95951 LEBANON ECONOMIC MONITOR THE BRUNT OF THE SYRIAN CONFLICT FALL 2013 Poverty Reduction and Economic Management Unit MIDDLE EAST AND NORTH AFRICA REGION The World Bank LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT 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). in a longer-term and global context, and assesses the implications of these developments and other For questions and comments on the content of changes in policy on the outlook for Lebanon. this publication, please contact Eric Le Borgne Its coverage ranges from the macro-economy to (eleborgne@worldbank.org). financial markets to indicators of human welfare and development. It is intended for a wide audience, Questions from the media can be addressed to including policy makers, business leaders, financial Mona Ziade (mziade@worldbank.org). 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 Poverty Reduction and Economic Management (PREM) team. It was prepared by Ibrahim Jamali (Economist) and Samer Matta (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist) and Bernard Funck (Sector Manager). Eric Le Borgne authored the Special Focus on the economic and social impact of the Syrian conflict on Lebanon. May Ibrahim (Senior Executive Assistant) provided Arabic translation and Zeina El Khalil (Communications Associate) 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 THE WORLD BANK TABLE OF CONTENTS PREFACE................................................................................................................................................................................................................. 1 EXECUTIVE SUMMARY ............................................................................................................................................................................... 4 …ò«ØæàdG ¢üî∏ªdG .................................................................................................................................................................................................... 5 RECENT ECONOMIC AND POLICY DEVELOPMENTS........................................................................................................ 6 Output and Demand.......................................................................................................................................................................................... 6 Labor Markets........................................................................................................................................................................................................ 7 Fiscal Policy ............................................................................................................................................................................................................ 8 Monetary Policy and Prices ............................................................................................................................................................................ 9 Financial Markets ...............................................................................................................................................................................................10 Balance of Payments and External Debt ................................................................................................................................................11 PROSPECTS .......................................................................................................................................................................................................13 SPECIAL FOCUS .............................................................................................................................................................................................14 Lebanon: Economic and Social Impact of the Syrian Conflict.............................................................................................14 Economic Impact ...............................................................................................................................................................................................16 Human Development and Social Impact ..............................................................................................................................................21 Infrastructure Impact .......................................................................................................................................................................................24 DATA APPENDIX............................................................................................................................................................................................29 SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON .....................................................................34 LIST OF FIGURES FIGURE 1. Economic activity stagnated in the first half of 2013 ............................................................................................ 6 FIGURE 2. Lebanon growth is heavily linked to growth in the MENA region.................................................................. 6 FIGURE 3. Private consumption and investment are expected to decrease in 2013 ................................................... 7 FIGURE 4. ...as reflected by the declining trends in the value of cleared checks and electricity production . 7 FIGURE 5. Services, historically the strongest driver of growth, stalled as....................................................................... 7 FIGURE 6. ...tourism declined .................................................................................................................................................................. 7 FIGURE 7. The widening fiscal deficit due to increased current expendtiures and a drop in revenues............. 8 FIGURE 8. ...is expected to be financed by more debt leading to an increase in the debt-to-GDP ratio .......... 8 FIGURE 9. Headline and core inflation have abated in the first half of 2013 ................................................................. 9 FIGURE 10. The banking sector growth slowdown started prior to the Syrian conflict................................................ 9 FIGURE 11. ...but favorable interest rate spreads continue to attract foreign deposits ..............................................10 FIGURE 12. The growth in M3 reflects the accomodative policy adopted by BDL......................................................10 FIGURE 13. The performance of the Beirut stock ...........................................................................................................................11 FIGURE 14. The trade in goods deficit decreased in 2013 .........................................................................................................11 FIGURE 15. ...along with the net foreign inflows, but the overall balance of payments strengthened .............12 FIGURE 16. Lebanon is hosting the largest number of Syrian refugees ..............................................................................15 FIGURE 17. ...despite being the smallest of Syria’s neighbors.................................................................................................15 FIGURE 18. Lebanon’s population (4.3 million) could expand markedly based on recent refugee influx trend 15 FIGURE 19. The impact of Syrian refugees on host populations differs widely across Lebanese districts .......15 FIGURE 20. The Syrian conflict’s impact on confidence, as reflected in the dollarization rate...............................16 FIGURE 21. The Syrian conflict’s impact on Lebanon’s solvency is viewed as large by financial markets .......16 FIGURE 22. Syria’s conflict is estimated to subtract 2.9 percentage points annually to Lebanon’s real GDP growth, for a cumulative cost of USD7.5 billion ...................................................................................................17 FIGURE 23. GDP growth forecast made priod to the crisis compared to the latest forecast point to a 2-3 percentage points drop due to Syrian conflict ........................................................................................................17 LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT FIGURE 24. Revenue losses became substantial early on as the Syrian conflict’s rapidly cut economic activity ...17 FIGURE 25. Spending pressures are building over time, mostly in line with the growing refugee influx ........17 FIGURE 26. Estimates of the budgetary and stabilization costs are sensitive to refugee projections ..................18 FIGURE 27. Lebanon: Exports of Wheat Flour to Syria have surged since 2012 ...........................................................18 FIGURE 28. The contraction in Lebanese exports through Syria accelerated in the first half of 2013 ...............19 FIGURE 29. ...as did the growth rates in imports coming through Syria ...........................................................................19 FIGURE 30. Tourist arrivals and hotel occupancy rates (percent; 3 months moving average) ..............................19 FIGURE 31. Tourism expenditures and hotel occupancy rates ( percent)..........................................................................19 FIGURE 32. The number of registered properties slumped at the onset of the crisis but seem to have stabilized ....20 FIGURE 33. Construction permits have trended sharply down since the onset of the Syrian conflict ...............20 FIGURE 34. Secondary and tertiary health care: Referrals and associated costs for refugees, H1 2013 ...........21 FIGURE 35. Primary health care: Use of PHC Services by refugees, December 2012................................................21 FIGURE 36. Lebanese and Syrian Students in Public Schools...................................................................................................22 FIGURE 37. Number of Syrian Children Ages 6-15 in public schools and not in public schools ..........................22 FIGURE 38. Poverty Rates in Lebanon by Governorate................................................................................................................22 FIGURE 39. Services Provided by MOSA Social Development Centers, 2011 ................................................................22 FIGURE 40. Extreme Poverty and Geographical Distribution of Refugees .........................................................................22 FIGURE 41. Number of Services Provided and Medical Consultations in SDCs ............................................................23 FIGURE 42. Number of Beneficiaries in the Population-at-Risk Program ...........................................................................23 FIGURE 43. Probability of Entering the Labor Force, By Age Groups ...................................................................................24 FIGURE 44. Percentage of Syrian Refugees out of Lebanese Labor Force, by Age Groups .......................................24 FIGURE 45. Percentage of Syrian Refugees out of the Lebanese Labor Force, By Education ...................................24 FIGURE 46. Increase in electricity demand due to the influx of Syrian refugees............................................................26 FIGURE 47. Budgetary cost of supplying (subsidized) electricity