Policymakers need to urgently address Lebanon’s longstanding and worsening structural bottlenecks, said Eric Le Borgne, lead economist at the World Bank.
“Lebanon continues to be beset by structural bottlenecks such as electricity, water, transportation and telecommunications, and the country is in dire need of reforms,” he said during the launching of theLebanon Economic Monitor at Universite Saint Joseph Thursday.
Dubbed “the economy of new drivers and old drags,” the report aims at providing an update on key economic developments and policies over the past six months in addition to assessing the implications of these developments and other changes in policy on the outlook for Lebanon.
Le Borgne said that Lebanon’s bottlenecks are becoming even more binding as shown by a worsening of Lebanon’s international ranking among key investment climate assessments.
For instance, Lebanon slipped further in 2015 on the World Bank’s ease of doing business index, ranking 104 out of 189 countries compared to 102 in the previous year.
Le Borgne added that the rise of demand by Syrian refugees for basic services has also exacerbated these problems given that a deficit in service delivery existed before the influx.
“Hence, any reform or investment in those areas will alleviate this pre-existing deficit, once refugees return to their homes. In the meantime, while refugees are present, the much needed reforms would improve living conditions and standards of both Lebanese and refugee communities, mitigating tensions among communities,” he said.
However, he added, the delay of such reforms is ultimately hurting the economy and its citizens as debt is again accumulating, jobs are not created and corruption becomes even more prevalent while services deteriorate at an accelerating pace and most of all growth remains weak.
The growth rate is expected to witness a slight increase to 2.5 percent in 2015 compared to 2 percent in 2014 as projected by the report, which added that Lebanon is gradually adapting to the negative spillovers from the regional turmoil.
The World Bank made its projections based on the assumption that the Syrian crisis will not come to an end in the period extending from 2015 to 2017 but its spillovers will still be contained.
“Also, the declining oil prices will generate a stronger than expected momentum for the first half of 2015, leading to an upward revision of our growth projections for 2015 to 2.5 percent,” Le Borgne said.
Le Borgne’s remarks were echoed by Wissam Harake, country economist at the World Bank, who said that the decline in oil prices in addition to the improvement in the security situation contributed to boosting consumer sentiment while reinforcing private demand in 2014.
“The consumer confidence index rose by 21 percent in 2014 compared to 2013, reserving the negative trend in retail trade,” he said. “Private demand is also supported by Syrian investment since Syrians in Lebanon are gradually shifting their economic role from being mainly consumers to becoming income earners by establishing micro and small businesses,” he added.
Harake added that tourist arrivals increased by 6.3 percent in 2014, registering the first increase since 2011.
“In the real estate sector mixed results were witnessed since we had an increase of 4.5 percent in construction permits versus a 7 percent fall in cement delivery,” he said. “Also, more lending took place in the agriculture sector through Kafalat,” he added.
On the fiscal side, Harake said that technical and unsustainable measures, rather than policy actions, helped improve the fiscal balance in 2014. “The overall fiscal deficit narrowed to an estimated 7.2 percent of GDP, a decline of 2.3 percentage points of GDP from a year earlier,” he said.
Harake said that this recovery was led by the primary balance, which improved by 2.7 percentage points of GDP, swinging back into surplus for the first time since 2011.
“The primary fiscal improvement was driven almost entirely by improved revenue collection, especially non-tax revenues, with total revenues increasing by an estimated 2.4 percentage points to reach 23.7 percent of GDP,” he said.
He added that the quality of this improvement, however, was weak as it primarily reflected a one-off measure – a surge in transfers from the telecom sector related to the collection of past telecom arrears – and is therefore not sustainable.
On the other hand, Harake said that the total public debt continued rising in 2014 but at a slower rate, reaching 145.7 percent of GDP by the end of last year compared to 143.1 percent at the end of 2013.
When it comes to the external sector, Lebanon’s current account balance improved in 2014 but remains structurally weak, the report said.
“The current account deficit is estimated to have improved by 4.4 percentage points of GDP from 2013 to 2014, reaching 22.2 percent of GDP, a deficit that remains among the largest in the world, exposing the country to significant refinancing risks,” Harake said. He added that Lebanon is heavily dependent on capital inflows to finance its current account deficit.
“Net Foreign Direct Investments (FDIs) in 2013 declined by 60 percent to $973 billion, equivalent to 2.2 percent of GDP compared to an average of 9.5 percent of GDP for the pre-crisis period of 2000-2010,” Harake said.
“The presence of Syrian refugees, however, has partially compensated for this loss of inflows; the longer the Syrians are displaced from their country, the more likely they will seek adjustments to their financial situation and this involves investments in their host country,” he added.
