Monthly Editorial  
Economic Letter
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July 2016

External exposure and economic fallback

(Published by Lebanon Opportunities)


Economic indicators published by concerned administrations and institutions, including the Central Bank (BDL) and some other banks, show a general reduction in economic activity, particularly in some important sectors. Current economic stagnation is caused by the officials’ misuse of power and by the economic and security conditions prevailing in the country’s surroundings. Caught between a rock and a hard place, banks are exerting themselves to manage their risks in protecting deposits, and maintaining a minimum of profitability and a maximum of liquidity.

The practice of risk diversification is insufficient to kick-start growth at lending rates that are capable of absorbing the domestic workforce that enters the labor market annually. It is also inadequate to alter deficit levels of external balances. The political class is submerged in corruption and in its own narrow interests while demonstrating utter failure in making the State’s institutions function with the minimal of competence. If the political class fails to watch out for the expanding and deepening macro economic and social imbalances, the tables would then be turned on everyone, big and small alike.

Indicators normally hide more than what they reveal. But what is being revealed is enough to set off serious alarm bells. The Price Index published by the Consulting and Research Institute (CRI) has recorded a moving average of 0.88 during the past twelve months. This reflects the kind of economic stagnation that Europe and Japan are trying to exit through heavy purchases of bank-held government securities. These actions are in vain as investors remained abstinent despite the fall in interest rates to, at times, below zero. Lebanon’s monetary policy cannot obviously simulate these levels of low interest rates, wary that they would upset financial stability which it has maintained for a quarter of century, albeit at an economic cost that undermines growth, and at a social cost at the expense of employment and revenues.

Another indicator, the Beirut Traders Association – Fransabank Index, measuring retail trade and consumption – shows a year-on-year decline rate of 6.88 percent during the second quarter of 2016. The indicator has been on a downtrend throughout the period 2011 to 2016, with a single exception for the second semester of 2012, dropping from 100 to 48.93. It is the first time since the level was set at 100 in Q4 of 2011 that the index has fallen below 50. This intersects with the aforementioned CRI Price Index. Moreover, the BDL Coincident Indicator suffered a decline, albeit slightly at minus 1.5, for the same measured period: 273.5 in Q2 of 2016 in contrast to 277.7 in Q2 of 2015. It shows that the rate of decline has accelerated since the end of 2015: When comparing an index of 302.3 at that time with 273.5 at the end of Q2 of 2016, the decline rate exceeds 9.5 percent. In the same context, the BLOM Purchasing Managers’ Index (PMI) registered a decline rate of 9.94 percent: 49.3 for June 2015 versus 44.4 for June 2016. This index did not witness a decline of such a magnitude since it was first calculated in May 2013. A slide below level 50 in the index reflects deterioration in private sector production, output, and employment. Finally, the Byblos Bank/AUB (American University of Beirut) index, Consumer Confidence Index, showed a decline of 4.9 percent between its respective averages in Q1 of 2015 and Q1 of 2016. Furthermore, in comparing March 2016 to March 2015, the decline exceeds 23 percent. 

These indicators, which measure the level and evolution of domestic activity in terms of production and consumption, inherently include import and export activity levels, as they are essential constituents of production and consumption activities. It is therefore normal to record a decline in imports by more than two billion dollars during 2011-2015 (11.5 percent). Obviously, this decline projects itself on 2016 where imports in the first half of the year amounted to more than eight billion dollars or, if the trend continues, $16 billion annually. Export volume also fell during the same period from $4.3 billion to $2.96 billion, at a rate close to 45 percent. Whatever the reasons and circumstances, this speaks of erosion in the productive capacity and competitiveness of the economy. The trade deficit remains at a high level exceeding $15 billion for 2015, despite the marked decline in imports.

The trade deficit is of course chronic. The novelty is in its financing. BDL estimates that at this level, the current services, income, and transfers accounts netted the country about seven billion dollars in 2015. The resultant is a current deficit of $8.15 billion, or 16 percent of the $50.8 billion estimated GDP. It is one of the largest in the world. The Balance of Payments (BoP), according to BDL numbers, shows a deficit of $3.35 billion at the end of 2015. This implies that capital inflows, including foreign investments, commercial facilities, and deposits of non-residents are estimated at a net of $4.8 billion, which led to the shrinking of the gap between the current deficit and the deficit in the total BoP. The trend has continued during the first six months of 2016 with deficits in trade of eight billion dollars and in the Balance of Payments ($1.77 billion).

To complete the picture of the national accounts, it is worth looking at the State’s overall financial situation. Public spending and the ensuing public deficit contribute to foreign deficits in an essential way. They are intrinsic to economic activity, both in terms of production and consumption. The realized total disbursements increased from $11.7 billion to $13.5 billion between 2011 and 2015, or at rates which respectively reached 19.1 percent and 26.7 percent of GDP. The prevailing political conditions have prevented the expansion of public spending in view of the paralysis of the State’s institutions, the absence of public budgets, and the contraction of the expenditure on infrastructure. The public debt’s financing terms contributed to limiting the exacerbation of public spending, as the servicing of the public debt accounted for 34.3 percent and 34.7 percent of total public expenditure for 2011 and 2015 respectively. Note that the public debt rose from $53.7 to $70.3 billion during the same period. The cost of salaries, wages, and their related annexes rose, as a percentage of total expenditure, from 31.4 to 34.7 percent for the same period. The share of public wages and salaries is expected to increase if the new budget for 2017 is passed. The Minister of Finance has included in it the financial implications of the raise in the Scale of Grades and Salaries and its annexes. In order to grasp the differences in these changes in spending and debt, one must consult the details of the accounts and balances between the Ministry of Finance (MoF) and BDL. These show that MoF’s deposits with BDL, which amount to approximately five billion dollars, are registered in lira, while BDL’s loans to the State’s Treasury, at close to ten billion dollars, are registered in foreign currencies.

In parallel to the aforementioned developments analyzed at the economy, foreign trade, and public finance levels, the banking sector registered a growth rate of 5.8 percent in its total assets for 2015, and 2.34 percent for the first half of 2016. This increase has practically gone toward the financing of the local private sector. The increase in bank deposits at BDL came from deposits in foreign currencies with correspondent banks in consideration of foreign liquidity abroad. At the same time, the banks’ financing of the public sector remained stable at a level of $37.5 billion by the end of June 2016, in comparison to $37.8 billion at the end of 2015. This goes in line with the stability of actual public spending and the magnitude of BDL’s funding to the Treasury through a basket of currencies.

All of these developments and data, especially with regard to the commercial, financial, and banking foreign relationships, require a serious examination by the political establishment and society as a whole. These overall negative changes are not sustainable as they are. They require structural reforms that would limit the volume of external exposure on the one hand, and would restore the production and consumption of ‘made in Lebanon’ goods and services to higher levels on the other hand. The provision of foreign exchange to finance external exposure is liable to bring about surprises at all levels. At such a time, lament and remorse will not do, for not having instituted economic and financial policies, timely enough and favorable to the economic and social realities of the country.


Last Updated on September 15, 2016
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