95954 LEBANON ECONOMIC MONITOR DOWNSIDE RISKS MATERIALIZE Fall 2014 Global Practice for Macroeconomics & Fiscal Management, GMFDR MIDDLE EAST AND NORTH AFRICA REGION The World Bank LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE PREFACE The Lebanon Economic Monitor provides an update To be included on an email distribution list for on key economic developments and policies over this Lebanon Economic Monitor series and related the past six months. It also presents findings from publications, please contact Nada Abou Rizk recent World Bank work on Lebanon. It places them (nabourizk@worldbank.org). For questions and in a longer-term and global context, and assesses comments on the content of this publication, please the implications of these developments and other contact Wissam Harake (wharake@worldbank. changes in policy on the outlook for Lebanon. org) Eric Le Borgne (eleborgne@worldbank.org). Its coverage ranges from the macro-economy to Questions from the media can be addressed to financial markets to indicators of human welfare Mona Ziade (mziade@worldbank.org). and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Lebanon. The Lebanon Economic Monitor is a product of the World Bank’s Lebanon Poverty Reduction and Economic Management (PREM) team. It was prepared by Wissam Harake (Economist) and Samer Matta (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist) and Bernard Funck (Global Practice Manager). Haneen Sayed (Program Leader) and Dima Krayem (Research Analyst) authored the Special Focus on social safety nets. May Ibrahim (Senior Executive Assistant) provided Arabic translation and Zeina El Khalil (Communications Officer) print-produced the report. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its activities in Lebanon, including e-copies of this publication, please visit www.worldbank.org.lb Preface | 1 THE WORLD BANK TABLE OF CONTENTS PREFACE................................................................................................................................................................................................................. 1 EXECUTIVE SUMMARY ............................................................................................................................................................................... 4 …ò«ØæàdG ¢üî∏ªdG .................................................................................................................................................................................................... 5 RECENT ECONOMIC AND POLICY DEVELOPMENTS........................................................................................................ 6 Output and Demand.......................................................................................................................................................................................... 6 Labor Markets........................................................................................................................................................................................................ 8 Fiscal Policy ............................................................................................................................................................................................................ 9 External Sector ...................................................................................................................................................................................................... 9 Monetary Policy, Banking and Prices ......................................................................................................................................................11 Financial Markets ...............................................................................................................................................................................................12 SPECIAL FOCUS .............................................................................................................................................................................................15 Towards an Effective Social Safety Net in Lebanon ....................................................................................................................15 Social Safety Nets and Poverty ...................................................................................................................................................................15 Lebanon: SSN Effectiveness, Types, Targeting, and Spending ...................................................................................................16 Path Towards More Effective SSNs ..........................................................................................................................................................18 The National Poverty Targeting Program (NPTP) ..............................................................................................................................20 Syrian Crisis and NPTP ...................................................................................................................................................................................20 DATA APPENDIX............................................................................................................................................................................................24 SELECTED SPECIAL FOCUS FROM RECENT LEBANON ECONOMIC MONITORS ....................................28 SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON .....................................................................30 LIST OF FIGURES FIGURE 1. Economic activity remains contingent on the security situation. ................................................................... 6 FIGURE 2. Real GDP growth is expected to pick up slightly. ................................................................................................... 6 FIGURE 3. A mid-year rebound in tourism ...................................................................................................................................... 7 FIGURE 4. ... and in private sector activity … ................................................................................................................................... 7 FIGURE 5. … including construction…................................................................................................................................................. 8 FIGURE 6. … and consumption. .............................................................................................................................................................. 8 FIGURE 7. The widening fiscal deficit… .............................................................................................................................................. 9 FIGURE 8. … reversed the downward trend of debt- to-GDP ................................................................................................. 9 FIGURE 9. Robust capital inflows... .....................................................................................................................................................10 FIGURE 10. … helped BDL to increase its stock of foreign reserves.....................................................................................10 FIGURE 11. Headline and core inflation abated in 2013. ...........................................................................................................11 FIGURE 12. Lending to the private sector grew, partly due to BdL’s stimulus package. ............................................11 FIGURE 13. Lebanese banks’ sovereign debt exposure increased in 2013… ...................................................................12 FIGURE 14. … as did commercial banks’ assets. ............................................................................................................................12 FIGURE 15. Deposits at commercial banks continued to rise steadily in 2013. .............................................................13 FIGURE 16. Falling risk premium on Lebanese Eurobonds translated into narrowing spreads..............................13 FIGURE 17. The equity market improved over the first half of 2014. ..................................................................................13 FIGURE 18. Lebanon is vulnerable to reversal of deposit inflows ..........................................................................................13 FIGURE 19. WEF Social Safety Net Score in MENA. ......................................................................................................................16 LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE FIGURE 20. Non-subsidy SSN Program Mix by Type, MENA, 2008-11 ..............................................................................17 FIGURE 21. Non-subsidy SSN Program Mix by Targeting Type, MENA, Selected Countries, 2008-11 .............17 FIGURE 22. Lebanon Social Safety Net Spending............................................................................................................................18 FIGURE 23. Citizens’ Satisfaction with Government Assistance to the Poor the MENA region, 2011. ..............19 FIGURE 24. Preference for poverty targeting (vs. categorical). ................................................................................................19 FIGURE 25. Preference for cash-benefits (vs. in kind). ................................................................................................................19 FIGURE 26. Projected Number of Eligible NPTP Beneficiaries .................................................................................................21 FIGURE 27. Mapping of NPTP Beneficiaries with Syrian Refugees ........................................................................................22 LIST OF TABLES TABLE 1. Lebanon: Household Coverage and Budgetary Implications of NPTP .......................................................22 TABLE 2. Lebanon: Selected Economic Indicators, 2011-2016..........................................................................................24 TABLE 3. Lebanon at a Glance .............................................................................................................................................................25 TABLE 4. Lebanon: Millennium Development Goals, 1990-2011 ....................................................................................27 LIST OF BOXES BOX 1. Using an E-Card Food Voucher System to Deliver Food Benefits................................................................26 LIST OF KEY ABBREVIATIONS USED bps: Basis points H1, H2: First half of the year, second half of the year. 3mma: Three-months moving average pp: Percentage points Q1 (Q2, Q3, Q4): First (second, third, fourth) quarter of the year qoq: Quarter-on-quarter sa: Seasonally adjusted saar: Seasonally adjusted, annual rate yoy: Year-on-year LHS, RHS: Left hand side, right hand side (for axis of figures) THE WORLD BANK EXECUTIVE SUMMARY i. A new domestic political stalemate has iv. Lebanon’s fiscal position continues to developed while spillovers from the Syrian deteriorate. The central government’s overall fiscal conflict further exacerbated. The Presidency of the deficit is forecast to widen to 10.2 percent of GDP in Republic has been vacant since May 2014 due to 2014, compared to 9.4 percent in 2013. Moreover, domestic political deadlock, which could eventually Lebanon’s primary balance in 2014 is expected to be lead to an unprecedented political vacuum in the in deficit for the third consecutive year as it widens three branches of government simultaneously. by a projected 0.7 percentage points (pp) to 1.2 Meanwhile, in August 2014, Lebanon faced the first percent of GDP. As a result, gross public debt would coordinated attack by Islamic State and Al-Nusra in reach 149 percent of GDP in 2014, up from 143.1 the village of Arsal close to the Syrian border. While percent of GDP at end-2013. the Lebanese Armed Forces were able to eventually take back control of Arsal and repel the terrorists v. Banque du Liban maintained an to the outskirts of the village, around 20 Lebanese expansionary monetary stance to support the soldiers were captured during combat, three of economy, while sustaining confidence in the whom were later executed. Lebanon remains host Lebanese pound. Conservatism in financial to the largest number of Syrian refugees, with about regulations and private sector banking helped 1.2 million of them registered with the UNHCR. maintain a well-capitalized and resilient domestic banking sector, despite sluggish growth and ii. A mid-year lull in the security situation downgrades by international rating agencies. Elevated gave a temporary boost to consumer and investor spreads between domestic and international rates of sentiment. High frequency data suggest that tourism, return supported continued inflows of deposits to commerce and real-estate, all of which contracted Lebanese banks, leading to larger liquidity buffers. sharply during the past three years, underwent a mild rebound during the relatively stable spring and vi. The expanding political stalemate at home summer, marginally boosting growth. Overall, we and regional spillovers pose significant downside expect real GDP to grow by 1.5 percent in 2014, an risk to growth. The economy is projected to grow improvement over 2013, which, at 0.9 percent, was by 2 percent in 2015 on account of a low base effect the worst performance since 1999. and an assumed abating of current domestic and regional tensions. Given current developments, this iii. Lebanon’s current account deficit remains assumption of a pre-May and June 2014 environment elevated, albeit lower than during the pre-crisis could fail to materialize. This would negatively period. The current account balance is forecast to impact growth in 2015. hover around -8 percent of GDP in 2014, in line with the previous two years. To meet its balance of payments needs, Lebanon remains dependent on capital inflows, generated, in large part, from the displaced Syrians and international aid for refugees. As a result, the stock of international reserves (excluding gold) at the central bank rose to the equivalent to 12.1 months of imports by end-2013. 4 | Executive Summary LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE …ò«ØæàdG ¢üî∏ªdG »a áĪdÉH 149 »dɪLE’G »∏ëªdG èJÉædG ≈dEG ΩÉ©dG øjódG áÑ°ùf ≠∏ÑJ »a »∏ëªdG »°SÉ«°ùdG OƒªédG øe ójóL §ªf ô¡X .i »dɪLE’G »∏ëªdG èJÉædG øe áĪdÉH 143^1 p`H ák fQÉ≤e ,2014 ΩÉ©dG ’ .ó∏ÑdG ≈∏Y ájQƒ°ùdG áeRC’G äÉ«YGóJ äóYÉ°üJ ɪæ«H ,¿ÉæÑd .2013 ájÉ¡f »a ÖÑ°ùH 2014 ƒjÉe/QÉjCG ô¡°T òæe Gk ôZÉ°T »°SÉFôdG »°SôμdG ∫Gõj ´hôa »a ¥ƒÑ°ùe ô«Z ÆGôa ≈dEG …ODƒj ób ɪ q e ,»°SÉ«°ùdG OƒªédG ºYód á«©°SƒàdG ¬à°SÉ«°S ≈∏Y ¿ÉæÑd ±ô°üe ßaÉM .v /ÜBG ô¡°T »a ¿ÉæÑd ¬LGh óbh .óMGh ¿BG »a áKÓãdG á«eƒμëdG á£∏°ùdG k .á«fÉæÑ∏dG Iô«∏dG »a á≤ãdG ≈∏Y ¬JGP âbƒdG »a ɶaÉëe ,OÉ°üàb’G á«eÓ°SE’G ádhódG º«¶æJ πÑb øe ≥°ùæe …ôμ°ùY Ωƒég ∫hCG ¢ù£°ùZBG »∏jƒªàdG ´É£≤dG º«¶æJ ¢üîj Ée »a á¶ap ÉëªdG á°SÉ«°ùdG äóYÉ°S .ájQƒ°ùdG OhóëdG øe áÑjô≤dG ∫É°SôY á≤£æe »a Iô°üædG á¡ÑLh »∏ëªdG »aô°üªdG ´É£≤dG ájɪM »a ¢UÉîdG »aô°üªdG ´É£≤dGh OÉ©HEG »a íéfh ∫É°SôY ≈∏Y Iô£«°ùdG »fÉæÑ∏dG ¢û«édG OÉ©à°SG ɪæ«Hh DƒWÉÑàdG øe ºZôdG ≈∏Y ,áXƒë∏e áfhôeh …ƒb ∫ɪ°SCGôH ™àªàj …òdG ∫ÓN Ék jóæL 20 ±É£àNG ºJ ,á≤£æªdG »MGƒ°V ≈dEG ø««HÉgQE’G .᫪dÉ©dG ä’ÉcƒdG πÑb øe ∞«æ°üàdG iƒà°ùe ¢VÉØîfGh ƒªædG »a q ∑QÉ©ªdG ∫Gõj ’h .º¡æe OƒæL 3 ΩGóYEÉH ¿ƒ«HÉgQE’G ΩÉb ,áë∏°ùªdG »a á«LQÉîdGh á«∏ëªdG äGóFÉ©dG ∫ó©e ø«H äÉbhôØdG âªgÉ°S ɪc ø«ÄLÓdG q OóY ≠∏H å«M ,ø«jQƒ°ùdG ø«ÄLÓd q ôÑcC’G ∞«°†ªdG ¿ÉæÑd »a ™°SƒJ ≈dEG iO q CG ɪ q e ,á«fÉæÑ∏dG ±QÉ°üªdG ≈dEG ™FGOƒdG ≥aóJ ºYO ø«ÄLÓdG q ¿hDƒ°ûd IóëàªdG ºeCÓd á«eÉ°ùdG á«°VƒØªdG iód ø«∏é°ùªdG .±QÉ°üªdG iód ∫õY IGOCÉc ádƒ«°ùdG .…Qƒ°S ¿ƒ«∏e 1^2 äÉ«YGóJh øWƒdG ó«©°U ≈∏Y »°SÉ«°ùdG OƒªédG ¿EG .vi ø°ùëJ ≈dEG ΩÉ©dG ∞°üàæe ∫ÓN »æeC’G Ahó¡dG iqOCG ó≤d .ii ≈∏Y »fÉæÑ∏dG OÉ°üàbE’G IQób øe ¿Gqóëj ób ᫪«∏bE’G äÉYGô°üdG ájOOôàdG äGP äÉfÉ«ÑdG ∫óJh .ôªãà°ùªdGh ∂∏¡à°ùªdG á≤K »a âbDƒe ¿CG ™bƒàªdG øe .´É°VhC’G âªbÉØJ Ée GPEG äGôjó≤à∏d É≤ah ƒªædG ∫ÓN ô«Ñc πμ°ûH É¡WÉ°ûf ∫AÉ°†J »àdG äÉYÉ£≤dG ¿CG ≈dEG á«dÉ©dG IóYÉ≤dG øe Ék bÓ£fG 2015 ΩÉ©dG »a áĪdÉH 2 áÑ°ùæH OÉ°üàb’G ƒªæj ,äGQÉ≤©dGh ,IQÉéàdGh ,áMÉ«°ùdG ¢üNC’ÉH ,á«°VɪdG çÓãdG äGƒæ°ùdG »dÉëdG ôJƒàdG AGô q L øe äÉjÉYGóàdG IóM â©LGôJ GPEG ∂dP ,≈fOC’G ÖÑ°ùH ™«HôdGh ∞«°üdG »∏°üa q ∫ÓN ’ k óà©e Ék °TÉ©àfG äó¡°T ób ’ ób ,áægGôdG äGQƒ£à∏d Gk ô¶fh .»ª«∏bE’Gh »∏ëªdG øjó«©°üdG ≈∏Y πμ°ûHh .»°ûeÉg ƒëf ≈∏Y ƒªædG §«°ûæJ ≈dEG iO q e ,»æeC’G Ahó¡dG q CG ɪ ±ƒ°S ɪ q e ,2014 ƒ«fƒj/¿GôjõMh ƒjÉe/QÉjCG πÑb Ée á«°Vôa ≥≤ëàJ áĪdÉH 1^5 áÑ°ùæH »∏ëªdG »dɪLE’G èJÉædG ƒªæj ¿CG ™bƒàªdG øe ,ΩÉY .2015 ΩÉY »a ƒªædG ≈∏Y Ék Ñ∏°S ôKDƒj k fQÉ≤e Ék æ°ùëJ ¢ùμ©j ɪ CGƒ°SCG ó¡°T …òdG 2013 ΩÉ©dÉH á q e ,2014 »a .1999 ΩÉY òæe (áĪdÉH 0^9) Gk ƒªf øμdh ,kÉ©ØJôe »fÉæÑ∏dG …QÉédG ÜÉ°ùëdG »a õé©dG ∫GR Ée .iii øe .áeRC’G πÑb Ée â∏é°S o »àdG ∂∏J øe ≈fOCG ≈≤ÑJ õé©dG áÑ°ùf øe áĪdÉH 8- áÑ°ùf …QÉédG ÜÉ°ùëdG »a õé©dG ¢ùeÓj ¿CG ™bƒàªdG ø«eÉ©dG ™e Ék «°TɪJ ∂dPh ,2014 ΩÉ©dG »a »∏ëªdG »dɪLE’G èJÉædG ¿ÉæÑd óªà©j ,äÉYƒaóªdG ¿Gõ«e äÉLÉM á«£¨J ±ó¡Hh .ø««°VɪdG ≈dEG Ék «FõL ∂dP Oƒ©jh ,ᣰTÉf ∫GõJ Ée »àdG á«dɪ°SCGôdG äÉ≤aóàdG ≈∏Y .ø«ÄLÓd q á°ü°üîªdG á«LQÉîdG äGóYÉ°ùªdGh ø«jQƒ°ùdG ø«MRÉædG (ÖgòdG AÉæãà°SÉH) »ÑæLC’G ó≤ædG äÉWÉ«àMG äójGõJ ,∂dòd áé«àfh .2013 ΩÉY ájÉ¡f »a äGOQGƒdG øe Gk ô¡°T 12^1 ∫OÉ©j Ée ≠∏Ñàd ™°Sƒàj ¿CG ™bƒàªdG øe .QƒgóàdG »a »dɪdG ™°VƒdG ôªà°ùj .iv èJÉædG øe áĪdÉH 10^2 ≠∏Ñ«d ájõcôªdG áeƒμë∏d ΩÉ©dG »dɪdG õé©dG .2013 ΩÉY »a áĪdÉH 9^4 p`H á k fQÉ≤e ,2014 »a »∏ëªdG »dɪLE’G ΩÉ©∏d 2014 »a »dhC’G õé©dG ôªà°ùj ¿CG ™bƒàªdG øe ,áaÉ°VE’ÉHh ,ájƒÄe á£≤f 0^7 áÑ°ùæH ™°SƒàdÉH OGOõj ±ƒ°Sh ,»dGƒàdG ≈∏Y ådÉãdG ±ƒ°S ,∂dòd áé«àfh .»∏ëªdG »dɪLE’G èJÉædG øe áĪdÉH 1^2 ≠∏Ñ«d …ò«ØæàdG ¢üî∏ªdG | 5 THE WORLD BANK RECENT ECONOMIC AND POLICY DEVELOPMENTS 1. Expanding regional turmoil holds back environment has induced a high level of uncertainty, economic activity in Lebanon. The World Bank’s one that is bound to impact business and consumer Coincident Indicator (WB-CI) dipped by one percent sentiment for the rest of the year. Nonetheless, (yoy) in Q1 2014, compared to a contraction of 0.8 overall economic activity this year is expected to percent for the same period a year earlier (Figure pick up slightly compared to 2013, primarily due 1).1 This coincided with a series of terrorist attacks, to the lull experienced during spring and summer one of which took the life of former finance minister (Figure 2). All the while, Lebanon remains host to the Mohammad Shattah. The security situation improved largest number of Syrian refugees; according to the thereafter, following the success of the security plan UNHCR, as of September 9, the number of Syrian that was approved by the new government. On top of refugees, both registered and awaiting registration, that, GCC countries rescinded travel advisories that reached 1.18 million, representing 26.7 percent of urged their citizens to avoid Lebanon. As a result, the the total Lebanese population. World Bank’s Leading Indicator (WB-LI) points to a significant improvement in Q2 2014. In mid-June, however, the Islamic State in Iraq and Syria (ISIS), subsequently renamed the Islamic State (IS), took Output and Demand control of large parts of Northern and Western Iraq, sending shock waves across the region. Terrorist 2. The mid-year security improvement led activity returned to Lebanon in the wake of the IS to slightly firmer economic activity. Relative calm advance, along with coordinated attacks on Lebanese in the security situation between February and June Armed forces by militants. The fluid security 2014 noticeably improved consumer and investor Percentnt 11 10.3 10 9.4 9.1 9 8.0 8 7.5 7 6 5 4.0 4 3.4 3.2 3 2.7 2.0 2.2 2 1.3 1.6 1.5 0.9 1 0 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012e 2013e 2014p 2007 FIGURE 1. Economic activity remains contingent on the FIGURE 2. Real GDP growth is expected to pick up security situation. slightly. Source: WB staff calculations. Source: Lebanese authorities and WB staff calculations. 