to refugees..................................................................26 LIST OF TABLES TABLE 1. Lebanon: Quantified Impact Assessment of the Syrian Conflict Spillovers ...........................................27 TABLE 2. Lebanon: Quantified Stabilization (Needs) Assessment of the Syrian Conflict Spillovers ...............28 TABLE 3. Lebanon: Selected Economic Indicators, 2010-15 ...............................................................................................30 TABLE 4. Lebanon at a Glance .............................................................................................................................................................31 TABLE 5. Lebanon: Millennium Development Goals, 1990-2010 ....................................................................................33 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. Spillovers from the Syrian conflict are exemptions on fuel oil. On the expenditures side, imposing a heavy toll on Lebanon’s economy key drivers are the increase in demand for public which, under an unchanged environment, is services stemming from the Syrian refugees and the projected to grow by 1.5 percent in both 2013 continued impact of the 2012 wage increases. The and 2014. Compared to our spring 2013 Lebanon rising fiscal deficit combined with low growth will Economic Monitor, our GDP growth projection was lead to a reversion in the downward trend in the revised down to 1.5 percent due to continued political debt-to-GDP ratio which is expected to increase to uncertainty and weaker than projected economic 137.1 percent in 2013. activity indicators. After robust growth performance from 2007 to 2010, growth is estimated to have iv. The balance of payments strengthened decreased significantly to 1.4 percent in 2012 and during the first seven months of 2013, in part due is projected to continue to expand at a subdued to the weakening economic activity and sustained pace in the next two years unless the regional and capital inflows. The trade-in-goods balance domestic environments improve. From the demand improved through July due to a decrease in imports side, private consumption and investment remain arising from a weakening in economic activity and a soft as consumer and investor confidence have softening in local demand but also large and lumpy been particularly affected by the volatile security oil imports by Electricité du Liban (EdL). Exports also environment. From the supply side, tourism, a surged, from a low base, in the first eight months central source of employment and growth for the of 2013 reflecting increased food and oil demand Lebanese economy, is negatively affected. from Syria. Meanwhile, the elevated spread between domestic and international interest rates continues to ii. The economic slowdown and domestic attract capital inflows which contribute to narrowing and regional turmoil also affected banking the balance of payments deficit. activity. Credit is decelerating, reflecting the reluctance of banks to lend in the midst of the v. The conflict in Syria is having a large, heightened uncertainty as well as increased risk negative, and rapidly growing impact on Lebanon’s aversion following the losses experienced by economy, its social fabric, and its public services subsidiaries of Lebanese banks operating in Syria. (Special Focus). The cumulative losses in economic The banking sector remains nonetheless highly activity could reach USD7.5 billion by end-2014. liquid and resilient to external shocks. While the Social cohesion is rapidly deteriorating partly due losses impact short-term profitability, the medium- to combination of rising poverty—approximately and long-term outlook for the banking sector 170,000 Lebanese would be pushed into poverty—a remains positive. The dollarization rate of deposits worsening labor market, rising insecurity, amid has increased moderately over the past year to 65.7 deteriorating core public services. Public services percent in August 2013. are under pressure given the sudden and large increase in demand arising from the Syrian refugee iii. After a strong fiscal expansion in 2012, the influx. The fiscal cost of Syrian conflict is estimated fiscal deficit continues to widen in 2013, to a large at USD2.6 billion. Across all core public services, extent driven by the spillovers from the Syrian the surge in demand is currently being partly met conflict. The effects of the major fiscal expansion through a decline in public service access and that started in 2012 continue to reverberate in 2013. quality. It is estimated that an additional spending The overall budget deficit increased to 8.7 percent of USD2.5 billion would be required to reinstate the of GDP in 2012 equally divided between soft access to and quality of public services to their pre- revenue performance and rising expenditure. On the Syrian conflict level. revenue side, the weakness partly stems from VAT 4 | Executive Summary LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT .…ò«ØæàdG ¢üî∏ªdG .2013 ΩÉY »a èJÉædG øe áĪdÉH 137^1 ¢VôØJ ÉjQƒ°S »a ´Gô°üdG øY áªLÉædG äÉ«YGóàdG ¿EG .1 πX »a ,™bƒàªdG øe …òdG »fÉæÑ∏dG OÉ°üàbE’G ≈∏Y Ó k «≤K kÉÄÑY ô¡°TC’G ∫ÓN kÉjƒb A k GOCG äÉYƒaóªdG ¿Gõ«e ó¡°T ó≤d .4 ∫ÓN áĪdÉH 1^5 áÑ°ùæH ƒªæj ¿CG ,Iô« q ¨àªdG ô«Z á«dÉëdG ±hô¶dG »a ∞©°†dG ≈dEG kÉ«FõL ∂dP Oƒ©jh ,2013 ΩÉ©dG øe ≈dhC’G á©Ñ°ùdG á≤HÉ°ùdG ájOÉ°üàb’G Iô°ûædG ™e á k fQÉ≤e .2014h 2013 ø«eÉ©dG ¿Gõ«e πé°Sq .∫GƒeC’G ¢ShDhQ ≥aóJ QGôªà°SGh …OÉ°üàb’G •É°ûædG âªJ ó≤d ,(2013 ΩÉ©dG ™«HQ) ∫hC’G π°üØdG »a äQó°U »àdG ¢VÉØîfG π°†ØH ∂dPh ƒ«dƒj/Rƒª q J ô¡°T ≈àM Ék æ°ùëJ ™∏°ùdG IQÉéJ »dɪLE’G »∏ëªdG èJÉædG ƒªf áÑ°ùf ¢üîj Ée »a ÉæJÉ©bƒJ á©LGôe DƒWÉÑJh ájOÉ°üàb’G ácôëdG ∞©°V øY âéàf »àdG äGOQGƒdG áÑ°ùf ôªà°ùª o dG »°SÉ«°ùdG QGô≤à°S’G ΩóY ÖÑ°ùH ∂dPh ,áĪdÉH 1^5 ≈dEG á«£ØædG ¿ÉæÑd AÉHô¡c á°ù°SDq ƒe äGOQGh ≈dEG áaÉ°VEG ,»∏ëªdG Ö∏£dG mAGOCG ó©Ña .Iô«NC’G äGô°TDƒªdG Ö°ùëH …OÉ°üàb’G •É°ûædG ∞©°Vh k IóYÉb øe ,É°†jCG â©ØJQG ó≤a äGQOÉ°üdG ÉeCG .áÑ∏q ≤àªdGh Iô«ÑµdG ƒªædG ∫ó©e ó¡°T ó≤d ,2010h 2007 ø«H Ée IôàØdG »a ƒªæ∏d …ƒb m ¢ùµ©j ɪq e 2013 ΩÉY øe ≈dhC’G á«fɪãdG ô¡°TC’G »a ,á°†Øîæe ™bƒàªdG øeh ,2012 ΩÉ©dG »a áĪdÉH 1^4 ≠∏Ñ«d Ék Xƒë∏e Ék °VÉØîfG kÉæeGõJh .ÉjQƒ°S øe á«£ØædGh á«FGò¨dG OGƒªdG ≈∏Y ójGõàªdG Ö∏£dG n ∫ÓN Ohóëe QÉWEG øª°V ™°SƒàdÉH ƒªædG iƒà°ùe ôªà°ùj ¿CG ø«r eÉ©dG á«∏ëªdG IóFÉØdG ä’ó©e ø«H ô«ÑµdG ähÉØàdG ôªà°ùj ,∂dP ™e .»ª«∏bE’Gh »∏ëªdG øjó«©°üdG ≈∏Y Ék æ°ùëJ CGôW Ée GPEG ’ q EG ,ø«r ∏n Ñ≤ªdG ¿Gõ«e õéY ≥««°†J »a ºgÉ°ùj ɪ q e ,∫GƒeC’G ¢ShDhQ ÜòéH ᫪dÉ©dGh ácôM Qɪãà°S’Gh ¢UÉîdG ∑Ó¡à°S’G πé°ùj ,Ö∏£dG ÖfÉL øªa .äÉYƒaóªdG á«æeC’G ´É°VhC’ÉH ôªãà°ùªdGh ∂∏¡à°ùªdG á≤K äôKCÉJ å«ëH ádƒéN ,áMÉ«°ùdG ´É£b ôKCÉJ ó≤a ,¢Vô©dG ÖfÉL øe ÉeCG .Iô q ≤à°ùªdG ô«Z á«Ñ∏°Sh Iô«Ñc äÉ«YGóJ ÉjQƒ°S »a ´Gô°üdG øY ºéæj .5 OÉ°üàb’G »a ƒªædG ∂jôëàdh πª©dG ¢UôØ o d »°SÉ°SC’G Qó°üªdG …CG ¬JÉeóNh »YɪàL’G ¬é«°ùfh ¿ÉæÑd OÉ°üàbG ≈∏Y QÉ°ûàf’G á©jô°Sh .»Ñ∏°S ƒm ëf ≈∏Y ,»fÉæÑ∏dG •É°ûædG »a ᫪cGôàdG ôFÉ°ùîdG ≠ o ∏o ÑJ ób .(¢UÉN ôjô≤J) áeÉ©dG ɪc .2014 ΩÉ©dG ájÉ¡f »a »cô«eCG Q’hO QÉ«∏e 7^5 …OÉ°üàb’G á«∏NGódG äÉHGô£°V’Gh …OÉ°üàb’G DƒWÉÑàdG ôKCG ɪc .2 m Qm ƒgóJ ≈dEG »YɪàL’G ∂°SɪàdG ¢Vô©àj »eÉæJ ÖÑ°ùH ∂dPh ™jô°S ¿ÉªàFE’G ácôM â©LGôJ å«M ,»aô°üªdG •É°ûædG ≈∏Y ᫪«∏bE’Gh øWGƒe ∞dCG 170 »dGƒM ¢ùeÓj ¿CG ™bƒàªdG øe å«M) ô≤ØdG áÑ°ùf ô«Z ´É°VhC’G πX »a ∞«∏°ùàdG ∫Éée »a ±QÉ°üªdG OoOôJ ¢ùµY ɪe …OôJh ,»æeC’G ôJƒàdG óYÉ°üJh ,πª©dG ¥ƒ°S ∞©°Vh ,(ô≤ØdG §N ôFÉ°ùîdG ÜÉ≤YCG »a QÉ£NC’G …OÉØJ ≈∏Y É¡°UôM ójGõJh áæĪ£ª o dG äÉeóîdG ≈∏Y äÉWƒ¨°†dG OGOõJh .á«°SÉ°SC’G áeÉ©dG äÉeóîdG á«fÉæÑ∏dG ±QÉ°üª∏d á©HÉàdG á«dɪdG äÉ°ù°SDƒªdG É¡d ¢Vô©àJ »àdG èJÉædG Ö∏£dG á«MÉf øe ÅLÉتdGh ô«ÑµdG ´ÉØJQ’G πX »a áeÉ©dG á«dÉY ádƒ«°ùdG áÑ°ùf ≈≤ÑJ ,∂dP øe ºZôdÉH .ÉjQƒ°S »a á∏eÉ©dG ´Gô°üdG äÉ«YGóàd á«dɪdG áØ∏µdG ÉeCG .ø«jQƒ°ùdG ø«ÄLÓdG áeRCG øY ôFÉ°ùîdG ¿CG ø«M »ah .á«LQÉîdG äÉeó°ü∏d …ó°üàdG ≈∏Y IQOÉbh Ée »ah .»cô«eCG Q’hO QÉ«∏e 2^6 p`H Qó q ≤oàa ¿ÉæÑd ≈∏Y ÉjQƒ°S »a á«HÉéjEG äÉ©bƒàdG ≈≤ÑJ ,ô«°ü≤dG ióªdG »a ìÉHQC’G áÑ°ùf ≈∏Y ôKDƒJ äôKCÉJ ó≤a ,á«°SÉ°SC’G áeÉ©dG äÉeóîdG ≈∏Y Ö∏£dG ójGõJ ¢üîj â©ØJQG óbh .πjƒ£dGh §°SƒàªdG ø«r jóªdG ≈∏Y »aô°üªdG ´É£≤∏d q CG .É¡«∏Y ∫ƒ°üëdG ádƒ¡°Sh á«YƒædG á«MÉf øe Ék Ñ∏°S äÉeóîdG ∂∏J Ée »°VɪdG ΩÉ©dG ∫ÓN ∫óà©e πµ°ûH »cô«eC’G Q’hódÉH ™FGOƒdG áÑ°ùf áeÉ©dG äÉeóîdG á«Yƒf â«ÑãJ IOÉYE’ áHƒ∏£ªdG á«aÉ°VE’G äÉbÉØædG .2013 ¢ù£°ùZCG/ÜCG »a áĪdÉH 65^7 ≠∏Ñàd Q’hO QÉ«∏e 2^5 p`H Qó≤oàa ÉjQƒ°S »a ´Gô°üdG πÑb ¬«∏Y âfÉc Ée ≈dEG .»cô«eCG ,2012 ΩÉ©dG ∫ÓN áeÉ©dG á«dɪdG »a O m ÉM ™°SƒJ m ó©Ña .3 ≈dEG ∂dPh ,2013 ΩÉY »a kɪJ ó¡°ûj »dɪdG õé©dG ∫Gõj ’ QÉKB’G ¿EG .¿ÉæÑd ≈∏Y ájQƒ°ùdG áeRC’G äÉ«YGóJ ÖÑ°ùH ó«©H óM ôo ªà°ùJ 2012 ΩÉY ∫ÓN CGóH …òdG OÉëdG »dɪdG ™°SƒàdG øY áéJÉædG »dɪLE’G õé©dG áÑ°ùf â©ØJQG ó≤a .2013 ΩÉY »a É¡JGOGóJQÉH »dɪLE’G »∏ëªdG èJÉædG øe áĪdÉH 8^7 ≈dEG áeÉ©dG á«fGõ«ªdG »a AGOC’G ø«H hm É°ùàe ƒm ëf ≈∏Y áÑ°ùædG √òg ´RƒàJh ,2012 ΩÉ©dG »a ,äGOGôjE’G ÖfÉL øe .äÉ≤ØædG ºéM ´ÉØJQGh äGOGôjEÓd ∞«©°†dG øe OƒbƒdG âjR IOÉe AÉØYEG ≈dEG »FõL πµ°ûH π°UÉëdG ∞©°†dG Oƒ©j á°ù«FôdG ™aGhódÉa ,äÉbÉØædG ÖfÉL øe ÉeCG .áaÉ°†ªdG ᪫≤dG áÑjô°V ø«ÄLÓdG áeRCG ÖÑ°ùH áeÉ©dG äÉeóîdG ≈∏Y Ö∏£dG IOÉjR øª°†àJ ºJ …òdG QƒLC’G IOÉjR QGôb øY èJÉædG ô«KCÉàdG QGôªà°SGh ø«jQƒ°ùdG áÑ°ùædG ™e óYÉ°üàªdG »dɪdG õé©dG øeGõJ ¿EG .2012 ΩÉY ¬∏«©ØJ øjódG áÑ°ùæd …QGóëf’G √ÉéJ’G ¢ùµY ≈dEG …ODƒj ób ƒªæ∏d áØ«©°†dG ≈dEG ™ØJôJ ¿CG ™bƒàªdG øe »àdGh ,»dɪLE’G »∏ëªdG èJÉædG ≈dEG ΩÉ©dG …ò«ØæàdG ¢üî∏ªdG | 5 THE WORLD BANK RECENT ECONOMIC AND POLICY DEVELOPMENTS consumer confidence (Figure 3). The Byblos/AUB Output and Demand consumer confidence index dropped by an average of 37 percent in 20121. The increase in checks cleared 1. Economic activity has decelerated since by 1.8 percent (yoy) during the first seven months of July 2012 as the Syrian conflict increasingly took 2013 reflects an increase from a low base in 2012 its toll on Lebanon. The subdued economic activity rather than a pick-up in consumption2. A multitude of was reflected in a stagnating growth rate of Banque indicators additionally point to a decrease in private du Liban (BdL)’s coincident indicator, one of the investment in first five months of 2013 (Figure 4). few available high frequency measure of economic Electricity production dropped by 4.9 percent (yoy) activity, at an average of 2.5 percent (yoy) in the while construction permits declined by 17.4 percent first half of 2013 (Figure 1). The services sector, (yoy) in the first half of 2013. The heightened which accounts for about 75 percent of GDP, and investment risk perceptions are reflected, at the consumer confidence have been particularly affected sovereign credit risk level, in Moody’s downgrade by the volatile security environment. The muted of Lebanon’s outlook from stable to negative in May GDP growth in Lebanon is in line with the regional 2013. economic stagnation, and more specifically, across countries affected by the Arab Spring (Figure 2). Real GDP Growth in Selected Regional Countries Percent BdL Coincident Indicator: annual growth rate Percent and its contributors M3 Foreign Trade Foreign Passengers Cement Cleared Checks EDL Petroleum Coincident Indicator FIGURE 2. Lebanon growth is heavily linked to growth in the MENA region Source: World Bank. FIGURE 1. Economic activity stagnated in the first half of 2013 Source: Banque du Liban and World Bank staff calculations. 3. From the supply side, tourism, a central source of employment and growth for the 2. From the demand side, the deteriorating Lebanese economy, was negatively affected security environment also negatively affected by the security environment. A number of Gulf 1 The latest available data for the consumer confidence index dates back to end-2012. 