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Lebanon Economic Monitor Summary

Core Content

The Lebanon Economic Monitor provides an analysis of key economic developments and policy changes in Lebanon over the past six months, placing them in a broader macroeconomic and global context. It highlights both the challenges and opportunities facing Lebanon, particularly in light of the ongoing Syrian conflict, regional instability, and internal political stalemate.

Main Points and Key Information

1. Economic and Political Context

• Lebanon continues to be impacted by domestic political paralysis and regional turmoil, especially along the Syrian border.
• The presidential vacancy since May 2014 remains a significant obstacle to governance and policy implementation.
• The influx of Syrian refugees has slowed due to government restrictions, but 26% of the population are still registered Syrian refugees, indicating a substantial demographic impact.
• Security conditions have improved in the second half of 2014, contributing to economic activity recovery and consumer and investor confidence.

2. Economic Performance in 2014

• Real GDP growth increased to 2.0% in 2014, up from 0.9% in 2013, driven by private demand.
• Tourism rebounded, with a 6.3% increase in tourist arrivals in 2014.
• Manufacturing contraction slowed, and consumer sentiment rose, as shown by the ARA consumer confidence index increasing by 21%.
• Fiscal deficit narrowed by 2.3 percentage points to 7.2% of GDP, but public debt rose to 145.7% of GDP due to increased domestic debt servicing.

3. Monetary and Financial Sector Developments

• The central bank implemented expansionary monetary policy, injecting $800 million in 2014 and planning further injections in 2015.
• Capital inflows were robust, and foreign reserves reached $32.4 billion (equivalent to 11.6 months of imports).
• Inflation dropped to 1.9% in 2014, down from 2.7% in 2013, supported by exchange rate stability and a large output gap.

4. External Sector and Shocks

• Declining imports contributed to an improvement in the current account balance, reducing the deficit by 4.4 percentage points to 22.2% of GDP.
• External shocks, such as the Syrian conflict and global oil price declines, continue to affect the economy.
• Lebanon is exposed to US interest rate hikes, which may lead to higher debt servicing costs and reduced private sector lending.

5. Impact of Syrian Refugees on Trade

• The Syrian conflict has not negatively impacted Lebanon's trade, both merchandise and services.
• Lebanese exporters to Syria have faced reduced demand, but other exporters have increased trade to fill gaps in Syrian production.
• Syrian refugees have provided a positive boost to services exports, particularly in sectors like retail and construction.

6. Energy Sector Challenges

• The electricity sector has been underperforming for decades, leading to significant macroeconomic costs.
• Transfers to Electricité du Liban (EdL) account for over half of the fiscal deficit.
• Low oil prices are expected to reduce transfers to EdL, but reforms such as tariff adjustments, corporatization, and increased investment are needed to improve the sector's financial health.

7. Water Sector Concerns

• Despite abundant water resources, water shortages are a major issue in Lebanon.
• Inaction in the water sector is estimated to cost 1.8% of GDP, rising to 2.8% when environmental degradation is included.
• Infrastructure and institutional reforms are critical to addressing these shortages.

Prospects for 2015

• Real GDP growth is expected to accelerate to 2.5% in 2015, supported by continued low oil prices and improved security.
• Fiscal position is likely to remain unchanged due to reduced transfers to EdL and higher debt servicing costs.
• Current account deficit is projected to narrow by 5.5 percentage points, driven by falling oil prices and a depreciating euro.

Key Recommendations

• Political resolution is essential for governance and policy implementation.
• Sustainable fiscal measures should replace cosmetic adjustments to address long-term deficits.
• Energy sector reforms such as tariff rationalization, investment in infrastructure, and corporatization are necessary to reduce macroeconomic costs.
• Water sector reforms must be prioritized to address supply shortages and environmental degradation.
• Integration of Syrian refugees into the labor market should be supported through formal employment opportunities and inclusive policies.

Conclusion

The Lebanon Economic Monitor underscores the complex interplay between political instability, external shocks, and economic performance. While security improvements and low oil prices have provided some economic stability, structural issues in the energy and water sectors and ongoing refugee challenges remain critical concerns. The report highlights the need for policy coherence, institutional reform, and inclusive growth strategies to ensure sustainable economic development.