101022 LEBANON ECONOMIC MONITOR THE GREAT CAPTURE Fall 2015 Global Practice for Macroeconomics & Fiscal Management, GMFDR MIDDLE EAST AND NORTH AFRICA REGION The World Bank lebanon economic monitor | The great Capture Preface The Lebanon Economic Monitor provides an update To be included on an email distribution list for on key economic developments and policies over this Lebanon Economic Monitor series and related the past six months. It also presents findings from publications, please contact Nada Abou Rizk recent World Bank work on Lebanon. It places them (nabourizk@worldbank.org). For questions and in a longer-term and global context, and assesses comments on the content of this publication, please the implications of these developments and other contact Wissam Harake (wharake@worldbank. changes in policy on the outlook for Lebanon. org) or Eric Le Borgne (eleborgne@worldbank.org). Its coverage ranges from the macro-economy to Questions from the media can be addressed to Zeina financial markets to indicators of human welfare El Khalil (zelkhalil@worldbank.org). and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Lebanon. The Lebanon Economic Monitor is a product of the World Bank’s Lebanon Macro-Fiscal Management (MFM) team. It was prepared by Wissam Harake (Country Economist) and Samer Matta (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist) and Auguste Kouame (Global Practice Manager). Nadwa Rafeh (Senior Economist) authored the Special Focus on the health sector, while Jana Harb (Economic Analyst) authored the Special Focus on governance. May Ibrahim (Senior Executive Assistant) provided Arabic translation, Nada Abou-Rizk (Program Assistant) provided French translation and Zeina El Khalil (Communications Officer) print-produced the report. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its activities in Lebanon, including e-copies of this publication, please visit www.worldbank.org.lb Preface | 1 The World Bank Table of Contents Preface......................................................................................................................................................... 1 EXECUTIVE SUMMARY................................................................................................................................ 4 ‫الملخ�ص التنفيذي‬............................................................................................................................................... 7 Résumé......................................................................................................................................................... 8 Recent Economic and Policy Developments.......................................................................... 10 Output and Demand...................................................................................................................................... 10 Labor Markets................................................................................................................................................ 14 Fiscal Policy.................................................................................................................................................... 15 External Sector............................................................................................................................................... 17 Monetary Policy, Banking and Prices............................................................................................................. 18 Financial Markets........................................................................................................................................... 20 Prospects................................................................................................................................................. 22 SPECIAL FOCUS.......................................................................................................................................... 24 I. Elite Capture and the Hollowing of the State: an Overarching Constraint to Lebanon’s Development...... 24 Elite capture hidden behind the veil of confessional governance................................................................... 24 Poor governance and weak institutions.......................................................................................................... 26 Paralysis in decision-making.......................................................................................................................... 30 II. Lebanon’s Health Sector: Modest Reforms despite the Challenges...................................................... 31 Overview of the healthcare system................................................................................................................ 31 Spending Trends............................................................................................................................................ 33 Main Challenges............................................................................................................................................ 35 Key Health Sector Reforms: Moving in the Right Direction............................................................................ 36 Final Note...................................................................................................................................................... 37 DATA APPENDIX......................................................................................................................................... 39 Selected Special Focus from Recent Lebanon Economic Monitors........................... 40 SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON................................................... 43 List of Figures Figure 1. EMBIG spread reflects idiosyncratic country risks..................................................................... 11 Figure 2. By 2014, the output gap turned negative …. ............................................................................. 12 Figure 3. … while the cumulative output gap is falling again.................................................................... 12 Figure 4. Real GDP growth sluggish but stable in 2015............................................................................ 13 Figure 5. Tourism rebounds in Lebanon, but remains below pre-crisis levels........................................... 13 Figure 6. Retail trade stabilizes. ............................................................................................................... 13 Figure 7. The ICT sector experiences robust growth................................................................................. 13 Figure 8. Consumer sentiment is volatile.................................................................................................. 14 Figure 9. PMI contraction persists............................................................................................................ 14 Figure 10. Fiscal deficit widens in 2014...................................................................................................... 16 Figure 11. … debt- to-GDP, however, falls................................................................................................. 16 Figure 12. Despite a regression in capital inflows….................................................................................... 17 Figure 13. … Bdl to increase its stock of foreign reserves........................................................................... 17 Figure 14. Inflation abates in 2015............................................................................................................. 18 Figure 15. Lending to the private sector continues to respond to BdL’s stimulus package.......................... 18 Figure 16. Lebanese banks’ sovereign debt exposure increases in 2015….................................................. 20 Figure 17. … as did commercial banks’ assets............................................................................................ 20 lebanon economic monitor | The great Capture Figure 18. Real deposits at commercial banks continued to accelerate in 2015......................................... 21 Figure 19. Global volatility translated into negative spread. ....................................................................... 21 Figure 20. Bribery and nepotism are pervasive in policy execution in Lebanon.......................................... 25 Figure 21. Public funds are diverted into the coffers of Lebanese politicians and civil servants.................. 25 Figure 22. Nepotism in the Lebanese civil service recruitment is perceived as highest in MENA................ 25 Figure 23. Perceptions of nepotism in Lebanon’s civil service recruitment are rising over time................. 26 Figure 24. Institutional quality in Lebanon is one of the lowest in the world.............................................. 26 Figure 25. Trust in core public institutions is very low............................................................................... 27 Figure 26. The quality of governance has deteriorated markedly since 2005.............................................. 27 Figure 27. Civil justice in Lebanon is particularly slow, unfair, ineffective and corrupt............................... 28 Figure 28. Lebanon’s supply and quality of physical public services rank very poorly in the world............ 28 Figure 29. Quality of social public services in Lebanon is inferior to MENA and world average................. 28 Figure 30. Public service delivery in Lebanon is subject to stark spatial inequality..................................... 28 Figure 31. Hospital beds per 1000 population: Lebanon, MENA average, and other countries; 1980-2011. ...... 32 Figure 32. Physicians per 1000 population: Lebanon, MENA average, and other countries; 1980-2011. ........... 32 Figure 33. Total health spending per capita (current US$): Lebanon, MENA average, and other countries; 1995-. ..... 32 Figure 34. Total health spending as a share of GDP: Lebanon, MENA average, and other countries; 1995-2011. ... 32 Figure 35. Public health expenditure as a share of total government expenditure versus income per capita. .... 33 Figure 36. Population pyramid, Lebanon, male and female, 2012.............................................................. 34 Figure 37. Population pyramid, Lebanon, male and female, projected 2050............................................... 34 List of Tables Table 1. Correlation coefficients between the output gap and................................................................. 11 Table 2. Health outcomes indicators, Lebanon and MENA average, most recent years........................... 31 Table 3. Elasticities of public health spending relative to government revenues and spending, 1995-2011...... 34 Table 4. Household out-of-pocket expenditure on health, 2011............................................................. 34 Table 5. Ministry of Public Health, budget allocations for main categories, percentage share of total budget...... 36 Table 6. Lebanon: Selected Economic Indicators, 2012-2017................................................................. 39 List of Boxes Box 1. Measuring the Output Gap for Lebanon.................................................................................... 12 List of Key Abbreviations Used bps Basis points H1, H2: First half of the year, second half of the year. 3mma: Three-months moving average pp Percentage points Q1 (Q2, Q3, Q4): First (second, third, fourth) quarter of the year qoq: Quarter-on-quarter sa: Seasonally adjusted saar: Seasonally adjusted, annual rate yoy: Year-on-year lhs, rhs: Left hand side, right hand side (for axis of figures) The World Bank EXECUTIVE SUMMARY I. Systematic failures in governance in the projected rise of 0.6 percentage points (pp) in the face of seismic shocks in an environment of overall fiscal deficit to 7.2 percent of GDP due endemic corruption could result in a rupture. primarily to lack of the one-off revenue measures Creeping political paralysis has rendered the three that boosted revenues in 2014. Externally, lower branches of government either vacant or ineffective. oil prices, as well as a more broad contraction in Moreover, the collapse of public services, such as imports, are expected to induce a 5 pp narrowing of electricity, water supply and a visually powerful the current account deficit, which will nevertheless garbage crisis that has left piles of it uncollected on remain elevated at a forecast 21 percent of GDP. the streets, led to sizable popular demonstrations. This, however, was more than offset by lower All the while, Lebanon continues to face momentous capital inflows adversely affecting the net foreign challenges emanating from the war in Syria, including asset position of the financial sector. Nonetheless, hosting the largest assembly of Syrian refugees (in gross foreign exchange reserves at BdL are expected proportion to the population). to increase to US$ 34.5 billion by end of 2015 as commercial banks continue to repatriate their II. Notwithstanding the political foreign assets in search of higher yields. dysfunctionality, improved security conditions have provided a boost for economic activity in IV. A negative output gap combined with 2015. Growth has been driven by a resurgent tourism declining commodity prices lead to a deceleration sector and continued expansion in private lending in prices. Real GDP growth continues to lag behind, as Banque du Liban (BdL) renewed its stimulus compared to an average rate of 4.4 percent from 1993 package in the amount of $1 billion this year; tourist to 2014. In addition, headline inflation plummeted arrivals increased by 16.6 percent, year-on-year from 2.7 percent in 2013 to a forecast 0.2 percent (yoy), in the first eight months of 2015, compared in 2015 and is expected to remain tempered over to a mere increase of 0.7 percent during the the medium term. This, in addition to exchange rate corresponding period in 2014. On the other hand, stability reflected in a gradual fall in the dollarization the real estate sector has acted as a drag on growth, rate, has provided the basis for an expansionary with construction permits and cement deliveries monetary policy as reflected in the series of BdL contracting by about 18.8 percent and 16.7 percent, stimulus packages in the form of subsidized loans. respectively, during the first seven months of 2015. Overall, we project that growth will remain around V. Spillovers from the war in Syria remain a 2 percent this year, largely unchanged from 2014. principal short-term challenge, despite the recent respite, which cannot be guaranteed due to severe III. The decline in oil prices has so far had volatility. Moreover, uncertainty over America’s net positive effects on the Lebanese economy, Federal Reserve Board (FED) tightening this year freeing up savings for both internal and external has made monetary policy expectations in Lebanon imbalances. Fiscally, lower transfers to the state- somewhat ambiguous; despite the preferred owned Electricity du Liban (EdL), in addition to expansionary stance reflected in the subsequent BdL increased scrutiny of expenditures by the present stimulus packages, upon FED tightening, Lebanon Ministry of Finance, are expected to help maintain would be bound to follow suit to maintain the a primary surplus in 2015. This is despite a small margin on USD and LBP deposits in Lebanon. This 4 | Executive Summary lebanon economic monitor | The great Capture will negatively impact lending to the private sector and raise Lebanon’s large debt service, as new debt will need to be contracted at higher interest rates given the ongoing large gross financing needs. VI. Lebanon’s post-civil war governance system has evolved and deteriorated to a point of failing the country and its citizens (Special Focus #1). The public sector has become increasingly governed by bribery and nepotism practices, failing to deliver basic public services and incapable of resolving the most urgent needs. This has culminated in the comprehensive breakdown in the political process, with the three branches of government either vacant or effectively idle, and the only national plebiscite abrogated. Since the summer, a series of protests and civil disobedience measures erupted—sparked by failure to collect garbage in the country—and is targeting the ruling political class with emphasis on corruption and incompetence. Current conditions are unsustainable, and without significant political and economic reforms, a widening and worsening of socio-economic unrest is not unfathomable. VII. Lebanon’s healthcare system is a complex amalgam of public and private institutions, providing health services to the population (Special Focus #2). Key challenges include; (i) low public spending on health; (ii) high household out- of-pocket spending on health; (iii) disproportionate allocation of resources on expensive curative rather than preventative care; and (iv) emerging epidemiologic and population trends associated with unprecedented influx of refugees having significant implications on the delivery and financing of the health sector. Despite the challenges and prolonged periods of instability, the Ministry of Public Health embarked on several successful reforms that contributed to the resilience of the system in the face of the crisis. Executive Summary | 5 ‫‪The World Bank‬‬ ‫الأ�سا�سية ومعالجة االحتياجات الطارئة‪ ،‬م ّ‬ ‫ما �أدى �إلى تفكك في‬ ‫الهيكلية ال�سيا�سية و�إفراغ �أو تعطيل ال�سلطات الحكومية بفروعها‬ ‫الثالث‪ ،‬كما تم �إلغاء المنظومة االنتخابية الوطنية الوحيدة في‬ ‫البالد‪ .‬وقد �أ�شعلت �أزمة النفايات هذا ال�صيف �شرارة الحراك‬ ‫زت تلك التحركات على ف�شل‬ ‫ال�شعبي والع�صيان المدني‪ ،‬ورك ّ‬ ‫النخبة الحاكمة والف�ساد المتف�شي فيها‪ .‬فالو�ضع الحالي غير‬ ‫قابل لال�ستمرارية‪ ،‬و�إذا ما تم تفعيل الجهود الإ�صالحية ب�شكل‬ ‫جدي‪ ،‬فلي�س من الم�ستبعد �أن تتفاقم اال�ضطرابات االقت�صادية‬‫ّ‬ ‫واالجتماعية‪.