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Drop in global oil prices to benefit Lebanon's fiscal and external accounts

BEIRUT | iloubnan.info - February 09, 2015, 11h01
The World Bank anticipated that the drop in global oil prices would have a positive impact on Lebanon. First, the Bank expected that the decline in global oil prices would improve the country's structurally weak fiscal position, Byblos Bank ‘Lebanon This Week’ reported.
It said that lower oil prices would reduce Treasury transfers to the state-owned and money-losing Electricité du Liban (EdL), which averaged about 3.9% of GDP annually over the past decade. It indicated that Treasury transfers have financed EdL's annual losses, which are due to the fixing, since 1996, of electricity tariffs based on an average oil price of $23 per barrel. It noted that high global oil prices in the past few years led to larger-thanaverage transfers to EdL of about 4.7% of GDP per year since 2011. As such, it said that Treasury transfers to EdL are linked to oil prices, which means that reduced hydrocarbon prices would have a positive impact on the fiscal balance through lower transfers. But it noted that the pass through would materialize with a six- to nine-month lag, given the structure of EdL's outstanding contracts with fuel oil and gasoil suppliers.

Second, the Bank expected that lower global oil prices would reduce Lebanon's oil import bill and improve its balance-of-payments position, given that the country is a large net oil importer. It said that Lebanon's wide current account deficit reflects a large deficit in the trade balance, mainly from energy imports that averaged about 8.3% of GDP annually since 2010 and that account for 24% of the import bill. In parallel, it said that the country remains dependent on capital inflows, mainly in the form of remittances from the Lebanese Diaspora, to finance its balance of payments. It considered that lower oil prices would negatively affect remittance inflows given that a large share of these flows comes from Lebanese expatriates in the Gulf Cooperation Council countries. It added that the GCC economies are a major source of income for many Lebanese businesses. It considered that the positive impact of lower oil prices on oil imports would outweigh the negative impact on capital inflows.

Third, the Bank considered that the impact of lower oil prices on economic activity is uncertain, and will depend on the length an expectations of the decrease in prices. It said that reduced oil prices would benefit consumers and could support growth. But it noted that a sustained decrease in oil prices would weigh on remittance inflows from oil-producing economies, which would negatively affect consumption.
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#oil_prices, #petrol
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