This year's growth was actually triggered by a slight increase in aggregate consumption at large, an improvement in exports to meet strong regional demand, in addition to the registered post-Israeli war reconstruction spending.

Domestic and foreign investment levels remained relatively depressed on the overall within the context of a wait-and-see attitude among investors in view of political uncertainties. Tourism spending has also been mild and did not recapture its strong development phase that was witnessed prior to the July-August 2006 events.

The various political and security events of the past three years - starting from the assassination of former Prime Minister Rafik Hariri in early 2005, passing through the Israeli war in the summer of 2006, to this year's ongoing domestic political crisis - have undeniably weighed severely on Lebanon's economy.

The output forgone over the past three years is officially estimated at 20 percent in nominal terms within a Middle Eastern region that has been growing at a very fast pace over the period, which obviously represents a significant lost opportunity for Lebanon's economy at large. It is worth mentioning that real regional growth is estimated at an average of 6 percent since 2005, a record high in the past two decades, benefiting from surging oil prices, the repatriation of capital to the region and improving competitiveness at large.

The quantity theory of money confirms the positive but weak growth for Lebanon in 2007. The growth in Money Supply M3 by 10.2 percent on average in 2007 relative to 2006 was coupled with a rise in the velocity of money of 8.4 percent, leaving an average annual inflation of 4.1 percent and a net expansion in output. The slight rise in velocity was actually realized within the context of a 17.9 percent rise in cleared checks and a 8.8 percent increase in average deposits over the period.

Rather remarkably, given the political turmoil and economic sluggishness, some elements of Lebanon's economy functioned quite well during the year.

Among these rises, the foreign sector, which reported a positive performance in 2007.

Aggregate imports reported a growth of 25.7 percent on a yearly basis, while exports reported a growth of 23.4 percent. The trade balance reported accordingly a trade deficit widening by 26.5 percent on a yearly basis.

Despite the growing trade deficit, the latter was more than fully covered by growing capital flows as suggested by the consecutive balance-of-payments surpluses. The latter actually managed to end the year 2007 with a significant surplus of $2.037 billion over the year.

Another relatively favorable performance was reported at the level of public finances. The Finance Ministry announced the state deficit for 2007 had been reduced from 38 percent to 31 percent of expenditures.

To the 12 months ending December 31, Lebanon recorded a primary budgetary surplus, excluding debt servicing costs, of $731 million, a noteworthy improvement from a primary deficit of $ 4.5 million recorded at end-2006. Though a step in the right direction, the 2007 public finances would have been far better had the political situation been more stable and more favorable to growth. One area that saw little improvement during the year was Lebanon's debt level, which remained fixed at $ 42.1 billion, the equivalent of 175 percent of GDP.

Monetary conditions remained under control. Despite a turbulent political year, no market pressures were observed. Net conversions were rather positive to the net advantage of the Lebanese Pound, although mild in magnitude.

The year ended with a Central Bank foreign-assets position of $2.4 billion, the equivalent of 75.4 percent of LP Money Supply and 9 months of imports, notwithstanding the $7.6 billion of gold reserves available at the BDL by year-end, a new record high that benefited strongly from a 34 percent increase in gold prices in 2007.

One of the success stories for the sluggish year was the banking sector, which saw consolidated assets rise by 10.7 percent over the year to $82.3 billion. There was likewise strong growth in deposits, with a year on year increase of 10.9 percent, the equivalent of $6.6 billion.

The banking industry thus proved to be resilient relative to sluggish real sector performance and a hefty political situation.

Beyond activity growth, resilience was manifested by a sound growth in consolidated net earnings. The latter reported an annual growth of more than 30 percent for the sector as a whole.

The Beirut Stock Exchange registered an acceptable performance in 2007, with the AUDI Stock Index gaining 21.4 percent over 2007.

However, the market also saw wide fluctuations, mainly driven by the political situation. It also reported a narrower trading volume, with the annual trading value reporting $925 million in 2007, versus a higher amount of $1.9 billion in 2006, thus dropping by 52 percent year-on-year.

The adverse local security and political conditions were negatively reflected on the bond market's performance, as the average spread on Lebanese Eurobonds outstanding widened by 161 basis points since year-end 2006 to reach 461 basis points at year-end 2007. - Bank Audi