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French Version

Lebanon's economy is down but not out - report

Economist economic intelligence unit predicts gdp will grow by 9 percent in 2007

Lebanon's economy will contract sharply this year as a result of the war with Israel, but is expected to rebound in 2008 as long as the political situation stabilizes, a report released Thursday by a London-based research group said.

Though the budget deficit will grow to 18 percent of GDP in 2007, according to the latest projections of the Economist Economic Intelligence Unit (EEIU) - a branch of the Economist magazine - it will narrow as a proportion of Gross Domestic Product (GDP), and fall to 11 percent in 2008.

Since Lebanon experienced its strongest period of sustained growth since 1995 during the first half of 2006, the economy will not register the full impact of the war until 2007, when a decline in state revenues and an increase in the government expenditures will coalesce to reverse the gains made in managing public accounts and Lebanon's bloated national debt.

"The ease with which Lebanon's economic authorities maintained financial stability during the hostilities has enhanced confidence in their capacity to protect the currency in the short term," reads the report, referring to the conduct of the Banque du Liban during the July war.

Thanks to Saudi Arabia and Kuwait's cumulative deposit of $1.5 billion to the Central Bank to bolster its foreign-currency reserves and minimize the impact of conversion and capital flight, the Lebanese pound was able to maintain its peg to the US dollar. The projected weakening of the dollar in 2007-08 is expected to bolster the competitiveness of Lebanese exports in the Euro zone, says the EEIU.

Fiscal revenue fell by 9 percent overall due to the conflict, on the heels of a 15-percent rise in the first two quarters of the year. Meanwhile post-war fiscal expenditures are expected to double during the same period.

Domestic inflationary pressure has receded since an Israeli blockade was lifted in September but due to the strength of the dollar, prices on basic goods and services will remain high, growing by an average of 7 percent in 2006. In 2007-08 the EEIU expects prices to stabilize, dropping by 3 percent.

Despite the Central Bank's intervention in defense of the pound, the war reversed five years of government progress in decreasing the fiscal deficit - which has hovered around 15 percent of GDP since the 1990s - beginning with its introduction of the VAT in 2001.

Figures from the Finance Ministry reveal marked improvement in Lebanon's public accounts during the first half of 2006, but the state's overall revenues for 2006 fell 17 percent below projections due to a 30-percent decrease in customs revenues and a 20-percent decline in VAT revenues.

The drop has been coupled by a 9-percent increase in projected government expenditures for the same period to 12.5 trillion pounds, though the war's full impact on the government budget will not be felt until 2007.

"Although the projected drop in second-half revenues is extremely steep, the full-year figures will be helped by the strong performance in the first half of the year, when most taxes on profits, capital gains and property are collected. The sharpest fall in revenue is therefore expected to take place in early 2007," the EEIU says.

According to the report, the blow to tourism revenues will have the most acute economic impact of any of the wars' direct and indirect losses.

But the outlook for 2007 is not entirely bleak, since the reconstruction process is expected to stimulate consumption and investment levels for the year, causing GDP to spike by 9 percent. As the environment normalizes in 2008, GDP growth will recede to a more moderate 2 percent growth rate.

Beirut 19-10-2006
Lysandra Ohrstrom
The Daily Star

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