2 The average growth rate of checks cleared during the period 2008 to 2012 averaged 15.9 percent. The 1.8 percent growth rate in the first seven months of 2013 is significantly lower than the average historical growth rate. 6 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT 25 Demand side: Contribution to GDP Growth Production side: Contribution to GDP growth 20 Percent Industry Services 10 Real GDP growth rate Agriculture 15 Percentage point/percent 10 8 5 6 0 4 -5 -10 2 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012P 2013P -15 Net exports (contrib.) Private consumption (contrib.) 0 Government consumption (contrib.) Real GDP growth 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012P 2013P Investment (contrib.) -2 FIGURE 3. Private consumption and investment FIGURE 5. Services, historically the strongest driver are expected to decrease in 2013 of growth, stalled as... Source: National Accounts and World Bank Staff Calculations. Source: National Accounts and World Bank Staff Calculations. Tourism Sector 200,000 40 180,000 35 160,000 30 140,000 120,000 25 100,000 20 80,000 15 Tourist arrivals (number, sa) 60,000 10 40,000 Hotel Occupancy rate (sa,rhs) 20,000 5 0 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 2008 2009 2010 2011 2012 2013 FIGURE 4. ...as reflected by the devlining trends in the FIGURE 6. ...as tourism declined value of cleared checks and electricity production Source: BDL and World Bank Staff calculations. Source: Ministry of tourism and World Bank staff calculation. Cooperation Council, the United States, and European countries, among others, have issued Labor Markets travel advisories urging their citizens not to travel to Lebanon. As a result, tourist arrivals slumped 4. The large influx of Syrian refugees 17 percent in 2012, and dropped an additional exacerbated the already difficult labor market 10 percent (yoy) in the first eight months of 2013 conditions facing low skilled workers. Even (Figure 5). The decline in tourist activity was also without the Syrian refugees, the Lebanese economy reflected in low hotel occupancy rates which stood needed to create six times the amount of jobs it at 23.2 percent in the first half 2012, declining by previously did to absorb new entrants to the labor 2 percentage points from the first half of 20123 market. Prior to the Syrian conflict, labor markets (Figure 6 and Figure 30). The modest drop in hotel were characterized by a low, albeit increasing, occupancy between 2012 and 2013 reflects the participation rate (especially by women) and a sharp increase in Syrian refugees, some of whom high prevalence of informal employment. The large are accommodated in hotels, especially those at the influx of Syrian refugees, the vast majority of whom lower price range. are low- to semi-skilled workers, increase the labor 3 Hotel occupancy rates registered 17.3 percent in November 2012, their lowest level in three years. Recent Economic and Policy Developments | 7 THE WORLD BANK supply by an estimated 30 percent in 2013 (World Five Months Government Finances Bank, 20134). A number of Syrian refugees are also 6 establishing small enterprises. The intensifying 5 competition among Lebanese and Syrian low- 4 and semi-skilled workers and small enterprises is 3 fueling social discontent, tensions among the host 2 and refugee communities and is expected to result 1 in sharply higher unemployment, especially among 0 low-skilled Lebanese workers. -1 2008 2009 2010 2011 2012 2013 -2 Total Revenues Total Expenditures Budget Deficit FIGURE 7. The widening fiscal deficit due to increased current expenditures and a drop in revenues. Fiscal Policy Source: Ministry of Finance and World Bank staff calculations. 5. The effects of the permanent fiscal spending increases that started in 2012 are Debt to GDP ration (%) continuing in the first five months of 2013 (Figure 7). The central government’s overall fiscal deficit widened by 46.7 percent (yoy) in 80 200 70 180 the first five months of 2013 while the primary 60 160 140 fiscal surplus shrank by a staggering 91.9 percent 50 120 40 100 (yoy). Government expenditures increased by 11.4 30 80 60 percent (yoy) driven by an increase in (i) the cost 20 40 10 of servicing Lebanon’s large public debt as interest 20 0 0 costs have increased, especially on external debt, 2005 2006 2007 2008 2009 2010 2011e 2012e 2013p 2014p (ii) the public sector wage bill due to the cost-of- Gross Public Dept Nominal GDP Debpt to GDP (rhs) living adjustment that started in 2012, and (iii) capital expenditures which increased by 46.1 FIGURE 8. ...is expected to be financed by more debt percent (yoy). On the revenue side, total revenues leading to an increase in the dept to GDP ratio. increased by 2.3 percent (yoy), significantly Source: National Accounts and World Bank staff calculations. below nominal GDP growth. This weak revenue performance partly stems from the spillovers from the Syrian conflict and the associated weakening The decelerating economic activity, wider fiscal in private consumption and investment, but it also deficits and rising interest risk premium due to the reflects the continued impact of the VAT exemption Syrian conflict have halted Lebanon’s remarkable on fuel oil introduced in early 2012. progress in reducing its debt-to-GDP ratio. That ratio is projected to increase to 137.1 percent and 6. The rising fiscal deficit combined with 141.2 percent in 2013 and 2014, respectively. The low growth is projected to lead to a reversal reversal of the downward trend in the debt-to-GDP in the downward trend in the debt-to-GDP ratio is an important source of risk and subjects ratio that started in 2006. Lebanon’s debt Lebanon to shifts in market sentiment (Figure 8). dynamics improved markedly after 2006. The improvement was, however, largely cyclical (due to high economic growth), rather than structural. 4 World Bank (2013) Lebanon: Economic and Social Impact Assessment of the Syrian Conflict, September, Report No. 81098, Washington DC. 8 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Monetary Policy, Banking Headline and Core Inflation Rates (yoy change, 3mma, sa) and Prices 7. Inflation started decreasing in 2013 though the extent to which this stems from weakening activity, one-off factors, or underreporting of rent inflation is unclear. Measured headline and core inflation accelerated considerably in 2012 due to (i) an increase in the minimum wage and cost of living adjustment; (ii) a positive output gap resulting from above potential growth in 2007- 2010; and (iii) localized price pressures and an increased consumption of a large influx of Syrian FIGURE 9. Headline and core inflation have adapted in refugees. Headline (core) inflation abated to the first half of 2013 3.1 (2.2) percent in July 2013 compared to 4.9 Source: CAS, CRI, and WB Staff Calculations. 1/ Core inflation (3.7) in July 2012 (Figure 9). The deceleration in depicts changes in domestic prices excluding fuel and food. It is calculated using the CPI figure of CRI and recalibrated by the weights output growth in 2013 and 2014 will contribute of the official CPI of CAS to further easing inflationary pressures. As rent inflation, which account for 16 percent of the Lebanon: Growth Rates of Private Sector Loans and Deposits inflation weight, is not reported since July 2012, inflation is likely underreported, potentially by a significant margin. Rent pressures are indeed likely to be present in Lebanon given the large increase in housing demand stemming from the Syrian refugees. A pickup in rent inflation is materializing in Jordan, a country which has significantly less refugees while having a larger population and country size. FIGURE 10. The banking sector growth slowdown 8. The Lebanese banking sector, one of started prior to the Syrian conflict... Lebanon’s main services sectors, has traditionally Source: BDL and World bank staff calculations. enjoyed high liquidity and a large asset base. The sector has shown resilience to external shocks. The sector benefited from (i) prudent management 2013.5 Liquidity in the banking sector has typically and (ii) conservative regulation and oversight by been cushioned by non-resident deposits that the BdL and the Banking Control Commission are attracted by the elevated spread between (BCC). With relatively under-developed financial domestic deposit and international interest rates6 markets, the banking sector has been at the center (Figure 11). of financial intermediation in the country. After steadily increasing over the 2009-2012 period, 9. The banking sector continues to benefit assets of commercial banks continued growing from the inflow of foreign deposits but bank by 8.5 percent (yoy) in the first seven months of lending remains tepid amid a weak economic 5 According to International Monetary Fund (IMF, 2012) estimates, commercial banks’ assets are 350 percent of GDP. The loan-to- deposits ratio was 30.3 percent in July 2013, one of the lowest in the world. This indicates the absence of funding risks for Lebanese banks (IMF, 2012). 6 The IMF (2012) estimate that 40 percent of total bank deposits belong to non-residents. While these are in principle short-term deposits, evidence shows these are loyal customers and ensures that they behave as long-term deposits. Recent Economic and Policy Developments | 9 THE WORLD BANK exchange gains, Lebanese banks operating in Syria experienced a loss of USD205.3 million (Byblos bank, 2013). Banks have increased their provisions to cover these losses. The worsening security environment and the heightened uncertainty have also led to a deceleration in the growth rate of lending to the private sector from 17.3 percent (yoy) in July 2011 to 10.3 and 9.9 percent (yoy) in July 2012 and 2013, respectively (Figure 10). While the losses in Syria materially impact Lebanese banks’ profitability in the short FIGURE 11. ...but favorable interest rate spreads term, the medium- to long-term prospects remains continue to attract foreign deposits positive when the Syrian conflict is resolved. Source: BDL, ABI adn World Bank staff calculations. 10. Money supply increased in the seven months of 2013 partly reflecting the central M3 Growth Rate (yoy) bank’s attempts to stimulate the sluggish economic activity. Money supply (M3) increased by 3.2 percent between year-end 2012 and July 2013. The increase in M3 reflects, in part, BdL’s accommodative monetary policy stance that aims to stimulate economic activity (Figure 12). The increase in the money supply is expected to have a limited multiplier impact due to weak consumer sentiment and a deceleration in the growth lending to the private sector by commercial banks. The dollarization rate of deposits inched slightly up to 65.7 percent in August 2013 increasing by 0.9 FIGURE 12. The growth in M3 reflects the accomodative policy adopted by BdL percentage point from end-2012 likely reflecting a worsening in Lebanon’s outlook, as captured, for Source: BDL and World Bank staff calculations. example, by Moody’s outlook downgrade from stable to negative in May 2013 (Figure 20). environment and rising uncertainty. Non- resident private sector deposits grew by 23.4 percent (yoy) in the first seven months of 2013. Nonetheless, the banking sector remains exposed to sovereign (and exchange rate) risk as it is Financial Markets a large holder of Lebanon sovereign debt.7 In a bid to diversify their investments, commercial 11. The stock market index declined in banks attempted to expand regionally. A total the first half of 2013. The BLOM stock index of seven Lebanese banks operated in Syria at dropped by 5.4 percent between January and the start of the crisis. The Syrian subsidiaries of August 2013 as the prices of equities trading on Lebanese banks have been materially impacted by the Beirut Stock Exchange (BSE) were affected the Syrian conflict. Excluding unrealized foreign by the volatile security environment and the 7 Despite being on a downward trend, commercial banks holdings of total outstanding Treasury bills, stood at around 50.2 percent in July 2013. This exposes commercial banks directly to sovereign credit and foreign exchange risks. Commercial banks also intermediate deposits at the BdL. In fact, 35 percent of total assets of commercial banks are held as deposits with the BdL. Given that the central bank also invests in government debt, this creates an indirect exposure of commercial banks to sovereign default. 