BEIRUT: The Institute of International Finance (IIF) forecast economic growth in Lebanon at 6 percent in 2009 and at 7 percent for 2010, and indicated that the global recession has had only a minor impact on the Lebanese economy, as reported by Lebanon This Week, the economic publication of the Byblos Bank group. 

It said growth has been strong this year, driven by a thriving tourism industry, growing financial services and strong capital flows. It added that government spending has remained robust despite continuing deficits, while surging private consumption is supported by remittances and the strong performance of the services sector. 

The IIF considered that the economic outlook for Lebanon remains positive, and that the risks to the stability of the exchange rate or the banking system are minimal. It warned, however, that risks to the outlook exist and consist of a possible deterioration in security conditions in the region, which could threaten the delicate political balance in Lebanon and negatively affect economic growth. 

It noted that most Lebanese have low expectations from the upcoming coalition government, especially regarding the long-delayed structural reforms such as privatization, debt reduction and fiscal consolidation. 

The IIF said Lebanon’s external debt and fiscal deficits remain exceptionally high but do not seem to have affected market confidence, as Lebanon has managed to reduce the debt-to-GDP ratio from 180 percent of GDP to 153 percent of GDP at end September 2009 despite the political paralysis over the past three years through robust economic growth and steadily rising budget revenues. 

It expected the public debt to be equivalent to 154 percent of GDP at end-2009 and 145 percent of GDP at end-2010. It said revenue growth has been helped by the reintroduction of gasoline excise taxes and improved VAT performance. Higher revenues have also partly offset lower receipts from the telecom sector and higher subsidies to Electricite du Liban and the Higher Relief Council. It forecast the budget to record a primary surplus, excluding grants, of 2.2 percent of GDP and to post a deficit of 8.6 percent of GDP in 2009 and 7.4 percent of GDP in 2010. 

The IIF warned that tackling the pressing fiscal and debt burdens remains Lebanon’s most important economic challenge. It said policy priorities include a reduction in budgetary support of EdL, currently equivalent to 5 percent of GDP, streamlining and gradually reducing government spending, and increasing the VAT rate from 10 percent to 12 percent. 

It added that the privatization of the mobile phone licenses could provide a vehicle to cut the debt, as well as help spur the development of the technology sectors that remain underdeveloped despite a highly skilled and educated labor force. 

It noted that both the restructuring of EdL and the privatization of the telecom firms, which had been continuously delayed since early in the decade, would require political consensus that has proved elusive so far. In parallel, it noted that the political and economic leaders appear resigned to the poor prospects of fundamental reform in the short run, but expressed the hope that partial reforms, already worked out, could be carried out by the new government and could effect a much-needed increase in the primary surplus. 

The IIF added that the surplus on the capital account has increased sharply in the past year, which is particularly significant in view of the global financial crisis that has sharply reduced global capital flows. 

Capital inflows, especially from the GCC countries, accelerated to about $13 billion, an increase of 25 percent as compared to the previous year; while foreign direct investment, largely in real estate, remains stable. As a result, international re­serves, excluding gold, increased by $4.5 billion to $25 billion at end-September 2009, which is equivalent to 90 percent of GDP, or more than the equivalent of 10 months of import cover for goods and services. Also, the trade balance has remained in deficit so far this year. 

Total exports posted a 7 percent real decline in the export of goods, which was nearly offset by a sharp rise in income from tourism and a steady flow of remittances. Imports, however, have continued to rise. It expected the current account deficit to remain high at about 9 percent of GDP for this year and 8 percent of GDP for 2010. 

The IIF indicated that the Lebanese banking system remains highly liquid and continues to grow at a time of tight global liquidity conditions. 

Deposits have continued to rise at a fast pace, as depositors are motivated by a long-held trust in Lebanon’s financial system, the perceived stability of the fixed exchange rate regime, and the attractiveness of high deposit rates on Lebanese pounds. Investors and depositors are also comforted by Lebanon’s default-free track record, despite exceptionally high levels of debt, and by the traditionally conservative banking practices. Also, banks are well capitalized and have not been exposed to structured financial products. Eurobond and Credit Default Swap spreads have moderated, and now move around the emerging markets average. – The Daily Star