Big savings: the expected benefits and unexpected costs of the oil price slump on the Lebanese economy

Published January 12th, 2015 - 01:11 GMT
The slump in oil prices will have a significant impact on the Lebanese economy.
The slump in oil prices will have a significant impact on the Lebanese economy.

There has been much concern that the drop in oil prices will have negative consequences on Lebanon, due to the decline in money transfers from Lebanese expatriates living in the oil-rich Gulf. However, initial tabulations show that the Lebanese oil bill will decline by $1.1 billion in 2014 and $2 billion in 2015. The falling price of oil has a positive effect on the real economy, as well as a set of negative consequences, which have plagued Lebanon’s economy since early 2011.

The slump in oil prices will have a significant impact on the Lebanese economy. On one hand, the bill for domestic consumption of petroleum products has declined; on the other, remittances by Lebanese expatriates working in countries whose budgets depend on oil prices are expected to shrink. To which side will the scale tip? Will the positive effects overshadow the negative ones or vice versa, especially as the Syrian crisis is an additional burden on Lebanon? It is a pressing question given that declared money transfers are estimated at $7.7 billion annually, and so represent a vital and essential element in sustaining the current system financially and economically. On the flipside, there are preliminary indicators of a dramatic decline of about $2 billion in the oil bill, and encouraging economic, financial and monetary implications.

Big savings

That is the Lebanese scene in early 2015. The crash in global oil prices has produced a sense of relief in the domestic market that may compensate for the loss in income incurred by Lebanese families: high oil prices had doubled the cost of factory production and encumbered monetary policies with the burden of “storing” green currency. This new state of affairs comes after four years of a record high oil bill representing anywhere between 13 to 16.3 percent of the Gross Domestic Product (GDP). With the 54 percent drop in the price of a barrel of oil since June 2014, the oil bill’s share of the GDP dropped to 8.4 percent in 2014 and is expected to drop to 5.5 percent in 2015, assuming that there is a 2 percent GDP growth rate and oil prices stabilize at $50 per barrel.

Regardless of the reasons behind this decline in oil prices — whether it is a side effect of the oil war between the US-Gulf and Russia-Iran alliances, or the result of the abundance in supplies due to global economic stagnation — in Lebanon all analyses suggest that the national oil bill shrunk by $1.1 billion in 2014 and will shrink by $2 billion in 2015.

The average price of petroleum products imported by Lebanon, which was $900 per ton in the first half of 2014, before the plunge in prices, has since dropped to $450. If we calculate these prices based on the amount of petroleum imported in 2013, 5,500 tons, the bill would come up to $3.7 billion in 2014 compared to $5.5 billion in 2013 and $5.8 billion in 2012. Accordingly, the cost of importing fuel and oil for use by Electricité du Liban (EDL) will drop by $660 million as the slump in prices saves $122 per ton of fuel and $132 per ton of oil.

According to former Lebanese Labor Minister Charbel Nahas, when “oil prices rise, the budget deficit rises due to the electricity deficit but when the prices drop, the electricity deficit in the budget drops and the cost of importing petroleum products drops. We will automatically see a decline in the cost of living for the consumer, which will have a positive impact.”

Golden transfers

Skeptics of the net positive impact of this development point out that the declining oil prices will negatively affect money transfers by Lebanese expatriates. Over the past decades, Lebanon has produced an almost industrial output of expat workers, who migrate abroad and send a portion of their income back home to their family. According to World Bank estimates, this formula brought in $7.67 billion worth of declared transfers in 2014, compared to $7.55 billion in 2013 and $6.92 billion in 2012. That amounted to about 16 percent of the GDP and 35 percent of the average revenues during these three years. It remains the most important source of foreign currency that Lebanon needs to pay for imports, meet families’ needs and shrink the deficit in the balance of payments. Note that the sum of actual remittances from Lebanese working overseas is probably higher than we know, as significant amount of transfers enter Lebanon through unofficial channels, especially from Africa.

According to past statements by Francois Basil, the president of the Association of Banks in Lebanon, 60 percent of these remittances originate from Gulf countries which plan their budgets according to the price of oil. Therefore, there is an automatic correlation between the total value of the remittances and the price of oil. That is why observers expect the value of remittances to decline instead of grow, based on the drop in oil prices as a basic indicator of the decline in Gulf governments’ spending on domestic investments, which reflects negatively on foreign investments, employment levels and per capita income. This decline explains predictions pointing to a decrease in Gulf governments’ spending. Most of these governments devised their budgets on the assumption that the price of oil is no less than $60 per barrel, which means they will face a fiscal deficit that may force them to use money from reserve funds, and they will not expand their spending.

On the other hand, some bankers are skeptical about these predictions. They argue that measuring declining investments and their impact on the income of Lebanese expatriates working in these countries is misleading, as these governments are not going to suddenly stop their projects. Further, they are not going to face financial difficulties because they have huge reserves that will help them overcome difficulties for a year or two. “If this decline in prices does not continue for a long time, say for example five years, there will be no negative impact on expatriates’ remittances,” says one banker.

Nahas argues that no matter how much expatriates’ remittances decline due to plunging oil prices, “the situation on balance will not be bad in Lebanon, because the impact of the declining prices on money transfers is a lot less than the impact on the oil bill. It is true that the repercussions affect the supply of dollars from overseas but on the other hand, the domestic demand for the dollar will drop which means it will not affect the Central Bank’s reserves. On the contrary, payments required in dollars will decline. There are pros and cons but the pros dominate the general picture.”

Decline in political money

 One outcome of these developments is that the drop in oil prices will have a positive impact on the balance of payments deficit, which represents the net funds flowing in and out of Lebanon, whether in the form of investments or transfers or the result of trade with the outside world. However, according to one banker, these low prices are going to reduce the flow of political money to Lebanon even though they represent a huge chance to mitigate the cost of the economy, especially the cost of manufacturing. According to board member of the Association of Industrialists Munir al-Bsat, some industries will experience an immediate decline in cost given that petroleum products represent an essential component of the cost, especially factories that rely on energy-intensive production where petroleum products represent no less than 20 percent and up to 40 percent of their spending.

However, some industries will not benefit quickly or dramatically from the declining prices, but will be affected indirectly. “Petroleum products do not represent more than 10 percent of the cost of manufacturing food products but these industries will still experience a positive impact within a short period of time.”


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