1 As national accounts in Lebanon are only available with a significant time lag—e.g., the latest accounts are from 2011—World Bank staff have developed two new indicators, a Coincident Indicator (WB-CI) and a Leading Indicator (WB-LI) to better assess recent economic developments (for details, see Matta, S. (2014) “New Coincident and Leading Indicators for the Lebanese Economy,” World Bank Policy Research Working Paper No. 6950). 6 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE number percent Tourist arrivals (sa) 60 160,000 90 Hotel occupancy rate in Beirut (rhs, sa) 150,000 Increasing rate of expansion 80 55 140,000 70 130,000 120,000 60 50 110,000 50 100,000 45 40 Increasing rate of contraction 90,000 80,000 30 40 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 41407 41438 41468 41499 41530 41560 41591 41621 41652 41683 41711 41742 41772 41803 41833 41864 FIGURE 3. A mid-year rebound in tourism ... FIGURE 4. ... and in private sector activity … Source: Lebanese authorities and WB staff calculations. Source: BLOM Bank. sentiment. In addition, the rescinding of the GCC historically dominated the Lebanese economy,4 travel advisory in time for the Eid festivities following suffered a major hit in recent years due to the regional the month of Ramadan translated into a rise in the turmoil.5 However, high frequency data suggest that number of tourists visiting Lebanon (Figure 3). These tourism, commerce and real-estate, all of which had positive developments are reflected in an improved experienced a sharp contraction during the past BLOM purchasing managers’ index (PMI)2 during two years, underwent a mild rebound during the that particular period (Figure 4). This, however, relative stability of spring and early summer of 2014, remained timid, contingent on the security situation, marginally boosting growth (Figure 5). Externally, which deteriorated once again towards mid-June. the trade deficit has remained broadly unchanged The average PMI for the year through August at between 14 to 15 percent of GDP; over the past remained low at 46.9 points, pointing to a continued few years lower exports resulting from the loss of contraction in activity. Nonetheless, overall, the regional markets due to the turmoil were offset by a firmer activity in the first half of the year3 is expected decline in imports due to lower economic activity. to help boost real GDP by 1.5 percent in 2014, an improvement over the previous year, which, at 0.9 4. From the demand side, the improved percent, was the worst growth performance since security situation boosted consumer and 1999. investor sentiment, which is estimated to have resulted in strong private demand. The ARA 3. From the production side, the services consumer confidence index6 rose by 81 percent sector benefited more from the perceived from January 2014 until May (Figure 6). During improvement in security. The services sector, which the same period, private investment was positively 2 The PMI is an indicator that is based on a monthly survey of business conditions in the Lebanese private sector. It is a composite index calculated as a weighted average of five individual sub-components: New Orders (30%), Output (25%), Employment (20%), Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%). A value of the PMI above 50.0 signals an improvement in business conditions from the previous month, while a drop in the PMI below the 50.0 threshold indicates a slowdown in business activity (BLOM Bank, 2013). 3 This is suggested by the World Bank Coincident and Leading Indicators. 4 Between 1997 and 2011, the services sector accounted, on average, for 73.5 percent of real GDP. In addition to its large share of the Lebanese economy, the tertiary sector attracted more than two thirds (71.6 percent) of the Lebanese workforce as of 2009. 5 The service sector’s contribution to growth declined from an average of 4.6 percentage points (pp) in the 2005-2010 period to only 0.9 pp in 2011. 6 ARA Marketing Research and Consultancy, a private consultancy firm, constructs and disseminates a consumer confidence index on a monthly basis. This Index is based on the following six sub-indices: current economic situation index, expected economic situation index, current personal income index, expected personal income index, current employment opportunities index and purchase of durables index. We calculate the 3-months moving average. Recent Economic and Policy Developments | 7 THE WORLD BANK Tousand of m2 650 2,100 600 1,900 550 1,700 500 450 1,500 400 1,300 350 1,100 300 250 Cement deliveries (sa, thousands of tons) 900 Construction permits (sa, rhs, thousand of m2) 200 700 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 FIGURE 5. … including construction… FIGURE 6. … and consumption. Source: BLOM Bank. Source: ARA Marketing Research and Consultancy and BdL. impacted by the pickup in construction activity, widespread informality (more than 56.2 percent of which has traditionally been a principal driver of total employment) and low-productivity and low- the former. Further evidence suggesting an uptick quality jobs (ILO, 2014). The competition created by in private consumption and investment can be low- to semi-skilled Syrian refugees at times fuels deduced from the 7.4 percent rise in loans to the social discontent and tensions between the refugee private sector (in local and foreign currencies) and host communities. during the first half of the year, compared to 4.1 percent for the same period a year earlier. In 6. Lebanon’s inability to generate sufficient addition, the large influx of Syrian refugees has jobs has acute demographic implications. Real also boosted private demand. estate, construction, finance and tourism have been the traditional drivers of economic activity.10 Since these sectors either are not labor intensive, or attract lower skilled and cheaper foreign labor, LABOR MARKETS growth observed in Lebanon does not adequately generate employment for Lebanese nationals. In 5. The large influx of Syrian refugees is adding fact, the long-run employment-growth elasticity is to longstanding structural stresses in the labor estimated to be 0.2 (World Bank, 201211), much market. Labor supply expanded by an estimated 30 lower than an estimated MENA average of 0.5 (IMF, percent in 2013 (World Bank, 20137) and is forecast to 2014). Furthermore, during the 2005–09 period, grow a total of 50 percent by end-2014 (IMF, 20148). Lebanon created only 3,800 jobs per year (one for With the majority of Syrian refugees being low- to every six new entrants to the labor market), while semi-skilled workers, job competition, especially in some 22,000 new Lebanese entrants are expected the informal sector, has materially increased. Youth each year until 2019 (excluding the Syrian refugees) unemployment in Lebanon is estimated to have (World Bank, 2012). The unemployment rate in 2011, exceeded 22 percent in 2013 (ILO, 20149). The labor still yet unaffected by regional hostilities, stood at 11 market continues to suffer from skill mismatches, percent, slightly exceeding the MENA average of 10 7 World Bank et al., 2013, Lebanon: Economic and Social Impact Assessment of the Syrian Conflict, Washington DC 8 IMF, July 2014, Article IV Consultation and Selected Issues, Washington DC. 9 International Labor Organization, 2014, Global employment trends 2014: Risk of a jobless recovery? 10 The real estate sector, in particular, has accounted for anywhere between 50 and 70 percent of total gross fixed capital formation (GFCF) since 1997. 11 World Bank, December 2012, Republic of Lebanon—Good Jobs Needed: The Role of Macro, Investment, Education, Labor and Social Protection Policies, Washington DC. 8 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE Percent US$ bln Percent 35 30 80 190 70 180 25 60 170 20 50 160 15 40 150 10 30 20 140 5 10 130 0 0 120 2009 2010 2011 2012 2013 2014p 2005 2006 2007 2008 2009 2010 2011e 2012e 2013p 2014p -5 -10 Total Revenues Total Expenditures Budget Deficit Gross Public Debt Nominal GDP) Debt to GDP (rhs) -15 FIGURE 7. The widening fiscal deficit… FIGURE 8. … reversed the downward trend of debt- to-GDP Source: MoF and WB staff calculations. Source: MoF and WB staff calculations. percent, and reflecting insufficient job opportunities. are also forecast to rise somewhat to 2.1 percent of Unemployment is estimated to have worsened GDP, compared to 1.9 percent in 2013. significantly since then. Demographic implications have been acute; educated Lebanese have sought 8. Lebanon’s debt-to-GDP ratio is rising for employment in countries with a demand for high the second year running. Growing deficits coupled skilled labor, creating a large diaspora. Meanwhile, with subdued GDP growth are estimated to push non-Lebanese dominate the unskilled labor market, gross public debt to a projected 149 percent of GDP pricing out the nationals. at end-2014, compared to 143.1 percent of GDP at end-2013, and up from 133.5 percent of GDP at end-2012 (Figure 8). It is also projected to continue increasing in 2015. The government financed the FISCAL POLICY widening fiscal deficit primarily by issuing Treasury bills (TBs) and Eurobonds. The stock of debt 7. Lebanon’s fiscal position continues to outstanding remains mostly internal12 and as of mid- deteriorate. The central government’s overall fiscal 2014, 75.7 percent of gross public debt it is held by deficit is forecast to widen to 10.2 percent of GDP commercial banks and the BdL. in 2014, compared to 9.4 percent in 2013 (Figure 7). Moreover, Lebanon’s primary balance in 2014 is expected to be in deficit for the third consecutive year, widening by a projected 0.7 percentage points EXTERNAL SECTOR (pp) to 1.2 percent of GDP. This comes despite an expected improvement in domestic revenues 9. Lebanon’s current account deficit remains due primarily to higher tax revenues (both direct elevated, albeit lower than during the pre-crisis and indirect taxes), reflecting improving economic period. The