March 20, 2012 - The Government of Lebanon is seeking to improve the use of financial resources to promote growth, create jobs, especially for the youth, and develop productive capacities. In support of this objective, the World Bank, in collaboration with the Central Bank of Lebanon, the Ministry of Finance and the Prime Minister Office, recently concluded an in-depth analysis of capital inflows and their impact on the economy.
The study has been judged of “great importance … since it constitutes for Lebanese policy makers an essential support in the design of the country strategy regarding growth and development,” said Minister of Finance Mohammad Safadi. The Governor of the Central Bank Riad Salamé underlined that “the list of reforms as suggested by the study should constitute a valuable support to the Government in its effort to adopt the necessary policies for the country.”
The study was indeed available for decision makers in early drafts starting May 2011. Entitled Using Lebanon’s Large Capital Inflows to Foster Sustainable Long-Term Growth, the report concludes that large inflows of foreign financial resources, continuous import of low-skilled labor, migration of Lebanon’s skilled labor and a booming real estate market have been the key features of the economy over the past two decades.
Indeed, Lebanon is a quintessential case of a small, open economy that is largely impacted by foreign financial inflows. It has been consistently attracting inflows from the region, including inflows related to regional oil wealth. The country’s attractive real estate assets and its vibrant banking sector have combined to consolidate the country’s reputation as a financial safe haven in times of crisis. Another important factor is the large and widely diffused Lebanese Diaspora, whose remittances make a steady contribution to financial flows to Lebanon economy.
“The analysis notes a long-term stable relation between oil prices and the dynamics of deposits in the banking sector over 40 years,” said Chadi Bou Habib, the World Bank’s Beirut-based senior economist who led the research team.
Furthermore, a significant increase in the inflows can be traced back to 2007-2010 and continues to date, although at a slower pace. This recent increase was inspired by two main factors: a spike in oil prices and a deep confidence crisis in international and regional financial and capital markets.
Lebanese authorities, in particular Central Bank, or BdL, have tightened regulations, and followed a policy of sterilization, following the global economic meltdown. The Bank has built-up substantial foreign currency reserves, which stood at US$30.8 billion in December 2011. The measures helped avoid asset bubbles and a further appreciation in the real exchange rate which would have further impeded competitiveness.
In the short term, economic fluctuations remain highly dependent on foreign inflows and foreign demand related to regional oil wealth and oil prices. The downside is that highly productive industries and innovative activities do not seem to benefit from financial inflows, which take the shape of short-term deposits in Banks or real estate acquisitions. Infrastructure bottlenecks and structural dysfunctions are in fact impeding broad-based endogenous growth and are contributing to the low-level investment in productive capacity.
The report analyses the determinants of foreign financial inflows to Lebanon and examines policy options that would unlock and increase Lebanon’s endogenous growth potentials over the long term, hence generating jobs to the high-skilled youth looking to migrate.
“The recent turmoil in neighboring countries and in some Diaspora host countries underlines the vulnerability of Lebanon towards exogenous shocks that can affect the flows of goods, services, financial resources and workers,” Bou Habib noted. “Facing this vulnerability and increasing the potential for endogenous growth can be considered a national interest for Lebanon.”
He added: “The country has the potential to do so, thanks to its human capital and financial resources. From there, what is needed is the political will to engage in a process of reform that would create a more diversified, innovation-driven economy, capable of generating the high number of jobs required for the skilled labor force. Many countries with initial conditions by far less advantageous than those of Lebanon managed to breakthrough, the example of neighboring Cyprus being one of the most striking in modern history.”
