During April of the current year, the Lebanese government adopted a “Capital Investment Program” (CIP) that focuses on the development and rehabilitation of major infrastructure projects in Lebanon, with a total estimated cost of around $23 billion, extending over a period of 12 years (2018-2030) divided into three phases of 4 years each, and including a total of over 280 projects. This report, drafted by the Credit Libanais Economic Research Unit, presents a brief overview of the transportation sector projects within the CIP, which detain the lion’s share of allocated funds, amounting to $7.38 billion or the equivalence of 32% of the total CIP envisaged cost. Transportation-related investments will be allocated over 24 separate projects, the potential economic and environmental impact of which are highlighted in this paper.

 

Lebanon suffers from severe congestion conditions due to years of neglect and lack of urban planning and major investments in basic infrastructure. Furthermore, in the absence of alternatives such as a comprehensive national public transportation system or railway services, the current fleet of transportation means is largely dominated by private vehicles which account for more than 86% of the entire fleet. Daily entrant vehicles to Beirut via the Northern Highway are estimated at 300,000 according to the World Bank, while around 200,000 and 150,000 vehicles arrive via the Southern and Eastern axes respectively per workday. Moreover, the vehicle stock in Lebanon has been significantly growing over the years whereby in 1997, the total number of vehicles circulating across the road network was almost 783,000 at a time when the population was 3.1 million or 0.25 vehicle per capita, reaching an estimated 1.4 million in 2015, according to the Ministry of Environment, against a total population of 5.85 million (including Syrian refugees), the equivalence of 0.24 car per capita (a ratio that would rise to 0.32 were Syrian refugees excluded). To further aggravate the situation, the Syrian refugee crisis has imposed large burdens on the social, political, environmental, and economic levels, most tangible of which can be spotted on the level of the country’s already decaying infrastructure.

 

Lebanon’s traffic problem imposes heavy burdens and large direct and indirect costs on the country’s economy, setting huge constraints on its growth prospects and hindering it from realizing its potential. Overall, various studies conducted by Lebanese ministries and other international organizations estimate that the economic cost of traffic in Lebanon ranges between 5% and 10% of its Gross Domestic Product (GDP), a ratio that is considered very high, according to the World Bank, when compared to other nations. These costs along with associated opportunity costs display themselves on various levels such as: trade and transport of goods and services, transportation costs (whereby surveys indicate that, generally-speaking, transportation costs constitute an estimated 15% of a regular Lebanese household’s total expenditures, a share that is extensively high when compared to peers in the region), the tragedy of commuting, road safety (whereby the World Health Organization’s (WHO) “Global Status Report on Road Safety 2015” estimated road traffic fatalities at 1,088 in 2015 and GDP loss due to road traffic crashes between 3.2% and 4.8%, higher than most countries around the globe), and investment. Besides the many negative effects traffic conditions and the state of the transportation sector in Lebanon have on its economy, there can be detected additional significant repercussions as well on the country’s environment. According to a study conducted by the Ministry of Environment (MoE) in collaboration with the United Nations Development Programme (UNDP) and the Global Environment Facility (GEF), the transport sector has a very high contribution to air pollution, accounting alone for over 40% of national oil consumption and almost 23.6% of total Greenhouse Gas (GHGs) emissions in Lebanon.  

 

The assessment of the CIP takes into consideration and attempts to depict the extent to which investment in infrastructure influences national performance on the level of both overall productivity in the economy and the geographic distribution and spread of economic activity. Moreover, the approach of the proposed CIP is not limited to generally boosting economic growth and developing local infrastructure, but also accounts for the risks and drawbacks of prevailing regional conflicts on the overall economy and the opportunities that will potentially arise in the aftermath of the termination of said conflicts.

 

Undoubtedly, the CIP will have a direct and indirect impact on the Lebanese economy through its positive contribution to: employment (expected to generate an estimated 62.65 million labor days of employment according to the Lebanese government, equivalent to a total of 248,611 job opportunities ~ 20,718 job opportunities per year over the entire period of implementation which spans over 12 years), investment, trade and transport of goods and services, and social cohesion and inequality and poverty reduction.

 

Finally, this research document illustrates the positive repercussions of CIP-related projects on the environment. More specifically, roads rehabilitation and expansion will certainly ease the traffic on major and minor routes outside, at the entrances, and inside the Greater Beirut Area (GBA). As a consequence, less congestion will contribute to decreased GHGs emissions and hence to an improved air quality. Moreover, World Bank estimates reveal that the new public transport scheme proposed under the umbrella of the CIP is projected to decrease congestion by around 16% in the GBA, accounting for a 45,000+ decline in circulating cars per day, equivalent to a reduction in associated negative externalities by 0.5% to 1% of GDP.

