When Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank, announced in November $800 million for a new stimulus package to help the economy grow in 2014 — he was perhaps guilty of overstatement. While there will be $800 million made available, what Salameh neglected to mention was that $468 million of it was actually unused money from 2013’s stimulus package which will be rolled over. As such, just $332 million of purely new money will be extended, less than 1 percent of gross domestic product (GDP).
While Salameh was quick to stress that the primary reason for not releasing more money was fear of inflation, there are other factors that may have caused him to ease off. Put simply, the impact of the first stimulus package remains unclear, while the general weakness in the economy and low levels of confidence mean that the positive effect of any new round of stimulus is likely to be muted. In such a climate, and with the ongoing political impasse showing no signs of easing up, the governor is faced with the unenviable task of again shouldering the burden of moving the economy forward with limited tools.
In January last year BDL announced the details of its first monetary stimulus package since 2009, with a total of $1.47 billion being extended. The mechanism, as with most monetary stimulus packages, was indirect — BDL would extend loans at 1 percent to the country’s commercial banks, providing they lend to their customers at corresponding lower rates. Specific sectors were targeted, with real estate receiving 56 percent of the funds, environmentally-friendly projects 20 percent and the productive sectors just 14 percent. The cumulative effect of the package, it was hoped, would be to boost demand in the economy by helping thousands of Lebanese buy their first homes, open businesses or develop existing projects.
Assessing the efficacy of these policies has proved difficult. The bank has yet to release detailed numbers on the impact and, industry experts say, is unlikely to do so. “We need to see the detailed results of the first stimulus to have the full picture,” Nassib Ghobril, head of research at Byblos Bank, says. “BDL doesn’t publish those but often the governor [Salameh] indicates them through the media.”
So far the main sign Salemeh has given was the seemingly high figure of 96,000 housing loans supported through the package, which he mentioned at a public speech in November. There has, however, been no specific data released on this, and so it is impossible to assess how many of these loans would have been taken out by home buyers anyway without the interest rate subsidy (see real estate article article).
Lebanon’s economic activity grew in total an estimated 1.5 percent in 2013, according to the World Bank and government figures, but how much of that was supported by the stimulus package is unclear. The World Bank has done what its economist Ibrahim Jamali describes as a “small analysis” but has yet to undertake a larger one, partly due to lack of data. “The extent of the impact is still not clear. We will have to wait at least one or two more quarters to have a more elaborate idea [of how it affected the economy].” Ghobril agrees that there are as yet “no reliable estimates” of the impact on GDP, but believes that “without the stimulus growth would probably have been lower.”
One area of criticism, however, has come from the focus of the stimulus package. The decision to put over half of the available funds into real estate has certainly helped boost parts of that sector, but the knock-on effects for the rest of the economy have perhaps been more muted than if investments had been made elsewhere.
The issue is that real estate in Lebanon already suffers from oversupply — half-built or already empty buildings scatter the country. As such, a measure that helps people invest in their first homes has limited multiplier effects for the overall economy. “New mortgages are not generating the construction of new buildings, so it doesn’t generate economic growth and new jobs,” Ghobril says.
While BDL has yet to release in-depth details of where the second round of stimulus will go, Salameh has indicated the focus will not fundamentally differ from its predecessor. “This new package is similar to the one we launched this year,” he said in November, singling out real estate and technology as targeted areas.
There are fears that the continued focus on housing in the second package will do even less than the first one to help stimulate the real economy. The World Bank estimates that only 6 percent of loans made possible by the stimulus package went to the productive sectors, where multiplier effects are higher. “The real estate sector has already benefited from the first stimulus package,” the Bank’s Jamali says. “It should not be omitted in the second one but maybe more funds should be allocated toward the productive sectors.” Ghobril concurs that a shift in emphasis is necessary. “Personally I would shift it toward companies and sectors rather than real estate and mortgages.”
Roger Melki, senior adviser to the Ministry of Economy and Trade, sees nothing wrong in support for the real estate sector but adds that small businesses are suffering and need support. “What we have observed in the last 12 months is that the small and medium sized companies are refraining from taking loans, but not the large ones, they are investing.” A key indication, he adds, is the loans made by Kafalat — the government sponsored loan-guarantee company which supports small and medium-sized businesses — have fallen, with companies wary of expansion. “If you look at Kafalat loan guarantees they are 16 percent lower in 2013.”
Deck chairs on the Titanic
While debates about the focus of the package are relevant, more fundamental problems look set to undermine the impact of Salameh’s plans. One reason to doubt the impact of any stimulus package is the desperately low levels of confidence in the economy.
In the first six months of 2013, the Byblos Bank/AUB Consumer Confidence Index dropped to its lowest level since the index was founded in 2007. In total there was an average monthly reading of 29.4, down 14.1 percent from the second half of 2012. The primary reason is the country’s political turmoil, with the impact of the Syria crisis a major factor. Effectively, confidence in the economy is so low that even if loans are cheap, customers may be hesitant to invest.
In the face of such a difficult challenge policy makers need as many options as possible, but Salameh’s hands are tied. The central bank can only carry out a monetary stimulus — lending to the banks cheaply on the basis that the interest subsidy will feed into the economy — but such a funding mechanism is flawed in a static economy. If, as was the case with 2013’s package, confidence is so low that there is not enough demand, then the money goes unused. The alternative would be a fiscal stimulus — direct government spending in key sectors to boost demand.
“A fiscal stimulus would have a more direct impact. In terms of monetary policy you talk about channels of transmission — there is a stimulus package but unless people are willing to borrow the money and do something with it, it is not that useful,” the World Bank’s Jamali says. “With a fiscal stimulus the government is spending that money, so there is no question whether people will borrow it or do something with it that is not useful. A fiscal stimulus would be more immediate and this might be desirable at this time, given the state of the economy.”
Fiscal stimuli such as a hearty infrastructure development package might benefit Lebanon in more than one way. Applying this Keynesian methodology would be the responsibility of the government and this, unfortunately, is outside the realm of options for Salameh. Since the resignation of Prime Minister Najib Mikati in March 2013, Lebanon has been without a government of any kind, and there are few prospects of forming one in the coming months. For this reason, a fiscal stimulus package is impossible. In effect, the complete failure of the country’s political class to work together has crippled the country’s economic options for countering the impact of the downturn and forced Salameh into action. “BDL is taking on the role the executive branch should be doing. It is the government that should find ways for growth not the central bank having to bear this burden again,” Ghobril says.
As Lebanon looks for economic hope in 2014, the stimulus package is one area of positivity. Salameh has long been the driving force behind the economy, filling the role the politicians have failed to. But a combination of a severe lack of confidence, odd choices of focus and a lack of alternative options mean the real economy will likely be numb to the stimulus.