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Pharmaceutical crisis deepens in Lebanon as central bank unable to meet cost of subsidized medicines

04 June 2021 Sacha Baggili

For international pharmaceutical companies, Lebanon has long been a small but important export market. Until recently, at around 50% of total healthcare spending and around 3.5% of GDP, the country's pharmaceutical spending rates were among the highest in the Middle East region. The central bank's recent inability to continue subsidizing all drug imports has caused multiple economic shocks to combine with underlying market weaknesses - including a high reliance on out-of-pocket spending and poor supply chain management - to create a major flashpoint for the pharmaceutical sector. If the government fails to swiftly implement measures for a phased rationalization and gradual lifting of subsidies, the wholesale removal of medicine subsidies would intensify a chaotic pharmaceutical market environment and would complicate an already deep crisis in healthcare provision.

Lebanon's central bank, Banque du Liban, last week announced that it was unable to cover the cost of outstanding invoices worth USD1.3 billion for medical supplies imported under the country's subsidy system for essential goods, bringing months of mounting medicine supply problems to a crisis point.

The central bank's announcement had followed meetings with the country's caretaker health minister Hamad Hasan, who had been seeking payment of USD1.3 billion to cover the cost of subsidized medical supplies for which importers were awaiting payment before releasing warehoused stocks into the market. The central bank published a statement saying it was unable to pay these costs without eating into its mandatory minimum foreign currency reserves of USD15 billion, which "the board of the central bank refuses [to do]" and called on the "responsible [political] powers to find a solution".

An agreement was reached the next day for medicines worth around USD180 million to be paid for and distributed to help ease an immediate and critical shortage of drugs in pharmacies and hospitals. However, the standoff confirmed that, after months of warnings to the country's health authorities, the central bank was no longer able to continue subsidizing all medicine imports under a comprehensive system that has been in place since the start of Lebanon's financial crisis in October 2019.

Banque du Liban had maintained exchange rate stability since early 1990, with the Lebanese pound pegged to the US dollar at LBP1,507.5/USD1.0 since 1997. However, a de facto devaluation occurred when the black market rate emerged in August 2019. As the real value of the Lebanese pound collapsed and deposit outflows reduced the central bank's ability to maintain the peg, the official rate was rationed for critical imports including medicines. The central bank has been subsidizing the import of medicines, along with other essential goods, by providing 85% of the foreign currency needed for pharmaceutical products at the previously used official exchange rate of LBP1,507.50. Nevertheless, it has been warning since late 2020 that, due to the plummeting value of the pound and the depletion of foreign-currency reserves, it would be unable to continue subsidizing all medicines through this system indefinitely.

At market exchange rates, the Lebanese currency has lost around 85% of its value against the dollar since 2019, and with pressure mounting, the government had been exploring ways to rationalize the subsidy system. Over recent months, local news sources have reported that discussions with industry stakeholders strategies mooted have included reducing the proportion of foreign currency provided at the LBP1,507.50 rate from 85% for certain categories of medicines, permanently excluding over-the-counter (OTC) medicines from subsidies, and/or applying subsidies only to medicines for chronic diseases such as cancer, diabetes, and cardiovascular disease. Domestic pharmaceutical manufacturers have also called for more stringent rules on what foreign drugs can be imported and for greater government support to boost domestic manufacturing.

Despite mounting fiscal constraints and months of discussions with sector stakeholders, no official plans for a redesign of the medicine subsidy system were confirmed, causing acute uncertainty in the market, medicine hoarding by consumers, ad hoc rationing of deliveries by distributors to pharmacies, and a rise in black market medicine trade. In the absence of a cohesive policy for rationing medicine subsidies, relations between importing agents, the health ministry, and the central bank have also become increasingly hostile. In an attempt to contain costs, procedural changes were imposed requiring import orders to be granted prior authorization from the central bank in order to qualify for access to hard currency at the subsidized rate. As heated discussions ensued last week over the unpaid medicine invoices and warehoused medicine stocks, questions were posed by various parties over the validity of medicine quantities ordered, whether prior authorizations had been sought as required, and over which parties or government bodies are responsible for verifying importers' orders.

Fears over the escalating financial crisis in Lebanon had already slowed exports to Lebanon prior to last week's announcement by the central bank. The Drug Importers' Syndicate, Karim Jabara, told local newspaper Al-Akhbar newspaper in early May that exporting companies had become reluctant to send supplies to Lebanon because of "increasing talk about the bankruptcy of the state [of Lebanon] and the inability to pay the bills". The supply problems have had a crippling effect on the Lebanese healthcare system. Anesthesia drugs are among the medicines that have been in short supply, causing operations to be postponed, and medicines for heart diseases, diabetes, epilepsy, and other non-communicable diseases have also been reported missing in the market. Although the recent release of USD180 million worth of medicines will provide some short-term relief, the government is now under intense pressure to rapidly find a way of ensuring access to medicines for Lebanon's most vulnerable patients and to avoid a sudden and wholesale removal of all medicine subsidies.

Plans to replace subsidies for essential goods for all Lebanese citizens with a new social safety net program for the country's lowest-income families, which would utilize a USD246 million World Bank loan, have reportedly been in the pipeline since March. However, details and timings for implementation remain elusive. Additionally, the sustainability of the proposed program, and its ability to sufficiently secure access to medicines, is uncertain since poverty rates have sky-rocketed in recent months. The United Nation's Economic and Social Commission Asia (ESCWA) estimated in August 2020 that more than 55% of the country's population was trapped in poverty and struggling to afford basic necessities, up from 28% in the previous year.

Posted 04 June 2021 by Sacha Baggili, Senior Analyst, Middle East, Africa and Indian subcontinent, Life Sciences, IHS Markit

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