Financial Policy and Economic Growth the Lebanese Experience 9780231882248

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Financial Policy and Economic Growth: The Lebanese Experience

FINANCIAL POLICY AND ECONOMIC GROWTH The Lebanese Experience SAMIR A .

NEW YORK

MAKDISI

COLUMBIA UNIVERSITY

1979

PRESS

T H E MODERN MIDDLE EAST SERIES No. 12 Sponsored by T h e Middle East Institute Columbia University, New York

Library of Congress Cataloging in Publication Data Makdisi, Samir A 1932Financial policy and economic growth. (The Modern Middle East series; No. 12) Bibliography: p. Includes index. 1. Finance—Lebanon. 2. Monetary policy—Lebanon. 3. Lebanon—Economic conditions. I. Title. II. Series. HG188.L4M34 332'.095692 78-31561 ISBN 0-231-04614-6

Columbia University Press New York Guildford, Surrey Copyright © 1979 Columbia University Press All rights reserved Printed in the United States of America

To Jean

Contents

Preface Introduction 1. National Economy Objectives and Financial Policy with Special Reference to Developing Countries Part 1. Policy Framework and Developments in the Monetary and Exchange Fields 2. Characteristics of the National Economy and the Emerging Framework of Postwar Economic Policy 3. Monetary Developments and Management 4. Exchange Rate Trends and Balance of Payments Developments Part 2. Financial Policy and Economic Growth: An Evaluation 5. A Broad View of Postwar Development 6. The Role of Monetary Policy 7. The Role of Exchange Rate Policy

ix

3

23 39 60 69 79 92 vii

CONTENTS

8. Reflections on the Lebanese Experience and a Look to the Future Statistical Appendix Notes Selected Bibliography Index

viii

114 139 167 199 205

Preface

T h e 1975-76 war in Lebanon has ushered in a new era in the history of the country. 1 It is perhaps too early to assess the effects and consequences of this war at the national level and more specifically at the economic level. Whatever these may be, it marks the end of the first era of postwar Lebanon, namely the period 1945-74. 2 The present study was initiated prior to the fateful events of early 1975 which led to the civil strife. On the economic side, this strife has devastated the national economy: the trend and pattern of postwar growth were temporarily disrupted. 3 Reconstruction is yet to begin on a substantial scale. When it does, new departures will or should be envisaged. But the links with the past exist and cannot be ignored. On the contrary, they should act as a major guide for the future. A serious assessment of Lebanon's past development gains, as a result of the civil war, added significance. What model of development was emerging in the 1945-74 period? How can it be instructive for the future? What lessons does it provide? What were the areas of strength and the areas of weakness? Turning to the ecoIX

PREFACE

nomic field, a basic motivation behind the present study has precisely been to attempt to answer some of these questions in respect of a major area of economic policy, namely financial policy. T h e relevance of financial policy to economic activity and to the process of economic growth has received growing attention in the postwar period at academic as well as governmental levels. T h e theoretical literature in this area has been growing rapidly and so have empirical investigations, mostly in relation to the industrialized economies.4 It is only in recent years that well founded studies concerning the role of financial policies in developing countries have begun to appear. In fact, it may be said that the relevance of financial variables in the national economy has not yet been adequately recognized by many developing countries. This is sometimes manifested in the overly limited role which these countries accord to financial policy. Similarly, the concept of financial planning or programming, 5 and accordingly of policy coordination, has yet to take effective hold in many countries, though it has been gaining acceptance in a number of developing countries.6 In this context, the Lebanese experience is worthy of study for several reasons: Lebanon is one of those countries whose economic development has not been guided by any official planning or policy formulation.7 This does not imply that the authorities did not take certain policy positions. These, however, were often of an implicit rather than an explicit nature. T h e Lebanese economy is highly monetized and witnessed during the period under review a rapid development in the banking sector. It is a developing economy which has been open to the world economy via the maintenance of a liberal exchange system, based on a flexible exchange rate.8 As such it offers the opportunity to study the impact of these financial characteristics of the x

economy on the process of economic growth and to try to ascertain the relevance of financial policy and, more generally, policy coordination in this regard. Several questions relating to Lebanese experiences immediately suggest themselves: (1) How did the economy generally perform in the period under study? (2) What role did governmental policy positions actually play in the national economy? (3) What role could policy formulation have played, and what role should it play? (4) How relevant is financial policy to the economic growth of Lebanon? and (5) What policy lessons can we derive from the Lebanese experiences in the period up to 1974? In an attempt to answer these questions, the present study has been carried out with three aims in mind: to assess Lebanon's economic performance in general and financial performance in particular during the period which ended in 1974; to point out the role that government policy positions played in the national economy; and to evaluate the past and future (post 1975-76) role of financial planning in the economic development of the country taking into account the disruption of the 1975-76 war. A fourth aim may be added, namely to stimulate further research in this field, which, in the opinion of the author, has yet to receive its adequate share of competent analysis. Two areas in particular deserve serious future investigations: the first relates to quantitative measurements, which at present may not be carried out due either to the lack of, or inadequacy of, requisite data. Unfortunately, the Lebanese statistical base is very inadequate and substantial work in this area is required. The second concerns the elaboration of policy models which can act as useful guides for governmental action. It is hoped that the present study will prove useful in stimulating further research in both directions. XI

PREFACE

Financial policy is part of general economic policy. Financial instruments are used in conjunction with other economic tools to achieve general policy goals. The discussion of financial policy can, therefore, be meaningful only within an overall policy framework. In practice, as in the case of Lebanon, explicit official formulation of policy targets and instruments did not exist. Instead, the national authorities resorted to ad hoc policy measures. To evaluate official policy positions, it would still be necessary to construct a policy framework in the sense of defining the implicit policy targets of the authorities and then inquire to what extent the instruments they have used have helped in achieving these targets. As used in this study, the term financial policy implies monetary policy, exchange rate policy, and the monetary impact of budgetary policy. The latter has been minimal, the central core of financial policy in Lebanon revolving around policy positions of the authorities in the monetary and exchange rate fields. The study falls into three divisions: an introductory chapter and two parts. The introductory chapter deals with general policy issues with special reference to developing countries. It is intended to serve as a guiding framework to the subsequent analysis. Part 1 is a survey of actual developments in 1950-74 comprising three chapters. 9 The first (chapter 2) attempts to construct a policy framework based on actual policy positions taken by the national authorities and to measure economic and financial progress of the country against assumed national goals. Chapter 3 describes monetary developments and management, and chapter 4 surveys exchange rate developments and balance of payments developments in the period under study. Part 2 comprising four chapters, attempts to evaluate Lebanon's financial policy positions and to derive the appropriate xii

PREFACE

lessons for the future. The first (chapter 5) draws a broad picture of Lebanon's economic performance and focuses on the criteria which are to be used in evaluating the contribution of monetary and exchange rate policies. Chapters 6 and 7 assess the roles of monetary policy and exchange rate policy, respectively, in the light of the postulated criteria. Finally, chapter 8 draws together concluding observations on the Lebanese experiences in 1950-74 primarily as regards the issue of policy formulation and the role of financial policy in the stability and growth of the national economy. It also outlines what is regarded as important future departures in the financial and economic policy of the post (1975-76) civil war era. The study was supported by a generous grant from the Social Science Research Council (New York) which I gratefully acknowledge. The following graduate students assisted at various times in the research work pertaining to the study: Mr. Nizar Khouri, Mr. Rafi Tejerian, and Miss Lina Fallahah. I have benefited from the comments of a number of colleagues. Professor Charles Issawi, Mr. Said Hitti, and Dr. Subimal Mookerjee read the entire manuscript and offered valuable suggestions. Others, including Dr. Salim Hoss, Professor Nadim Khalaf, Dr. Anthony Lanyi, and Dr. Saleh Nsouli read parts of earlier drafts and offered constructive suggestions. T h e index was prepared with the kind assistance of Mrs. Suha Tuqan. To all of them I register my gratitude. I alone bear the responsibility of any flaws which may still remain.

xiii

Financial Policy and Economic Growth: The Lebanese Experience

Introduction

CHAPTER 1

National Economic Objectives and Financial Policy with Special Reference to Developing Countries

The present chapter is written with two aims in mind: the first is to discuss briefly the policy objectives of national authorities in both developed and developing countries and to suggest certain contexts in which these objectives may be viewed. The second aim is to focus on financial policies and planning with special reference to the developing countries by (a) outlining certain policy issues concerning the uses and effectiveness of monetary and exchange rate tools, (b) discussing briefly the impact of financial policy on economic activity, and (c) pointing out the essence and implications of financial planning. The chapter is, accordingly, divided into four sections: section i deals with national policy objectives, section u takes up certain policy issues, section m outlines the impact of 3

INTRODUCTION

financial policy, and section iv discusses policy coordination and financial planning.

I. N A T I O N A L P O L I C Y O B J E C T I V E S It has become common to formulate national economic objectives in terms of internal and external targets. In the literature concerning the developed economies, internal objectives may emphasize employment as in early postwar writings or the emphasis may be placed on what is regarded as a desirable rate of growth as is done in certain more recent works. 1 Relative price stability is another internal target which has continually been stressed although the authorities have frequently been forced to attempt a reconciliation between price stability and acceptable levels of unemployment. 2 When formulating desirable external targets, the emphasis has often been on the maintenance of equilibrium in the balance of payments with minimum exchange controls, although it is recognized that an unchanged level of foreign reserves may not always necessarily be a desirable target. O n the contrary, a deficit or a surplus in the balance of payments may be projected, as a necessary outcome, if the domestic targets are to be achieved. The initial level of foreign reserves is an important consideration; again here, given available sources of financing, both domestic and foreign, the authorities have sometimes had to reconcile the rate of growth and the level of foreign reserves. Underlying the formulation of policy targets is the reasoning (not necessarily borne out in practice) that the advanced industrial economies are sufficiently flexible to permit the pursuit of multiple objectives with available policy tools. T h e existence of well developed money and capital market facilitates the transmission process of monetary, exchange, and fiscal poli4

NATIONAL ECONOMIC

OBJECTIVES

cies,3 while the general characteristics of the economy permit a certain flexibility not only in the choice of policy tools but also in shifting from one tool to another so as to minimize possible policy conflicts. In formulating their own national economic objectives, what would seem to have been uppermost in the minds of the planning authorities in developing countries is the rate of growth of the economy. It is true that other national objectives are formulated, such as price stability or the level of employment, but, in practice, if a conflict were to arise, the authorities would generally seem to be predisposed to give priority to targeted economic growth at the expense of, say, a worsening external situation or price stability. This emphasis on the acceleration of growth is perhaps pardy induced by its political appeal; at times attempts have been made to achieve a high rate of economic growth without much regard being paid to available resources, a temptation which is especially strong when the country concerned has not experienced the consequences of prolonged economic instability or when international reserves stand initially at a particularly high level and therefore afford the country the chance of high levels of expenditures, at least for a period of time. The stress on a desired (in contrast with a feasible) rate of growth may perhaps also be explained by a less than full awareness of the interrelationship between various objectives, especially in the longer run, and that the failure to attain one objective may seriously affect the attainment of other objectives. It may be worth noting, in this context, that in these countries the problem of the level of unemployment has not always commanded the same serious attention it has in the more developed economies. For one thing, the rate of growth is often taken by the developing countries as a proxy for the rate of employment, irrespective of the 5

INTRODUCTION

nature of the development process being envisaged. Secondly, labor's political organization in these countries has generally not attained a level which would permit it to exert as strong a pressure on the government as perhaps is the case in industrialized economies; and thirdly, the concept and meaning of unemployment takes on somewhat different interpretations in the developing countries. There is, for example, the question of disguised unemployment which cannot be readily quantified but which also implies that the burden of the unemployed is being borne (wittingly or unwittingly) by the private sector and therefore is taken away from the government. The problem of disguised unemployment is not necessarily confined to the agricultural sector; with the rapid growth of the public sector and public administration, political patronage and favors have acted to swell the number of public employees, many of whom are not gainfully employed in any meaningful economic sense. The foregoing observations should not be construed to imply that the national authorities of the developing countries are not concerned, or would not like to be concerned, with the question of employment: the relationship between the rate of growth and employment is direct, although the nature of this relationship is determined by the pattern and type of the industrialization process and more generally that of the whole development process. What is being underscored is that, given the generally prevailing politicaleconomic systems in developing countries, the authorities seem to have a wider choice in selecting their broad targets than in developed economies, and that for political and other reasons (domestic and international) the rate of growth has come to symbolize national achievement. The emphasis on growth should, of course, be given first priority; but what often seems not to have been given sufficient 6

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OBJECTIVES

attention on the part of national authorities of the developing countries is that the rate of growth is more than simply the formulation of a growth target, an estimation of an aggregate capital-output ratio, the drawing up of the requisite investment plan, and the specification of sources of finance. Planning for growth has often either ignored or not underscored sufficiently the interaction between various policy objectives and, in particular, the interrelationships between the financial and real variables in the economy. The physical and financial aspects of national plans, in other words, have not always been properly coordinated, partly it seems because the concept of financial programming has not as yet taken sufficient hold in national planning, and additionally because it often requires a degree of economic discipline which is politically unattractive. At the same time, one should recognize a growing awareness of the importance of financial policy in the process of economic growth, born in part as a result of the experiences of the developing countries themselves but also stimulated by postwar research and debates concerning monetary and exchange rate policies at both the academic and official policy levels. Growing contacts with international financial organizations (within the UN system and outside it) have also focused attention on the importance of financial discipline and, in certain respects, the potential of financial policies. Nevertheless, the role that financial policy can play remains a subject of controversy among academicians and policymakers alike (see section n). How can one regard the major national objectives of economic policy? The answer may be construed in the context of (a) shorter- and longer-run considerations, (b) the initial situation facing a country, and (c) quantitative and qualitative targets. The acceleration of the rate of growth in real terms may not only be a desirable but also a 7

INTRODUCTION

feasible objective in the long run; in the short run, circumstances may exist which would require a slower rate of growth. Similarly, whereas price stability may constitute a long-run objective, in the shorter-run the continuation of inflation (although at a reduced rate) may be unavoidable. Longer-run objectives may be considered "ideal" targets, whereas the shorter-run objectives are the "feasible" targets. What is ideal and what is feasible should be properly coordinated. What is feasible is dependent upon the initial situation being faced. Thus, for a country that is facing runaway inflation, the primary short-run objective might be to control or decelerate the rate of price increases, even though this may have to be achieved at the cost of a slowing down in the real rate of growth. In contrast, a stable economy with sufficiently high level of reserves may afford to concentrate on the acceleration of its rate of growth in the short run and/or raising the level of employment without undue fears of longer-run instability, provided the attempted acceleration is geared to the actual and realistically projected potential. A balance of payments deficit may then be the requisite target. The terms high or low reserves are frequently interpreted in terms of the ratio of such reserves to the level of imports. The criteria for judging the adequacy of this ratio (and thereby deviations from it representing high or low reserves as the case may be) may differ from country to country, depending, among other things, on the exchange rate policy in operation, the openness of the economy and the degree of its reliance on the world economy, particularly as concerns the potential degree of fluctuations of export receipts and import payments, the structure of foreign trade, and the importance of capital movements. Simi8

NATIONAL ECONOMIC

OBJECTIVES

larly, what constitutes an adequate ratio may be subject to change in the same country as circumstances evolve. Ultimately, the criteria for adequacy would have to be derived empirically. A specified rate of growth, the level of employment, balance of payments performance, the level of investment, and the level of domestic savings are familiar illustrations of quantitative targets, i.e., macroeconomic targets. Quantitative performance is not, or can no longer be, acceptable as the sole criterion on the basis of which a country's actual performance can be judged. The qualitative aspects of growth, i.e., its socioeconomic content, have emerged as equally important criteria by which to evaluate economic policy and achievement: income redistribution in nominal or real terms, coordination of rural and urban development, the establishment of welfare facilities, the creation of opportunities for the betterment of the quality of life have become, or are rapidly becoming, priority targets of developing countries. Indeed, some of these targets may have been achieved, at times, at the expense of quantitative targets of development. Concern with the quality of development raises, of course, additional difficulties for the planners and renders the planning process more complex. To plan for a specific rate of growth in the light, for example, of the past trend in domestic savings is less difficult than to postulate the same rate of growth with the added constraint of an intended substantial income redistribution during the plan period, for such a redistribution, in turn, affects the rate of aggregate savings. At a more general level, given the demonstration effect of developed countries, competing political platforms of political parties or groups, the growing internal political and social consciousness through world and regional con9

INTRODUCTION

tacts, etc., the developmental tasks of the national authorities are becoming increasingly more complex and diverse and more demanding of resources, especially human resources. The extent and form which public sector participation in national development can or should take cannot be generalized. The special circumstances and endowments of each country will, in the context of the political ideology it has chosen, have to be the determining factors. There have been cases, among developing countries, where the factor of immitation has been given too much weight. That is, in choosing its path of development, a country may tend to look at what another has done and proceed accordingly but uncritically. The repetition of others' experiences may have been specially marked at the level of institutional development and the form of public sector participation. Political or other causes may explain this phenomenon, particularly among neighboring countries. Whatever the reason may be, this heavy reliance on other countries' pattern of development has not necessarily proved beneficial. On the contrary, it has sometimes led to the misuse of valuable resources. While developing countries should assess the experiences of other countries, the choice of their pattern has to be based on their own endowment, material and human. Lebanon and the Sudan are two contrasting examples. Given the structure of their respective economies, their varying resources and other characteristics specific to each economy, the requirements of efficient growth would dictate different patterns of development for each of the two countries. It would similarly dictate varying forms and extent of public sector participation in national development. Indeed, the pattern of development of each individual country and the role of the public sector therein are expected to change over time.4 10

NATIONAL ECONOMIC

OBJECTIVES

II. FINANCIAL POLICY ISSUES MONETARY

POLICY

Throughout the postwar period, there has been a growing awareness of the importance of monetary policy in the process of economic growth stimulated, as already mentioned, by recent research and debates concerning money which have taken place both at the academic and at the national policy levels. Nevertheless, the role that monetary policy can play remains a subject of controversy among academicians and policymakers alike. The academic debate has been primarily concerned with the developed (Western) economies. While there seems to be widespread agreement among economists that money has an important influence on economic activity via the level of spending, the degree of this importance and the manner in which monetary effects are transmitted are not agreed upon, despite the extensive empirical work that has been carried out; similarly, there is disagreement on the respective importance of fiscal and monetary policies in influencing economic activity.5 With regard to developing countries, whose money and capital markets are generally either extremely limited or are being evolved, the debate is not so much concerned with the intricacies of the transmission process but tends to be more policy oriented. 6 Primary concern seems to be related to the manner in which monetary policies can be used to achieve economic objectives; in this connection, there is also disagreement as to the extent to which these policies can be effective, given the prevailing conditions in developing countries. For example, there exists a tendency to attribute a lesser importance to monetary policies in developing countries where the public sector has encom11

INTRODUCTION

passed the major areas of economic activity, and where comprehensive and centralized planning has been adopted, than in developing countries where the public sector is less dominant, in terms of its direct ownership and management of economic activities; these are economies where either indicative or other types of planning prevail or, in the absence of any planning, national objectives, if formulated, are sought through the available instruments of economic policy. Differences in national economic management and in the structure of economies apart, the effectiveness of monetary policy tools in developing countries has been and continues to be reassessed in the light of empirical research and actual experiences. Some of the traditional tools have been found to be inappropriate or ineffective; at the same time, new tools have been developed. Credit ceilings which specify an upper limit on the expansion of domestic assets during a given period of time have come to be widely used. Of the traditional tools, minimum reserve requirements have proved to be effective.7 Similarly, during certain periods, specific tools might not have been tried and to that extent their potency could not be ascertained; when tried out, they proved to be effective or if tried out might have proved effective.8 Undoubtedly, varying economic structures, levels of development, and national management influence the efficacy of monetary policy in helping attain national economic objectives; but even with these differences accounted for, the ultimate test in any given country is empirical verification, which would imply the trying out of alternative means. This has not always been attempted or in practice might prove difficult to implement to the extent that the monetary authorities are not ready to use policy tools interchangeably or to test the efficacy of new tools. When empirical verification is not possible or if possible, it is 12

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OBJECTIVES

constrained by exogenous factors, then greater reliance might have to be placed on the experiences of similarly situated countries, or on results derived from the existing knowledge concerning monetary theory and policy. EXCHANGE

RATE

POLICY

The academic debate concerning exchange rate policy has centered mainly on the merits and demerits of exchange systems based on a fixed (but adjustable) rate versus those based either on a freely fluctuating exchange rate or, as in more recent years, a rate which is allowed a certain degree of flexibility. The central role of the exchange rate in balance of payments adjustments is generally recognized; where disagreements have arisen, it is mainly in connecion with the efficacy of each of the above systems in serving the goals of economic policy both at the national and the international levels. In terms of policy, the par value system which underlay the structure of the International Monetary Fund (IMF) had, until mid-1971, set the basic pattern of fixed (but adjustable) exchange rate relationships, although deviations from this pattern (some temporary but others maintained for long time) had not been infrequent, particularly among developing countries. On August 15, 1971, the U.S. suspended the convertibility of officially held U.S. dollar balances into gold or other reserve assets.9 This move also eliminated an important feature of the postwar international monetary system: the dollar, based on its convertibility into gold had acted as a measuring rod for other currencies. Subsequently, and up to early 1976, exchange systems were essentially based on flexible rates with currency changes not being subject to international supervision as was the case prior to 1971.10 In the meantime, international discussions concerning reform of the international mone13

INTRODUCTION

tary system dealt, among other things, with the desirability of introducing a greater degree of exchange rate flexibility.11 International agreement on certain basic issues was finally reached in Kingston (Jamaica) on January 8, 1976.12 As far as exchange rate relationships are concerned^ the essential features of the new system may be summarized as follows: (1) Member countries may choose their exchange rate policies, provided they are consistent with their obligations under the new system, i.e., basically avoiding exchange rate arrangements intended to permit an effective balance of payments adjustment or gain an unfair competitive advantage over other members: 13 (2) Member countries may establish par values in terms of SDRs or some other common denominator as is prescribed by the IMF. The margins around parity, in regard to other currencies also based on par values, are set at percent: (3) The Fund is to exercise surveillance over exchange rate policies of members and adopt specific principles for the guidance of all members with respect to those policies.14 As members of the Fund, developing countries had, until mid-1971, been evolving their rate systems in the direction of fixed (but adjustable) exchange rate relationships. In practice, however, severe domestic pressures had forced certain countries to follow a flexible exchange rate policy for extended periods of time until these pressures could be contained. 15 At times, dual or multiple exchange rate policies were adopted either as transitional measures accompanying the dismantling of complex exchange rate systems, to effect a disguised devaluation, or to cope with specific problems which were judged to have induced pressures of a temporary nature. From mid-1971 and up to early 1976, the policy of the developing countries was initially to either link their currencies to one of the major currencies, notably the dollar and 14

NATIONAL ECONOMIC

OBJECTIVES

sterling, or to continue to float independently or to choose to do so. Subsequently, (after July 1974) some of the developing countries (e.g., certain petroleum exporters) chose to link their currency to the Special Drawing Rights (SDRs) issued by the IMF.16 While, in accordance with the new system, countries may choose to follow flexible rate policies,17 unitary exchange rates are not necessarily maintained by all developing countries. 18 The issue of unitary vs. dual or multiple rates remains, though on the whole exchange rate systems have evolved in the direction of unified rates. Under the new international regime, the issue of fixed versus flexible rates, which had been a central issue both at the academic and policy levels, has so far been resolved in favor of flexible rates subject to guidelines to be evolved by the Fund. Developing countries formally have wider options in terms of choosing their exchange rate policies than they did under the Bretton Woods system. Accordingly, they may henceforth have wider opportunities for coordinating between their internal and external policy objectives.

