Lebanon’s economic growth remained positive in 2014 despite the challenging political, security, and external environment. The Lebanese economy went through difficult times in 2014 except for the formation of a cabinet towards the end of the first quarter. The spillovers from the Syrian conflict were also having an ongoing negative impact on Lebanon estimated at $7.5 billion by the World Bank.
Thus, real Gross Domestic Product (GDP) registered a 2% growth rate in 2014, slightly better than the 1-1.5% growth registered in 2013. The slowdown in domestic demand and consumption mostly lies behind the weaker GDP growth. This was coupled with a subdued inflation rate as the consumer price index increased at an average rate of 1.86% over the year.
Disparate trends characterized the Lebanese core sectors tourism, real estate and construction. The former managed to show a relatively better performance in the first half of 2014 mainly after the long-awaited Cabinet formation and the security plan that took place by the end of the first half. However, the latter kept on suffering the mismatch between demand and supply with prices continuing to decline.
Business activity of the private sector, measured by the Purchasing Managers’ Index for Lebanon (BLOM PMI), remained below the 50 benchmark separating expansion from contraction for the whole year of 2014.
On the external front, the Balance of Payments (BoP) deficit broadened at a faster pace in 2014 to $1.41B. This was mainly the result of worsening current account deficit, BOP’s largest constituent, despite the progress of the capital and financial account and that of the unrecorded transactions. In details, the current account balance remained under the strains of the dwindling tourism activity as frail levels of receipts heavily impacted the balance of services.
As for trade balance, it managed to tighten its deficit during 2014. This has followed a higher slump in imports’ value than that of exports. The slight 2.0% narrowing of deficit was mainly the result of bearish oil prices hand in hand with the depreciation of the euro. Exports covered 19.0% of imports in 2014, compared to 19.6% in the previous year.When it comes to public finance, Lebanon’s fiscal balance significantly improved in 2014. In details, the deficit tightened by 27% over the year following a 15.5% jump in total revenues versus a marginal 2% yearly rise in expenditures. Thus, the share of the fiscal deficit in the GDP retracted from 9.3% in 2013 to 6.4% in 2014.
On the brighter side, the primary balance, referring to the fiscal balance excluding debt service, recovered after two years of being in the red. Accordingly, the share of the primary balance in GDP recovered from a deficit of 0.53% in 2013 to a surplus of 2.73% in 2014.
In details, both tax and non-tax revenues boosted total budget revenues in 2014, while treasury receipts almost doubled to $1.1B. As for expenditures, the effect of lower oil prices has not been materialized in lower transfers to EDL since the transfers of 2014 correspond to a previous consumption period. Accordingly, the 11% annual growth in the value of interest payments along with the 18% y-o-y upturn in domestic interest payments and, to a lesser extent, the uptick in foreign interest payments constituted the main increase in public expenditures.
However, Lebanon’s gross public debt rose by 5% y-o-y compared to the 10.1% rise in 2013. In specific, the value of domestic debt almost increased by an annual 10% in 2014 simultaneously with the 2% yearly drop of foreign debt. In addition, interest payments on both domestic and foreign debt have increased more than the increase in the stock of debt while interest rates did not change.
To support economic growth and price stability, monetary policy has remained highly accommodative during 2014. The central bank kept the interest rates stable as witnessed by T-bills rates, maintained the exchange rate peg at its current level, pumped money into the system through subsidized loans and added to its sizable holdings of government securities.
As security and political situations had their toll on the economy since 2011, the central bank’s aim remained to support progress toward price and exchange rate stability and economic growth. In this context, the central bank implemented an $800M economic stimulus package in 2014, which targeted start-up companies and some other sectors of the economy including housing, tourism, and manufacturing. It also initiated the “Knowledge Economy”- “an economy in which information is invested to create new and improved products and services with a high added value that constitutes a main component of the production process and generation of wealth”.
Lebanon’s financial markets kept on mimicking the political and security dynamics that characterized the country over 2014. While both the Lebanese stocks and Eurobonds’ markets witnessed a relatively prosperous first half in 2014, the worsening developments that painted the second half of the year triggered down investors’ appeal for the Lebanese securities. This has led to flat, yet leaning to positive, outcomes over the mentioned financial markets.
From one side, the Lebanese stock exchange revealed a 1.75% timid yearly upturn in its BLOM Stock Index. This was coupled with an improving trade activity that totaled 38.67M shares worth $297.55M being traded over the year, compared to a volume of 93.92M shares worth $576.26M the previous year.
On the other side, Lebanon’s Eurobonds market finally took off and recovered in 2014 following 3 years of negative performance. In fact, the relationship binding Lebanese Eurobonds to the local scene was stronger than the impact of the international trend driven by the U.S. Treasuries. Thus, the BLOM Bond Index (BBI) mirrored the dwindling local market’s performance and added a mere 1.7% y-o-y.
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Annual report 2014