10 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT of the military conflict– that have pushed Lebanon to substitute away from cheap Syrian products (towards more expensive imports). On the other hand, the increase in exports was primarily boosted by exports to Syria, as these increased more than two folds benefitting from a captive market that is currently under sanctions. 13. The overall balance of payments has strengthened so far this year due to the continuous inflow of capital and the improvement observed in the trade balance. FIGURE 13. The performance of the Beirut stock exchange weakened in the first half of 2013 The balance of payments shrank by 28.7 percent Source: Beirut Stock Exchange and World Bank staff calculations. (yoy) in the first seven months of 2013, due to the 2.1 percent (yoy) decrease in the trade deficit economic slowdown. Volumes traded registered and the 1.9 percent (yoy) increase in net foreign a sharp decrease of 43.7 percent over the same inflows of transfers, income, services and capital period likely echoing the weakening investor (Figure 15). The increase in net foreign inflows sentiment (Figure 13). The depth of financial compares to a 15.8 percent (yoy) rise over the markets remains shallow in Lebanon as shown by same period in 2012. This deceleration in the low market capitalization (as a percent of GDP), growth rate of foreign inflows, despite the wide traded volumes, and liquidity in the BSE compared spread between average domestic interest rates to international standards. that reached 349 basis points by July 2013, can be attributed to (i) lower inflows from tourism, and (ii) an expected decrease in Foreign Direct Investment (FDI) due to the heightened risk caused by the Syrian conflict. Balance of Payments and External Debt 12. Lebanon’s trade in goods deficit shrank in the first eight months of 2013 as a result Trade in Goods of increased exports to Syria and decreased 23 14 12 (lumpy) fuel imports (Figure 14). The trade in 18 10 13 goods deficit narrowed by 0.9 percent (yoy) 8 6 8 during the eight months of 2013 as a result of a 0.4 5 3 2 percent (yoy) drop in imports and a 1.7 percent -2 0 (yoy) rise in exports. The decrease in imports was -7 -2 -4 driven primarily by a 20.1 percent (yoy) drop in -12 -6 energy imports due to lumpy oil imports by EdL in February 2012 that have not yet materialized. On the other hand, imports excluding energy FIGURE 14. The trade in goods deficit products increased by 6.6 percent (yoy)–Figure decreased in 2013... 14–reflecting (i) the increased demand stemming Source: Lebanese Customs, World Bank staff calculations from Syrian refugees which partly offsets the decreasing consumption patterns of the Lebanese, and (ii) production disruptions in Syria–as a result Recent Economic and Policy Developments | 11 THE WORLD BANK FIGURE 15. ...along with the net foreign inflows, but the overall balance of payments strenghtened Source: BDL Lebanese Customs and World Bank staff calculations. 14. As a result, foreign reserves have increased. Despite the decrease in gold prices, foreign gross reserves held by the central bank increased by 4.3 percent (yoy) during the first seven months of 2013 and reached US$ 31.3 billion by July 2013. In terms of months of imports, the coverage ratio remains elevated, at around 11. 12 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT PROSPECTS 15. Assuming unchanged dynamics in Syria’s 17. Lebanon’s fiscal deficits and debt conflict in the near term, spillovers onto the dynamics are another important source of risk. Lebanese economy are projected to continue Given the permanent (non-discretionary) nature to pose significant challenges. World Bank of the increase in government expenditures, staff projections through 2014 are based on the weak revenue collection, large debt and deficits, assumption that spillovers from the Syrian conflict fiscal space is limited in Lebanon. As a result, the abate significantly towards end-2014. Some of country’s capacity to absorb shocks to public the downside risks identified in our spring 2013 finances is reduced and constitutes a source of Lebanon Economic Monitor materialized.8 In risk. The large and rising deficit and debt generate particular, increasingly more frequent security substantial gross financing needs that expose the incidents have impacted consumer and investor country to sudden shifts in investor sentiment. confidence while weaker than expected economic Structural reforms on the revenue and expenditure indicators have emerged. Our spring 2013 GDP sides would reduce these risks. growth projections have, therefore, been revised down and we now project that GDP growth in both 18. Infrastructure bottlenecks in the 2013 and 2014 will remain tepid, at 1.5 percent electricity, water, transportation and for each of these years. For 2015, a rebound to telecommunication sectors need to be addressed 4 percent is projected. This growth acceleration, to improve public service delivery and boost however, hinges critically on a resolution of growth. Addressing infrastructure bottlenecks, the conflict in Syria and an improvement in the especially in the electricity sector, would alleviate security and political environments in Lebanon. fiscal pressures. Structural reforms will also be critical to achieving inclusive and sustained 16. Risks to these growth projections are growth and for improving the investment and broadly balanced. Upside growth potential business climate as the infrastructure bottlenecks exists should spillovers from Syria abate earlier increase the cost of doing business. than assumed. Downside risks are also present. Key risks include a further worsening in the security situation or deepening of the domestic political gridlock, and regional risks. Among the latter, events unfolding in Egypt or a widening of the Syria crisis to a regional context, could result in higher oil prices and a decrease in multiple country tourism. As Lebanon is a large net oil importer and has a large tourism sector, these shocks would worsen Lebanon’s trade-in-goods and balance of payments. 8 The Spring 2013 issue of the Lebanon Economic Monitor can be found at: www.worldbank.org/lb Prospects | 13 THE WORLD BANK SPECIAL FOCUS i.e., to reinstate the access to and quality of public LEBANON: ECONOMIC services to their pre-Syrian conflict level. AND SOCIAL IMPACT OF 20. At the request of Prime Minister Najib Mikati, the World Bank led an Economic and THE SYRIAN CONFLICT9 Social Impact Assessment (ESIA) of the Syrian conflict on Lebanon for the 2012-2014 period. 19. During the 2012-2014 period, the conflict in This effort was a collaborative one between the Syria is having a large, negative, and rapidly growing World Bank, the United Nations,10 the European impact on Lebanon’s economy, its social fabric, Union, and thew International Monetary Fund. and its public services. On the economic front, Strong collaboration from numerous government the deteriorating security situation is undermining ministries and agencies was also extended to the consumption, investment which is dragging down ESIA team. The ESIA report is limited to quantifying growth. The cumulative losses in economic activity the impact and stabilization needs of Lebanon. could reach an estimated USD7.5 billion. On the Based on priorities set by the Government, a social front, social cohesion is rapidly deteriorating second report will focus on the identification of partly due to combination of rising poverty— policy recommendations, programs and projects approximately 170,000 Lebanese would be pushed to mitigate the impact of the Syrian conflict. This into poverty (over and above the 1 million currently Special Focus provides an overview of the key living below the poverty line)—a worsening labor findings of ESIA report market which is estimated to result in a doubling of the unemployment rate to above 20 percent, rising 21. The ESIA differs in important ways from insecurity, amid deteriorating core public services. typical impact and needs assessments due to Public services are under pressure given the sudden the nature of the shock that Lebanon is facing. and large increase in their demand arising from the Key differences are that the shock is (1) ongoing— Syrian refugee influx. The fiscal cost of Syrian conflict Lebanon has been, and continues to be, subject to is estimated at USD2.6 billion, of which USD1.5 the spillover effects of conflict in a neighboring billion stems from foregone government revenue country, but it is neither in a post-disaster collection while the remaining USD1.1 billion are situation, nor is it in a post-conflict situation; expenditure incurred by the government to meet (2) of uncertain magnitude, both in terms of some of the surge in demand for public services. duration and size—the start of the spillover is Across all core public services, the surge in demand diffuse while the end date unknown, and the is currently being partly met through a decline in size of the shock depends to a large extent on both the access to and the quality of public service the intensity of the (ongoing) conflict in Syria; (3) delivery. It is estimated that an additional spending temporary—Lebanon is not facing a permanent of USD2.5 billion would be required for stabilization, shock, as is the case with a natural disaster or 9 For further details, see World Bank (2013) Lebanon: Economic and Social Impact Assessment of the Syrian Conflict, Report No. 81098, Washington DC, September. 