Migration has been a phenomenon plaguing the Lebanese society for more than a century. In recent years, remittances, a consequence and companion of migration, has been given special attention and has raised the interest of economists to study its possible impact on the economies and growth prospects of home countries. With respect to Lebanon, this interest heightens as the number of Lebanese emigrants reached 798,140 as at the end of 2015 with remittances nearing the $7.31 billion mark as at the end of 2016, representing 14.10% of GDP. In this context, Lebanon ranks among the top twenty receivers of remittances in the world and among the top three in the MENA region, outperforming all other countries on a per capita basis. It is worth noting, in this context, that Saudi Arabia is the major source of remittances to Lebanon, accounting alone for 20% of total remittances in 2015, also topping the list when it comes to remittance outflows per expatriate ($12,416).

This research report conducted by Credit Libanais’ Economic Research Unit illustrates the dependence of the balance of payments on remittance inflows over the 2010-2015 period. In 2015, remittance inflows reached $7.48 billion, surpassing by far the capital and financial inflows to Lebanon, which stood at $6.27 billion. Such remittance inflows limited, to a large extent, the deficit in the net foreign assets of the Lebanese financial sector (which stood at $3.35 billion in 2015), which otherwise would have worsened to read $5.37 billion had incoming remittances channeled through local banks (estimated at 27% of total remittances according to the IMF) been excluded. Concurrently, and as proven in this research report, remittance inflows to Lebanon ($7.48 billion in 2015) clearly exceeded foreign direct investment (FDI) and official development assistance (ODA) levels combined ($3.32 billion in 2015). While FDIs exhibit a cyclical behavior depending on the state of the economy, remittance inflows seem to reflect a more stable pattern. Moreover, as ODA comes conditioned and accompanied by restrictions, remittances flow independent of any obligations towards any party or foreign agency. From another standpoint, our study proves the significant contribution of remittance inflows channeled through banks in maintaining a steady growth in deposits, whereby remittances seem to have fueled some 21.12% of the growth in deposits at banks over the 2002-2016 period.

This research publication also attempts to capture the potential effect of oil price corrections on remittance inflows to Lebanon, especially that a large proportion of remittances (around 25% as at the end of 2015) comes from expatriates residing in oil-producing Gulf Cooperation Council (GCC) countries. On the short term, no immediate and substantial effect of a drop in oil prices on remittance inflows has been noticed. The measures taken by GCC countries in response to the oil price crisis have helped maintain, to some extent, their government spending and therefore economic stability. Moreover, the diversity of sources of remittance inflows to Lebanon has as well helped limit the impact of oil price changes on the size of total remittance inflows. Nevertheless, concerns over the medium and long terms still prevail as two factors remain uncertain: oil price behavior from one side, and the ability of GCC countries to still employ fiscal buffers in order to sustain their spending, from the other.

Finally, Credit Libanais’ Economic Research Unit conducted an empirical analysis to estimate the direct impact of remittances on economic growth. The model tested in the study depicted a positive yet statistically insignificant impact of remittances on GDP per capita growth. As far as other independent variables in the model are concerned, our regression analysis showed a negative and statistically significant impact of each of GDP per capita growth lag, trade, and population growth on GDP per capita growth, while it portrayed a positive and statistically significant impact of private consumption on growth. A possible explanation for the statistically insignificant coefficient of remittance inflows is that remittances may favor GDP growth indirectly through another major channel, namely, consumption. In particular, our analysis revealed a positive correlation (+0.55) between remittance inflows and private consumption, where the latter was shown to have a positive and statistically significant impact (β=+0.38, i.e. a 1% growth in private consumption drives GDP per capita growth up by 0.38%) on GDP per capita growth. In fact, a sizeable portion of remittance inflows is allocated to household consumption, which in turn stimulates GDP per capita growth via the multiplier effect.

Last but not least, the research report gives a series of recommendations of which we mention: adopting policies and measures that incentivize emigrants to allocate their money in investment-oriented activities which would favor growth, while at the same time striving to reduce the very high cost of sending remittances to Lebanon (noting that Lebanon emerged as the most expensive country in the world in 2015 when it comes to receiving remittances) in order to encourage expatriates to send more money through formal channels to their home country.

