Monthly Editorial  
Economic Letter
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January 2018

     No Imminent Collapse, But Reforms Are Crucial

                                                         (Published by Lebanon Opportunities)


Each time an international conference is to be held in support of Lebanon, the State’s departments and agencies are like busy bees preparing for the event. Their effort is mostly spent on improving the statistics and consequently ‘embellishing’ the country’s image before it is conveyed to the international community. This is a worthy cause, although the involvement of the International Monetary Fund (IMF) in the process makes reality speak louder than this intended image. The IMF boasts a database about Lebanon that covers a long period of time while no local public entity holds similar data and figures, including the Central Administration of Statistics (CAS). CAS, for instance, stopped publishing statistics about the GDP and its expenditure components at the end of 2015! It must be noted that CAS’ new management, which was at first ‘promising’, failed to study or publish any data pertaining to the balance of payments (BoP), incomes and their structure, or even household spending. It is leaving the study of these aggregates to the Central Bank (BDL) and private research centers. BDL reduces the BoP data to the net changes in foreign currencies held by the banking sector. It recently began to add some of the Eurobonds that it holds in its portfolio. As for incomes and their distribution or concentration, they are not dealt with by CAS. Some writers of research papers venture to theorize about this issue without following the requirements of scientific rigor. Household spending and household budgets have also become a private matter as researchers and think tanks carry out truncated surveys despite their diligence and the effort they make. These surveys don’t give a comprehensive picture of the real situation regarding household income or spending. There are many factors relating to the income and spending of households that are not taken into consideration. Central statistics is a sovereign issue par excellence. It is hoped that CAS will tackle it in with energy and shed light on many elements that are overlooked either purposely, out of ignorance, or due to a lack of resources.

One of the national oddities that we read in local publications, for instance, is that Lebanon is so dependent on imports that imported goods account for 85 percent of total consumption. This would prompt us to conclude that the Lebanese ‘model’ is heading towards a collapse. In fact, imported goods represent just 29 percent of national spending (both household consumption and investment).  If we exclude investment, imported goods account for just 35 percent of household consumption. Net imports, after we deduct exports, represent less than 23 percent of domestic spending and less than 28 percent of final consumption expenditures. For a big picture of the situation, we can add the value of services to imported goods and compare the total to national spending. The ratio becomes 51 percent. If we use net imports of goods and services by subtracting exports of goods and services, the ratio falls once again, to less than 19 percent. This low ratio is explained by the fact that Lebanon’s services exports are more than four times its goods exports. This makes the balance of trade in goods and services more balanced than that of just goods. I have used the national accounting aggregates of consumption and investment to calculate the above mentioned ratios, in order to keep the consistency between the image that we want to show to the world and the real ratios. The concept of national spending is broader than the concept of GDP and it is more accurate in calculating the volume of imports (of goods and services) in a particular economy. The national spending-to-GDP ratio is around 120 percent, 99 percent of which consists of consumption. Investment accounts for the remaining 21 percent, according to the latest statistical tables provided by CAS for 2015.

The time has come for effecting a radical change at CAS. This glaring lack in field research should not be tolerated anymore. There are also unacceptable deficiencies in the estimation of national account aggregates pertaining to production, spending, incomes, household spending, and public and private investment, as well as external and domestic investment. These are just a few matters expected from any central statistics agency in any country. CAS officials and its sponsoring authority should take a look at the pages relating to Lebanon in the IMF’s publications and statistical data to see for themselves our shortcomings compared with countries that have the same income level. In every report it issues, the IMF reminds us of the necessity of providing the required statistics and in improving their quality. This lack of statistical data could be the reason why many negative reports are written about the Lebanese economy. In the absence of statistical data, some rush to hasty conclusions about the collapse of the economy and other similar guess work. In 1999 and 2000, I was part of a team of economic experts who were trying to foresee the country’s future prospects. We were at that time fully convinced that economic collapse was inevitable. This was nearly 19 years ago! Fortunately for the Lebanese and Lebanon, the prophecy did not materialize.

It does not mean that we are in a good state of affairs, or that our economy and public finances are faring well. The economy is suffering from deep structural bottlenecks at the level of human resources, machinery, work procedures, labor and institutional productivity.The economy also suffers from a lack of investment both in quantity and quality, which results in low growth rates that are insufficient to absorb the domestic workforce, not to mention the non-Lebanese who are coming to our country from all directions. As for public finances, it is a long story. We hear about numbers growing due to outrageous levels of corruption, such as a deficit of nearly $8 billion projected in the draft budget of 2018. If the deficit were approved, it would be enough by itself to cancel the expected results of forthcoming Paris conference. The government has done well by committing to a deficit of $4.82 billion that is approximately equal to the deficit that was projected for 2017. We can no longer bear such bickering and wrangling and schemes. This behavior will not lead to a conference that achieves a minimum level of success, no matter how the international community shows a collaborative and positive attitude.

Each year, the banking sector extends precious time for the country to carry out reforms. It is subject to unprecedented attempts to weaken it through a flood of taxes on its incomes. These taxes are unique, with nothing similar applied anywhere in the world. Instead of targeting banks, authorities should at least reform the electricity mess which is weighing down on the country and the environment. There is no reason for such unfair treatment regarding banks other than escalating corruption and the need to finance it. The unfair treatment of banks is also due to the ease of imposing and collecting taxes from them thanks to the transparency of its published financial statements and the multi-level supervision they are subjected to.

The extent of the risks that are threatening the economy, public finance, and the financial sector are obvious. But there is no reason to assume that the financial collapse will happen, or that it is coming soon. The State is shouldering its debt service cost. The private sector is doing the same towards its financial obligations. Commercial banks and the Central Bank have foreign assets in foreign currencies, bonds, and gold, which are sufficient to finance the external deficits for many years. The political class which is ruling in the name and power of sectarianism must awaken and put a limit to the channels of waste and corruption that are very costly to the national economy and the society at large.

 

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Last Updated on April 05, 2018
 
 
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