I I I . I M P A C T OF F I N A N C I A L

POLICY

The impact of financial policy on economic activity and thereby its contribution to the attainment of desired goals lies in its effects on (a) the stream of domestic expenditures, (b) the composition of domestic expenditures, (c) the level of (monetary) savings, and (d) the balance of payments. It is by means of such effects that financial policy can play a role in influencing the degree of financial stability and the rate and pattern of economic growth. These effects are interrelated: a reduction in the stream of domestic expenditures while leaving the level of monetary savings unchanged influences the balance of payments favorably. 15

INTRODUCTION

The deliberate reduction in the balance of payments deficit through, for example, an exchange rate adjustment is bound to affect the level and composition of domestic expenditures and output. The interdependence of economic variables, and in this context the place of financial variables, is illustrated by the familiar general equilibrium model which integrates the commodities, money, and other specified markets. 19 T h e impact of monetary policy is seen not only directly through its effects on money supply and the demand for money but also indirectly through the influence which changes in monetary variables may have on the commodities market. Exchange rate (and fiscal) policies exert their influence through their effects on the factors underlying the intersecting schedules. But in line with what was observed earlier, while ultimately the impact of any policy is measured in aggregate terms, the qualitative aspects of this policy have to be properly accounted for: it is not sufficient to specify quantitative limits on credit expansion, one should also consider the distribution of the resulting level of credit flows. Similarly, it does not suffice to bring about an adjustment in the balance of payments; the means by which this adjustment is brought about may be equally important in the longer run, particularly as concerns the rate of growth. More generally, concern with the social content of economic growth has, to a large extent, come to influence the nature of policy objectives to be attained and the policy instruments to be used. But in practice, socioeconomic objectives have not necessarily been achieved through the most efficient means. Often targets have been formulated without due regard being given to the availability of the requisite instruments or the sufficiency of available resources. Proper policy coordination, in other words, has been lacking. 16

NATIONAL ECONOMIC

OBJECTIVES

I V . P O L I C Y C O O R D I N A T I O N AND F I N A N C I A L PLANNING The central dictum of policy coordination (Tinbergen's Principle) is that with "n" policy instruments, we can achieve "n" policy goals, provided the policy instruments are independent in their effects on target variables.20 The achievement of goals with the available instruments is a simultaneous process which, it has been argued, should be based on an efficient pairing of the two.21 T o the extent that available instruments are more than sufficient for the stated objectives, then a combination of instruments can be used. In practice, coordination of policy is frequently nonexistent; the factors underlying this phenomenon vary: political pressure which forces the authorities to plan for the achievement of a larger number of objectives than is feasible with the given instruments; unawareness as to the meaning and implications of policy coordination; traditional reliance on certain tools to the exclusion of others, even though they are available or can be activated. But perhaps a general problem which has confronted developing economies has, in part, related to a lack of sufficient appreciation of the issue of policy coordination itself, rather than to the issue of achieving an efficient pairing of instruments and targets. The other part of the problem concerns the complex nature of policy coordination, and the practical problems it faces due, in large measure, to the inadequacy of the statistical base of the developing countries. It is not surprising that often economic plans have proved "ambitious" or greatly unrealistic; or that, in the process of implementing the plan, external and internal constraints often emerged as direct consequences of its attempted implementation. Nevertheless, progress in achieving coordination is becoming gradually more evident as is the greater sophistication of the planning process. 17

INTRODUCTION

T h e essence of financial planning may perhaps be outlined as follows: as a first and primary step, it attempts to check internal and/or external economic imbalances either totally or partially via consistent financial policies. Financial planning places stress on financial variables in the economy to influence the rate of domestic expenditures and/or the balance of payments outcome. Its approach is based on integrating national income variables and the net financing of sectoral positions at the end of specified periods of time.22 Financial planning thereby enables the planning organs to concentrate on financial flows, the data for which are usually up-to-date; rather than on income flows, the data for which usually become available with a substantial time lag, particularly in developing countries. Domestic credit now becomes the most significant control variable in respect of domestic expenditure, while deposits are regarded as the counterpart of national real savings, though the two are not expected to be equivalent. Indeed, they could diverge substantially. By attempting to influence the level of expenditure and of monetary savings, the authorities can influence the balance of payments and the general price level 23 But since other (autonomous) factors also influence the balance of payments, the net outcome is not solely determined by the financial policies of the authorities. T h e balance of payments outcome influences in turn domestic operations.24 In open economies (with fixed exchange rates or flexible rates subject to intervention by the monetary authorities), the authorities, therefore, have to try to reconcile internal and external targets in the context of continuous interactions between the internal and external sectors.25 While financial plans may seem to concentrate on monetary equilibrium in the short run, i.e., on relative financial stability, their time horizons can be expanded to focus on 18

NATIONAL ECONOMIC

OBJECTIVES

problems of growth as well. There are at least three aspects which relate financial planning to the issue of growth: firstly, it can act as a check on the feasibility and consistency of growth targets embodied in national plans. Secondly, it can influence financial flows to conform to the desired pattern of investment envisaged under these plans. Thirdly, financial planning can deal with credit market structures and, more generally, financial markets to ensure that they serve, as much as possible, the requirements of growth. Financial planning need not concern itself only with being a guide to preventing the emergence of imbalances or restoring economic balances. It can contribute to increasing the level of savings and rendering financial structures more flexible and adaptable for policy purposes. 26 Financial policy has its limitations. T o begin with, monetary forces do not always, or by themselves, necessarily influence changes in economic activity. T h e monetary approach to the balance of payments recognizes, for example, that the payments outcome may be the result of autonomous shifts abroad, e.g., inflow of capital which is seeking profitable investment outlets in the recipient country or coming in for purposes of refuge. Similarly, changes in the level of domestic expenditure may be the result of autonomous investment decisions and not due to any tightening or relaxation in financial policy. In developing countries, the degree of nonmonetization of the economy may be substantial. T o that extent the aggregate effect of any financial measures are reduced. Further, even if the economy is basically monetized, the national markets—financial and real—may not be well integrated. The transmission process of any policy measures is thereby weakened and becomes uncertain. In addition, the form which real national savings take may, to a large extent, 19

INTRODUCTION

be nonmonetary, e.g., hoarding of stocks. It is not surprising that the ratio of monetary savings to national savings is usually higher in developed than in developing countries.27 Financial planning forms part of the overall planning picture. It is used in conjunction with other planning processes and does not replace them. Viewed in this context, financial planning, even when all the requisite data are available, cannot be considered as a panacea for correcting economic maladjustments whether in the short or longer run. But to the extent that monetary variables affect economic activities and decisions, financial planning acts as one important framework for policy purposes.

20

PART 1

Policy Framework and Developments in the Monetary and Exchange Fields

CHAPTER 2

Characteristics of the National Economy and the Emerging Framework of Postwar Economic Policy This chapter aims at providing a general background to the forthcoming discussion in chapters 3 and 4. Its primary objective is to describe briefly the major economic characteristics of the Lebanese economy around the mid-seventies, and to attempt to delineate the emerging policy framework adhered to by the Lebanese authorities in the postwar period with a view to gaining an understanding of Lebanon's broad economic policy positions and general economic performance during the period u n d e r study. It is divided into three sections: (i) Economic Characteristics, (ii) Economic Policy, and (in) Economic Performance. I. E C O N O M I C C H A R A C T E R I S T I C S : A B R I E F OVERVIEW It is often noted in writings on the Lebanese economy that its specific features contrast sharply with those of other 23

PART

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developing economies. Lebanon's endowment with natural resources is relatively limited: of a total area of 10,400 square kilometers, it is estimated that over one-third is cultivable. As of the mid-seventies, about 55 percent was actually under cultivation. Agricultural output is diverse, the economy is not dependent upon a few primary products.1 In terms of gross domestic product (GDP), the agricultural sector has played a relatively small role, comprising less than 10 percent of the total in 1973.2 But in terms of the population which derives its livelihood from this sector, the percentage was much higher, though it has been steadily declining.3 In the early seventies, it probably accounted for about one-fifth of the labor force.4 In contrast, trade and services have occupied an important position in the national economy. In the sixties and early seventies they accounted for about 60 percent of GDP, and at the beginning of the seventies they absorbed about half the labor force. What is especially noteworthy, is the relatively fast growth recorded by the industrial sector in the postwar period. According to the official estimates, its share in GDP exceeded that of agriculture (see statistical appendix table 3a). In the early seventies it is estimated that the industrial sector accounted for about 18 percent of the labor force. Industrial production has traditionally concentrated in the area of food processing, textiles and footwear, and building materials. In the sixties and the first half of the seventies, there occurred an important diversification of industrial output with the emergence of new industries such as chemicals, paper manufacture, and metal products which, in part, were stimulated by the growing demand in the markets of the Arab countries for such products. Indeed, the growth of Lebanese industrial exports prior to 1975-76 is striking. According to official estimates, their value increased from £L 48 million in 1952 to about £L 24

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1,400 million in 1973.5 In this connection, two observations are called for: (1) for a large portion of industrial exports, the import content is high; exports of transport equipment, for example, practically amount to reexports, and (2) a notable acceleration in industrial exports took place after the mid-sixties. Among the factors which appear to have contributed to rapid expansion in industrial exports are the vigorous promotional efforts of Lebanese manufacturers, especially in the Arab countries, tax incentives,6 and the existence of an exchange rate whose level would seem to have been favorable to export expansion (see chapter 7).7 A significant characteristic of the Lebanese economy relates to its human endowment. The entrepreneurial element among the Lebanese is well known. 8 Equally important is the relatively high rate of literacy and the relative abundance of skilled and professional groups. 9 Along with the long-established tradition of business enterprise, these factors have combined to produce a vigorous private sector, which, to a large extent, was responsible for the postwar Lebanese economic expansion. 10 The share of the governmental sector in GDP has been about 7 to 9 percent, bearing in mind that this does not reflect the indirect influences of the government over the national economy via its economic policy. Another important characteristic of the Lebanese economy has been, and remains, its openness, with a simple and liberal exchange system based on a flexible exchange rate. And again in contrast with many developing economies, private capital movements have occupied an important position in the Lebanese balance of payments (see chapter 4). Finally, on the basis of per capita income (although it does not give a sufficiently adequate idea of development), Lebanon would be classified in the so-called "intermediate" group of countries. 25

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Admittedly, when compared with other developing economies, the Lebanese economy exhibited certain uncommon characteristics as far as its structure and orientation are concerned. Analyses of the Lebanese economy have not failed to emphasize the implications of its special features for the pattern of the country's development. 11 The economic contrast between Lebanon and other developing economies has not been confined, however, to the question of structure; it may also be noted in the area of policies—implicit or explicit—which the authorities have adopted in the postwar period and which do not seem to have received the attention they deserve. 12 The focusing on Lebanese policy may invite an immediate reaction from some students of the Lebanese scene. Is it not "common knowledge" that the growth of Lebanon in the postwar period may be attributable primarily to the efforts of the private sector and that, while the public sector has contributed towards the building of the country's infrastructure, there has been a lack of public economic policy? While the major role of the private sector in Lebanon's postwar economic development is undeniable, the economic policy positions of the authorities apear to be less obvious. In part, this may perhaps be explained by the implicit nature of some of the policy positions taken by the authorities throughout most of the period up to 1974, in contrast with declared national economic objectives which are reflected in national documents such as economic plans. It was only in 1972 that the authorities announced a SixYear Plan (1972-77) which turned out to be no more than a formal declaration of some of the policies which they planned to maintain or put into effect (see section II, this chapter). 13 As will be indicated later, toward the end of the period 26

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under study, the government had begun to engage more actively in the area of policy making. The efforts at pursuing a more active policy were soon afterwards overshadowed or perhaps swept aside by the events which struck Lebanon in 1975-76. A new phase in the country's development is expected to emerge, and the priority which should be accorded to proper policy coordination cannot be overstressed. This move in turn should be carried out in the light of a proper understanding of the country's postwar economic experiences and policy positions.

II. E C O N O M I C

POLICY

The attempt to delineate Lebanese economic policy in the period up to 1974 would, on the whole, have to be based on policy descriptions in budget statements (primarily since 1962) but perhaps more importantly on a direct reading of policies which had been in operation for an extended period of time. The Six-Year Plan, announced in 1972, was one step in the direction of portraying a more definite official policy stance—economic and developmental. It stated formally the objectives of the national authorities more clearly than before, 14 but, as indicated below (pp. 31-33), it did not evaluate the consistency of these objectives and discussed only partially and inadequately the means by which they were to be achieved. POLICY

TRENDS

IN

THE

POSTWAR

PERIOD

UP

TO

1974 Early in the postwar period, the various controls which had been imposed during World War II were gradually dismantled: restrictions on most international economic transactions were removed 15 and the exchange rate was 27

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gradually unified. 16 The Lebanese economy became an open economy. This policy of openness was maintained in conjunction with (a) a flexible exchange rate policy, with occasional Central Bank intervention on the foreign exchange market in order to influence the level of the Lebanese pound; and (b) up to 1967 a generally inactive monetary policy or perhaps the lack of such a policy with little supervision over banking activities;17 beginning effectively that year,18 the monetary authorities took several measures designed to assure sound banking practices— while the use of monetary instruments became more discernible, an active monetary policy was not, however, put into effect until 1974;19 and (c) cautious fiscal positions though the budget was regarded as an important tool in attaining policy objectives. Elements of formal economic policy positions were indeed most consciously touched upon in national budget statements, particularly those of latter years of the period under study.20 The stated objectives frequently focused on the desirability of making available a greater portion of resources for development purposes which mainly related to infrastructure and some irrigation schemes (e.g., the 1967 and 1972 budget statements), the expansionary or contractional effects of budget operations (e.g., the 196871 budget statements) and the need to view budgetary policy as part of development plans (e.g., the 1972 budget statement). At the same time, however, budget statements were perhaps, by necessity, confined to general observations concerning desirable objectives:21 in contrast, with rare exceptions, no specific objectives and fiscal instruments were elaborated and the evolution of what might be termed a fiscal policy would be hard to follow.22 In effect until the more recent years of our period, the lack of a sufficient 28

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degree of consolidation of public accounts did not permit any meaningful attempts at quantifying the impact of fiscal operations, which, in turn, rendered the formulation of specific fiscal targets difficult to achieve. What is more significant is the lack of any fundamental reform in the fiscal system, particularly as concerns the tax structure, designed to help achieve desired economic targets, though a number of important changes were contemplated for a long period of time.23 Serious administrative and political constraints were largely responsible for this outcome, limited efforts at administrative reform notwithstanding. 24 In brief, policy formulation as reflected in national budgets, while possibly indicative of the economic thinking of the authorities at the time, cannot be considered as having been a serious endeavor. Given noneconomic obstacles regarding possible reform, fiscal policy could be described as having been generally conservative, both at the administrative and at the policy levels, although in recent years, the beginning of a more active and well-defined fiscal policy has started to appear. 25 It is not surprising that, on the whole, the outcome of fiscal operations did not conform to general policy objectives. Other areas of the economy similarly did not benefit from a well-defined public policy.26 The public sector expanded somewhat and the influence of governmental policies increased, but the government's role in helping sustain the rate of growth and especially in influencing the pattern of development remained much more limited than emerging circumstances would have required (see chapter 5). Governmental policy decisions appear to have been taken on a largely ad hoc basis (except as regards the external sector). The economic and financial measures adopted in recent years, discussed in chapters 6 and 7, 29

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might have been the beginning of a transitional period leading to a more consistent, well-defined and active economic policy. However, the 1975-76 civil war disrupted the pre-1975 process of change. The basis upon which public sector policy will be built in the post civil war era is yet to be fully worked out (comments on future policy formulation are discussed in chapter 8). TARGETS

AND

INSTRUMENTS

UP

TO

1 9 7 4

Based on the policy trends outlined above, it may be said that until 1974 Lebanese economic policy had two main and related objectives: (a) to maintain relative financial stability and (b) to support the economic efforts of the private sector and provide it with opportunity to exercise the major influence on the rate and pattern of economic expansion. 27 Concerning the first objective, two means were consciously or unconsciously employed in attaining it: a liberal trade and payments regime, and a flexible exchange rate. The underlying principle here is that domestic pressures, should they arise, would work themselves out through the balance of payments, whose adjustment, in turn would be dependent upon the flexibility of the rate.28 The authorities' policy of an open economy was accompanied by cautious domestic fiscal policy.29 Policy intentions were, on the whole, rooted in the concept of minimal budgetary deficits and surpluses and a restrained credit expansion as far as the public sector was concerned. 30 The government's policy decisions toward the private sector were not governed by well-defined criteria, except perhaps for the belief that financial stability was a necessary companion for private initiative and was beneficial for the country as a whole. Judging by actual policies, governmental support for private initiative took two main forms: the 30

EMERGING

FRAMEWORK

OF P O S T W A R

POLICY

building of the country's infrastructure, and the nonhindering of private enterprise except in relatively few specified areas which were effectively reserved for public sector operations (e.g., public utilities and tobacco marketing.31 Regulatory mechanisms were enforced in respect of several economic activities (rent, prices of certain basic foodstuffs, tobacco production, transportation fees, etc.) and direct public sector participation included irrigation works and other projects. While governmental policy influence was on the rise, nevertheless private enterprise remained largely free from governmental supervision and direction. Lebanon's postwar economic growth could indeed be mainly attributable to the efforts of the private sector. By comparison, in many other developing countries the public sector tended to expand rapidly (not necessarily on account of economic factors) with a surge in the dominance of governmental policies.32 THE

SIX

YEAR

DEVELOPMENT

PLAN

1 9 7 2 - 1 9 7 7

Under this plan five national economic objectives were listed: (a) the attainment of a rate of growth, in real terms, of 7 percent per annum; (b) the rapid development of agriculture and industry; (c) increasing employment opportunities; (d) reduction in the balance of payments current account deficit; and (e) reduction in income inequality. T h e plan document discussed in some detail past developments and desirable future policies concerning the various sectors it covered. These policies, however, did not necessarily reflect policy commitments on the part of the authorities and, therefore, they could not be considered as an integral part of the plan itself. In its essence, the plan was basically an investment program (with both public and private sector participation) whose totality was based on an assumed capital-output ratio and the above-stated rate of growth. One 31

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can only presume that the public sector program was drawn up with a view to achieving the other listed objectives. The public sector (inclusive of autonomous bodies) was assigned a little less than one-quarter of the total projected annual investments. The investment total of the public sector was extrapolated on the basis of rough estimates for the preceding years (1964-69). 33 Projected financing of the total public planned expenditure indicated an anticipated gap equivalent to about 15 percent of the total. This was to be covered principally through increased tax revenue (mainly extensions, revision, and better collection of existing taxes) and unspecified internal and external loans (38 percent of the total deficit or 56 percent of planned public expenditure). At the technical (policy) level, there were at least three areas with which the plan did not deal. The first concerned the consistency of the various targets, the second related to the various means by which it was intended to attain the plan objectives, and the third concerned the financial implications of the plan if actually realized. It is not suggested that these questions could have been easily or readily tackled, particularly in the face of existing gaps in available Lebanese statistics. Nevertheless, empirical problems apart, it would be necessary to underscore the need for clarity in the planning process—in the ability to define objectives clearly and to delineate what paths have to be traversed if the desired objectives are to be attained. Thus, as far as the plan was concerned, a number of unresolved problems would have suggested themselves. Was the rapid increase in industrial and agricultural development necessarily consistent with a reduction in the balance of payments current account deficit? What type of domestic development did this entail? How would a tendency for either a substantial shortfall or an excess in the level of private investment have 32

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been dealth with? What would have constituted the sources of borrowing for the public sector: the commercial banks, the Central Bank, or the public? How would the distributional aspects of the investment flow have been made to conform to what was desired? How would income redistribution have been affected? What was the overall balance of payments effect of the plan in that no specific target for the level of net foreign reserves was fixed? At what rate was the level of domestic credit expansion being envisaged? Did the authorities assume a fixed or a flexible exchange rate for the whole period? The attempt to deal with such questions would have rendered the planning process more meaningful in terms of policy decisions even though limitations on available data would not have permitted a necessarily reliable quantification of various policy measures. Having discussed the evolving framework of postwar Lebanese economic policy, let us turn to the actual performance of the economy within this framework.

