BEIRUT: The Economist Intelligence Unit projected economic growth in Lebanon at 3.4 percent in 2012, higher than the estimated growth rate of 1.5 percent in 2011, but still below the average growth rate of 8.1 percent recorded between 2007 and 2010.

It said that Lebanon’s growth prospects in the coming year would depend on regional developments, as Lebanon’s service-oriented economy relies on demand from Arab countries, mainly from the economies of the Gulf Cooperation Council.

According to the EIU the unrest that engulfed the region this year, along with domestic political instability in the first half of 2011, had a sharp impact on economic activity throughout the year. It expected any economic recovery in 2012 to be limited by the serious downside risks from the continued unrest in Syria, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The EIU said the weak performance of the tourism, banking and construction sectors throughout 2011 demonstrated how sensitive Lebanon’s economy is to political uncertainty.

It considered that the long-stalled economic reforms could proceed at a slow pace, given the current, more politically homogenous government. It noted that the factions within the Cabinet will only be able to reach consensus on some relatively neutral political and economic topics such as energy sector reform.

However it said structural changes, such as fiscal reforms, will face resistance, as corruption and patronage permeate the political system and many politicians have their own interests in maintaining a bloated public sector.

In parallel, the EIU anticipated the fiscal deficit to remain large at 7.7 percent of GDP in 2012 but to contract from 8.7 percent of GDP in 2011.

It pointed out that Lebanon has struggled to pass budgets in the past five years due to political disputes and external conflicts. It added that the 2012 budget proposal includes controversial tax rises that may prevent it from being ratified. It noted that spending on reforming Lebanon’s electricity sector will constitute a major component of capital spending next year.

It noted that the Finance Ministry is now including revenues from the Telecommunications Ministry, which normally provides a large portion of non-tax revenues to the government, in its official accounts.

But it is unclear whether the funds are actually being transferred, it added. The EIU expected the deficit to begin to narrow gradually in case of higher growth rates and if a more coherent government policy allows for better expenditure management.

Also, the EIU indicated that Lebanon is unlikely to face contagion from debt crises in the eurozone and elsewhere, despite having a large structural deficit and one of the world’s highest debt-to-GDP ratios, because local banks hold most of the government’s foreign debt.

It also projected Lebanon’s current account deficit to average 21 percent of GDP in 2012-13, and said that the deficit will fall after reaching an estimated nearly 31 percent of GDP in 2011, when high prices for oil will have driven up import costs.

It added that the ongoing unrest in Arab countries means that Lebanese exporters are struggling to get products to markets and demand in these economies has slowed down, which is worsening Lebanon’s trade deficit. It said the drop-off in demand in Syria, as the unrest weakens the economy, will affect Lebanon’s services account as it serves as an overland transit route for many goods shipped to Syria and other Arab markets.

The EIU added that tourism receipts, mainly coming from Lebanese expatriates who visit the country regardless of political instability, and remittances will help to moderate the widening current account deficit, although remittances may decline this year.

It indicated that Lebanon’s current account imbalance is normally covered by capital inflows, but noted the Central Bank of Lebanon has reported deficits on the capital account for 2011. It added that this may not account for unreported transfers of funds from Lebanese residents abroad or some Syrian movement of money into Lebanon.