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IMF report proposes adding remittances to Lebanon's GDP
30 September 2009
BEIRUT: The International Mo-netary Fund (IMF) proposed in a working paper to add the remittances flowing into Lebanon each year to the country’s GDP and this could lead to further drop of public debt to GDP ratio.
Although the working paper cannot be considered as the official line of the IMF this gesture nevertheless indicates that some international organizations are more than willing to introduce new concepts to help the Leba-nese government better contain the growing public debt.
The IMF team which prepared the paper said that it tried to investigate the impact of remittances on the sustainability of government debt.
“We detail the conditions under which remittances can be viewed as part of the potential tax base and how the traditional debt-to-GDP ratio can be modified to create a more accurate representation of debt sustainability for a country that receives significant remittance inflows,” the paper said.
It added that the main result is that the inclusion of remittances in the traditional debt sustainability analysis alters the amount of fiscal adjustment required to place debt on a sustainable path, with the relative growth rate of real remittances and real GDP as the deciding factor in setting fiscal policy.
“While these findings should be viewed as preliminary, we believe they are illustrative of why countries with different balance of payments characteristics may be justified in constructing alternative measures of debt sustainability. In particular, remittance-dependent countries may need to view stability through several metrics, using both debt-to-GDP and debt-to-GDP plus remittances, for example, when evaluating the appropriate stance of fiscal policy,” it said.
The paper stressed that understanding the effects of remittances on the setting of fiscal policy and debt sustainability is likely to remain an important topic in the coming years.
Gross remittance inflows to Lebanon amounted to an estimated 20 percent of GDP in 2008, making the country one of the largest recipients of remittances as a share of GDP in the world. About 54 percent of these inflows originate in the Gulf Cooperation Council (GCC), and some 16 percent come from Lebanese working in the US, Ca-nada and Australia (IMF, 2009).
Lebanon’s public debt-to-GDP ratio is among the largest in the world. Central government gross debt was about 150 percent of GDP in 2000. It has grown to 162.5 percent of GDP in 2008, but is projected to dec-line over the medium term from 161.9 percent of GDP in 2009 to about 136.4 percent of GDP in 2014, through the phased implementation of the Paris III fiscal consolidation measures, together with further privatization and pledged donor support.
“We also assessed possible implications for fiscal adjustment over the period 2009-2014 under alternative scenarios. Underlying each scenario is the assumption that the slowdown in global economic activity and lower global liquidity, especially in the GCC, is expected to negatively affect Lebanon in 2009 through lower tourism receipts, FDI, portfolio investment, and deposit inflows. As a result, real GDP growth is projected to fall to 3 percent in 2009 from a robust 8.5 percent in 2008,” the IMF said.
It added that the first scenario assumes a 6 percent real growth rate of remittances over the projection period. This is roughly the average annual real growth rate of remittances in Lebanon over the period 2000-2008.
“By allowing remittances to continue to grow at their historical average rate, this scenario implicitly assumes that remittances are resilient to the current financial crisis and the global slowdown in economic activity,” the paper said.
The second scenario accounts for the empirical evidence that suggests remittance inflows are positively related to the growth rate of the remittance-sending-countries. In the case of Lebanon, this means the projected decline in the real GDP growth rates in the GCC, US, Canada, and Australia in 2009 is likely to lead to a sizable fall in remittance flows into Lebanon.
The paper said that the third scenario also sets real remittance growth at -15.9 percent for 2009, but relies on a rebound in remittance-sending countries thereafter. “Thus, it assumes a more favorable outlook for the remittance-sending countries over the period 2010-2014 relative to the second scenario, with real growth rates of remittances ranging between 4.2 percent and 6 percent over that period,” the IMF paper said. – The Daily Star
© Copyright The Daily Star 2009.
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