The Institute of International Finance (IIF) joined other agencies and investment banks in lowering Lebanon’s projected economic growth in 2011 due to the political standoff and mounting regional tension.
The IIF revised their forecast for real GDP growth for 2011 from 4 percent to 1.1 percent, depending on political developments in the second half of the year.
The report was published by Bank Audi Lebanon Weekly Monitor.
There is a growing feeling among international agencies that Lebanon may not be able to sustain high growth this year if rival politicians do not reach an amicable understanding on the Special Tribunal for Lebanon.
The report said that real GDP growth decelerated sharply in the first half of this year due to domestic political tensions following the collapse of the former Prime Minister Saad Hariri’s government in January, as well as the rise in geopolitical risks in the region, particularly the uprising in Syria.
“Most proxy indicators of economic activity have registered significant declines in the first five months of this year as compared with the same period last year. The exceptions are credit to the private sector, resident deposits and the number of construction permits, which continued growing significantly,” the report said.
The IIF has developed two scenarios. The first, with a 70 percent probability, assumes continued instability in Syria and a difficult relationship between the new Cabinet and the international community.
Under this scenario, domestic private investments by residents, FDI, construction and the number of tourist arrivals in the second half of the year are not expected to recover significantly until late in the year.
This would result in real GDP growing by 1.3 percent in the second half of 2011 and 1.1 percent overall for 2011.
Under another scenario, with a 30 percent probability, restoration of political calm in Syria and a non-destabilizing arrangement with the international community regarding the recent U.N.-backed tribunal decision would enable the indicators mentioned above to grow significantly in the second half, resulting in a real GDP growth of 5.1 percent in the second half of 2011 and 3.0 percent for all of 2011.
“In sum, the 2011 real GDP growth forecast of 1.8 percent is the weighted average growth of the two scenarios,” IIF stressed.
The report added that the overall fiscal deficit doubled in the first four months of this year to the equivalent of 35.5 percent of expenditures, as compared with 19.5 percent of expenditures in the same period last year.
The IIF expects the fiscal situation to improve in the second half of this year as economic activity rebounds.
The modest improvement in tax revenues (excluding the excise on gasoline) combined with a large increase in non-tax revenues (assuming all Telecom profits are included) would partly offset the increase in spending on wages and infrastructure.
Under the first scenario, the fiscal deficit (including all receipts from Telecom profits) is forecast to widen to 9.5 percent of GDP in 2011.