BEIRUT (Reuters) - After importing medical supplies to Lebanon for 20 years, Hassan Hamdan shut his business in December. Sales were plummeting, clients couldn’t pay, and the dollars he needed to buy imports had dried up. Now he drives an Uber.

A woman walks near closed shops in Beirut, Lebanon February 19, 2020. Picture taken February 19, 2020. REUTERS/Mohamed Azakir

Businesses such as Hamdan’s have been shutting at a rapid rate since a financial crisis exacerbated by months of political instability has brought much of Lebanon’s economy to a halt.

“Everyone is in debt - even me - because of what’s happening. But I’m able to afford food for the house and a few bills. Without Uber, I would be begging,” said Hamdan, 37.

While Lebanon produces little hard, up-to-date economic data, interviews with two dozen business owners, union leaders, industry groups and traders paint a picture of an economic and financial crisis without precedent since independence in 1943.

More than 220,000 jobs in the private sector have been shed since mid-October when protests fueled by worsening economic conditions erupted against the political elite, according to a survey in February.

“It’s a social catastrophe,” said Ramzi El Hafez, general manager of InfoPro, the research firm behind the survey. “This is the heaviest one-shot drop since the end of the civil war ... There is no end in sight. It is an open-ended crisis.”

A fifth of workers in the hotel industry, a traditional engine of the economy, have been laid off and in the southern city of Sidon, one in five shops has already shut down.

The job losses since October are a major blow to Lebanon’s employed workforce, which the International Labour Organisation estimated at just 1.59 million in a 2019 report.

Importers of critical goods such as medical supplies say their requests for dollars have gone almost entirely unmet since February, leaving many hospitals dangerously low on everything from heart stents to dialysis equipment.

“Almost all the work has come to a halt. We’re unable to do anything,” said Mohamad Sukkar, who owns a contracting company.

His business is frozen, stuck between banks that will not cash checks and suppliers demanding payment in dollars he cannot get. “We’ve had to close down all the work and we’re not taking up any new work,” said Sukkar.

Hard hit businesses were dealt yet another blow this week as Lebanon ordered malls, restaurants and other venues to close to stop the spread of the coronavirus, as well as halting flights from the worst hit countries.

‘AFRAID TO BRING IN GOODS’

Lebanese banks have attracted huge foreign inflows for years by offering some of the region’s highest interest rates, allowing the country to pay for imports despite low exports.

But inflows have fallen sharply in recent years along with economic growth, dragged down by regional turmoil, a nine-year war in Syria and strained relations with wealthy Gulf states.

Lebanese expats who had been propping up the economy with remittances, meanwhile, started to hold back funds as banks began imposing strict controls which now limit withdrawals for regular customers to as little as $100 a week.

The situation has deteriorated since the political crisis to the point where Lebanon said this month it can’t repay its sovereign debt as well as pay for essential imports.

Virtually locked out of the banking system, importers have struggled to keep up with the rising price of dollars. The Lebanese pound has lost about 40% of its value since October, hiking the price of everyday imported goods.

As dollars grow increasingly scarce, the country’s import-dependent supply chain has slowed to a crawl.

Traders of foodstuffs say they have slashed imports by 30%-40%. Industrialists say they’re struggling to source raw materials. Consumers and businesses gripe about rising prices and slumping sales.

“We’re getting to the stage where we’re afraid to bring in goods,” said Mohammed Yakoub, who supplies restaurants. His sales have slumped 70% since October as the economic crisis takes its toll on businesses.

At least 785 restaurants, cafes and nightclubs went belly-up from September through February, with 240 shut in January alone, according to the sector’s main union.

“There will be more unemployment, there will be a big exodus, people will look for work abroad, we are already seeing this. We will lose yet another batch of good workers that we would have liked to retain in the country,” said union general secretary Maya Bekhazi.

RUNNING OUT OF WHEAT

Among the tell-tale signs that dollar flows are getting even more critical is what traders describe as a near halt in a central bank process launched in September to secure foreign currency for critical goods - medicine, fuel, and wheat.

“The central bank has stopped transfers for all operations related to importing wheat for about a month. It is completely shut down, so now we are in the process of running out of stocks,” said Crown Mills flour mill owner Paul Mansour.

Mansour said mills unable to pay foreign suppliers were considering asking the government to import grain: “The stocks have decreased and within 40 days will be depleted.”

Many cities outside Beirut appear harder hit. South of the capital in Sidon, its once bustling market is lined with empty storefronts up for rent.

“Even the shops you still see open are unable to sell anything,” said shopkeeper Abdullah Merzoub. “Things are getting harder”.

The head of the Sidon trade association, Ali al-Shareef, said 120 of the city’s 600 shops have closed since October and he expected the number to double in the next few months.

“We’re headed toward a bigger and bigger collapse,” he said.

Emptied of guests, hotels have laid off 20% of their workforce and put the rest on half-time, said Pierre Achkar, head of Lebanon’s hotel federation.

“This is the lowest occupancy rate I’ve seen in 50 years,” he said. “If the summer is bad, I think we will have a lot of hotels that will close.”

Slideshow (7 Images)

Many companies, such as Chip, which provides security systems, said they were staying in business despite heavy losses only because shutting down and reopening would be more costly.

Chip chief executive Hady Nahas said he was keeping his 72 employees on even though turnover was only 15% of what it was a year ago - but he would be forced to do something dramatic by the end of the year if things don’t improve.

“We’re draining our personal resources as owners. There’s a limit, and I don’t know if the situation will be resolved ... before we break,” said Nahas.

Reporting by Eric Knecht, Ellen Francis and Reuters TV; Editing by Tom Perry and David Clarke

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