A small country unknown to many beyond its borders, Lebanon has great diversity in its cultures and relations with other countries, rendering its economy intriguing on many levels. Despite the government’s intervention in different industries in many ways, Lebanon still enjoys a free market economy and a Laissez-faire system. Previously known as “The Paris of The Middle East” because of its thriving economy, with a recent GDP of $64.31 billion (PPP) and a budget deficit of 9.4 % of GDP in 2013, Lebanon does not seem to be doing so well. And although Lebanon is considered highly developed in certain industries, specifically education and healthcare, the country still struggles to keep up with the rest of the world in many aspects.
Despite the government welcoming foreign investments into the country, the country still suffers from several issues that impede the flow of investments inward. Among the major issues that serve as obstacles to foreign and domestic investors are corruption, prevalence of sectarianism, undefined licensing scheme, high taxes and the complicated procedures pertaining to customs. Several important global and regional political and economic events have shaped Lebanon’s economy, and nurtured all matters pertaining to it, specifically the governmental issues. One major event that worsened the country’s economic situation was the 15-year civil war, which destroyed the infrastructure causing the government to borrow to finance its debts, and thus leading to a huge budget deficit that the country still struggles to overcome.
Lebanon’s Different Sectors and Economic Indicators
Lebanon’s economy is highly dependent on the service sector, which comprised about 75% of the GDP in 2013. The rest of the GDP goes to the industry sector by about 20% and the agriculture sector by around 5%. Moreover, Lebanon is a net-importer country, thus providing another reason for the susceptibility of its economy towards circumstances in many other countries. Among the most imported commodities are petroleum products, food and consumer goods, tobacco, medicinal products, and clothing. Imports amounted to about $20.97 billion in 2013, divided between several countries, among them the US with 11.2%, Italy with 8.6% and China with 8.3%. As for exports, they accounted to about $5.826 billion in 2013, divided amongst South Africa (19.3%), Switzerland (12.2%), Saudi Arabia (8%) and a few other countries of the Middle East. The list of the most common exported goods includes jewelry, consumer goods, fruits and vegetables, base metals, and chemicals.
Although Lebanon had maintained a relatively high inflation rate in the past, averaging around 3.36 between 2008 and 2015, the rate was observed to have dropped to -3.8 in beginning of 2015. This drastic drop in inflation rate is due to the decrease in oil prices, especially that Lebanon is a great importer of oil. The exchange rate on the other hand, has been pegged to the US dollar at 1,507.5 L.L since 1999, in an attempt to help in creating some sort of economic and political stability.
The Effect of the Recent Drop in Oil Prices
Being a net oil importer, the recent drop in oil prices is expected to decrease Lebanon’s oil import bill by half in year 2015, considering the prices will not soar up anytime soon. This decrease in the oil import bill will represent more than a 15% reduction in the annual total import bill. Al Akhbar, a renowned Lebanese newspaper, stated that “All analyses suggest that the national oil bill shrunk by $1.1 billion in 2014 and will shrink by $2 billion in 2015”.
In addition, Electricité du Liban (EDL) has been suffering from losses for years now due to the need to fix problems pertaining to the electricity tariffs and that are associated with average price of oil. The government has been funding the fixing of the electricity tariffs and thus the decrease in the oil prices will reduce the amount provided to EDL and will in turn decrease the government’s fiscal deficit. The other side of the story, however, is that the IMF expects a cut in the money transfers by expatriates into the country. According to The World Bank, the amount transferred by the expatriates, amounted to about 16% of GDP in the past 3 years, and remains a significant source of financing imports and the fiscal deficit. Therefore, it is not very clear which side of the story will outweigh the other, but experts predict that the net effect will be positive.
The Spillover Effects of the Syrian Conflicts
Being on the borders of and having close economic and political relations with Syria has rendered Lebanon more vulnerable to major events that occur in Syria. As a result, spillovers from the Syrian conflict since 2011 were starting to prevail in Lebanon around 2012. The conflicts in Syria drove many Syrians into Lebanon where they were permitted to enter and reside freely but temporarily. The greater inflow of Syrians into Lebanon lead to a great increase in the consumption, labor supply, small-scale residential construction, and exports from Lebanon into Syria, thus causing a drop in the fiscal deficit. Nonetheless, the negative effects exhibited by a fall in foreign investments and tourism, and an increase in demand for government services, outweighed the positive effects, thus causing the economic situation in Lebanon to deteriorate. The net negative impact is reflected in the cut in the annual real GDP growth rate by 2.9 percentage point, the increase in the number of Lebanese living in poverty by around 170,000, and the decrease in government revenues by $1.5 billion coupled with an increase in expenditure by $1.1 billion.
With so many critical events taking place in Lebanon and the region around, and the sensitivity of the situation in Lebanon to fluctuations, it is always expected that the state of the country will vary accordingly. It is therefore difficult to predict what the future holds for this small country. Unfortunately, however, it takes no expert to realize that it will require unrealistic and extensive changes over a very long period of time for Lebanon to regain its title as “The Paris of The Middle East”.
Photo credit: Paul Saad