‬‬ ‫‪ .vii‬النظام ال�صحي في لبنان هو مزيج معقد من الم�ؤ�س�سات‬ ‫الخا�صة والعامة التي تقدم الخدمات ال�صحية �إلى المواطنين‬ ‫(تحليل خا�ص رقم ‪ .)2‬ونذكر التحديات الرئي�سة كالتالي‪)1( :‬‬ ‫تدني الإنفاق العام على قطاع ال�صحة‪ )2( ،‬الن�سبة العالية التي‬ ‫تنفقها الأ�سر من جيوبها الخا�صة على الخدمات ال�صحية‪)3( ،‬‬ ‫عدم التوازن في تخ�صي�ص الموارد حيث يتم الإنفاق ب�شكل �أعلى‬ ‫على الرعاية العالجية المكلفة مقارن ً‬ ‫ة بالرعاية الوقائية الأقل كلفة‪،‬‬ ‫و(‪ )4‬االتجاهات الوبائية وال�سكانية النا�شئة المتعلقة بتدفق غير‬ ‫ما ي�ؤثر �سلب ًا على �أداء وتمويل القطاع ال�صحي‬‫م�سبوق للاّ جئين‪ ،‬م ّ‬ ‫في لبنان‪ .‬وبالرغم من التحديات والفترات الطويلة من عدم‬ ‫اال�ستقرار‪� ،‬شرعت وزارة ال�صحة العامة في �إطالق العديد من‬ ‫الحمالت الإ�صالحية التي �ساهمت في تثبيت النظام ال�صحي �أمام‬ ‫الأزمة الحالية‪.‬‬ ‫| ‪6‬‬ ‫الملخ�ص التنفيذي‬ ‫‪lebanon economic monitor | The great Capture‬‬ ‫الملخ�ص التنفيذي‬ ‫الإجمالي المحلي‪ .‬في مواجهة هذا التح�سن في ن�سبة العجز‪� ،‬أثر‬ ‫قد ي�ؤدي الف�شل المنهجي في الحوكمة‪ ،‬وذلك في �سياق‬ ‫‪ .i‬‬ ‫ة على و�ضعية‬ ‫الهبوط في تدفقات ر�أ�س المال على نحو �أكثر �سلبي ً‬ ‫�صدمات زلزالية و�ضمن بيئة ي�ست�شري فيها الف�ساد‪� ،‬إلى تقهقر‬ ‫�صافي الأ�صول الأجنبية في القطاع المالي‪ .‬ومع ذلك‪ ،‬من المتوقع‬ ‫ما ال�شلل ال�سيا�سي‪ ،‬في�ستم ُ‬ ‫ر‬ ‫هيكلية النظام الحالي في لبنان‪� .‬أ ّ‬ ‫�أن ترتفع احتياطات النقد الأجنبي الإجمالية في م�صرف لبنان لتبلغ‬ ‫بالزحف نحو ال�سلطات الحكومية بفروعها الثالث‪ ،‬حيث �أم�ست‬ ‫‪ 34.5‬مليار دوالر �أميركي في نهاية العام ‪ ،2015‬حيث �أن الم�صارف‬ ‫معطلة‪ .‬ون�ضيف �إلى ذلك تدهور الخدمات العامة‪،‬‬ ‫�إما فارغة �أو ّ‬ ‫التجارية �سوف ت�ستمر ب�إعادة �أ�صولها الأجنبية بهدف تح�صيل‬ ‫كالكهرباء‪ ،‬و�إمدادات المياه‪ ،‬و�أزمة النفايات التي تراكمت في �أكوام‬ ‫عائدات �أعلى‪.‬‬ ‫ما �أ�شعل حراك ًا �شعبي ًا �ضخم ًا‪ .‬هذا‪ ،‬وما زال‬ ‫تعيق النف�س والب�صر‪ ،‬م ّ‬ ‫لبنان يواجه تحديات ج�سيمة ناجمة عن الحرب في �سوريا‪ ،‬بما في‬ ‫ي�ؤدي ظهور الفجوة ال�سلبية في الإنتاجية‪ ،‬بالتزامن مع‬ ‫‪.iv‬‬ ‫ ‬ ‫ة بالعدد‬‫ذلك ا�ست�ضافة �أكبر ن�سبة من اللاّ جئين ال�سوريين مقارن ً‬ ‫انخفا�ض ا�سعار ال�سلع الأ�سا�سية‪� ،‬إلى تباط�ؤ الأ�سعار‪ .‬وي�ستمر النمو‬ ‫الإجمالي ل�سكان البلد‪.‬‬ ‫ة بمعدل ‪4.4‬‬ ‫الحقيقي للناتج المحلي الإجمالي في تباط�ؤه مقارن ً‬ ‫بالمئة بين العام ‪ 1993‬والعام ‪� .2014‬إ�ضافة �إلى ذلك‪ ،‬انخف�ضت‬ ‫على الرغم من ال�شلل ال�سيا�سي‪� ،‬أدّى الهدوء الن�سبي‬ ‫‪ .ii‬‬ ‫ن�سبة الت�ضخم من ‪ 2.7‬بالمئة في العام ‪� 2013‬إلى ما هو متوقع ًا‬ ‫في الأو�ضاع الأمنية في لبنان �إلى دعم االقت�صاد في العام ‪.2015‬‬ ‫للعام ‪� ،2015‬أي �إلى ‪ 0.2‬بالمئة‪ ،‬ومن المحتمل �أن تبقى ن�سبة‬ ‫كما �أن بع�ض االنتعا�ش الحا�صل في قطاع ال�سياحة �إ�ضافة �إلى‬ ‫الت�ضخم محدودة على المدى المتو�سط‪ .‬وقد �ساعد ذلك‪� ،‬إ�ضافة‬ ‫ال�سيا�سة التو�سعية التي ا�ستمر في اعتمدها الم�صرف المركزي‬ ‫�إلى ا�ستقرار �سعر ال�صرف الذي ظهر من خالل هبوط تدريجي‬ ‫عبر �إطالق حزمة �إجراءات تحفيزية جديدة هذا العام بقيمة مليار‬ ‫في معدل الدولرة‪ ،‬على ت�أمين القاعدة الأ�سا�سية لل�سيا�سة النقدية‬ ‫دوالر �أميركي‪ ،‬قد حفزّا النمو االقت�صادي هذه ال�سنة؛ حيث ارتفع‬ ‫التو�سعية التي اعتمدها م�صرف لبنان �ضمن �سل�سة من الإجراءات‬ ‫عدد الوافدين �إلى البلد من ال�سياح بن�سبة ‪ 16.6‬بالمئة في الأ�شهر‬ ‫التحفيزية في �شكل قرو�ض مدعومة‪.‬‬ ‫الثمانية الأولى من العام ‪( 2015‬على �أ�سا�س �سنوي)‪ ،‬مقارن ً‬ ‫ة بارتفاع‬ ‫ب�سيط بن�سبة ‪ 0.7‬بالمئة خالل الفترة نف�سها عام ‪ .2014‬من ناحية‬ ‫ما زالت تداعيات الحرب في �سوريا ت�شكل تحديات‬ ‫‪ .v‬‬ ‫�أخرى‪ ،‬فر�ض القطاع العقاري عبئ ًا على النمو االقت�صادي‪ ،‬وقد برز‬ ‫�أ�سا�سية على المدى الق�صير‪ ،‬على الرغم من بع�ض الهدوء‬ ‫ذلك من خالل االنكما�ش الحا�صل في تراخي�ص البناء وفي حركة‬ ‫الن�سبي الذي �شوهد م�ؤخراً والذي قد ينك�سر في �أي لحظة‬ ‫ت�سليم الإ�سمنت بحوالي ‪ 18.8‬بالمئة و‪ 16.7‬بالمئة على التوالي‪،‬‬ ‫ل�شدة توتر الأو�ضاع‪ .‬كما �أن عدم اليقين في ما يخ�ص ال�سيا�سة‬ ‫خالل الأ�شهر ال�سبعة الأولى من العام ‪ .2015‬وب�شكل عام‪ ،‬من‬ ‫التقييدية للم�صرف االحتياطي الفيديرالي الأميركي قد �أدى �إلى‬ ‫المتوقع �أن تبلغ ن�سبة النمو ‪ 2‬بالمئة هذه ال�سنة‪ ،‬دون تغيير ملحوظ‬ ‫بع�ض الغمو�ض في �سيا�سة لبنان النقدية لهذا العام؛ فعلى الرغم‬ ‫ة بالعام ‪.2014‬‬‫مقارن ً‬ ‫من موقف م�صرف لبنان الذي يميل �إلى ال�سيا�سة التو�سعية من‬ ‫خالل �إطالق الحزم التحفيزية المتالحقة‪ ،‬ف�إذا ما فر�ض الم�صرف‬ ‫‪� .iii‬أدّى انخفا�ض �أ�سعار النفط �إلى ارتدادات �إيجابية على‬ ‫االحتياطي الفيديرالي الأميركي تقييدات محددة‪� ،‬سوف يكون‬ ‫ما �سمح با�ستخدام المدّخرات للم�ساعدة في‬ ‫االقت�صاد اللبناني‪ ،‬م ّ‬ ‫لبنان بالتالي ملزم ًا بال�سير في نف�س االتجاه للحفاظ على هام�ش‬ ‫تغطية النق�ص الحا�صل في الموازنات الداخلية والخارجية‪ .‬من‬ ‫الودائع الم�سجلة بالدوالر الأميركي والليرة اللبنانية‪ .‬وقد ي�ؤثر ذلك‬ ‫الناحية المالية‪ ،‬فمن المتوقع �أن ي�ساهم االنخفا�ض الحا�صل في‬ ‫�سلب ًا على القرو�ض الموجهة �إلى القطاع الخا�ص وي�ؤدي �إلى ارتفاع‬ ‫التحويالت النقدية �إلى �شركة كهرباء لبنان العامة وتكثيف عملية‬ ‫ال في لبنان‪ ،‬بحيث �سوف يتم تعاقد الديون‬ ‫خدمة الدين العالية �أ�ص ً‬ ‫التدقيق المالي من قبل وزارة المالية‪ ،‬في الحفاظ على الفائ�ض‬ ‫الجديدة بفوائد �أعلى‪ ،‬نظر ًا لالحتياجات التمويلية الكبيرة في‬ ‫الأولي للعام ‪ .2015‬هذا بالرغم من توقع ارتفاع ب�سيط بن�سبة‬ ‫الوقت الحا�ضر‪.‬‬ ‫‪ 0.6‬نقطة مئوية في العجز المالي الإجمالي �إلى ‪ 7.2‬بالمئة من‬ ‫الناتج الإجمالي المحلي‪ ،‬وذلك ب�سبب عدم وجود التدابير المالية‬ ‫تدهور نظام الحوكمة في لبنان ما بعد الحرب‬ ‫‪ .vi‬‬ ‫ما من الناحية‬ ‫المرحلية التي عزّزت الإيرادات في العام ‪� .2014‬أ ّ‬ ‫الأهلية �إلى حد الف�شل فخاب الوطن والمواطن (تحليل خا�ص‬ ‫الخارجية‪ ،‬قد ي�ؤدي انخفا�ض �أ�سعار النفط والتقل�ص في الواردات‬ ‫رقم ‪ .)1‬تزايدت ممار�سات الر�شوة والمح�سوبيات والو�ساطة‬ ‫�إلى ت�ضييق العجز في الح�ساب الجاري بن�سبة ‪ 5‬نقاط مئوية‪ ،‬ولكن‬ ‫في القطاع العام‪ ،‬وقد ف�شلت تلك الإدارات في تقديم الخدمات‬ ‫يبقى العجز مرتفع ًا حيث من المتوقع �أن يبلغ ‪ 21‬بالمئة من الناتج‬ ‫الملخ�ص التنفيذي‬ ‫‪| 7‬‬ The World Bank Résumé I. Les échecs systématiques en matière l’économie libanaise grâce aux économies de gouvernance dans un contexte de chocs générées et à la réduction des déficits internes majeurs et de corruption endémique pourraient et externes du pays. Au niveau financier, la entraîner une rupture. La paralysie politique réduction des transferts à Électricité du Liban larvée en place depuis plus d’un an et demi a fait (EdL)—une société publique—en plus d’un examen que les trois composantes du pouvoir sont soit accru des dépenses par l’actuel Ministère des inefficaces, soit souffrantes d’une vacance à leur Finances, devraient contribuer à maintenir un tête. Plus encore, l’effondrement des services excédent primaire en 2015, et ce, malgré une petite publics, tels que l’électricité, l’approvisionnement augmentation prévue (de 0,6 points de pourcentage en eau et la crise, visuellement accablante, des (pp)) du déficit budgétaire de 7,2 pour cent du ordures amoncelées dans les rues, a été à l’origine PIB. Cette augmentation est essentiellement le fait d’importantes manifestations. Dans le même temps, du manque de certaines recettes ponctuelles qui le Liban continue de faire face à d’importants défis avaient fait grimper les recettes en 2014. Au niveau découlant de la guerre en Syrie, notamment l’accueil externe, la baisse des prix du pétrole, ainsi qu’une de la plus large communauté de réfugiés syriens (en importante contraction des importations, devraient pourcentage de la population libanaise). réduire de 5 pp le déficit du compte courant, qui restera néanmoins élevé à 21 pour cent du PIB. Cela II. En dépit du dysfonctionnement politique, a été toutefois compensé par une diminution des l’amélioration des conditions de sécurité dans le apports de capitaux affectant la position des avoirs pays a favorisé une reprise modeste de l’activité extérieurs nets du secteur financier. Néanmoins, les économique en 2015. La croissance a été favorisée réserves de la BdL en devises devraient augmenter par une redynamisation du secteur touristique et par de 34,5 milliards de dollars d’ici la fin de 2015 dans l’accroissement des prêts privés en partie dû à la la mesure où les banques commerciales continuent Banque du Liban (BdL) et à ses mesures de relance à rapatrier leurs actifs étrangers à la recherche de économique à hauteur d’un milliard de dollars pour rendements plus élevés. 2015. Le flux annuel de touristes a augmenté de 16.6 pour cent au cours des huit premiers mois de IV. Un écart de production négatif combiné 2015, comparé à une simple hausse de 0.7 pour à la baisse des prix des produits de base ont cent durant la période correspondante en 2014. Sur provoqué une chute des prix. La croissance du PIB un autre plan, le secteur immobilier a agi comme réel demeure en dessous de la croissance moyenne un frein sur la croissance dans la mesure où l’octroi de 4,4 pour cent de 1993 à 2014. En outre, le taux de permis de construire et la livraison de ciment d’inflation a chuté de 2,7 pour cent en 2013 à une ont régressé respectivement de 18.8 pour cent et prévision de 0,2 pour cent en 2015. Ce taux devrait de 16.7 pour cent au cours des sept premiers mois rester modéré sur le moyen terme. Ces facteurs, de 2015. De manière générale, nous prévoyons une combinés à la stabilité du taux de change—qui croissance de 2 pour cent pour 2015, pratiquement se traduit par une diminution graduelle du taux le même taux qu’en 2014. de dollarisation—a fourni la base d’une politique monétaire expansionniste comme en témoigne III. La baisse des prix du pétrole n’a eu, la série de programmes de relance de la BdL sous jusqu’à présent, que des effets positifs sur forme de prêts subventionnés. 8 | Résumé lebanon economic monitor | The great Capture V. L’impact de la guerre en Syrie sur le Liban incidence importante sur les prestations du secteur demeure l’un des principaux défis à court terme, de la santé et son financement. Malgré les défis et malgré le récent répit, qui ne peut cependant pas les longues périodes d’instabilité, le Ministère de la être garanti en raison d’une grave instabilité. En Santé Publique a mis sur pied plusieurs réformes qui outre, l’incertitude au sujet de la normalisation des ont été couronnées de succès et qui ont contribué à taux de la Banque Fédérale Américaine complique la résilience du système face à la crise. la politique monétaire au Liban. La politique expansionniste suivie par la BdL serait impactée à terme lorsque la Fed commencera sa politique de normalisation des taux compte tenu de la nécéssité de maintenir une marge entre les dépôts en dollars et en livres au Liban. Cela aura un effet négatif sur les prêts au secteur privé et relèvera le service de la dette publique au Liban. VI. Le système de gouvernance du Liban durant la période d’après-guerre civile s’est détérioré au point que l’Etat n’a plus la capacité de décemment servir le pays et ses citoyens (Dossier No 1). Le secteur public est devenu de plus en plus régi et capturé par la corruption et le népotisme, et se trouve incapable d’assurer les services publics de base ou de répondre aux besoins les plus urgents des citoyens. Cette ineptitude est illustrée par l’inefficacité ou la vacance au niveau de la tête des trois postes les plus élevés de la fonction publique et surtout par le blocage de l’élection présidentielle. Depuis l’été, une série de mouvements de protestation et des mesures de désobéissance civile, déclenchés par la crise des déchets, ont vu le jour, visant la classe politique et mettant en cause sa corruption et son incompétence. Cette situation ne peut durer sans avoir d’importantes répercussion négative. Néanmoins sans d’importantes réformes politiques et économiques, il est à craindre que les troubles socio-économiques ne s’accentuent. VII. Le Système de santé au Liban est constitué d’un amalgame complexe d’institutions publiques et privées, qui offrent des services de santé à la population (Dossier No 2). Les principaux défis comprennent : (i) une faiblesse du budget public consacré à la santé; (ii) un budget élevé consacré par les ménages aux dépenses de santé (iii) une allocation disproportionnée des ressources sur les traitements coûteux; et (iv) l’émergence de nouvelles épidémiologies associés à l’afflux sans précédent de réfugiés syriens, ce qui a une Résumé | 9 The World Bank Recent Economic and Policy Developments 1. Endemic corruption, the collapse of agreement can offer a much-needed contribution to government services and the annulment of the tension-relief in the region. democratic process have given way to widespread popular discontent. Creeping political paralysis has 3. The influx of Syrian refugees abates rendered the three branches of government either but they still account for almost a quarter vacant or effectively idle. As the presidential vacancy of Lebanon’s pre-Syrian conflict population. enters its 18th month, discord within the Cabinet Following a large increase in the number of Syrian of Ministers (CoM) over its own modus operandi refugees entering Lebanon in 2013 (i.e., 675,742 or has paralyzed the executive branch. Moreover, 15 percent of the Lebanese population), the Lebanese disagreements over the legislative agenda have government began imposing stricter conditions induced a prolonged boycott of parliament, which on the influx of refugees on October 2014, further extended its own mandate in 2013, abrogating tightening the enforcement of these new policies in the only national plebiscite. The breakdown in the January 2015. This effectively resulted in siphoning political process is augmented with a breakdown of off the influx of refugees. According to the UNHCR, government services; after failures to deliver reliable as of August 25, 2015,1 the number of registered electricity and water, a visually powerful garbage Syrian refugees was 1.1 million, which represents crisis left piles of it uncollected on the streets. This has 24.5 percent of the total Lebanese population. This triggered a series of protests and civil disobedience continues to mark the highest refugee-to-population measures targeting the ruling political class with ratio compared to all countries in the world. emphasis on corruption and incompetence. Amid the political deadlock and popular disenchantment, a new round of national dialogue between the main political parties kicked off on September 9 to discuss the main domestic points of contention (i.e. Output and Demand presidential and parliamentary elections, the modus operandi of the current government etc.). 4. Despite a near-complete absence of economic policy and reforms in the face of 2. Notwithstanding the political seismic shocks, periphery sectors have helped dysfunctionality, improved security conditions maintain positive, albeit tepid, growth in real and the P5+1 nuclear agreement have reinforced GDP since 2011.2 While traditional drivers—real a sense of stability. Early this spring, Hezbollah estate, construction, finance and tourism—have launched a successful campaign that led to the ejection of Al Nusra and ISIS militants from large 1   As of 6 May 2015, UNHCR Lebanon has temporarily areas around the Syrian-Lebanon border region from suspended new registration as per Government of Lebanon’s where they propelled terrorist operations inside instructions. Accordingly, individuals awaiting to be registered are no longer included. Lebanon. Furthermore, the successful conclusion 2 of the P5+1 nuclear negotiations has had strong   National accounts data since 2011 are World Bank staff estimates based on our coincident economic indicator (for reverberations in Lebanon; while political reactions details, see Matta, S. (2014) “New Coincident and Leading have expectedly reflected conflicting geopolitical Indicators for the Lebanese Economy,” World Bank Policy stances, there is a prevailing sense that this Research Working Paper No. 6950), pending final GDP estimates from CAS for 2011 to 2014. 10 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture bps bps suffered heavily from the regional turmoil, support 1400 Lebanon’s sovereign spreads in 500 for the economy has originated from other sources, historical perspective 1200 400 including, Syria-related economic activity in War with Israel 300 1000 Syrian Lebanon,3 private consumption, pharmaceuticals4 conflict Presidential vaccum 200 800 Hariri's and ICT sectors; the percentage of individuals‫ س‬using assassination 100 600 the internet jumped from 52 percent in 2011 to 74.7 0 400 percent in 2014, while fixed broadband subscriptions Fiscal -100 crisis almost trebled to reach over 1.1 million persons, and 200 -200 mobile-cellular telephone subscriptions expanded 0 -300 Jan-03 May-03 Sep-03 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-13 May-13 Sep-13 Jan-15 May-15 Sep-02 Sep-04 Sep-07 Sep-08 Sep-12 Sep-14 May-02 May-04 May-07 May-08 May-12 May-14 Jan-02 Jan-04 Jan-07 Jan-08 Jan-12 Jan-14 by 127 percent over the same period.5 Nonetheless, Spread (rhs) EMBIG Composite EMBIG Lebanon this remains insufficient to regain pre-crisis growth rates or even reach potential output. To examine FIGURE 1. EMBIG spread reflects idiosyncratic country risks. the slack in growth, we undertook an exercise to Source: JP Morgan and WB staff calculations estimate potential output for Lebanon. The results, which are presented in Box 1, illustrate that by end- 2014, output and, possibly, cumulative output, were Table 1. Correlation coefficients between the output gap and: both below potential. 