current account balance is forecast to conditions. Total revenues are projected to increase hover around -8 percent of GDP in 2014, in line with by 0.3 pp to 21.6 percent of GDP. From the the previous two years. In 2011, however, prior to expenditures side, current expenditures are forecast the regional turmoil, Lebanon’s current account was to grow by 0.9 pp led by higher interest payments, -10.9 percent. The improvement over the past three offsetting lower transfers to EDL, which dropped by years is primarily attributed to a drop in the trade 0.6 pp to 4.2 percent of GDP. Capital expenditures deficit, and in particular to a decline in imports.13 12 Internal debt is defined as the sum of Treasury bills and Eurobonds held by commercial banks plus the Treasury bills held by BdL. 13 Total imports are expected to decrease to around 64 percent of GDP in 2014, compared to 71 percent a year ago, and 78 percent in 2011. Recent Economic and Policy Developments | 9 THE WORLD BANK However, this conceals multiple offsetting dynamics. The decline in total imports has more than offset a Petroleum imports have fluctuated in volumes.14 fall in exports, which is forecast to reach about 50 Additionally, the influx of Syrian refugees has pushed percent of GDP in 2014, compared to 56.9 percent a up demand for imports of consumption goods. As a year ago and 61.2 percent in 2011. Lebanon mostly result, freights incoming at the Port of Beirut have exports services (e.g., financial services, advertising) risen in volume by 8.4 percent in 2012, 13.4 percent to the region, and as such, the turmoil has caused in 2013 and are projected to grow robustly this year as significant market loss. Merchandize exports have well. Lastly, imports of industrial machinery increased also been negatively impacted, driven by a sharp by 13 percent in 2012, as Lebanon began replacing drop in exports of pearls, precious stones and metals. many industries in Syria, and 4.3 percent in 2013, as Syrians began finding more competitive suppliers. 10. Lebanon is heavily dependent on capital inflows to finance its current account deficit (Figure 9). For the past three years, sectors toward which most foreign capital has traditionally gravitated, US$ bln US$ bln 15 6 have suffered a significant decline in activity, 5 ceasing to be an attractive destination for capital 10 4 (e.g., real estate, tourism). However, the influx of 5 3 Syrian refugees has partially offset those losses; the 0 2 longer the Syrians are displaced from their country, 2007 2008 2009 2010 2011 2012 2013 -5 1 the more likely they will seek more medium-term 0 adjustments to their financial situation. This involves -10 -1 investments and bank deposit transfers to their host -15 Capital Inflow Trade in Goods Balance BoP (rhs) -2 country, in the form of FDI and short-term flows. Additionally, international aid for Syrian refugees FIGURE 9. Robust capital is also reflected in the balance of payments. FDI in inflows... 2012 (the latest available data) rose by 13 percent Source: BdL, Lebanese Customs and WB staff calculations. to US$3.1 billion, equivalent to 7.1 percent of GDP. We estimate that in 2013, FDI reached about 7.3 percent of GDP, and project that in 2014, as Syrians adjust for the medium term, FDI will rise to about US$ bln Foreign reserves at BDL (excl Gold, US$ bln) months 8 percent. Deposit transfers and international aid Imports of Goods (US$ bln) 40 Coverage Ratio (months of imported goods, rhs) 16 helped short-term capital flow to almost double in 35 14 2013 to an estimated US$3 billion, and is projected 30 12 to further rise this year. This is also reinforced by 25 10 the wide spread between domestic and international 20 8 15 6 interest rates that reached an average of 421 basis 10 4 points15 by mid-2014. 5 2 0 2007 2008 2009 2010 2011 2012 2013 2014p 0 11. Foreign reserves accumulation by the BdL remains robust. Robust inflows have pushed FIGURE 10. … helped BDL to increase its stock the stock of international reserves (excluding of foreign reserves gold) at the central bank to US$31.7 billion (71.5 Source: BdL, Lebanese Customs and WB staff calculations. percent of GDP) by end-2013, increasing by 5.8 14 In 2012, Lebanon began importing fuel bound to Syria as Syria lost access to its own oil fields, increasing the volume of fuel imports to Lebanon by 8 percent. Regarding this as support for the Syrian regime, anti-Syrian regime groups in Lebanon began attacking trucks carrying fuel to Syria; this curtailed the volume of imported fuel to Lebanon by 0.5 percent in 2013. In 2014, a moderate rebound is expected as the political noise around the issue has dissipated. 15 This is the interest rate differential between the 3-month Lebanese T-bill and the 3-month LIBOR. 10 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE percent compared to end-2012 (Figure 10). In Percent terms of months of imported goods, the coverage Lebanon: headline inflation rate Lebanon: core inflation rate ratio increased from 16.9 percent in 2012 to 17.9 Food & Beverages Water & Energy 9.0% percent in 2013. This trend is projected to continue 7.0% throughout the remainder of 2014 with reserves 5.0% reaching around US$34 billion, equivalent to 13.8 3.0% months of imports. 1.0% -1.0% Jan Feb Apr Jun Jul Aug Sep Dec Jan Feb Apr Jun Jul Aug Sep Dec Mar May Mar May Oct Oct Nov Nov -3.0% Monetary Policy, Banking -5.0% 2012 2013 FIGURE 11. Headline and core inflation abated in 2013. and Prices Source: CAS, CRI and WB staff calculations. 1/ Core inflation depicts changes in domestic prices excluding fuel and food. It is calculated 12. Amid a sizeable cumulative output gap, using the CPI figure of CRI and recalibrated by the weights of the official CPI of CAS. Lebanon’s inflation rate reached is lowest level in a decade. According to the Consultation and Research Institute (CRI) the headline CPI inflation averaged 2.7 percent in 2013, representing a 3 pp decrease relative to the same period in 2012 (Figure 11).16 The declining inflation rate reflects both domestic factors and import inflation. The former is illustrated by falling core inflation, resulting from the sharp deceleration in economic activity, and the latter by declining energy and food prices. Rent/ housing inflation is not adequately captured in the various existing inflation measures in Lebanon. Anecdotal evidence from Lebanon and evidence from Jordan (which has a larger population and a FIGURE 12. Lending to the private sector grew, partly due to BdL’s stimulus package smaller number of Syrian refugees) suggest a large Source: BdL and WB staff calculations. increase in rents due to the surge in Syrian refugees and the associated demand for housing. As a result, existing inflation indices are likely to currently policy. Exchange rate stability can be discerned underestimate actual inflation. The slowdown in from a stable dollarization rate, which declined by inflation has translated into tepid growth in money 11 basis points during the first half of 2014 to reach supply (M3, including non-resident deposits), which 66 percent by end-June, again reflecting the mid- by June 2014 increased 6.8 percent (yoy), compared year lull in the security situation. This, along with to 10 percent a year earlier. low inflation, allowed the Banque du Liban (BdL) to launch a stimulus package in 2014 for the second 13. Exchange rate stability and low inflation, year running17 in the amount of US$800 million. allowed BdL to continue its expansionary monetary These packages have been vital for stabilizing the 16 Inflation data in Lebanon are problematic. The CRI CPI index does not include rents and only collects price data for the Greater Beirut area. As such, the Central Administration of Statistics’ CPI inflation, which does reflect infrequent measurement of rent inflation, averaged 5.7 percent in 2013. The CAS inflation time series is relatively short and its methodology was recently changed (e.g., to better capture rents). Additionally, CAS did not collect any price data between January and May 2013. These make the use of the CAS CPI challenging for economic analysis. 17 The last stimulus package was launched in January 2013 in the amount of USD1.46 billion and proved successful. As detailed in the Spring 2013 issue of Lebanon Economic Monitor, the real estate sector benefited the most from the subsidized loans. Start-ups and venture capital (relatively nascent in Lebanon) are also responding favorably to BdL’s subsidized loans. Recent Economic and Policy Developments | 11 THE WORLD BANK FIGURE 13. Lebanese banks’ sovereign debt exposure FIGURE 14. … as did commercial banks’ assets increased in 2013… Source: BdL and WB staff calculations. Source: BdL and WB staff calculations. real estate sector by boosting domestic demand 4 percent conversion buffer, compared to the Basel after demand from Lebanese expatriates and foreign III mandated 2.5 percent. The loan-to-deposit ratio, buyers dropped sharply. an indicator of short-term liquidity, stood at 31.1 percent in June 2014 and remains one of the lowest in 14. Lending to the private sector has expanded the world.18 Moreover, non-performing loans (NPLs) briskly in the first half of 2014. Credit to the private are low and return on equity is in the double digits.19 sector increased by 13.2 percent (yoy) in June 2014, Nonetheless, commercial banks are highly exposed compared to 8.9 percent a year ago (Figure 12). This to sovereign credit risk as they are a large investor is in no doubt propelled by BdL’s stimulus packages. in public debt.20 In fact, Lebanese banks’ sovereign Nonetheless, lending remains below the 2008-2012 debt exposure21 increased slightly from 55.2 percent average rate of 16.5 percent, reflecting reduced end of 2013 to 56.4 percent by June 2014 (Figure economic activity and elevated risk aversion from 13). In an attempt toward diversification, banks the volatile security environment. expanded regionally, an effort that has been largely arrested by the recent regional upheaval. 