A positive external environment boosted Lebanon's economic activity in 2003, the IMF said Wednesday. Despite the adverse effects of the war in Iraq, real GDP growth picked up to an estimated 3 percent, with inflation remaining in the low single digits.
The rebound rests on stronger regional demand for tourism, real estate and other services, as well as goods exports, it added. The depreciation of the U.S. dollar, to which the Lebanese pound is pegged, has strengthened competitiveness.
These trends are expected to continue into 2004, with growth stabilizing at around 3 percent. However, growth remains below potential and, by all accounts, unemployment remains high and job prospects for recent graduates poor.
The strength of external demand has been matched by equally buoyant capital inflows. In addition to large official inflows related to Paris II, private capital inflows surged in 2003, driven by the reflow of Arab saving and attractive yields on deposits. As a result, liquidity (broad money plus nonresident deposits) grew by 15 percent in 2003.
Yields on two-year CDs and T bills have stabilized at around 8 percent. While the current account deficit declined only modestly to 13 percent of GDP, the turnaround in the capital and financial account and dedollarization contributed to an increase in net international reserves (NIR) in 2003. Gross reserves stand at around US$10 billion. Capital inflows and monetary growth have remained strong in the first two months of 2004.
Policy outcomes have fallen short of the authorities' Paris II objectives. The domestic policy consensus that emerged around the Paris II conference gave way to renewed political tensions in the course of 2003, and major policy decisions are on hold ahead of forthcoming elections.
Markets appear to have largely discounted the policy stalemate of 2004, banking on the emergence of a clearer political consensus for reform after elections.
Following an impressive deficit reduction in 2001-02, the pace of fiscal adjustment slowed down in 2003, the IMF stated. While revenue grew strongly and wage and pension outlays were well contained, capital spending and transfers - in particular to the electricity company (EdL) - exceeded targets by wide margins. As a result, the primary surplus, at 3.6 percent of GDP, was well below target. The government gross financing need for 2003 (about 60 percent of GDP) was financed through a mix of exceptional and central bank financing, with limited recourse to the market.
The privatization of the two mobile phone operators fell through as foreign operators withdrew from the bidding process in January 2004, and bids from the two domestic operators came in below expectations. Unresolved issues about the government's stake in the companies and about the regulatory framework appear to have undermined the confidence of foreign investors. Management contracts were awarded in early April, pending a new privatization drive.
Failure to privatize the two mobile phone networks and slippages on the fiscal front resulted in a further increase in the debt ratio, to 185 percent at end-2003. The 2004 budget is also a reflection of the current policy stalemate, with no new tax or expenditure measures. If expenditure is kept in check, the primary fiscal surplus could be stabilized at 3½ percent of GDP.
A decline in the government interest bill (due to lower spreads and exceptional financing related to Paris II) should permit a stabilization of the debt ratio in 2004.
Against a favorable external environment, the soft landing strategy presented at the Paris II conference remains the guiding policy framework for the authorities, notwithstanding recent policy slippages. (menareport.com)
© 2004 Mena Report (www.menareport.com)
