Dark clouds of recession hang over Lebanon

Published September 17th, 2012 - 07:16 GMT
Lebanon could enter recession in the third quarter of 2012
Lebanon could enter recession in the third quarter of 2012

Lebanon’s 2012 GDP growth is unlikely to exceed 1.2 percent by the end of 2012, and the country could enter recession in the third quarter, according to the Washington-based Institute of International Finance.

Lebanon’s economy contracted by 0.3 percent in the second quarter, a report issued by the institute added, according to a report by Lebanon This Week, the economic publication of Byblos Bank.

Expecting the economy to contract another 0.5 percent in the third quarter of 2012, the report argues the Lebanese economy would officially enter a state of recession. Recession is defined as two consecutive quarterly contractions in real GDP.

The new report is in line with most projections of economists and international investment banks, which gave a bleak picture of the Lebanese economy.

Most reports attribute the poor economic performance to the tense political situation in Lebanon and the volatile security condition in Syria.

The IIF report titled “Lebanon: Turmoil in Syria Dims Economic Prospects” blames deterioration in security conditions and spillover from the Syrian conflict for the rapid decline in economic activity from 7 percent growth achieved in 2010.

Downgrading its 2012 growth forecast from 2.1 percent last March, the report cited lower transit trade, plummeting tourist arrivals and weak foreign direct investments.

Nonetheless, the IIF forecast real GDP growth could rebound to 3 percent for the third quarter if significant improvements in the domestic security situation and the rule of law take place, including the beginning of structural reforms.

This would allow the economy to achieve a more sustainable and higher growth rate and reduce the public debt level. It projected Lebanon’s real GDP growth at 3.7 percent in 2013 and 4.5 percent in 2014, if Lebanon manages to improve tourism and raise foreigndirect investments.

However, the IFF indicated that Lebanon continues to face serious and chronic vulnerabilities.

It considered that the main obstacle to economic growth is the persisting deep divisions within Lebanon’s political scene, which have paralyzed government decision-making and delayed the implementation of much-needed structural reforms.

According to the report, Lebanon is significantly exposed to market conditions given its large finance requirements resulting from the widening current account and fiscal deficits.

It warned that failure to implement near- and medium-term fiscal consolidation would exacerbate the already-existing debt sustainability concerns.

The report said Lebanon’s fiscal deficit would widen to 9 percent of GDP in 2012, up 3 percent from 6 percent of GDP in 2011. Public debt would increase to 138.6 percent of GDP at the end 2012 up from 137 percent of GDP in 2011.

The report confirmed the country’s economy has been resilient to shocks due to solid a banking system, stable remittances and investments, but said its failure to improve in the political environment and domestic security conditions would have dire effects on the economy.

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