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Economist Intelligence Unit cautiously optimistic about Lebanon in 2007
Posted On:4/19/2007 4:24:00 PM

The London-based Economist Intelligence Unit (EIU) said Wednesday that Lebanon's economy may experience some growth this year thanks to the massive economic and financial packages pledged by the donor states. But the prestigious research center did not conceal its fear that a worsening political crisis could derail reform efforts which will eventually hurt the already fragile economy.


"We estimate that Lebanon's real GDP contracted by around 6.4 percent in 2006 despite strong growth in the first half of the year, as both domestic consumption and fixed investment fell sharply following the July-August conflict ... and subsequent political turmoil," the EIU said in its annual report.


It added that domestic demand is only likely to recover slowly in 2007, and any further increase in political tensions could set it back still further. "Nevertheless, given the contraction in 2006, quick reconstruction opportunities should result in 'catch-up' real GDP growth of just over 2 percent this year. As the economy continues to recover in 2008, growth is forecast to rise to 2.7 percent."


But the EIU said that this positive scenario assumes that the current government remains in place and external financial assistance continues to be made available.


International donors have pledged $7.6 billion in aid to Lebanon, and the government has promised economic reforms to reduce the budget deficit.


New data from the Ministry of Finance show that the already large fiscal deficit has widened sharply, driven principally by a rise in spending. Net public debt reached 187 percent of estimated GDP at the end of 2006.


There is growing concern among economists that the government may not be able to meet the ambitious targets set in its reform plan if the political stalemate remains the same.


Even Finance Minister Jihad Azour stressed in Washington this week that political stability and a general consensus on reforms are imperative for the success of the program.


The EIU said indirect economic indicators have confirmed that Lebanon suffered a marked downturn in 2006. "Commercial banks, which reported a sharp rise in profits in 2006, have been asked to place up to 10 percent of their customer deposits with the Central Bank at a rate of zero interest," it noted.


Data from the Central Bank have suggested that export earnings rose by 21 percent (owing largely to a rise in jewelry sales) and imports increased by 0.6 percent in 2006. Aid and remittances have led to a strong external accounts surplus.


The EIU argued that the grants and soft loans to the Lebanese government may be politically motivated in order to increase pressure on Hizbullah.


"Although the government had prepared a detailed economic reform plan in preparation for Paris III," it said, "in the event the donors appear to have provided aid based principally on a political rationale."


It added that this was particularly evident from the sharp increase in US aid, to $890 million, compared with an annual average of around $35 million over the previous decade.


"The Lebanese government used the ongoing standoff with pro-Syrian forces as a lever to attract funds," the report said, "making the implicit argument to donors that, without financial support, Lebanon could become a new source of instability in the Middle East and a threat to regional security."


Prime Minister Fouad Siniora told delegates to the Paris III meeting their support would be "essential" in seeing Lebanon through the current crisis and that the cost of failure would be "too great to contemplate."


The EIU said that the Lebanese government was portrayed in parts of the international media as the last bastion of moderation, standing between Western countries and the "Islamist threat" - in particular, Hizbullah. "This attitude, in part, also explains why the Paris III conference has been seen as a highly politicized event in the Lebanese domestic context and as an attempt to support Siniora in his battle against the Hizbullah-led opposition, rather than to assist Lebanon as a country," the report said.


This view was reinforced when the US secretary of state, Condoleezza Rice, declined to answer the question of whether any future elected government led by Hizbullah would receive the funds promised by the US.


"But this perception of bias did little to improve the local political situation in Beirut or the prospects for some form of accommodation between the two sides. Moreover, it contributed to the decision of the Lebanese opposition to reject the economic reform program on which the plans to make use of the donor funds are based." (Daily Star)

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