III. E C O N O M I C P E R F O R M A N C E UP T O 1974: A BRIEF SURVEY

Quantitative economic performance shall be briefly indicated firstly in terms of the recorded rate of growth and secondly in the context of the financial trends which have prevailed in the postwar period under study. RATE

AND

PATTERN

OF

GROWTH

Consistent official estimates of national income for Lebanon begin with 1964.34 Estimates for previous years reach back to 1950. There is, however, no one continuous series which could be used for the period prior to 1964 as a whole, although consistent estimates are available for the period 1950-58. :i5 33

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According to official estimates, the (exponential) rate of growth of NNP in 1964-73, at current prices, was about 9.5 percent per year. Deflating NNP by the available price indices would yield a rate of growth of 6.0-6.5 percent. 36 Owing to the severe limitations of these indices, this estimate cannot be reliable and the rate of growth, in real terms, could have been different. In all probability, the recorded rise in prices was less than the actual rise. On the basis of the estimates for the previous years, the average annual rate of growth, in real terms, during the period 1950-57 was about 7.5 percent. 37 In both periods, the most notable development was the declining share of the agricultural sector which in 1973 was estimated at about 9.5 percent of total GDP38 (see statistical appendix table 3a). By comparison, the leading growth sectors in the fifties were communications and finance; and in the sixties, industry, administration, and nonfinancial services. Were comparisons between the two periods to be made (bearing in mind that the computations of the two periods are not strictly comparable), the following features of the sectoral distribution of growth would be noteworthy: the continuous decline in the share of agriculture; the important position maintained by trade whose share amounted to a little over 30 percent in 1973; and the growth in the share of industry which in 1973 stood at about 15 percent compared with less than 10 percent for agriculture. 39 The share of administration ranged from 7.5 percent to 8.7 percent of total GDP.40 FINANCIAL

TRENDS

Monetary and exchange rate developments are discussed in detail in chapters 3 and 4. Here we shall briefly summarize the prevailing trends during the period under 34

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review to determine whether they had conformed to official (implicit) objectives. Up to 1971, financial developments may be outlined as follows: the rate of growth in domestic liabilities (money and quasi-money) exceeded that of domestic credit, Central Bank net credit operations having had a limited impact41 (see statistical appendix table 4). As a result, net foreign assets of both the Central Bank and the banking system as a whole registered continued growth.42 The increase in the general price level was very moderate during this period. The average rate of annual increase in the general level of prices, as measured by the wholesale price index, amounted to a little over 2 percent. 43 Thus, in conjunction with relative price stability, Lebanon managed up to 1971 to accumulate and maintain a substantial amount of international reserves (as measured in terms of imports) without resort to, or perhaps because of the lack of any restrictions on, international economic transactions or on capital transfers and not at the cost of a depressed economy, although as pointed out in chapter 6, the experience of the sixties suggests that a higher rate of growth, in real terms, could and should have been feasible.44 One aspect of this picture changed during 1971-74. While net foreign assets continued to increase at a rapid rate,45 the price trend rose markedly due to internal and external causes and governmental policy measures, to counter the inflationary trend, had only a very limited impact.46

A P P E N D I X : A N O T E O N P U B L I C F I N A N C E IN L E B A N O N AS OF T H E M I D - S E V E N T I E S

As of the mid-seventies, the Lebanese public sector has revolved around the central government, the government 35

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agencies and the municipalities.47 There have been, in addition, three semipublic organizations, namely the Social Security Fund, the Deposit Insurance Fund, and the National Bank for Industrial and Tourist Development. The Treasury has been at the center of public financial operations, executing its financial supervision through the General Budget of the Central Government, the attached budgets of financially dependent government agencies,48 the independent budgets of financially autonomous government agencies and municipalities, as well as through extrabudgetary special accounts. The attached budgets have been linked to the general budget and approved by Parliament at the same time it has approved the General Budget. The independent budgets of autonomous public agencies (e.g., railroads, port authorities, electricity companies, water companies, etc.) have been subject to the review of the ministries under whose supervision they fall and have been approved by the Minister of Finance. Some of these agencies have received subsidies from the General Budget. The surpluses of others, however, have not been transferred to the General Budget. Municipality budgets have been subject to the approval of the Ministry of Interior. Over half of their revenues have been collected by the Central Government and held in transit accounts with the Treasury to be released to thé municipalities when needed. The extrabudgetary special accounts had been established to link certain expenditures to specific sources of revenues. Transfers between the various accounts and the General Budget have been subject to authorization by Parliament. In its essence, the management of the public sector (apart from public financial institutions) has been based directly on the old French system and reflects a philosophy which assigned a limited governmental role in the economic and social fields. Legal formalism has been a predominant 36

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characteristic of public management. On the whole, management has not been policy- or development-oriented, 49 though attempts by some senior officials have been made in favor of such orientation, as reflected in the more active policy role which the public sector has tried to assume in the more recent years of the period under review (see pp. 2 7 30). More often than not, the public sector and the General Budget, in particular, have tended to generate budgetary surpluses which reflected lags in capital expenditure. 50 The General Budget accounted in the early seventies for about 70 percent of total public sector expenditures. Total investment expenditure accounted for a little less than 30 percent of total public sector expenditure. 51 For the same period, tax revenues averaged about 11 to 12 percent of GNP and total government revenue about 14 to 15 percent. Indirect taxes accounted for about 60 percent of total tax revenue, the most important source being customs duties, which accounted for over 40 percent of total tax revenue. Direct taxes generated, on average, a little less than one-fourth of the total, with the share of income taxes averaging less than 15 percent (see statistical appendix table 2). The above features of the tax system do not establish its then prevailing degree of progressivity (or regressivity) though the basic tax rates are progressive in nature. Nonetheless, it would not be incorrect to state that the large share of the tax burden was probably borne by the middle-income groups, bearing in mind that Lebanon has an important middle class.52 The income tax law itself suffered from a number of defects, three of which will be mentioned here: (1) no global income tax existed, with separate tax rates applying to separate sources of income.53 In practice, assuming equal income levels, the tax revenue would be less when collected from separate sources than from one single 37

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source; (2) since the progression in tax rates differed in accordance with the source of revenue, income taxation was inequitable; and (3) the application of progressive tax rates on profits of incorporated and unincorporated companies might have tended to discourage the inflow of savings towards the formation of corporations. Prior to the war of 1975-76, the national authorities (i.e., the Ministry of Finance) had prepared a new tax law which was intended to eliminate existing defects and render income taxation more equitable. Further, it was intended to adapt the tax system in order that it play a more important role in the development of the national economy. It is expected that the post-1975-76 era will witness reforms not only in the tax system but in the overall management of the public sector.

38

CHAPTER 3

Monetary Developments and Management

The present chapter endeavors to trace the major monetary developments in the period under study and outlines the evolution of monetary management; this provides the basis for evaluating monetary policy and performance, which is taken up in chapter 5. The chapter is divided into three sections: section i is a brief background discussion of financial intermediation in Lebanon; section n describes the major postwar monetary developments; and section HI discusses monetary management. I. FINANCIAL I N T E R M E D I A T I O N IN LEBANON The financial system is made up of financial institutions which essentially act as intermediaries between the saving or surplus units and the deficit or borrowing units in the community. The more developed the financial system, 39

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the more active is the role of the intermediaries, and the more diversified are their operations and the types of instruments with which they deal. Traditionally, financial operations have been broken down into two broad markets—the money market and the capital market. The former includes institutions which deal basically in short-term assets, while the latter comprises institutions dealing primarily in medium-term and longterm assets. This division is recognized as being arbitrary. Institutional specialization, particularly in developing countries, may not strictly correspond to it as a number of institutions operate in both markets. Nevertheless, the division has proved convenient for analytic purposes. It highlights the differences between long-term and short-term financial operations, and focuses on the evolution of savings in the economy. The development of financial intermediation in Lebanon has been largely tied to the development of commercial banking. Thus, the money market has been the dominant financial market, and term financing has been basically related to short-term operations. The removal of restrictions on international economic transactions and the importance of foreign economic transactions in the economy have induced the development of a vigorous foreign exchange market largely operated by the commercial banks.1 The growth of commercial banking in the postwar period under study is impressive. The number of operating banks increased up to the early seventies by 11 to 12 times.2 This had been accompanied by a concomitant growth in deposits.3 As a ratio of national income, total deposits averaged about 20 percent in 1952-54 rising to an average of about 112 percent in 1971-73. Similarly, for the same period, the ratio of outstanding claims on the private sector to national income rose from 30 percent to 50 percent respectively.4 40

MONETARY

DEVELOPMENTS AND

MANAGEMENT

Financial activities, including banking, had not been subject to special regulations until the enactment of the Law on Money and Credit of 1963 which established the National Central Bank, the Bank of Lebanon, that began operations in 1964.5 In the latter years of the period under review, a few banking institutions dealing with medium- and long-term credit operations were established. 6 Most notably a National Bank for Industrial and Tourist Development, with a capital of £L 60 million, began operations in September 1973.7 In 1972, one of the operating commercial banks was converted into a medium- and long-term credit bank. Subsequently a few consortium banks—grouping Lebanese and foreign interests—as well as a few finance companies were established. 8 Until the breakout of the civil war this trend was expected to continue, accompanied by a greater diversification of the financial system. Indeed, the development of a capital market in Lebanon should continue to be assigned high priority by the authorities. While there also existed an unorganized money market, its importance, in all probability, had declined substantially in the postwar period, though there are no reliable data to corroborate such a conclusion. In any event, the size of this market appears to have been more limited than in other developing countries. 9

II. M O N E T A R Y D E V E L O P M E N T S — G R O W T H IN T H E A S S E T S A N D L I A B I L I T I E S OF T H E B A N K I N G SYSTEM

Analysis of monetary developments in Lebanon is subject to several important statistical constraints. The most important one is that the existing series are not consistent for the postwar period as a whole, the major break occuring 41

PART 1. MONETARY AND EXCHANGE

FIELDS

in 1964.10 Prior to that year, the available series are less adequate and generally not reliable.11 Another constraint is the nonexistence of series for intermediaries other than commercial banks. But perhaps a mitigating factor here is the fact that the role of these intermediaries has been limited. In what follows, we shall first survey developments post-1963, (1964-74) then briefly look at developments prior to 1964, with the aim of providing an overall picture for the whole period. DEVELOPMENTS:

Quantitative

1964-1974

Developments

Five major developments in this period are noteworthy (see statistical appendix table 4). 1. Central Bank net credit operations had a limited impact though it tended to become more deflationary in 1971-74: over the period as a whole the outstanding credit declined; the annual variations are attributable primarily to changes in claims on commercial banks induced by the Intra Bank crisis of October 1966.12 To forestall the spread of the crisis to other banks, the Central Bank made available to them special credit facilities.13 As a result, its claims on the commercial banks rose, reaching a maximum in 1968, after which they declined as commercial banks repaid their debt. 2. Changes in the outstanding commercial bank credit, the bulk of which was directed to the private sector, was influenced by the Intra Bank crisis and to a lesser extent by the Arab-Israeli war of June 1967. The effect of these events was to induce some decline in the outstanding amount in 1967 and 1968, followed by a cautious recovery 42

MONETARY DEVELOPMENTS AND

MANAGEMENT

in 1969 and 1970 and a vigorous rate of expansion in the subsequent four years.14 Over the period as a whole, bank credit expanded at an annual average rate of about 12 percent. 15 3. The rapid expansion in the domestic liabilities of the banking system; i.e., primarily money and quasi-money, is striking particularly in the first half of the seventies; the average annual increase was about 14 percent. The growth in quasi-money was more striking, averaging annually about 18 percent. 16 This relative shift in its favor is partly explained by the rise in the interest rate paid on savings and the time deposits denominated in foreign currencies following the rise in the Euro-dollar rates beginning 1968, tending to decline especially in 1971 and 72 but rising again in 1973 and 1974.17 The fact that interest income on savings deposits is exempt from taxes might have also influenced the shift toward these deposits. The classification of deposits according to currency is available only from 1969 onwards. For the years 1969-72, the foreign currency component of total quasi-money of residents averaged about 29 percent, tending to decline over the period. The factors underlying the aggregate growth of money and quasimoney are discussed in chapter 7. 4. As a ratio of GNP, total deposits (money and quasimoney) stood at about 114 percent at the end of 1973, compared to 85 percent at the end of 1964. The ratios of domestic credit to GNP were about 61 percent and 59 percent, respectively. The differential rate of growth in favor of deposits is reflected, of course, in the rise in the level of net foreign assets of the banking system, which averaged about 38 percent per annum. In absolute amounts, net foreign assets amounted to £L 1,187 million at the end of 1964 (89 percent of the year's c.i.f. imports) 43

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rising to £L 4,265 million at the end of 1973 (134 percent of the three years' c.i.f. imports), and to £L 5,758 million at the end of 1974. The net foreign reserves of the monetary authorities alone have increased during 1964-74 at an average annual rate of about 40 percent, or from £L 750 million at the end of 1964 (60 percent of c.i.f. imports) to £L 3,805 million at the end of 1974 (68 percent of c.i.f. imports). This rise continued in 1975-78 (see p. 64). 5. The price level rose very moderately up to 1971. As measured by the wholesale price index, the annual increase averaged about 3 percent. 18 But the existing price indices are not reliable: the actual rise in the general price level is probably greater than the recorded rise, though it would still be considered moderate or restrained. The situation changed after 1970. The new official consumer price index (for Beirut), with 1966 as a base,19 indicates that from 1971 to 1974 the general price level rose annually by an average of about 8 percent. 20 Restrained credit expansion up to end 1971 (in relation to the expansion in domestic liabilities), along with the policy of an open economy which Lebanon followed, helped moderate any tendencies for general price increases. The acceleration in the rise in prices in 1971-74 may be attributable to several causes. First, the then prevailing worldwide inflation21 was bound to have an important influence on the behavior of domestic prices in an open economy like Lebanon's; 22 second, domestic market imperfections, particularly as concerns import oligopolies, made it possible for import concerns to raise the prices of certain basic imports by more than their increase in world markets; this opportunity was afforded not only by the prevailing world inflation but also by interruptions in trade channels due to domestic and regional political developments; and third, there occurred a substantial acceleration in the rate of 44

MONETARY DEVELOPMENTS

AND

MANAGEMENT

domestic credit expansion, especially in 1973 (rising by over 50 percent), which fueled domestic expenditures at a time when the balance of payments could not act as a deflationary outlet. While credit expansion was accompanied by a substantial growth in monetary savings, the average annual rate of credit creation exceeded the average rate of growth in money and quasi-money. To the extent that price developments in 1971-74 had been in part externally induced, effective control by the national authorities might have been difficult to achieve. However, since domestic factors appear to have also been behind the rise, anti-inflationary measures might have been taken. This was done on a limited scale (see chapter 6). In sum, the picture which emerges, in quantitative terms, in the period 1964-74 is as follows: up to 1971 monetary developments, irrespective of the factors which underlay them, have been such as to permit the attainment of two important objectives, namely a strong balance of payments performance and relative domestic price stability. In the subsequent three years inflationary pressures, partly due to external causes, manifested themselves in a marked rise in the general price level. At the same time the balance of payments registered record overall surpluses. Composition of Credit

The flow of commercial bank credit is shown in statistical appendix table 5. Over half of the outstanding amounts was directed to the trade sector, which seems to have maintained its share in total credit disbursements. The discernible trends are the growth in the share of credit extended to industry in contrast with the decline in the shares of credit going to the agricultural and, up to 1971, to the financial sector (institutions). The share of the latter rose in 1972 and 45

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AND EXCHANGE

FIELDS

1973 reflecting increased financial activity, i.e., the establishment of financial institutions noted earlier. The shares of agriculture and industry in GDP have shown similar movements while that of financial services has remained basically unchanged, except that after a relative decline in 1969 their share showed a small upward trend i n the early seventies (see statistical appendix table 3a). While commercial bank credit is normally short term,—i.e., with maturities of less than one year—in many instances, maturing debt had been rolled over from year to year thereby effectively transforming short-term commercial financing into medium-term lending. In the absence of alternative and adequate sources of medium- and longerterm financing, including the reinvestment of profits, some Lebanese industrialists and other business men might have benefited from the roll over of commercial bank debt. Nevertheless, they still had to contend with the uncertainty as to whether they could rely on extended financing by the commercial banks. The absence of adequate term financing seems to have acted as a constraint on plans to expand plant capacity.23 The requirements for longer-term financing were met on a very limited scale.24 On the basis of existing data, medium-term and longer-term financing in Lebanon constituted a small portion to total financing. The only available series are those for the Banque de Credit Agricole, Industriel, et Financier (BCAIF) (statistical appendix table 6). During the period 1966-71, its outstanding credit averaged a little over 1 percent of total commercial credit. While other sources of medium-term and longer-term credit might have been available (and private investment banks were being established), the overall share of such credit in total credit remained very limited. This existing gap in term 46

MONETARY DEVELOPMENTS AND

MANAGEMENT

financing is expected to be partly offset by the operations of the recently established Development Bank. 1950-1963 Available data for the years 1950-53 indicate a similar pattern of quantitative developments to that of the post1963 period. Domestic liabilities (money and quasi-money) grew annually at an average rate of 15 percent, while domestic credit expanded annually at 13 percent. As a percentage of national income, deposits stood at less than 40 percent at the end of 1950, rising to an estimated 144 percent at the end of 1962. The ratio of domestic credit to national income increased from an estimated 27 percent to an estimated 85 percent respectively.25 Consequently, official foreign assets increased from £L 134 million at the end of 1950 (over 30 percent of imports) to £L 664 million at the end of 1962 (over 50 percent of imports) or at an average annual rate of 30 percent. The level of prices—as measured by the cost of living index—registered an annual average increase of less than 2 percent. Unfortunately, data pertaining to the sectoral flow of commercial credit is not available. However, it would not be too unreasonable to assume that the composition of credit prior to 1964 was not too dissimilar from that which prevailed subsequently. DEVELOPMENTS:

OVERALL

DEVELOPMENTS:

A SUMMARY

VIEW

To the extent that a comparison is made between the two periods, the following picture of postwar quantitative developments emerges. The rates of growth of credit and liabilities were more rapid prior to than post-1964. In both periods, the overall rate of growth in liabilities exceeded that of credit, with the gap between the two rates increasing 47

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FIELDS

in the 1964-74 period. The rates of growth in the level of net foreign assets was substantial in both periods, while the increase in the level of prices remained moderate up to 1971, and accelerated in the subsequent three years. T h e foregoing summary raises two basic questions: (1) Why were the rates of growth of deposits and domestic credit much faster prior to 1964 than subsequently? and (2) Why did the gap between the two rates widen in the more recent period? Of course, given the less than reliable series prior to 1964, it is not certain whether deposits and credit expanded at the rates indicated by the available data. Still, they are probably indicative of the underlying trends. An attempt will be made to tackle these two questions in chapter 6.

III.

