Record low inflation
helping purchasing power

Improved consumption is driving growth and compensating for low investment

Inflation has reached its lowest level in a decade, according to the ‘Lebanon Economic Monitor’ report published by the World Bank today. Inflation decreased from 2.7 percent in 2013 to 1.9 percent in 2014.

“Inflation was lower than usual last year, said Wissam Harake, Economist at the World Bank-Lebanon. “This decline is driven by a continued negative output gap, since the economy is growing below its potential and favorable external prices, mostly declining global energy and food prices, as well as an appreciating effective exchange rate given the country’s peg to the dollar,” he said.

The report said that inflation data in Lebanon have been problematic. Due to the interruption in official CPI inflation data, since the Central Administration of Statistics (CAS) did not collect any price data between January and May 2013, the report said it used the CRI CPI index instead, which does not include rents and only collects price data for the greater Beirut area. “We used the CRI CPI index to fill the data gap,” said Harake.

Harake said low inflation is good as long as it does not turn into ‘deflation’, which occurs when the inflation rate falls below zero percent, and could lead to negative effects like lesser purchasing power and less lending. “This is not to be expected in the upcoming three years,” he said.

Inflation is expected to remain tempered over the medium term. It is projected to be at 2.2 percent in 2015, three percent in 2016, and 3.1 percent in 2017. “These are not high levels and just prove that inflation is at normal levels,” said Harake.

“The decline in inflation is translated into good consumption, which is supporting growth and partly compensating for the decline in investments, especially Foreign Direct Investments (FDI),” said Marwan Barakat, Head of Research at Bank Audi. “FDIs are sluggish, currently, given the political uncertainties in the country. Investors are in a wait-and-see attitude and are delaying their investment decisions,” he said.

The report said that the influx of Syrian refugees in 2014 was sharply lower than in 2013, supply side factors that previously pushed inflation upwards (e.g., the sudden
and massive increase in housing demand), is likely to have waned, albeit with a lag, given the likely contained demand.

“Low inflation is good since it increases the purchasing power of consumers,” said Karim Rebeiz, Associate Professor at the American University of Beirut. “A decrease in inflation supports economic growth, adjustment of wages, and protects savings,” he said.

Decelerating inflation has prompted the Central Bank (BDL) to continue its expanded monetary policy, by launching a second stimulus package in 2014 and introducing a plan to guarantee up to 75 percent of the value of a commercial bank’s equity investment in startups or venture capital funds, targeting Lebanon’s knowledge economy. “The BDL is trying to inject liquidity in the market to stimulate economic growth,” said Harake.

Harake said that “the growth of the economy will depend, in the short term, on how much Lebanon is able to contain security and political tensions.” In the medium to long term, he said that “the country will need to enhance reforms, mainly in the electricity, telecom, and water sectors.”

The Gross Domestic Product is expected to average 2.5 percent between 2015 and 2017, up from two percent in 2014, the report said.