10 The United Nations agencies that collaborated in the ESIA are: ILO, OHCHR, UNESCO, UNICEF, UNHCR, UNDP, UNESCWA, UNFPA, UN Habitat, UNRWA, UN Women, FAO, WFP, and WHO. 14 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT FIGURE 16. Lebanon is hosting the largest FIGURE 18. Lebanon’s population (4.3 million) could number of syrian refugees expand markedly based on recent refugee influx trend Source: UNHCR. Source: UNHCR, UNDP, UNICEF, UNRWA, WBI’s WDI, and World Bank staff projections. a (direct) war; (4) without material damages to Lebanon’s infrastructure, housing, capital or country. This policy and the close historical human stock. Losses, instead, are on flows, such links binding the two countries has resulted in as loss of economic activity, income, access to Lebanon receiving the lion share of the refugees and quality of public services. Based on a request (Figure 16), despite being the smallest of Syria’s from the Government of Lebanon, the ESIA is a neighbors, be it by land area or population rapid assessment, having been completed at very (Figure 17). To assist Lebanon in coping with the short notice, in light of the ongoing degradation humanitarian dimension of the refugee influx, the of the situation and the request to have the report international community, through the UNHCR ready for the United Nations General Assembly and UN partner agencies, promptly established meeting on September 25, 2013. operations in Lebanon. By August 2013, the refugee influx had expanded dramatically—to 22. The initial spillovers from the Syrian 914,000 equivalent to 21 percent of Lebanon’s conflict were primarily of a humanitarian pre-crisis population—and led to the largest nature and related to the influx of refugees humanitarian emergency operation of its kind for into Lebanon. Since the onset of the Syrian many years. Based on current trends, a total of 1.3 crisis, Lebanon has generously maintained an million Syrian-conflict refugees are projected to open border policy and has permitted refugees have entered Lebanon by end-2013 (as presented to temporarily but freely settle across the in the Regional Response Plan 5 in June 2013). FIGURE 17. ...despite being the smallest of FIGURE 19. The impact of Syrian refugees on host Syria’s neighbors populations differs widely across Lebanese destricts Source: UNHCR and World Bank 2013 World Development Indicators. Source: UNICEF, UNHCR CDR, and World Bank staff. Special Focus | 15 THE WORLD BANK FIGURE 20. The Syrian conflict’s impact on FIGURE 21. The Syrian conflict’s impact on Lebanon’s confidence, as reflected in the dollarization rate solvency is viewed as large by financial markets Source: Lebanese customs and World Bank staff calculations. Source: Banque du Liban. Projections for 2014 are subject to significant in both the access to and the quality of public uncertainty. To address this, two scenarios are service delivery. It is estimated that an additional analyzed. A baseline refugee influx scenario spending of USD2.5 billion would be required forecasts 1.6 million refugees by end-2014 (37 for stabilization, i.e., to reinstate the access to percent of Lebanon’s pre-crisis population). For and quality of public services to their pre-Syrian illustration and sensitivity purposes, a lower conflict level. It is estimated that the economic probability/higher impact scenario is also used impact of the Syrian conflict became significant (high refugee influx scenario)—Figure 18. The during 2012, as revealed by indicators such as existing influx of refugees is already overwhelming deposit dollarization (Figure 20) or spread on some host communities where, in some case, the Lebanon’s Eurobonds (Figure 21). refugees account for more than half the pre-crisis community population (Figure 19). Economic Impact 23. With the escalation of the Syrian conflict, spillovers onto Lebanon have rapidly 24. The conflict in Syria—a country that moved beyond the humanitarian to the is closely linked, through historical, social economic and social spheres where large, and economic ties to Lebanon—is severely negative, and growing spillovers are occurring and negatively impacting the Lebanese (Table 1). In summary, the ESIA report finds economy. Lebanese growth is estimated to be that during the 2012-2014 period, the conflict down by 2.9 percentage points each conflict year. may (1) cut real GDP growth by 2.9 percentage This is generating cumulative losses in economic points each year, entailing large losses in terms activity of USD7.5 billion over the 2012-2014 of wages, profits, taxes, or private consumption impact assessment period—Table 1 and Figure 22. and investment; (2) push approximately 170,000 The largest impact arises through the insecurity Lebanese into poverty (over and above the 1 and uncertainty spillovers which profoundly and million currently living below the poverty line) negatively affect investor and consumer confidence. and double the unemployment rate to above The resulting lower economic activity is putting 20 percent, most of them unskilled youth; and downward pressure on government revenues (Figure (3) depress government revenue collection by 24) which, combined with rising demand for public USD1.5 billion while simultaneously increasing services stemming from the large refugee influx, is government expenditure by USD1.1 billion due to generating large costs for the budget (Figure 25) the surge in demand for public services, bringing and damaging Lebanon’s structurally weak public the total fiscal impact to USD2.6 billion. Across finances. For 2014, these costs are largely driven by all key public services, the surge in demand is the projected influx of refugees into Lebanon (Figure currently being partly met through a decline 26). 16 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT FIGURE 22. Syria’s conflict is estimated to subtract FIGURE 24. Revenue losses became substantial early on 2.9 percentage points annually to Lebanon’s real as the Syrian cobflict’s rapidly cut economic activity GDP growth, for a cumulative cost of USD7.5 billion Source: World Bank staff estimates. Source: World Bank (2013). FIGURE 23. GDP growth forecast made prior to the crisis FIGURE 25. Spending pressures are building over time, compared to the latest forecast point to a 2-3 percentage mostly in the line with the growing refugee influx points drop due to syrian conflict Source: EUI, IMF, World Bank Source: World Bank (2013). 25. The impact of the Syrian conflict is also trade flows (Figure 27). Conversely, trade disruptions particularly pronounced in the trade sector, are pushing up domestic prices of some staples such affecting goods and services trade, and in as wheat flour, which has important implications on particular the large tourism sector. An economy welfare, particularly for poor households. with a large trade sector, Lebanon is significantly exposed to Syria not only due to its role as a 26. Lebanon’s public finances were trading partner, but also because a sizable share of structurally weak prior to the Syrian shock and Lebanese trade transits through Syria and because are now becoming severely strained, with the of the risk a destabilized Syria creates for Lebanon’s deficit estimated to widen by USD2.6 billion large services exports, especially tourism, with the over the 2012-14 period—(Table 1, baseline number of international visitors having steadily refugee influx projections). Following half a declined since 2010. The first half of 2013 witnessed decade of robust growth, Lebanon experienced a sharp reductions in trade flows, particularly for food remarkable decrease in its debt-to-GDP ratio, from products and consumer goods. While Lebanon was about 180 percent in 2006, to 134 percent at the traditionally a net food importer from Syria, the eve of the Syrian conflict in 2011. The country’s country posted its first food trade surplus in 2012— improved public finances, however, were to a large wheat is one such stark example of rapidly changing extent due to a cyclical improvement, as strong Special Focus | 17 THE WORLD BANK FIGURE 26. Estimates of the budgetary and stabilization FIGURE 27. Lebanon: Exports of Wheat Flour to Syria costs are sensitive to refugee projections have surged since 2013 Source: WB staff calculations based on data from Ministry of Source: WB staff calculations based on lebanese Customs data. Economy and Trade. Notr:(*) denotes that data for 2013 are only available until June.. structural reforms envisaged as part of the Paris III the deceleration of imports implied consumers and conference have yet to be fully implemented. The firms foregoing foreign goods of the value of USD1.7 Syrian conflict shock is putting Lebanon’s public billion. More importantly, both export and import finances under severe and rapidly escalating strains, growth is likely to contract further in light of the first unsustainable given Lebanon’s initial weak public six months data available from 2013. finances. On the revenue side, spillovers from the conflict are estimated to cut USD1.5 billion in revenue 28. The contraction in Lebanese exports and collection over 2012-14, due to a combination of imports that travel through Syria accelerated direct impact on key sectors (e.g., tourism) and during the first months of 2013. Figure 28 shows indirect impacts through weaker economic activity. the evolution of monthly export growth rates for On the expenditure side, total budgetary spending total exports and for exports through Syria as well by the Government alone is estimated to grow by as trends for each of the series. The growth rate up to USD1.1 billion over 2012-2014 because of the of exports through Syria fell by 11.6 percentage Syrian conflict and the associated sharp increase in points when comparing the pre- and post-Syrian demand for and consumption of public services by conflict periods. The fall in growth rates becomes refugees from Syria. The wider fiscal deficits, lower particularly important in 2013. Figure 29 does the economic growth, and rising interest risk premium same for imports, and the picture that emerges is due to the Syrian conflict have halted Lebanon’s similar. Growth of imports through Syria fell by 43.6 remarkable protgress in reducing its debt-to-GDP percentage points when comparing pre- and post- ratio; for the first time since 2006, Lebanon’s debt conflict periods, and in this case the sharp reductions ratio rose again in 2012 with further increases in the growth of imports started earlier in 2012.11 projected through 2014. 29. The impact of the Syrian crisis through 27. To date, the Syrian conflict has had disruptions in services trade is having a sizable negative impact on overall trade in significant impacts on Lebanon’s economy, Lebanon. The deceleration of exports experienced most clearly in the tourism sector but also the during the last two years implied about USD2.8 banking sector. On the one hand, this is largely billion of foreign exchange income foregone, that due to the importance of services for the domestic results from comparing actual export trends with the economy, with services’ share of GDP at 75 percent projected one, had the growth trend of 2000-2008 in 2011. In addition, nearly 80 percent of Lebanon’s continued over the period 2011-2012. Similarly, total exports were services, totaling USD19.8 billion 11 While on average the post-conflict reduction in the growth of exports is about 4 percentage points, for import growth, the post- conflict period displays a 3.4 percentage-point higher growth rate (though neither of these changes in growth rates is different from zero statistically.) 18 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Percent 50 Lebanon’s Exports Growth: Total and Through Syria 80 1.5 70 45 60 40 50 35 1 40 30 30 20 25 0.5 10 20 0 15 10 -10 0 10 -20 -09 Apr-09 -09 Oct-09 -10 Apr-10 -10 Oct-10 -11 Apr-11 -11 Oct-11 -12 Apr-12 -12 Oct-12 -13 Apr-13 -09 Jan-09 -09 -10 Jan-10 -10 -11 Jan-11 -11 -12 Jan-12 -12 -13 Jul-09 Jul-10 Jul-11 Jul-12 Jan-13 -30 5 Apr- Oct- Apr- Oct- Apr- Oct- Apr- Oct- Apr- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- -40 0 O O O O J J J J -0.5 A A A A A J J J J J ov-09 ep-09 ep-10 ep-11 ep-12 an-09 Sep-09 J an-10 Sep-10 an-11 Sep-11 an-12 Sep-12 an-13 ov-10 ov-11 ov-12 ay-09 M ay-10 M ay-11 ay-12 ul-09 J ul-10 J ul-11 ul-12 ar-09 ar-10 ar-11 ar-12 ar-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jul-09 Jul-10 Jul-11 Jul-12 May-09 May-10 May-11 May-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Growth Imports u u u u o o o o Ma Ma Ma a a Se Se Se Se a a a a a a a a a Growth Imports Through Syria J J M M M M J J J J -1 Poly. (Growth Imports) Tourist Arrivals (y.o.y change) Upper-End Hotels (rhs) Lower- End Hotels (rhs) FIGURE 28. The contraction in Lebanese exports through FIGURE 30. Tourist arrivals and hotel occupancy rates Syria accelerated in the first half of 2013... 