Current Account Imbalances of Selected Middle Eastern Countries

Why and how to solve it

Term Paper (Advanced seminar) 2011 33 Pages

Economics - Finance


Table of Content

Table of Figures


1. Lebanon’s Trade Balance Deficit
1.1 Preliminary Overview of Lebanon’s Current Account
1.2 The Underdeveloped Industry Sector
1.3 TheTwinDeficit
1.4 Proposed Solution: Saving, Targeted Investment and Political Support

2. Saudi-Arabia’s Dependences
2.1 Preliminary Overview of Saudi-Arabia’s Current Account
2.2 The Oil-Rentierism
2.3 TheCurseofRentierism
2.4 Proposed Solution: Privatization, Liberalism and Diversification

3. Summing up Conclusion


Table of Figures

Fig. 1: CurrentAccount 1990 -2010, Lebanon

Fig. 2: Trade Balance Deficit 1993 -2011 (in US$ m), Lebanon

Fig. 3: Sector Output 1997 - 2007 (in current prices, in LBP bn), Lebanon

Fig. 4: Inflation (in %) and Current Account (in LBP bn) 1994 - 2009, Lebanon

Fig. 5: Revenue and Expenditure 1992 - 2010 (in LBP bn), Lebanon

Fig. 6: Workers’ Remittances and Consumption, 1990 - 2009 (in US$ bn), Lebanon

Fig. 7: Consumption, GDP per capita (in US$ bn), and Imports 1990 - 2009, Lebanon

Fig. 8: Gross National Saving and Investment 1990 - 2010 (in % of GDP), Lebanon

Fig. 9: Current Account 1990 - 2009 (in US$ bn & % of GDP), Saudi-Arabia

Fig. 10: Breakdown Current Account 2005 - 2010 (in US$ bn), Saudi-Arabia

Fig. 11: Arab LightPrice andExports of Goods and Services 1999 -2009, Saudi-Arabia

Fig. 12: Income Figures 2005 - 2009 (in US$ m), Saudi-Arabia

Fig. 13: Current Account Excl. Oil Exports 2005 - 2010 (in US$ bn), Saudi-Arabia

Fig. 14: Real Effective Exchange SR and Non-Oil Exports 1990 - 2009 (in US$ m), S.-A23

Fig. 15: Services in the Current Account 2005 -2010 (in US$ m), Saudi-Arabia


Discussions on global economic imbalances and adjustment have become highly valued and popular nowadays. The worldwide financial crisis, European crisis and China’s rise to an economic world power have particularly brought these issues to light. China is thought to boost its exports through an artificial low exchange rate, Germany is accused of profiting from the common European currency and money policy through high competiveness and the USA is blamed for financing its excessive consumption through unsustainable foreign debt.

Notable cases are also found in the Middle East. Above all, attention must be paid to the antagonism toward oil exporting and non-oil exporting countries. Their different economic structures are often the primary cause of current account imbalances. Hence, this paper focuses on the examination of two Middle Eastern countries: Lebanon and Saudi- Arabia. Lebanon is a small oil-importing country with a diverse population that experienced a period of intense European influence and which has been regularly confronted with regional conflicts. Saudi-Arabia is a major regional power and oil-exporting country, whose politics emerge from a strictly conservative Islamic ideology. Primary attention is paid to the current accounts of the two countries. The purpose of this paper is to examine the causes of the current account imbalances and to propose strategies to adjust these imbalances.

Chapter 1 deals with Lebanon’s current account deficit and traces it back, on the one hand, to a negative trade balance, which derived from its historically weak industry sector, caused by low productivity. On the other hand, Lebanon experiences a high twin deficit that further supports this imbalance. Chapter 2 analyzes Saudi-Arabia’s current account surplus, which is caused by enormous oil-exports and further revenues from temporary high oil prices. Subtracting the oil sector, negative structural effects of this rentier-system become apparent; they cause a theoretical current account deficit. Examples are the outflow of workers’ remittances and a blown-up public sector. Each of these two chapters concludes with a proposed solution containing strategies to overcome these imbalances and to create sustainable economic development. Chapter 3 sums up the results.

