Monthly Editorial  
Economic Letter
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May 2018

It’s growth folks!

           (Published by Lebanon Opportunities)

The Central Administration of Statistics (CAS) recently issued the ‘National Accounts’ for 2016.  It considers the parts of the report relating to the GDP’s real and nominal growth, and the production and spending structures that characterize it.  Despite all shortcomings, the release of this is a positive step. I hope CAS continues to improve such reports. I wish that flaws were dealt with, especially those related to income distribution and its general configuration. There are also weak spots regarding the Balance of Payments (BoP) and its structure, capital flows and capital accounts, especially the framework of remittances to resident households, and also the flows from and to refugees (as if they are not being accounted for by CAS!) Finally, it is necessary to shed light on the components of economic sectors, and their contributions to GDP and intermediate consumptions. The government, the business community, and the various activities and sectors need a consolidated view of the economy. The availability of such data encourages investors to invest in existing ventures or in new ones. It also helps public administrations and institutions to set up plans and to act in beneficial ways.

Three major inferences result from this data. In 2011 to 2016, growth rates were at around five percent, which is moderate to low growth in comparison with an annual average rate of 10.7 percent over the 2005 to 2010 period. The five percent growth remains relatively high, but about 36 percent of it was derived from real growth, and 64 percent from rising prices. The economy grew at a nominal rate of 3.15 percent in 2016 compared with 2015. The International Monetary Fund (IMF) expects the Lebanese economy to have grown by 3.7 percent in 2017. About 1.2 percent was real growth while the remaining 2.5 percent consisted of the GDP price deflator. GDP reached $49.6 billion in 2016 according to CAS and $51.5 billion according to the executive summary of the IMF’s last ‘Article IV Consultation with Lebanon’ report. The IMF expects the Lebanese GDP to nominally grow by more than four percent in 2018 at current prices to $53.6 billion.

The second conclusion pertains to how GDP relates to the external sector through the import and export gap of goods and services. This gap reached more than $11 billion at 2016 prices, which is equivalent to 21.5 percent of GDP, and would exceed 25 percent if assessed at 2015 prices. Most of the trade deficit is reflected as a deficit in the current balance of external payments, which is equivalent to more than 20 percent of GDP in 2017 and to nearly 26 percent in 2018, said the IMF. This external deficit (both the trade and current deficit) mirrors the weak production edifice in the country, and also reflects the weak rate of gross national saving, which is estimated by the IMF at a negative rate of 4.3 percent for 2018. The IMF expects negative saving rates to worsen in 2019 to 2023. Inflows from Lebanese expatriate workers and foreign direct investment (FDI) act as a force that narrows this large trade deficit. Net inflows from expatriates amounted to nearly $3 billion in 2016, according to CAS statistics. FDI is estimated by the United Nations Conference on Trade and Development (UNCTAD) at around $2.6 billion yearly, or five percent of GDP in 2016 and 2017. Lebanon had witnessed much higher FDI volumes in the past. In 2005 it represented more than 15 percent of GDP, according to a recent edition of Byblos Bank’s weekly news bulletin. Besides workers’ remittances and FDI, other financial flows must be taken into account, especially those triggered by financial engineering operations carried out by the Central Bank (BDL), which are escalating both in numbers and in volume. Such transactions contribute to partly reducing the huge trade deficit cited above. These short-term financial flows, by their nature and by the fact that they are attracted to local deposits in order to earn high interest income at a fast pace, result in an additional shrinking of the external deficit, and even surpluses in the external BoP for some years. The proof is that the BoP in 2009 to 2017 generated a cumulative surplus of nearly $2.85 billion despite continuous deficits! Including BDL’s portfolio of local Eurobonds in the BoP balance is actually reckoned only for Eurobonds sold to non-resident natural or institutional persons. Such transactions add liquidity in foreign currencies to BDL’s external assets.

The third inference from the National Accounts pertains to the overall structure of economic activities and sectors. Contributions of goods-producing sectors (agriculture, fishing, manufacturing, electricity, water, and construction) account for 19.6 percent of GDP, excluding taxes. This means that trade and services contribute more than 80 percent to GDP. Such services include administrative, education, and health services, which suffer from low productivity, and consequently their contribution to economic growth is limited. Owing to their nature and quality, the overwhelming bulk of these services is confined to the local market. It is hard to export them, especially with the slump in tourism, commercial and financial intermediation, and transit traffic, as well as the weakening of the role of the airport and the port of Beirut as transportation hubs, and even the corrosion of the standing of local universities. Unlike prices of imports, the prevailing prices of locally-produced services are somewhat inflationary due to a lack of competition in the local market. This elucidates most of the differential between the level of domestic prices and the GDP deflator.

