World Bank Workshop Supports Lebanon's Drive to Turn Capital Inflows into Long-Term Growth

April 13, 2012

April 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 report, entitled Using Lebanon’s Large Capital Inflows to Foster Sustainable Long-Term Growth, was presented at a workshop held in Beirut on March 30, 2012. The event, chaired by Hedi Larbi Country Director for Lebanon, Syria, Jordan, Iraq and Iran, attracted some 50 participants, including the Prime Minister’s Economic Advisor Samir Daher, Director General of the Ministry of Finance Alain Bifani, and leading bankers, economists, academicians and media representatives.
In his opening remarks, Larbi noted that Lebanon is blessed with “ample financial and human resources to unlock the growth potential. What is needed is the political will to engage in a process of reform.”

He added that many countries with initial conditions by far less advantageous than Lebanon’s have managed to reverse economic stagnation, despite political volatility, citing Cyprus and South Korea as examples.

Both Daher and Bifani lauded the scope and approach of the study, noting its significance in combining an assessment of present-day conditions, an analysis of how Lebanon could double its average economic growth rate of 3.7 percent if reforms were introduced and an outline of policy options that would spur the aspired growth.

Minister of Finance Mohammad Safadi had recently said that the study was of “great importance … since it constitutes for Lebanese policy makers an essential support in the design of the country strategy regarding growth and development.”

The Governor of the Central Bank Riad Salamé, had also 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 available for decision makers in early drafts starting May 2011. In its final version, 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.
Lebanon is indeed 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’s economy.

Lebanese authorities, in particular the Central Bank (Banque du Liban), have tightened regulations following the global economic meltdown. The Central 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 demand related to regional oil wealth. 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 and innovative sectors capable of employing skilled youth who are migrating.
The study identified upgrading infrastructure, increasing efficiency of public spending, improving competition, reducing macroeconomic volatility, promoting innovation and protecting research adaptation as five key areas were policy action would generate substantial growth and employment payoffs in five years. Hence, the growth potential can be improved by up to 2.9 percent, leading to a GDP per capita 50 percent higher than the benchmark case with no reforms. This quantitative upscale in economic wealth corresponds to a total reshuffle of overall welfare and of the structures of the economy and society towards upper levels of development.

Ndiame Diop the Lead World Bank Economist for Lebanon, and Chadi Bou Habib, the World Bank’s Beirut-based senior economist who led the research team, analyzed in a presentation at the workshop the findings and methodologies applied to produce the report.

“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,” said Bou Habib. “Facing this vulnerability and increasing the potential for endogenous growth can be considered a national interest for Lebanon.”