1. Lebanon’s Trade Balance Deficit

1.1 Preliminary Overview of Lebanon’s Current Account

Traditionally, the current account in Lebanon is consistently negative. Though the service account (above all, travel services) and the current transfer account (especially workers’ remittances) are having surpluses, the enormous deficit of the goods account contributes to the negative share of the current account deficit. From 1990 to the present, the current account deficit has moved between a range of approx. US$ 400m and approx. US$ 5bn at its worst and showed great volatility. Beginning with a deficit of about US$ 1bn in 1990, a new high of approx. US$ 2.8bn was recorded in 1992, equaling a share of almost 30% of GDP. After a recovery, the deficit reached a new high in 1997 with approx. US$ 5bn, which equaled half of the GDP. Up to 2006 both figures rebounded to a deficit of slightly more than US$ 1bn, or approx. 3 % of the GDP. Since 2007, the deficit continuously increased to US$ 4bn, but its equal share of the GDPjust rose slightly up to 10%.

Fig. 1: Current Account 1990 - 2010, Lebanon

illustration not visible in this excerpt

Source: Compiled by the author, based on: International Monetary Fund (2011a): World Economic Outlook Database, April 2011, www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The main reason for Lebanon’s current account deficit is the trade balance’s deficit, which arises when the value of imported goods exceeds the value of exported goods. This is financed by high surpluses in Lebanon’s capital account, especially due to capital inflows in the banking sector through the financial account (inward direct investments). In Fig. 2, we can see that, on the one hand, imports increased enormously between 1993 and 2011. Starting with a value of about US$ 500m per month in 1993, their figures commuted between US$ 400m and US$ 600m per month in the following years, reaching a new peak in November 2001 with more than US$ 800m. After a short downturn and quick stabilization shortly afterwards, imports began rising again since 2003. With the exception of a breakdown, caused by the war in 2006, imports reached new peaks and swung volatilely, ranging from approx. US$ 1,200m and approx. US$ 2,000m per month with a positive inclination accruing from high domestic demand. On the other hand, Lebanon’s exports couldn’t keep up with this development. Until 2002 their value commuted very low in a range between US$ 40m and US$ 80m per month. At least the tendency was upwards, as the exports ranged between US$ 100m and US$ 180m per month in the following years, regularly exceeding the US$ 200m since 2006 and ranging between US$ 300m and US$ 400m since 2009. Still, compared to the imports’ development, these total figures have been disappointing. This can be traced back to a underdeveloped industry sector.

Fig. 2: Trade Balance Deficit 1993 - 2011 (in US$ m), Lebanon

illustration not visible in this excerpt

Source: Compiled by the author, based on: Banque du Liban (2011): Trade Balance, www.bdl.gov.lb/edata/elements.asp?Table=t54-1

Comparing the sector outputs in Fig. 3, it is noticeable that Lebanon’s trade sector contributes more than double to the GDP than the industry sector does, and the figure for the market services in 2007 was even three times higher. By now, the industry sector remains small with an 8.8%-share of the GDP[1], compared to the service sector’s (selection: commerce, tourism, and financial services) contribution of 77%, which, compared to an average of 70% in the 1970s, grew steadily and kept its historic impact.

Fig. 3: Sector Output 1997 - 2007 (in current prices, in LBP bn), Lebanon

illustration not visible in this excerpt

Source: Compiled by the author, based on: Ministry ofEconomy and Trade Lebanon (2011a): The 1997 - 2007 National Accounts Publication, p. 10,


1.2 The Underdeveloped Industry Sector

Overall, exports have grown strongly in relative figures, if not in absolute ones. Especially between 2000 and 2005, their value in constant 2000 US$ grew by a factor of 3.27 and their volume by 2.60 against the imports’ growth factors of 1.55 (value) and 1.77 (volume). The decrease of the current account deficit was due to low inflation after the depreciation of Lebanese Pound and its peg to the dollar (Fig.4). When high inflation returned after 2006, the current account deficit became larger again. Though the real effective exchange rate of the Lebanese Pound depreciated by almost 20% between 2000 and 2007[2] (hence, the economic environment was suitable for exporting), the figures were low. There is no doubt that this indicates problems of structural and historical nature: Those can be traced back to the Lebanon war and the laissez-faire system.