1998-2014 1998-2005 2005-2014 5. Since 2005, the Lebanese economy has -0.52 -0.53 -0.53 Arab region mostly been driven by shocks rather than by MENA region -0.55 -0.58 -0.53 global or regional growth developments. We GCC region 0.02 0.14 -0.42 explore drivers of the business cycle in Lebanon by EU -0.29 -0.34 -0.49 considering the relationship of the output gap with a number of regions as well as with the EMBIG OECD -0.19 -0.19 -0.38 Lebanon-composite spread.6 The EMBIG spread USA 0.07 0.24 -0.35 captures the effect of shocks, which heavily impact Globe -0.22 -0.23 -0.38 market sentiment (Figure 1), such that a positive Lebanon-EMBI Spread 0.07 -0.71 -0.46 spread indicates that Lebanon idiosyncratic risk Source: Lebanese authorities and WB staff calculations exceeds emerging market risk. We observe that from the post-war period until 2005, real GDP growth for each of the Gulf- Cooperation Council (GCC) 3   Positive economic impact and contribution of Syrian region and the USA positively impacted growth in nationals in consequence of the war in Syria has been expounded on in the Spring 2015 issue of the LEM. Lebanon, whereas shocks that increased country 4 risk (EMBIG spread) did so negatively, as one would   According to Société Générale de Banque au Liban, in its EcoNews, No. 36, publication in September 2015, have expected (Table 1).7 Since 2005, however, none pharmaceutical output and capacity have increased significantly of the regions impart a positive effect on Lebanon’s over the past five years following a series of new investments in the industry geared mainly towards export markets. economy, whereas the EMBIG spread continues to 5 exert a negative effect.8 This dominated impact of   Source: International Telecommunication Union (ITU). shocks on the country’s growth reflects the severe 6   We correlated the percent standard deviation of actual output security and political upheavals that the country has from potential output with each of the real GDP growth rates for the Arab region, the Middle East and Northern Africa region, been going through since 2005. the Gulf Corporation Council (GCC), the OECD, the European Union, the USA and the globe (all World Bank Group countries) 7   The results show that from 1990 until 2005, the coefficients for the time period 1990-2014. We also correlate the difference for the correlations that include the GCC region and the USA between actual and potential output with the EMBIG Lebanon- are positive at 0.14 and 0.24, respectively, while that for EMBIG composite spread. The results (Table 1) indicate that for the spread is -0.71. The other regions generate negative correlation time period 1990-2014, the coefficients for the correlations are coefficients, which is counterintuitive. either of a sign that is inconsistent with our understanding (Arab, 8 MENA, EU, OECD and Globe regions) or are unexpectedly low in   The correlation coefficient for the EMBIG-spread for the magnitude (GCC and the US). Based on that, we disaggregated 2005-2015 period was -0.46. All regions generate negative the time period into pre- and post-2005 periods. correlation coefficients, which is counterintuitive. Recent Economic and Policy Developments | 11 The World Bank Box 1. Measuring the Output Gap for Lebanon. The output gap is an economic measure of the difference between the actual output of an economy and its potential output, such that if it is positive the economy is running at above potential. Due to uncertainties surrounding output gap estimation techniques and due to data limitations for which Lebanon is known, two alternative estimation techniques are employed: The Hodrick-Prescott (HP) filter and a Production Function (PF) model. The HP filter is a de-trending statistical method, which we employ using three standard smoothing parameters. To minimize the end-point bias that the HP filter is normally susceptible to, the sample period is extended through 2017 using World Bank staff projections. Output gap is also estimated using a PF model, which is a structural method incorporating economic theory that relates output to total factor productivity and production inputs. The output gap for Lebanon is estimated using the sample periods of 1988-2017 and 1990-2017 for the HP and the PF methodologies, respectively. For most periods, the estimation methods yield different output gap, both in levels and cumulative; nevertheless, the trajectories generated by the four methodologies are highly correlated. An immediate observation is that there exists a large variation in growth rates, with actual output sharply surpassing potential in boom periods and significantly below during recessions. This is consistent with volatile economic and security conditions in the country, which has been subject to a high frequency of large shocks. In the early nineties, and following the end of the civil war, Lebanon witnessed a reconstruction program, which generated robust growth rates. This was followed by a prolonged slack in economic activity, such that by 1999, the positive output gap that had persisted during the nineties reverted to zero. The enduring economic slack, however, led to an increasingly negative cumulative gap, until 2007, when a high growth period ensued until 2010. The regional turmoil starting in 2011 was felt strongly in Lebanon, causing sluggish economy activity. All methods indicate that the large positive output gap that existed in 2010 starts narrowing in 2011 and closes by 2014 (Figure 2). In fact, the output gap even turned slightly negative in 2014 with estimates from the different methods ranging from -0.51 percent to -1.02 percent of potential output. The very large negative cumulative output gap that existed over the period 2000-2008 has significantly narrowed and virtually closed by end-2014 (Figure 3). Estimates of the cumulative output gap over the period 2000-2014 range from -2,749 to 1,084 billion LBP, with an average of -725 billion LBP across the four estimation methods. Output gap LBP billion Cumulative output gap (percent of potential output) 1500 (1999=0) 20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015p 15 -1500 10 5 -4500 Percent 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016p -5 -7500 -10 -15 Output Gap Production Function -10500 Cumulative Output Gap Production Function -20 Output Gap HP_100 Cumulative Output Gap HP_100 Output Gap HP_6.25 -13500 Cumulative Output Gap HP_6.25 -25 Output Gap HP_400 Cumulative Output Gap HP_400 FIGURE 3. … while the cumulative output gap is falling FIGURE 2. By 2014, the output gap turned negative … again. Source: Lebanese authorities and WB staff calculations Source: Lebanese authorities and WB staff calculations 6. In 2015, improved security conditions and of Lebanon’s economy have surprised on the high periphery sectors have helped stabilize growth, and the low. The tourism sector regained impetus which nonetheless remains sluggish. Real GDP in 2015, albeit from low levels, with tourist arrivals growth for H1 2015 registered around 2.3 percent9 increasing by 16.6 percent, year-on-year (yoy), in and is expected to be around 2 percent for the the first eight months of 2015, compared to a mere year, similar to 2014 (Figure 4). Traditional drivers increase of 0.7 percent during the corresponding period in 2014 (Figure 5). Hotel occupancy rate also 9   This is a World Bank staff estimate based on our coincident rose by 6.6 percentage points, yoy, for the first eight economic indicator. 12 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture 12 Real GDP growth (%) BTA-Fransabank retail trade (nsa, real) 10.3 110 10 9.3 9.1 100 Retail trade index 90 Poly. (Retail trade index) 8.0 8 7.5 80 70 Points 6 60 50 3.9 40 4 3.4 2.7 30 1.7 2.0 2.2 2.0 2.0 20 2 1.6 1.1 0.9 10 0 0 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-15 Q2-15 Q1-14 Q2-14 Q3-14 Q4-14 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015p 2004 FIGURE 4. Real GDP growth sluggish but stable in 2015. FIGURE 6. Retail trade stabilizes. Source: Lebanese authorities and WB staff calculations Source: BTA-Fransabank 160 Tourism sector (sa) 90 ICT sector 80 1,200 80 140 70 Percentage of Individuals 1,000 Thousands of subscriptions 70 using the internet 60 Thousand 120 Fixed-broadband 800 60 Percent 50 subscriptions Percent 50 40 600 100 40 30 400 80 20 Tourist arrivals (lhs) 30 200 Beirut hotel occupancy rate (rhs) 10 60 20 0 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-15 May-15 Jan-14 May-14 Sep-14 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2014 FIGURE 5. Tourism rebounds in Lebanon, but remains FIGURE 7. The ICT sector experiences robust growth. below pre-crisis levels. Source: Lebanese authorities and WB staff calculations Source: International Telecommunication Union months of 2015 to reach 61 percent in August 2015. experienced any growth during that period, suggests Moreover, after falling sharply since end-2012, the that the local pharmaceutical industry continues retail index appears to have stabilized (Figure 6); to be a positive contributor to GDP. Prospects are the loss of higher purchasing power consumers encouraging for the industry as it stands to benefit (i.e. gulf tourists) has been partially replaced by from reforms initiated by the Ministry of Health that the large contingency of displaced people (i.e. allows the substitution of cheaper generic drugs Syrians, Iraqis). On the other hand, evidence point for brand-name drugs in prescriptions. The ICT to a sharp decline in the real estate sector, another sector also appears to be sustaining relatively well, traditional driver of the economy; construction with potential for further growth driven by demand permits and cement deliveries both underwent yoy from those displaced to Lebanon as they gradually respective contractions of 18.8 percent and 16.7 integrate into the economy (Figure 7). percent during the first seven months of 2015, compared to respective expansions of 11.3 percent 7. From the demand side, private and 0.6 percent during the same period in 2014. consumption and the external sector drive Periphery sectors have maintained much needed growth in 2015. Improved security conditions support to the economy. An 18.2 percent growth and lower oil prices helped partially offset the (yoy) in exports of chemicals for the period January- negative impact on consumer sentiment caused July 2015, one of few export categories to have by the deteriorating political climate. The three- Recent Economic and Policy Developments | 13 The World Bank Growth rate of consumer confidence indices BLOM PMI (sa) (nsa, yoy, %) 60 53 50 52 Increasing rate of expansion Byblos/AUB 40 51 ARA (3mma) 50 30 20 49 Points 10 48 Percent 0 47 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-15 Apr-15 Jul-15 Jul-14 46 Oct-14 Jan-14 -10 -20 45 Increasing rate of contraction -30 44 -40 43 May-13 Jul-13 Sep-13 Nov-13 Jul-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Jan-14 May-14 Sep-14 Nov-14 Mar-14 -50 -60 FIGURE 8. Consumer sentiment is volatile. FIGURE 9. PMI contraction persists. Source: ARA Marketing Research and Consultancy and BdL Source: BLOM Bank month-moving average for the Byblos/AUB than offset a contraction in merchandize exports. consumer confidence index10 rose by 50.2 percent This resulted in a narrowing of the trade deficit in in the first eight months of 2015, compared to goods and services. Public investment, on the other the corresponding period in 2014 (Figure 8), but hand, is expected to lag in 2015 due to the political remains volatile. Moreover, private lending toward paralysis and increased scrutiny on outlays by the consumption and real estate purchases continues Ministry of Finance. Investment as a whole remains to expand, albeit at a decelerated rate, motivated week, albeit slightly improved from 2014; the BLOM by a BdL stimulus package in 2015; commercial purchasing managers’ index (PMI)12 averaged 48.7 banks’ claims on residents grew by 6 percent (yoy) during the first nine months of 2015, which, while in August 2015, compared to 9.7 percent in August in a state of contraction, is still progress from the 2014. Anecdotal evidence suggests that private corresponding period in 2014 where it averaged 47 demand is also supported by Syrian investment and (Figure 9). consumption, concentrated in the informal sector; as the Syrian turmoil endures, Syrians in Lebanon are gradually shifting their economic role from being mainly consumers reliant on handouts to becoming income earners, albeit for many, confined within the Labor Markets informal sector. This includes establishing micro and small businesses that sell goods (including those 8. Given their protracted presence, Syrian originating in Syria) at lower prices targeting the nationals have de facto become part of the labor Syrian community (ILO, 201411). However, Lebanese market. With around half of the working age Syrian businesses, which are not able to compete at those refugees economically active (ILO, 2014),13 by prices are negatively impacted. The external sector 12   The PMI is an indicator that is based on a monthly survey has also been a positive contributor to real GDP of business conditions in the Lebanese private sector. It is a growth due to falling merchandize imports and a composite index calculated as a weighted average of five individual sub-components: New Orders (30 percent), Output tourism-led increase in exports of services that more (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stocks of Purchases (10 percent). A 10   The Byblos Bank/AUB CCI comprises two sub-indices: the value of the PMI above 50.0 signals an improvement in business Byblos Bank/AUB Present Situation Index and the Byblos Bank/ conditions from the previous month, while a drop in the PMI AUB Expectations Index. The former represents consumers’ below the 50.0 threshold indicates a slowdown in business opinion about current economic conditions, while the latter activity (BLOM Bank, 2013). reflects consumers’ outlook about the future of the economy. 13   The study surveyed the employment profile of refugees 11   International Labor Organization, 2014, Assessment of the and the impact of their economic participation on the host Impact of Syrian Refugees in Lebanon and Their Employment communities’ livelihoods. Data was collected from 400 Profile. households, which included a total of 2,004 individuals. 14 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture end-2014 the labor supply in Lebanon is estimated been the traditional drivers of economic activity.17 to have expanded by 50 percent (IMF, 201414). Since these sectors either are not labor intensive, The majority of Syrian refugees are low- to semi- or attract lower skilled and cheaper foreign labor, skilled workers, engaged primarily in construction, growth observed in Lebanon does not adequately agriculture, and personal and domestic services, generate employment for Lebanese nationals. In concentrated in the informal sector. It is unclear fact, the long-run employment-growth elasticity is to what extent low-skilled refugees are competing estimated to be 0.2 (World Bank, 201218), much with Lebanese nationals since Syrians were lower than an estimated MENA average of 0.5 (IMF, heavily represented in Lebanon’s low-skilled 2014). Furthermore, during the 2005–09 period, labor sector even prior to the crisis, in addition Lebanon created only 3,800 jobs per year (one to other nationals (e.g. Bangladesh, Ethiopia, for every six new entrants to the labor market), Philippines); as such, it is more likely that low- while some 22,000 new Lebanese entrants are skilled foreign labor in Lebanon, including other expected each year until 2019 (excluding the Syrian Syrians who were present here before 2011, will refugees)—World Bank (2012). The unemployment bear the brunt of the competition from refugees. rate in 2011, still yet unaffected by regional This can explain the lack of significant tensions hostilities, stood at 11 percent, slightly exceeding between the refugees and host communities, the MENA average of 10 percent, and reflecting considering the sheer number of refugees. insufficient job opportunities. While no data exist Lebanese employers and business owners, on yet, unemployment is estimated to have worsened the other hand, earn an unequivocal benefit from significantly since then (World Bank, 2013). This the availability of less costly labor (ILO, 2014). structural labor market weakness is changing the These findings are consistent with evidence of de socio-demographic fabric of the country: educated facto (but rarely de jure) labor market inclusion Lebanese have sought employment in countries witnessed in similar protracted refugee presence with a demand for high skilled labor, creating a large in host countries (e.g., World Bank, 201115). They diaspora; meanwhile, non-Lebanese dominate the also confirm the simulations undertaken in the unskilled labor market, pricing out the nationals. World Bank (2013)16-led report: namely that the Syrian conflict and the massive influx of refugees into Lebanon would generate both winners and losers among Lebanese (and refugees); those having good human or physical capital are not Fiscal Policy strongly impacted and might even benefit (e.g., landlords or retail store owners in regions with 10. In 2015, Lebanon is expected to undergo high refugee influx), while those with limited such a slight deterioration in the overall fiscal balance, capital would be worse off (e.g., lower wages, less while maintaining a primary surplus. The overall jobs). fiscal deficit is forecast to widen slightly to 7.2 percent of GDP, compared to 6.6 of GDP in 2014 9. Lebanon’s inability to generate sufficient (Figure 10). This small relapse is led by the primary jobs has acute socio-demographic implications. balance (i.e., excluding interest payments), which is Real estate, construction, finance and tourism have projected to shrink by 0.6 pp to reach 2 percent of GDP, albeit remaining in surplus for the second year 14   IMF (2014), Article IV Consultation and Selected Issues, July, in a row since 2011 (Table 6). The declining primary Washington DC. 15 17   World Bank (2011), “The Impacts of Refugees on   The real estate sector, in particular, has accounted for Neighboring Countries: A Development Challenge,” Background anywhere between 50 and 70 percent of total gross fixed capital note for the 2011 World Development Report on Conflict and formation since 1997. Development, Washington DC. 18   World Bank (2012), “Republic of Lebanon—Good Jobs 16   World Bank (2013) “Lebanon: Economic and Social Impact Needed: The Role of Macro, Investment, Education, Labor and Assessment of the Syrian Conflict”, Washington DC. Social Protection Policies”, December, Washington DC. Recent Economic and Policy Developments | 15 The World Bank 35 Central government finances 3.5 Debt to GDP ratio (% of GDP) 80 (%) 190 30 3.0 70 180 25 2.5 60 170 20 2.0 50 US$ bln Percent 160 15 1.5 40 Percent Percent 150 10 1.0 30 140 5 0.5 20 0 0.0 10 130 2009 2010 2011 2012 2013 2014 2015p -5 -0.5 0 120 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015p 2014 -10 -1.0 Total Revenues Total Expenditures -15 -1.5 Gross Public Debt Nominal GDP) Debt to GDP (rhs) Budget Deficit Primary Balance (rhs) FIGURE 10. Fiscal deficit widens in 2014... FIGURE 11. … debt- to-GDP, however, falls. Source: MoF and WB staff calculations Source: BdL, CAS and WB staff calculations surplus is driven by a fall in revenue collection, Board). The government continues to primarily specifically, non-tax revenues; a projected 2.2 pp finance the fiscal deficit by issuing Treasury bills decline in total revenues to 21.6 percent of GDP and Eurobonds. In February 2015, the government in 2015 is driven by a contraction in both telecom raised US$ 2.2 billion through a dual-tranche transfers and treasury revenues; the fall in the Eurobond issuance,20 while subsequent issues are former is due to the lack of one-off measures, which being prepared for this year for around $1.3 billion. in 2014 include the collection of telecom arrears that Moreover, in August 28, the cabinet authorized helped improve the fiscal balance. The slowdown in the Ministry of Finance to swap $750 million in economic activity has induced a general decline in Eurobonds that mature in January 2016. The stock of total revenues to below the 10-year average of 23.4 debt outstanding remains mostly in local currency, percent of GDP. On the expenditures side, primary whereby, as of August 2015, 62 percent of gross spending is forecast to fall by 1.5 pp to reach 27.2 public debt is denominated in LBP. percent of GDP in 2015. This is principally due to lower oil prices, which is expected to decrease 12. Longstanding structural bottlenecks in transfers to Electricité du Liban (EdL), the state- public finance are important manifestations of owned power company, from around 4.6 percent of the endemic corruption and political malfunction, GDP in 2014 to around 2 percent of GDP in 2015. impeding the development of the country. Since 2005, budgets have not been ratified by parliament 11. A primary surplus for the second year due to discord over accountability over previous running is expected to help temper the debt-to- fiscal accounts. Moreover, none of the post-war GDP ratio, which has been rising since 2013. Total budgets were voted within constitutional time and public debt is projected to reach 144.5 percent of the last officially closed fiscal accounts are those GDP (US$70 bln) by end-2015, compared to 145.6 of 2003, although those from 1993 till 2003 need percent of GDP at end-2014 (Figure 11) (Table 6). major adjustments. Spending has been conducted Despite this minor improvement, which is due to a largely through treasury advances and ad-hoc larger growth rate for nominal GDP than for debt,19 measures in times of pressures. This leaves fiscal the trend, based on current policies and real GDP policy without an anchor. Even prior to 2005, fiscal growth rates, is unsustainable and is expected to policy has been missing a medium-term perspective. notably worsen once global dollar interest rates start The lack of proper oversight and extra-budgetary normalizing (a pace which is expected to start with a 20   Despite it being one of the largest issues by the government tightening of policy rates by the U.S. Federal Reserve and occurring during a period of regional turmoil, it was oversubscribed. The issue consisted of two tranches: US$ 800 19   In fact, in absolute terms, the increase in debt is expected million for a maturity of 10 years at 6.2 percent and, significantly, to be larger in 2015 than in 2014. US$ 1.4 billion for a 15-year maturity at 6.65 percent. 16 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture Net foreign assets position (NFAP) 2,500 Coverage ratio 12,000 first seven months Coverage Ratio (months of imported goods, rhs) 2,000 40 Foreign reserves at BDL (excl Gold, US$ bln) 14 7,000 1,500 Total Imports (US$ bln) 35 12 1,000 30 2,000 10 US$ mln US$ mln 500 25 US$ bln Months 2010 2011 2012 2013 2014 2015 8 -3,000 0 20 6 15 -500 -8,000 4 10 -1,000 5 2 -13,000 -1,500 0 0 Capital inflows Trade in goods balance NFAP (rhs) 2007 2008 2009 2010 2011 2012 2013 2014 2015p FIGURE 13. ... BdL to increase its stock of foreign FIGURE 12. Despite a regression in capital inflows... reserves. Source: BdL and WB staff calculations Source: BdL, Lebanese Customs and WB staff calculations entities that receive significant government funding of the country’s exports. Meanwhile, exporters help entrench a culture of non-transparency and of merchandize goods were severely afflicted by encourage corruption in fiscal affairs. the closure of the few remaining routes via Syria, through which they were still able to reach the GCC market.23 While this applies to a broad range of goods, exports of chemical products experienced a significant improvement, possibly a reflection of External Sector the rare success concentrated in the pharmaceutical industry. Nonetheless, we are still expecting total 13. Lebanon’s current account balance exports to increase slightly in 2015, led by services, is expected to improve in 2015 but remains Lebanon’s primary export,24 as the tourism sector structurally weak. The current account deficit is experiences a bit of a revival. Remittances in 2015 is forecast to decrease by over 5 pp of GDP in 2015, forecast to recover to 4.2 percent of GDP, compared reaching 21 percent of GDP;21 a deficit that remains to 3.7 percent of GDP in 2014, but will remain lower among the largest in the world, exposing the country than the previous decade’s average of 6.1 percent of to significant refinancing risks. The improvement is GDP due to sluggish global conditions. a result of a 6 pp projected decline in total imports to around 64 percent of GDP, compared to an 14. Lebanon is structurally and heavily average of 80.5 percent of GDP over the previous dependent on capital inflows to finance its decade. This is entirely due to a large contraction in current account deficit. 25 Since 2012, leading merchandise imports, encompassing a broad range sectors towards which the majority of foreign of goods and driven by lower commodity prices, capital has traditionally gravitated have suffered especially fuel products,22 and the depreciation of a significant decline in activity, becoming a less the euro; in 2014, the Euro region was the origin attractive destination for FDI (e.g., real estate, for around a third of Lebanon’s total imports, in tourism). However, net FDI in 2014 (the latest value, but a destination for only around 9 percent 23 21   On 10 August 2015, the Government agreed to subsidize   BoP revisions by authorities are frequent and substantial. the cost of exporting goods to Arab countries through the sea, Recent revisions have included a substantial increase in over a period of 7 months. The total subsidy amount was set at historical numbers for the current account deficit. For example, US$14 million. in a previous BoP issue, the current account deficit in 2012 and 24 2013 had hovered around 8 percent of GDP.   In 2014, exports of services in value was three times that of 22 merchandise exports.   Latest World Bank staff projections predict that the average 25 composite energy price will fall by 39 percent in 2015 compared   The current account deficit has averaged 17.2 percent of to 2014. GDP during the past ten years. Recent Economic and Policy Developments | 17 The World Bank Inflation rate (yoy, %) LBP bln Commercial bank loans to the private sector Percent 14 120,000 Total Loans to private sector CRI Loans to non-residents 12 Loans to residents 100,000 CAS 10 8 80,000 6 60,000 4 2 40,000 0 20,000 Ma y-11 Se p-11 Ma y-12 Se p-12 Ma y-13 Se p-13 Ma y-15 Ma y-14 Se p-14 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jan-11 Jan-12 Jan-13 Jan-15 Jan-14 Mar-11 Mar-12 Mar-13 Mar-15 Nov-11 Nov-12 Nov-13 Nov-14 Mar-14 -2 -4 0 Jan-11 May-1 Sep-11 Jan-12 May-1 Sep-12 Jan-13 May-1 Sep-13 May-1 Sep-14 Jan-15 May-1 Jan-14 -6 FIGURE 15. Lending to the private sector continues to FIGURE 14. Inflation abates in 2015. respond to BdL’s stimulus package. Source: CRI and CAS Source: BdL and WB staff calculations available full-year data) grew by 22.4 percent reserves remain robust. The cumulative change to US$ 1.2 billion, equivalent to 2.6 percent of in total net foreign assets recorded negative US$ GDP, and the first such increase since 2010. 1.6 billion during the first eight months of 2015, Nevertheless, it remains well below pre-crisis compared to negative US$ 433 million during the levels, where between 2000 and 2010, FDI corresponding period in 2014 (Figure 12). This averaged 9.5 percent of GDP. We project a deterioration was the result of a sharp drop in total slight increase in 2015 to 2.7 percent of GDP. capital inflows, which, at US$ 6.9 billion for the The presence of Syrian refugees has partially year to August, is a 39.5 percent (yoy) decrease, compensated for the overall loss of inflows since despite the rise in tourism inflows. We expect this 2010; the longer the Syrians are displaced from trend to moderate in the second half of 2015 for their country, the more likely they will seek more an overall decline in capital inflows of 20 percent medium-term adjustments to their financial in 2015. In spite of the worsening net foreign situation. This involves investments and other asset position, the stock of gross foreign reserves inflows to their host country, in the form of FDI held at the central bank is projected reach US$ and short-term flows. Additionally, international 34.5 bln (equivalent to 13.4 months of imported aid targeting Syrian refugees provides additional goods and services) by end-2015, increasing by support to the balance of payments. 26 This effect almost 7 percent compared to end-2014 (Figure is also reinforced by the wide spread between 13). To some extent, this reflects repatriation of domestic and international interest rates that commercial banks’ foreign assets in search of reached an average of 417 basis points (bps) higher yield. during January-July 2015.27 15. Lower capital inflows weakens the net foreign asset position, but gross foreign 26   Inflows to Lebanon have also included international Monetary Policy, Banking aid targeting Syrian refugees, albeit via various international organizations and not through the government, which continues and Prices to appeal for assistance. A United Nations Development Program (UNDP) study assesses the impact on the Lebanese economy of international humanitarian aid delivered via UN agencies to the 16. Amid lackluster economic activity and Syrian refugees in Lebanon. It estimates that this aid, estimated falling oil prices, Lebanon’s inflation rate is at over a billion dollars between 2012 and 2014, has a multiplier expected to reach its lowest level in over a effect that added 1.3 pp to 2014 GDP growth. decade. Headline CPI inflation is forecast to average 27   This is the interest rate differential between the 3-month 0.2 percent in 2015, undergoing a one pp decline Lebanese T-bill and the 3-month LIBOR. 18 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture relative to 2014 (Figure 14).28 The declining inflation 18. To maintain the peg, BdL ensures that rate in 2015 reflects the continued negative output banks offer attractive dollar spreads to finance gap (Figure 3) as well as favorable external prices the current account. Under sustained severe (mostly declining global energy and food prices, and fiscal needs and a banking sector balance sheet also an appreciating effective exchange rate given that is over three times GDP, the BdL ensures the country’s peg to the dollar). Moreover, with the that banks keep attracting foreign deposits and influx of Syrian refugees sharply lower in 2015 than that the public sector gross financing needs in 2014, supply side factors that previously pushed are met. For the former, BdL introduced new inflation upwards (e.g., the sudden and massive certificate of deposits for the 15Y, 20Y and 30Y increase in housing demand), is likely to have waned tenors, lengthening the maturity structure, as off. The slowdown in inflation is translating into well as various subsidized refinancing schemes. tepid growth in money supply (M3, including non- For the latter, BdL bids on the TBs primary market resident deposits), which we project to be 6 percent and acts as a buyer on the secondary sovereign in 2015, unchanged from a year earlier. debt market. The resulting banking-sovereign feedback loop is therefore adding a financial 17. Exchange rate stability, a negative output burden on BdL. gap and low and decelerating inflation prompted the central bank, Banque du Liban (BdL), to 19. In 2015, lending to the resident continue its expansionary monetary policy. The private sector continues to expand, albeit, at dollarization rate—a key gauge of confidence in a decelerated rate. The stock of commercial Lebanon—registered 65 percent by August 2015, a banks’ credit to the private sector increased by decrease of 93 bps from mid-2014. Simultaneously, a sluggish 3.7 percent (yoy) in August 2015, real GDP growth continues to lag behind the 1993- compared to 3.5 percent (yoy) in August 2014 2014 average rate of 4.4 percent; as shown in Box (Figure 15). However, this comes with a couple 1, a negative output gap has opened up in 2014. of caveats. First, with an exceptionally low These, along with low inflation, allowed the BdL to inflation rate, the change in real private lending is launch a stimulus package in 2015 for the third year larger. Second, this conceals diverging dynamics; running,29 amounting to US$ one billion, in the form while claims on non-residents contracted by 0.8 of subsidized loans. These packages have been vital percent (yoy) over the same period, those on for buttressing the real estate sector by boosting residents grew by 6 percent. Part of the growth domestic demand after demand from Lebanese in credit to residents, which nonetheless signals expatriates and foreign buyers dropped sharply. a deceleration from 9.7 percent growth in August 2014, is related to the BdL’s stimulus packages described above. The deceleration possibly 28   Inflation data in Lebanon have been problematic. reflects the impact of macroprudential measures Due to interruption in official CPI inflation data (Central Administration of Statistics (CAS) did not collect any price introduced by the BdL to help contain the over- data between January and May 2013), we used the CRI leveraging of the financial sector. 30 Moreover, CPI index instead, which does not include rents and only lending remains below the 2008-2012 average collects price data for the Greater Beirut area. Even prior to the interruption, the Central Administration of Statistics’ rate of 16.5 percent, reflecting reduced economic CPI inflation did not reflect periodic measurement of rent activity and elevated risk aversion from the inflation. In December 2013, CAS released a rebased volatile security environment. inflation time series using a new methodology to better capture rents. 29   Stimulus packages were launched by the BdL in 2013 and 2014 in the amounts of US$ 1.46 billion and US$ 800 million, 30 respectively, and these have proved successful. While the real   To limit leverage risks on the consumer side and the fallout estate sector benefited the most from the subsidized loans, impact on banks, in 2014, BdL instructed banks to require a start-ups and venture capital (relatively nascent in Lebanon) are minimum down-payment of 25 percent for any car or housing also responding favorably to BdL’s subsidized loans. The BdL is loan and to limit the value of the loan such that the monthly expected to continue acting as a lender of last resort subject to installment does not exceeding 45 percent of family income (35 exchange rate stability. percent for a housing loan). Recent Economic and Policy Developments | 19 The World Bank Lebanese commercial banks sovereign exposure 35 Growth rate of assets as a percentage of total assets (%) (yoy, %) 59 66.5 30 58 BdL 66.0 25 57 Commercial banks 65.5 20 Commercial banks 56 (real assets) Percent Percent Percent 55 65.0 15 54 64.5 10 53 Commercial banks exposure to sovereign risk 64.0 5 52 Deposit dollarization rate (rhs) 51 63.5 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Apr-14 Jan-15 Apr-15 Jul-15 Jul-14 Oct-14 Jan-14 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-15 May-15 Jan-14 May-14 Sep-14 -5 FIGURE 16. Lebanese banks’ sovereign debt exposure FIGURE 17. … as did commercial banks’ assets. increases in 2015… Source: BdL and WB staff calculations Source: BdL and WB staff calculations to 58.4 percent at end-August 2015 (Figure Financial Markets 16). In an attempt toward diversification, banks expanded regionally, an effort that has been 20. Lebanon’s banking sector is liquid, severely compromised by the recent regional profitable and well regulated, but highly upheaval.35 exposed to the public sector. Banks are well capitalized and resilient owing to prudent 21. Deposit growth decelerates. Commercial investments and conservative regulation by BdL banks’ balance sheet continued to grow, rising by and the Banking Control Commission. In 2014 6.6 percent (yoy) in August 2015, compared to 7.4 (latest available), the Tier one capital-to-risk- percent in August 2014 (Figure 17). Once again, weighted-asset ratio was 12.8 percent, which an exceptionally low inflation rate is distorting was double what is required by Basel III. The the trend as real assets36 growth (yoy) was higher liquid asset-to-total deposit ratio,31 an indicator and not lower in July 2015 compared to a year of short-term liquidity, stood at 69.4 in July 2015, earlier. Deposits constitute the principal funding compared to 66.9 in July 2014. Moreover, banks’ source for commercial banks, with the deposit- profits continue rising while non-performing to-total liabilities ratio at 87.6 percent by August loans (NPLs) are low and return on equity is in 2015, compared to 88.1 percent a year earlier. the double digits.32 Nonetheless, commercial Total private sector deposits at commercial banks are highly exposed to sovereign credit risk banks grew by 5.7 percent (yoy) in August 2015, as they are a large investor in public debt. 33 In compared to 7.7 percent a year earlier; resident fact, Lebanese banks’ sovereign debt exposure 34 and non-resident private deposits increased by 5.1 increased slightly from 57.3 percent end-2014 percent (yoy) and 8.3 percent (yoy), respectively, undergoing respective declines of 1.8 pp and 2.7 31   Liquid assets consist of commercial banks’ deposits with central bank, Treasury Bills in LL held by commercial banks and pp from August 2014 (Figure 18). However, once Eurobonds held by commercial banks. inflation is accounted for, the yoy growth in real 32   There has been some deterioration in profitability and NPL deposits exhibits is largely unchanged in July 2015, ratios since the beginning of the Syrian crisis in 2011. compared to a year earlier, and is generally higher 33   Interest income, as obtained from BilanBanques, amounted than it has been since the beginning of the regional to, respectively 64.09 percent, 65.31 percent and 64.06 percent 35 of total consolidated banks’ income in 2010, 2011 and 2012.   