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French Version

Think tank foresees dismal economic outlook for Lebanon

Presidential deal won't solve problems - report

The London-based Economist Intelligence Unit (EIU) said on Thursday that Lebanon's political and economic future is still at risk due to the deadlock between the government and the opposition over the presidential election. In its annual report on Lebanon, the EIU expects the political situation in Lebanon to remain volatile, with a strong possibility of renewed outbreaks of violence.

"Although the government and the opposition may come to a temporary compromise, the current political stand-off remains unlikely to be fully resolved before the parliamentary election due in May 2009," the report said.

It added that the deep domestic divisions, reflecting splits within the wider region, could potentially spark a more serious confrontation although all parties remain eager to avoid a return to civil war.

"The degree of cooperation with an international tribunal to investigate the killing of a former prime minister, Rafik Hariri, will remain a focus of dissent, given its potential impact on the Syrian leadership and the divisions within the country over whether Lebanon's international alignment should be with Syria and Iran or with the US and France," the EIU said.

It added that the ongoing political deadlock is likely to delay planned economic and political reforms, and that despite substantial international financial assistance the country's large fiscal deficit will continue to boost the massive public debt stock. Real GDP growth will recover only slowly, to 1.2 percent in 2008 and further to 2.3 percent in 2009.

The EIU predicts a series of political crises occuring over the next two years in Lebanon, beginning with the debate over the selection of a new president by the Parliament, due by November 24. Rising tensions driven by deep and unresolved national divisions are likely to result in occasional outbreaks of violence, and further political assassinations remain a possibility.

"The political situation will remain volatile, owing to continued clashes between pro- and anti-Syrian forces within the country. These will be fueled by long-standing grievances between the various sectarian groups over the distribution of access to political influence and economic resources, with many Shiite Muslims and some sections of the Christian community claiming that they have been disenfranchised," it said.

The EIU stressed that the continued political tensions will make it extremely difficult for the government to implement its comprehensive economic reform plan, which has been rejected by much of the opposition.

The plan focuses on the privatization of state assets and greater "efficiency" in public expenditure. If this economic restructuring is postponed, it could prevent Lebanon from receiving all of the $7.6 billion in conditional financial aid and soft loans pledged at the Paris III conference, according to the report.

"Without reforms, it will be extremely difficult to address Lebanon's long-term structural fiscal deficit, which is mainly driven by the costs of servicing the country's extremely large public debt burden, and has been exacerbated by a series of political crises since early 2005," the report said.

It added that in the absence of any substantial improvement in the political situation, the imbalance in Lebanon's public finances is expected to persist in 2008-2009, and a major crisis could cause the situation to deteriorate more rapidly than currently forecasted.

The EIU said that in 2007 it estimated that total government revenue will have risen by just over 12 percent to around $6.1 billion, as rising value-added tax and customs revenue offset the other tax losses resulting from ongoing political tensions, assisted by an influx of foreign grants.

"However, the rising cost of servicing the large public debt stock and ongoing reconstruction costs will have caused spending to grow even more strongly, at just under 20 percent year on year, pushing the fiscal deficit up to nearly LL 5 trillion [15 percent of GDP]," the report said.

It added that over the outlook period, government spending should moderate.

"Assuming that at least some of the planned tax reforms are implemented toward the end of 2008, revenue from VAT and customs should also rise further. The fiscal deficit is therefore expected to narrow marginally to an average of LL4.8 trillion in 2008-2009 or the equivalent of around 13 percent of GDP," it said.

"We estimate that Lebanon's real GDP will have grown by just 0.3 percent in 2007, as ongoing political tensions delayed the country's economic recovery" from the summer 2006 war with Israel, the report said.

It added that despite a recovery in government consumption, private-sector consumption will have remained sluggish, limiting growth in overall domestic demand.

"Trade volumes will have recovered only slowly, with much of the growth representing transshipment rather than going to feed Lebanon's own economy," the report stated.

"Assuming that the political crisis remains contained over the outlook period, domestic demand is expected to revive slowly. Ongoing tensions will mean that tourists may be slow to return to the country, limiting growth in the vital services sector," the report said.

It added that export volumes are also expected to expand only modestly.

"As a result, real GDP growth is forecast to increase to a still weak 1.2 percent in 2008," the report said.

In 2009, the EIU predict that rising private consumption and fixed investment will push growth up further, to about 2.3 percent.

Beirut 26-10-2007
The Daily Star

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