High indebtedness has been plaguing the Lebanese economy over the past two decades or so, as the government has been caught in a vicious cycle of a hefty public debt burden and recurrent budget deficits. This has thwarted the economic growth, escalated the debt crisis, and positioned Lebanon among nations with the highest debt-to-GDP ratios in the world. More specifically, the Lebanese government embarked in the early 1990s on an expansionary fiscal policy and a costly reconstruction plan, aimed primarily at rehabilitating the severely destroyed infrastructure in the hope of fostering economic growth and doubling the GDP per capita. In this context, the Credit Libanais Economic Research Unit has analyzed the Lebanese public debt dynamics particularly in the post war era and recommended potential reform measures to trim the budget deficit and curb debt growth.

Our publication highlights that total capital expenditures stood at $12.49 billion between end of 1992 and 2014 out of which circa $5.02 billion were externally funded and $7.47 billion were financed by the government. The sizeable borrowings to restore the damaged public infrastructure, the high interest payments on said debt, along with the resulting budget deficits from debt servicing and transfers to EDL were the main culprits behind the ballooning public debt. More particularly, said debt grew at its fastest pace during the early post-civil war period, with growth decelerating at later stages. Delving further into details, our analysis uncovers that Lebanon’s debt grew at a CAGR of around 40% during the 1993-1998 era, increasing from $3.39 billion to $18.56 billion as the capital expenditures to GDP ratio hovered between 8% and 9% during the 1994-1998 period before slowing markedly to around 1% to 2% of GDP in the early 2000s. Similarly, government borrowings fell sharply between the years 1998 and 2015 due to the government’s efforts to refinance its existing debt by rolling it over on several occasions and at a cheaper cost, aided by the Paris conventions and other donors’ agreements. Transfers to EDL have been a major drain on public finances, aggregating to $16.85 billion over the 1992-2015 period, accounting for 23.96% of gross public debt at end of year 2015.

At present, the Lebanese banking sector still holds the lion’s share (53.8%) of total debt, despite managing to reduce its exposure from 59.3% in the year 2013. This is in fact mirrored by the smaller proportion of claims on the public sector which fell from 26.96% of local banking sector balance sheet in 2008 to 20.32% in 2015 and subsequently to 20.35% as of April 2016. Historically, Lebanon’s debt has been almost evenly split between the domestic currency and foreign currencies, with the share of local currency debt increasing significantly over the last couple of years. This new trend can be attributed to the fact that the issuance of foreign currency denominated debt in the form of Eurobonds requires the ratification of the parliament; the thing which was hard to secure in recent years on the back of the intense political bickering, which has derailed the regular convention of legislative parliamentary sessions.

At present, gross public debt stands at $71.65 billion (April 2016) with Lebanon’s debt to GDP ratio reaching an alarming 139% level, positioning it as the 4^th highly indebted country in the world according to the CIA World Factbook. This debt figure excludes some sizeable amounts owed by the government to the National Social Security Fund, hospitals, and private sector contractors, among others which, if embedded in the calculation, would undoubtedly raise gross public debt to just above $74 billion. This trend is unsustainable and calls for immediate action from the government in the form of reform measures which can take several forms such as privatization, Public-Private Partnerships, expenditure rationalization, fiscal reforms, and many rounds of debt softening and financial engineering schemes.

Despite its strength as a reform measure, privatization seems to be the least applicable tool at present amid the prevailing local and regional turmoil which would widen the sovereign risk premium and accordingly depress the fair market values of public sector enterprises. Public-Private Partnership schemes, on the other hand, would be a viable solution to trim the budget deficit, especially if implemented in the exploration and extraction of the newly discovered offshore oil and gas reserves in Lebanon’s Exclusive Economic Zone, which are believed to be able to generate circa $1.85 billion in revenues for the government during the first year, a figure that can reach $3.66 billion over twenty years according to a research previously published by the Credit Libanais Economic Research Unit. The implementation of PPPs, however, is delayed by the inability of the parliament so far to pass the required laws due to the continuous political bickering.

Expenditure rationalization is essential to contain the structural deficit in public finances, yet would be almost impossible to implement without the passing of a budget law, noting that the government failed to pass a budget law proposal note since 2006. Fiscal reforms such as combating tax evasion and improving tax collections is another alternative to consider, with some progress being already accomplished including the introduction of e-payments both by the Ministry of Energy and Water for the settlement of the water bill and the Ministry of Finance for the payment of the built-up property tax among others. However, it is imperative to put an end to the prevailing paralysis on the executive and legislative fronts in order for the transition to the e-government to take full swing.

Finally, many rounds of debt servicing alleviation through swap mechanisms similar to the recently engineered $2 billion tripartite exchange between the Ministry of Finance, the Central Bank, and commercial banks can be considered to reduce the budget deficit and curb the growing public debt.