Joachim BALD, Frankfurt School
Lebanon’s economic and financial crisis has been qualified as one of the most severe in 150 years by the World Bank, leading to a 35% decrease in GDP in a two-year period and triple digit inflation. Nadine CHEHADE gave three main reasons for this crisis: fiscal and trade balance deficits, declining capital inflows and diminishing foreign exchange reserves.
As a result of the crisis, at least 55% of the population is living in poverty (UN ESCWA 2021 report estimates that the multi-dimensional poverty rate reached 82%). In 2020, CGAP surveyed 1,000 borrowers to study the impact on the microfinance sector in Lebanon. The results show that 30% of borrowers became inactive and that sales of micro-entrepreneurs decreased by 94%. About 80% of borrowers dramatically lost purchasing power with average real incomes falling below 1 USD per day. Some 40% of borrowers became unable to meet basic needs, 50% depleted savings and 61% of borrowers had to transfer children to public schools where the quality of education is generally lower than at private schools.
Microfinance institutions (MFIs) are struggling to survive and currently operate at half capacity. Their Non-Performing Loans rate increased to 20%, and they continue to have challenges with foreign exchange rate fluctuations, loss of customers and debt repayment. This shows that their situation is precarious. Chehade finished her presentation by stressing the importance of preserving this sector, which was built over 20 years into a highly successful sector until the crisis hit (proof being that 93% of borrowers were actually very satisfied with their microfinance institution).
Youssef FAWAZ presented about the crisis in Lebanon from the perspective of a microfinance institution. Al Majmoua is the largest MFI in Lebanon with 90,000 clients, USD 100 million outstanding portfolio and 500 staff before the crisis. Fawaz showed how his institution changed strategies and action plans over time to deal with the crisis as it unfolded since the beginning of early 2020.
In the second quarter of 2020, Lebanon experienced its first lockdown due to the COVID-19 pandemic. In response, the MFI reduced staff from 500 to 400 and took measures to work remotely. Then, in the third quarter, the explosion in the port of Beirut took place. In the meantime, the MFI was already restructuring debts and decided to establish a crowdfunding platform to fundraise for clients.
In 2021, the crisis deepened even further as the exchange rate of the Lebanese Pound (LBP) to the US Dollar spiked from 8,000 to 15,000 and another wave of coronavirus infections led to a second lockdown. The MFI had to revise its strategic plan, closed 10 of its 30 branches and further reduced staff to 300. Salaries of remaining staff were effectively cut by 80% compared to their salaries before the crisis and they are no longer earning a living wage.
In September 2021, the number of clients had dropped to less than 40,000 and the portfolio at risk had increased to 16.7%, while this had been around 1% historically. The MFI considers lending in Lebanese Pounds untenable under the current situation of hyperinflation and is looking for other options. However, the uncertainties about developments in the Lebanese financial sector complicate strategic planning.
Despite all the setbacks, Al Majmoua remains relevant and has preserved much of its human capital. Operations have continued, although at a smaller scale, and the MFI has maintained trust with clients and investors. Some investors have even provided support by paying international software licenses of the MFI, as transactions in US Dollars are restricted by authorities. When the situation stabilizes, the MFI is ready to serve more clients again and contribute to rebuilding the Lebanese economy.
Joachim BALD elaborated on the foreign exchange crisis, which is complicating the work of MFIs in Lebanon. The forex crisis has four dimensions: Foreign Exchange Rate Risk, Convertibility Risk, Transfer Risk and Currency Induced Credit Risk. The Foreign Exchange Rate Risk is the risk of loss from movements in cross-currency exchange rates between foreign currencies and from changes in the value of the functional currency against foreign currencies. MFIs in heavily dollarized markets often adopt USD or EUR as functional currency. Convertibility Risk is the possibility that government or the central bank restrict access by domestic players with obligations in hard currency to the foreign exchange market. Such a restriction makes it impossible for those players to buy the needed currency. Transfer Risk occurs when local authorities will not allow foreign currency to leave the country. Currency Induced Credit Risk arises when residents borrow in foreign currency and intend to service their debt with local currency, making them vulnerable to devaluation of local currency.
Although the official exchange rate is still 1,500 LBP against 1 USD, people in Lebanon are unable to get this rate. People receiving their salary in USD in an on-shore account will get 3,900 LBP for 1 USD and the street rate was around 23,000 LBP in November 2021. Due to the hyperinflation, the USD is becoming the de facto functional currency.
Some of the results of the forex crisis on MFIs are that lending in LBP has become unprofitable and that their equity will turn negative when their USD borrowings are revalued to market rates. The way out of the crisis is likely to require a full dollarization or the launch of a new LBP to level the playing field. This will require a lot of trust, which is currently lacking. External players such as IMF may be able to help establish confidence again.
Chehade added that donors and investors have a large role to play in supporting the microfinance sector to weather the crisis in Lebanon. In the short-term, the sector must be stabilized and new money must enter the economy. In the long-term, the debt in USD must be restructured.
In response to a question from the audience on lessons from other countries, Bald explained that good money squeezes out bad money. This will require a concerted effort from international organisations and politicians to establish confidence. With large external backing, the economy can be reset and allow MFIs to help finance the rebuilding of the economy.