The global economy has witnessed the most significant slide in oil prices since 2008, with global oil prices slashed by more than half between mid-June and early 2015. This decrease can be attributed to the dwindling global economic growth, a boost in U.S shale oil production and OPEC’s increased focus on market share rather than price-targeting. The impact was a deterioration of the fiscal and external accounts of oil producers in the developing world in particular and the reverse for oil importers.
As for Lebanon, the fiscal balance is expected to benefit from the decreasing trend in oil prices as a direct result of lower government transfers to the electricity company (EDL), which averaged 4.70% of GDP since 2011. However, the results of these lower transfers will experience a 6-9 month lag before transfers to EDL due to futures contracts signed with fuel oil and gas providers. Consequently, gross public debt is projected to stand at 149% of GDP at end-2014, although Blominvest’s estimates put this figure at 140% of GDP. In any case, lower oil prices can be expected to improve Lebanon’s debt levels.
Similarly, Lebanon’s balance of payments is expected to improve. Lebanon’s energy imports averaged 8.30% of GDP since 2010 and will decrease with lower oil prices. Adversely, income receipts and remittances to Lebanon from expatriates can be expected to decline, especially when we consider that most expatriates are located in the oil-exporting GCC region. However, the lower oil imports are considered to be more sensitive to changes in oil prices compared to remittances, with respective elasticities to oil prices estimated at 0.25 and 0.12, resulting in an expected positive net impact on Lebanon’s balance of payments.
The average price per barrel of oil between Jan-Jun 2014 stood at $109.44 according to the Ministry of Finance (MoF). Also, the World Bank and the International Monetary Fund (IMF) predict oil prices to stand at anywhere between $20/barrel in the short term (in case of an increased global supply from Iran, Iraq and Libya) and $65/barrel (in the case of a market self-correction). Regardless of the outcome, we can expect Lebanon to harness the benefits resulting from such drastic changes in price in 2015 to boost its fiscal and external accounts.