“A lost year”

2011 growth below two percent, a four-year spell of strong economic performance has come to an end: IMF

Lebanon’s economy lost momentum in 2011 after four strong years, according to a report published by the International Monetary Fund (IMF) on February 8.

The report, which said that domestic political uncertainty and regional unrest have eroded market confidence, estimated growth to have hovered between one and two percent in 2011. The country had managed to sustain an average annual GDP growth of eight percent during the period 2007–2010.

In its Staff Report for the 2011 Article IV Consultation, the IMF said that while authorities have handled the downturn well, the fiscal position and financing conditions have worsened. It said that the credit growth has slowed, attributing the slowdown to the cooling of the real estate market. Annualized credit growth at end-October stood at 15 percent compared to 25 percent for the same period of 2010.

According to the IMF, deposit inflows remain strong, growing at nine percent annually, but the dollarization rate — an indicator of confidence in the domestic currency—is up. The IMF indicated that capital inflows had resumed in March following deposit outflows and currency conversions earlier in the year. The IMF said that deposits growth was due to the attractive premium of domestic interest rates.

The Central Bank’s gross foreign reserves increased to around $32 billion as of end-November, covering 43 percent of foreign currency deposits. According to the IMF, these reserves would be sufficient to withstand a shock of similar magnitude to the 2006 war with Israel or the 2005 assassination of Prime Minister Rafiq Hariri.

According to the IMF, growth could increase in 2012. Assuming that the external environment improves, growth is projected at 3.5 percent. The IMF warned, however, that the uprising in Syria, particularly if protracted, presents the most serious risk to the economy.

The IMF also cautioned against risks related to the worsening outlook in Europe. It said that indirect effects of the financial crisis across Europe could be sizeable if regional oil exporters were affected through lower oil prices or financial losses.

The IMF concluded that the economic outlook hinges on strong domestic policies. It said that a fiscal consolidation strategy should further cut the debt ratio, indicating that the government must reduce its reliance on Central Bank financing.