Lebanon's central bank trying hard to pump growth

Published September 17th, 2013 - 08:18 GMT
State debt is now around 140 percent of GDP, a figure which had fallen in the years of fast growth but which could increase again.
State debt is now around 140 percent of GDP, a figure which had fallen in the years of fast growth but which could increase again.

Lebanon’s central bank plans a further boost next year to an economy hit by war in neighboring Syria and domestic turmoil, but the package will be smaller than this year’s $1.46 billion, its governor said Monday.

Riad Salameh said the stimulus plan had been vital to keeping Lebanon’s economy growing at a rate which he estimated at between 2 and 2.25 percent this year, and additional support would be needed in 2014.

“But it will not be the same amount because we have to balance economic needs and the liquidity we are putting in the market,” he said, pointing to the need to contain inflation and keep exchange and interest rates steady.

Lebanon’s economy grew 8 percent a year between 2007 and 2010, but growth has been relatively sluggish since the collapse of a unity government and the start of Syria’s uprising in 2011.

Tourism and construction, two mainstays of the economy, have both suffered from Syria’s conflict and the spread of violence and political instability, which has scared off wealthy Gulf Arab tourists and some investors.

Salameh said about three-quarters of this year’s stimulus package, which included housing loans and support for renewable energy projects, had already been taken up.

The bank plans to roll over what has not yet been taken up and add more, although no decision would be taken before December, he said.

“If an increase is needed, bearing in mind our targets on inflation and the stability of the country, we will make that increase,” he said, adding that he expected inflation this year would be under 4 percent, in line with the bank’s target.

The Central Bank and Finance Ministry also agreed to extend the term of some loans, including those to small- and medium-sized businesses, by three years, typically converting a seven-year loan into a 10-year loan, Salameh said.

The bank’s active intervention has come about partly because of paralysis in Lebanon’s government since the resignation six months ago of Prime Minister Najib Mikati.

His designated successor has been unable to assemble a Cabinet, leaving Mikati’s caretaker administration nominally in charge but unable to take day-to-day decisions.

“We feel that as long as the situation is not clear in Lebanon politically and securitywise, the Central Bank has to be proactive to help the economy,” said Salameh, a 20-year veteran as governor.

He said Lebanese banks, which have a strong regional presence, had cut their exposure to Syria from around $5 billion at the outbreak of the crisis in March 2011 to $1 billion, and could ride out unrest in Egypt and economic troubles in Cyprus.

“We do not expect any negative news impacting the banks in the rest of 2013 or in 2014 due to these crises,” he said.

The Central Bank’s foreign currency and gold reserves are enough to guarantee the stability of Lebanon’s pound, which is pegged at close to 1,507.5 the dollar, he said, but public debt remains a concern.

State debt is now around 140 percent of GDP, a figure which had fallen in the years of fast growth but which could increase again, particularly after the country recorded a primary budget deficit last year for the first time since 2006, when Hezbollah guerrillas fought a war with Israel.

“It is essential for Lebanon to have an acting government that can put in place the necessary measures so that this debt to GDP [ratio] will not increase further,” he said.

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