MONETARY

MANAGEMENT

The orderly, indeed the impressive, financial performance of Lebanon (using quantitative yardsticks of measurement) contrasts with the experience of many other developing economies which have been burdened with serious national and/or international economic instability.26 Viewed solely in this context, Lebanese monetary performance can be judged to have been successful; but as will be discussed in chapter 5, there are additional and equally important criteria by which such performance can be and should be judged. This section features an attempt to trace the evolution of what might be described as monetary policy, or perhaps monetary policy positions, and their relation to monetary developments. Measured against the principles of proper policy coordination, it is difficult to speak of a Lebanese monetary, and in a wide context, economic policy. That is, policy formula48

MONETARY

DEVELOPMENTS

AND

MANAGEMENT

tion was not conceived in terms of specific objectives and instruments let alone whether their formulation conformed to what was theoretically proper. Lack of proper policy formulation probably characterizes the policies of most countries of the world.27 As stated in chapter 2, the attempt to delineate Lebanon's economic policy in the postwar period would, to a very important extent, have to be based on a direct reading of policies which had been in operation for an extended period of time supplemented by policy descriptions in budget statements, primarily since 1962. The Six-Year Plan was a limited attempt in the direction of portraying a more definite policy stance. But, among other shortcomings, noted in chapter 6, the plan did not discuss adequately the means by which the stated targets were to be achieved. In fact, the plan's policy formulation seemed to be the weakest (almost nonexistent) in the monetary, and more generally, the financial field. The evolution of Lebanon's monetary positions in the period under study may be classified, for purposes of analysis, into three periods: pre-1964, 1964-1966, and 19661974. At the level of policy performance, the demarcation in time would have to be the year 1966 when the Intra Bank crisis occurred. This crisis caused a number of banking reforms to be adopted, and led to a greater consciousness of the potential use of monetary instruments. In contrast, prior to 1966 commercial banking was practically unregulated (despite the enactment of the 1963 monetary law) and monetary management was primarily passive. Still, with the establishment of the Central Bank a new institutional framework was created, and the monetary authorities had at their disposal previously nonexistent tools of monetary policy. At the institutional level, therefore, the year 1964 49

PART 1. MONETARY AND E X C H A N G E

FIELDS

would constitute a new phase in the evolution of monetary management. PRE-1964

LACK

FRAMEWORK

AND

OF

AN

ADEQUATE

PASSIVE

OFFICIAL

MONETARY MONETARY

MANAGEMENT

In the absence of a national Central Bank, or a similar monetary authority, monetary management was essentially entrusted to the commercial banking system.28 The privilege of note issue had already been given in 1936 to the then major banking institution, the Banque de Syrie et du Liban (BSL), which held this privilege until 1964. The BSL also acted as the custodian of government funds; and by virtue of its eminence in the banking system, it assumed, on a very limited scale, some of the other traditional central banking operations such as interbank clearings and lending to other banks. The role of the BSL as a central banking institution was essentially limited and therefore was inadequate. This was partly due to the dual and sometimes conflicting nature of its functions, 29 i.e., the BSL was regarded as a competitor to other commercial banks. It was also due to the inherent limitations imposed by its statutes on its ability to provide credit to other banks,30 as well as to the absence of financial regulations providing for adequate monetary tools which the BSL could have been empowered to employ in accordance with the government's policy positions. Similarly, no specific regulations were in force concerning the establishment of commercial banks or the overseeing of their operations. The only regulatory control was imposed on the currency issue. The code required a note cover half of which, as a minimum, was to comprise gold and convertible foreign exchange, the balance to include government bonds and securities and commercial bills.31 50

MONETARY DEVELOPMENTS AND

MANAGEMENT

In principle, the monetary authorities (i.e., Ministry of Finance in cooperation with the BSL) could have influenced to some extent the total of currency issue and influenced directly the volume of credit and money supply by varying the amount of government papers held by the BSL. There is no evidence, however, that the monetary authorities wished to take any explicit serious initiative in influencing the volume of credit or the money supply. Similarly, there was no apparent coordination between balance of payment and domestic credit moves if and when such moves were taken. The monetary stance of the authorities was a passive one. On the currency side, the outstanding government papers held by the BSL were relatively stable. On the foreign exchange side, while the government undertook exchange stabilization measures, the objective of such measures was to influence the rate of exchange without any regard to its monetary impact. It might be argued that there was an implicit official policy position, namely to permit the commercial banking system to regulate, on its own, the volume and composition of credit in accordance with the evolving market conditions. Monetary management, in other words was existent but was entrusted to the private rather than the public sector. If this line of reasoning were to be accepted, then one could state that up to 1964 monetary policy, and generally economic policy, rested on providing the private sector with the maximum opportunity for exercising the major influence on the rate and pattern of economic expansion. As will be discussed later, this stance eventually proved to be inadequate. 1964-1966 The Monetary Law of 1963 provided for the establishment of a national Central Bank and regulated banking activity. Essentially it reflected the attempt by the authori51

PART

1. M O N E T A R Y

AND E X C H A N G E

FIELDS

ties to lay down the regulatory framework for banking and other financial operations without impinging unduly on the important role played by the private sector in the economy. While the limitations on governmental access to borrowings from the Central Bank were modified, they remained strict and not too dissimilar from the rules operating under the BSL. Under the new law, the Bank could now provide the Treasury with a loan facility up to 10 percent of the average of the ordinary revenue of the government during the most recent three years for which the budgetary accounts had been closed, and with a maturity not to exceed four months. Otherwise, the Bank was not to provide credit to the government except in unusual circumstances and provided alternative measures were not available. The maturities of any such advances could not exceed ten years.32 The prevailing notion was that the government should strive to maintain a policy of balanced budgets.33 Similarly, commercial bank access to Bank financing remained basically subject to the same limitations which existed under the BSL regime. As with the BSL, the Bank was permitted to discount or rediscount papers carrying three signatures and with maturities not exceeding 90 days.34 It was also authorized to extend loans under a line of credit for a period not exceeding 12 months and secured by commercial paper or gold and foreign exchange. 35 The authorities' intention, it would seem, was to limit Central Bank credit operations, leaving it to the commercial banks to regulate the flow of domestic credit in accordance with evolving market conditions. But the law did provide the Bank with powers to influence monetary developments. It did not spell out all the tools at the disposal of the Bank save for its power to impose minimum reserve requirements up to 25 percent in the case of demand deposits, and up to 15 percent in the case of time deposits. The Bank was also allowed to engage 52

MONETARY DEVELOPMENTS AND

MANAGEMENT

in open market operations though its activities were made subject to strict limits.36 Nonetheless, until the Intra Bank crisis of October 1966, commercial bank operations continued on the same path they had followed prior to 1964 with little, if any, Central Bank direction. 1966-1974:

MOVES

TOWARD

PUBLIC

MONETARY

MANAGEMENT Post

Intra

Departures

The crisis of the Intra Bank initiated three major departures in public monetary management: 1. The first was of a temporary nature; it comprised measures, referred to earlier, designed to meet possible additional liquidity requirements of commercial banks in the aftermath of the Intra crisis,37 and manage the affairs of the Intra Bank itself after a decision had been made not to liquidate it; as it turned out, the Bank was eventually reorganized into an investment company (Intra Investment Company), 38 and a commercial bank named "Bank alMashrek."39 2. The second comprised measures which were intended to weed out weak commercial banks considered a liability on the banking system. Under Law No. 28-67, enacted on May 9, 1967, a Higher Banking Council was created which was empowered, among other things, to take over unsound banks; 40 BCAIF was entrusted with the administration of the seized banks and the execution of their liquidation or, if possible, their sale to interested parties.41 Furthermore, on September 28, 1967, Decree No. 8284 was issued providing for credit and tax incentives for bank mergers and self-liquidation of banks which were relatively weak, and, therefore might take advantage of the incentives which were being offered. 42 53

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1. MONETARY AND E X C H A N G E

FIELDS

3. The third and most important departure related to measures which aimed at a more effective control of banking operations and the restoring of confidence in the banking system. The Banking Control Commission,43 which was given the authority to control and supervise banks, has concerned itself with scrutinizing bank investments in the light of existing resources and ensuring that banks adhere to existing regulations. Toward the end of 1967 a Deposit Insurance Fund was established.44 All deposits of a single depositor (both resident and nonresident) were henceforth guaranteed by this company up to £L 30,000. In March 1970 an amendment of Law No. 28-67 permitted the Central Bank to set the maximum interest rate which commercial banks might offer on their deposits if they were to remain eligible for the deposit insurance. Amendments

to the Law

on Money

and

Credit

Major amendments to the Law on Money and Credit of 1963 were enacted in 1973.45 The basic aim of these amendments was to enable the Central Bank to have greater flexibility in its monetary policy, evolve a more effective monetary management, and help develop the financial market. The major amendments may be summarized as follows: 1. The Bank was permitted to raise the minimum reserve requirements by more than 25 percent in the case of demand deposits and 15 percent in the case of time deposits. Henceforth, government or government-guaranteed obligations would qualify as reserve assets up to a proportion of deposits to be specified by the Bank. Further, it was empowered to impose varying reserve ratios on various bank obligations within the overall limits set for minimum reserve requirements. Under special circumstances (not defined) the Bank could henceforth impose marginal 54

MONETARY DEVELOPMENTS AND

MANAGEMENT

reserve requirements without reference to the above deposit requirements. Also, commercial banks were obliged to hold with the Bank special minimum reserves equivalent to a proportion of their assets to be specified by the Bank. Finally the Bank was authorized to accept deposits which carry interest, the rate to be set by it presumably in the light of evolving conditions.46 2. The Bank was authorized to renew for an additional year the one-year loans it extended in the form of a line of credit. At the same time, it was permitted to accept as mortgage credit instruments, with maturities not exceeding three years, obligations arising from agricultural, industrial, or public works activities, or associated with export financing.47 3. The maturity of discounted or rediscounted commercial bills, denominated in foreign exchange, was extended from three to six months. Further, the limitation previously imposed on the maturity of debt instruments issued by foreign governments or international organizations which the Bank could purchase was removed. 48 4. The Bank was empowered to use selective credit controls in order to influence the flow of credit to various economic transactions.49 5. The maturity of securities held by the public which the Bank had been authorized to buy or discount was extended from 90 to 180 days. The same extension was applied to private and public obligations in which the Bank was permitted to deal. In addition, the Bank could henceforth deal in government or government-guaranteed securities with maturities not exceeding five years, provided such securities were intended to finance development projects.50 6. Lebanese financial institutions would henceforth have to be limited liability companies and their minimum 55

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1. MONETARY AND E X C H A N G E

FIELDS

capital was set at £L 2 million. Supervision of their operations was entrusted to the Banking Control Commission. 51 The Use of Monetary Beginning

Tools:

of an Active Policy Toward End of Period

Up to and including 1973, the use of monetary tools to influence directly the flow of commercial bank credit was limited to the imposition of a 5 percent reserve requirement in May 1969, raised to 7 percent effective September 1, 1972. Also, in May 1972, the Central Bank issued a regulation whereby bank lendings to any individual or group of individuals became subject to a maximum limit of 30 percent of the equity of the bank. The object of the 1969 move was partly to help reduce the then existing pressure on the Lebanese pound by forcing the banks to hold a minimum amount of domestic balances. In 1972, the aim of the increase in reserve requirements was primarily to reduce excess liquidity. In effect, this increase managed to reduce excess reserve only partially; the banking system continued to seek outlets for its surplus funds. 52 During the course of 1972 and 1973, Lebanese bank consortiums made arrangements to finance certain institutions and companies abroad and domestic credit expansion was accelerated. While the banking system as a whole still maintained some excess reserves, a number of banks began to face liquidity shortages.53 The interbank rate rose sharply, prompting the Central Bank to take certain measures designed to relieve the tightening liquidity situation. The rise in the general price level which began in 1971 and accelerated in 1973 and 1974, combined with a substantial appreciation of the Lebanese pound, 54 prompted Central Bank policy to become more active. Measures designed to counter both trends were not put into effect, 56

M O N E T A R Y D E V E L O P M E N T S AND

MANAGEMENT

however, until 1974. To help stem the appreciation of the pound, the Central Bank took the following measures:55 1. Effective January 1, 1974, 25 percent of the reserve requirements against obligations denominated in foreign exchange could be held in foreign exchange. 56 This ratio was raised to 50 percent effective April 1974. 57 2. Effective August 1, 1974, commercial banks could no longer offer interest on nonresident accounts denominated in Lebanese currency.58 Further, advances in foreign exchange were exempted from marginal reserve requirements imposed earlier in the year (see below), while existing reserve requirements were to be reduced gradually, beginning with a reduction effective July from 8 to 5 percent.59 3. Effective September 13, 1974, the Central Bank announced it stood ready to buy foreign exchange (i.e., dollars) at market prices, providing 75 percent of the domestic currency proceeds were held in blocked accounts, earning 5 percent interest per annum. The remaining 25 percent would be added to the reserves of the commercial banks.60 Another circular issued the same day reduced, effective September 1, reserve requirements on deposit obligations in foreign exchange from 5 to 4 percent.61 Shortly afterwards, on September 20, 1974, the Bank decided to reduce these requirements to 3 percent effective October 1, 1974, 2 percent effective November 1, 1974, 1 percent effective December 1, 1974, and zero percent effective January 1, 1975.62 The above measures, on their own, could not have influenced the level of the exchange rate to an appreciable extent. Their impact on the demand for foreign exchange was likely to have been limited.63 In contrast, direct intervention by the Central Bank was (and is) an influential tool. Indeed, in the last quarter of 1974, the Bank did intervene 57

PART

1 . M O N E T A R Y AND E X C H A N G E

FIELDS

on a substantial scale. Measuring, as a rough approximation, the magnitude of the Bank intervention by the change in the international reserves, the cumulative purchase o f foreign exchange amounted in October-December 1974 to a little less than $600 million.64 Nevertheless, the effect o f the intervention was to depreciate the level of the pound only temporarily. 65 Given the underlying balance of payments trends during 1974 (i.e., substantial capital inflow), this outcome was not surprising. 66 Measures designed to curb domestic inflation may be outlined as follows: 1. Effective July 1, 1974, minimum reserve requirements were raised from 7 to 8 percent. Marginal reserve requirements were imposed (for the first time) on increases in bank advances over and above the amounts outstanding as of end 1973. T h e required ratios were varied in accordance with the rates o f increase. 87 2. Effective August 1, 1974, 15 percent deposit requirements by bank customers were imposed against all letters of credit opened for import purposes. 68 3. Effective November 1, 1974, the highest marginal reserve requirement was further increased. 69 4. Effective January 1, 1975, minimum reserve requirements were increased to 10 percent. In addition, credit ceilings were placed on advances (in local currency and foreign exchange) to residents. For the period October 1-December 31, 1974, the increase in such advances was limited to 6 percent over and above the amounts outstanding as of September 30, 1974. 70 For the period JanuaryJ u n e 30, 1975, the limit was set at 12 percent over and above the amounts outstanding as of end 1974. 71 At the same time, marginal reserve requirements were eliminated. T h e impact of these measures, as far as 1974 was 58

MONETARY

DEVELOPMENTS AND

MANAGEMENT

concerned, was limited, partly because of their late implementation and partly due to their nature. Their desired effect on credit flow in 1975 became submerged under the increasingly adverse economic influence of the 1975-76 war. (For a brief evaluation of the 1974 measures see chapter 6.)

59

CHAPTER 4

Exchange Rate Trendsand Balance of Payments Developments

Lebanon is one of the few countries—developing and developed—which had consistently maintained a floating or fluctuating exchange rate policy throughout the postwar period under review.1 Our concern in this chapter centers on assessing exchange rate trends and the degree of stability in exchange rate movements and balance of payments developments in the period 1950-74, leaving the evaluation of exchange rate policy for chapter 7. Looking at the 1950-74 period as a whole, four features of exchange rate developments are noteworthy: the first is the general absence (with the exception of the first few years and the last few years of the period under review) of large short-term (monthly) fluctuations in the exchange rate. This observation is based on the record of daily quotations available at the Beirut Bourse. Statistical appendix table 7 reproduces the monthly average, maximum, and minimum rates of the Lebanese pound in terms of the U.S. 60

E X C H A N G E R A T E S A N D B A L A N C E OF

PAYMENTS

dollar. Statistical appendix table 8 includes computations of the standard deviation of the monthly average, maximum, and minimum exchange rates for the period 1950-70. Excluding the first four years (1950-53), the coefficient of variation of both the average and maximum rates ranged from less than 0.5 percent to less than 2 percent. In the first four years, the ratio ranged from 3 percent to a little over 6.5 percent. In the case of minimum rates, the coefficient of variation for 1956-70 was even smaller, ranging from less than 0.5 percent to about 1.5 percent. In 1950-55, the ratio ranged from 3.5 percent to less than 9 percent; for the period December 1972-December 1974, the coefficient of variation of the weighted exchange rate was 5.46 percent and 2.75 percent for 1973 and 1974, respectively (see statistical appendix table 9). Similarly, monthly fluctuations in the rate between the minimum and maximum were, on the whole, relatively small. This gap, measured as a percentage of the average monthly rate, generally was less than 2 percent with greater fluctuations occurring in the first four years of the period (see statistical appendix table 10). For the post-1970 period, similar exchange rate data is available in terms of individual currencies but not for weighted rates. Second, long-run movements of the pound have passed through five stages (see charts 4.1 and 4.2). In the initial two years, the pound tended to depreciate; this was followed by a relatively long period, 1952(2)-1962 when the pound tended to appreciate; in the following three years, the pound tended to stabilize; it then tended to depreciate over the period 1966-71(2), i.e., until the dollar crisis of August of that year. In the aftermath of this crisis, the pound appreciated substantially in terms of the dollar; it also tended to appreciate vis-à-vis other currencies but to a lesser degree. 2 The long-run movement of the pound was very gradual; indeed, for the larger part of the period 61

PART

1.

MONETARY C H A R T 4.1

AND

EXCHANGE

FIELDS

LEBANON: E X C H A N G E R A T E M O V E M E N T , 1 9 5 0 - 1 9 7 1 (QUARTERLY AVERAGE £ L / U S

$1)

1950 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66 '67 '68 '69 '70 '71 YEAR

under consideration, the pound may be described as having been relatively stable. In 1950-52(2), the average quarterly change (depreciation) of the pound was 1.4 percent. 3 In the period 1952(2)—1971(2), the average quarterly change (appreciation) was even less, amounting to 0.05 percent. 4 62

EXCHANGE

RATES

AND

BALANCE

OF

PAYMENTS

For the period 1972 (December)-1974(4), the average monthly change (appreciation) of the pound was more marked, amounting to about 1.0 percent. 5 Third, given the openness of the Lebanese economy, the movement of the pound basically reflected market forces despite occasional intervention by the monetary authorities. This intervention was generally aimed at moderating the appreciation of the pound rather than cushioning its depreciation; 6 the main policy, however, had been not to obstruct the basic market trends. Fourth, the net outcome of the authorities' interCHART 4.2 LEBANON: WEIGHTED MONTHLY EXCHANGE RATE MOVEMENTS. DECEMBER 1 9 7 2 - N O V E M B E R

1974

(DECEMBER 1972 = 100)

63

PART

1. M O N E T A R Y A N D E X C H A N G E

FIELDS

vention had been the almost continuing rise in the net official foreign reserves which at the end of 1974 stood at about $1.67 billion (rising at the end of 1977 to $1.96 billion and at the end of 1978 to $2.5 billion) compared with about $39 million at the end of 1950. The above movements in the exchange rate should be viewed in the context of balance of payments developments. Here we are faced with three statisical shortcomings: first, no distinction is made prior to 1968 between resident and nonresident accounts, and even since then the basis for this distinction is not yet fully adequate; second, the pre1964 banking series, and more so the available balance of payments data, are not altogether reliable and, therefore, measurement of financial flows and the balance of payments are not adequate; 7 and third, prior to 1964 no series concerning foreign reserve movements of the commercial banks'are available. Accordingly, any generalizations which may be made, at least for the period pre-1964 if not 1968, are subject to the aforementioned constraints. Still, the available data can be assumed to reflect the underlying payments trends in the postwar period under review. With a fixed exchange rate, one measure of the overall deficit or surplus in the balance of payments is the change in the net foreign assets of the banking system. This measure, however, is also frequently confined to changes in the net foreign reserves of the monetary authorities alone.8 In the Lebanese context, the exchange rate had been (and remains) basically market-determined. In principle, in the absence of intervention, any tendency for a deficit or surplus to arise would tend to be eliminated by movements in the rate itself, i.e., such movements would reflect the underlying payments position and there would be no need for accommodating movements. But, as mentioned, in practice the exchange rate had not been totally free, with the Cen64

E X C H A N G E R A T E S A N D B A L A N C E OF

PAYMENTS

tral Bank intervening to influence its level. At the same time, it would be difficult to distinguish between the accommodating and autonomous movements in the foreign assets and liabilities of the commercial banks. T h e surplus or deficit in the Lebanese balance of payments shall, accordingly, be measured as the change in the net foreign assets of the banking system. This would also amount to a policy definition which relates the domestic and external policies to each other, i.e., the balance of payments impact on the money supply can be readily discerned. Looking at the available balance of payments data (see statistical appendix table 11), during the first ten years, 1951-61, the balance of payments appear to have incurred continuous overall surpluses.9 Despite foreign exchange purchases by the monetary authorities, there occurred an overall appreciation of the pound of about 19 percent.10 T h e period 1962-67 was characterized by bigger yearly surpluses with the exception of 1967 when a small deficit was recorded. The pound tended to fluctuate in this period within a relatively small range (£L 3.00-3.25 per US $1) but with an overall tendency to depreciate.11 T h e post-1967 period up to 1974 displayed relatively large and rising surpluses. Official intervention—manifested in the accumulation of foreign exchange reserves—helped prevent the appreciation of the pound. Indeed, up to 1971 the pound experienced some depreciation. In the following three years it appreciated substantially in the face of important Central Bank intervention. Neither the recorded current account balance nor the basic balance (i.e., goods and services, transfers, and longterm capital) showed any discernible trends over the period 1951-72 (see statistical appendix tables 12a and 12b). T h e current account characteristically incurred deficits which ranged from about £L 30 million (US $10 million) to about 65

PART

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FIELDS

£L 465 million (US $200 million). The trade balance deficit on the whole exhibited an upward trend, although beginning 1964 and up to and including 1973, the ratio of exports to imports rose continuously from 16 percent to 48 percent, respectively.12 The faster rate of growth of exports, compared with that of imports is explained primarily by the rapid expansion in industrial exports, notably those of mineral and chemical products (see chapter 7). The basic balance exhibited a similar trend to that of the current account, except that generally the basic balance deficit was of a lower magnitude, due to the recorded net long-term capital inflow. This deficit was almost always continuously more than offset by substantial net short-term capital inflow (including net errors and omissions), with record inflows being registered in the early part of the seventies. During 1970-74 total capital inflow (inclusive of errors and omissions) is estimated to have averaged annually about £L 1,200 million (US $415 million).13 In brief, taking a long-run view of the Lebanese postwar balance of payments developments (1951-70), the two overall trends were the emergence of overall surplus accounts, i.e., the accumulation of official reserves, due to Central Bank net purchase of foreign exchange, matched by a relatively stable pound. In the 1971-74 period official reserves grew at a rapid rate but this was, nonetheless, accompanied by an important appreciation of the pound. Indeed over the period 1975-77 official reserves continued to witness a substantial increase despite the civil war (see appendix table 4 and note 9 of chapter 8).

