|Lebanon's growth should stabilize at 3% of GDP (Daily Star)
|Economic growth in Lebanon should stabilize at around 3 percent of Gross Domestic Product (GDP) in 2004, according to the International Monetary Fund (IMF), which noted that real GDP growth picked up last year despite the adverse effects of the war in Iraq.
A positive external environment boosted economic activity in 2003 "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 ... the depreciation of the US dollar, to which the Lebanese pound is pegged, has strengthened competitiveness," said the IMF in a report published this week. "However, growth remains below potential and, by all accounts, unemployment remains high and job prospects for recent graduates are poor."
The international body also said that the strength of external demand has been matched by equally buoyant capital inflows - partly from large official inflows related to the "Paris II" donors' conference and private capital inflows which surged in 2003 due to the reflow of Arab saving and attractive yields on deposits. "As a result, liquidity grew by 15 percent in 2003."
Nevertheless, the IMF said, the set of reform policies promised by local authorities to international donors during Paris II have fallen short of being realized. "The domestic policy consensus that emerged around the Paris II conference gave away to renewed political tensions in the course of 2003, and major policy decisions are on hold ahead of forthcoming elections," the IMF said. "Markets appear to have largely discounted the policy stalemate of 2004, banking on the emergence of a clearer political consensus for reform after elections."
Even though state revenue grew strongly in 2003 and wage and pension outlays were contained, capital spending and transfers - in particular to the state-held electricity company Electricite du Liban - well exceeded targets by wide margins. As a result, the primary surplus of 3.6 percent of GDP was well below target and the government gross financing need for 2003 (around 60 percent of GDP) was "financed through a mix of exceptional and Central Bank financing, with limited recourse to the market."
Privatization, the other policy promised during Paris II, also fell through. However,management contracts for the two mobile phone operators were awarded in April to Detecon and MTC, pending a new privatization drive. The executive directors of the IMF "commended the authorities for the transparency of the recent tender for managing the two mobile phone networks."
But failure to privatize and liberalize the two mobile phone networks and slippages on the fiscal front resulted, as expected, in an increase in the debt ratio, which stood at 185 percent of GDP by the end of 2003. And the 2004 budget, still according to the IMF, which is also a reflection of political stalemate, will not make a difference since no new tax or expenditure measures were implemented.
The executive directors welcomed the recent positive macroeconomic developments in Lebanon with real GDP growth accelerating, inflation remaining low and international reserves increasing. Nevertheless, directors cautioned that the way forward to strengthening economic viability in Lebanon remains long and arduous.
"High domestic real interest rates and financial uncertainty dampen private investment and constrain growth and impede efforts to improve social conditions and reduce unemployment and poverty. The high proportion of government debt on balance sheets of the banks constitutes the greatest vulnerability in the banking system."
Having said that, the directors also considered that the financial risks appear to be controllable in the short run, owing to the favorable external environment and a comfortable level of Central Bank reserves. "Directors were also encouraged by the recent favorable fiscal trends and hoped that these would bring about a decline in the debt-to-GDP ratio in 2004," said the IMF report.
"Directors underscored the importance of structural reforms and privatization to strengthen competitiveness, raise efficiency and achieve sustained economic growth. They expressed disappointment that the reform momentum has lagged in 2003-04, including the delays in privatization in the telecommunications sector and the absence of new fiscal measures."
However, they commended the authorities for their open trade regime, the progress made toward World Trade Organization membership and the steps taken to accelerate trade integration with Europe and within the region.
Tarek El Zein
The Daily Star