Expansion of Lebanese commercial banks in Turkey 34 continues, however, helping to increase profitability.   The sovereign debt exposure is computed as a ratio of 36 commercial banks’ aggregate investment in Treasury bills,   To get real assets, we divided nominal assets by the CRI Eurobonds and deposits at BdL relative to total assets. price index. 20 | Recent Economic and Policy Developments lebanon economic monitor | The great Capture 70 Deposits at commercial banks (nsa, yoy %) 25 Lebanon's sovereign spreads in historical bps bps perspective 60 Resident deposits 20 550 200 Non-resident deposits 500 175 50 Total deposits (rhs) 450 150 Real total deposits (rhs) 15 125 400 40 100 Percent Percent 350 10 75 300 30 50 250 25 5 200 20 0 150 Spread (rhs) -25 0 100 EMBIG Lebanon -50 10 50 EMBIG Aggregate -75 0 -5 0 -100 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jun-14 Jul-14 Aug-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Oct-14 Jan-14 May-14 Sep-14 Feb-14 Apr-14 Nov-14 Mar-14 Dec-14 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Jan-15 May-15 Sep-14 FIGURE 18. Real deposits at commercial banks continued FIGURE 19. Global volatility translated into negative to accelerate in 2015. spread. Source: BdL and WB staff calculations Source: JP Morgan and WB staff calculations turmoil. Moreover, with global interest rates between antagonistic parties and good crisis lingering at record lows, the Lebanese banking management overall.39 system continues to be an attractive destination for depositors. Non-resident deposit growth has 22. Spreads on Lebanese Eurobonds been a vital factor in the stability of the banking turned negative in 2015, whereas the stock sector, and in fact the whole economy. Attracted market index fell slightly. The negative EMBIG by interest rate spreads37 it has been expanding spread likely reflects an improvement in overall at an average of 18 percent annually since 1993. security conditions along with a worsening of However, a deceleration over this period signals macroeconomic fundamentals in key emerging the unsustainability of such a high rate; non- market economies (Figure 19). On the other hand, resident deposit growth declined from an annual the Beirut Stock Exchange BLOM Index declined by average of 21.5 percent for the period 1993-2002, 2 percent in the year to September, while market to 16.2 percent during 2003-2011. Since 2011, capitalization fell by 1.8 percent to reach US$ 11 the regional turmoil has further exacerbated billion, equivalent to around 24 percent of 2014 this trend to an average growth of 10.3 percent. GDP. It is unlikely that this decline is driven by Nonetheless, this remains sufficient to meet the volatility in global equity markets, since the the country’s financing needs.38 Furthermore, BSE has traditionally had weak global linkages. these deposits, which are largely sourced from Average trading value during January-September Lebanese expatriates, are resilient to shocks due 2015 also declined by 1.3 percent, compared to the to the diaspora’s familiarity with the country’s corresponding period in 2014. political and security volatilities. Additionally, the BdL has demonstrated its readiness to be the ultimate guarantor of the financial sector via its large foreign exchange reserves, intermediation 37   The main interest rates that matter in this arrangement are the international dollar rate, a local rate on dollar deposits and a local rate on LBP deposits. A spread between the local and international dollar rates attracts deposits in dollar, while a 39 spread between LBP and local dollar rates encourages deposits   For example, in 2011 the US accused the Lebanese in local currency. Nonetheless, like much of the country, Canadian Bank of money laundering, which caused a rattle in Lebanon’s banking system is highly dollarized (65 percent the Lebanese financial sector. BdL immediately declared that dollarization rate). it has sufficient funds to back up the bank, rapidly negotiated a takeover by Societe Generale de Banque au Liban, and 38   Source: IMF 2014 Article IV Consultation. eventually agreed on a settlement with the US government. Recent Economic and Policy Developments | 21 The World Bank PROSPECTS 23. The regional turmoil, especially the war in 25. The conduct of monetary policy is likely Syria, poses serious security threats in Lebanon to become more challenging due to conflicting and the recent relative clam is not a guarantee of objectives. BdL, whose primary objective is to stability. A key assumption underlying projections maintain the stability of the peg to the dollar, is for the Lebanese economy regards the Syrian expected to become confronted over the short to conflict and its spillovers. Current World Bank medium term with challenges to its expansionary staff projections no longer assume that the end of policies (secondary objective) from a number of the Syrian war occurs within the projection period factors. First, expected normalization of global of 2015-2017, but instead assume that current interest rates will ultimately require domestic conditions hold, i.e., containment of the spillovers interest rates to increase in order to maintain continues but does not prevent occasional security exchange rate stability. Second, the enthusiastic events from occurring. Relative to our Spring 2015 response to BdL initiatives (subsidized loans) has issue of the Lebanon Economic Monitor, real GDP helped boost economic activity but, after several growth for 2015 is projected to be 0.5 pp lower at years of such lending, more attention will need 2 percent, reflecting a sharp contraction in the real to be paid to the issue of household leveraging estate sector and negative effects of the garbage and repayment capacity. The expanded use of crisis on tourism and private consumption during macroprudential tools shows that BdL is vigilant to the critical months of summer. Over the medium these risks. Hence, while monetary policy has been term, we expect real GDP growth to be around 2.5 one of the few effective countercyclical policy tools percent. The return to potential output critically during the ongoing period of sluggish growth, it will hinges on a resolution of the conflict in Syria as likely become less potent economic stimulant going well as a marked improvement in the security and forward.   political situations in Lebanon. 26. The breakdown in the political process 24. Absent significant structural reforms on and the severe deterioration in government either revenue or spending, Lebanon’s public services are fundamental challenges to the post- finances are projected to remain structurally war system in Lebanon. Current conditions are weak. The primary surplus is expected to continue unsustainable, and without significant political falling over the medium term, almost disappearing and economic reforms, a widening and worsening by 2017, due to higher primary spending; transfers of socio-economic unrest is not unfathomable. In to EdL will rise once again along with energy fact, the demonstrations and activities directed at prices. Moreover, assuming political paralysis the political class that the country is witnessing is eases by 2016, we expect some limited public one such manifestation. It is thus imperative and sector wage increases as well as higher transfers urgent for policy-makers to address Lebanon’s to municipalities. A projected increase in debt longstanding and worsening structural bottlenecks. servicing due to pass through from higher global Lebanon continues to be beset by structural interest rates (i.e., US. Federal Reserve Board- bottlenecks, including in infrastructure such as related) will also raise current spending. As a result, electricity, water, waste treatment, transportation the overall fiscal deficit is forecast to continue and telecommunications. These bottlenecks are widening over the medium term. becoming even more binding as shown by a 22 | Prospects lebanon economic monitor | The great Capture worsening of Lebanon’s international ranking among key investment climate assessments (e.g., the World Bank’s Doing Business indicators or the World Economic Forum’s Global Competitiveness Index). Policy inaction is not just putting on hold Lebanon’s development, it is dragging it backwards. Prospects | 23 The World Bank SPECIAL FOCUS I. Elite Capture and Elite capture hidden the Hollowing of the behind the veil of State: an Overarching confessional governance Constraint to Lebanon’s 27. The 15-year long Lebanese civil war formally ended through the establishment of Development 40 the 1989 Taif Agreement that institutionalized the confessional nature of the political system. A Lebanon’s post-war governance endures systemic complicated matrix of antagonistic interests in the failures. Intuitionalized confessionalism intended Lebanese civil war involving international, regional as protection for the mosaic of communities and local players was finally successfully balanced in a country that lacks a demographic majority in the 1989 Taif Agreement that adjusted and has developed into pervasive elite capture and institutionalized a power-sharing formula among patronage system. This elite commands the the different confessional communities in Lebanon. main economic resources, generating large rents The Taif Agreement brought about a more equitable and dividing the spoils of a dysfunctional state. confessional distribution formula between Christian In the process, the public sector has become and Muslim (50/50) representation in the executive increasingly governed by bribery and nepotism and legislative branches (previously these were practices, failing to deliver basic public services 60/40 in favor of the Christian representation), while and incapable of resolving the most urgent transferring much of the executive powers of the needs. This has culminated in the comprehensive Maronite president to the Cabinet. In the process, breakdown in the political process, with the however, it further entrenched confessionalism in the three branches of government either vacant or Lebanese governance system by constitutionalizing effectively idle, and the only national plebiscite the sectarian ownership of the top three positions abrogated. This has triggered a series of protests in the country: the President of the Republic and civil disobedience measures targeting the (Maronite), the Prime Minister (Sunni), and the ruling political class with emphasis on corruption Speaker of Parliament (Shia).41 Although the accord and incompetence. Current conditions are stated that the abolition of political confessionalism unsustainable, and without significant political was a national goal, and set out a mechanism to and economic reforms, a widening and worsening achieve this, 25 years later this system still prevails of socio-economic unrest is not unfathomable. due to selective implementation of the accord. 28. The post-war confessional governance system developed into a pervasive elite capture and patronage system. By the end of the 15- 40   This Special Focus draws to a large extent on the recent 41 Lebanon Systematic Country Diagnostic (World Bank,   This distribution existed prior to the Taif Agreement as part 2015). of a National Accord and not the constitution. 24 | Special Focus lebanon economic monitor | The great Capture Policy execution Vignette: typical public sector employee asked 1: Hardly ever / 7: Almost always to distribute equivalent of 1000 USD to the 6 needy poor. How much would reach each 5 5 5 4.7 4.7 group? 5 4.4 4 Other 3 3 3 100 3 15 8 5 3 Superiors of the public 80 10 9 employee 7 2 Percent 60 17 Public employee's own 1 30 pocket 40 69 Middlemen/consultants 0 49 Favorable kickbacks = Officials treat some Personal contacts = 20 28 Kin/family procurement contracts groups unfairly granting licenses 0 Lebanon MENA OECD Needy poor Lebanon MENA OECD FIGURE 20. Bribery and nepotism are pervasive in policy FIGURE 21. Public funds are diverted into the coffers of execution in Lebanon. Lebanese politicians and civil servants. Source: Quality of Government Expert Survey, 2010 Source: Quality of Government Expert Survey, 2010 year civil war, the Lebanese state was crippled How important is the applicant's political orientation in obtaining governmental employment compared to and had lost its sovereign function. Furthermore, qualifications and experience? the nature of the confessional system encouraged 100% constant competition over state resources. This led 17% 12% 22% 15% 80% 25% 29% to the breeding of a new ruling class that became 48% 34% 28% 60% 46% 47% dominated by former warlords, militia members and 40% 75% oligarchs, who captured the public sector and used 65% 54% 57% 20% 39% 40% it as a source of redistribution and rent-seeking. 10% 18% 22% 27% 19% 0% Behind the veil of confessionalism, the political elite   Algeria   Egypt   Iraq   Jordan   Lebanon Palestine Saudi Sudan Arabia     Tunisia   Yemen   MENA used the public sector to advance and protect the More important Equally as important Less important I don't know interests of their constituencies in order to secure their allegiance while political influence and wealth FIGURE 22. Nepotism in the Lebanese civil service recruitment is perceived as highest in MENA. became concentrated in the hands of a few families. Source: Arab Barometer Survey, 2010-2011 The latter was facilitated by the lack of regulation over conflicts of interest between the political and economic elite which has generated considerable (Figure 20). Public funds, including those intended political rent. For instance, many members of the for the most vulnerable segment of the population, ruling class are directly or indirectly tied to major are diverted into the coffers of the political elite players in the financial and real estate sectors, to and civil servants. For instance, only 28 percent of major holding companies, and to companies that public funds intended for the poor reach that group have monopolized a wide range of markets at the while the rest are directly pocketed by civil servants, expense of the welfare of the Lebanese public (e.g., their superiors or kin (Figure 21). These practices Chabaan, 201542). are pervasive in all sectors to the extent that social and economic constitutional rights have become 29. The public sector has become increasingly defined by clientalism and sectarian affiliations. governed by bribery and nepotism practices. According to surveys, public procurement contracts 30. Power and resource allocations among are most often awarded to the firms that provide the competing confessions have also extended the most favorable kickbacks to senior officials, into civil service appointments. Confessional while civil servants favor their personal contacts considerations and nepotism, rather than merit, when granting licenses to start up private firms mostly determine recruitment into the public sector. In the 2010-2011 Arab Barometer Survey, 42   Jad Chabaan (2015) “Mapping the Control of Lebanese 75 percent of Lebanese respondents reported that Politicians over the Banking Sector,” mimeo, AUB. Special Focus | 25 The World Bank How important is the applicant's political orientation their weaknesses, rendering them incapable of in obtaining governmental employment? carrying out the most basic functions. Much-needed 100% reforms in all sectors of the public sphere have 90% 12% 80% 10% I don't know never been implemented because the political and Less important than 70% 57% qualifications and business elite have an incentive to preserve the 60% experience status quo that enables them to generate large rents 50% Equally as important as 40% qualifications and and divide the spoils of a dysfunctional state. At 75% experience 30% 18% the same time, the governance formula introduced More important than 20% qualifications and by the Taif Agreement with its requirement for 10% 23% experience 0% broad consensus on every decision has resulted in 2007 2010-2011 a paralysis of decision-making since 2005.43 As a FIGURE 23. Perceptions of nepotism in Lebanon’s civil result, the state was effectively hollowed out in the service recruitment are rising over time. face of sectarian and economic interests. Source: Arab Barometer Survey, 2007 and 2010-2011 Rank of Lebanon's institutional indicators relative to the rest of the world Diversion of public funds Judicial independence 137 138 Poor governance and weak institutions Transparency of government policymaking 138 Efficiency of legal framework in challenging regulations 139 Intellectual property protection 139 Business costs of terrorism 140 Irregular payments and bribes 142 32. Lebanon’s poor governance and weak Favoritism in decisions of government officials 142 institutions constrain productivity and prosperity Wastefulness of government spending 143 Public trust in politicians 144 in the economy. A sound and fair institutional environment is a basic and fundamental driver of 1 14 27 40 53 66 79 92 105 118 131 144 Best Rank Worst growth (see Easterly and Levine 1997; Acemoglu et FIGURE 24. Institutional quality in Lebanon is one of the al. 2001, 2002; Rodrik et al. 2002; and Sala-i-Martín lowest in the world. and Subramanian 2003). The World Economic Source: World Economic Forum, Global Competitiveness Index 2014/15 Forum’s Global Competitiveness Index has identified institutions in Lebanon as the third factor when it comes to obtaining public employment, an constraining the level of prosperity of the economy, applicant’s political orientation is more important preceded by infrastructure and macroeconomic than qualifications and skills (Figure 22). This share environment. Lebanon’s governance structure and is not only the highest in the MENA region but has institutions are extremely weak with key constraints also markedly increased over time (Figure 23). The including, a lack of vision and planning to address lack of a meritocratic recruitment process within short- and long-term challenges, inefficient and the public sector has severely undermined the corrupt public institutions such as the judicial performance of the Lebanese public administration. system, low capacity to deliver quality public services (as exemplified by the recent protests 31. The capture of the state by sectarian against the government’s inability to deliver garbage and economic interests has undermined the services in the country), favoritism in the decisions autonomy and effectiveness of public institutions of government officials, excessive bureaucracy and and generated a stalemate that has characterized red tape, and weak accountability. the political landscape of post-war Lebanon. Public institutions emerged from the civil war in very 33. Lebanon fares poorly and well below dismal states. The redistributive and rent-seeking world and regional averages on a wide range practices of the post-war governance system failed 43 to build strong institutions and further exacerbated   Prior to 2005, the Syrian military presence was the main power broker and decision maker in Lebanon. 