The gap grew 33,9% to $5.568bn from January to June, while total foreign trade was valued at $9.060bn, according to figures released by the Higher Customs Council in mid-August.

Lebanon's currency, like for most countries of the Middle East, is pegged to the US dollar. With the greenback's retreat over the past 18 months, Lebanon's import bill has climbed, with calls being made to switch the currency linkage to the Euro.

While the US is Lebanon's largest single source of imports, the combined Euro zone accounts for around 38% of all imported goods, with other non-bloc countries also using the European currency as its basic trading unit.

Riad Salameh, the governor of Lebanon's Central Bank, has repeatedly rejected suggestions to decouple the Lebanese pound from the dollar, saying the weakened US currency has helped boost the competitiveness of the country's exports.

True enough, overseas sales of Lebanese goods and services increased 33.1% to $1.746bn in the first half of 2008. However, Lebanon's lack of industrial and production capacity means it will remain a net importer of goods and services and a net exporter of cash.

According to a report issued by Byblos Bank at the end of July, the rising price of oil and the continued weak value of the US dollar have, over a period of four years, added $1.92bn to the trade deficit.

The impact of rising oil prices and currency fluctuations on Lebanon's inflation was underscored by the World Bank, which estimates that imports account for more than 33% of the country's domestic consumption. In its report on Lebanon for 2007, the bank said 70% or more of inflation was due to fuel cost increases and exchange rate movements.

Meanwhile, figures released by the Central Administration of Statistics in late August highlighted the effects of high fuel and imports costs on the nation's inflation rate. Lebanon's Consumer Price Index (CPI) rose by just under 7.2% for the first seven months of the year, with transportation being the single biggest contributor, climbing by 20%. The cost of electricity and fuel increased by 15.6%, while prices at restaurants and hotels rose by 17.5%, reflecting in part the high levels of imported foods and consumer goods used by these establishments.

One factor underpinning the Lebanese economy is the high level of remittances from citizens living overseas. Last year, $5.5bn of remittances flowed into Lebanon, a 6.2% rise on 2006, according to the World Bank's Migration and Remittances Fact Book for 2008, released in mid-August. In total, remittances accounted for 22.3% of Lebanon's gross domestic product last year, the highest in the Middle East and North Africa (MENA) region, the bank said.

Thanks in part to rising remittances, Lebanon recorded net capital inflows of $5.649bn for the first half of 2008. However, while both exports and financial inflow are on the rise, the country's Finance Ministry has warned these results could be put at risk by any renewed political unrest.

The ministry said Lebanon remained vulnerable to possible changes in regional liquidity and demand, despite the fact that the region has so far been isolated from the slowdown in major industrial countries, in its August 12 report on the progress in implementing the economic and social reforms set out during the January 2007 Paris III donors' conference.

"A worsening of the Lebanese political and security situation could rattle confidence and trigger a slowdown or even a reversal of deposit inflows, which would complicate the government's financing strategy and put pressure on reserves," the ministry report said.

Ironically, the recent lessening of political tension in Lebanon, with the forming of the new national unity government and the resumption of parliament, could actually add to inflationary pressures, one economist has warned.

Saad Andary, the deputy general manager of the Bank of Beirut and Arab Countries, said Lebanon's relatively low inflation could break out and match the double digit rates of the Gulf region should domestic demand increase.

If Lebanon is able to enjoy a period of political stability, with general elections scheduled for next year, there could be a strong increase in levels of capital inflow, Andary told the local press on July 29.

"We have not yet seen the money flowing in the way it should from the Gulf," he said. "If there is political stability for a length of time, it is going to translate into inflationary pressures."

While no one would advocate a return to the violent clashes and political infighting that have marked Lebanon's recent past, peace may come at a price, though this could be eased if international oil costs continue their recent retreat.

Even with lower fuel costs, Lebanon will have to pay for its dependence on imported energy and consumer goods for a long time to come, despite government efforts to overhaul and modernise the country's electricity industry and encourage higher levels of domestic production.

Source: Oxford Business Group