Empirical analysis of merchandise trade deficit and the current account in Lebanon

Abstract EN

The paper provides an empirical analysis of Lebanon's merchandise trade deficit and the current account for the 1969-2016 period.

Using the Auto-Regressive Distributed Lag approach, it estimates standard demand functions for merchandise exports and imports and the trade deficit.

The results show that real exchange rates do not have a long-run impact on exports, imports, the trade deficit, and the current account; domestic production has a notable effect on reducing trade deficits while absorption expenditures, primarily public expenditures, have a strong effect on increasing trade deficits.

The main three conclusions and policy implications that emerge from the analysis are: first, the Central Bank of Lebanon's policy of fixing the exchange rate in the postwar period has not harmed competitiveness and has proved to be a strong basis for monetary stability; second, a more active industrial and investment policy is needed to enhance competitiveness and export promotion and to increase and diversify domestic production; and third, public expenditures ought to be urgently rationalized and conducted within a framework of sound fiscal and governance reforms.