26 | Special Focus lebanon economic monitor | The great Capture of governance indicators. Public institutions in Lebanon are characterized by severe inefficiencies and Percent of respondents reporting "absolute lack widespread corruption that have become customary of trust" in core public institutions in the political and administrative landscapes. 80 69 70 61 59 According to the Global Competitiveness Index, 60 52 institutional quality in Lebanon is one of the worst 50 41 40 Percent 34 33 in the world, ranked at 139 among the 144 countries 40 30 20 19 included in the index. Lebanon ranks among the 20 11 12 bottom 10 countries on 10 out of the 21 sub- 10 0 indicators that capture the quality of institutions Government Judiciary Parliament Police Political Armed Forces (Cabinet) (2010-2011) Parties (Figure 24). Public trust in politicians has the lowest (2010-2011) Lebanon MENA score and ranks last among the 144 countries. This is confirmed by polls of Lebanese citizens that have FIGURE 25. Trust in core public institutions is very low. shown that the public at large has lost faith in the Source: Arab Barometer Survey, 2010-2011 and 2012-2014 state that it perceives to be rife with corruption. In the 2013 Arab Barometer survey, more than half of the Lebanese respondents reported an absolute lack Governance Indicators -2.5: Lowest score / 2.5: Highest score of trust in core public institutions (Figure 25). Not only are these shares alarmingly high, but they are 0 1996 1998 2000 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 -0.3 also well above the averages in the MENA region. -0.6 Moreover, in the 2013 Global Corruption Barometer -0.9 survey, 93 percent of Lebanese respondents reported -1.2 that corruption is a (serious) problem in the public -1.5 sector while 77 percent reported that the government -1.8 is (very) ineffective in the fight against corruption. -2.1 Control of Corruption -2.4 Political Stability and Absence of Violence/Terrorism Rule of Law 34. Lebanon’s poor governance performance has significantly deteriorated over the past FIGURE 26. The quality of governance has deteriorated markedly since 2005. decade, from an already low starting level. The Source: World Bank, Worldwide Governance Indicators 2015 World Bank’s Worldwide Governance Indicators show a substantial decline in the quality of governance in Lebanon particularly since 2005 poor performance on a number of indicators on (Figure 26). The control of corruption indicator, the strength of the judicial system. Out of 144 which measures the extent to which public office is countries in the Global Competitiveness Index, used for private gain, has decreased from an already Lebanon ranks 139 on the efficiency of legal low score of -0.5 in 2005 to -0.9 in 2013. Similarly, framework in challenging regulations, 138 on over the same time period, the rule of law index has judicial independence and 132 on the efficiency decreased from -0.3 to -0.8. Lebanon scored 31 out of legal framework in settling disputes (Figure 24). of 100 on the Corruption Perception Index in 2005, Like most other public sector positions, judicial further dropping to 27 in 2014, indicating serious appointments have become confessionally-driven, and deteriorating levels of corruption. Likewise, thus undermining the independence of the judiciary. from 2012 to 2014, Lebanon’s score on institutional The civil justice system is unfair and ineffective as quality in the Global Competitiveness Index dropped evident from Figure 27 where Lebanon scores below from 3.2 to 2.7, with the rank falling from 125/144 MENA and Sub-Saharan Africa averages on civil to 139/144. justice equality, honesty, independence, timeliness and effective enforcement. Furthermore, the weak 35. The judicial system is corrupt, inefficient, judicial system adversely impacts businesses by ineffective and unfair. This is reflected in Lebanon’s raising their transaction costs. Enforcing a contract, Special Focus | 27 The World Bank Civil Justice Best Quality of public services 0: Lowest score / 1: Highest score 4 3.5 0.60 0.48 0.47 3 0.50 0.43 0.41 2.5 2 0.37 0.37 2 0.40 1.5 1 1 0.30 1 0.20 0.5 0 0 0 0.10 education (urban education (rural Basic healthcare Higher education / Public transport Worst Primary and Primary and secondary secondary 0.00 university areas) areas) People have Civil justice is Civil justice is Civil justice is Civil justice is Civil justice is access to free of free of free of not subject to effectively affordable civil discrimination corruption improper unreasonable enforced justice government delays influence Lebanon MENA Sub-Saharan Africa Lebanon MENA OECD World Average FIGURE 27. Civil justice in Lebanon is particularly slow, FIGURE 29. Quality of social public services in Lebanon unfair, ineffective and corrupt. is inferior to MENA and world average. Source: World Justice Project, Rule of Law Index 2015 Source: Institutional Profiles Database, 2012 Rank Best Territorial coverage of services Worst Score Best 144 7 4 3.5 3 128 6 3 112 2.5 2 96 5 2 1.5 1 1 1 1 80 Score Rank 4 1 64 0.5 48 3 0 Basic healthcare Drinking warer infrastructure Maintenance and Public schools Electricity grid and sanitation 32 Transport Worst networks solid waste 2 services disposal 16 0 1 Best Worst Quality of overall Quality of Quality of roads Mobile telephone infrastructure electricity supply subscriptions/100 pop Lebanon MENA OECD World Average FIGURE 28. Lebanon’s supply and quality of physical FIGURE 30. Public service delivery in Lebanon is subject public services rank very poorly in the world. to stark spatial inequality. Source: World Economic Forum, Global Competitiveness Index 2014/15 Source: Institutional Profiles Database, 2012 for instance, necessitates 37 procedures, takes over has become chronically dysfunctional. Shortages in 700 days and costs 30.8 percent of the value of the supply and quality exist in almost all basic services claim, most of which is associated with attorneys’ such as electricity, water, sanitation, solid waste costs (Doing Business, 2015). Polls of Lebanese management (garbage collection), transportation citizens have also reflected weaknesses of the judicial and telecommunication. Moreover, performance in system. For instance, in the 2013 Arab Barometer these sectors is much worse than in other countries survey, 52 percent of respondents reported an in the MENA region and the rest of the world (Figure absolute lack of trust in the judiciary (Figure 25). 28 and Figure 29). In addition to inadequate supply and quality, public service delivery is also subject 36. The capacity of the public sector to to stark spatial inequality, often at the expense of provide sufficient, high-quality and evenly- rural and poor areas (Figure 3044). As a result, less distributed public services is severely impaired. well-off citizens are disproportionally affected by During the civil war, the private sector and non- the shortages in public services especially since they governmental organizations started providing cannot afford the high costs imposed by private social and infrastructural services in order to fill service providers. the gap generated by the weakened state. This state of affairs persists till the present day, such 44 that public service delivery of goods and services   The latest available data from the Institutional Profiles Database is for the year 2012. 28 | Special Focus lebanon economic monitor | The great Capture 37. The ongoing waste management/garbage Municipal Fund (IMF), account for 70 percent of disposal crisis exposes, in a very visible and municipal revenue. The remaining 30 percent odorous way, the cumulative failures of post- is collected through local taxes and fees. The war governance. A visually powerful garbage IMF allocations are based on inequitable criteria crisis that has left piles of it uncollected on the and disbursements are most often irregular and streets of Lebanon have galvanized sizable popular delayed. In addition, municipalities have limited demonstrations. Garbage has been piling up since capacity to collect local taxes and fees and deal July 17, 2015 when the Naameh landfill, which with non-compliance. served as the primary landfill for the country, was closed without an alternate site being designated 39. Widespread corruption and rent- due to opposition from local communities. A non- seeking have become institutionalized in the transparent tendering process was organized by the public procurement system. Bribes and political government for new waste management contracts connections play a very big role in contract awards, across the country. On August 24, 2015, the with the implication that in most instances contracts Ministry of Environment announced the winners of are not awarded to the most qualified applicants the bids, most of whom were seen as having close (Figure 20). The public procurement system ties to the political elite.45 The perceived incessant relies on an outdated law from 1963 that is not corruption at the expense of quality of services comprehensive and does not regulate all aspects triggered a series of protests and civil disobedience of the sector. Proper implementation of rules and measures targeting the ruling political class with guidelines is also not regularly enforced while emphasis on corruption and incompetence. a shortage in qualified personnel is obstructive. A surprised and shaken political elite quickly Furthermore, the lack of laws governing access abandoned the waste management contracts and to information, whistleblower protection and a distanced themselves from the process. The waste procurement complaint mechanism has rendered management crisis illustrates and encapsulates the the procurement process void of transparency and very features that have so negatively characterized accountability. the post-war political landscape: elite capture, corruption, dysfunctional public institutions and 40. Despite the lack of leadership and a political impasse. development vision for the country, rising poverty levels and unemployment, catastrophic 38. Local governments in Lebanon are unable public service delivery, massive diversion of to adequately provide services to their residents public funds and widespread and unveiled rent- let alone invest in much-needed local economic seeking, there has been limited accountability of development. This is reflected in the share of elected officials and public servants. This is partly local government spending to central government due to the lack of transparency and participation primary spending that was only 6 percent in in the decision-making process and the lack of Lebanon in 2007 compared to an average of 20 key legislations, all of which erode accountability. percent in countries with unitary governments Draft legislation for a freedom of information around the world (World Bank, 2007c). Despite the act, whistleblower protection, an anti-corruption large responsibilities attributed to municipalities as agency, an Ombudsman’s office and public per Article 49 of the Municipal Law (Decree-Law procurement are either awaiting approval from 118 of 1977), municipalities lack adequate financial the Council of Ministers or awaiting parliamentary and human resources. Transfers from the central debate and approval. Furthermore, regulations government, distributed through the Independent governing conflicts of interest and income and 45 asset disclosure for public officials and servants are   This has been widely reported in the media, for example, in Al Akhbar newspaper in August 25, 2015 edition or in weak. Mouawad, Jamil “Lebanon’s Rubbish Crisis Is a Chance to Clean up the Polluted Political System.” The Guardian. N.p., 2 Sept. 2015. Web. Special Focus | 29 The World Bank Audit. Lack of consensus between political factions Paralysis in decision- has also left a large number of senior administrative civil service appointments vacant, further degrading making the performance of state institutions. Despite the necessity and urgency of reforms in most public 41. The fragile political equilibrium of the sectors, especially the deteriorating infrastructure, confessional system reached its limits in 2005 the lack of political consensus has left all of these when Syrian tutelage was removed and the challenges unaddressed. Furthermore, the absence Lebanese process had to proceed without a power of political consensus has left the country without broker. Following the assassination of ex-Prime a strategy to deal with a 25 percent increase in Minister Rafiq Hariri and the withdrawal of the Syrian its population due to the massive influx of Syrian forces from Lebanon, competition between political refugees. forces ensued and the whole political landscape was restructured. Political forces organized into 43. The nature of the confessional system two opposing coalitions that dominated the political of the post-war period created an environment landscape: March 8 and March 14. The political where political stalemate was inevitable. In order forces offered competing visions and strategy, to protect the interests of the various confessional aliening with opposing sides of the schism that has communities and to prevent the hegemony of one afflicted the region. As a result, consensus was barely group over the others, the Taif Agreement gave the reached and all decisions that furthered the interests competing sectarian factions veto powers in the of some groups but not others were blocked. In decision-making process thereby requiring broad the absence of a power-broker to enforce these consensus on practically all decisions. This created decisions, the policymaking process has come to an unstable equilibrium that made the decision- a halt and institutional quality rapidly deteriorated making process long and challenging. Whenever across a wide range of indicators (Figure 26). consensus was not achieved, political forces resorted to an external power-broker (Syria up until 2005). 42. The protracted political crisis has plunged The lack of resolution induced pent-up pressures the legislative and executive branches of the that at times caused outbreaks of violence. government into a complete impasse. The country has suffered from a presidential vacuum twice in the 44. The breakdown in the political process past 10 years. In 2008, the presidency was vacant for and the severe deterioration in government 6 months and was only filled after a domestic violent services are fundamental challenges to the post- episode erupted and subsequently an external war system in Lebanon. Current conditions are power-broker (Qatar) intervened. Currently, the unsustainable, and without significant political and presidential seat has been vacant for the past 18 economic reforms, a widening and worsening of months (since May 2014). Parliament has failed in socio-economic unrest is not unfathomable. The over 25 legislative sessions to elect a new president. demonstrations and activities directed at the political Moreover, parliament does not regularly convene class that the country is currently witnessing is one due to a lack of quorum and has barely produced any such manifestation. It is thus imperative and urgent legislation in the past years. For instance, in 2007, not for policy-makers to address Lebanon’s longstanding one single law was passed, while in 2013 only two and worsening structural bottlenecks (e.g., in laws were passed: the first extended parliamentary infrastructure such as electricity, water, waste election deadlines and the second postponed them treatment, transportation and telecommunications). for 17 months and extended parliament’s term. These bottlenecks are becoming even more binding Parliament has also failed to approve a Public Budget as shown by a worsening of Lebanon’s international Law since 2005, which meant that for the past 10 ranking among key investment climate assessments. years budgetary receipts and payments have not been Policy inaction is not just putting on hold Lebanon’s subject to oversight from parliament or the Court of development, it is dragging it backwards. 