Lebanon’s economic recovery depends on political stability

Just like the critical security situation in Lebanon, which witnessed a series of terrorist bombings, the economic situation — in decline for over three years now — awaits a positive political shock to be created by the announcement of the formation of the government after nine months of unprecedented local conflict about the shape, color and quotas of its various parties. Moreover, in light of the developments occurring with the beginning of 2014, no solution seems to be looming in the horizon.

Despite the confidence that the formation of the government will presumably confer to the economy, some have questioned whether the economic files would be included in the missions entrusted to the government-to-come during 2014, the year of presidential elections where priorities are focused on security. In this respect, former Lebanese Minister of Finance Jihad Azour confirmed in an interview with Al-Hayat that any action that contributed to political stability would reflect on the economy, thanks to the confidence factor. Azour recalled that “Lebanon has previous experiences and its economy managed to quickly recover following any development that led to a positive shock.” He revealed the results of a study he had conducted indicating that 12 sectors, making up 70% of the economy, were able to quickly drive economic recovery when a minimum of political stability was ensured.

Azour noted that “2013 indicators were disappointing and negative, with the exception of some sectors that registered positive performances.” He pointed to the drop in real economy indicators, such as the growth rate — which maintained its slowdown — and the fall in commercial activity and the tourism and services sectors, which were affected this year even more than during previous years. He believed that the difficulty was the economic decline accumulating for three consecutive years. “This depletes the capacities of productive institutions capable of enduring such a situation for a period not exceeding one and a half years, thus making them bear a high incurred cost and delaying their ability to recover.”

A policy that eases the burden on the state

As for public finances, Azour noted “a continuation of a policy that goes against the state’s capacity in the current situation, as spending increased more than $1 billion in the first nine months of 2013 compared to the same period in 2012, knowing that oil prices did not rise so as to require more subsidies to electricity and to Electricité du Liban (EDL).” He also noticed that there was “a drop in revenues, bringing the deficit up to more than $1.2 billion in the first 10 months of 2013.” He indicated that this figure was too high, especially as overall public spending exceeded a record 21 trillion Lebanese pounds [$14 billion] in 2012, describing public finances indicators as worrying.

Azour stressed that “the state’s financial administration must be changed to counter economic recession and security and political instability with financial stability and hedging policies that ease the burden on the state and the economy, and reduce the risks raising investors’ and savers’ concerns.” He also believed that spending was not always adequately allocated in 2013, which requires a more programmed spending. “Coordination between the Ministry of Finance and the Central Bank of Lebanon (CBL) is important in order to take preemptive measures to previously refinance debt maturing this year and reduce refinancing risks in the event of a prolonged transitional stage.”

Furthermore, he added that investment activity was slower than in past years, especially foreign investments. This made the economy rely on remittances from Lebanese citizens abroad as partial compensation, as well as on industry and agriculture, undamaged by the Syrian crisis. The former finance minister referred in this respect to statistics indicating an increase in domestic consumption and a drop in imported Syrian products, which used to compete with the local production sector. He suggested the formation of a coordination committee between sectoral ministries, even under a caretaker government, as even simple measures could achieve plenty.

Azour said that “the most prominent element that seriously affected the economy during 2013 was displacement from Syria. It significantly affected the [Lebanese] economic and social situation.”


In an interview with Al-Hayat, Secretary-General of the Association of Banks in Lebanon (ABL) Makram Sader said that “basic negative indicators were registered in the first 10 months of 2013, as building permits dropped by 10%, exports of goods by 5% and imports by 1%.”

Sader did not rule out that results of some other activities and services were unknown. He indicated that CBL, the Central Statistical Directorate, and the International Monetary Fund (IMF), along with some banks, issued growth estimates ranging between a negative figure and 1.5 to 2%. Based on GDP-related data, he noticed that consumption still exceeded the GDP value by 100%, in addition to the almost complete lack of state investment and declining private sector investments. In order to meet overall demand, “there was a significant import activity that slightly raised the deficit in the balance of payments that was not covered by remittances or capital investment accounts. Consequently, the balance of payment registered a $1.5 billion deficit against $2 billion in the same period in 2012.”

Sader believed that this improvement did not mean that the deficit was not still significant. He confirmed that the most influential reason for this deficit was the weakness of exported services, such as tourism, and not the drop in remittances, especially since there was no indication that remittances from Lebanese nationals abroad declined. Sader explained that the factors causing the deficit in the balance of payments were the decline in export of services and the shrinking influx of foreign investments.

Continued flow of deposits

Regarding the development of the banking sector, Sader noted that total budgets amounted to $160.6 billion up to October 2013, compared to $151.9 billion at the end of 2012, with a 5.8% growth rate between the end of December 2012 and last October 2013, and compared to 6.3% between December 2011 and October 2012. This indicates that overall deposit growth was affected by events in Lebanon and the region, albeit slightly. He also indicated an increase in credits to the private sector exceeding 8% in the first 10 months of 2013, rising from $37.9 billion to $41 billion. “This is a good and important increase and credit will be the only element that raises the growth rate and stimulates economic activity,” said Sader, stating that bank credits to the public sector rose from $31.13 billion to $36.6 billion, i.e. by 18%. He clarified that $4.7 billion out of the $ 5.5 billion increase represented the value of Eurobonds bought by banks from the CBL portfolio.

“Deposits increased from $127.7 billion to $135 billion — an increase of 5.7%. Non-resident deposits increased by 10%, thus reaching $26.5 billion and accounting for 20% of total deposits, which is higher than the average overall increase in deposits.” He explained that this meant that deposits would keep flowing to Lebanon, an indicator of the unrelenting confidence in the banking sector.

The recession pace

Sader asserted that public finances were worrying in light of the 2% drop in their revenues and the 12% increase in spending in the first 10 months of 2013, which requires a control of expenses. He believed that the talk about bankruptcy was not logical, but the recession was clear and exacerbating. “In my opinion, acceleration or slowdown of the recession is linked to the political situation, which will improve with the formation of a government, the reunion of the parliament and presidential elections. This would be a positive trend as it means that constitutional institutions are back to work. However, it will deteriorate and probably lead to possible dangers if the decline and lack of solutions persist.”

Sader warned that credit rating agencies would lower the rating given the deteriorating political situation, which affected the banking sector by imposing additional requirements for bank capitalization.

Daniel Daher

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