1/ (percent; 3 months moving average) Source: WB staff calculations based on Lebanese Customs data. Source: Ministry of Tourism and World Bank staff calculations. 1/ Data for 2013 are only available until June. Seasonally adjusted. Upper-end is defined as 5 and 4 star hotels; lower-end is 3 and 2 star hotels. Classification adopted is that of the ministry of tourism. Percent 0.8 Lebanon’s Import Growth: Total and Through Syria 6 0.6 0.4 0.2 0 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Jan-09 Jul-09 Jan-10 Jan-11 Jan-12 Jan-13 Jul-10 Jul-11 Jul-12 -0.2 O O O O A A A A A J J J J J -0.4 0.4 Growth Exports Growth Exports Through Syria -0.6 Poly. (Growth Exports) Poly. (Growth Exports Through Syria) -0.8 FIGURE 29. ...as did the growth rates in imports coming FIGURE 31. Tourism expanditures and hotel occupancy through Syria 1/ retes (percent) Source: WB staff calculations based on Lebanese Customs data. Source: National Accounts for tourism spending, Ministry of Tourism 1/ Data for 2013 are only available until June. Seasonally adjusted. for occupancy rates, and WB calculations. Note: 2011-2012 is projected using a simple OLS regression with tourists spending as a function of hotel occupancy rates and tourists arrivals. (equivalent to 49.4 percent of GDP) compared had moved from Syria to Lebanon because of the to merchandise exports of USD5.4 billion. While conflict. At end-2012, that number grew to 204,826, services imports are also important, Lebanon has and by July 2013, it reached 832,118 (Figure 18).12 maintained a positive services trade balance over the Tourism industry reports indicate that the sector last decade equivalent to 17 percent of GDP in 2011. has partly catered for the housing demands of these On the over hand, the composition of Lebanon’s refugees and returnees. This is most visible with services exports also plays a role, as the impact of rental apartments and occupancy at non-luxury the Syrian crisis is being felt in particular sectors, hotels, especially in the North, Beka’a. For example, such as tourism and, to a lower extent, banking. average hotel occupancy rates in the North and Beka’a have dropped less severely than in Beirut as 30. Tourism losses were partly compensated these two regions witnessed a large influx of Syrian by the consumption of Syrian citizens and refugees. This is especially true for lower quality (and refugees who entered and are residing in thus cheaper) hotels that serve as residences for the Lebanon. As the conflict intensified many Syrian growing number of Syrian refugees in the North and citizens arrived into Lebanon while some Lebanese Beka’a. This explains some of the resilience depicted citizens living in Syria have returned to their in occupancy rates for this segment of hotels. The home country. At end-2011, some 5,668 people average stay of Syrian nationals significantly exceeds 12 This number also includes Palestinian refugees from Syria. 13 As evidenced by the contraction or softness in housing construction indicators (e.g., cement deliveries, new construction permits) Special Focus | 19 THE WORLD BANK FIGURE 32. The number of registered properties slumped FIGURE 33. Construction permits have trended sharply at the onset of the crisis but seem to have stabilized down since the onset of the Syrian conflict Source: Cadastre and World Bank Staff Calculations Source: Cadastre and World Bank Staff Calculations regular tourists. Many Syrians also opt to stay in the number of registered properties and property apartments and therefore exert upward pressure on registration fees started declining prior to the rent prices. This is notably the case in border areas, Syrian conflict and contracted sharply during especially in the North and the Beka’a. 2012 and early 2013, a stabilization seems to have taken place in Q2 2013 (registration fees 31. The Syrian conflict impacts Lebanon’s real grew by 6.9 percent yoy in that quarter while estate sector through two key channels: putting the number of registered properties shrank by a an upward pressure on rents, but a downward modest 2 percent yoy)—Figure 32. The decline pressure on sales (at least initially). Specifically: in registration fees and number of registered properties observed through Q1 2013 may be • The large influx of Syrians is boosting the attributable to several factors, such as (1) the demand for housing, putting upward pressure continuing decline in consumer confidence on rents. Although no rent data are available likely affected prospective buyers’ willingness to capture the recent increase in the Syrian to purchase a property amid a deteriorating refugee population, given the suddenness and security environment, (2) a deceleration in magnitude of the increase in housing demand economic growth might have also contributed to this generates, and the fact that housing supply decreasing local demand, and (3) the decrease is not responding meaningfully13 to what could in foreigners demand for Lebanese real estate be seen as a temporary surge in demand, rents amid rising security incidents. The strengthening are expected to be rising rapidly, especially in observed in Q2, if confirmed over subsequent areas of the country where the increase in the quarters, could reflect buy-to-rent Lebanese population has been strongest (Figure 19). Such investors given the high demand for housing pressures on rent have been observed in Jordan’s that is maybe being slowly perceived as less inflation numbers. As Jordan has received a temporary than initially thought, and growing lower number of Syrian refugees than Lebanon demand from Syrian nationals given their while having about 50 percent more population, strong increase in absolute and relative terms the upward pressure on rents is expected to be (in December 2012, the Syrian-related increase noticeably stronger in Lebanon. in population was 204,826; by June 2013, that number had surged to 722,851—which • While real estate transactions had entered compares to a pre-crisis Lebanese population of a consolidation phase prior to the Syrian 4.2 million).14 Construction permits, however, conflict, the impact of the conflict seems to still point to continued challenges for the sector have initially accelerated this trend but might (Figure 33). recently have been a stabilizing force. While 14 Such transactions from Syrian nationals have likely partially offset the drop in real estate activity observed since 2010. 20 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Human Development and sharp rise in communicable diseases (the number of measles cases, for example, increased from 9 Social Impact in 2012 to 1,456 in 2013) and the emergence of previously absent diseases, such as leishmaniasis 32. Over 2012-14, the Syrian conflict is (420 cases); and (5) increased risks of epidemics estimated in health, education and social safety such as water-borne diseases, measles, and nets to have a fiscal cost of USD308-USD340 tuberculosis. Overcrowding, lack of water million while USD1.4-1.6 billion (3-3.4 percent and sanitation infrastructure and other poor of GDP) will be needed for stabilization—i.e., to environmental conditions also pose significant restore access to and quality of these services to pre- risks to increased infections, as outbreaks of conflict levels—including USD166-242 million for lice and scabies among refugees have shown. short-term job creation (Tables 1 and 2). The conflict Thus, demand for health services has markedly is estimated to negatively and materially affect the increased over the past 6-12 months—in poverty, livelihoods, health and human capital December 2012 alone 40 percent of primary conditions of the Lebanese people. By end-2014, health care visits were for Syrian refugees (Figure some 170,000 additional Lebanese will be pushed 35). In addition, strong demand for hospital care into poverty (over and above the current 1 million is crowding hospitals and compromising access below the poverty line). Furthermore, an additional to healthcare, thus exerting financial pressure 220,000-324,000 Lebanese, primarily unskilled on hospitals, increasing costs, and generating youth, are expected to become unemployed, thus medication shortages. In the medium- to long- doubling the unemployment rate to over 20 percent. term, the impact of delayed health care could The influx of refugees has challenged the already result in increased overall levels of morbidity, weak public social services sector in Lebanon and particularly for the vulnerable. The fiscal impact social tensions, including gender issues, among has been estimated to be USD38 million in 2013 refugees and Lebanese communities are on the rise. and USD48-69 million in 2014, depending on refugee projections. Health care costs needed to • The increase in demand for health services restore the system to its pre-refugee access and caused by the Syrian conflict is straining quality levels is estimated at USD177 million Lebanon’s health system. The conflict in Syria in 2013 and USD216-306 million in 2014, is impacting Lebanon’s health system through: depending on the refugee projections. (1) increased demand for health care services (Figure 34); (2) increased unpaid commitments • The increase in demand for education services of the Ministry of Public Health (MOPH) to arising from the Syrian children refugees is contracted hospitals; (3) shortages in health leading to mounting fiscal costs, an adverse workers including specialists and nurses; (4) a effect on quality of public education, and a 40 1400 Percent Syrians out of total visits Share Sh fC of Cases 35 1200 60 Child Care visits 30 Mean cost (USD) 1000 Reproductive Health visits 25 50 ercent Percent USD, $ 800 20 600 US Pe 15 40 10 400 5 200 30 0 0 testinal… ological… mia and… iratory… gnant/… ed (non… d other… 20 stetrics Obstetrics Gastrointestinal uma and injuries njuries ections Other urgery Surgery genital vascular disease ological erology Nuerology (malignant/ conditions ditions r disease (other) infections congenital disease phro/urological Gynaecological ndition ogical condition respiratory tobiliary disease Anaemia classified Gastrointe in Su atal/ cong ealth cond Nuer d sm (malig vascular d d con Nephro/urol Gynaecol Anaem abetes and atory infe ( onic respi Obs t classifie 10 Hepatobiliary Cerebrovascular Cardiovascular Dermatological Diabetes Respiratory Mental health Neonatal/ Chronic Trauma Neoplasm G G Respira 0 Neoplas Cerebrov Cardiov Chro Nep Not Dermatolo he Neona Vascular Hepat Trau Dia North Bekaa Mount South Beirut Lebanon FIGURE 34. Secondary and tertiary health care: FIGURE 35. Primary health care: Referrals and associated costs for refugees, H1 2013 Use of PHC Services by refugees, December 2012 Source: UNHCR, 2013. Source: MOPH, 2013. Special Focus | 21 THE WORLD BANK FIGURE 36. Lebanese and Syrian Students FIGURE 38. Poverty Rates in Lebanon by Governorate in Public Schools Source: WB/UNICEF staff calculations based on UNHCR data. Source: Government of Lebanon, 2010, and UNICEF (2011). FIGURE 37. Number of Syrian Children Ages 6-15 FIGURE 39. Services provided by MOSA in public schools and not in public schools Social Development Centers, 2011 Source: WB/UNICEF staff calculations based on UNHCR data. Source: MOSA (2012). significant need for non-formal education. Prior to the Syrian conflict, basic education enrollment in Lebanon had been stable at over 90 percent for a decade. Although public schools only accommodated 30 percent of total students, they catered predominantly to children of lower socio-economic status. Since the onset of the Syrian conflict, and the influx of refugees into the country, the Ministry of Education and Higher Education (MEHE) provided open access to refugees in its public schools. In 2012, 40,000 refugee children were accommodated in public schools for a budgetary cost of USD29 million. An additional USD24 million in costs were financed by donors through UN agencies, which the MEHE would otherwise have had to bear. These costs are projected to continue to escalate: in the coming academic year 90,000 refugees FIGURE 40. Extreme Poverty and Geographical Distribution of Refugess are expected to enroll, and, by 2014 that number Source: PCM, UNICEF, UNHCR, 2013. would reach between 140,000 and 170,000. The latter figure amounts to 57 percent of public school students in Lebanon. Therefore, MEHE’s in 2013 and between USD348-434 million in stabilization needs amount to USD183 million 2014, depending on the refugee influx scenario. 