30 | Special Focus lebanon economic monitor | The great Capture 1,000 live births to 8 deaths, under-five mortality II. Lebanon’s Health rate declined from 33.1 to 9.3 deaths per 1,000 live births,46 and maternal mortality ratio dropped Sector: Modest from 52 deaths per 100,000 live births to 16 per 100,000.47 Life expectancy has also improved, Reforms despite the rising from 66.6 years to 81.5 years, considerably higher than MENA average of 69 years. Nonetheless, Challenges there are regional disparities in health outcomes with Beqaa and the North having lower rates than This special focus provides an overview of the national averages. health sector in Lebanon and highlights both successes and challenges facing the system. 46. Lebanon’s healthcare system is a complex Lebanon’s trends in health outcomes, inputs and amalgam of public and private institutions, spending are analyzed over time and compared to providing health services to the population, with a number of countries with similar levels of income the MoPH serving as the main steward. In the and health spending, as well as to the averages for public sector, a total of 28 public hospitals, with a bed the Middle East and North Africa (MENA) region. capacity of 2550,48 in addition to dispensaries and Global comparisons are presented for each of these primary health centers (PHCCs) provide healthcare measures based on the latest available year of data across the country. All public hospitals are financially (generally 2011). Key challenges are highlighted; and administratively autonomous with administration (i) low public spending on health which hinders boards appointed by government decrees. the Ministry of Public Health’s (MoPH) ability to adequately respond to the health needs of Table 2. Health outcomes indicators, Lebanon and MENA average, most recent years. low income groups; (ii) high household out-of- pocket spending on health subjecting low income Life expextancy at Mortality rate per birth (years) 1,000 Live births groups to financial hardship; (iii) disproportionate Newborns Children with low birth under Neonatal allocation of resources on expensive curative care; Under-5 Female Infant Male Total weight (%) weight (%) and (iv) emerging epidemiologic and population trends associated with unprecedented influx of Lebanon 81.5 79.6 83.2 11.5 NA 5.4 8.0 9.3 refugees having significant implications on the MENA delivery and financing of the health sector. Despite Average 69.0 71.0 73.0 12.0 13.0 17.0 30.0 39.0 the challenges and prolonged periods of instability, Source: WHO-EMRO, 2013 the MoPH embarked on several successful reforms that contributed to the resilience of the system in the face of the crisis. 47. The private sector is a dominating part of the Lebanese healthcare system. The majority of hospitals (168) are private, both for-profit and not- for-profit, comprising 84 percent of hospital beds in the country. Private hospitals’ bed occupancy rate is Overview of the around 58 percent with an average length of stay of healthcare system 46   World Bank, 2013a, World Development Indicators, World Bank, Washington, DC. 45. Despite protracted periods of instability, 47   World Health Organization (WHO), Regional Health Lebanon attained significant improvements in the Observatory, URL http://www.who.int/gho/countries/lbn/ health outcomes, performing better than MENA country_profiles/en/ averages (Table 2). Between 1990 and 2012, the 48   Walid Ammar MD, Ph.D., Health Beyond Politics, 2009, infant mortality rate dropped from 27.4 deaths per World Health Organization Eastern Mediterranean Regional Office. Special Focus | 31 The World Bank 4 4 Lebanon Lebanon 3 3 Turkey Hospital beds per 1,000 Jordan Physicians per 1,000 MENA Avarage Thailand MENA Avarage 2 2 Turkey Jordan 1 1 Colombia Colombia Philippines Thailand Philippines 0 0 1980 1985 1990 1995 2000 2005 2010 1980 1985 1990 1995 2000 2005 2010 Year Year FIGURE 31. Hospital beds per 1000 population: Lebanon, FIGURE 32. Physicians per 1000 population: Lebanon, MENA average, and other countries; 1980-2011. MENA average, and other countries; 1980-2011. Source: World Development Indicators and WHO NHA, 2013 Source: World Development Indicators and WHO NHA, 2013 800 Total health spending per capita (current US$) 12 Lebanon Turkey Total health spending per capita (% US$) 10 Jordan 600 Lebanon Colombia 8 400 Jordan 6 MENA Avarage Colombia MENA Avarage Turkey 200 Thailand 4 Thailand Philippines Philippines 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 1995 1997 1999 2001 2003 2005 2007 2009 2011 Year Year FIGURE 33. Total health spending per capita (current FIGURE 34. Total health spending as a share of GDP: US$): Lebanon, MENA average, and other countries; 1995-. Lebanon, MENA average, and other countries; 1995-2011 Source: World Development Indicators and WHO NHA, 2013 Source: World Development Indicators and WHO NHA, 2013 3 days.49 The total hospital bed to population ratio faces imbalances in health human resources with is 3.5 beds per 100 population which is significantly significant shortage of nurses, and oversupply of higher than the MENA average of 1.5 beds and other pharmacists (18.6 per 10,000 compared to 5 per countries with similar income levels (Figure 31). 10,000 in MENA) and dentists (12.7 per 10,000 compared to 3 per 10,000 in MENA). 48. Lebanon has an imbalance in the supply of healthcare providers. The number of physicians 49. Half of the Lebanese citizens have per capita has increased from 1.7 physicians per insurance coverage (50.1 percent) under the 1000 population in 1981 to 3.5 physicians per three main insurance schemes - the National 1000 population in 2010, creating a surplus of Social Security Fund (47.8 percent of insured), physicians. While the ratio is more than twice as public schemes covering mainly public sector high as the MENA average and other countries employees and the armed forces (30.8 percent with similar income levels, the rate at which it has of insured), private sector (16.3 percent of increased is similar to other countries; the MENA insured), and others (5.1 percent of insured). For average rose from 0.7 in 1980 to 1.4 physicians per the uninsured who belong mainly to low income 1000 population in 2011 (Figure 32). Yet Lebanon groups and the informal sector, the MoPH serves as a safety net and as an insurer-of-last resort, 49 providing a generous package of hospital services   Syndicate of Private Hospitals, Lebanon, July 2013 32 | Special Focus lebanon economic monitor | The great Capture through contracted public and private hospitals, and covering 85 percent of the hospital expenses, and 100 percent of medication of chronic and high risk diseases. While secondary and tertiary care in (% total government budget) Lebanon is covered, for the most part, through the Public health spending various schemes available in the country, Lebanon still faces coverage gaps in terms of preventive care, primary and ambulatory healthcare, with the low income groups carrying the higher financial burden. GDP per capita (current US$) FIGURE 35. Public Health Expenditure as a Share of Total Government Expenditure versus Income Per Capita. Spending trends Source: World Development Indicators & WHO, 2013 Total health spending Public health spending 50. Lebanon experienced a significant 52. While THE per capita is higher than MENA increase in total health expenditures (THE) in average, public health spending per capita is recent decades. Per capita spending rose from quite low when compared to other countries with US$ 361 in 1995 to US$ 621 in 2011 (720 per similar income. In 2011, public spending on health capita in international dollar), which is higher represented 25.5 percent of THE (1.7 percent of than MENA average of US$ 220 (Figure 33). As GDP) and 5.8 percent of total government spending.50 a share of GDP, Lebanon’s THE remains quite This is significantly lower than global averages high despite falling from 10.7 percent in 1995 to (Figure 35). Similarly, MoPH allocations from the 6.6 percent in 2011. This is comparable to other government budget (excluding debt) dropped by countries with similar income levels and almost 41 percent from 5.9 percent of total government 1 percent point higher than the MENA average of expenditures in 2005 to 3.4 percent in 2012.51 Given 5.7 (Figure 34). the relatively low levels of public health spending as a share of the total government budget, a strong 51. The composition of health spending in argument could be made for the reprioritization of Lebanon differs quite drastically from other the health sector by the GoL against other needs. comparable countries, with the lion share of spending coming from private spending and out- 53. Elasticities of public health spending of-pocket payments. In 2011, private spending in varies across time periods. Table 3 displays the Lebanon represented 74.5 percent of THE and 4.9 elasticities of public health spending relative to percent of GDP, while out-of-pocket (OOP) spending total government revenues and total government constituted 37.4 percent of THE, surpassing global spending. Relative to total government revenues, averages. According to World Health Organization public health spending increased 52 percent per (WHO) criteria, countries with OOP shares between year less rapidly than government revenues for 15-20 percent of THE are able to ensure financial the 1995-2011 period (elasticity of 0.38). Between protection for their citizens. Given that Lebanon’s 2006 and 2011, however, public health spending OOP spending is higher than WHO macro criterion grew 5.8 percent per year faster than total for financial protection suggests that further reforms government revenues. Relative to total government need to be taken to ensure financial protection for 50   This includes MoPH allocations, as well as health spending the Lebanese. by the NSSF and the military. 51   Ministry of Public Health, 2012. Special Focus | 33 The World Bank Table 3. Elasticities of public health spending relative to government revenues and spending, 1995-2011. 1995-2011 1995-2005 2006-2011 Public health spending relative to revenues 0.4 0.2 1.1 Public health spending relative to expenditures 0.7 0.4 1.3 Sources: WDI, IMF WEO, and WHO, 2013 Population Pyramid Graph - Custom Region - Lebanon Male Lebanon - 2050 Female Male Lebanon - 2012 Female Population (in thousands) Age Group Population (in thousands) Population (in thousands) FIGURE 36. Population pyramid, Lebanon, male and FIGURE 37. Population pyramid, Lebanon, male and female, 2012. female, projected 2050. Source: UN Population database Source: UN Population database Table 4. Household out-of-pocket expenditure on health, 2011. Average of household’s Average of individual’s Share of total household Share of total health expenditures US$ expenditures US$ expenditure percentage expenditure percentage Health categories 2 446 603 7.8 100.0 Pharmaceutical Products 1 287 317 4.1 52.6 Other Medical Products 4 1 0.0 0.2 Therapeutic Appliances and Equipment 67 17 0.2 2.8 Medical services (medical examination) 211 52 0.7 8.6 Dental Services 106 26 0.3 4.3 Other medical services 194 48 0.6 7.9 Hospital Services 577 142 1.9 23.6 Health Insurance 98 24 0.3 7.9 Total 31 279 7 715 100.0 - Source: Central Administration for Statistics (CAS)-Household Budget Survey (HBS) 2011-2012 expenditures, government health spending grew whether this would be possible in the future. 21 percent per year less rapidly from 1995-2011 (elasticity of 0.688), but 33 percent per year faster 54. The limited fiscal space suggests that than GDP between 2006 and 2011 (elasticity of Lebanon will need to rely on efficiency enhancing 1.329). This suggests that Lebanon could increase reforms to improve health outcomes, such as public spending in order to improve financial risk those that strengthen incentives for cost effective protection for the population. It is thus important medical care. World Bank Staff projections of to analyze the available fiscal space to understand Lebanon’s macroeconomic conditions indicate 34 | Special Focus lebanon economic monitor | The great Capture that Lebanon’s key fiscal indicators are projected 57. There is an over reliance on direct to deteriorate slightly over the medium term; payment at the time people need care. Despite the overall fiscal deficit is forecast to widen from MoPH’s successful efforts at reducing out-of-pocket 6.6 percent of GDP in 2014, to 7.2 percent, 7.9 (OOP) spending to 37.34 percent in 2012,54 the percent, 10.1 percent of GDP, in 2015, 2016 and burden continues to be shared disproportionately 2017, respectively. among households, leaving Lebanon below the broad World Health Organization (WHO) macro criterion for financial protection. The obligation to pay directly for services subjects a large proportion of the population to financial hardship Main challenges and impoverishment. Lower income groups spend a higher percentage of their income (14 55. A growing and aging population, percent) on health than those with higher income combined with a rise in non-communicable (4.2 percent).55 For uninsured households, OOP diseases (NCDs) and injuries will carry significant expenditure accounts for 7 percent of income, implications for health care financing and service while households covered under public and private delivery in the future. The bulge of currently young health insurance schemes spend 6 percent and 5.2 and healthy people will transition into a middle-aged percent of their income, respectively. The single and older cohort by 2050 (Figure 36 and Figure largest component of out-of-pocket payments 37), which will increase demand for health care. for health is pharmaceuticals, which accounts for Furthermore, epidemiological trends are shifting more than half of total household expenditures from communicable diseases to NCDs. Almost half (52.59 percent) (Table 4). While further analysis is of all deaths in Lebanon are due to cardiovascular important to understand health seeking behavior diseases (45 percent), and one in five deaths are in the country, these figures may suggest that cancer related.52 The top five causes of morbidity – Lebanese use pharmacies as an alternative to costly measured by disability adjusted life years (DALYs) physician’s visits. – are all NCDs, namely ischemic heart disease, low back pain, major depressive disorders, stroke and 58. Disproportionate allocation of resources diabetes.53 These trends also suggest that Lebanon favors expensive curative over cheaper will have to reshape its health system to better preventative care. As the main public health address the prevention and treatment of NCDs. financing agency in Lebanon, the MoPH plays a key role in resource allocation. The MoPH allocates the 56. The decline in government spending on majority of its budget (62 percent) to reimburse health in the last decade is indicative of the lower contracted private hospitals for the care provided prioritization of health within the government to the uninsured population, while contributions to budget. Low public spending on health has negative non-governmental organizations (NGOs) that are implications on health outcomes especially among the main providers of primary health care services low income groups. The need to achieve fiscal have remained at a relatively low level of less than consolidation, however, suggests that financial three percent of the total budget (Table 5). As such, resources for healthcare are limited, and improving the system is skewed towards high cost curative the efficiency of spending will thus be essential for care compared to lower, cost effective preventive improving health outcomes. and primary health care. 59. Fragmentation of financing and service 52   World Health Organization, Non Communicable Diseases delivery systems is another challenge facing the Country Profiles, Lebanon, 2014, www.whoint/nmh/countries/ 54 lbn   Ministry of Health, National Health Accounts, 2012. 53 55   Institute of Health Metrics and Evaluation, 2013. GBD   World Bank, 2013b, Fairness and Accountability: Engaging Profile Lebanon. in Health Systems in MENA. World Bank, Washington DC. Special Focus | 35 The World Bank Table 5. Ministry of Public Health budget allocations for main categories, percentage share of total budget. 2009 2010 2011 2012 Hospitalization in private sector 69.4 65.8 62.5 61.9 Public Hospitals 2.7 2.5 2.3 2.4 Medicines 15.0 18.7 20.8 21.8 Contributions to NGOs 2.9 2.6 2.4 2.4 Salaries and other employees’ benefits 6.3 5.7 5.2 4.9 Other Expenses 3.2 3.8 3.7 5.0 Source: MoPH, 2013 health sector. Today, 20 percent of the insured population is covered by 70 private insurers, many Key health sector of which are relatively small, while the other 80 percent are covered through multiple insurance reforms: moving in the schemes. On the public side, providers have different packages of subsidized services and right direction varying reimbursement systems. From a governance perspective they fall under different ministries, 61. Several reform initiatives have been making it politically difficult to obtain a coherent implemented in the past decade focusing on national policy framework. Fragmentation negatively increasing system efficiency, controlling cost impacts the health sector as it results in (i) adverse and improving quality of care. These reforms risk selection with the MoPH baring the burden of successfully contributed to improving health sector the sick population, (ii) higher administrative costs performance, building up resilience to cope with the at both the fund (MoPH, NSSF) and the provider country’s prolonged periods of conflict and crisis. level, (iii) different groups getting different packages, and (iv) weak purchasing power. 