Disappointing Rankings Indicate Tough Road Ahead for Lebanon’s Economy
A recent report from the International Monetary Fund (IMF) projects Lebanon’s 2019 real GDP growth at 1.3%. Although this is an improvement over the October 2018 forecast of 1% and the country’s growth rate of 0.2% in 2018, Lebanon lags behind the projected 5% growth rate for the Mashreq economies. According to an analysis of IMF data by the Byblos Bank’s Economic Research and Analysis Department, Lebanon’s projected 2019 rate “would make it the second slowest-growing economy among 18 MENA countries with positive economic growth.” While the IMF was unable to factor in the impact of the potential CEDRE reforms, such as the recent electricity plan going before parliament, the rate is far below the 6-7% needed to rebuild economic activity to a level that generates jobs for the Lebanese, reduces the burden of subsidies and grants, and provides revenues to the government to offset the need for borrowing.
On the bright side, Lebanon’s inflation rate is projected to remain low at 2% compared to the overall MENA rate of 10% and 13% for the Mashreq. Lebanon’s fiscal deficit will grow incrementally from 11% of GDP in 2018 to 11.7% in 2019, reflecting a projected rise in public spending to 33.5% in 2019 versus 31.6% in 2018. Overall, it is anticipated that the primary budget deficit, the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments, will narrow slightly from 1.3% in 2018 to 1.2% of GDP in 2019. In other words, Lebanon will continue to have a negative gap between spending and income for quite some time.
The nagging concern is that Lebanon’s underperforming economy has a cumulative effect that dampens investments in Lebanon, raises borrowing costs, hobbles the banking system in terms of liquidity in support of government bond issues, and undermines the country’s currency, all factors that lead to economic instability. The pace and impact of the CEDRE reforms are an essential antidote to these deficiencies, as well as to the low projected growth rate of 2% for 2020, far below the 3.2% MENA average.
The need for leadership from the government and parliament is a serious challenge. Will reforms hit a roadblock once attention is paid to highly visible distortions such as electricity rates and production, and then fail when it comes to reductions in public spending for jobs, salaries, and select constituencies? Or will there be a consistent movement forward to implement the National Industrial Plan (NIP) designed to bring inclusive economic development to the country? Will the government have the capability to adjust priorities based on new and renewable technologies or will it seek to do more of what is already inadequate to meet Lebanon’s needs since it contributes to advancing their narrow interests?
Another set of dispiriting statistics was released by the recent Purchasing Managers’ Index (PMI), a globally-used monthly indicator that measures economic growth in the private sector based on new orders, output, employment, suppliers’ delivery times, and stocks of purchases. Lebanon’s index dropped from 46.3 in March, down from 46.9 in February. As noted by Byblos Bank’s Economic Research and Analysis Department, “a score that exceeds 50 signals positive business activity, while a score that falls below 50 shows a deterioration in activity.” While this do not seem to be a significant gap, when a country continues to have a below 50 score for consecutive periods, as Lebanon has since 2016, it indicates an underperforming economy.
Overall, respondents to the survey of companies indicated that contractions in new export orders was due to regional instability that reduced demand, while political uncertainties negatively affected company decision-making related to investments, hiring, and purchases.