Byblos Bank Headquarters, March 17, 2015: The Institute of International Finance (IIF) released today its report on the Lebanese economy during a press conference held at Byblos Bank Headquarters in Beirut. The report indicates that the ongoing domestic and regional political uncertainties and security breaches have kept consumer confidence and investor sentiment at low levels, which has limited economic activity. Also, the political deadlock in Lebanon has hampered efforts to strengthen the economic policy framework, especially to address the public debt, exploit potential off-shore gas reserves, upgrade the infrastructure and improve the business environment. According to the IIF, the economy grew by 1.7% in 2014 helped by Banque du Liban’s (BDL) stimulus package, the fiscal deficit narrowed to 7% of GDP and the current account deficit narrowed to 22% of GDP. The IIF baseline scenario expects a modest pick-up in growth to 2.2% in 2015, supported by a third BDL stimulus package and a modest recovery in the exports of goods and services.
During the press conference, Dr. Garbis Iradian, Chief Economist for the MENA region at the IIF, commented: “Lebanon’s economic performance has been lackluster, reflecting policy inaction amid a protracted political crisis and rising regional insecurity. Our real GDP growth forecast of 2.2% for 2015 continues to be below the required growth level to change the dynamics of the Lebanese economy.” He added “A stronger economic rebound in 2015 and 2016 hinges on an improvement in the security situation, the election of a new President, a de-escalation of the civil war in Syria, and progress on in-depth supply-side structural reforms. This would help move the Lebanese economy to a higher growth path beyond 2015 and bring the public debt down to more sustainable levels.” He noted, “Lebanon’s banking system remains resilient, supported by loyal depositors and stable remittance inflows from the large Lebanese Diaspora, which are not likely to be affected by the drop in oil prices. The Lebanese pound also remains stable and official foreign exchange reserves continue to increase.”
Mr. Nassib Ghobril, Chief Economist and Head of the Economic Research and Analysis Department at Byblos Bank, stated that “consumer confidence and investor sentiment in Lebanon continue to be severely affected by domestic political instability and regional turmoil, so it is not surprising that growth will remain at low levels this year.” He added that “the drop in global oil prices and the decline in the prices of basic metals represent an opportunity that Lebanese authorities should seize to reduce public finance vulnerabilities and external imbalances; and to implement reforms that would reduce the operational obstacles facing the private sector and raise households’ purchasing power.”
He considered that “the economy requires a positive political shock of the magnitude of the Doha Accord for consumer confidence and investor sentiment to rebound to the levels seen in 2009 and 2010. But he cautioned that this would not be sufficient to achieve and sustain high growth rates without structural reforms.” He stressed that “policymakers must avoid complacency and need to tackle the challenges ahead in order to reduce public finance vulnerabilities, preserve financial and monetary stability, and reverse the deteriorating competitiveness of the economy by focusing on reforms that would improve the economy’s investment climate, business environment and reduce the operating costs on the private sector.”
Dr. Iradian noted that “the fall in global oil prices has provided Lebanon with a window of opportunity to undertake fiscal policy reforms, but authorities have yet to formulate a concrete strategy to adjust to the new era of low hydrocarbon prices.” He expected the public debt to increase to around 143% of GDP in 2015 in the absence of fiscal reforms, which would leave Lebanon vulnerable to shifts in the availability of financing. He added that “the primary surplus needs to be raised to at least 2.7% of GDP to ensure a decline in the public debt ratio.”
On the issue of fiscal reforms, Dr. Iradian presenteda possible fiscal adjustment scenario based on the following measures: 1) further strengthening of the tax revenue administration and combating pervasive tax evasion; 2) selling non-performing state assets (such as real estate holdings); 3) gradually raising the average electricity tariffs, which have remained unchanged since 1996 when the global price of oil was $23 per barrel, to cost recovery levels by 2018; 4) reforming the pension system to correct looming imbalances; 5) liberalizing the telecommunications sector to introduce real competition; 6) involving the private sector in the financing of infrastructure projects; 7) enforcing fines on illegally-built seaside properties; 8) increasing tobacco excise taxes; 9) rescinding the reduction in the fuel excise tax if oil prices remain at their current level in 2016; and 10) raising gradually the VAT rate when the economy recovers and the growth rate increases sustainably. The primary surplus would rise to 5% of GDP and the fiscal deficit would narrow to 3.3% of GDP by 2018, and the public debt-to-GDP ratio would decline from 140% of GDP in 2014 to 117% by 2018.
The Washington D.C.-based Institute of International Finance is the leading global association of financial services firms with more than 470 member institutions. Byblos Bank S.A.L. is a long-time member of the IIF and Dr. François Bassil, Chairman and General Manager of Byblos Bank, is a member of the IIF’s Emerging Markets Advisory Council.