Economic damages of Beirut explosion over $20 billion

16 September 2020 Consultancy-me.com

While a month has passed since Lebanon was left reeling from a colossal explosion in its capital city, a new report has found that there is still a huge shortfall in funding for the rebuilding of Beirut. Distrust in the country’s leadership and the global recession at hand mean that Lebanon faces a massive funding gap.

On August 4th 2020, a large amount of ammonium nitrate stored at the port of the city of Beirut exploded. Roughly 2,750 tonnes of the highly flammable substance – commonly used in fertiliser, and the main component in many types of mining explosives – had been abandoned without proper safety measures for the previous six years, following its confiscation by Lebanese authorities from the abandoned ship MV Rhosus.

While the exact cause of the detonation remains under investigation, it is suspected that a fire in the unguarded warehouse was responsible to detonating the equivalent of around 1.1 kilotons of TNT in two catastrophic explosions in Lebanon’s capital city. The disaster killed roughly 200 people, wounding 6,000 more, as the blasts sent shock waves racing from Beirut’s industrial waterfront, into the densely populated residential and shopping districts.

Summary of the infrastructure impact

Broken glass and debris was seen two miles away, across an area where more than 750,000 people live, while the second blast was reportedly heard over 100 miles away in Cyprus.

According to a new study by Strategy&, formerly Booz & Company and the strategy consulting subsidiary of PwC, on top of the immediate devastation of the explosions, the event has also left a devastating crater in Lebanon’s already-crumbling economy. Totting up the damage to infrastructure, businesses, housing, cultural and social costs of the blasts, Strategy& has estimated that the bill stands at around $5 billion.

This figure is excluding public infrastructure damages such as the port, and indirect economic impacts, such as export and supply chain disruptions, which according to an estimate by the firm amounts to some $15 billion.

With the national unemployment rate surging past the 30% mark, the country's people fuming and willing to overturn the political elite, and the embattled central bank facing an internal audit to try and foster trust with the IMF, the explosions could arguably have not come at a worse time for Lebanon.

First of all, the damages to infrastructure will cost more than $3.1 billion. This includes over $1.8 billion to help rebuild and repair housing, and $865 million to help the 30,000 businesses which suffered damages recover. 

Infrastructure impact - HousingWhile these repairs go on, the social impact of the disaster will also rack up a cost of $555 million. This included that with an estimated 31,000 houses now uninhabitable, around 13,000 households will need shelter – something which comes with a funding requirement of $30 million for 18 months. As mentioned, the destruction of the country’s food supply has also left 300,000 people in moderate to urgent need of food assistance – something which will cost $215 million for one year.

Around $920 million in revenues will be lost by businesses in the aftermath of the port blast (based on a 1-year window), with Lebanon’s retail scene to face the hardest hit. Around 38% of the total will come from shopping, while with eight damaged universities, the lucrative education sector will be the next worst hit, at 17%. Due to the effects of the explosion had on food supplies, food and drink will also see an 11% loss.

The Medawar, Rmeil, Saifi and Marfaa districts are most in need of urgent help. According to Strategy&, Rmeil alone has suffered $489 million in property damage, including 14,000 impacted households, and 1,100 buildings.

Summary of the economic impact - excludes indirect economic impacts

Funding gap

While Strategy&’s analysis echoes that of the World Bank to some extent – with the Bank’s Rapid Damage and Needs Assessment report having also focused on damage to infrastructure and physical assets in Beirut – the report does go further in analysing the funding of Beirut’s recovery. This includes the fact that there is a significant shortfall in the donations needed to help Beirut recover.

With regards to housing, for example, the generosity of those sending help has been dwarfed by the size of the problem at hand. The UNHCR, donated $35 million to shelter and protect the most vulnerable Lebanese, refugees, and migrant households over the coming months, while over $2 million was raised by public crowdfunding campaigns – with ordinary people managing to match the amount given by some of the world’s wealthiest corporations such as Google, Facebook, P&G, Pepsi and Chanel.

Despite several in-kind donations such as tonnes of glass being donated by the UAE and Cyrprus for repairs and hundreds of shelters offered by the Lebanese community and hotels, of the $1.8 billion in costs incurred by the explosion, only a tiny portion has been realised. Similarly, the announced pledges to help boost Lebanon’s food security are alarmingly underwhelming. With $215 million needed, countries such as Canada, the US, the UK, Australia, Denmark and Hungary have only mustered $25 million in foreign aid to help, while USAID has added another $7.5 million.

Social impact - Businesses by sector

Once more, the world’s largest corporations have chipped in millions of further support – though considering they are worth trillions of dollars collectively, that is small change. At the same time, other sources prefer to donate in kind – perhaps a reflection of the lack of trust afforded to Lebanon’s government on the back of decades of corruption – but even so, the more than 900 tonnes of food from France, Morocco and Spain have not made much of a dent in the cost Lebanon faces to simply secure food for its citizens.

Whether it is because the tragedy struck amid a global pandemic and recession, meaning countries and companies are already watching their expenditure without worrying about giving money away, or whether a lack of trust in Lebanon’s authorities means there is hesitancy to hand them much of anything, even now, materially it amounts to the same outcome. According to Strategy&, excluding $325 million in summit commitments which have not yet been allocated to particular sectors, the vast majority of Lebanon’s funding requirements will not be met at present.

Healthcare is the best supported segment, and even then, the researchers estimate that some 40% of its needs will be unmet. Food security meanwhile will have around 30% of its needs met – but business, culture, education and housing will each see more than 95% of their requirements unmet. Overall, for non-public infrastructure and social costs, this leaves a huge funding gap of an estimated $3 billion.

Estimated financial requirements vs announced pledges by type of need

Lebanon in crisis

The past year had already seen Lebanon’s government and economy crippled by a series of severe crises, before this latest blow. By the summer, the country’s economy was already in its worst state since a fifteen-year civil war, which had ruptured the country in the 70s and 80s.

Decades of economic mismanagement centring around political corruption and the pegging of the lira to the dollar have left the country in as much as a $100 billion hole – the size of which meant bailout talks quickly stalled with the International Monetary Fund (IMF). For context, the $57 billion loan the IMF made to Argentina in 2018 remains the largest such bailout.

The Central Bank had for long artificially ‘pegged’ the value of the Lebanese lira to the US dollar, at the rate of roughly $1 = 1,500LP. This was managed by the Central Bank borrowing from private banks, who depended on depositors attracted by its huge interest rates of up to 14%. Through multiple socio-political, economic and security challenges, the Lebanese economy managed to succeed thanks to this pyramid-scheme, however as with the financial crisis of 2008, a collapse in confidence has since rendered the lira worthless.

Over the last year, the lira’s exchange rate lapsed to 10,000 lira to the dollar. While the government largely managed to keep its earlier exchange rate ($1 = 1,500), very few people have access to that rate, barring the politicians and business elite who led the economy to meltdown in the first place.


Profiles
More news on