16. Deposit growth decelerates. Commercial Financial Markets banks’ balance sheet continued to grow, rising by 7.9 percent (yoy) in June 2014, compared to 8.3 percent 15. Lebanon’s banking sector is liquid, a year earlier (Figure 14). Tier one capital constitutes profitable and well regulated, but highly exposed the principal funding source for commercial to the public sector. Banks are well capitalized banks, with the deposit-to-total liabilities ratio at and resilient owing to prudent investments and 87.5 percent. However, and despite large spreads conservative regulation by BdL and the Banking between domestic and international interest rates, Control Commission. In 2013, the tier one capital- a worsening in the security situation at the start of to-risk-weighted-asset ratio was 12.2 percent, which 2014 led to a deceleration in deposit inflows into was double what is required by Basel III. By 2015, the banking sector; the non-resident private sector BdL mandates that banks should have an additional deposit growth (y-o-y) slowed to 5.2 percent in 18 Such a low loan-to-deposit ratio indicates limited liquidity risk for Lebanese banks. 19 There has been some deterioration in profitability and NPL ratios since the beginning of the Syrian crisis in 2011. 20 Interest income, as obtained from BilanBanques, amounted to, respectively 64.09 percent, 65.31 percent and 64.06 percent of total consolidated banks’ income in 2010, 2011 and 2012. 21 The sovereign debt exposure is computed as a ratio of commercial banks’ aggregate investment in Treasury bills, Eurobonds and deposits at BdL relative to total assets. 12 | Recent Economic and Policy Developments LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE FIGURE 15. Deposits at commercial banks continued to FIGURE 16. … Falling risk premium on Lebanese rise steadily in 2013. Eurobonds translated into narrowing spreads. Source: BdL and WB staff calculations. Source: JP Morgan and WB staff calculations. June 2014, compared to 22.1 percent a year earlier. 2014 (Figure 16). This dynamic was also reflected in Resident private sector deposit, on the other hand, the Beirut Stock Exchange (BSE), which rose by 6.7 grew by 7.4 percent (yoy) in June 2014, compared to percent (yoy) in June 2014 (Figure 17). Total trading 6.6 percent a year earlier (Figure 15). value at the Beirut stock exchange (BSE) also rose by 47 percent for the year to June, while market 17. Spreads on Lebanese Eurobonds have capitalization of stocks grew by 3.4 percent to reach narrowed in first half of 2014. This likely reflects the US$ 11.2 billion, equivalent to 25.3 percent of 2013 mid-year improvement in the security situation and GDP. the formation of new government on 15 February FIGURE 17. The equity market improved over the first FIGURE 18. … Lebanon is vulnerable to reversal of half of 2014. deposit inflows Source: Beirut Stock Exchange, BLOM Bank and WB staff. Source: BdL and World Bank staff. Recent Economic and Policy Developments | 13 THE WORLD BANK PROSPECTS 18. Regional turmoil will continue inhibiting maintaining security, the political stalemate and the economic activity. World Bank staff projections additional requirement of absolute consensus for through 2016 are based on the assumption that passage of government decrees will likely prevent spillovers from the Syrian conflict gradually abate in any progress on longstanding structural issues. Water 2015 and 2016. Relative to our Spring 2014 issue and electricity have especially deteriorated over the of the Lebanon Economic Monitor, we maintained summer as winter produced record low rainfall, our growth projection for 2014 at 1.5 percent, but while strikes and funding quarrels caused a dramatic have revised our forecasts downwards for 2015 and increase in power outages. These bottlenecks 2016 to 2 percent (from 2.5 percent) and to 3.4 are translating into a worsening of Lebanon’s percent (from 4 percent), respectively. This reflects international ranking among key investment a change in the assumption regarding the timing of climate assessment (e.g., the World Bank’s Doing a major improvement of the conflict in Syria and the Business indicators or the World Economic Forum’s associated security spillovers in Lebanon. The return Global Competitiveness Index). Addressing these to potential output growth critically hinges on a bottlenecks is essential for fostering a favorable resolution of the conflict in Syria as well as a marked environment for small to medium size enterprises improvement in the security and political situations and to create quality jobs. in Lebanon. 21. Macroeconomic fragility stems from the 19. Significant risk emerges as Lebanon delicate fiscal-financial co-dependence. The begins to be directly impacted by expanding delineation between fiscal, monetary and the financial regional turmoil. Our forecast assume that the sectors becomes less pronounced as government attack on Arsal by IS and Al Nusra does not signal collects bank liquidity via T-bills and Eurobonds in a decision by these groups to expand their military order to finance persistently large fiscal and current conquests to Lebanese territory. Even if this were to account deficits, thus supporting the exchange rate. be the case, a worsening of the Syrian conflict would The risk is illustrated by considering Lebanon’s still likely result in increasing spillovers to Lebanon. short-term foreign liabilities, which surpasses the Simultaneously to these regional developments, country’s foreign asset reserve, exposing the country Lebanon faces increased stalemate and political to a sudden stop scenario (Figure 18). The former vacuum at home. Such developments weigh down are largely foreign liabilities of commercial banks, heavily on consumer and investor sentiment and which reached 222 percent of GDP (US$98.5 billion) generate significant downside risks to our economic by end-2013. On the other hand, Lebanon’s total growth forecast. foreign assets, consisting of BdL foreign reserves (foreign currency and gold) and commercial banks’ 20. Under current circumstances, the foreign assets, was 157 percent of GDP (US$69.5 Lebanese Government is unlikely to address billion) in the same period. A sufficiently large shock Lebanon’s longstanding and worsening structural could undermine confidence in the banking sector bottlenecks. Lebanon continues to be beset by in Lebanon, reversing foreign currency deposits and structural bottlenecks, including in infrastructure resulting in a balance of payments crisis. This makes such as electricity, water, transportation and Lebanon vulnerable to an increase in global interest telecommunications. The short-term focus on rates. 14 | Prospects LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE SPECIAL FOCUS TOWARDS AN EFFECTIVE Social Safety Nets and SOCIAL SAFETY NET IN Poverty LEBANON 22. Social safety nets (SSNs) are non- contributory transfers designed to provide Lebanon’s social safety nets (SSNs) fail to protect regular and predictable support to targeted poor poor and vulnerable Lebanese as it consists of a and vulnerable people. Non-contributory transfers multitude of small and poorly targeted programs that are also referred to as “social assistance” or “social suffer from low coverage, high leakage, and limited transfers.” SSNs are part of broader social protection benefit levels, while large budgetary resources are systems that include measures such as contributory expanded on universal subsidies which are pro-rich insurance and various labor market policies. When and crowd out other social spending. With poverty well crafted, SSNs can contribute toward breaking incidence elevated and broadly unchanged for the the cycle of intergenerational poverty by helping past 25 years, Lebanese citizens revealed in a World families to keep children healthy and in school. SSNs Bank (2014d) survey of country stakeholders that along with increased social services can also help social protection ranked second in their development to tackle the problem of spatial pockets of poverty priorities. International experience reveals that in slums and rural areas. The main types of SSNs carefully designed SSNs can help prevent shocks include conditional cash transfers, unconditional from pushing vulnerable households into poverty, cash transfers, conditional in-kind transfers, help tackle the problem of spatial pockets of poverty unconditional in-kind transfers, public works, in slums and rural areas, and also can help break and general subsidies (State of Social Safety Nets, the cycle of intergenerational poverty. With these 2014),22 hence SSNs fall under two broad categories: objectives in mind, in 2011 the Ministry of Social (i) subsidies; and (ii) non-subsidy SSNs. Affairs embarked on a modernization of Lebanon’s SSN system, starting with the introduction of the 23. Social safety nets play a number of crucial National Poverty Targeting Program. The NPTP is the roles. For example, they help alleviate poverty, first means-tested targeting social assistance program food insecurity, and malnutrition. They contribute in Lebanon. With the Syrian crisis pushing vulnerable to reducing inequality and boosting shared households into poverty, the NPTP has been scaled prosperity. They support households in managing up to cover more beneficiaries as part of a three year risks and coping with shocks. They help build and emergency project to help mitigate the impact of the protect human capital and connect people to job Syrian crisis on Lebanese households. Most recently, opportunities. And they are an important factor in the institutionalization of the NPTP into a permanent shaping social contracts between states and citizens program with an annual budgetary allocation has (State of Social Safety Nets, 2014). In broad terms, been proposed by members of Parliament, which if SSNs can promote three main outcomes: (i) social approved would constitute a significant positive step inclusion, by enabling investment in human capital forward in the effectiveness of Lebanon’s SSN