1/6. Few thoughts on the new phase of the #Lebanon economic crisis. Left to its own devices, the economy is actually adjusting. While the “clean up” is theoretically desirable, the way it is evolving is brutal, sub-optimal, and hurting the wrong segments of the society.
2/6. First, the positives. After years of “living beyond its means”, #Lebanon is adjusting to a more normal size. Best way to see this: The economy’s annual $ gap (i.e., the current account) will shrink from a massive $11.5b in 2019 to a much more manageable $4b in 2020.
3/6. In parallel, #Lebanon is in the midst of a massive de-leveraging that, over time, will put the economy on a more sustainable path. Debt is eroding through a combination of inflation (inflating LL debt away); moratorium (on Eurobonds); and private sector bank workouts.
4/6 However, this #Lebanon adjustment is extremely painful. It reflects an imploding economy. And depositors are paying a steep price: their LL savings are being inflated away while, sadly, they are accepting a haircut on $ deposits by withdrawing them in LL at an expensive FX.
5/6. The #Lebanon adjustment isn’t happening in a policy vacuum. Inflating the debt away reflects a policy of extreme monetary expansion. And, the delay in imposing capital controls allowed capital flight leaving “trapped capital" to incur a disproportionate part of the hit.
6/6. At best, this policy backdrop reflects extreme incompetence. At worse, it verges on the criminal. #Lebanon
