Lebanon’s economic crunch and fuel shortages

Lebanon has been suffering a host of crises the latest of which is power cuts. The Lebanese have been enduring the lack of electricity for as many as 18 hours a day. Power outages have further weakened the country’s fragile economy and the situation is getting worse by the day.

As a result, the Lebanese government raised fuel prices by 66 percent following its decision to halt fuel imports which it pays by the dollar, opting instead to buy fuel with the local currency, with an exchange rate of 8,000 Lebanese pounds to the dollar.

Lebanon’s Electricity Sector

Lebanon depends mainly on fossil fuels and imported petroleum products for electricity generation. In 2019, its dependence on these products increased by 96 percent despite the state’s plans to move towards reliance on renewable energy resources by 2030, as can be seen in the following figure: 

Figure 1: Total Primary Energy Supply by Source (percent)

The figure shows that petroleum products make up 96 percent of Lebanon’s total primary energy supply, followed by coal with 2 percent, then hydroelectric and solar power with 1 percent equally between them. 

According to official numbers, the production capacity of Lebanese laboratories is distributed as follows: Deir ‘Ammar with 430 megawatts, Zahrani with 298 megawatts, Zouk with 248 megawatts, Jiyeh with 67 megawatts, Baalbek with 30 megawatts, Tyre with 30 megawatts, Hraiche with 33 megawatts and finally Turkish ships with 283 megawatts, which represents more than 20 percent of the total energy produced. As for the evolution of electricity production from these sources, they can be demonstrated as follows: 

Figure 2: Annual Electricity Production (million kilowatts/hour)

From the previous figure, it is shown that the electricity generated during 2020 declined by around 16.6 percent, on an annual basis of 12324.8 million kilowatts/hour compared to 14791.9 kilowatts/hour in 2019. The following figure can be used to demonstrate the monthly electricity production:

Figure 3: Monthly Electricity Production (million kilowatts/hour)

The previous figure shows the decline of electricity production to its lowest level during the period in question at 814.6 million kilowatts/hour during February 2021, representing a decline of 28.3 percent monthly. Regarding electricity consumption: 

Figure 4: Annual Electricity Consumption (terawatts/hour)

It can be concluded from the figure that the electricity consumption in Lebanon has risen, coinciding with a decrease in production, by about 4.05 percent on an annual basis, during 2019, to 20.79 terawatts/hour.

Appearances and Indicators

 Lebanon has been experiencing a problem concerning growth in the electricity sector for decades owing to its reliance on old thermal power plants using low-efficiency generators at high operational cost, the inability to refuel production plants as a result of the lack of liquidity of United States dollars with both the government and the Bank of Lebanon. In addition to the widespread institutional weakness and corruption in a variety of economic sectors in general, and the energy and electricity sector in particular. 

Act 462/2002 establishing a body to regulate the electricity sector and restructure the Lebanon Electricity Establishment has not been implemented. As a result, the State’s electricity production deficit exceeded around 1600 megawatts, where the power outages ranged from 12 to 18 hours daily. The Lebanese electricity sector’s debts amounted to about $40 billion of the total general debt of the state in 2020, as a result of a decline in the foreign exchange reserves, the unavailability of foreign exchange for the maintenance of power plants, and the accumulation arrears for private maintenance and service contractors. 

In addition, support for the electricity sector is straining the public budget without any reward in return. Therefore, the Government has decided to reduce spending on the Lebanon Electricity Corporation – the main electricity producer in the country – in the medium term, as shown in the following figure:

Figure 5: Percentage of GDP Spent on Electricity Corporation of Lebanon (percent)

The percentage of expenditure on the Lebanon Electricity Corporation is likely to decline to 0.7 percent of GDP by 2023. Although the transfers made to the establishment are treasury advances that are not included in the budget expenditure, they still represent an increasing burden on the reserve, seeing that no advances were repaid during the past years. Here came the significant pressure on the monetary balance and the increase in the general debt. 

What added insult to injury was that two of the main power-generating plants, Deir ‘Ammar and Zahrani”, which provide 40 percent of the country’s electricity, suffered from running out of fuel on 10 July. This happened as a result of international oil companies announcing the closure of all their stations in Lebanon and the halt of the distribution process once and for all, either because their stock had completely run out or because of the delayed payments of financial dues. One of the most notable steps was the Turkish company Karpowership’s decision to suspend production from two anchored ships off the shore of Lebanon after months of delay of the payment of financial dues. Resultantly, the State lost around a quarter of its electricity supply. 

Disastrous Consequences

The electricity crisis negatively affected both the economic and social conditions of Lebanon, representing a major obstacle to economic growth and competitiveness. Moreover, the electricity crisis costs Lebanon’s industrial sector around $400 million annually and doubles the financial burden on the country’s households. The average electricity bill for households in Lebanon is about $1,200 per year, more than two-thirds of which is paid for private generators, which means that the Lebanese citizen pays two electricity bills.

The crisis has also burdened government and private hospitals by running out of fuel. Many hospitals have been forced to reduce electricity consumption and turn off some appliances, at a time where the country is suffering from the coronavirus outbreak. In addition to the impact of the crisis on bakeries, threatening to put an end to their operation and create a new crisis in addition to the accumulating crises.

Additionally, the increase in petroleum prices is expected to be added, as shown in Table 1, onto the Lebanese citizen’s burdens, amidst the increase in inflation. 

Table 1: Fuel Prices in Lebanon

Based on the previous table, the transport and communications price index, which is part of the consumer price index, will rise in the coming months, as shown in the following figure:

Figure 6: Transport price index (per point)

The graph shows the positive trend of the index over the next three months as it rose steadily over the past year and a half to score 535.22 points last June. 

In all, the fuel crisis in Lebanon can be seen as the result of many of the country’s current economic problems. It is the product of government corruption, the lack of foreign exchange sources, and the collapse of the domestic currency. Moreover, it counts as the cause for the country’s stunted growth, hike in inflation, and other related crises.