The World Bank released this week its MENA Economic Update report titled “Reforms and External Imbalances: The Labor-Productivity Connection in the Middle East and North Africa” in which it anticipated the region’s economic growth to sustain its modest pace ranging between 1.5% and 3.5% during the 2019-2021 period. The World Bank has requested the leaders of the MENA region to work on improving the digital-economy space providing them with goals which, if achieved, will allow MENA countries to surpass many advanced economies in terms of “the coverage and quality of cellular and broadband services” and in the digital payments field. The report also mentions an emerging challenge for the economies of the region: Creating structural reforms to reduce current account deficits by improving the aggregate labor productivity. Following the restructuring of the oil markets, countries that were financing current account deficits of others now must face their own current account deficits, and also according to the World Bank, the region’s current account deficits need to be addressed in the medium to long run rather than wait for flows of capital to reverse the deficit.

On a local basis, the World Bank downwardly revised its previously expected economic growth forecast for Lebanon for the year 2018 from 1.0% to 0.2%, portraying the country’s sluggish economic activity and expected said growth to remain shy at 0.9% in 2019, 1.3% in 2020 and 1.5% in 2021. In detail, the report commented on the negative repercussions of halting BDL’s subsidized loans on the housing and construction sector, citing some 5.3% y-o-y drop in cement deliveries during the first eleven months of the year 2018. The World Bank attributed as well this downward revision in growth to the shy increase in tourism activity, with the number of tourists visiting the country increasing by just 5.8% (approximately half the rate of increase registered in 2017) in 2018. As far as foreign trade is concerned, the World Bank commented that the 13.6% annual drop in merchandize imports has resulted in a 16% drop in the balance of trade deficit in 2018, rendering net exports as the main driver for GDP growth. On the public finance front, the World Bank estimated Lebanon’s fiscal deficit at 11.5% of GDP in 2018, compared to 7% in 2017, despite Lebanon’s pledge to reduce the deficit-to-GDP ratio by one percentage point every year over the next five years as agreed upon during the CEDRE conference in April 2018. In addition, the World Bank mentioned that the primary balance dropped from a surplus of 2.3% of GDP in 2017 to a deficit of 1.8% in 2018, driven by higher current expenditures and transfers to the electricity sector. The World Bank report attributes the rise in expenditures as well to the 266% hike in transfers to municipalities during the first nine months of 2018 in the wake of the parliamentary elections. It also commented that average interest rates on deposits rose by 274 basis points on USD deposits and 143 basis points on LBP deposits over the October 2017-December 2018 period. From another standpoint, the report pointed to the rising inflationary pressure in Lebanon, with the consumer price index soaring by an annual 6.1% during the year 2018, largely triggered by higher international commodity prices (namely fuel products) and 2 years of negative inflation. The report highlighted that the Net Foreign Assets of the financial sector shrank by $4,823 million in 2018 versus a drop of $156 million in 2017, despite improvements in the balance of trade. Accordingly, BDL’s foreign exchange reserves (including Eurobonds) fell to $39.7 billion by end of 2018, representing 13.5 months of imports of goods and services. The World Bank envisaged economic prospects to remain weak, which shall be accompanied by a snowballing debt service and a widening budget deficit to GDP ratio despite the government’s pledges to reduce said ratio. Finally, the report mentioned that the government formation was optimistically met by the financial markets yet warned that this sigh of relief is not likely to last for long, unless reforms are implemented in the short term.