22 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT FIGURE 41. Number of Services Provided and Medical Consultations in SDCs Source: MOSA (2013). were weak, fragmented and poorly targeted. For this reason the Ministry of Social Affairs (MOSA) was in the process of implementing reforms to its SSN system. To date, the MOSA has noted a 40 percent increase in the utilization of its health and social programs (Figure 38 and Figure 39). To stabilize the situation, USD176 million will be required till end-2014, of which over USD50 million is needed to scale up the National Poverty Targeting Program for poor and FIGURE 42. Number of beneficiaries on the Population-at-Risk Program vulnerable Lebanese. Source: MOSA (2013). • The Syrian spillovers are further exacerbating These figures do not reflect the 65 percent of already difficult labor market conditions refugees who are not expected to enroll in formal and are expected to result in further schooling, thus creating significant needs for unemployment and informality. Prior to the non-formal/out-of-school education, necessary Syrian crisis, labor market conditions in Lebanon to control the onset of child labor and other were already dire. High unemployment rates negative social consequences. coexisted with mismatches in the labor market and a high prevalence of low-quality and low- • As a result of the conflict, it is expected that productivity jobs. The influx of Syrian refugees by end-2014, an additional 170,000 Lebanese is expected to increase labor supply by between citizens will be pushed into poverty while the 30 and 50 percent—with the largest impacts on existing poor will fall deeper into it. Prior to the women, youth, and unskilled workers (Figure 43, Syrian conflict, poverty in Lebanon was significant left panel). It is worth noting that the probability and regional disparities in living conditions were of Syrian refugees to enter the labor force is acute (Figure 38). Nearly 1 million Lebanese were higher than the probability that Syrian nationals estimated to be poor (living on less than USD4 had prior to the conflict (compare the two per day). Regions with a high poverty incidence panels of Figure 43). Such a massive increase are also the ones that are hosting large numbers in the number of individuals looking for jobs of refugees (Figure 40). Social safety nets (SSN) at a time when economic activity is subdued is Special Focus | 23 THE WORLD BANK FIGURE 43. Probability of Entering the Labor Force, By Age Groups Source: UNHCR Data August 2013 and Syrian Labor Force Survey 2007. FIGURE 44. Percentage of Syrian Refugees out of FIGURE 45. Percentage of Syrian Refugees out of Lebanese Labor Force, by Age Groups Lebanese Labor Force, by Age Education Source: World Bank Calculations and UNHCR data 2013. Source: World Bank Calculations and UNHCR data 2013. expected to have major effects on labor market the purposes of this report as water and sanitation, outcomes. The overall unemployment rate and municipal services, electricity and transport), already the share of informal work in total employment severely constrained, was ill-prepared to cope with could both increase each by up to 10 percentage increased use resulting from the surge in refugees. points. Stabilizing the situation by implementing The cash-strapped and under-capacitated local and a comprehensive package of active labor market municipal governments and establishments are programs to improve livelihoods and earnings severely impacted by the crisis as they now extend opportunities over the short-term would require basic services and tend to the immediate needs of resources in the order of USD166-242 million. both refugees and host communities. Tables 1 and 2 provide a sector breakdown of these impacts and Infrastructure Impact stabilization (needs) assessments. Detailed tables identifying the various components of the impact 33. Over the period 2012-14, the fiscal cost of and stabilization assessments are available at the the Syrian conflict on infrastructure is estimated beginning of each sector chapter. at USD589 million, while USD1.1 billion would be required for stabilization, including USD258 • Water supply and sanitation systems, million for current spending (baseline influx already facing acute pre-crisis challenges in scenario). The country’s infrastructure (defined for balancing supply augmentation with demand 24 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT management, must now meet an additional (1) the closure and rehabilitation of open and estimated water demand of 26.1 million m3/ uncontrolled municipal solid waste dumps; year, equivalent to 7 percent of the pre-crisis (2) establishing composting, separating and demand. The cumulative fiscal impact over landfilling facilities, and; (3) extending financial 2012-14 reaches approximately USD18 million support to host municipalities to cover the (baseline influx projection). Between 2012-14, an expected additional operational and capital estimated USD340-375 million will be required expenditures. for stabilization interventions to reinstate pre- crisis levels of WSS service to host and refugee • Increased electricity demand due to the communities. These include: (1) humanitarian incoming Syrian refugee population is relief interventions such as distribution of bottled estimated at 213 megawatts (MW) by end- and tanked water, chlorination kits and storage 2013 and between 251 to 362 MW by end- tanks to the most vulnerable populations; (2) 2014, depending on the refugee projection additional capital and operation and maintenance (Figure 46). Even prior to the Syrian crisis, costs, provision of urgent equipment, and Lebanon’s electricity sector had insufficient additional short-term infrastructure for installed capacity, low efficiency, high losses restoring water supply infrastructure; and and inadequate infrastructure, resulting in (3) acceleration of infrastructure investments poor reliability, inadequate levels of supply and and institutional reforms such as storage and extensive load shedding. The current fiscal cost of transfer infrastructure, distribution network providing electricity to the refugees is estimated rehabilitation and replacement, water and at USD170 million for 2013 and USD314-393 wastewater treatment and irrigation expansion million for 2014, depending on the projected and improvement. influx of refugees (Figure 47). The interventions required to reinstate pre-crisis levels of electricity • A markedly visible decline in the level and service to the Lebanese population and meet the quality of solid waste management and needs of refugee communities include: (1) capital municipal services has resulted from the investment in generation capacity and associated sudden and sharp increase in demand and transmission and distribution networks; and (2) utilization by Syrian refugees. Lebanon’s local institutional capacity and technical assistance governments and municipalities are highly for project preparation and implementation. It dependent on central government transfers, is estimated that between USD310-440 million have a weak local revenue base, and have a would be required by end-2014 for stabilization backlog of investment needs that far exceed interventions. available resources. Solid waste generation has doubled in several areas, which is contributing to • Regions with high influx of refugees such as ground water contamination, pollution of water Akkar, Zahleh, and Ba’albek, will witness resources and spread of water-borne disease. traffic increase of more than 50 percent on Both municipal revenues and expenditures are some roads, resulting in accidents and the expected to see a major shortfall in 2013 and rapid deterioration of the transport network. 2014. This will further restrict the capacity of Lebanon’s transport network is generally in municipalities to deliver basic services and fair to poor condition and is over-saturated, fund minimum maintenance of their already particularly in the Greater Beirut Area. While dilapidated assets. The cumulative fiscal impact the Syrian crisis did not have direct fiscal impact over 2012-14 on solid waste management on the government expenditures in the sector, reaches USD71 million (baseline influx scenario). it has affected Lebanon’s transport sector in It is estimated that between USD193-206 million the form of: (1) increased wear and tear of the would be required over 2012-14 for stabilization road and transport network; (2) substantial interventions in the municipal sector including: increase in traffic volumes causing congestion; Special Focus | 25 THE WORLD BANK To conclude: 34. Such large and growing impact and stabilization costs are unsustainable given Lebanon’s weak public finances and need to be promptly addressed. With a debt-to-GDP ratio of 134 percent in 2012 and an overall fiscal deficit of 8.6 percent of GDP, Lebanon cannot—and should not be expected to—shoulder on a sustained basis FIGURE 46. Increase in electricity demand due to to the influx of Syrian refugees the impact and stabilization costs described above Source: MOEW and World Bank calculations. Low scenario is the on its own. baseline scenario. 35. Furthermore, the Syrian conflict at large has challenged the already delicate societal and inter-communal balance in Lebanon. As noted throughout the report, overcrowding, saturation of basic services and competition for jobs are among the root causes for social tensions between host and refugee communities. Maintaining and promoting greater social cohesion is important to reduce the negative social and economic impacts of this crisis. 