United Nations Capital Development Fund

ABSTRACTThis paper estimates a structural macro-econometric model of the Lebanese economy to simulate the implications of accumulated debt changes on GDP and other economic indicators, and to project the growth–fiscal nexus for the six years following the last year for which national statistics are systematically available, 2015–2020. To these ends, historical and up-to-date national accounts data for the years 1992–2014 were painstakingly collected from individual government agencies, and an economic framework with five macroeconomic blocks (macroeconomic; government; price; monetary and financial sector; and external accounts) was constructed. Our simulations predict that additional deficits and more debt accumulation would deter growth, while fiscal consolidation such as paying off government debt is growth promoting. We use the prospect of future natural gas revenues as a potential external source to pay off Lebanese national debt – rather than as a collateral for additional borrowing – in order to promote sustainable economic growth. These results have important implications for the fiscal position and macroeconomic policy in Lebanon as well as other transitional, potentially resource-rich, open economies, where debt servicing is crowding out other growth promoting government spending activities.