The World Bank released this week its MENA Economic Update report titled “Reaching New Heights: Promoting Fair Competition in the Middle East and North Africa” in which it anticipated the region’s economic growth to contract to 0.6% in 2019, down from 1.2% in 2018, before increasing to 2.6% in 2020 and 2.9% in 2021. The World Bank has urged the leaders of the MENA region to work on “demonopolizing” their markets as a key to fostering growth. In details, the World Bank uncovered that the absence of fair competition, characterized by the market dominance of stated-owned and connected enterprises, discourages private investment reducing as such the number of potential jobs. As per the World Bank report, MENA countries must grow on their collective demand, citing in this context the region’s growing population which exceeded 400 million inhabitants, twice that of Western Europe, with expectations for said figure to nearly double by the year 2050. The report commented that steps such as reducing tariffs and improving the poor logistics would certainly promote regional integration; yet said steps remain not enough. The key step, as per the World Bank report, lies in tearing down the barriers to entry to local markets by eliminating the network of vested interests in MENA countries.     

On a local basis, the World Bank downwardly revised its previously expected economic growth estimate for Lebanon from 0.9% for 2019 to a negative 0.2%, pointing out to a slight recession during the concerned year and expected said growth to remain shy at 0.3% in 2020 and 0.4% in 2021. In detail, the report commented on the negative drawbacks of halting BDL’s subsidized loans on the housing and construction sector, citing some 32.4% y-o-y drop in cement deliveries during the first six months of the current year. The World Bank, however, highlighted that while most economic indicators have suffered from a frail performance during the first part of 2019 at the exception of the tourism activity as tourist arrivals rose by 8.1% on an annual basis by the month of July. As far as foreign trade is concerned, the World Bank commented that net exports will be a drag on GDP growth, as the anticipated rise in imports is expected to offset the projected improvement in exports. On the public finance front, the World Bank pointed out to the 21% reduction in fiscal deficit and to the 300% improvement in the primary surplus during the first half of the year 2019, notwithstanding the 10% drop in VAT revenues on the back of the sluggish economic activity. Said reduction in fiscal deficit comes mainly as a result of the 11% contraction in expenditures, although part of the drop is attributed to the accumulation of arrears. The World Bank also commented that average interest rates on deposits rose by 324 basis points on USD deposits and 212 basis points on LBP deposits over the October 2017-June 2019 period. Said rise in interest rates can be partially attributed to the monetary tightening policy of BDL in the aim of limiting LBP liquidity in the market, bearing in mind that the latter can be used to drain BDL’s foreign exchange reserves. In addition, the report pointed to the reduction in inflationary pressures, with the consumer price index increasing by 3% during the first six months of the year 2019 in comparison with 6.2% a year earlier, as commodity prices dipped. The report revealed that the Net Foreign Assets of the financial sector shrank by $5.4 billion in H1-2019 in comparison with a $4.8 billion contraction in the full-year 2018 and a $156 million drop in 2017, driven by some outflow of deposits and the rise in the deposit dollarization base from 69.8% in June 2018 to 73% in June 2019. Accordingly, BDL’s foreign exchange reserves (including Eurobonds) fell to $36.4 billion by end of June 2019. The World Bank envisaged economic prospects to remain weak, yet indicated that its projections do not account for any CEDRE-related disbursements or any new measures in the year 2020 budget. Finally, the report highlighted that Lebanon remains highly vulnerable to political confidence shocks and that loan quality is expected to deteriorate as a result of the contractionary monetary policy and sluggish growth prospects.