BEIRUT: In a country where over 80 percent of goods are imported, it can be hard to tell how much inflation is locally generated and how much comes from abroad. To answer this question, the Lebanese Economic Association (LEA) has established a working group to build the country's capacity to forecast inflation in about a year.
“What’s causing food and fuel prices to increase? At the level we have now, it’s all anecdotal evidence,” said Jad Chaaban, assistant professor of economics at the American University of Beirut and a founding member of LEA, at a conference, Global Price Transmission to Local Economies, at the Crowne Plaza Hotel Monday. “We don’t have evidence of how much inflation we’re importing.”
"This is a very important project, especially since it's something that's not being discussed enough. This is a platform to look at prices and cost structure of the economy from a technical perspective. At least it's a step in the right direction to go from anecdotal to scientific evidence -- especially in a country like Lebanon where [economic] discussions take on political dimensions," said Wael Mansour, economist in poverty reduction and economic management at the World Bank in Beirut, who attended the conference.
He added, "Data is always a problematic issue in Lebanon, especially those needed for such types of models, as few experts remain in the public sector. We need to acknowledge though the efforts made by CAS and the National Accounts team despite being underfunded and understaffed. Statistics in Lebanon need to be further institutionalized".
Alban Thomas, senior researcher at the Toulouse School of Economics in France presented his findings of global price transmission to a group of Lebanese economists, using data from Vietnam, India and Egypt, also showing an application to Lebanon of price transmission and import substitution. (Global price transmission measures the way by which price changes in international markets, for example, how the price of Brent oil barrel affects local prices in markets consumers buy from local petrol stations).
He used three models: price inflation (looking at goods), different sectors and the AIDS (Almost Ideal Demand System) model.
He said that challenges to measuring price transmission in small countries, such as Lebanon, include the assumption that world prices are fixed, the transmission of world prices to border prices. In addition, transmission might be affected by an imperfect exchange rate, product differentiation and border price policies.
Thomas took the case of Egypt -- like Lebanon, a non-oil-producing Middle Eastern country with a high level of imports, well integrated into the world economy that is vulnerable to global prices shocks. Between 2007 and 2008 Egypt experienced a 129 percent increase in the price of cereal, later dubbed the bread crisis.
In 2009, Egypt for the first time became an importer of wheat. Today, Egypt allocates most of its subsidies to bread. Food subsidies in Egypt allow 730,000 households to live above the poverty line. These figures are now used to analyze policy reform.
In applying these methods to Lebanon, the first step would be to investigate price transmission and secondly to explore substitutability between local and imported goods. The main constraint in Lebanon is to consider sectors relevant for both local and imported commodities.
Last Thursday Central Bank Governor Riad Salameh projected inflation in Lebanon to jump to 6 percent from the current 4 percent.
Another challenge to the Lebanese economy, and a possible cause of its inflation, is its continued fixed exchange rate to the dollar. With the U.S. dollar losing its value to the euro, and with most of Lebanon’s imports coming from outside the United States, some people wonder if the country would be better off either being pegged to the euro or having a basket of currencies.
"When you look at a preliminary results, it's important to understand which goods are susceptible to inflation from abroad, and are helpful to policymakers to examine issues related to Lebanon's trade policy, subsidies policy and identify sectors that are mostly affected by inflation," said Mansour. “These models could further examine the relationship between prices and the productivity of the economy."