Donor aid will go a long way towards helping plug the sizeable gap in Lebanon’s economic growth caused by a month of Israeli bombardment this summer, the country’s central bank governor Riad Salameh told Emerging Markets in an interview.
Lebanon’s economy has largely weathered the storm unleashed by the conflict thanks to prompt action by Arab governments as well the inherent strength of Lebanon’s central bank and the country’s banking sector, Salameh said. The IMF estimates in its World Economic Outlook that Lebanon’s GDP will contract by 3.5% in 2006 – a “gap” that can be plugged through donor aid, Salameh said. His comments come as donors prepare for a special Core Group meeting in Singapore on Monday to help clarify the international response to the country’s reconstruction needs
The governor also sought to reassure international markets over the stability of the country’s financial sector, despite the damage inflicted to the economy by the conflict. “The financial sector remains strong. The central bank’s strong balance sheet has kept confidence in the system,” Salameh said.
The governor pointed out that secondary debt markets have stayed calm. Following Israel’s lifting of its blockade, Beirut can also consider a return to the international capital markets if necessary. “Lebanon continued to pay the interest on its bonds throughout the war,” Salameh said.
Donors are expected on Monday to adopt a medium-term approach to helping reconstruct the country battered by a 34-day conflict launched in the wake of the capture of two Israeli soldiers.
Gulf states have too often made large aid commitments to crisis stricken areas of the Middle East, only be sluggish in pushing through payments. But this time, Saudi Arabia immediately paid up a $1 billion five-year loan and Kuwait provided $500 million on similar terms. Both Gulf states also committed at least $500 million and $300 million respectively under the planned Arab donor fund to rebuild the economy, discussed first at a donor conference in Stockholm on August 31. Salameh was clear on what Lebanon wanted from donors: “We can be compensated [for the damage and losses] if the donor package provides grants, not loans” or other instruments. The Saudi and Kuwaiti grants set a promising pattern, he said – and “European and US grants could also come in”.
Until Beirut knows what donors were lining up it is “premature to see how public finances are going.” Salameh said. One or more special funds are expected to be established to underwrite reconstruction.
The initial cost for rebuilding public infrastructure and damage to commercial buildings is put at $2.5 billion by the Council for Development and Reconstruction, created by late prime minister Rafiq Hariri to rebuild Lebanon after its 1979-91 civil war. The war cost the economy $2 billion - $3 billion “depending on the level of growth – it was supposed to be 5% this year and in June, [state statistics office] INSEE said it was running higher than that,” Salameh said.
The governor played down reports of pressure on the Lebanese pound, saying the central bank, which has about $13billion in foreign exchange reserves, was committed to the currency’s stability and would maintain the confidence of the markets. Salameh predicted an increase in inflation from 4% to 6-7% after the conflict, but said that there was no need to change interest rates or inject liquidity into the system. He also said the government had enough funds to cover servicing the high public debt, of about $40 billion, for this year.