BEIRUT - In its annual report on Lebanon, the Institute of International Finance estimated real GDP growth at 7 percent in 2008 and projected growth to decline to 4 percent in 2009, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group. It said despite the adverse impact of the global economic recession and financial crisis, a soft landing for Lebanon's economy seems likely, owing to the relative political stability and strong banking system.

It added that while the current global recession could reduce modestly earnings from exports, tourism, remittances, and FDI inflows, the continued political stability and the associated continued improvement in confidence is expected to sustain a modest growth. It noted, however, that the country will continue to be influenced by political developments in the region given the strong connections that outside powers have to Lebanon's various factions.

The IIF said growth in 2009 will be driven by services on the production side and consumption on the expenditure side. It expected average consumer price inflation will ease from 10.7 percent in 2008 to around 5 percent in 2009 due to much lower import prices associated with the recent fall in commodity prices and the moderation in domestic demand.

The IIF considered that the fiscal position is unlikely to improve in 2009, as the growth in revenues is expected moderate, while non-tax revenues, which include telecom transfers to the budget, may fall slightly this year before recovering in 2010. On the expenditure side, the budgeted increase in wages and capital spending will more than offset the savings from lower government transfers to the EdL associated with the fall in oil prices. Consequently, the fiscal deficit is likely to remain around 10 percent of GDP and the primary surplus will narrow slightly to 1.6 percent of GDP from 2.0 percent of GDP in 2008.

It said the government's pressing fiscal constraint and mounting debt burden remain Lebanon's paramount economic weaknesses. While the ratio of government debt to GDP declined from 179 percent in 2006 to 160 percent in 2008, it still remains one of the highest in the world. Simply meeting the interest payments on this debt consumes more than 60 percent of public revenues, and leaves the fiscal position extremely vulnerable to political or economic shocks, while also imposing considerable opportunity costs. To meet its debt commitments the government has come to rely on the absorptive capacity of the local banking sector, which, with its sizable deposit base, has demonstrated so far a strong appetite for government debt in both local and foreign currency.

Periodic injections of concessional finance from the international donor community have also been important in preventing the debt burden from overwhelming the country. The government has for some time committed to introducing wide-reaching structural reforms aimed at broadening the revenue base and reducing spending inefficiencies. But the 2006 war and the political paralysis since then have impaired progress in this regard. -Daily Star