illustration not visible in this excerpt

Source: Compiled by the author, based on: International Monetary Fund (2011a): World Economic Outlook Database, April 2011, www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The Lebanon war that took place from 1974 to 1990 has been an influential and historical factor. The war destroyed the prospering economic emergence and resulted in the economy’s instability and recession. Lebanon’s GDP per capita (current US$) dropped by two thirds in this period to a level of US$ 820 in 1990. In this year, the industry sector was heavily damaged and an extensive part of the infrastructure and capital stock was destroyed. First of all, Lebanon had to put all of its efforts into reconstruction and maintaining political and economic stability. Next to the total physical damage of US$ 25bn (UN-estimate), the brain drain of more than 200,000 professionals marked the industrial re-emergence. Skilled labor was curt: In the whole economy, well-skilled and regular-waged labored jobs were just one of six. The industrial’s share of employment of this kind was less than 2%.[3] Although the government supported the industry with credits and investments, this sector remained weak, which can be traced back to the fact that the un-established necessary infrastructure initially constricted business, and the depreciation of the Lebanese Pound in 1992 made vital imports expensive.[4]

At this point one can see the effects of the free market laissez-faire system that has lasted for half a century and has failed in the scope of industrial development. Contrary to most of the countries that established this system, in Lebanon, it conserved economic structures that favor the service sector. As capital and investments moved freely, diverting to the less-attractive industry sector didn’t happen. Incentives to assist the industry sector were missing, as the laissez-faire regime is a “conservative strategy that favors the status quo while industrialization requires deliberate and sustained policies towards that objective. This is best confirmed by the absence of a significant structural change in manufacturing, and indeed in all the economy, over a period of half a century. [..] [It cannot] be congenial to an industrialization strategy, which is a dynamic process that disrupts existing structures.”[5]

Those missing investments are the drives of productivity and innovation that are vital to the industry sector. Consequently, in the late 1990s, productivity was almost half as low as in the beginning of the 1970s, although there had been extensive capital accumulation. In 1997, total output was LBP 34.943bn. Of this, value adding contributed LBP 24.108bn, which equals 70%. Values adding’s contribution to output in the trade sector was 85.4%, in agriculture 79.8%, but just 46.6% in manufacturing.[6] The share of imports of the aggregate demand for manufactured goods increased over time and the industry’s weakness led to a low total factor productivity growth attributable to missing spillover effects and inter-industrial externalities. This had a negative long-term influence on the whole industry sector.[7]

1.3 The Twin Deficit

Reconstruction and growing wealth led to high figures of consumption and general investment during the last two decades. This resulted in a budget deficit and low savings. The industry sector wasn’t capable of satisfying the high demand because of the aforementioned reasons. Consequently, a twin deficit arose, which causes a trade deficit.

During the war and especially afterward, the influence of the government grew rapidly via the reconstruction efforts, namely the “National Economic Recovery Program” and the “Horizon 2000-Program.” Between 1993 and 2007 these programs distributed more than US$ 18bn, which were especially invested into infrastructure by the “Council for Development and Reconstruction”. Additionally, a growing public sector was also partly due to the new emerging Syrian influence after the peace treaty of Taif in 1989 that encouraged a policy that is contrary to the laissez-fair. Consequently, the Lebanese government became a more relevant player in economic activities and rolled back the laissez-faire policy. According to some economists, this triggered Lebanon’s rapidly growing budget deficit.[8] The rising influence of the government, resulting in expenses for rents and salaries for the newly established bureaucracy, caused high expenditures, and hence steadily growing interest payments. Obviously, this development is not sustainable.[9]

These expenditures exceeded revenues by far, as seen in Fig. 5. Both expenditures and revenues duplicated by a multiple in a short amount of time, but the expenditures have always been much higher since 1992. Obviously, this spending habit caused high debts. The gross total debt grew constantly between 1993 and 2010. The gross public debt in % of the GDP increased from approx. 18% of the GDP to more than 170% of the GDP respectively in 1993 and 2006. Presently the gross public debt decreased to a share of approx. 140% of the GDP. Thus, governmental savings are negative: [illustration not visible in this excerpt]. This also indicates a long-term structural change in the savings-investment equation.[10]

