A London-based financial research center has projected positive economic growth for Lebanon over the next five years after Prime Minister Saad Hariri withdrew his resignation, and the expected reopening of trade routes with Syria and Iraq in 2018.
“We expect real GDP growth to pick up from 2.2 percent in 2017 to 3.1 percent in 2018 driven by some recovery in investment and exports. The latter could be supported by reopening the blocked trade routes by mid-2018 with Syria and Iraq following the defeat of ISIS [Daesh],” the Institute of International Finance said in a comprehensive report on Lebanon.
The IIF stressed that the withdrawal of Hariri’s resignation and the commitment of the Cabinet to stay out of regional conflicts will ease the political and economic crisis and help ensure monetary stability.
“But the governing system has become so inefficient and corrupt that it is no longer capable of providing basic public services and agree on serious structural reforms,” the report argued. The IIF is among several international organizations that have repeatedly expressed concern about deeply rooted corruption in government agencies.
It also underlined the need to preserve monetary policy and keep inflation at bay. “Monetary policy needs to remain tight, to reduce inflationary pressures, support the peg to the dollar, and help attract adequate nonresident deposits. We expect the Fed to raise its policy rate by 50 basis points next year. As a result, interest rates in Lebanon may increase in 2018,” the IIF said.
It expected that the peg of the Lebanese pound to the U.S. dollar will be maintained, supported by adequate foreign currency reserves of about $42 billion, 80 percent of GDP.
“Thanks to prudent management and conservative regulation, the banking system remains sound and continues to attract sizeable deposits from the Lebanese diaspora,” the report noted.
The IIF said the Lebanese government should put more efforts toward reducing the debt-to-GDP ratio, which has reached alarming levels.
“Serious fiscal adjustment and a significant decline in the government debt-to-GDP ratio are needed to reduce the burden shouldered by the Central Bank, and the heavy reliance on deposit inflows to cover financing needs,” the report said.
It added that the public debt and deficit are hindering growth in Lebanon. “Large twin deficits pose a continuing threat to macroeconomic stability and are a hindrance to growth. The fiscal deficit, while narrowing to 7.7 percent of GDP in 2017 due to one-off factors, will widen again to 8.8 percent in 2018, and the debt-to-GDP ratio will remain above 140 percent. An exit from the debt overhang will require fiscal and structural reforms to reduce the deficit and create conditions for higher and sustainable growth,” the report said.
The IIF said among the serious risks facing Lebanon is the country’s inability to dissociate itself from regional conflicts – in clear reference to Hezbollah’s involvement in the wars in Syria and Yemen.
“The main risks to the outlook are the failure of the government to implement the policy of ‘dissociation’ from regional conflicts. Another risk is related to slower reform implementation, which could undermine private investment and macrostability,” the report said.
Among Lebanon’s key weaknesses, according to the IIF, is the absence of reliable statistics. “Reliable and timely statistics are key to effective policymaking and analysis. Unfortunately, the statistical base in Lebanon is one of the weakest in the region. While some progress has been made, more needs to be done to address remaining shortages in the coverage, quality, and timeliness of economic statistics,” the report said.
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It added that good management and conservative regulation mean the banking system remains sound.
“Depositors’ commitment to Lebanon will remain strong, motivated by a deep trust in the financial system and the perceived stability of the fixed exchange rate regime. At end-October 2017, annual growth in total deposits was 7.2 percent thanks to loyal depositors and favorable interest rates that banks pay on deposits both in local currency and in dollars,” it said.
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