system. (such as supporting school attendance or better 22 The World Bank (2014): “The State of Social Safety Nets” Washington, DC, The World Bank. Special Focus | 15 THE WORLD BANK nutrition for children); (ii) livelihoods, by protecting against destitution; and (iii) resilience to crises, by helping households to navigate the effects of shocks (Silva et al., 2012).23 24. A key factor behind effective SSNs is the method of targeting. Globally, there are three main targeting methods for SSNs. (i) Methods that assess the eligibility of the individual or the household in need of assistance. Eligibility can be determined by status of wealth (measured by means or proxy means tests) or assessed by the community (community based targeting); (ii) Methods that FIGURE 19. WEF Social Safety Net Score in MENA. select beneficiaries based on categories (categorical Source: World Economic Forum, Human Capital Report, 2013. targeting) such as age (demographic targeting) or place of residence (geographical targeting). (iii) Self- targeting method, where a program is designed needy clients of such organizations; (ii) Fee waivers in such a way that encourages the needy to target for hospitalization in public and private hospitals themselves while discouraging (but not excluding) which is for use of hospital services by those not the participation of those are who in less need.24 covered by the National Social Security Fund and lacking the means to purchase insurance, provided by the Ministry of Public Health. (iii) Education fee waivers and scholarships provided by the Ministry Lebanon: SSN of Education and Higher Education (MEHE). (iv) Price subsidies for electricity, diesel25, bread, Effectiveness, Types, agricultural exports, and domestic production of tobacco. Although universal, these subsidies reach Targeting, and Spending a small number of beneficiaries and tend to be pro- rich. They utilize a significant amount of financial 25. The following types of public social safety resources that could be spent on more efficient and nets (SSNs) exist in Lebanon: (i) Social services effective SSN programs. Their specific SSN role is and programs targeted to certain categories of also often not their primary goal. the population (e.g., disabled persons, juvenile delinquents, school dropouts, orphans) provided 26. Although hard evidence is not available, it by the Ministry of Social Affairs (MOSA) with is considered that existing public SSNs in Lebanon the majority of its budget distributed to NGOs, have not contributed significantly to poverty Civil Society Organizations (CS0s), and religious alleviation. Poverty incidence has been elevated and organizations. SSN distribution handled by these broadly unchanged for the past 25 years in Lebanon. charitable and religious organizations (who are 90 Today, it is estimated that nearly 27 percent of percent confessional-based) can result in under- the Lebanese population, or 1.2 million people, coverage of the poor and vulnerable that might are poor, living on less than US$4 per day. Seven not have a political or religious affiliation, and in percent, or close to 300,000 people, are extremely inefficient distribution of SSN resources to the non- poor, living on less than US$2.40 per day. As one 23 Silva, Joana; Levin, Victoria; Morgandi, Matteo. (2012), “Inclusion and resilience: the way forward for social safety nets in the Middle East and North Africa”, MENA Development Report. Washington, DC: World Bank. 24 FAO (2011), “Safeguarding Food Security in Volatile Global Markets”. 25 The diesel subsidy has been discontinued in 2012. 16 | Special Focus LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE FIGURE 20. Non-subsidy SSN Program Mix by Type, FIGURE 21. Non-subsidy SSN Program Mix by Targeting MENA, 2008-11 Type, MENA, Selected Countries, 2008-11 Source: World Bank ( 2012), “The Way Forward for Social Safety Nets Source: World Bank ( 2012), “The Way Forward for Social Safety Nets in the Middle East and North Africa” Washington DC. in the Middle East and North Africa” Washington DC. of the most urbanized countries in MENA and the due to the lack of micro data, it is concluded by world, Lebanon has the majority of its poor located most that what is spent on SSNs is not contributing in urban areas (World Bank, 2011c).26 Regional to reducing poverty or addressing inequalities, nor inequalities are stark with the highest concentration is it doing an adequate job in protecting vulnerable of poor people found in the North governorate (52.5 Lebanese. The same programs have been present percent), followed by the South governorate (42 since 2005 with limited reform and improvement to percent) and the Bekaa (29 percent).27 coverage and targeting. 27. Lebanon’s social safety net system is 29 In addition, Lebanon’s non-subsidy SSN also considered to not have provided sufficient programs are numerous and relatively small. protection against job loss or disability. According In 2012, five out of the eight non-subsidy SSN to citizens surveyed for the 2013 World Economic programs consisted of fee waivers, education and Forum (WEF) Human Capital Report, Lebanon health benefits. This pattern is not dissimilar to other ranked among the weakest in the world with respect MENA countries (Figure 20). In addition, several of to providing such protection (117 out of 122).28 Lebanon’s SSNs overlap between various ministries. Figure 19 compares Lebanon’s WEF SSN ranking For example, the MOSA provides education fee to countries in the MENA region; the average score waivers for the disabled, while MEHE also provides across the countries is 62, while only Morocco’s education fee waivers. Similar overlap exists for rank is worse than Lebanon’s. Lebanon’s ranking hospitalization fee waivers. shows the need for improvement of its provision of social safety nets. 30. Targeting methods for non-subsidy SSNs in Lebanon are primarily categorical which is 28. Excluding price subsidy programs—whose a factor behind their low effectiveness. Five focus is not primarily SSN—Lebanon’s non-subsidy out of the eight non-subsidy SSN programs are SSN spending does not exceed 1 percent of GDP categorically targeted, meaning beneficiaries are in 2013. Although no incidence analysis is available selected based upon belonging to certain categories 26 World Bank, (2011), “Poor Places, Triving People: How MENA Can Rise Above Spatial Disparities”, Report No. 58997, January. 27 UNDP. (2008) “Poverty, growth, and income distribution in Lebanon” Beirut,Lebanon: UNDP. 28 The administered question in the World Economic Forum, Executive Opinion Survey: In your country, does a formal social safety net provide protection from economic insecurity due to job loss or disability? [1 = not at all; 7 = fully] | 2012–2013 weighted average. Special Focus | 17 THE WORLD BANK by the large transfers to Electricité du Liban (EdL). Figure 22 below shows the percentage of GDP spent on SSNs with and without the electricity subsidy since 2005. Although the electricity subsidy is perceived as a social safety net for the Lebanese poor as it has a progressive tariff fixed since 1996, it is not intended or designed as such; not surprisingly it suffers from high leakage and offers a small benefit value to the poor; hence, the programs’ efficiency as a social safety net is weak. As such, at 5.6 percent of GDP, spending on SSNs becomes extremely FIGURE 22. Lebanon Social Safety Net Spending costly and crowds out spending on more effective social programs. It also widens inequality arising Source: Ministry of Finance, 2014 and World Bank staff calculations. from the following aspects: (i) consumers who are not billed are cross subsidized by taxpayers and EdL such as disabled, widowed, orphaned and the like.29 customers that are paying their bills; (ii) consumers Two programs are geographically targeted, while who suffer from electricity blackouts are faced with only one SSN program – the recently introduced higher cost alternatives (e.g., private generator for National Poverty Targeting Program (NPTP) - is the rich, candles for the poorest consumers); (iii) targeted based on proxy means testing, meaning poor regions go without public electricity for 12-13 beneficiaries are selected based upon their level of hours every day, while richer ones such as Beirut are poverty. Similar to Lebanon, the SSN programs in the subject to 3 hours of daily blackouts (World Bank, MENA region overwhelmingly use geographic and 2009c).30 categorical targeting. Figure 21 depicts the different targeting methods across the region. Such targeting methods work well in environments where poverty is concentrated, but not when poverty is multifaceted Path Towards More and spatially dispersed as in the case of Lebanon. In the latter case, methods that identify households Effective SSNs or individuals based on their means or correlates of poverty (proxy-means testing; PMT) are preferable. 32. Moving from the current social safety The overreliance on categorical and geographical net status toward more effective, reliable, and targeting methods in Lebanon induces high rates equitable social safety nets requires taking into of leakage to the non-poor. Enhancing targeting account several aspects of sustainability namely: towards the poor and vulnerable in Lebanon will (i) fiscal sustainability, (ii) political economy allow improving SSNs to better promote inclusion, sustainability, and (iii) administrative sustainability livelihood, and resilience. (Silva et al., 2012).31 31. If subsidy SSNs are taken into account, 33. To achieve fiscal sustainability, Lebanon Lebanon’s spending on SSNs as a whole increases is in need of focusing on programs that are well dramatically to over 5.6 percent of GDP. targeted to the poor, and rationalizing its high Specifically, the dramatic increase is accounted for cost subsidies such as the large transfers to EdL. To 29 Categorical targeting could be effective if those belonging to specific categories were all poor. However, it is usually not the case that all orphans, or widows, or disabled are poor. And neither are most poor among these categories. Hence, the potential high levels of inclusion and exclusion errors in this targeting method. 