Engulfed by two of the most volatile conflicts in the Middle East, Lebanon’s economy has been forced to adjust to instability. The Syrian war has led to about 1.5 million refugees fleeing over the border, while tensions between Shia militant group Hezbollah and Israel seem to be constantly on the verge of eruption.

Despite all this turmoil, Lebanon’s economy has still managed to grow. Last year was hailed a fiscal success, with limitations on capital spending, particularly on infrastructure, seen as the main driver allowing for the reductions in public deficit.

Net improvement

According to the local Bank Audi, 2014 saw a net improvement in Lebanon’s public finances, with the fiscal deficit dropping by 31 per cent in the first 10 months. This is understood to be driven by a 12 per cent rise in public revenues coupled with a 2 per cent decline in government spending.

This has set the precedent for the fiscal policies likely to be implemented in the next 18 months. The expectation is that Lebanon will not see an improvement in the deficit because capital expenditure is likely to increase, with a push on infrastructure projects. A move the government was reluctant to make in 2014.

Lebanon suffers from a twin shortfall, with its fiscal deficit sitting at 8 per cent of GDP and the trade deficit equating to 35 per cent, according to a quarterly report by Bank Audi.

The focus on infrastructure spending is the result of a bottleneck caused by limited investment in recent years and the influx of Syrian refugees. Marwan Barakat, group chief economist and head of research at Bank Audi, says that, on average, emerging markets should be spending 5-6 per cent of their GDP on infrastructure projects, whereas Lebanon has only been committing to 1.2 per cent over the past four years.

An increase in capital spending on infrastructure is expected to coincide with a decrease in other areas such as government wages and maintenance.

Despite the projection that the fiscal deficit is unlikely to improve, Lebanon’s economy has been one of the few in the region to grow off the back of cheaper hydrocarbons prices. Bank Audi claims that energy imports, which used to cost $5bn annually, have halved due to the recent drop in oil prices.

A report published in January by the local Byblos Bank says the Washington-based World Bank predicted that a decline in global oil prices would improve the country’s fiscal position due to the reduction in treasury transfers to the state-owned and “money-losing” Electricite Du Liban.

The utility provider had its government transfers linked to an oil price of about $23 a barrel; transfers were inflated with the rise in crude prices and have been 4.7 per cent of GDP a year instead of the anticipated 3.9 per cent. The recent drop in oil prices has meant a drop in treasury transfers and overall government spending.

Despite this, Lebanon is facing issues surrounding tourism and foreign direct investment (FDI). According to local analysts, investors and tourists are adopting a wait-and-see attitude due to the volatile security situation.

In 2014, the number of tourists visiting the country was 38 per cent less than in 2010. The same goes for FDI, which amounted to $2.8bn in 2014, compared with $4.3bn in 2010.

Further growth

Lebanon’s economy, which grew at a rate of 2.5 per cent in 2014, is expected to do the same this year. Although capital spending is likely to increase, with little or no change to the fiscal deficit, reduced energy imports combined with an improving consumer market have meant pressures caused by regional instability have been alleviated.

While the government has little control over the ongoing war in Syria, it is clear the domestic landscape must improve and provide the legislative stability needed for medium-to-long-term economic growth. Despite having a functioning cabinet, which has revealed it will announce a government budget for the first time in more than 10 years, Beirut’s 22 failures to elect a replacement for former president Michel Suleiman, whose term ended on 25 May 2014, are preventing much-needed political stability.

The failure comes amid an ongoing feud between various political factions and does not bode well for the country’s oil and gas ambitions, which have seen little movement for nearly two years due to the political paralysis. Crucially, plans for its first oil and gas licensing round, which the Lebanese Petroleum Administration says could be transformative for the economy, have failed to move forwards.

All of which adds to a number of growing issues that a seemingly ineffective government is failing to solve as a consequence of its inability to agree and apply a streamlined economic policy to ensure Lebanon is able to alleviate instability that it has no recourse to.