66

PART 2

Financial Policy and Economic Growth: An Evaluation

CHAPTER 5

A Broad View of Postwar Development

This chapter has two aims: the first is to draw a broad picture of Lebanon's postwar economic performance based on the analysis of part 1; the second is to focus on the broad criteria which we shall use in evaluating the contribution of financial (monetary-exchange rate) policies to the economic development of Lebanon in the postwar period under review.

I. FEATURES OF DEVELOPMENT Looking at the period 1950-74 as a whole, the broad model of Lebanon's economic development may be described by a set of four characteristics: firstly, a relatively high rate of growth, in real terms, in the fifties, tending to drop in the sixties, and a quantitative economic expansion accompanied generally by relative financial stability;1 sec69

PART

2. P O L I C Y

AND GROWTH:

AN

EVALUATION

ondly, on the whole, a successful external economic stance by the national authorities; but thirdly, the absence of effective public economic participation and direction manifested by the absence of overall economic policy targets; and fourthly, a marked inadequacy in the qualitative nature of Lebanon's economic growth, i.e., the authorities did not pay sufficient attention to the socioeconomic content of economic development. 2 Stated differently, Lebanon experienced an impressive economic expansion but because of the lack of an appropriate domestic policy, this was not accompanied by the requisite social change. In this connection, benefits arising from a successful external economic policy stance were not exploited to bring about a change in the pattern of domestic development. Considering the political setup and the political leadership which prevailed throughout the postwar period, the development of a modern public sector conscious of its role in influencing the pattern and content of economic expansion in the direction of clearly defined social goods was very limited. We cannot assess here the causes for the shortcomings of public policy but can only stress a special postwar duality in Lebanon's postwar development up to the mid-seventies, namely, the coexistence of a vigorous private sector and a lagging public sector. Such a duality was not imperative, in that, in principle, the public sector could have drawn on available human resources in the private sector for purposes of efficient planning, organization, and execution. In practice, this was not done, except on a very limited scale. Whatever might have been the political reasons responsible for this outcome, it constituted an important flaw in postwar Lebanese development and as of the mid-seventies it stood as a challenge for future development. 70

A B R O A D V I E W OF P O S T W A R

DEVELOPMENT

II. E X P O S T O B J E C T I V E S A N D P E R F O R M A N C E It was observed in chapter 2 that Lebanese (implicit) economic policy aimed at maintaining relative financial stability and providing the private sector with the opportunity of playing the major role in economic expansion. It was also noted that in the latter years of the period under review the elements of a more active fiscal-monetary policy began to appear, and official attention to longer-term developmental planning became more pronounced (i.e., Six-Year Plan 1972-77) though this move was yet to be seriously implemented. T h e first objective was achieved (at least up to 1971). If relative financial stability, defined to mean relative price stability and the absence of persistent payments deficits, or to put it more positively the maintenance of what is regarded as a desirable minimum level of international reserves, is to be considered as the criterion for a successful financial policy, then the overall financial performance of Lebanon had been remarkable in the postwar period up to and including 1974, 3 especially when compared with that of many other countries. Lebanon's external economic policies, based on a simple exchange system characterized by the absence of restrictions on current payments and capital transfers and a flexible exchange rate, had, in large measure, helped maintain financial stability and generate a strong balance of payments performance, particularly since the authorities had adhered to cautious fiscal-monetary policies. Combined with relative political stability, these conditions attracted foreign capital, for investment as well as for refuge purposes, and encouraged domestic investment. 4 They fostered the role of Beirut as a banking and commercial center and stimulated its development as a money market. They also explain, in part, the important 71

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position occupied by trade and services in Lebanon's national income. The orderly, indeed the impressive financial growth of Lebanon in the period under review contrasts with the experiences of many other developing economies which were burdened with serious inflation (without the benefit of a rapid or an "adequate" rate of growth in real terms), and/ or heavy restrictions on international economic transactions and/or serious and sometimes persistent balance of payments deficits.5 Viewed in this context, Lebanese international economic policy had been successful. To the extent that financial stability had been accompanied by a satisfactory or a planned rate of growth, it may be argued that in quantitative terms economic performance had been satisfactory. In the Lebanese context this seems to have been the case in the fifties when, on the basis of available estimates, the rate of growth in real terms averaged over 7 percent per annum. 6 In the second half of the sixties and the first half of the seventies the financial performance (and specifically the balance of payments performance) had been more impressive than in the fifties but the average rate of growth in real terms dropped. In purely broad quantitative terms, given the strong balance of payments performance, the authorities were afforded the opportunity to attempt to accelerate what, retrospectively, appears to have been a slowing rate of growth: the relatively high level of international reserves would have permitted the authorities to pursue expansionary domestic policies without undue fears of their repercussions on the balance of payments. This does assume, of course, that any such expansion would have been subject to prescribed limits so as not to overburden the national economy. 7 The nonpursuit of expansionary policies may be attributed to the lack of an overall direction in the realm of economic policy and the 72

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absence of short-term and medium-term economic objectives.8 It should be pointed out, however, that the Lebanese authorities had taken the position (undeclared) that a relatively high level of international reserves (of which a high portion was held in the form of gold) was a desirable goal. Such a policy, according to their reasoning, would contribute to building up and sustaining the confidence of the business community in the Lebanese pound, particularly when one considers the important position occupied by capital movements in the Lebanese balance of payments. But even if one were to accept this line of reasoning, in retrospect there is no doubt that a more expansionary policy would have been permissible, supported by the flexible exchange rate policy which had been (and remains) in operation. As it turned out the pressure was mostly on the Lebanese pound to appreciate. Admittedly, in the absence of reliable price indices, it would not be possible to ascertain the rate of growth in real terms in the second half of the sixties and early seventies, though it must have been less than 7 percent (see chapter 2); again if one were to employ the criterion of relative performance, Lebanon's rate of growth was, in all probability, above average for the developing countries as a whole. Thus, in purely quantitative terms, it might be argued that taking the postwar period as a whole Lebanon's economic performance was successful, and that its liberal international economic policies, along with an atmosphere of domestic stability, had an important positive influence on economic performance. This does not contradict the presumption that with the proper implementation of public policies, Lebanon's economic performance, as measured by its real rate of growth, could and should have been improved upon in the sixties. In quantitative terms the 73

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policy problem, it may be said, related to failing domestic direction and efforts in contrast with the relatively successful performance of economic policy on the external front. T h e second objective, i.e., that of fostering the private sector, was served by the concentration of the authorities largely on the building of the country's infrastructure and by their limiting the growth in the direct participation of the public sector in the national economy (see chapter 2), while the role of governmental policy had grown it did not exercise a decisive influence on the rate and pattern of private domestic expansion. This is not surprising since, as mentioned before, the public sector did not have well defined socioeconomic goals. Its role in the social field, while existent, appeared to be achieved by ad hoc actions. Instead of leading, the public sector was led by evolving domestic pressures.

I I I . A BASIC FLAW: I N A D E Q U A C Y OF QUALITATIVE OBJECTIVES It was stated earlier that economic performance should not be judged on the sole criterion of quantitative achievement in isolation from other national objectives, which, if formulated, were not achieved; or if not formulated should have formed part of governmental policy. Developmental effort may not be measured simply in terms of aggregate rates of growth or the aggregate level of international reserves just as policy measures may not be viewed only in terms of their aggregate impact, e.g., on total savings, total credit, etc. T h e criteria for evaluating economic performance should include what in the context of the economies being examined would be regarded as desirable qualitative targets. It is in this area that Lebanese economic policy (manifested by the elements of the government's economic 74

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positions) revealed its primary shortcomings. That is, the major failures of Lebanon's economic policy were much more manifested by the absence of important socioeconomic objectives which should have been sought than by the record of achievement in quantitation terms, though shortcomings were also noted here. To have avoided these failures would, of course, have demanded a change— indeed a radical change—in the attitudes and behavior of the national authorities. Such a change would, in turn, have implied an official willingness and ability to think in terms of policy coordination, i.e., in terms of drawing up national targets—both external and internal—and the elaboration of well defined and consistent means to attain them. 9 In this connection, it should be noted that in the latter part of the period under review, announced official policies did pay some attention to socioeconomic issues. The SixYear Plan, for example, took note of some of these issues: two of its listed objectives were to create greater employment opportunities and to reduce income inequality. But again neither objective was clearly defined, and the means to attain them were not specifically discussed. According to the plan document, the projected investment program had taken account of the employment objective but the planned increase in the level of employment was not mentioned. 10 As to the reduction in income inequality, the plan document referred to tax reform as one method of achieving this objective. But no tax reform was actually envisaged in the plan itself or separately. On the expenditure side, there was a presumption that the investment program had allowed for this objective by assigning part of the expenditure to some of the regions. But again it was not shown how the envisaged pattern of expenditure would have brought this result about. Similarly, the plan document tackled other social issues 75

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(health, education, and social services). While the outstanding problems were outlined and some remedies were noted, what was planned to be carried out related only to the construction of the required physical facilities. Investment in human resources was not considered. In brief, the whole planning exercise was not carried out within the overall policy framework set for the sector concerned. IV. FUTURE DEPARTURES The objective of financial stability apart, there are at least four areas which, in the process of postwar development, deserved and deserve high priority. The first, belonging primarily to the fiscal field, is income redistribution, in real terms, in favor of low-income groups. 11 For example, the availability of free or low-cost medical, housing, and educational facilities to all citizens should, in the context of Lebanon's development, have been made possible as part of the overall national programs. Governmental efforts in this direction had been made but were very limited.12 This task could have been accomplished by raising the level of governmental revenues, modifying the existing tax system and altering the pattern of expenditures. On the side of taxes, the requisite change would have called, among other things, for the introduction of a global income tax and a greater degree of progressivity in the tax structure for the purpose of raising the level of revenue and thereby noninflationary expenditure by placing a heavier tax burden on the higher income groups (see appendix to chapter 2).13 By comparison with other developing countries, the tax ratio in Lebanon was not high and the scope for raising it existed without impairing incentives for work or inducing capital to leave the country. 14 At the level of expenditure, the change would have implied increased but 76

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efficiently controlled spending on categories which had been assigned national priority: education, housing, and the provision of more adequate health services. According to available estimates, the portion of public investment expenditure going to these fields averaged less than 8 percent of the total in 1964-71. 15 Under the Six-Year Plan, however, their combined share was raised to over 27 percent of the total, though the share of housing alone appeared to be inadequate. 16 The details of any such programs, important as they are, do not concern us here, except to emphasize, once more, the requirement of proper intrasectoral policy coordination. And as stated above, any required change in this area belongs to the fiscal field, which is outside the scope of our study. 17 The second and related area concerns the coordination of rural and urban development so as to relieve urban congestion, effect a more rational distribution of the population and work centers, and assure that the growth of urban and rural areas conforms to overall planning whose ultimate aim is to improve the quality of life. In a small country such as Lebanon, this problem should have assumed high priority. In fact, any such policy is likely to succeed partly because Lebanon has a relatively well-developed transportation network; the urban centers are well connected with various regions of the country. Again here, appropriately directed public expenditures as well as the creation of incentives for individuals could, for example, make it attractive for people to live outside urban centers assuming this becomes an aim of any urban-rural planning. This area is not directly related to financial policy. But as pointed out below, this policy could contribute indirectly through its influence on the composition of credit in favor of activities which serve this objective. The third and fourth objectives are directly related to 77

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financial policy and they include (a) the acceleration of the rate of growth, in real terms, particularly because it tended to fall in the sixties and early seventies; and (b) further diversification of the economy with two corollary aims in mind: creating wider opportunities for employment, 18 and accentuating the trend of industrial exports. The advocacy for encouraging export-oriented industries basically rests on the wider market opportunities afforded Lebanese industry abroad in contrast with the limitations of the domestic market alone.19 In summary, the assessment of the contribution of monetary-exchange rate policies to the economic development of Lebanon shall be carried out in the light of three basic criteria: their contribution to financial stability; their contribution to accelerating the rate of growth, and their contribution to the further diversification of the economy and to the corrollary objectives stated above. Chapter 6 evaluates the contribution of monetary policy to the above listed objectives by examining (a) its success in permitting the maintenance of relative financial stability, (b) the composition and proper allocation of credit, and (c) the growth in the level of monetary savings. Chapter 7 evaluates the contribution of exchange rate policy by examining (a) its role in Lebanon's balance of payments performance, (b) its influence over price trends, or in maintaining relative stability, and (c) its effects on domestic production via its relation to the exports of industrial products. Chapter 8 draws together concluding observations, primarily as regards the issue of policy formulation and the contribution of financial policy to the stability and growth of the Lebanese economy. It also outlines some of the important departures in the post-1975-76 financial policy. 78

CHAPTER 6

The Role of Monetary Policy

Under each o f the criteria we have chosen in order to evaluate monetary policy (relative financial stability, proper credit allocation, and the growth in the level of monetary savings, i.e., the strengthening of the processes of financial intermediation), we shall discuss first the factors which have tended to affect the outcome and then describe the contribution of monetary policy to this outcome. 1 The first criterion could be subdivided into two parts: relative price stability and balance of payments performance. They are closely related and together they constitute the two aspects of financial stability. Accordingly, for the purpose of the present analysis, they may be grouped together. T h e second criterion is concerned with the qualitative aspects of development, and the third relates to the ability o f the economy to husband its resources for the purposes of growth. T h e foregoing criteria have been postulated on the basis of two implicit assumptions: the first is that financial 79

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stability is conducive to economic growth or that financial instability tends to obstruct the growth process; and secondly that the authorities are called upon to influence the level and direction of economic activity and not leave it at the mercy of private market forces. In economic growth, the divergence between social and private benefits is all too common; though on purely economic grounds, neither the extent nor the form of public sector direct or indirect participation is necessarily determined a priori. Adequate performance in all the above enumerated areas is, therefore, regarded as tantamount to a positive contribution to the total national development effort.

I. R E L A T I V E

FINANCIAL

STABILITY

In quantitative terms, monetary developments (up to and including 1970) helped maintain relative price stability and permitted the almost continuous rise in the level of net foreign assets of the monetary authorities and of the banking system as a whole. Ex post (and from an accounting point of view) this is explained by the faster rate of growth in the domestic liabilities of the banking system than in the rate of growth of domestic credit with the gap between the two rates widening after 1963 (see chapter 3). There are a number of reasons for the differential rates of growth in favour of domestic liabilities. On the demand side, their rapid growth might be explained by (a) a relatively rapid rate of growth in national income (in real terms) of probably over 7 percent in 1950-63 and probably about 5 percent in 1964-70; estimates of income elasticity of the demand for money (broadly defined) in Lebanon are not yet available; the experience of other countries, however, would suggest that it is likely to be relatively high; and (b) the tendency after 1963 for the interest rates, particu80

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larly on balances held in foreign currency, to rise, reflecting the general rise in the Euro-dollar rates; the presumption here is that there is a significant positive relationship between monetary savings and the rate of interest. On the supply side the openness of the Lebanese economy along with relative domestic political stability tended to attract foreign capital into Lebanon, which strengthened and enhanced confidence in the Lebanese pound; 2 and the rapid development of the banking system, and to a lesser extent branch banking, tended to enhance real savings and to siphon them into monetary channels. As for private domestic credit, its rate of expansion was influenced by the generally conservative policies of the commercial banks—the Intra crisis notwithstanding. With certain exceptions, the commercial banks maintained relatively large cash reserves and directed most of their operations to ventures which normally were of short duration and did not carry a substantial risk. Furthermore, a large portion of investment expenditure was financed by the retained earnings of individual investors or family-owned enterprise, in direct competition with bank credit operations.3 An important contributing factor was the relatively mild net impact of governmental operations on the credit flow: whenever budgetary deficits arose, they were of relatively small magnitude. This experience contrasts with the experiences of many other countries where substantial deficit financing has been a major source of an imbalance in the economy. In brief, despite the fact that until recently no cash reserve requirements were imposed nor were credit operations subject to any other legal or governmental policy constraints, the rate of credit expansion tended (up to 1970) to lag behind the growth in liabilities, particularly in the past decade or so. Indeed, to the extent that a comparison is made 81

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between the pre- and post-1964-70 series, then the decline in the rate of growth of both credit and liabilities in the latter period is striking. Since the pre-1964 series, in particular, are not reliable, any reasons offered to explain this apparent tendency have to be in the nature of conjectures. 4 With this caution in mind, the fall in the rate of credit expansion might, among other factors, be attributed to the Intra-crisis which had some depressive effects on economic and credit developments in the years immediately following the crisis; the periodic political tension which prevailed after the 1967 June war might have been an additional adverse factor, though, if it were, it would appear to have had a limited economic impact. Yet a third factor might have been the enhanced profit opportunities abroad, as manifested, for example, by substantial financial investments in the Euro-dollar market, real estate, and other business ventures. On the other hand, the lower rate of growth in domestic liabilities, as compared with the pre1964 period, might have been influenced by the lower rate of growth in national income. In the period 1971-74, as discussed in chapter 3, credit expanded at a substantial rate, averaging annually about 27 percent. 5 Combined with imported inflation and oligopolistic practices, this factor led to a marked rise in domestic price level. How does public monetary management fit in the above picture? Excluding the last one or two years of the period under study, it could be said that the basically passive role of the monetary authorities had both positive and negative effects. To the extent that the authorities' passiveness reflected a policy position based on the belief that an unregulated private sector could attain and maintain financial stability, then such belief had been sustained as far as relative domestic price stability is concerned, at least up to 82

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1971. However, given a flexible exchange rate policy, the substantial growth in the level of international reserves could have permitted the authorities to stimulate economic activity by following a more expansionary policy, subject to certain limits.6 This could have been achieved without jeopardizing either relative stability or the maintenance of a reasonable level of international reserves. Passiveness of public policy, however, implied the absence of targets and, therefore, the lack of well-defined and coordinated moves to either correct potential maladjustments or to take advantage of existing economic opportunities. Furthermore, as the experience of other countries has shown, and indeed as have the tendencies which prevailed in 1971-74, there is no a priori reason to believe that private economic behavior would necessarily assure financial stability either domestically or internationally. With the manifestation of inflationary trends after 1971, measures aimed at curbing pressures due to domestic causes were not put into effect until mid-1974.7 And effective steps were not taken, except toward the end of the year when, for the first time, credit ceilings were established (see chapter 4). Prior to that, the authorities had relied primarily on increasing reserve requirements and the establishment of marginal reserve requirements. As far as their impact on credit expansion in 1974 was concerned, the effectiveness of such measures was weakened by three factors: 1. The authorities pursued, at times, contradictory policy measures, arising from the nature of the two objectives being pursued, i.e., the countering of inflation and the stemming of the appreciation of the pound. To illustrate, while at one time reserve requirements were raised in order to absorb excess liquidity, shortly afterwards required reserves against deposit obligations denominated in foreign exchange (half of which at least could be held in domestic 83

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currency) were reduced and eventually eliminated altogether in order to encourage the holding of foreign exchange deposits by the commercial banks. Similarly, in July 1974, a 15 percent deposit was required against the opening of letters of credit for import purposes. This measure was imposed in order to reduce the pace of credit expansion. However, it might also have served to reduce the demand for imports, which would have had contrary effects to those desired on the foreign exchange market. 8 2. The monetary impact of the change in reserve requirements was likely to have been limited even if foreign exchange deposits had not been exempted. Actual reserves which were being maintained by the banking system remained greater than the required reserves after the measures were put into effect. The position of individual banks might, of course, have varied greatly.9 3. The effectiveness of domestic policy measures in an open economy such as Lebanon's was curtained by the impact of outside factors (i.e., the then prevailing worldwide inflation) on the domestic price level. Inflation in other words was in part imported, and to that extent, its causes lay effectively outside the control of the authorities. Monetary policy was expected to have become more effective beginning late 1974 when credit ceilings were set establishing a maximum permissible credit expansion (to residents) of 6 percent in the last quarter of 1974, 12 percent in the first half of 1975 and another 12 percent for the second half of the year, for a total of 24 percent during the course of 1975. To appreciate the significance of such ceilings would, in part, require a knowledge of the demand for money in Lebanon, the rate of income expansion in 1975, etc. These are not yet available. In practice, the breakout of the civil war in 1975 and its consequent prolongation overshadowed the impact of policy measures which 84

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had been designed for normal circumstances. What can be said, in this connection, is that the year 1974 witnessed the beginning of an active monetary policy, prompted by the change in the price trend in the early seventies. As it turned out, this policy was being implemented toward the end of an era which terminated with the civil strife of 1975-76. Irrespective of any shortcomings of the announced policy, its overall effects, especially in 1975-76, were superseded by the events which hit the country and led to a deceleration in the rate of credit and deposit creation especially in 1976. (For data on financial development up to and including 1977, see Appendix table 4.)