The IMF set the GDP deflator for 2017 and 2018 at 2.5 percent and 2.7 percent respectively, and the consumer price index for the same two years at five percent and 3.5 percent. In order to fully tackle the third conclusion, the structure of GDP should be analyzed through its expenditure component. Final consumption, according to CAS, represents 101 percent of GDP distributed on households’ final consumption and public sector consumption at the rates of 88.6 percent and 12.2 percent respectively. The gap between export and import is equivalent to the share of investment in GDP. The private sector accounts for 92 percent of this share, the remaining eight percent represent the public sector. Final consumption holds the lion’s share of the GDP components. Investment accounts for just 16.5 percent of final demand and 20 to 21 percent of GDP as shown by the IMF report. This share is considered insignificant to achieve higher real growth rates. In this case we would need investment rates that would exceed 30 percent and that could even reach 35 to 40 percent, as was the case in China during the last four decades! The resource gap was the ‘theoretical’ basis on which was founded the paper presented by the Lebanese government at the Paris investment conference.

The decline and weakening of investment rates in Lebanon could be attributed to a set of five factors. The first factor resides in the inefficiency of investment, both in terms of quality and quantity. Investment in land and buildings continues to have an impact on the present term only, not on the medium or long term. The second consists of bad or even absent public policies on the part of the government and related institutions and administrations. The third factor is attributable to a regression in FDI compared with earlier periods. The main impediments to FDI are numerous, not least of which is rampant corruption, which repels good investors and attracts bad ones. The fourth cause contributing to the decline of investment is the random and nonstop escalation and expansion of the tax structure, while the opposite is happening in many countries and economies, which provide incentives to attract investors. The sole objective of tax policy seems to be concerned only with securing financing for public expenditure apart from any development policy or any incentive program to encourage the business community. The last factor is in interest rates in the banking sector, both at the level of BDL and commercial banks. Theses interest rates have become the major tool for maintaining the monetary stability policy, which enjoys the unanimous approval of the Lebanese, both at the level of the state and citizens.  High interest rates don’t only act as deterrents to investment. They also cause investors to prefer placing their funds in more liquid instruments instead of investing them, thus having to cope with all the administrative and public hurdles mentioned above. Monetary policy in our country is the result of expansionary fiscal policies or the absence of social and economic development policies.

An atmosphere of gloom is hovering over the country, and is justified by a number of factors mentioned above. These factors include the weakening and even the absence of funding amid an economic recession, and the failure to create job opportunities for the new generation that is entering the labor market, especially university graduates. This is resulting in an ever growing emigration of our labor force. But it is unfair, unrealistic – even unethical – for some people to exploit these circumstances in order to make citizens lose hope, especially by spreading unfounded rumors such as claims that a financial collapse is imminent. The lingering tough economic and financial circumstances didn’t radically worsen in order to warrant increased levels of pessimism and negativity. In spite of the unfavorable economic conditions, the lira remains stable but undoubtedly at a higher cost. The banks did not only uphold their solvency and liquidity, they have even boosted them. They have also maintained their capacity to finance the state, either directly or through BDL. Likewise, the banks have preserved the quality of their portfolios despite the increase in the doubtful debt ratio thanks to their provision creation policy. The ratio of net doubtful debts has risen from 3.9 to 3.97. The banks have not only maintained their profitability, they have even increased it through their foreign expansion and despite the unfair tax burden imposed on them, which is unprecedented worldwide. For the first time, international rating agencies – Moody’s, Standard & Poor’s, Fitch IBCA, and Capital Intelligence – agree on the short and long term future outlook of sovereign risks in Lebanon as ‘Stable’. They did the same for financial instruments denominated in the local and foreign currencies. Doomsayers must have some scruples when they promote and disseminate unconfirmed reports. In such rumors lie a great deal of damage that not only hurts business people and the wealthy, which enjoy presence abroad that shields them from the predicaments of hard times. Such rumors can inflict extreme harm to low-income classes and to those whose income is denominated in the national currency. Instead of looking for opportunities to weaken the lira, our duty must be to strengthen it by all means available. Those who really care are expected to fight corruption, the plundering of public funds, and the erosion of the authority of the state. They are not supposed to attack the banks and BDL, whose leaders are struggling to uphold the stability of the national currency, and eventually safeguard the purchasing power of the wages and savings of citizens.


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