36. While the scope of the ESIA report was FIGURE 47. Budgetary cost of supplying (subsidized) limited to the quantification of the impact electricity to refugees and stabilization costs, several options could Source: MOEW and World Bank calculations. Low scenario is the baseline scenario. significantly reduce the costs imposed on Lebanon. These include receiving external financing from the and (3) a near halt of Lebanon’s thriving transit international community and introducing policy business particularly for freight. The Greater reforms to improve the efficiency of public service Beirut Area will witness a 15-25 percent traffic delivery. In practice, some combination of the various increase which can reduce speeds and increase options will probably be required. Sustainable social travel times by about 20-30 percent during cohesion will also need to be sought by investing the peak hours. Transit trucking services have in conflict mitigation mechanisms, processes and decreased by over 65 percent following the capacities at all levels, and through conflict sensitive crisis, particularly for Lebanese trucks. In order programming. to restore transport sector performance to pre-crisis levels, investments ranging between USD246-525 million would be required over the period 2013-14 for the baseline and high refugee influx scenarios respectively. These investments can be categorized as follows: (1) asset preservation primarily including enhanced road maintenance; (2) capacity increases including network reconstruction, widening and expansion; and (3) public transport solutions such as mass transit. 26 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Table 1. Lebanon: Quantified Impact Assessment of the Syrian Conflict Spillovers Cumulative 2012 2013 2014 2012/14 Baseline Baseline High Refugee Refugee Refugee Influx Influx Influx (in millions of Lebanese Pounds) Impact Assessment 94,343 475,745 781,984 973,041 1,352,072 Human Development & Social Impact 62,032 162,754 238,801 287,807 463,587 Health 9,088 57,999 71,688 103,705 138,775 Education 43,994 95,206 153,113 184,102 292,313 Poverty and Social Safety Nets 1/ 8,950 9,550 14,000 … 32,500 Infrastructure Impact 32,311 312,991 543,183 685,235 888,485 Electricity 24,120 256,275 473,355 592,448 753,750 Water and Sanitation 8,191 7,571 11,337 14,698 27,099 Solid Waste Mangement & Municipal Services - 49,145 58,491 78,089 107,636 (in millions of US dollars) Impact Assessment 63 316 519 645 897 Human Development & Social Impact 41 108 158 191 308 Health 6 38 48 69 92 Education 29 63 102 122 194 Poverty and Social Safety Nets 1/ 6 6 9 … 22 Infrastructure Impact 21 208 360 455 589 Electricity 16 170 314 393 500 Water and Sanitation 5 5 8 10 18 Solid Waste Mangement & Municipal Services - 33 39 52 71 (in percent of GDP, unless otherwise indicated) Impact Assessment 0.1 0.7 1.1 1.4 1.9 Human Development & Social Impact 0.1 0.2 0.3 0.4 0.7 Infrastructure Impact 0.0 0.5 0.8 1.0 1.3 Economic impact (public and private; in percent) -2.9 -2.9 -2.9 -2.5 … Real GDP growth rate: No Syrian Conflict Spillovers (in percent) 4.3 4.4 4.4 4.4 … Real GDP growth rate: Actual and Projected (in percent) 1.4 1.5 1.5 1.9 … Fiscal impact (change in overall fiscal balance due to conflict spillover) 1.1 2.1 2.6 2.6 5.8 Revenue: foregone due to conflict spillover 0.9 1.3 1.3 1.0 3.4 Expenditure: increment due to conflict spillover 0.2 0.9 1.3 1.6 2.4 Memorandum item: (in millions of US dollars) Nominal GDP (actual and projected) 42,945 45,203 47,230 47,408 … Nominal GDP (counter-factual: no Syrian conflict spillover) 44,088 47,662 51,157 51,157 … Source: World Bank (2013). 1/ No high scenario has been calculated for Poverty and SSNs in 2014. Special Focus | 27 THE WORLD BANK Table 2 Lebanon: Quantified Stabilization (Needs) Assessment of the Syrian Conflict Spillovers Cumulative 2012 2013 2014 2012/14 Baseline Baseline High Refugee Refugee Refugee Influx Influx Influx (in millions of Lebanese Pounds) Stabilization (Needs) Assessment 309,734 1,237,495 2,205,928 3,145,052 3,753,157 Human Development & Social 237,373 643,389 1,230,226 1,480,770 2,110,988 Health 56,578 267,031 326,018 461,271 649,626 Education 145,692 275,245 524,903 654,999 945,840 Employment and Livelihoods 1/ … … 250,875 364,500 250,875 Poverty and Social Safety Nets 2/ 35,103 101,114 128,430 … 264,647 Infrastructure 72,361 594,106 975,702 1,664,282 1,642,169 Electricity 58,793 322,605 85,928 281,903 467,325 Water and Sanitation 8,141 133,866 370,893 422,854 512,900 Solid Waste Mangement & Municipal Services 5,427 72,511 212,859 232,607 290,797 Transportation infrastructure - 65,125 306,023 726,918 371,148 Current spending 205,003 641,581 1,156,239 1,370,995 2,002,823 Capital spending 104,731 595,913 1,049,690 1,774,056 1,750,334 (in millions of US Dollars) Stabilization (Needs) Assessment 205 821 1,463 2,086 2,490 Human Development & Social 157 427 816 982 1,400 Health 38 177 216 306 431 Education 97 183 348 434 627 Employment and Livelihoods 1/ … … 166 242 166 Poverty and Social Safety Nets 2/ 23 67 85 … 176 Infrastructure 48 394 647 1,104 1,089 Electricity 39 214 57 187 310 Water and Sanitation 5 89 246 281 340 Solid Waste Mangement & Municipal Services 4 48 141 154 193 Transportation infrastructure 0 43 203 482 246 Current spending 136 426 767 909 1,329 Capital spending 69 395 696 1,177 1,161 (in percent of GDP) Stabilization (Needs) Assessment 0.5 1.8 3.1 4.4 5.4 Source: World Bank (2013). 1/ Stabilization costs for 2014 baseline and high scenarios include the needs for 2013. 2/ No high scenario has been calculated for Poverty and SSNs in 2014. 28 | Special Focus LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT DATA APPENDIX Data Appendix | 29 THE WORLD BANK Table 3. Lebanon: Selected Economic Indicators, 2010-15 2010 2011 2012 2013 2014 2015 Act. Prel. Est. Proj. Real sector (annual percentage change, unless otherwise specified) Real GDP 7.0 3.0 1.4 1.5 1.5 4.0 Real GDP per Capita 6.2 2.3 0.7 0.8 0.7 3.2 Agriculture (share of GDP) 4.5 4.5 4.5 4.5 4.5 4.5 Industry (share of GDP) 20.1 20.1 20.1 20.1 20.1 20.1 Services (share of GDP) 75.4 75.4 75.4 75.4 75.4 75.4 Money and prices CPI Inflation (p.a) 4.9 5.7 5.7 3.8 3.2 2.9 Money (M3, including non-resident deposits) 12.1 7.1 8.1 8.0 8.0 10.0 Investment & saving (percent of GDP, unless otherwise specified) Gross Capital Formation 33.9 29.8 29.4 28.5 27.9 30.0 o/w private 32.1 28.0 27.8 26.7 25.9 27.0 Gross National Savings 11.5 17.7 15.0 13.3 12.2 13.3 o/w private 16.8 22.3 21.4 21.0 20.1 19.9 Central Government Finance Revenue (including grants) 22.7 22.8 22.3 21.8 22.3 23.0 o/w. tax revenues 17.8 16.4 15.7 15.6 16.0 16.5 Total expenditure and net lending 30.4 29.2 31.1 31.6 32.2 32.6 Current 28.6 27.4 29.4 29.8 30.2 29.5 o/w Interest Payment 10.5 9.4 8.4 8.4 8.5 8.6 Capital & Net Lending (excluding foreign financed) 1.8 1.8 1.6 1.8 2.0 3.0 Overall balance (deficit (-)) -7.7 -6.4 -8.7 -9.8 -9.9 -9.6 Primary Balance (deficit (-)) 2.8 2.9 -0.3 -1.4 -1.5 -0.9 External sector Current Account Balance -20.4 -12.1 -14.4 -15.2 -15.3 -16.7 o/w Export (GNFS) 24.1 32.2 28.7 28.4 28.4 29.4 o/w Import (GNFS) 50.2 50.0 49.2 48.3 48.4 50.3 o/w Remittances 7.2 6.4 6.7 6.7 6.7 7.2 Trade Balance (GNFS) -26.1 -17.7 -20.6 -19.9 -20.0 -20.9 Trade of Goods Balance -31.5 -30.7 -30.1 -28.8 -29.1 -30.5 Gross Reserves (months of imports GNFS) /1 /2 11.5 12.1 11.3 11.3 11.5 10.5 Total Public Debt Total Debt Stock (in million US$) 52,602 53,656 57,700 61,993 66,677 71,501 Debt-to-GDP ratio (percent) 141.7 133.8 134.4 137.1 141.2 141.6 Memorandum Items: Nominal GDP (in billion LBP) 55,965 60,442 64,740 68,143 71,199 76,097 GDP (in million US$) 37,124 40,094 42,945 45,203 47,230 50,479 Sourtce: Government of Lebanon data, World Bank staff for estimates and projections. 1/ Gross Reserves (months of imports GNFS)=(Imports of Goods and Services / Gross Res. excl. Gold)*12. 2/ Total Imports using the BOP data from the Quaterly Bulletin of BDL. 30 | Data Appendix LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Table 4 Lebanon at a Glance 9/11/13 M . East Upper Ke y D e v e lo pm e nt Indic a t o rs & No rth middle Lebano n A frica inco me Age Distribution, 2011 ( 2 0 12 ) Male Female P o pulatio n, mid-year (millio ns) 4.3 337 2,490 75- 79 Surface area (tho usand sq. km) 10 8,775 61,034 60- 64 P o pulatio n gro wth (%) 0.7 1.7 0.7 Urban po pulatio n (% o f to tal po pulatio n) 90 59 61 45- 49 30- 34 GNI (A tlas metho d, US$ billio ns) 40.7 1,279 16,341 15- 19 GNI per capita (A tlas metho d, US$ ) 9,490 3,866 6,563 GNI per capita (P P P , internatio nal $ ) 14,470 8,052 10,703 0-4 10 5 0 5 GDP gro wth (%) 1.4 4.2 6.6 percent of total population GDP per capita gro wth (%) 0.7 2.4 5.9 ( m o s t re c e nt e s t im a t e , 2 0 0 5 – 2 0 12 ) P o verty headco unt ratio at $ 1 .25 a day (P P P , %) .. 3 9.0 Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) .. 14 20.4 Life expectancy at birth (years) .. 72 73 80 Infant mo rtality (per 1,000 live births) .. 26 16 Child malnutritio n (% o f children under 5) .. 6 3 70 60 A dult literacy, male (% o f ages 15 and o lder) 93 84 96 50 A dult literacy, female (% o f ages 15 and o lder) 86 68 91 40 Gro ss primary enro llment, male (% o f age gro up) 105 108 111 30 Gro ss primary enro llment, female (% o f age gro up) 99 101 111 20 10 A ccess to an impro ved water so urce (% o f po pulatio n) .. 89 93 0 1990 1995 2000 2011 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) .. 88 73 Leban on Middle East & North Afri ca N e t A id F lo ws 19 8 0 19 9 0 2000 2 0 12 a (US$ millio ns) Net ODA and o fficial aid 298 286 200 448 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2010): United States 3 12 32 84 50 France 16 26 31 60 40 Euro pean Unio n Institutio ns 5 29 36 53 30 A id (% o f GNI) .. 2.6 1.1 1.2 20 A id per capita (US$ ) 114 90 53 106 10 0 Lo ng- T e rm E c o no m ic T re nds -10 95 05 Co nsumer prices (annual % change) .. -99.7 -0.8 5.7 GDP implicit deflato r (annual % change) .. 97.4 -2.1 5.6 GDP GDP per capi ta Exchange rate (annual average, lo cal per US$ ) .. 695.1 1,507.5 1,507.5 Terms o f trade index (2000 = 100) .. 91 100 79 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 12 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 2.6 3.2 3.8 4.3 1.9 1.7 1.1 GDP (US$ millio ns) .. 4,690 17,260 42,945 .. 8.8 5.0 (% o f GDP ) A griculture .. 7.3 7.1 6.1 .. 7.0 1.0 Industry .. 25.5 22.8 20.5 .. 5.2 5.3 M anufacturing .. 14.4 13.0 8.5 .. 6.4 1.4 Services .. 67.2 70.1 73.4 .. 6.4 4.9 Ho useho ld final co nsumptio n expenditure .. 124.5 84.1 75.2 .. 8.0 3.8 General go v't final co nsumptio n expenditure .. 14.0 17.3 15.0 .. 14.7 3.7 Gro ss capital fo rmatio n .. 29.3 20.4 30.3 .. 9.9 10.2 Expo rts o f go o ds and services .. 12.5 14.2 28.7 .. 24.1 8.6 Impo rts o f go o ds and services .. 79.9 35.9 49.2 .. 11.8 7.0 Gro ss savings .. -10.5 -1.2 15.9 No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. a. A id data are fo r 2010. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). Data Appendix | 31 THE WORLD BANK Table 4 (cont.): Lebanon at a Glance 32 | Data Appendix LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT Table 5. Lebanon: Millennium Development Goals, 1990-2010 Data Appendix | 33 THE WORLD BANK SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON (for an exhaustive list, please go to: http://go.worldbank.org/8700A29QW0http://go.worldbank.org/5N4AMNJXV0) 34 | Data Appendix LEBANON ECONOMIC MONITOR | THE BRUNT OF THE SYRIAN CONFLICT NOTES Data Appendix | 35 THE WORLD BANK NOTES 36 | Data Appendix 0.9375 cm The World Bank www.worldbank.org/lb