Fig. 5: Revenue and Expenditure 1992 - 2010 (in LBP bn), Lebanon

illustration not visible in this excerpt

Source: Compiled by the author, based on: Ministry of Finance Lebanon (2011c): Public Finance Statistics 1992 - 2010”, www.finance.gov.lb/en- US/finance/EconomicDataStatistics/Pages/PublicFinanceStatistic.aspx

Next to the budget deficit of the government, the private sector also accumulated debts through consumption. An important part of Lebanon’s increasing consumption is workers’ remittances, which amounted to approx. 20% of the GDP in 2008.[11] These usually fund current consumption or asset accumulation. Academics observed that workers’ remittances are mostly used for consumption purposes and not to invest in the economy to accumulate assets.[12] Fig. 6 shows the value of workers’ remittances and its correlation to the household final consumption expenditure. It’s significant that the growth of consumption expenditures slowed down when worker’s remittances decreased in 1995. When workers’ remittances began rising again after 2000, the growth rate of consumption also rose with greater celerity. Similar effects also occurred the following years. Therefore, workers’ remittances boost private consumption and, hence, demand. Additionally, remittances expand the government’s revenue base, which allows it to carry more debt, incur more expenditure, and worsens the budget deficit.[13]


[1] Cf. Ministry of Finance Lebanon (2011a): Trade Data for March 2011, www.finance.gov.lb/en- US/finance/EconomicDataStatistics/Documents/TradeStatistics/LITE%202011-03.pdf

[2] Cf. United Nations Conference on Trade and Development (2009): Trade and Development Report, 2008”; New York

[3] Cf. Gaspard, T. K. (2004a) : A Political Economy ofLebanon, 1948 — 2002: The Limits ofLaissez-faire\ Leiden, p.87

[4] Cf. Ministry of Finance Lebanon (2011b): Lebanon Country Profile 2010, www.finance.gov.lb/enUS/finance/ ReportsPublications/DocumentsAndReportsIssuedByMOF/Documents/Sovereign%20and%20Invensment%20R eports/Country%20Profile/2010%20Lebanon%20Country%20Profile.pdf, p.22

[5] Gaspard, T. K. (2004a), op. cit., p. 137

[6] Cf. Ministry of Economy and Trade Lebanon (2011a): Breakdown of GDP by sector, www.economy.gov.lb/ MOET/English/EconomicResearchAndPrices/National%20Account/Documents/GDPbySector.pdf

[7] Cf. Gaspard, T. K. (2004a), op. cit., p. 115 - 119

[8] Cf. Azar, Pierre (2006): Good Governance und wirtschaftliche Entwicklung, Eine Analyse am Beispiel der libanesischen Budgetpolitik; Inaugural-Dissertation FAU-University, p. 194- 195

[9] Cf. Gaspard, T. K. (2004b): Lebanese Government Budgets: A Social and Economic Perspective; The Budget Analysis Project; In: The Lebanese Transparency Association: http://leb- budget.org/Framesets/english/our%20studies/Gaspard/Lebanese%20Government%20Budgets%20a%20Social% 20and%20Economic%20Perspective.pdf, p. 20

[10] Cf. Pradhan, M., Taylor, A. M., Stanley, M. (2011): Current Accounts and Global Adjustment: TheLongand Short of It; In: Journal of Applied Corporate Finance, Vol. 23, Number 1, Winter 2011,p. 32

[11] Cf. Abdih, Y., Chami, R., Gapen, M. ,Mati, A. (2009): Fiscal Sustainability in Remittance-Dependent Economies', In: IMF working papers, WP 09/190, p. 8

[12] Cf. Chami, R., Barajas, A., Cosimano, T., Fullenkamp, C., Gapen, M., Montiel, P. (2008): Macroeconomic Consequences of Remittances; In: IMW Washington paper: http://www.imf.org/external/pubs/ft/op/259/op259.pdf, p. 28

[13] Cf. Abdih (2009), op. cit., p. 3


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Friedrich-Alexander University Erlangen-Nuremberg
Gulf Countries GCC Middle East Dubai Lebanon Libanon Leistungsbilanz Defizit Current Account Saudi Arabia Saudi-Arabien Surplus Oil Öl



Title: Current Account Imbalances of Selected Middle Eastern Countries