High oil prices and a weak dollar hurt the Lebanese

Inflation nation

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It is August in Lebanon, which means stifling heat during the day, and humidity that hugs the skin late into the evening like a hot, wet blanket. Traffic jams choking major roads and garbage washing ashore make beating the heat at the beach less appealing, and, adding to the woe, a seaside lunch is becoming a little more pricey. A dollar in Lebanon is just not buying as much these days.

Consumer prices are on their way up. Lebanon’s inflation rate reached 7.6 percent this June in a year-on-year comparison of the consumer price index (CPI), a measure of a basket of consumer goods and services gathered by the country’s public bean counter, the Central Administration for Statistics (CAS). Since the start of 2018, however, the inflation rate has risen at a slower pace, at 3.1 percent.

There could be a number of contributing factors to year-on-year inflation. These include a slumping US dollar, a rise in the price per barrel of oil, and this year, to some extent, the implementation of new taxes that went into effect at the beginning of January.

In recent years, the US dollar has weakened. According to the US Dollar Index, a measure of the value of the US dollar relative to a basket of foreign currencies, the dollar fell from a high of $102.92 in 2016 to $94.49 on July 22 this year. Lebanon’s is a highly US dollarized economy, with the local currency pegged to the dollar, so the country has little room to maneuver regarding its monetary policy. A depreciated US dollar could mean imports from Europe to Lebanon become more expensive.

An additional factor contributing to Lebanon’s inflation may be the rising price of a barrel of oil, which leapt up by 54 percent since last June, when a barrel cost about $50. This June, the price reached almost $80. The price of oil and the weakened US dollar were the main reasons for Lebanon’s inflation in 2017, which the International Monetary Fund calculated at 5 percent, in its most recent Article IV concluding statement, published this June.

The elusive reason

To a lesser extent, tax increases that went into effect at the beginning of 2018 may be a factor in the inflation. The new taxes, which included an increase in the Value Added Tax (VAT), has affected prices on household consumer items, says Jad Chaaban, an economist at the American University of Beirut. Chaaban argues that the increase in VAT and other indirect taxes was the main driver behind rising inflation, and that the resulting rise in the costs of doing business had really hurt consumer prices.

Two other economists who Executive spoke with had not yet definitively pinpointed the reasons behind the inflation increase. Louis Hobeika, an economist at Lebanon’s Notre Dame University, expressed surprise at the increase, saying he thought that the year-on-year 7.6 percent inflation figure was a high estimate. He suggested looking to the central bank’s inflation rate (4.5 percent for the full year of 2017) for a more conservative indicator. Kamal Hamdan, of the Consultation and Research Institute, is still mulling over how to explain the upward trend. He argues that the inflation rate suggests something abnormal, and lists a few possible reasons, including the increase in the price of meat, fruits, and vegetables. But he said that the regulated price formula for fuel imports had somewhat tempered the effect of fuel prices on the CPI.

Prices are rising in Lebanon, and the country has not been able to boost economic growth for several years now. This summer, Moody’s, a credit rating agency, forecast only “a modest rise” in Lebanon’s GDP growth, at 2.5 percent this year, up from 1.9 percent in 2017. Textbook economics would suggest that higher inflation coupled with low economic growth could lead Lebanon’s economy to stagflation.

The higher oil prices and weaker US dollar point toward Lebanon’s year-on-year inflation rate as an imported phenomenon. Experience has taught us that Lebanon has a hard time insulating its economy from external pressures. It is possible that November’s reapplication of unilateral sanctions by the US targeting Iran’s oil exports could result in an oil price spike, which may push inflation even higher in Lebanon.

Jeremy Arbid

Jeremy is Executive's former economics and policy editor.