GDP Growth to Drop in 2018 Due to Political Instability in Lebanon

Published August 28th, 2018 - 10:14 GMT
Lebanon’s GDP growth to slow to 1.7 percent in 2018 due to political instability. (Shutterstock)
Lebanon’s GDP growth to slow to 1.7 percent in 2018 due to political instability. (Shutterstock)

The Economist Intelligence Unit predicts Lebanon’s GDP growth to slow to 1.7 percent in 2018 due to political instability, potential military conflict and tax changes.

“Lebanon’s investor sentiment (especially toward tourism and construction) and private consumption growth will be held back by political instability, potential military conflict and tax changes, including increases to the capital gains tax rate and levies on construction, which will fall especially heavily on financial services and construction firms,” the EIU said in its recent report on Lebanon.

It projected Lebanon’s GDP growth to fall to 1.7 percent in 2018 compared to an estimated GDP growth of 1.9 percent in 2017.

“In the short term, consumer confidence will also suffer amid uncertainty over government formation. For Lebanon, the Syrian regime’s territorial consolidation and the start of reconstruction efforts are likely to boost economic growth modestly in the longer term on the back of stronger exports (as some trade routes are reopened) and private investment, particularly if the country can market itself as a hub for Syria’s reconstruction, although political concerns could impede this,” the EIU said.

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It is expected that real GDP growth will slow to 1.7 percent in 2018, and then average a still-modest 3 percent in 2019-2022.

“Furthermore, tax changes and higher global commodity prices, which have fed through to rising food, transport and utility costs, are driving up inflation in 2018. The presence of refugees will continue to exert near-term upward pressure on rents and housing prices, although this should ease as small numbers return home,” the EIU added.

The EIU has revised its forecast for inflation and anticipates that this will average 6.4 percent in 2018, before easing to an annual average of 3.9 percent in 2019-2020.

“The Lebanese pound will remain pegged to the U.S. dollar. Market jitters prompted by prolonged economic and political uncertainty have led to speculation regarding the currency peg but the EIU expects it to be maintained. BDL’s commitment to defending the peg is aided by its high level of international reserves and strong support from local banks,” the EIU said.

It is expected that the pound will depreciate on average against the euro in 2018-2022, reflecting a forecast weakening of the dollar against the euro. “International reserves (including gold) amounted to $56.6 billion in June, sufficient to cover around 21 months of imports. With a partial recovery in external support during the forecast period, reserves should suffice to support the currency,” it added.

Central Bank Gov. Riad Salameh has repeatedly said there is no immediate threat to the Lebanese pound, thanks to the massive foreign currency reserves. But he has underlined the importance of fiscal and economic reforms to reduce the budget deficit.

“At the level of the external sector, a surge in import spending in late 2017, as businesses and consumers brought forward purchases before increases in sales taxes and customs duties at the beginning of 2018, has skewed the trade data, but higher oil prices will ensure import costs remain elevated,” the EIU added.

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