Lebanon’s economy is projected to contract by 1 percent in 2024 under the severe weight of armed conflict and a deepening political and economic crisis, though a return to growth remains possible.

The European Bank for Reconstruction and Development’s latest Regional Economic Prospects report highlighted that these factors have created an environment of extreme instability, further undermining gross domestic product growth prospects due to stalled reforms and the lack of progress on an International Monetary Fund program.

Inflation, which had soared to a peak of 352 percent in March 2023, decreased to 35.4 percent by July 2024. Nonetheless, unemployment remains high, with over a third of the workforce without a job, highlighting the dire socio-economic conditions. 

The EBRD report noted that a return to modest growth is possible, saying: “Growth could return to a forecast 2 percent in 2025, provided regional tensions subside with some progress on reforms and an IMF program in place.”

The adoption of the 2024 budget law, aligning the exchange rate closer to market rates, has provided some stabilization, but Lebanon’s economy remains vulnerable.

Regional outlook for 2024 and beyond

Economic growth in the Southern and Eastern Mediterranean region is set to face a challenging year in 2024, with countries contending with the impacts of conflict, slowing investments, and climate-related disruptions, according to the report.

Growth is forecast at 2.1 percent for the first half of the year, rising modestly to 2.8 percent for the full year. This marks a downward revision from earlier estimates, driven primarily by slower-than-anticipated investment recovery in Egypt and the ongoing conflicts in Gaza and Lebanon.

The outlook, however, remains uncertain and depends on several factors, including the resolution of ongoing conflicts, a rebound in private and public investments, and effective responses to climate challenges. 

Severe droughts in Morocco and Tunisia, alongside energy sector disruptions in Egypt, continue to pose significant risks to the region’s growth potential.

The report underscores the urgent need for continued reforms and stabilization efforts across the SEMED region to ensure sustained economic growth in the coming years.

Egypt: Slow recovery amid energy sector disruptions

Egypt, one of the region’s largest economies, is expected to have grown by 2.7 percent in the fiscal year that ended in June, rising to 4 percent in 2024-25 as the country continues its recovery from a prolonged period of economic strain.

On a calendar-year basis, growth is forecast at 3.2 percent in 2024 and 4.5 percent in 2025, marking a steady return to pre-crisis levels, according to the EBRD.

The recovery is being bolstered by expansions in sectors such as retail, wholesale trade, agriculture, communications, and real estate. 

However, the energy sector continues to face disruptions, and inflation, while moderating, remains a challenge at 25.7 percent as of July, down from its peak of 38 percent in September 2023.

“The budget deficit stood at 3.6 percent of GDP in FY24 (fiscal year ending June) and the debt-to-GDP ratio is expected to fall to 83 percent in FY25,” the report said.

Egypt’s external accounts have recovered since the devaluation of its currency in March, with foreign exchange reserves reaching a five-year high. 

Financial inflows from international partners and investors have also provided critical support. However, risks remain, particularly with continued disruptions in energy supply and delays in structural reforms under the IMF program.

Jordan: War in Gaza weighs on economic prospects

Jordan’s economy is forecast to grow at a slower rate of 2.2 percent in 2024, with the ongoing Gaza conflict having a pronounced impact on its tourism sector and investment flows. 

The conflict has increased uncertainty among consumers, who are now holding back on large expenditures, further dampening growth. 

The EBRD said a modest recovery to 2.6 percent growth is possible by 2025, contingent on an easing of geopolitical tensions and continued progress on economic reforms.

“Jordan’s heavy reliance on imports makes it vulnerable to geopolitical instability in the region, as well as to shocks in energy and food prices and disruptions in global supply chains,” the report explained.

The country’s inflation remains moderate, standing at 1.9 percent in July, but unemployment remains persistently high at 21.4 percent, with significantly higher rates for women – 34.7 percent – and the youth population at 43.7 percent. 

The Central Bank of Jordan has maintained a stable policy interest rate, following the lead of the US Federal Reserve, as part of its efforts to preserve the currency peg.

Morocco: Agricultural struggles amid drought, tourism recovery

Morocco is grappling with severe drought, which is affecting its agricultural output — a key driver of the country’s economy. 

Growth is expected to reach 2.9 percent in 2024, with a rise to 3.6 percent in 2025, driven by a recovery in the manufacturing and tourism sectors, the EBRD forecasts.

The easing of inflation, which fell to 1.3 percent in July, has provided some relief, while exports and domestic demand continue to support economic activity. 

Morocco’s government has embarked on fiscal consolidation measures, reducing the budget deficit to 4.3 percent of GDP in 2023. The outlook for 2025 is more positive, provided that weather conditions improve and agricultural output recovers.

Downside risks remain for Morocco due to its dependence on energy imports and the vulnerabilities posed by climate change. 

Severe droughts are expected to weigh on growth in the short term, but the country’s recovery in tourism, remittances, and exports of automobiles and electric products should help sustain moderate growth.

Turkiye’s economic shift toward orthodoxy

In 2023, Turkiye reverted to more conventional economic policies, tightening monetary and fiscal measures to combat inflation. 

The Central Bank raised the policy rate by 4,150 basis points, holding it at 50 percent, while the Treasury’s efficiency package aimed to reduce the fiscal deficit, excluding earthquake-related expenses. 

The decision to forgo a mid-year minimum wage hike in July helped stabilize inflation expectations. 

Investor confidence improved with Turkiye’s removal from the Financial Action Task Force grey list, as indicated by a drop in credit default swap premiums and upgrades in sovereign ratings. The current account deficit shrank to $19.1 billion in July, while foreign exchange reserves increased to $147.9 billion. 

The economy grew by 3.8 percent in the first half of 2024, down from 4.6 percent a year earlier, with private consumption still leading growth despite a slowdown in manufacturing. 

Annual inflation fell to 52 percent in August from a peak of 75.4 percent in May, necessitating continued tight monetary policy to meet the revised inflation target of 41.5 percent by year-end. 

Economic growth is forecasted to decline to 2.7 percent in 2024, amid risks from high inflation and geopolitical tensions.

Tunisia: Modest growth but ongoing fiscal struggles

Tunisia’s economy is expected to post modest growth of 1.2 percent in 2024, rising slightly to 1.8 percent in 2025. 

While inflation has decreased to a 30-month low of 7 percent as of July, the country continues to face significant economic challenges. These include a large external debt burden, limited fiscal space, and vulnerability to external shocks, according to the report.

Despite contractions in agriculture and mining, Tunisia has experienced growth in tourism, financial services, and other industrial sectors, providing some support to the economy.

Tunisia’s fiscal struggles have been partially alleviated by an improvement in the current account deficit and higher tax revenues. 

However, the country’s reliance on external funding and its slow progress on IMF-supported programs continue to pose significant risks to its economic stability.