II. PROPER C R E D I T

ALLOCATION

Credit is mainly created to finance investment expenditures, though it is not the only means of finance. In assessing the "adequacy" of credit allocations, one therefore has to assess, as a first approximation, the composition of investment. This assessment, in turn, has to be carried out in the context of national aims and the available alternative means to attain them. 10 Once these elements have been ascertained, it should be possible to draw up a list of sectoral priorities on the basis of which sectoral investment expenditures, and by implication, credit flows could be considered. As we have already seen, in the Lebanese context there were no explicitly declared national aims of development. 11 At the same time, the concept of permitting economic behavior to be determined by purely market forces could not be acceptable, as seen above; in fact it proved to be inadequate. Alternatively, one could establish a list of objectives against which conjectures may be made as to the adequacy of past credit flows. In the light of the Lebanese economic experience, two 85

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broad objectives, relating to financial policy, were pointed out (chapter 5): the acceleration of the rate of growth in real terms; and further diversification of the economy with two corollary aims in mind: (a) creating wider opportunities for employment, and (b) accentuating the trend of industrial exports by placing greater official stress on the creation of export-oriented industries.12 The objective of effecting a proper coordination between urban and rural development can be served indirectly via monetary policy and may therefore be regarded as a third corollary objective. There are, in other words, at least three criteria by which priorities can be established: contribution of the sectors to the growth in national income;13 contribution to the level of employment; and their contribution to the redistribution of work centers.14 At a broad sectoral level, the above criteria would seem to imply that the composition of credit flows in the period under study with its heavy emphasis on trade and services (see statistical appendix table 5) would have to be modified:15 a greater portion of future investments would need to be channeled to nontrade activities, in particular certain types of industrial and agricultural ventures. 16 The attempt to translate the above aims into sectoral policy proposals is bound to be seriously handicapped by the lack of relevant data and empirical investigations.17 Nonetheless, the broad picture which seems to emerge is the following: 1. At an aggregate level, the acceleration in the rate of growth would call for a higher level of investment expenditures, particularly if the aggregate marginal capital-output ratio is expected to rise. This increase should be matched by increased domestic savings. But even if this should not prove totally feasible, particularly in the aftermath of the 1975-76 war (or sufficient foreign financing is not forthcoming) a level of credit expansion faster than the rate of 86

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growth in deposits could be envisaged, without fear of undue repercussions on balance of payments performance, provided a flexible exchange rate policy continues to be in operation and the rate of credit expansion is subject to certain limits. In practice, Lebanon's balance of payments did not impose a constraint on development efforts. The opposite was true. However, as the experience of the first half of the seventies shows, attention must also be paid to the impact of credit expansion on domestic prices, particularly if inflation is imported, in which case the balance of payments can no longer function as a deflator of domestic pressures. 2. If it is assumed that (a) the social marginal productivity of activities in the industrial and agricultural and infrastructure projects remains higher than that in trade activities, and (b) the former activities satisfy the other objectives listed above, then they should absorb a larger share of future investment financing18 without jeopardizing the necessary credit flows to trade and services activities. 3. The envisaged modifications in the directions of credit flows would seem to call for two related developments: (a) the establishment of the required institutional framework, i.e., the creation of institutions concerned with medium- and long-term credit operations, which implies the development of a capital market; and (b) a more effective public monetary management. 19 Both of these points are taken up in the following section. I I I . GROWTH OF FINANCIAL SAVINGS: ROLE OF FINANCIAL INTERMEDIARIES Financial savings comprise changes in the assets of the nonfinancial private sector (inclusive of governmental cor87

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porations). This would include changes in the claims of this sector on commercial banks, noncommercial banks, moneylenders, insurance companies, and other financial institutions. In practice, data on transactions by moneylenders are not available; even as regards financial institutions, series are often only available, as in the case of Lebanon, for the banking system.20 The growth in financial savings will, therefore, be measured by the changes in the volume of deposits with commercial banks; these changes probably comprise the bulk of financial savings,21 and their evolution can be regarded as representative of the overall trend in such savings. As a percentage of GNP, financial savings (FS/Y) averaged in 1970-73 over 17 percent; this ratio would rank Lebanon closer to the developed than to the developing economies.22 Similarly, the ratio of deposits to national income (DS/NI) averaged in the same period about 100 percent, which ranks Lebanon among the developed economies with high ratios. It would be hazardous to attempt to trace the evolution of monetary savings in Lebanon in the postwar period because of the fragmented nature and unreliability of the data for earlier years. On the basis of available data, nonetheless, it would seem that both ratios were not substantially dissimilar: somewhat higher in the case of FS/Y, and a little lower in the case of DS/NI. The ratios have fluctuated considerably from year to year, which is not surprising when one considers the openness of the Lebanese economy and the free movement of capital. While the financial ratios for Lebanon as they stood at the mid-seventies might have been relatively high by comparison with other developing economies, its financial structure was (and is) not yet adequately developed. Specifically, the processes of financial intermediation in Lebanon 88

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should have been evolved with three considerations in mind: (a) to raise the level of savings and increase its financialization by developing further the financial structure and instruments; (b) facilitating the desired modification in credit flows, and (c) modifying the social distribution of gains. Raising the level of savings is warranted by the requirement for a higher level of domestic investment. The growth of savings in the context of an efficient financial system implies better opportunities for a more efficient allocation of resources. The development of the Lebanese financial structure would have had (and has) to proceed simultaneously at the level of institutions and of debt instruments. Thus, it is not only that the institutions for medium- and long-term credit should have been developed (or existing institutions modified to be able to handle longer-term credit) but new debt instruments should also have been introduced and adapted to the requirements of savers, especially the small savers. Lebanon attained a stage in its economic development where this aspect of financial policy should have received, and should receive, serious official attention. The government might have helped by creating, or participating in the creation of, specialized financial institutions and, initially, in stimulating the creation of debt instruments by guaranteeing them. In particular, the creation of savings institutions in Lebanon would seem to have been, and is likely to remain, highly desirable, especially as the experience of other countries has demonstrated their success in converting liquid assets into longer-term lendable funds. 23 Returns on financial and other assets in Lebanon have been market-determined; they were not influenced by any governmental intervention purposely designed to depress them;24 nevertheless, even if this were to remain 89

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the case, in the future the authorities would have to keep careful watch on the general trend in interest rates to insure proper coordination with other aspects of economic policy. In brief, the development of an efficient capital market should have received, and should receive in the future, high national priority. The fact that economic decisionmaking in Lebanon was substantially decentralized would have argued for relying on the financial system to husband resources, provided the financial process was properly influenced by the government in order to serve the purpose of development. 25 Indeed, the achievement of the other two objectives would have implied governmental intervention, though we shall not deal here with the specific methods which the government could have adopted to attain them. It is possible that in the post-1975-76 phase, economic decision-making in Lebanon might not remain as decentralized as it was before. The fiscal system, in particular, is expected to play a greater role than previously in the national economy. Such a development, nonetheless, would not lessen the need for a concerted effort to develop Lebanon's financial system and structure to enable it to make a more effective contribution—along with the other components of the economic system—to the economic development of Lebanon. It has been pointed out that the growth of financial intermediation might weaken the effectiveness of monetary policy. This argument rests on the assumption that financial intermediaries can offset monetary policy which is traditionally directed at commercial banking activities. The extent to which this assumption holds would depend upon the ease with which funds can be transferred from one financial institution to another. A certain degree of substitution is expected to exist, i.e., financial markets are not likely to be totally separated from one another, and therefore 90

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monetary policy cannot be completely offset. These observations are primarily applicable to highly developed financial markets.26 They may not be seriously relevant in the context of Lebanese financial development. They do underscore, nonetheless, the importance of examining the processes of monetary expansion with a view to applying available monetary tools more effectively in serving desired economic goals, but also in order to develop new tools which would enhance public monetary management even as financial markets become more developed and complex.

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CHAPTER 7

The Role of Exchange Rate Policy

We examine in this chapter the role of Lebanon's flexible exchange rate in certain areas where traditionally it is expected to exercise an important influence—namely: overall balance of payments performance; price stability; exports of industrial products—and then draw some conclusions from the Lebanese experience which may be of relevance to the development of small open economies. Before we proceed with our task, however, a few introductory observations are called for: 1. Any attempt to quantify the influence of the exchange rate is constrained, as will be later indicated, by existing limitations on relevant data. Nonetheless, wherever it was deemed useful, regressions were run in an effort to quantify results which may have been arrived at through intuitive judgment, bearing in mind that the results which have been obtained can only be regarded as being tentative in nature. 2. The investigation is divided into two basic periods, 1950-70 and 1973-74. This demarkation is necessitated by 92

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the apparent lack of relevant official exchange rate data for the second half of 1971 and all of 1972.1 Further, the first half of the seventies witnessed two notable developments, in contrast with the prevailing trends in the previous period. They were an important inflationary price trend and a substantial appreciation of the pound. 3. Due to lack of the requisite data, the attempt to quantify the impact of the exchange rate movements on industrial exports had to be confined to the 1950-70 period only. As a general observation, in the larger number of regressions which have been run, autocorrelation appeared and was corrected by the Cochrane-Orcutt iterative process.2 The chapter is divided into four parts: the first discusses the impact of exchange rate policy on the balance of payments performance; the second examines the influence of exchange rate movements on the domestic price level; the third assesses the impact of the exchange rate on the expansion of industrial exports, and the fourth summarizes the principal results of our investigation and attempts to draw some conclusions based on the Lebanese experience.

I. E X C H A N G E R A T E P O L I C Y A N D B A L A N C E OF P A Y M E N T S PERFORMANCE

The consistent flexible exchange rate policy pursued by Lebanon has influenced balance of payments performance favorably both directly and indirectly. Its direct influence was manifested in placing the burden of balance of payments adjustment on movements in the rate, permitting it to respond to market forces, rather than on domestic and/or external policy measures. The authorities, accordingly, could continue maintaining a liberal exchange system, free of any restrictions on current payments or capital 93

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transfers, without undue fears of the possible loss of international reserves3 or the need to enforce specific domestic adjustments which balance of payments developments might have required. Though in practice they did not, the authorities could have pursued suitable development strategies, free from the constraints which a fixed exchange rate might have imposed. 4 Equally important, the ability to maintain freedom of exchange operations, along with relative financial stability (at least until the early seventies), have indirectly contributed to a strong balance of payments performance, particularly, as already noted, via the capital account. These characteristics helped make Lebanon, at least prior to the war of 1975-76, an attractive outlet for capital inflows,5 and stimulated banking and trade operations. 6 Lebanon's attractions for foreign capital, however, extended beyond the freedom of capital movements and relative financial stability, the inflationary pressures of the first half of the seventies notwithstanding. They included (up to 1974) relative political stability, despite occasional crises which the country had faced, the dominance of the private sector, and the absence of important tax and other fiscal levies which could have discouraged the inflow or encouraged the departure of capital. The dramatic post-1973 increase in financial resources of Arab oil countries had been expected, as recently as early 1975, to enhance the inflow of Arab capital into Lebanon and to stimulate the role of Beirut as a financial center. Prior to the civil war of 1975-76 Beirut had been attracting a growing number of foreign corporations which cho6e it as their regional headquarters. Capital inflow, in turn, stimulated the growth of a vigorous banking system and a money market, with a shift in the latter part of the period under review toward the development of a capital market. 7 Further, substantial net capital inflows 94

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which more than covered traditional deficits on the current account permitted a higher level of gross investments than that of national savings, though in recent years, the discrepancy between the two was limited.8 It may be difficult or perhaps incorrect to ascribe a strong balance of payments performance primarily to the maintenance of a flexible rate. T h e balance of payments outcome is influenced by many factors, some of which were noted above. Nevertheless, the pursuit of a flexible rate policy helped effectively maintain a liberal exchange system which reinforced domestic stability with its favorable influences on the balance of payments. While the authorities' intervention on the foreign exchange market helped stabilize the rate, they seem to have been oblivious to the opportunities for domestic development which their exchange policies—a liberal exchange system based on a flexible rate—did provide.

II. E X C H A N G E R A T E P O L I C Y A N D PRICE STABILITY The relationship between exchange rate movements and price stability has two aspects to it: the first concerns the extent to which movements in the rate affect the general price level and the second is the actual fluctuation in the rate or its underlying trend. That is, if a significant relationship is established, the impact of the exchange rate would rest on the degree of its change. It has already been indicated that the long-run trend of the exchange rate was relatively stable, i.e., changes were gradual. T h e more rapid variations took place at the beginning and at the end of the period under review. In an effort to quantify the impact of the exchange rate on the price level in the two periods under study, simple regressions 95

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were run with the consumer price index as the dependent variable and the exchange rate (LL/$) as the independent variable for the periods 1950-70, 1954-70, 9 and 1972-74, respectively.10 Lagged regressions were also tried on the assumption that the effect of the exchange rate on the price level might not have made itself felt before several months had elapsed. 11 No significant lagged relationship could be established and it may, therefore, be tentatively assumed that the effect of exchange rate movements on the price level, if any, was and is transmitted relatively quickly. The results are summarized in table 7.1. A striking outcome is that the impact of the exchange rate on the price level was much more important in 1950-70 than in 197274, despite much greater movements in the exchange rate during the latter period. 12 The following explanation may be offered: the 1950-70 period was characterized by the absence of domestic pressures (on both the demand and cost sides), by the emergence of relatively modest balance of payments surpluses, and the absence of imported inflation. Thus, the exchange rate with a significant coefficient in the log function of 1.88 was able to exercise a much more important influence on the price level (R2 = 0.79)13 than did other factors, particularly since foreign economic transactions formed a large portion of GNP. It would appear that the relative stability of the exchange rate contributed significantly to the relative stability of the domestic price level. During the period in which the exchange rate was relatively most stable—1954-70—the change in the general price level was most moderate. The explained variation attributable to the exchange rate was also reduced. The inclusion of additional explanatory variables does not eliminate the significance of the exchange rate though it reduces its coefficient. When included with the exchange rate, domestic 96

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credit, for example, appears as another significant explanatory variable but its coefficient is substantially smaller than that of the exchange rate while R2 is raised only a little.14 In contrast after 1971, domestic pressures intensified, partly due to an accelerated expansion in domestic credit, and the emergence of inflation abroad. Their influence on the domestic price level would appear to have overpowered that of the exchange rate, the significance of which as an explanatory variable was practically nonexistent (see table 7.1).15 The inclusion of other explanatory variables in the function does not basically alter the picture: the coefficient of the exchange rate appears to be consistently insignificant. Domestic credit appears as the most significant variable, accounting for the larger portion of the variation in the price level.16

III. E X C H A N G E RATE POLICY INDUSTRIAL EXPORTS

AND

For the bulk of the period under review, i.e., 1952— 1970, the relative stability of the rate may be interpreted as meaning that important variations in the exchange rate were not visualized by the authorities as a necessary tool for aiding Lebanese exports. Exchange rate policy, in other words, was intended to serve primarily other objectives. Or it may be argued that the prevailing level of the rate was not regarded as posing a constraint on the expansion of Lebanese exports. In practice, the influence of the exchange rate over the level of exports would have depended primarily upon the relationship of the Lebanese pound to the currencies of the major competitors of Lebanon, relative rates of inflation in Lebanon and abroad, in particular as concerns the cost element of export produc97

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TABLE

7.1

EVALUATION

LEBANON: M U L T I P L E REGRESSIONS WITH THE P R I C E I N D E X AS T H E D E P E N D E N T

VARIABLE3

Coefficient of Explanatory Variable Equation

Constant

ER

DC

D-W

R2

L o g PI = f ( l o g E R ) 1950-70 Annual data

-0.80

1.88 (8.60)

2.45

0.79

L o g PI = f ( l o g E R ) 1954-70 Annual data

-0.01

0.88 (3.04)

2.31

0.35

11.26

0.18 (4.69)

1.72

0.003

-3.97

1.53 (10.42)

0.09 (9.44)

1.48

0.88

1.18

0.08 (0.33)

0.34 (3.01)

1.62

0.59

PI = f ( E R ) b 1972-74 Monthly data L o g PI = f(log ER, log DC) 1950-70 Annual data L o g PI = f(log E R , log DC) 1972-74 Monthly data

Corrected for serial correlation by the Cochrane-Orcutt iterative process. ^ h e log function does not give significant results. December 1972 is the base period. Notation: PI = Consumer price index. ER = Exchange rate (EL/US 1$ or weighted unit of foreign currencies). D C = Domestic credit. D-W = Durhan-Watson statistic. R 2 = T h e ratio of explained variation to total variation adjusted for the degrees of freedom. Bracketed values refer to the t statistic. a

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tion, the effectiveness of promotional efforts and, more generally, demand conditions for Lebanese and competing products, respectively. As a general observation, prior to 1971 the exchange rate relationship between the Lebanese pound and other currencies in Lebanon's major export markets did not change substantially. Competitive depreciation did not arise as an issue. It was noted above that the general domestic price level in Lebanon tended to rise very gradually: inflation, whether in its demand or cost aspects, was not a domestic problem. Lebanon's performance in this regard was probably better than that of its main competitors. 17 To that extent, the competitive position of Lebanese exports, in real terms, probably improved. Looking at industrial exports, in particular, given the impressive expansion which they registered during the fifties, the sixties, and early seventies,18 the level around which the Lebanese pound tended to fluctuate during this period would appear to have been, if not favorable, at least nonrestricting to Lebanese industrial export expansion. With a satisfactory level of exchange rate, and relative domestic price stability, the expansion in industrial exports rested, to a large extent, it would seem, on other factors, such as promotional activity, incentives, availability of a labor force 19 supported by improved quality of export products which enhanced their competitiveness, particularly in the main Lebanese export markets, i.e., the Arab countries. 20 As a preliminary assessment of the above contention, regressions were run for the period 1952-70 with the exchange rate (£L/$) as the independent variable and various categories of industrial exports (by volume) as the dependent variable.21 The picture which emerged was the following: Movements in the exchange rate had a significant impact in respect of only three groups of exports, 99

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TABLE 7 . 2 LEBANON: REGRESSIONS WITH INDUSTRIAL EXPORTS AS THE D E P E N D E N T VARIABLE AND THE EXCHANGE RATE ( E R ) AS THE EXPLANATORY VARIABLE, 1952-19703

Equation

Log chemicals = f(Log ER) Log common metals = f(Log ER) Log transport equipment = f(Log ER)

Constant

Coefficient of Exchange Rate (ER)

D-W

R2

2.83

0.24

-0.35

24.15 (2.53)» 8.47 (2.54)

2.37

0.24

-42.43

17.54 (2.28)

1.89

0.19

-33.15

"Annual data used. Corrected for serial correlation by the CochraneOrcutt iterative process. b Bracketed values refer to the t statistic. Notation: D-W = Durhan-Watson statistics. R2 = The ratio of explained variation to total variation adjusted for the degrees of freedom.

namely chemicals, common metals, and transport equipment. 22 In all cases, however, the explained variation (R2) attributable to the exchange rate was either close to or less than one fourth (see table 7.2). Further, while all of them represented rapidly expanding groups of industrial exports, their combined share accounted in the latter part of the sixties to less than one fifth of the total. It would follow, therefore, that the factors largely responsible for the expansion of industrial exports in the 1950-70 period lay elsewhere. The above picture began to change in the first half of the seventies, during which it was noted that the Lebanese 100

