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International Monetary Fund. Middle East and Central Asia Dept.

Abstract

The coronavirus (COVID-19) crisis led to a surge in government debt and financing needs as many countries in the Middle East and Central Asia reacted swiftly to mitigate the pandemic’s impact. Although several of these countries successfully accessed international financial markets, domestic banks covered a significant share of emerging markets’ financing needs, further expanding their already significant exposure to the public sector. By contrast, most low-income countries (LICs) had a small response to the crisis because of financing and policy space constraints. Looking ahead, public gross financing needs in most emerging markets in the Middle East and Central Asia are expected to remain elevated in 2021–22, with downside risks in the event of tighter global financial conditions and/or if fiscal consolidation is delayed due to weaker-than-expected recovery. However, further reliance on domestic financing will reduce banks’ ability to support the private sector’s emergence from the crisis, thus prolonging the recovery. Credible medium-term fiscal and debt management strategies, together with policy actions to develop domestic capital markets and mitigate banks’ overexposure to the sovereign would reduce financing risks, address the elevated debt burdens, and entrench financial stability.

Mr. Jose Martelino, Mr. S. Nuri Erbas, Mr. Adnan Mazarei, Ms. Sena Eken, and Mr. Paul Cashin

Abstract

In the ten years prior to 1975, the Lebanese economy was one of the most dynamic in the Middle East region. It was characterized by low inflation, high rates of economic growth, large balance of payments surpluses, small fiscal deficits, and a floating, stable, and fully convertible domestic currency. Regulations impinging on the functioning of markets for goods and services, labor, capital, and trade were limited, and tax burdens were light in comparison with other countries at a similar stage of development. Furthermore, Lebanon had an important role as the key economic intermediary between the developed economies of Europe and the developing economies of the Middle East. Because of this combination of a stable macro-economic environment, liberal economics, and its role as regional intermediary, Lebanon enjoyed a strong comparative advantage in the services sector of its economy, particularly in banking and finance, tourism, insurance, and trade-related services.

Mr. Jose Martelino, Mr. S. Nuri Erbas, Mr. Adnan Mazarei, Ms. Sena Eken, and Mr. Paul Cashin

Abstract

This section examines the economic costs of the 1975–90 Lebanese civil war and its effects on the country's prospects for growth. The first subsection measures the value of output forgone owing to the war, and the second examines the implications for the path of future Lebanese growth of the drastic war-induced shrinkage of real output. The final subsection analyzes the growth consequences of the wartime destruction of capital, which yielded cross-sectoral imbalances in the stocks of physical and human capital. Four key conclusions arise from this work. First, the loss of output during 1975–93 is at least LL 98 billion at constant 1974 prices, or about 24 times the value of Lebanon's 1993 real GDP (at constant 1974 prices). Second, the length of time it will take Lebanon to reattain its prewar (1974) real per capita output level is partly contingent on the magnitude of the gap between 1993 measured and potential output and on how quickly this gap can be closed. Assuming that half this gap is closed in 1994 and that real per capita GDP will grow by 6 percent a year thereafter, Lebanon could close the remaining gap during the year 2000. Third, the transition from Lebanon's low postwar real per capita income level (estimated for 1993 to be about 48 percent of its 1974 value) to its steady-state level is likely to take several generations to complete, although three-fourths of the initial gap could be closed by about 2023 if high growth rates are achieved. Fourth, given that the civil war destroyed relatively more of Lebanon's stock of physical capital than of its human capital, the potential exists for Lebanon's real per capita income to approach its steady-state level at an even more rapid rate than that given above.

Mr. Jose Martelino, Mr. S. Nuri Erbas, Mr. Adnan Mazarei, Ms. Sena Eken, and Mr. Paul Cashin

Abstract

Prior to the civil war, the Lebanese Government played a relatively small role in overall economic activity and pursued conservative fiscal policies. For example, during 1974–75 the budget incurred surpluses, revenues made up 15–20 percent of GDP, and government expenditure amounted to less than 15 percent of GDP. The relative importance of tax and nontax revenue was about the same, with indirect taxes dominating tax revenue. While schedular income taxation had long been in use, indirect taxes (mainly customs duties) accounted for most tax revenue. On the expenditure side, the bulk of spending comprised wages and salaries paid to government employees.

International Monetary Fund. Middle East and Central Asia Dept.
This Selected Issues paper analyzes the various transmission channels of the Syrian crisis—though quantification is hampered by the lack of reliable data—with focus on the impact on fiscal performance and labor markets; it also takes stock of international donor efforts to date. The paper also provides overviews of main effects on Lebanon’s economy, the expenditure pressures associated with the refugee presence, the impact on poverty and inequality, and the added strains on labor markets. A section of the paper describes the response by the international community to help Lebanon cope with the Syrian crisis. Absent additional international support, the needs of both refugees and affected Lebanese communities will not be met. Sound government policies—including implementation of a concerted policy framework to deal with refugee issues and a commitment to fiscal discipline—will send credible signals to donors and help mobilize budget support. Tackling the unprecedented refugee crisis requires strong international support. There has been a large international humanitarian response, but much more is needed.
Mr. Ludvig Söderling and Mr. Domenico Fanizza
Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.
Mr. Jose Martelino, Mr. S. Nuri Erbas, Mr. Adnan Mazarei, Ms. Sena Eken, and Mr. Paul Cashin

Abstract

This section investigates currency substitution and dollarization in the Lebanese context during 1964–93, and particularly since the start of the civil war. To provide a more accurate insight into the public's asset portfolio response since the beginning of the war, the origins and extent of Lebanese currency substitution and dollarization are examined. This is followed by a look at capital flight and repatriation and their key determinants. Finally, the relative merits and demerits of pursuing a policy of de-dollarization of the Lebanese economy, as well as the requirements for achieving such a goal, are discussed.

International Monetary Fund. Middle East and Central Asia Dept.

Abstract

A year into the coronavirus (COVID-19) pandemic, the race between vaccine and virus entered a new phase in the Middle East and Central Asia, and the path to recovery in 2021 is expected to be long and divergent. The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions. 2021 will be the year of policies that continue saving lives and livelihoods and promote recovery, while balancing the need for debt sustainability and financial resilience. At the same time, policymakers must not lose sight of the transformational challenges to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies. Regional and international cooperation will be key complements to strong domestic policies.

International Monetary Fund. Middle East and Central Asia Dept.

Abstract

A year into the coronavirus (COVID-19) pandemic, the race between vaccine and virus entered a new phase in the Middle East and Central Asia, and the path to recovery in 2021 is expected to be long and divergent. The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions. 2021 will be the year of policies that continue saving lives and livelihoods and promote recovery, while balancing the need for debt sustainability and financial resilience. At the same time, policymakers must not lose sight of the transformational challenges to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies. Regional and international cooperation will be key complements to strong domestic policies.

Mr. Jose Martelino, Mr. S. Nuri Erbas, Mr. Adnan Mazarei, Ms. Sena Eken, and Mr. Paul Cashin

Abstract

Estimating money demand for Lebanon has been made more difficult by the war-induced increase in currency substitution that occurred during the sample period. Empirical tests suggest several promising monetary aggregates that result in a stable money demand function, giving the Lebanese monetary authorities scope to influence future developments in both the price level and income. These results provide econometric evidence that, despite the economic turmoil of the civil war, stable equilibrium relationships do exist in the long-run series for money, prices, and output in Lebanon.36 Specifically, in the context of monetary programming, the results also suggest that the domestic component of total liquidity is preferred as the monetary target for money denominated in Lebanese pounds, and the foreign component of total liquidity is preferred as the monetary target for dollar-denominated money.