May 2, 2017

GDP growth to accelerate to 2.5 percent this year. Fiscal and current account deficits to remain sizable

The World Bank has projected an improvement in economic growth this year, but expects fiscal and current account deficits to remain elevated.

Real GDP growth is expected to improve to 2.5 percent in 2017, provided the country does not revert to political stalemate, according to the spring issue of the World Bank’s Lebanon Economic Monitor.

The factors triggering the projected growth include the progress made in domestic politics, the continued revival of the tourism sector, and a slight recovery in real estate and construction.

Last year, real GDP growth slightly accelerated to an estimated 1.8 percent, compared with 1.3 percent in 2015. The improvement was mainly driven by an upturn in the construction sector and an 11 percent increase in tourist arrivals in 2016. The recovery in the construction sector is shown by a 4.4 percent increase in cement deliveries last year compared with an 8.6 percent drop in 2015.

While prospects for economic growth are improving, the state of public finance remains discouraging.

The World Bank said in the report: “Attracting sufficient capital, particularly deposits, to finance significantly larger budgetary and current account deficits could prove challenging based on recent deposit growth data.”

The current account deficit is expected to remain at “sizable and alarming level” under pressure from the large trade-in-goods deficit, according to the World Bank report. The current account deficit widened to an estimated 21 percent of GDP last year, from 17 percent of GDP in 2015.

Fiscal deficit is likely to remain elevated at around ten percent of GDP in 2017 and 2018. It is expected to drive the debt-to-GDP ratio to 166 percent of GDP this year and 170 percent of GDP in 2018.

In 2016, fiscal deficit hit double digits for the first time since 2006 after widening by 1.8 percentage points to ten percent of GDP.

Public spending is expected to increase mainly due to mounting debt servicing and larger transfers to Electricité du Liban driven by rising global interest rates and oil prices, respectively.

The World Bank said that the swap operations carried out between the Central Bank (BDL) and the banks in 2016 have resulted in abundant liquidity that has a high long-term cost and could exacerbate macro-financial risks. BDL has initiated the swap operations in order to boost its gross foreign exchange reserves after they fell by 5.4 percent in 2015. It succeeded in increasing these reserves by 11 percent to $34 billion.