A 2.2 percent GDP growth expected this year

The real Gross Domestic Product (GDP) is expected to have a modest pick-up in growth to 2.2 percent, up from 1.7 percent in 2014, according to a report released today by the Institute of International Finance (IIF).

“Growth will be supported by a third Central Bank (BDL) stimulus package and a modest recovery in the exports of goods and services,” said Garbis Iradian, Chief Economist at the IIF. “The expected percentage of growth continues to be below the required growth level for it to change the dynamics of the economy,” he said.

Nominal GDP is expected to reach $49.3 billion this year, up from $47.5 billion in 2014. “The economy is still growing below its potential,” said Iradian. The potential growth of the economy is estimated at about four to five percent, he said. “It’s not a bad level at all, but raising this potential to seven and eight percent requires more creation of job opportunities and more investments in new sectors rather than traditional ones like construction or tourism,” he said.

Given the continued weak economic activity and lower import prices, the IIF projects a decline in the average inflation rate from 2.1 percent in 2014 to -0.6 percent in 2015. “If the economy does not start to recover, the deflation could be larger,” said Iradian. Prolonged deflation could be problematic because it would raise real interest rates and complicate debt dynamics,” he said. The Consumer Price Index (CPI) has declined in the past few months due to weak domestic demand, lower oil prices and the strengthening of the dollar, the report said.

Fiscal deficit narrowed to around 6.9 percent in 2014, down from 9.3 percent of the GDP in 2013, but is expected to widen again to about eight percent of the GDP.

The report projects a decline in revenues of 5.6 percent. On the expenditure side, the wage bill could increase by five percent due to the planned additional recruitment in the public sector, mainly in the military and security forces. “We assume that the proposed salary scale adjustment will not be implemented in the near future,” said Iradian. “It is better to postpone it in the light of difficult economic conditions,” he said.

Transfers to the Electricité du Liban (EDL) are projected to decline from an estimated $1.9 billion in 2014 to $1.1 billion in 2015, but $800 million in savings will be partly offset by the projected decline in Value Added Tax (VAT) and customs receipts associated with lower imports.

The fall in global oil prices has raised consumers’ disposable income and producers’ cost of production. “This would help economic activity particularly if global oil prices remain at low levels for a prolonged period,” said Iradian. “Oil prices are expected to remain low in the near term,” he said.

Lending rates and interest rates were stable during the last four years, according to Iradian. He does not expect a rise in interest rates in the second half of this year, even if the US Federal Reserve were to hike interest rates this summer. “The banking system remains resilient, supported by loyal depositors and stable remittance inflows,” he said.

The report said that the key policy challenge is to raise near term growth by vigorously pursuing structural reforms to ensure long term sustainability, while preventing the deterioration of public finance and external imbalances. In the absence of any fiscal measures, debt to GDP is expected to rise to 143.2 percent this year, up from 140 percent in 2014.

“Lebanon needs reforms on the political level, first by fighting corruption and bureaucracy, then through administrative reforms in institutions like the EDL and in infrastructure (telecom, electricity, roads, etc…), and finally by enhancing partnership between the public and private sectors,” said Iradian. “If reforms are not implemented, this would lead to a brain drain and more unemployment,” he said.