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French Version

World Bank : Economy stronger but body concerned by lack of action on structural reforms (Daily Star)

Two important developments have marked the 2003 economic year according to the World Bank - a renewed confidence in the Lebanese economy on one hand and lack of action on the structural reforms front on the other.

In its fourth quarter report, the World Bank noted that various indirect indicators - such as rapid export growth, promising tourism figures and some early signs of recovery in the construction sector - pointed to a slight acceleration of economic activity in 2003.

"The significant decline in lending interest rates in the second half of 2003 could also favor productive investment in 2004, and improve Lebanon's growth potential," said the bank which focused on producing an economic assessment of 2003. "The 'Paris II' donors' conference helped the surge in capital inflows, the drop in interest rates and spreads and the renewed demand for local currency. This illustrates the very high response of the financial markets to positive signals and should be perceived by authorities as an inspiration to pursue the recovery plan it presented at Paris II," it added.

The bank warned, little progress was achieved in reducing Lebanon's macro-imbalances as the government pledged at the Paris II conference, held in November 2002."In 2003, the public deficit was 56 percent higher than budgeted and the privatization program was put on hold. The 2004 budget, as endorsed by the Cabinet, does not provide for major reforms to reverse the debt dynamics," it said.

The public debt has spiraled out of control due to lack of policies and overspending. It currently exceeds $33 billion, or 190 percent of the Gross Domestic Product (GDP), making it one of the highest debt-to-GDP ratios in the world.

"Debt will continue to grow in 2004 and its law of motion continues to be unsustainable, as it mechanically increases government's financing needs. Whereas Lebanon is showing a high degree of resilience to crisis, no country is immune in the face of growing imbalances."

The World Bank advised the Lebanese government to engage in a public debate to spell out the risks of non-action, available policy options, distributional implications of such policies and steps to mitigate their effects on the most vulnerable groups.

The result of non-action "would threaten the prospects of future recovery with devastating effects on the financial sector, the social fabric and the quality of public governance. Policy options would include fiscal and monetary policies, as well as debt management and privatization," said the World Bank.

The Lebanese government has set aside the privatization program it promised to engage in because authorities believe that the sale of the mobile, electricity and aviation sectors would not reap sufficient financial benefits to reduce the public debt.

Nevertheless, the government has been pursuing modernization. In the mobile sector, this has taken the form of recently awarding management contracts to prominent international mobile companies. In the electricity sector, the cost of producing electricity will soon be lowered through alternative cheap energy fuels such as natural gas. The aviation sector looks to modernize by purchasing the latest Airbus plane models for Middle East Airlines.

The World Bank believes that "given the current level of public indebtedness, the budgeted primary surplus for 2004 and the expected level of interest rate, a nominal GDP growth superior to 6 percent would be needed to stabilize the debt-to-GDP ratio."

Beirut 26-04-2004
Tark El Zein
The Daily Star

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