Why Have Large Lebanese Trade Deficits Persisted During the Crisis? And what is their Impact on Net External Debt or Foreign Liabilities?
Introduction
Perhaps the most interesting puzzle emerging from the Lebanese economic crisis is the behavior of the trade deficit in goods and services: regardless of the severe decline in income and exchange rates, it has remained largely unaffected, and driven by trade deficits in goods[1]. More explicitly, and based on CAS figures, in 2018 the trade deficit in goods and services stood at $14.7 billion and its ratio to GDP at 26.6%; in 2024, it stayed fairly close at $12.9 billion, but its ratio to GDP was a whopping 42.4%, among the highest in the world! Proposed explanations for this anomalous behavior vary: perhaps GDP is undervalued; or perhaps goods imports include a lot imports for Syria; or perhaps – but this is the least likely – Lebanese expenditures, especially ingrained conspicuous consumption, is largely inelastic to changes in income and prices.
With that in mind, what we want to do in this note is to suggest new explanation for the puzzle. More important, we will also investigate what impact these persistent trade deficits have had on foreign financial assets and liabilities. We will do that by using basic, but fundamental, economic relations or equations. That done, we will then conclude with a brief discussion of implications and policy recommendations.
[1] This has not historically been the case. To put things in perspective, in the post-civil war period (1990-2025), goods exports stood at 18% of goods imports; however, in the pre-civil war period (1969-1974), they stood at a third of them, or almost twice as much.
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