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pound had appreciated substantially. Existing data does not permit a measurement of the responsiveness during this period of industrial exports to changes in the exchange rate. Among other factors, such responsiveness will have been influenced as already observed by the import content of the exported product. The higher the ratio of imported raw materials in the finished product, the less is the constraining influence on export expansion of an appreciation in the Lebanese pound. While it is not yet possible to quantify the impact of the exchange rate movements on industrial exports in 1971-74, one study indicates that in accordance with a sample survey of selected industrial concerns, the number of concerns which reported to have suffered from the appreciation of the pound substantially outnumbered those which either benefited or seemed unaffected. 23 However, in terms of aggregate export values, this outcome portrays a biased picture. The weight of exports which had been either stimulated or remained unaffected by the appreciation of the pound was much greater than the numerical share of the concerns which had reported to this effect. In 1972, the share of exports of metals which appeared to be unaffected and of textiles (a large share of which appeared to be either unaffected or stimulated) comprised 25 percent of the total. The effect of the appreciating pound on the trend of exports does not appear, therefore, to have been as adverse as indicated by the reported outcome of the industrial concerns. Since available data does not permit a proper quantification of the effect, no firm conclusion can as yet be established concerning the responsiveness of industrial exports to the exchange rate in 1971-74. The performance of such exports in this period was, nonetheless, impressive: they increased from £L 458 million in 1971 to £L 1,350 million in 1973 or an increase of about 180 percent. 24 101

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Apart from any direct influence it might have exercised, exchange rate policy had an important indirect influence over industrial expansion. This is seen in its contribution to general and financial economic stability. T h e pursuit of a flexible exchange rate policy removed potential balance of payments constraints which might have been imposed by a fixed exchange rate system. Such constraints could, in principle, have led to domestic difficulties particularly during times of important political developments. One cannot attribute, however, to the flexible rate policy a specified contribution independent of the exchange system of which it formed a central part. As mentioned earlier, the maintenance of a liberal exchange rate system promoted confidence in the Lebanese economy and helped boost banking and trade operations. This, in turn, helped generate a strong balance of payments performance which, over the period u n d e r study, tended to strengthen the Lebanese pound, especially during the first half of the seventies. Central Bank intervention on the foreign exchange market in support of foreign currencies led to the accumulation of substantial foreign exchange reserves. T h e above developments acted favorably on domestic operations by generating increasing confidence in the domestic economy. At the same time, it does not necessarily follow that had Lebanon maintained a fixed exchange rate system, domestic constraints or economic instability would have necessarily arisen. In practice, u p to 1971 the exchange rate moved gradually, occasional Central Bank interevention and occasional sharp or short-term fluctuations notwithstanding. Given the lack of a significant inflationary trend (at least u p to 1971) and sustained political upheavals, an exchange rate—pegged to an appropriate level—might have been maintained without u n d u e strains on the economy. Indeed, one of the major arguments for a fixed exchange rate is the 102

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stability it is supposed to impart to the domestic economy, provided such a rate is realistic and is, therefore, defensible. Nonetheless, in the Lebanese context, the pursuit of a flexible exchange rate which up to 1970 the authorities could manage within relatively narrow range and, thanks to noninflationary trends, tended to move gradually over time, enabled Lebanon to reap the main advantages of both a floating and a fixed exchange rate system. While the effects of a substantial appreciation of the Lebanese pound on industrial exports during 1971-74 could not, as yet, be quantified, such an appreciation does raise a policy issue which the authorities may yet have to tackle. Let us assume that if the pound were to appreciate to, and remain at, a certain level, it would then have important adverse effects not only on industrial exports but on the services sectors as well.25 This issue is perhaps placed in sharper focus when the appreciation is attributable to capital inflows, as was the case in 1971-74, rather than to an increasingly favorable current account. What course of policy action would be open to the national authorities? The first course of action would normally be to stem the appreciation of the pound through intervention on the exchange market. However, the ability of the monetary authorities to do so is dependent upon the basic underlying balance of payments trend. If the appreciation is due to seasonal or temporary factors, it can intervene effectively to influence the level of the rate. The Central Bank of Lebanon followed this policy occasionally throughout the period under review. But if the underlying forces are of a sustained nature, the pound would ultimately have to be permitted to appreciate to a level which would permit the restoration of equilibrium.26 If this level is judged to be undesirable from a policy point of view, then three categories of alternative policy measures might be considered: 103

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(a) those aimed at reducing capital inflow; (b) splitting the exchange rate into (i) a rate of current transactions, and (ii) one for capital transactions; and (c) while permitting the pound to appreciate, the authorities will (i) act to reduce trade restrictions and (ii) provide the necessary incentives to the exports of goods and services. Controls over capital inflow via some form of exchange control would have proved (and would be) harmful to the Lebanese economy. The confidence in the Lebanese pound and the development of the economy itself owed substantially to the liberal exchange system which the authorities had consistently maintained, apart from efforts which were being made to further the role of Beirut as a financial center. Control of important inward capital inflow via measures to influence the foreign exchange position of the banks can only be regarded as a temporary accommodation. A dual exchange rate policy has been extensively discussed in the literature as a possible course of action. But as has often been pointed out, a dual rate policy has many inherent dangers, not least of which are the great difficulties of properly administering a dual rate system. Interested parties tend to pressure the authorities in order to adapt and alter existing rates with a view to fostering their own special interests, and leakages (e.g., transfers effected at unauthorized rates) tend to develop, thereby weakening the efficiency of the system. The experience of many countries indicates that such systems had often failed to achieve their stated objectives. Once introduced, they tend to be perpetuated beyond the periods for which they were intended. Moreover, the tendency for proliferation of rates appears to be strong.27 Equally importantly, dual rate systems were not designed or advocated as policy models of economies such as Lebanon's. In the literature, an argument for a dual 104

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rate structure has sometimes been made in respect of developing countries which rely on a few primary export products that may be facing an inelastic world demand. 28 In some cases, dual rate systems have been considered as a mechanism which may be employed by industrialized countries to insulate the effects of speculative capital flows from the domestic economy. In other cases, different objectives were postulated. 29 Whatever the desired objective, generally the underlying assumption was that the national authorities were maintaining a fixed (but adjustable) exchange rate. The merits and demerits of a dual rate system were analyzed with this assumption in mind. In recent years, managed floating effectively replaced the fixed rate systems. And dual rate structures have to be compared with what has been termed a hyprid system, in which both capital and current rates float.30 When the objective is to control capital flows, an essential prerequisite is the effective separation between the markets for current and capital transactions and the implementation of a policy of neutral intervention on the part of the Central Bank.31 Otherwise, the efficiency of the system will be greatly reduced. But to maintain a proper separation, comprehensive controls may be required which may adversely affect trading relationships.32 In the Lebanese context, the argument for a dual rate system tends to be weak. For one thing, one of the major drawbacks of Lebanese development has precisely been the inefficiency of the administrative setup. In the past, a proper separation of the two exchange markets could hardly have been accomplished. But even if the administrative setup is not inefficient, the problems which an effective separation would entail, specifically comprehensive controls, would render the choice of a dual rate system inappropriate. Furthermore, Lebanon has consistently main105

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tained a flexible rate policy; for the purpose of controlling capital flows, the dual rate system—especially under conditions of an effectively floating official rate—does not differ greatly from a unified floating rate system. Based on the Lebanese experience, capital flows have tended to be of an equlibrating rather than of a disequilibrating nature. Clearly, the prevalence of relative stability was a contributing factor in this regard. But even if unstable domestic conditions will be postulated, there would be no a priori reason to assume that a dual rate structure would be more efficient than a unified rate system. The opposite may be true. 33 To sum up, given the inherent difficulties which face its implementation, a dual rate policy appears to be an inferior alternative to a unified flexible rate policy. This leaves the appreciation of the pound as the logical outcome to the problem at hand combined with (a) a reduction of import restrictions, and (b) the extension of subsidies to the affected industries. But again, import restrictions (primarily tariffs) serve in Lebanon as an important source of budgetary revenue and any adjustments in them would necessarily have to take into account their impact on revenues. In practice, this would leave a combination of Lebanese pound appreciation and export incentives (in effect subsidies) as the proposed solution.34 The appreciation of the national currency will be the proper response to balance of payments surpluses, while subsidies or an increase in existing ones would be addressed to stimulating export industries which might be severely and adversely affected by the appreciation of the domestic currency. The extension of subsidies would require a fiscal system which would be capable of shifting or raising the resources which are needed to finance the subsidies. In addition, there must exist a readiness on the part of the authorities to withdraw 106

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the subsidies once the situation has changed, e.g., the pound depreciating, as in fact happened in late 1975 and the first half of 1976. The extent to which the then existing fiscal system could have provided the necessary flexibility to accomplish such objectives is a separate issue which does not concern us here.

IV. S U M M A R Y A N D

CONCLUSIONS

It may be useful to summarize the principal points of this chapter as follows: 1. Despite the openness of the national economy and the importance of capital flows in the Lebanese balance of payments, exchange rate movements were relatively limited and the long-run movement of the rate tended to be gradual up to 1970. Admittedly, occasional Central Bank intervention might have helped reduce the magnitude of fluctuations; however, the policy of the Bank was not aimed at obstructing basic underlying trends. Balance of payments adjustments were, thus, accomplished without recourse to substantial movements in the rate. In the first half of the seventies, continuous sizable capital inflows caused the pound to appreciate substantially, Central Bank intervention notwithstanding. 2. In contrast with the above picture, a significant relationship between the exchange rate and price level was found to exist in 1950-70 but not in 1973-74. The reason was that in the former period, private domestic and external factors contributed to price stability while the gradual movement in the exchange rate appeared as an important factor influencing the gradual movement in the price level. In the first half of the seventies, prevailing domestic and 107

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external factors caused an upward push in prices. Their influences on the price level apparently overpowered that of the exchange rate. 3. In the period 1950-70, the influence of the exchange rate on the expansion of industrial exports appears to have been limited. Given their impressive expansion it would appear that the prevailing levels of the exchange rate were generally favorable to or, at least, nonrestricting to the expansion of industrial exports. Indirectly, however, the beneficial effects of the flexible exchange rate policy were reflected in its contribution to the general economic and financial stability of the economy. For the 1971-74 period the existing evidence remains inconclusive. 4. Were basic balance of payments trends to cause the Lebanese pound to appreciate to, and be maintained at, a level which is considered undesirable from a policy point of view, then the proper response would not be in forcing an artificial lowering of the value of the pound. Rather, the authorities should permit the exchange rate to restore external balance while invoking other instruments in order to help achieve other (domestic) objectives. Fiscal policy, in particular, should be sufficiently resilient to permit the required changes without undue delays. Based on the preceding observations, it may be concluded that while employing a flexible exchange rate policy to effect balance of payments adjustments, Lebanon succeeded up to 1970 in maintaining relative domestic stability and promoting industrial exports. In the first half of the seventies, price stability was upset, but this was, to a large extent, due to external factors which lay outside the control of the national authorities. Available evidence concerning the impact of the appreciating pound on industrial exports remains as yet inconclusive. 108

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The relevance of the Lebanese experience concerning the role of exchange rate policy in small open economies may be stated as follows: 1. The fact that Lebanon's sources of foreign exchange were not dependent upon a few primary export products facing an inelastic world demand has implied that movements in the exchange rate—in particular a depreciation of the pound—did not pose undue constraints in respect of export earnings and the reallocation of resources. Lebanon's diverse export earnings and sources of imports have constituted a strong argument for an independently floating unified exchange rate to effect balance of payments adjustments. 2. The existence of a relatively well developed foreign exchange market has facilitated the role played by the exchange rate in the adjustment process. This is important in economies such as Lebanon's, where foreign economic transactions form a large portion of GNP. While a smoothly functioning exchange market may have contributed to the stability of the rate, this was also a reflection of the relative domestic stability which characterized the Lebanese economy up to 1970. The relative stability of the exchange rate and of the domestic economy were clearly mutually reinforcing. Given the openness of the economy these factors increased the level of confidence and stimulated the inflow of capital. 3. A contributing factor to the relative stability of the exchange rate is the fact that capital flows appear to have been responsive to the movements in the exchange rate. Speculation tended, on the whole, to be of an equilibrating rather than a disequilibrating nature. But the cautious economic policies which have been followed alongside relative political stability (up to 1974) were important elements in this regard. 109

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4. It may be argued that the prevalence of an exchange rate level which was not unfavorable to the expansion of industrial exports was fortuitious. Balance of payments developments were such as to bring about a suitable exchange rate. This argument calls forth two observations: first, the national authorities did not pursue a policy of nonintervention on the exchange market. On the contrary, the Central Bank frequently intervened to stem the appreciation of the pound. To the extent that the exchange rate did not move totally freely, it was not eliminated as a policy instrument, 35 but second, it is possible to argue that the magnitude of capital flows were such as to permit a successful intervention policy. This brings us to the fifth point. 5. The Lebanese authorities did not take full advantage of the benefits which were afforded by the liberal exchange system and the flexible rate policy. The main reason is that the concept of policy coordination was not part of official thinking. This defect mainfested itself in two related areas: the absence of a developmental strategy or even an outline for such a strategy; and the extremely limited use of available and potential policy instruments. It may be true that governmental intervention policy on the exchange market aimed at preventing the undue appreciation of the pound, probably because the authorities wished to preserve the competitiveness of national production. 36 This stand, however, was largely ad hoc in that it did not form an element in an overall governmental policy framework. 37 The rate and pattern of development was left basically for the private sector to determine. More generally, there were no national targets, and policy tools were hardly utilized. This lack of policy formulation became evident in the first half of the seventies when a substantial rise in prices was accompanied by an important appreciation of the Lebanese pound. Intervention policy failed and the authorities were at a loss 110

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as to what other measures they should contemplate to dampen the appreciation of the pound or alternatively to help the affected industries. The failure of the authorities was most pronounced in not taking advantage of the buildup of a high level of international reserves in order to speed up the pace of economic development when it tended to slacken as happened, for example, in the second half of the sixties and early seventies. 6. In summary, the Lebanese experience highlights the following points: given the existence of an economic structure which favors the adoption of a unified floating rate, the advantages of a liberal exchange system appear to be overwhelming provided appropriate domestic policies are pursued. In particular, the floating rate should be made subject to a well-designed intervention policy for the purpose of linking properly exchange rate policy to developmental strategy without sacrificing the basic role of the exchange rate as an equilibriating mechanism. This would imply, in turn, the ability of the authorities to draw up a policy framework with multiple objectives and the possibility of utilizing multiple tools.

APPENDIX: VARIABLES AFFECTING THE DOMESTIC PRICE LEVEL D U R I N G V A R I O U S PERIODS

To the extent that the exchange rate accounted for only a part, though a large one, of the variation in the general price level as in 1950-70, or hardly at all as in 1972-74, it would be a useful exercise to try to find out which additional variables were also responsible for price variations. That is, variables representing aggregate demand and supply may be included in the function to test their impact on the price level. Unfortunately, such an 111

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endeavor faces two constraints: first, given the deficiency of the existing data, the results which are obtained may be biased by the inadequacies of the data itself and, second, time series concerning most of the relevant variables which may be tested are not available for the whole of the 195070 period. Domestic credit series are one of the few exceptions. Nevertheless, as a tentative exercise, the series for certain variables, namely domestic credit, construction area, and output of selected industries were used, along with the exchange rate series to run regressions with the price index as the dependent variable for periods for which these series are available (see statistical appendix table 13).38 Clearly, the results obtained by using different periods are not strictly comparable to those obtained for 1950-70: comparisons of the same independent variables can only be made with the knowledge that different influences might have prevailed in the various periods. In contrast, all the independent variables were tested for the period December 1972November 1974. The picture which emerges is the following: For 1950-70, as noted above, the inclusion of domestic credit as an additional explanatory variable seems to account for a small portion of the previously unexplained variation in the price level raising R2 from 79 percent (when the exchange rate is the only explanatory variable) to 88 percent in the log function. The coefficients of both credit and the exchange rate are highly significant. But the credit coefficient is much smaller than the exchange rate coefficient: 0.09 and 1.53, respectively. To test the impact of the construction variable in the pre-1970 period, the subperiod 1963-71 (2) divided into quarters is used, quarterly data for previous years not being available. Regressing the exchange as the only explanatory variable it proves to be significant with a coefficient in the 112

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log function of 0.85. R2 stands at 24 percent. The addition of domestic credit shows that it is not a significant variable. But when the construction variable is also included, it proves to be significant, raising R2 to 43 percent in the log function, though its coefficient appears to be very small (0.03). The negative sign of the construction variable conforms to a priori expectations. To test the influence of the combined output of selected industries in the pre-1970 period, the 1968-71 subperiod is used with quarterly data. Again, the exchange rate is initially entered alone as an explanatory variable. It proves to be not significant. Adding domestic credit does not change the picture. Similarly, the addition of the construction variable produces no significant results. With the addition of the industrial variable, the picture does change. All four explanatory variables are now significant with R2 standing at 0.94 in the log function, but the industrial variable has the wrong sign. The coefficient of the exchange rate is again by far the highest, being 2.17, compared with coefficients of 0.28 and —0.08 for credit and construction, respectively. For the 1972-74 period, the inclusion of domestic credit alongside the exchange rate accounts for a large portion of the unexplained variation with R2 being raised from a negligible proportion to 62 percent in the linear function. 39 But the exchange rate coefficient is no longer significant. In the log function, the exchange rate variable is not significant with or without the addition of the credit variable. When the credit variable is added, R2 stands at 59 percent and the credit coefficient is 0.34. The addition of either the construction or the industrial variables does not change the picture. Both variables prove to be not significant. 113

CHAPTER 8

Reflections on the Lebanese Experience and a Look to the Future

The developmental experiences of Lebanon in the period 1950-74 are of special interest at three levels: first, they relate to the development of a small open economy and accordingly could be instructive to other small developing economies, especially those which do not rely on a few primary products that may be facing an inelastic world demand. Second, in contrast with many other developing and developed countries, the Lebanese public sector did not operate within a given national policy framework. Third, with the beginning of a new era in the history of Lebanon, the post-1975-76 civil war era, the design of future development and future policy should be based on a proper understanding of the immediate past: the economic experiences of Lebanon in 1950-74 cannot but be a major guide for future development, taking into account the economic impact and consequences of the 1975-76 war. 114

REFLECTIONS ON T H E LEBANESE

EXPERIENCE

With this in mind, the present reflections on the Lebanese experiences shall mainly relate to (I) the issue of policy formulation, (II) stability and growth and the role of financial policy therein during the period 1950-74 and (III) future (post-1975-76) departures in economic and financial policy. The chapter concludes with (IV) a few observations regarding the interaction between the economic and political elements in the national system. I. F O R M U L A T I O N

OF P U B L I C

POLICY

A major observation we have made about Lebanese economic policy stances up to 1974 is that governmental policy positions have been implicit and generally taken ad hoc.1 We have tried to construct a policy framework based on actual policy positions taken by the national authorities. However, the concept of policy formulation and coordination has been nonexistent, the limited policy attempts of the early seventies notwithstanding. In consequence, it may be said that the national authorities chose not to delineate the role of the public sector and public policy in the economy. Possible conflicts between "social" and "private" benefits were not dealt with except occasionally in an ad hoc fashion. The freedom accorded to the private sector was by no means unlimited. T h e areas of direct and indirect governmental intervention had been growing throughout the period under study, but they were growing with no overall aims as guiding criteria. T h e success or failure of governmental policy positions would appear to have been determined by factors which to a large extent lay outside the control of the government itself, i.e., by independently pursued activities of the private sector. It is one thing to try to maximize the contributions which the private sector can make to the development of the country. It is another matter not to be able, or willing, to 115

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guide economic activities toward well defined national goals, or to try to assure that whenever a conflict arises between "social" and "private" benefits, it is the former which is made to prevail. Indeed, the national authorities avoided the issue of conflict or complementarity between the private and public sectors as may be seen within an overall policy framework. Irrespective of any prevailing attitudes towards the respective roles of the two sectors, this issue has to be tackled: national objectives set and the means to attain them specified. It has been stressed that the basic flaw of postwar Lebanese development has stemmed from the inability and/or the unwillingness of the national authorities to tackle such an issue, particularly as concerns the socioeconomic content of development. 2 At the same time, the basic position of the authorities in certain major policy areas proved to be the correct one (e.g., exchange rate policy) though it would not appear to have been based on specific policy criteria. This aspect of the Lebanese experience contrasts with that of many other developing countries in two major ways: (1) The lack of an overall policy formulation did not prevent Lebanon from experiencing vigorous economic expansion and achieving a rate of growth, in real terms, which was above average for the developing countries as a whole; (2) The economic dominance of an enterprising private sector was largely responsible for this expansion, being aided, however, by the liberal international economic policy maintained by the national authorities. The openness of the Lebanese economy stands in sharp contrast with the heavy restrictions imposed by many other developing countries. The preceding remarks seem to point to the conclusion that the attainment of a satisfactory or even relatively rapid rate of growth is not necessarily dependent upon the draw116