30 World Bank, 2009c, “Lebanon - Social impact analysis : electricity and water sectors,” Report No.48993-LB, June. 31 Silva, Joana; Levin, Victoria; Morgandi, Matteo. 2012. Inclusion and resilience : the way forward for social safety nets in the Middle East and North Africa - overview. MENA development report. Washington, DC: World Bank. 18 | Special Focus LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE 100 90 80 70 60 50 40 30 20 10 0 Egypt, Arab Rep. Lebanon Jordan Tunisia Serving specific groups of people Serving the poor FIGURE 23. Citizens’ Satisfaction with Government FIGURE 24. Preference for poverty targeting Assistance to the Poor the MENA region, 2011. (vs. categorical). Source: The Way Forward for Social Safety Nets in the Middle East Source: The Way Forward for Social Safety Nets in the Middle East and North Africa, World Bank 2012. and North Africa, World Bank 2012 achieve political economy sustainability, Lebanon to working towards compiling consistent and could benefit from feedback from public opinion reliable household data. Such requirements will about poverty and redistribution in designing pave the way towards establishing a record of new and effective programs. Lebanese citizens transparency, effectiveness, and impact on alleviating revealed in a World Bank (2014d) survey of country poverty in Lebanon. The most critical constraint in stakeholders that social protection ranked second Lebanon for the analysis of SSN performance is the in their development priorities (public sector lack of household budget survey data from which governance and job creation ranked first and third, poverty profiles and impact can be measured. respectively), hence the overall importance that Lebanon lacks recent and relevant household the population puts on protection of the poor and surveys (with relevant SSN questions) that can be vulnerable. Similarly, a recently conducted Gallup used to assess coverage, targeting, generosity, and poll in Lebanon and three other countries inquired overall impact on poverty and inequality. Moreover, about citizens’ attitudes and knowledge about not enough data is available to accurately identify SSNs, in addition to support for reform of SSNs in the principal challenges faced by the poor, such as the region. Citizens in Lebanon expressed the least those that contribute to perpetuating poverty across satisfaction among other MENA countries, in the Government’s assistance to the poor. Merely 20 percent of the citizens surveyed expressed their 90 satisfaction (Figure 23). This result confirms the 80 urgent need to step up the government intervention 70 60 in improving its social safety nets. Moreover, an 50 overwhelming majority of citizens surveyed (close 40 to 80 percent) in Lebanon prefer SSN programs to 30 target the poor rather than specific categories, in 20 addition to preferring cash benefits over in-kind 10 (Figure 24 and 25). Those results are consistent 0 Egypt, Arab Rep. Lebanon Jordan Tunisia with the preferences of citizens around the region. Goods (food, clothes, etc.) Cash 34. To achieve administrative sustainability, FIGURE 25. Preference for cash-benefits (vs. in kind). Lebanon must define appropriate institutional responsibilities while developing efficient Source: The Way Forward for Social Safety Nets in the Middle East and North Africa, World Bank 2012 targeting and management systems, in addition Special Focus | 19 THE WORLD BANK generations and those that can lead the vulnerable 36. As of May 2014, more than 102,400 into a quick descent into poverty. Lastly, in terms of households (460,000 individuals) had applied targeting, it is essential that Lebanon moves away to the NPTP program, and approximately 52,000 from geographical and categorical targeting towards households (235,500 individuals) were deemed PMT, that better suits the multi-dimensional and eligible to receive the benefits, representing dispersed poverty reality in Lebanon. In this regard, 67 percent of extreme poor. The NPTP is the National Poverty Targeting Program (NPTP) is managed by the MOSA and the Presidency of the considered a best practice to follow and is presented Council of Ministers (PCM). It is implemented in detail below. through approximately 375 social workers and inspectors who have been hired at the level of 100 Social Development Centers of the Ministry. The social workers/inspectors have been trained The National Poverty to implement the targeting method and collect needed household information that is verified Targeting Program and processed using an automated management information system. To date, the NPTP social (NPTP) assistance (the basket of benefits) consists of the following: (i) comprehensive health coverage 35. The NPTP is a new program aimed at for beneficiaries in public and private hospitals, modernizing Lebanon’s SSN system, raising its through the waiver of 10-15 percent copayments effectiveness and efficiency at protecting vulnerable for hospitalization; and (ii) registration fee waivers and poor households. Arising from the need for an and free books for students in primary and effective and targeted social safety net system, the World secondary public schools. The Council of Ministers Bank supported the Government of Lebanon (GOL) and approved US$28.2 million for the financing of the MOSA in the aftermath of the Paris III economic and social assistance for 2011-12, demonstrating its social action plan to design, develop and finance the commitment to the NPTP. implementation of a poverty-targeted social assistance program. Officially launched in October 2011, the NPTP is the first poverty-targeted social assistance program in Lebanon with the objective to “provide social Syrian Crisis and NPTP assistance to the poorest and most vulnerable Lebanese households based on transparent criteria that assess 37. Prior to the Syrian crisis, the Ministry each household’s eligibility to receive assistance, given of Social Affairs (MOSA) was in the process the available public resources”.32 The NPTP specifically of implementing reforms to its SSN system. targets the extreme poor in Lebanon (7 percent of the However, more than three years of conflict in Syria population) and is based on a proxy-means testing have resulted in a massive outflow of refugees into (PMT) targeting mechanism – which is among the global neighboring countries, thus shifting the priorities of best-practices.33 As mentioned before, the PMT has the government. Lebanon has received the largest been demonstrated to work well in countries with high number of refugees reaching more than 30 percent of informality and unreliability of income information, and its pre-crisis population. By end 2014, it is estimated it relies on an objective assessment of a household’s that the number of Syrian refugees will increase to welfare based on observable correlates of living 1.6 million refugees (37 percent of Lebanon’s pre- standards. crisis population). 32 Cabinet policy statement on the NPTP (June 18th, 2009) established the program. 33 The NPTP was successfully piloted in 2009 with assistance from the World-Bank ESPISP I funds, in three areas in Beirut, namely Ein El Remmeneh, Chiyeh, and Tarik El Jdideh. 20 | Special Focus LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE 38. With the escalation of the Syrian conflict, addressing the poverty impact of the Syrian conflict spillovers into Lebanon have rapidly moved on poor Lebanese households as one of its main beyond the humanitarian to the economic priorities in the immediate term through the scaling and social spheres where large, negative, and up of the NPTP. growing spillovers are occurring. The World Bank/UN Economic and Social Impact Assessment 41. To mitigate the impact of the Syrian (ESIA)34 finds that during the 2012-2014 period, conflict on poor Lebanese, the World Bank the conflict is estimated to push approximately prepared, at the Government’s request, a 170,000 Lebanese into poverty (over and above grant-funded scaling up of the number of the 1.2 million currently living below the upper beneficiaries covered under the NPTP. The poverty line). By 2014, the rate of poverty incidence scale up is a 3-year US$8.2 million grant financed in Lebanon would therefore be 3.9 percent higher “Emergency National Poverty Targeting Program due to the impact of the Syrian conflict. At the Project”. The objective of the project is to expand same time, the existing poor (about one in seven the coverage and enhance the social assistance Lebanese) would be pushed deeper into poverty. package of the NPTP to Lebanese affected by the In terms of the extreme poor, assuming that the Syrian crisis and all Lebanese households under same percentage of the poor that are extreme the extreme poverty line. Specifically, the project poor still holds from the latest available household aims to expand the coverage of the NPTP from budget data of 2004, we expect that the extreme approximately 195,000 (baseline in 2013) to poor will increase by 50,000 as a result of the 350,000 beneficiaries (2016/2017)—the program Syrian crisis, to reach 8percent of the population would therefore cover all of the extreme poor by the end of 2014. population of Lebanon (Figure 26).35 It also aims to introduce new benefits to the already existing 39. Furthermore, the socio-economic basket of benefits, namely food assistance (see consequences of the refugee crisis have led to Box) provided through an electronic card system, increasingly fragile inter-communal relations currently being implemented by the World Food and social tensions. Even if refugees are largely Program (WFP) in Lebanon for more than 800,000 living in very basic and insecure circumstances Syrian refugees and primary health care through themselves, Lebanese communities widely attribute the decline in their own living standards to the 400000 refugee presence. Notwithstanding the efforts of the 1.2 350000 Lebanese authorities to highlight their concerns on 1 300000 this point, the fact that Syrian refugees have hitherto 250000 0.8 been the main beneficiaries of international and 200000 0.6 government assistance remains a source of tension 150000 0.4 between communities. 