Quality statistics on developing economies in the Arab region are rare, and their advanced analysis is rarer still. Even by these poor regional standards, Lebanon lags behind on account of tormented modern history, when economic indicators were not consistently collected or properly assessed under civil war, or among its various ethnic and religious groups including large refugee population. Measuring economic trends across time periods with different socio-political regimes represents a challenge itself. Yet, Lebanon is a strategically important country helping to mitigate political instability in the region, and newly could become one of the region’s producers of natural gas and oil. Understanding of the Lebanese economic trends in the coming decade is thus crucial to domestic and regional policymakers, international monitors, and investors alike.
This paper lays out and estimates a structural macro-econometric model of the Lebanese economy to simulate the implications of accumulated debt changes on GDP and other economic indicators, and to project the growth–fiscal nexus for the six years following the last year for which national statistics are available, 2015–2020. To these ends, historical and up-to-date national accounts data for years 1992–2014 are painstakingly collected from individual government agencies, and economic framework with five macroeconomic blocks is constructed, namely: macroeconomic, government, price, monetary and financial sector, and external accounts blocks. In total 16 behavioral equations are estimated with the help of an additional 10 identity equations defining theoretical dependency among variables in order to impute missing variables and to bound model forecasts.
Simulations predict that additional deficits and more debt accumulation will deter growth, while fiscal consolidation using external sources of revenues such as natural gas receipts to partially pay-off government debt is growth promoting. Contingent on oil prices rising, we project that if resource revenues are solely used to pay off national debt– rather than being utilized as a collateral for additional borrowing – economic growth will likely be sustained. These results have important implications for the fiscal position and macroeconomic policy in Lebanon as well as other developing, potential resource-rich, open economies under transitional governance (such as Egypt), in the Arab region or elsewhere. These results could help highly indebted developing economies to envisage the benefit of debt repayment especially when debt servicing is crowding out other growth promoting government spending activities.
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