Fransabank: it all depends on peace

BEIRUT: The Lebanese economy could grow up to 3 percent this year if prospects for peace between Israel and Syria improve substantially, a leading bank said on Thursday.

“We’re hoping for peace and its benefits, but the situation could remain as tough as last year if negotiations don’t resume,” said Joe Sarrouh, executive adviser at Fransabank.

Optimism followed the resumption of Israeli-Syria peace talks in January. But expectations for speedy economic revival diminished when a third round of talks didn’t materialize.

Peace between Israel and Syria would mean stability for Lebanon and the withdrawal of Israeli soldiers from the south.

Sarrouh, who helped write a new Fransabank report on the economy, said growth was 1 percent last year when confidence was shaken by political uncertainty, higher taxes and

little investment.

Fransabank said capital inflows fell 1.1 percent in 1999 despite the proceeds of September’s $700 million eurobond. Inflows shrank 18 percent in 1998.

“Central to slackening capital-inflow was investors prefering to evaluate government efforts to stimulate overall growth, besides the latest peace developments,” Sarrouh said.

The report said the deficit rose to 14.5 percent of GDP last year from 13.6 percent in 1998. A government program aims to reduce the deficit to 4.5 percent of GDP by 2003, mainly through increased revenue.

But Sarrouh said the policy of higher taxes and tighter discretionary spending was unlikely to bring revenue increase.

“They can’t burn the candle at both ends, restricting government spending and consumer spending at once with higher taxes,” Sarrouh said.

The government raised customs, dividend and income taxes in 1999. The 2000 budget authorized some public agencies to borrow money directly, a development Sarrouh said could cause a higher budget deficit than the 37.3 percent target.

Fransabank president Adnan Kassar, who heads the chamber of commerce, had called for cuts in the state payroll which consume 37 percent of expenditure instead of raising taxes.

Unemployment stands at 25 percent, according to the report.

But there were encouraging signs, Sarrouh said. Dollar-denominated deposits fell to 47.9 percent in 1999, signaling confidence in the local currency, which remained stable. The average interest rate fell to 11.7 percent from 12.4 percent.

Tourist arrivals rose by around 9 percent and exports grew to 4.2 percent of GDP.

“The government needs to stimulate consumer spending.” he said. “Money needs to be spent for the economy to grow.” - Reuters





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