100000 0.2 50000 40. The GOL’s Roadmap of Priority 0 2013 baseline 2014/2015 2015/2016 2016/2017 0 Interventions for Stabilization from the Syrian Conflict, developed as an outcome of the ESIA, Number of Eligible Beneficiaries Percentage of Extreme Poor Percentage of the Poor provides a set of priority short and medium term interventions targeted towards supporting Lebanese FIGURE 26. Projected Number of Eligible NPTP Beneficiaries communities, households, and the economy Source: World Bank Staff Calculations more broadly. In this regard, the GOL has placed 34 World Bank, 2013d, “Lebanon - Economic and social impact assessment of the Syrian conflict,” Report No. 81098-LB, September. 35 100 percent coverage rate assumes faultless outreach achieved by 2016/2017 assuming that in 2015 and 2016 the number of extreme poor remains constant. Special Focus | 21 THE WORLD BANK the Ministry of Public Health. Finally, the UNHCR the NPTP from 0.08 percent of GDP in 2014/2015 will be providing US $3 million to contribute to (0.25 percent of total government expenditure) to financing the e-card food voucher component of 0.18 percent of GDP in 2016/2017 (0.57 percent of the project. total government expenditure). While this constitutes an increase in spending on a single safety net, it will 42. The NPTP budget needed to cover all prove to be an important step towards spending on of Lebanon’s extreme poor by 2016/ 2017 is efficient and properly targeted programs. Moreover, about US$107 million; this represents a modest these figures are congruent with the best-performing budgetary outlay given the benefits provided and SSN programs, such as Mexico’s Oportunidades, in light of competing SSN programs in Lebanon. which covers about 30 percent of population at the The coverage of all extreme poor Lebanese under the cost of 0.3-0.5 percent of GDP (Table 1). program would increase government expenditure on TABLE 1. Lebanon: Household Coverage and Budgetary Implications of NPTP Source: World Bank Staff Calculations. FIGURE 27. Mapping of NPTP Beneficiaries with Syrian Refugees 22 | Special Focus LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE BOX 1: Using an E-Card Food Voucher System to Deliver Food Benefits To provide a cost-effective and efficient way Geographically the majority of Syrian refugees to deliver food benefits to households, the are located in regions already having high NPTP will use the same e-Card system as poverty rates and NPTP beneficiaries, deepening that deployed by the World Food Programme the vulnerability of the Lebanese in these areas for some 800,000 Syrian refugees, with some as competition for jobs, services and resources modifications to align it with the implementation increases. Figure 8 maps the significant overlap modality of the NPTP. Using the targeting criteria between Syrian refugees and NPTP beneficiaries. of the NPTP – that is, the poorest as defined by Seventy-seven percent of the bottom 50,000 NPTP the Proxy-Means Testing methodology – each beneficiaries that will receive e-card food vouchers eligible household is provided an e-card (issued in the first year reside in North Lebanon, while from MasterCard via a local partner commercial 14 percent reside in Beka’a. Introduction of the bank) with a monthly value of US$30/person. The e-card food benefit for Lebanese families will help e-cards can be utilized at some 285 shops around reduce tensions and conflict between the Lebanese the country that have been contracted by the WFP. communities and the Syrian refugees. The main aim of the e-card food voucher benefit is to provide needed food assistance to the most extreme poor Lebanese as a means to mitigate the impact of the Syrian crisis. Rising food prices and the coping mechanisms with food vulnerability indicate a need to provide food assistance to help alleviate the impact of the crisis on the food security of poor Lebanese. To cope with increased expenditures and decreased incomes many Lebanese households are reducing savings, increasing debt, or cutting on meals. Beka’a residents, for instance, reported to mostly having to purchase food on credit (59 percent), borrow food (42 percent), and are spending from their own savings (37 percent). North residents buy “only afford to” food items (43 percent), reduce quality of meals (40 percent) and spend from savings (40 percent) (UNDP, 2012).36 Spending from savings indicates that Lebanese households might not be able to sustain the current situation in the near future. 36 2012, “Rapid Assessment of the Impact of the Syrian Crisis on Socio-Economic Situation in North and Beka’a,” UNDP, August 2012. Special Focus | 23 THE WORLD BANK DATA APPENDIX TABLE 2. Lebanon: Selected Economic Indicators, 2011-2016 24 | Data Appendix LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE TABLE 3. Lebanon at a Glance Data Appendix | 25 THE WORLD BANK TABLE 3 (CONT): Lebanon at a Glance 26 | Executive Summary LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE TABLE 4: Lebanon: Millennium Development Goals, 1990-2011 Data Appendix | 27 THE WORLD BANK SELECTED SPECIAL FOCUS FROM RECENT LEBANON ECONOMIC MONITORS leading (one-year ahead) indicators for the Lebanese SPRING 2014 LEM: economy. Based on these indicators, GDP growth for 2012 and 2013 is estimated to be, respectively, 2.2 A SLUGGISH ECONOMY and 0.9 percent while growth in 2014 is predicted to reach 1.5 percent. Aside from having a high IN A HIGHLY VOLATILE degree of accuracy, both indicators are of relatively high (monthly) frequency and are available with a ENVIRONMENT relatively small time lag (2-3 months), which make them ideally suited for economic analysts, investors, A Sovereign Wealth Fund for Lebanon: Issues and and policy makers alike. In contrast to the BdL-CI, Preliminary Recommendations: (Special Focus 1) the WB-CI points to a deceleration in economic As Lebanon contemplates prospects of sizeable activity during the first ten months of 2013, which, hydrocarbon discoveries, the country is in the process if sustained over a few more months, would warrant of designing an institutional framework to manage a different monetary policy stance than the one these resources. One such issue is the establishment based on the BdL-CI. This monetary policy example of a Sovereign Wealth Fund (SWF), as required by the highlights the critical importance of having accurate, 2010 Hydrocarbon Law. This Special Focus provides high frequency, and timely economic indicators. an overview of the various types of SWFs that have been established across countries, draws lessons from these experiences, highlights some pitfalls, and presents preliminary recommendations for Lebanon as it moves towards establishing its SWF. Key among these recommendations is that the Lebanese SWF’s design should include (i) integration with the budget system, (ii) some (limited) flexibility in operational rules, (iii) no (or limited) earmarking but no extra-budgetary spending, (iv) coherence with country investment strategy, and (v) transparency and accountability. New Coincident and Leading Indicators for the Lebanese Economy: (Special Focus 2) Weak economic statistics in Lebanon impede economic analysis and decision making. To remedy this, World Bank staff developed two indicators of economic activity for Lebanon: a coincident indicator (WB-CI) and a leading indicator (WB-LI). These indicators, which are based on an expanded NBER-Conference Board methodology, reveal promising statistical properties that should make them valuable coincident and 28 | Selected Special Focus from Recent Lebanon Economic Monitors LEBANON ECONOMIC MONITOR | DOWNSIDE RISKS MATERIALIZE FALL 2013 LEM: THE BRUNT OF THE SYRIAN CONFLICT Lebanon: Economic and Social Impact of the Syrian Conflict: (Special Focus 1) During the 2012- 2014 period, the conflict in Syria is having a large, negative, and rapidly growing impact on Lebanon’s economy, its social fabric, and its public services. On the economic front, the deteriorating security situation is undermining consumption, investment which is dragging down growth. The cumulative losses in economic activity could reach an estimated USD7.5 billion. On the social front, social cohesion is rapidly deteriorating partly due to combination of rising poverty—approximately 170,000 Lebanese would be pushed into poverty (over and above the 1 million currently living below the poverty line)—a worsening labor market which is estimated to result in a doubling of the unemployment rate to above 20 percent, rising insecurity, amid deteriorating core public services. Public services are under pressure given the sudden and large increase in their demand arising from the Syrian refugee influx. The fiscal cost of Syrian conflict is estimated at USD2.6 billion, of which USD1.5 billion stems from foregone government revenue collection while the remaining USD1.1 billion are expenditure incurred by the government to meet some of the surge in demand for public services. Across all core public services, the surge in demand is currently being partly met through a decline in both the access to and the quality of public service delivery. It is estimated that an additional spending of USD2.5 billion would be required for stabilization, i.e., to reinstate the access to and quality of public services to their pre-Syrian conflict level. Selected Special Focus from Recent Lebanon Economic Monitors | 29 THE WORLD BANK SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON (for an exhaustive list, please go to: http://go.worldbank.org/8700A29QW0http://go.worldbank.org/5N4AMNJXV0) 30 | Selected recent World Bank publications on Lebanon 0.9375 cm The World Bank www.worldbank.org/lb