62. Reforms aimed to improve access via an increase in the physical infrastructure. As part 60. Adding to these challenges is the influx of MoPH reform efforts to improve the quality of Syrian refugees and the dramatic increase in and access to primary health care services to low demand for health services. The immediate impact income groups, the MoPH established in the of the rapid increase in patients over a short time 1990s a network of primary health care centers period has primarily been met through existing consisting of 230 centers run mostly by NGOs and structures, and an accelerated use and hence municipalities. Under this partnership, the MoPH depletion of resources. Refugees are accessing contracts with the network for the provision of services extended to Lebanese citizens, thus putting essential care to communities around the country, pressure on the delivery, quality of services and including maternal and child health, reproductive on public finances. The fiscal impact of the Syrian health, dental care and management of chronic crisis on the health sector has been estimated to be illnesses. The MoPH provides in-kind support to US$ 48-69 million in 2014. Overall healthcare costs these centers including essential drugs and vaccines, needed to maintain the system to its pre-refugee and in return the PHCCs charge nominal fees for access and quality levels was estimated at US$ 216- their services. This partnership proved successful in 306 in 2014.56 providing quality low cost primary care services and free drugs, especially to low income Lebanese as the use of network centers increased by 73 percent 56   Lebanon Economic and Social Impact Assessment of the between 2002 and 2012, from 32,6184 to 121,2000 Syrian Conflict, World Bank and the United Nations, September visits, respectively. 2013. 36 | Special Focus lebanon economic monitor | The great Capture 63. Reforms also targeted the Quality of provided with a subsidized package of essential health Care. In 2000, the MoPH introduced the hospital services, including preventive and case management accreditation program aimed at improving the quality services such as reproductive, maternal and child of care. A similar program was initiated in 2009 health services, screening tests and medications, for primary health care centers. The accreditation management of chronic illnesses such as diabetes system forms a critical cornerstone of MoPH’s and hypertension. The program is targeting 150,000 regulatory role. As a major payer of health care in by 2016, and aims to add another by 2018. Services Lebanon, the MoPH only contracts with accredited are provided through 75 contracted network centers hospitals and primary health care centers. This distributed throughout the country. The successful provides strong incentives to both private and public introduction of this program would lay the ground hospitals and centers to enhance their quality, and for expanding coverage to other groups in the future, the ministry to monitor performance and regulate namely the informal sector. It will also set the sector provider payment. on the right path of shifting care to lower cost- effective setting, such as preventive and primary 64. There have been attempts to better care, and to activities that benefit lower income scrutinize hospital contracting. In 2009, the MoPH groups. embarked on an important reform initiative aimed at improving hospital payment mechanisms and 66. Price controls and Pharmaceutical reducing expenditures. A new set of reimbursement measures. With pharmaceuticals taking up more rates were established based on key performance than half of households’ spending on health and indicators (KPIs) consisting of case mix indices and 22 percent of MoPH spending, the MoPH recently accreditation results. Accordingly, contracted hospitals launched several measures to contain the escalating are reclassified and their rates re-adjusted based on cost of drugs. Changes in drug prices are now more realistic measures. The system is supported reported by pharmaceutical companies within one with an automated billing system, utilization review month, compared to six months in the past, thus and auditing mechanisms, which allow the MoPH resulting in faster turn-around in reducing the cost to better monitor performance and expedite billing of drugs in the market. A new generic drug policy as processes. The payment system became effective in well as price cuts on high-cost drugs in the range of early 2015, hence more time is needed to assess its 15 percent have also been implemented. While cost impact on government hospital spending. savings in the pharmaceutical sector have already been reported lately, more time and further analysis 65. Expanding coverage has also been a are needed to assess the real impact of these primary objective of the reforms. Recognizing the measures on cost reduction. need to reduce out-of-pocket spending and improve financial protection of the population, the MoPH set a new strategy in 2013 aimed at expanding health coverage to the uninsured. The strategy has been put into practice in 2015 through the Universal Final note Health Coverage (UHC) program, targeting first poor households who are identified by the National 67. Against this background, reprioritizing Poverty Targeting Program as living below the government budget, giving health precedence, poverty line.57 Under this program, beneficiaries are is essential for reforming the health sector in the country. This is especially so in light of the 57   The National Poverty Targeting Program (NPTP) was government’s strategy to reach out to low income established by the Ministry of Social Affairs in 2011 as the first groups with expanded coverage and improved poverty-targeted social assistance program for the poorest and most vulnerable Lebanese families. To date, approximately services. However, considering the current 93,000 households have been identified as eligible to benefit economic and political environment and the limited from the NPTP social assistance package, with the poorest fiscal space, the MoPH is rightly aiming at promoting 5,076 households also benefiting from the e-card food voucher. Special Focus | 37 The World Bank efficiency of spending and eliminating waste. Primary health care reforms through the UHC program, if well implemented, can shift the composition of spending toward prevention of diseases, helping to contain costs in the future. 68. Fast tracking pharmaceutical reforms is also key, given the financial and fiscal importance medicines have in the overall funding of services. Implementing cost control through the use of generic drugs is a good first step in that direction. 69. Careful planning is crucial for moving the UHC program to the second stage of implementation, which may include expanding service coverage as well as population coverage to reach the informal sector. This will entail expanding prepayment schemes, increasing the efficiency of revenue collection and encouraging risk pooling and coordination. As such, extensive policy analysis and key policy questions will have to be addressed―who should pay and how much, what type of fund is most appropriate (public, private) and whether contribution should be made mandatory. Strengthening the public health insurance system through the harmonization of public pooling arrangements (e.g.; MoPH, NSSF) will also need to be considered and carefully examined. 38 | Special Focus lebanon economic monitor | The great Capture DATA APPENDIX TABLE 6. Lebanon: Selected Economic Indicators, 2012-2017.   2012 2013 2014 2015 2016 2017   Est. Est. Est. Proj. (annual percentage change, unless otherwise specified) Real sector Real GDP 2.2 0.9 2.0 2.0 2.5 2.5 Real GDP per Capita 1.2 -0.1 1.0 1.0 1.5 1.6   Agriculture (share of GDP) 4.5 4.8 5.2 5.0 5.0 4.9 Industry (share of GDP) 21.5 22.1 22.8 22.4 22.6 22.6 Services (share of GDP) 74.0 73.2 72.0 72.6 72.4 72.5   Money and prices CPI Inflation (p.a) 5.7 2.7 1.2 0.2 2.5 2.8 Money (M3, including non-resident deposits) 8.1 9.0 6.0 6.0 6.0 6.0             (percent of GDP, unless otherwise specified) Investment & saving Gross Capital Formation 29.4 30.4 30.8 28.1 26.9 24.0 o/w private 27.8 28.5 29.2 26.5 25.3 22.4 Gross National Savings 6.7 3.8 4.1 7.1 4.9 3.9 o/w private 9.8 15.7 15.2 12.6 11.2 12.4   Central Government Finance Revenue (including grants) 22.7 21.2 23.8 21.6 21.8 22.0 o/w. tax revenues 15.6 15.1 15.1 15.3 15.6 15.6 Total expenditure and net lending 30.9 30.7 30.4 28.8 29.7 32.0 Current 29.3 28.8 28.8 27.2 28.1 30.5 o/w Interest Payment 8.4 8.5 9.2 9.2 9.5 10.4 Capital & Net Lending (excl. foreign financed) 1.6 1.9 1.6 1.6 1.6 1.6 Overall balance (deficit (-)) -8.2 -9.5 -6.6 -7.2 -7.9 -10.1 Primary Balance (deficit (-)) 0.2 -0.9 2.6 2.0 1.6 0.3   External sector Current Account Balance -22.7 -26.6 -26.7 -21.1 -21.9 -20.2 o/w Export (GNFS) 46.6 45.7 40.0 39.4 41.7 43.5 o/w Import (GNFS) 73.5 75.4 70.2 63.8 66.7 67.0 Remittances 4.8 5.5 3.7 4.2 4.2 4.2 Trade Balance (GNFS) -27.0 -29.7 -30.2 -24.4 -25.0 -23.6 Gross Reserves (months of imports GNFS) /1 /2 11.3 11.4 12.1 13.4 13.0 13.1   Total Public Debt Total Debt Stock (in million US$) 57,684 63,489 66,576 70,043 75,226 80,867 Debt-to-GDP ratio (percent) 133.5 143.1 145.6 144.5 150.4 155.6   Memorandum Items: Nominal GDP (in billion LBP) 65,132 66,861 68,939 73,057 75,396 78,357 GDP (in million US$) 43,205 44,352 45,731 48,462 50,014 51,978 Source: Government data, and World Bank staff estimates and projections /1Gross Reserves (months of imports GNFS) = (Imports of Goods & Services / Gross Res. excl. Gold)*12 /2 Total Imports using the BOP data from the Quarterly Bulletin of BDL Data Appendix | 39 The World Bank Selected Special Focus from Recent Lebanon Economic Monitors gross public debt and is escalating rapidly as transfers Spring 2015 LEM: The now account for over half of the fiscal deficit. Some of the measures needed to improve EdL’s Economy of New financial situation are well known, such as increased investment, tariff reforms and corporatization of Drivers and Old EdL. Political and confessional obstacles, however, have so far hindered any progress. Drags Water in Lebanon – Coupling Infrastructure with The Trade Impact of the Syrian conflict on Lebanon Institutional Reform (Special Focus 3): Despite the (Special Focus 1): We explore the trade effect of the relative availability of water resources, the Lebanese Syrian war on Lebanon up until the second half of water sector has not achieved suitable levels of 2014. A dissection of the data reveals that, so far, the service provision and is not in line with the level of war seems to have affected neither merchandise nor economic development reached by the country. The services exports at the aggregate level. At the same cost of inaction in the water sector is estimated at time the relative stability of merchandise imports is about 1.8 percent of GDP, or 2.8 percent of GDP if likely a result of increased demand due to refugee the cost of environmental degradation is included. inflow being offset by higher transit costs through Several factors have led to this situation and require Syria as well as depressed Syrian production. A sustained attention. These include: (i) low continuity gravity-type trade model confirms these findings, of water supply due to small storage capacity, large suggesting also that Lebanese trade seems to have amount of water lost to the sea, growing demand for been less negatively affected by the Syrian war than water and deficiency of the existing water networks; other Syria’s neighbors. An empirical analysis using (ii) unfinished reform agenda that contributed micro level exporter data substantiates this finding. to institutional uncertainty and fragmentation While Lebanese exporters to Syria have suffered from of functions particularly relating to wastewater a drop in demand in the Syrian market (but less so and irrigation; (iii) an irrigation sector that is than their Jordanian counterparts), other Lebanese characterized by inadequate water storage capacity, exporters have started to export to Syria to fill the gap lack of proper maintenance and a heavy reliance on in Syrian production. Further econometric analysis subsidies; and (iv) regional water establishments suggests that Syrian refugees in Lebanon provide (RWE) that severely lack management and financial important impetus to Lebanese services exports. autonomy and are impeded by limited inter- agency coordination and weak central government Challenges in the Lebanese Energy Sector (Special oversight. Moving forward, the Government must Focus 2): The Lebanese electricity sector has been underperforming and in crisis for several decades, requiring urgent action to avoid further deterioration of the quality of electricity delivery. The macroeconomic impact has been massive; accruing debt on investments in and transfers to Electricité du Liban’s (EdL) amounts to 40 percent of Lebanon’s 40 | Selected Special Focus from Recent Lebanon Economic Monitors lebanon economic monitor | The great Capture Fall 2014 LEM: Spring 2014 LEM: A Downside Risks Sluggish Economy Materialize in a Highly Volatile Towards an Effective Social Safety Net in Lebanon Environment (Special Focus): Lebanon’s social safety nets (SSNs) fail to protect poor and vulnerable Lebanese as A Sovereign Wealth Fund for Lebanon: Issues and it consists of a multitude of small and poorly Preliminary Recommendations (Special Focus 1): targeted programs that suffer from low coverage, As Lebanon contemplates prospects of sizeable high leakage, and limited benefit levels, while hydrocarbon discoveries, the country is in the process large budgetary resources are expanded on of designing an institutional framework to manage universal subsidies which are pro-rich and crowd these resources. One such issue is the establishment out other social spending. With poverty incidence of a Sovereign Wealth Fund (SWF), as required by the elevated and broadly unchanged for the past 25 2010 Hydrocarbon Law. This Special Focus provides years, Lebanese citizens revealed in a World Bank an overview of the various types of SWFs that have (2014d) survey of country stakeholders that social been established across countries, draws lessons protection ranked second in their development from these experiences, highlights some pitfalls, and priorities. International experience reveals that presents preliminary recommendations for Lebanon carefully designed SSNs can help prevent shocks as it moves towards establishing its SWF. Key from pushing vulnerable households into poverty, among these recommendations is that the Lebanese help tackle the problem of spatial pockets of poverty SWF’s design should include (i) integration with in slums and rural areas, and also can help break the budget system, (ii) some (limited) flexibility in the cycle of intergenerational poverty. With these operational rules, (iii) no (or limited) earmarking but objectives in mind, in 2011 the Ministry of Social no extra-budgetary spending, (iv) coherence with Affairs embarked on a modernization of Lebanon’s country investment strategy, and (v) transparency SSN system, starting with the introduction of the and accountability. National Poverty Targeting Program. The NPTP is the first means-tested targeting social assistance New Coincident and Leading Indicators for the program in Lebanon. With the Syrian crisis pushing Lebanese Economy (Special Focus 2): Weak economic vulnerable households into poverty, the NPTP has statistics in Lebanon impede economic analysis been scaled up to cover more beneficiaries as part of and decision making. To remedy this, World Bank a three year emergency project to help mitigate the staff developed two indicators of economic activity impact of the Syrian crisis on Lebanese households. for Lebanon: a coincident indicator (WB-CI) and a Most recently, the institutionalization of the NPTP leading indicator (WB-LI). These indicators, which into a permanent program with an annual budgetary are based on an expanded NBER-Conference Board allocation has been proposed by members of methodology, reveal promising statistical properties Parliament, which if approved would constitute a that should make them valuable coincident and significant positive step forward in the effectiveness leading (one-year ahead) indicators for the Lebanese of Lebanon’s SSN system. economy. Based on these indicators, GDP growth for 2012 and 2013 is estimated to be, respectively, 2.2 and 0.9 percent while growth in 2014 is predicted to reach 1.5 percent. Aside from having a high degree of accuracy, both indicators are of relatively high (monthly) frequency and are available with a relatively small time lag (2-3 months), which make Recent Selected Special Focus from Recent Lebanon Economic Monitors | 41 The World Bank them ideally suited for economic analysts, investors, and policy makers alike. In contrast to the BdL-CI, the WB-CI points to a deceleration in economic activity during the first ten months of 2013, which, if sustained over a few more months, would warrant a different monetary policy stance than the one based on the BdL-CI. This monetary policy example highlights the critical importance of having accurate, high frequency, and timely economic indicators. 42 | Selected Special Focus from Recent Lebanon Economic Monitors lebanon economic monitor | The great Capture SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON (for an exhaustive list, please go to: go.worldbank.org/5N4AMNJXV0) Selected Recent World Bank Publications on Lebanon | 43 0.9375 cm The World Bank www.worldbank.org/lb