World Bank: Oil Price Shocks Positive for Lebanon
Published Saturday, January 31, 2015
According to its most recent report, entitled, “Plunging Oil Prices,” the World Bank expects lower oil prices to benefit Lebanon’s economy. Thus, the government’s reduced electricity spending should result in significant savings. This, in turn, is expected to have a net positive effect on the balance of payments (BoP), as lower oil imports will outweigh the decline in expatriate remittances.
The World Bank estimates that Lebanon saw 1.5 percent growth growth in 2014, a slight improvement on the 0.9 percent seen in 2013. According to the Middle East and North Africa (MENA) Quarterly Economic Brief, issued on January 29, growth is expected to remain slow this year, under 2 percent, which is a lot less than the high growth rate seen in the period prior to 2011. The report points out that the $1 billion dollar stimulus package issued by the Central Bank of Lebanon, in the form of subsidized loans to the private sector, will enable “entrepreneurs in Lebanon to access reasonable finance and enter the market.”
The World Bank is trying to measure the consequences of plunging oil prices on the economies of the MENA region, arguing that “the over 50 percent decline in world oil prices from US$115 a barrel in June 2014 to less than US$ 50 today will have significant consequences for the economies of the... region.” However, oil-importing countries like Lebanon, Jordan, Tunisia, and Egypt, will benefit from falling oil prices. The trade balance of these countries could improve by up to 2 percent of Gross Domestic Product (GDP). Whereas, oil-exporting countries are likely to see rising fiscal and current account deficits, or their surpluses shrinking considerably.
One of the authors of the report, Shanta Devarajan, noted: “Oil importers will benefit from lower import and fuel subsidy bills, while exporters, some of whom depend on oil for 80 percent of their income, will lose export and fiscal revenues.”
The report focuses on the consequences of low oil prices for eight developing countries in the MENA region (oil importers: Egypt, Tunisia, Lebanon and Jordan and oil exporters: Iran, Iraq, Yemen and Libya), in addition to the countries of the Gulf Cooperation Council (GCC), which play a major role in providing funds to the rest of the countries of the region in the form of aid, investment, tourism revenues and expatriate remittances.
The report says that Yemen and Libya are among the oil-producing countries most likely to suffer negative consequences from declining oil prices, while the oil trade balance (net oil exports) of Iran and Iraq could deteriorate more than 10 percent of GDP in 2015. Although the oil-exporting countries of the GCC are in a much better position because of their ample reserves, they could still endure losses of over US$ 215 billion in oil revenues, i.e., more than 14 percent of their combined GDP.
One of the authors of the report, Lili Mottaghi, warned: “The oil shock could threaten the ability of some of the oil exporters to meet domestic spending commitments. Their options include drawing down reserves, accumulating debt, and cutting spending on fuel subsidies and public-sector salaries.”
Oil-importing countries like Egypt, Jordan and Lebanon could be at risk, because their economies receive large flows of expatriate remittances and aid from the GCC. However, the report concludes that, based on comparable situations in the past, lower oil prices will likely lead to slower growth, but will not lead to a decline in expatriate remittances.
Therefore, the World Bank expects the overall effect on the Lebanese economy to be positive. On the fiscal side, Lebanon will see significant savings derived mostly from lowered government spending on electricity. The BoP is likely to experience a net favorable effect, because lower energy imports will outweigh diminishing remittances. According to the report: “The real-sector impact is uncertain, as lower petroleum product prices would boost private consumption on the one hand, while lower remittances by the Lebanese diaspora in oil-producing countries may dampen it.”
The report concludes: “The expected impact on growth is uncertain and would depend on the length and expectations of the oil price decrease. Lower oil prices would benefit consumers and boost growth, ceteris paribus, but on the other hand remittances from oil producing countries could come under pressure should there be a sustained decrease in oil prices. Headline inflation would decrease with lower oil prices.”
“Thanks to lower oil prices, Lebanon’s structurally weak fiscal position will improve,” the report said. However, the central government’s overall fiscal deficit is expected to increase from 9.4 percent of GDP in 2013 to 10.2 percent of GDP in 2014. The gross public debt reached 149 percent of GDP by the end of 2014. According to the report: “The primary impact of lower oil prices will be through transfers to Electricité du Liban (EdL).” In the past ten years, annual government transfers to EDL averaged 3.9 percent of GDP. These transfers correlate with or depend on oil prices and the correlation coefficient has been 0.4 since 2005. Unusually high oil prices in the past few years led to larger government transfers to EdL. These transfers averaged 4.7 percent of GDP since 2011. “A lower price of oil will have a positive impact on the fiscal position, ..., albeit with a 6-9 month lag given the structure of outstanding contracts with fuel oil and gasoil providers.”
The World Bank expects the BoP in Lebanon to improve “notwithstanding its exposure to oil-exporting countries through remittances and business, as a large net oil importer.” According to estimates, the current account deficit ran around 8 percent of GDP in 2014, similar to the previous two years. The main reason for this is the large trade deficit, which has averaged 34 percent of GDP since 2010. “As a net oil importer, Lebanon’s energy imports are a leading source of the trade deficit, averaging 8.3 percent of GDP during the same period. Moreover, to meet its balance of payments (BoP), Lebanon remains dependent on inflows, a large part of which are remittances, which amount to about 6.5 percent of GDP (2010 - 2013 average).” Expatriate remittances are also affected by oil prices because most of them come from the large Lebanese expatriate population in the GCC region. Not to mention that this region is an important source of income for many Lebanese businesses as well.
“Overall,” the report added: “lower oil prices are expected to have two offsetting effects on the BoP in Lebanon. The first is positive driven by cheaper energy imports, while the second is negative caused by lower income receipts.” The overall result depends on the relative elasticities of energy imports and income receipts regarding the price of oil. The World Bank estimates: “the relative elasticities of energy imports and income receipts vis-à-vis oil prices at 0.25 and 0.12, respectively, for the period January 2010 - July 2013. Considering that energy imports are also larger than income receipts, this suggests that lower oil prices will have an overall positive impact on the BoP.”
This article is an edited translation from the Arabic Edition.