Lebanon's private sector shrinks in June amid budget uncertainty

Firms remain downbeat on business outlook at the end of the second quarter

EPWHN2 Beirut, Lebanon
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Lebanon's private sector economic activity declined in June, continuing a six-year slide as output and new orders contracted amid flat economic growth.

The Blom Lebanon Purchasing Managers' Index (PMI), compiled by IHS Markit, in June was unchanged at 46.3, Blominvest Bank said on Wednesday. The index has remained below 50 - signalling contraction - since mid-2013, although it has shrunk at varying rates.

"Economic growth remains subdued, hovering between 0 and 0.5 per cent especially with output and new orders indices at less than 44," said Rouba Chbeir, senior economist at Blominvest Bank. "The proposed new tax-driven budget still awaits approval, which spurs uncertainty."

Lebanon's cabinet proposed a budget deficit of 7.6 per cent of the gross domestic product, down from 10.9 per cent in 2018, but it must still get the budget proposal passed in parliament. The country's economy has suffered as a result of internal political bickering and an influx of refugees during the eight-year war in neighbouring Syria. Its financial crisis was compounded by political wrangling amid a nine-month leadership void, until Lebanon finally formed a new government led by prime minister Saad Hariri on January 31.

Ms Chbeir said the government target to trim the fiscal deficit was "optimistic" while the International Monetary Fund projected the budget deficit will reach 9.75 per cent of GDP - well above the authorities' stated aim.

Companies cited political and economic instability as the main factors weighing on output in June, according to the Blom survey.

The new orders placed with private sector firms fell in June at a sharper rate from the previous month and extended a six-year deterioration.

Businesses surveyed remained pessimistic about the outlook at the end of the second quarter, according to the report. Some expect current market conditions to continue in the absence of substantial economic reform.

The IMF said Lebanon needs to identify and implement further fiscal measures to reduce its debt-to-GDP ratio.

The fund suggested revenue measures such as raising the value-added tax rate, increasing fuel excises and intensifying efforts to increase tax compliance.

The one bright spot in the economy was the continued growth of Lebanon's tourism sector. The total number of air passengers climbed by 4.4 per cent year on year to 2.57 million travellers by April 2019, while hotel occupancy rates and revenue per available room also rose.