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Lebanon economic growth at 7 percent in 2010 despite expected second-half slowdown

06 September 2010

BEIRUT: In its latest report on the Lebanese economy, the Institute of International Finance (IIF) projected economic growth in Lebanon at 7 percent in 2010 and 6.5 percent in 2011, slightly down from 8.6 percent in 2009, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

It estimated that real GDP grew by 9 percent in the first half of 2010 driven by strong activity, as the value of cleared checks grew by 26 percent in real terms; tax revenues rose by 12 percent in real terms; credit to the private sector increased by 16 percent in real terms; the number of tourists increased by 22 percent; construction permits rose by 33 percent; and exports and imports of goods and services expanded by 17 percent and 4 percent, respectively, in volume terms.

It expected real GDP growth to moderate in the second half of the year to 5 percent due to the rise in political tensions related to the findings of the UN tribunal probing the assassination of Premier Rafik Hariri, a possible decline in consumer confidence, and the slowdown of the global economy. The IIF said its baseline scenario assumes that political tensions will be contained and the relatively stable political environment will continue throughout the forecast period, which would keep at very low levels the risks to the stability of the exchange rate and the banking system.

It expected growth to remain strong over the medium-term under the baseline scenario of political stability and some progress on structural reforms.

It said industry, energy, and construction will drive growth on the production side, while investment and exports of goods and services will boost activity on the expenditures side.

It considered that reforming the energy sector, and specifically Electricité du Liban ( EdL ), would result in a large rise in investment and would raise annual economic growth by at least 2 percentage points on average over the medium-term. In turn, this could offset the expected slowdown in the growth of private consumption, and sustain an annual growth rate of at least 6.5 percent.

In parallel, the IIF indicated that the continued strong growth in tax revenues and delays in the execution of the 2010 budget are expected to result in a narrower overall deficit and a larger primary surplus than originally forecast.

Delays in budget execution, particularly in capital spending, combined with the expected further decline in transfers to EdL , may result in an increase in spending of less than 10 percent instead of the 16 percent forecast in the 2010 draft budget.

It added that slightly less than 40 percent of the budgeted expenditures have been executed in the first half of 2010, as total expenditures decreased by 9.7 percent from the same period last year.

Further, actual tax revenues increased by 16.2 percent in the first half of the year, and non-tax revenues rose by 14 percent from the same period last year when including the estimated $600 million in telecom profits, as has been the practice in previous years.

Consequently, it expected the overall fiscal deficit, excluding grants, to reach 7.5 percent of GDP in 2010 compared to 10.7 percent of GDP in the 2010 budget and down from 8.7 percent of GDP in 2009; and for the primary surplus to reach 3 percent of GDP this year relative to zero percent of GDP in the 2010 budget and down from 8.7 percent of GDP at end-2009. It also forecast the public debt to reach 136 percent of GDP at the end of 2010 compared to 146.4 percent of GDP in the 2010 budget and down from 150 percent of GDP at end-2009.

The IIF warned that the government’s pressing fiscal and debt burdens remain Lebanon’s most important economic challenges. It noted that simply meeting the interest payments on the public debt consumes more than 40 percent of state revenues, leaving the fiscal position vulnerable to political or economic shocks, and imposing considerable opportunity costs.

Macroeconomic risks from the exceptionally high debt ratio are somewhat alleviated by the fact that the financing needs of the government are supported by a highly profitable and liquid banking system, as well as by the large foreign assets of the Central Bank, it said. – The Daily Star

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