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ing up and implementation of well defined and consistent policies, particularly as regards economies where the public sector is not yet dominant. At the same time, as the Lebanese experience shows, the absence of such policies would certainly lead to the neglect of important social goals and is likely to permit the economy to operate at levels below what is practically feasible.3 Past experiences can guide future policy formulations. In trying to build a Lebanese policy framework, several departures may be pointed out: (1) The most obvious is the need to replace the implicit ad hoc nature of governmental policy positions by policy planning with well defined targets and consistent means to attain them; (2) A crucial area of the decision-making could very well relate to the means rather than the targets to be attained. It is here that a proper evaluation of the Lebanese experience is crucial. For it would be necessary to isolate—as we have attempted to do with respect to financial policy specifically and economic performance generally—the areas of weakness and strength in past Lebanese developments; and (3) given the inadequate statistical base for national planning purposes, financial programing—the requisite data for which is more readily available—gains added importance in the Lebanese context. It would constitute one important policy framework to guide governmental policy decisions. But, as pointed out in chapter 1, financial programming forms only part of the overall planning process. II. S T A B I L I T Y A N D G R O W T H : T H E C O N T R I B U T I O N S OF M O N E T A R Y A N D EXCHANGE RATE POLICIES

Certain characteristics of the Lebanese economy would favor the argument that monetary policy in Lebanon was (and is) likely to have been and continues to be—the 1975117

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76 war notwithstanding—more effective in terms of its impact on the national economy than might have been (or might be) the case in many other developing countries. Such characteristics would include, among others, the high degree of monetization of the economy, the rapid development of a vigorous banking system and the nondominance of the public sector in terms of economic decision-making. The fact that the Lebanese capital market had not yet been sufficiently developed, would not, in itself, have rendered monetary policy ineffective. Rather it would have directed the monetary authorities (as eventually did take place) to rely on monetary tools such as credit ceilings and minimum reserve requirements which are not dependent upon the existence of a well-developed capital market. As to exchange rate, its potential effectiveness as a policy tool is generally recognized. But here also the Lebanese experience contrasts with that of many other countries in that Lebanon had consistently followed a flexible exchange rate policy. This implied that Lebanon had greater freedom of policy action than countries which followed a pegged exchange rate policy. In practice, the full possibilities of an active financial policy were not tried out in the period under study. The effectiveness of alternative policy tools could not, therefore, be evaluated. As pointed out in chapter 3, monetary policy was basically passive until the early seventies. The monetary impact of budgetary policy remained limited. Exchange rate policy was the only major policy which had played an important role and on the whole it proved successful. In this connection, two observations may be made: (1) passiveness of monetary policy might be interpreted by some as a policy on its own. Whatever the merits of this interpretation, a passive monetary policy proved inadequate even under conditions of generally cautious banking policies. (2) 118

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Given the absence of overall policy coordination, the financial policy positions of the authorities when taken (as in the early part of the seventies and especially in 1974) were, not surprisingly, uncoordinated. But despite the lack of overall policy coordination in the financial field, both monetary and exchange rate policies made their separate contributions to the evolution of the Lebanese economy, as discussed in chapters 6 and 7, respectively. The importance of their combined or separate contributions differed depending upon which aspect of the Lebanese economy during 1950-1974 we are considering: its stability, its growth in quantitative terms, and the qualitative features of this growth. Each of the points will now be commented upon briefly. The section concludes with some observations concerning future policy departures in the formulation of financial policy, taking into account the economic impact of the 1975-76 war. CONTRIBUTION

TO

STABILITY

Until 1971, the most significant element of Lebanese monetary and exchange rate policies related to their role in helping maintain relative stability. The contribution of monetary policy, however, was indirect, being manifested in severe limitatons imposed on borrowing by the public sector from the banking system. Existing constraints on credit extension to the public sector were matched by restrained credit expansion (in relation to the growth in monetary savings) by the commercial banks. Whether the authorities were conscious of it or not, the restrained credit expansion to the private sector obviated the need for an active monetary policy for the purpose of maintaining stability. It also mitigated the significance of any shortcomings due to the lack of policy action on the part of the authorities as far as financial stability was concerned. But it did not 119

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permit or justify a lack of interest in the policies of individual banks, as the Intra Bank crisis of 1966 was later to demonstrate, or in developing policy positions designed to avert potential monetary maladjustments, as the experiences of the first half of the seventies were later to indicate. It could be said that the roles of monetary and exchange rate policies in helping maintain relative price stability were complementary in the period up to 1971. The flexible rate policy removed, in principle, potential balance of payments constraints which might have caused domestic instability. As it turned out, occasional Central Bank intervention was mainly aimed at moderating the appreciation of the pound. This led to the buildup of foreign reserves with no significant inflationary impact on the domestic economy partly because the commercial banks continued to pursue cautious credit policies. When the domestic economy began experiencing inflationary pressures in the first half of the seventies, the authorities were late in responding to the evolving conditions. When they did respond, mainly in 1974, the policy measures they took were either limited in their impact or inconsistent in terms of the objectives they were intended to serve. The effects of this active policy were soon superseded by the adverse economic influences of the civil war. To that extent, the lessons which could have been derived from trying out alternative policy tools were effectively lost. But more significantly, perhaps, they did underscore the need for proper policy formulation. CONTRIBUTION

TO

GROWTH

The evaluation of part 1 leads to a number of concluding observations regarding the role of monetary and exchange rate policies in the development of the Lebanese economy in 1950-74. They may be outlined as follows: 120

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1. As a general remark, the combined contribution of the above policies to Lebanon's economic growth was generally less significant than their contribution to the relative stability of the economy. Viewed together, their impact on the policies of growth was indeed clearly related to their contribution to stability. Relatively stable financial conditions generated domestic confidence and helped attract foreign savings to Lebanon. Viewed separately, the role of exchange rate policy was the more important one. This contention can be readily defended by pointing out the part which this policy played in two key areas: first, it provided the authorities with the ability to maintain a liberal exchange system without any strain. The liberal system helped in attracting capital and fostering confidence in the Lebanese economy. It does not follow that a fixed exchange rate policy would have led to the opposite result though, under certain circumstances, the temptation to impose restrictions might have been strong. It does mean, however, that the authorities were freed from the potential constraints of a fixed exchange rate policy which might have led to domestic instability. When it is recalled that official thinking on economic matters was not based on clearly defined policy criteria and that the efficiency of public administration was relatively low, the advantage of a flexible rate policy gains added significance. Public sector management being what it was, discretionary policies by the government could have been readily misdirected. And a fixed exchange rate policy would have inevitably forced the authorities to assume the burden of discretionary policies. Given a prevailing national system which did not permit the emergence of an efficient administration, the above development might have led to serious errors arising from economic mismanagement. 4 Second, partly due to fortuitous events, and partly due to Central Bank intervention, the 121

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degree of fluctuations in the exchange rate was relatively limited (except during 1971-74). And the levels around which the rate tended to settle appear to have been adequate for the promotion of industrial exports, or, at least, they did not restrict their expansion. Exchange rate policy, therefore, was permitted to help smooth out the adjustment process without impinging adversely on domestic economic expansion. In 1971-74 this picture changed, calling for appropriate policy responses which did not materialize (see chapter 7). 2. The potential of monetary policy to serve the process of growth was not exploited except on a very limited basis. The underlying reason is, of course, the absence of proper policy formulation. Chapter 6 points to three areas where the monetary authorities failed to make their contribution: first, no policy was designed to influence properly the sectoral flow of credit with a view to helping accelerate the rate of growth and the process of diversifying the economy. Two related objectives would have been to create wider employment opportunities and reinforce the expansion of industrial exports. Second, the authorities neglected to develop term financing adequately, 5 and the development of the requisite financial institutions and markets were similarly neglected. This was a particularly significant failure. With the then existing conditions, i.e., market-oriented and decentralized economic decision-making, financial intermediation had a substantial role to play. Third, the existing possibilities of accelerating domestic expansion via monetary and other policies were not recognized by the authorities. Given a flexible rate policy and a strong balance of payments performance in the period under study, the authorities were provided with the opportunity to plan for a development strategy not burdened by the constraints of a fixed rate policy or weak balance of payments, which had 122

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EXPERIENCE

been faced by many other developing countries. Such an opportunity was missed. 3. While exchange policies made positive contributions to the development of the Lebanese economy, the adherence to a flexible rate policy is not free of constraints. Emerging forces might give rise to exchange rate trends which may conflict with domestic policy. The issue which arose in the first half of the seventies is a case in point, i.e., when substantial capital inflow caused the Lebanese pound to appreciate substantially to the possible detriment of industrial expansion. Such potential conflicts underscore the significance of policy flexibility, i.e., assuring that the institutional setup does not prevent the authorities from taking appropriate policy action whenever deemed necessary. It also underscores the interaction of monetary and fiscal policies: tax and expenditure policies, in particular, should be made amenable to required policy adaptations. As has often been the case in many countries, the difficulty of moving along the fiscal front tends to shift the burden of required policy adjustment to other policy areas, and to render policy coordination in the financial field a difficult task. In the Lebanese context, the issue of monetary and fiscal policy coordination gained significance late in the period under study when the authorities began to implement a more active financial policy. As demonstrated, they were not prepared to tackle the issue of policy coordination. Nor in all probability would the system have permitted the adoption of the proper policy positions. 4. The gaps in the qualitative aspects of Lebanese development raise a number of relevant issues. To begin with, the required response forms part of the overall economic policy of the country. Within this framework, monetary and exchange policies have their roles to play in coordination with other policies, particularly fiscal policy. It is 123

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clear, however, that the contribution of monetary and exchange rate policies in this area is less important than that of other policies; i.e., it is basically indirect. T h e inclusion of planned socioeconomic targets, within the overall macroeconomic target, will render the planning process more complex. T h e required efficiency of public sector management becomes a crucial prerequisite for any successful policy. And in the Lebanese context, the emphasis on efficient public management cannot be overstated. It might be noted finally that whatever design for social progress might be agreed upon, its ultimate viability rests on a realistic projection of the existing economic potential. This, in turn, would presuppose a proper understanding of the importance of national planning and financial programming and the various issues to which they give rise.

III. FUTURE (POST-1975-1976) DEPARTURES IN E C O N O M I C AND F I N A N C I A L POLICY In building a new framework for economic policy, Lebanon faces a task of considerable difficulty. T h e vision of the future is bound to be influenced, in a profound manner, by the immediate consequences and effects of the 1975-76 war. But it is equally important not to lose sight of the lessons which may be derived from the experiences of the 1950-74 era. Indeed, these two aspects are related. In other words, in formulating short- and longer-run policy objectives, the economic lessons of 1950-74 would need to be considered in conjunction with the significant social and economic changes which the civil war has brought about. This section will, therefore, attempt to portray a brief picture of the economic impact of the war and the shorterand longer-run issues which the national authorities face in its aftermath and then lay out what, in the opinion of the 124

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author, would constitute important elements in the formulation of future financial policies. I M P A C T OF T H E 1975-1976 WAR The attempt to assess the economic impact of this war faces at this juncture certain important constraints, a major one being the nonavailability, as yet, of reliable estimates of the damage which was sustained by the Lebanese economy. The inability to provide reliable measurements of the magnitude of economic losses, in respect of areas where such measurements are useful, should not, however, preclude the drawing up of a meaningful picture of the effects of the war. These have manifested themselves in many interconnected areas and in various tangible and intangible forms which may be categorized as follows: 1. Severe and widespread damage to physical assets and, therefore, to existing capacity for production, e.g., damage to factories, farms, business establishments, public utilities, etc.6 2. Drop in national income owing to damage of physical capacity, disruption of the transportation network of the domestic and foreign trade channels, the departure of business firms and capital, and reduced governmental and private expenditures. 7 S. Drop in the level of employment which, however, did not necessarily imply a rise in the level of domestic unemployment. That is, unemployment caused by the damage of the production capacity, the disruption or closure of businesses and the reduced stream of expenditure should be balanced by the exodus of the labor force from Lebanon—basically nonskilled or semiskilled non-Lebanese labor and both Lebanese and non-Lebanese skilled labor and professionals—and rising employment in the various military-political organizations. 8 ECONOMIC

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4. Adverse intangibles—in particular: loss of confidence on the part of the private sector, loss of human resources and changed distribution (at least temporarily) of asset holdings as a result of physical destruction and/or pillage. 5. Adverse financial developments manifested in increased inflationary pressures, temporary closure of a number of banks and the narrowing of the banking sector, the narrowing of the exchange market and its partial fragmentation as a result of the de facto partitioning of the country, 9 the emergence of entangled debt problems and creditor-debtor relationships including the disruption of credit facilities, and the reduction of central banking activity to a minimum level.10 6. T h e rupture of the administrative setup. It is noteworthy that the Ministry of Finance continued to make payments (with some delay) to governmental employees and to members of the Lebanese armed forces, though the army had split up. In practice, ministries and public bodies ceased to function as unified organs. They were partly replaced by local bodies which made use of certain existing governmental apparatus and whenever possible, of governmental personnel. 7. T h e forced movement of groups of people from their traditional districts of residence to other districts in the country as a result of the war. This movement has not only intensified the problems of housing but has also created an additional social problem of immediate socio-political consequences. With the cessation of hostilities—at least at the time of writing—in most parts of the country, and the gradual reunification of the national economy, the tasks which the national authorities face in the aftermath of the 1975-76 war may be divided into three categories: shorter-run mea126

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sures to cope with immediate economic issues which have arisen as a result of the war; formulation of a well-integrated program of reconstruction and development; and mobilization of the required human resources into the public sector. These tasks are closely connected. The measures taken in the shorter run are bound to affect the intended policies for the longer run. And the success of any programming would depend on the human element involved in its formulation and management. Further, in thinking in terms of targets and instruments, the authorities would demonstrate their willingness to transform the public sector into a more active participant in national development. This, in turn, would imply the necessity of delineating the role that this sector should assume. 11 SHORTER-RUN

ISSUES

The shorter-run issues basically relate to the restoration of working relationships among various economic units, providing credit facilities to various affected units to help sustain their activities, the physical restoration of some of the public and private facilities which had been damaged (i.e. those which can be and are being restored in a relatively short period of time) and the rebuilding of public administration. A large number of economic units have not been seriously affected and thus have been able to resume normal operations. Concerning the other units, the degree to which they have been affected differs greatly—from total destruction to the need for a relatively small amount of working capital to resume full operations. The tasks of the authorities are twofold: (1) they have to decide the extent to and the measures by which they can assist the seriously affected units, and (2) they have to design macroeconomic policies with a view to minimizing further possible economic imbalances and their impact on 127

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the economy. 12 Successful policies in both areas would hasten the restoration of confidence. Examples of immediate issues include debtor-creditor relationships in the aftermath of the war. How should they be regulated, particularly as concerns outstanding debts during the period of the war? At the governmental level, what size of current budget can be contemplated with or without foreign aid? Given shortfalls in revenues, to what extent can the authorities resort to deficit financing to cover expenditures? What facilities can the Central Bank provide for the government sector as well as to the commercial banks? How can the immediate needs of various sectors be met—with or without foreign aid flowing in? How rapidly can public administration be restored? T h e issues which one may enumerate are many. All these problems have been aggravated by the political-military confrontations and disturbances of early summer 1978 which affected the eastern part of Beirut. As of that summer the response of the national authorities to pressing issues may be stated as follows: first, the government has promulgated a series of measures intended to restore working relationships between various economic groups. T o illustrate, laws have been promulgated which govern the status of employer-employee relationships during the war, 13 payments of rent which in many cases had been suspended, 1 4 benefits accruing from and contributions to the Social Security Fund, 13 etc. The authorities have also attempted to help settle issues concerned with debt relationships between commercial banks and their clients in respect of the war period and subsequently. 16 Second, the authorities have provided the National Bank for Industrial and Tourist Development with additional facilities to help provide working capital for affected industrial enterprises. Third, with the substantial fall in state revenues, the authorities have decided to cover their current budget by recourse 128

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EXPERIENCE

to borrowing from the Central Bank as well as the issuance of Treasury bills which are normally taken up by the commercial banks.17 Fourth, at the administrative level, by the end of April 1977, the expected reshuffling in administrative appointments had been completed and the bureaucratic machine was set to resume normal operations, despite as yet unresolved national problems. 18 It cannot be said, however, that the governmental measures which have been taken form an integrated short-run program. A number of short-run issues remain unresolved and, more importandy perhaps, the longer-run view of reconstruction and development has not yet been fully formulated (see below). LONGER-RUN

ISSUES

For the longer run, three interrelated basic issues may be mentioned. T h e first concerns the national targets which the government should formulate and the set of consistent policies it plans to follow in order to obtain them. In this regard, a proper integration of the physical (national) and financial aspects of the planning process is of the utmost importance. The second relates to the type of governmental participation which is to be envisaged. Should the public sector consider joint ventures with the private sector and, if so, in which areas? Is there a need for new financial and other public institutions to support the governmental program? The third issue concerns the availability and terms of foreign aid.19 While promised, the amount and nature of this aid has not yet been agreed upon by Lebanon and the donor countries. It is in this area, that of longer-term planning, that the national authorities have yet to finalize their programs although the preparatory work for this purpose has already begun.This task has been entrusted to the Council for Development and Reconstruction, which was established in February 1977 for the purpose of planning 129

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and guiding the future reconstruction and growth of the national economy. 20 The role to be played by this board is expected to influence to a large extent the type and character of Lebanon's development path, addressing itself, as it should, not only to the technical problems of planning but to various socioeconomic issues facing the country. ELEMENTS

OF

FUTURE

FINANCIAL

POLICY

In constructing a future policy framework, various lessons can be derived from the postwar Lebanese experience. In my opinion, any such construct should incorporate, among others, the following elements of financial policy. First, as already stressed, a primary task of future financial policy is not only to restore but also to sustain confidence in the Lebanese economy and strengthen financial management. Among other things, those features of the economic system which had helped generate confidence should be retained, e.g. a liberal exchange system based on a flexible rate. 21 Other components of foreign economic policy should nevertheless be modified in the light of future policy objectives.22 Another factor which will affect the restoration of confidence is the long-standing issue concerning the level of efficiency in public sector management. In the post civil war era, the public sector will have to assume expanded responsibilities. Public mismanagement not only wastes available resources but could lead to serious unchecked imbalances in the economy. In the past era, the cost of financial public mismanagement might have been readily absorbed by a vigorously growing economy led by the private sector. With an expanded public sector and a more active public policy, public mismanagement may prove too costly, at the national level, both in terms of resources and in the loss of confidence which might ensue. 130

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These observations lead to the conclusion that to be able to restore confidence by insuring the proper formulation and execution of economic policy, serious administrative reform and the drawing in of the requisite human resources into the public sector are important prerequisites. Second, the economic consequences of the civil war should reinforce the stress placed in chapter 6 on the role which the financial system and policy should play, as part of their coordination with development strategy, in helping generate a higher level of national savings. Irrespective of the level of international aid which Lebanon may receive, policy emphasis on generating as high a level of domestic savings as possible should receive high priority. Similarly, official efforts to develop private and public financial intermediation via the development of the money and capital market for the purpose of improving the efficiency of resource allocation should receive much more concented official attention than previously. T h e focus on this aspect of financial policy may be supported by a number of arguments: (1) In the near future, it is unlikely that the tax system or public planning will impinge on the growing role of the financial system in husbanding and channeling domestic savings.2'® This would remain true even if one were to project a lesser future importance for individual economic decision-making. T h e requirements of economic recovery may very well dictate (and to an extent has already dictated) the option o f national borrowing in preference to taxation as a means o f channeling savings to the public sector; (2) This in turn would require the issuance of pubic debt instruments, on a much larger scale than before, and the development o f public sector financial institutions to help ensure that the channeling o f savings is serving the official policy objectives; and (3) Continued increased reliance on the financial sys131

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tem would help restore the confidence of the private sector in the Lebanese economy: it would signal the intention of the authorities to participate in, albeit on a much more extensive scale than before, rather than totally dominate, the process of economy recovery. In the transitional period which Lebanon now faces, it would be a wise policy to try to stimulate private sector economic activity, particularly since the country has a strong entrepreneurial tradition. In contrast with past experience, private sector activity would be subject to overall national priorities and policy targets. In brief, the policy aim would be to maximize national benefit by emphasizing the complementarity of Lebanese public and private sector activities.24 Third, future planning will have to accord the cost aspects of national production an increasing importance. This contention stems from two basic considerations: the additional costs which the effects of the civil war imparted to the national economy; and the expected increase in the costs of a substantial expansion in social services: real wages will assume a greater significance in national product. T h e implication of any projected cost increase is that stabilization policies will require a coordination of financial planning—which acts on the demand side—with resource planning which acts on the supply or cost side of the national equation. Economic pressures arising from the cost side of production may not have their solution in financial planning. T h e latter, however, will help guide the authorities to a more effective use of available resources and a better assessment of the feasibility of overall national planning. Fourth and finally, the policy of an independent float should continue to be in operation. The flexibility it imparts to policymaking is an important advantage of which the planning authorities should make use. But for the purpose of planning, the authorities may have to decide on a certain 132

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range for the exchange rate which they may regard as desirable from a policy point of view. For example, one important consideration relates to the prospective role that the exchange rate is expected to play in stimulating exports of goods and services as part of an overall policy to stimulate the recovery of the domestic economy. The experiences of the 1950-74 period are partially instructive. Up to 1971, the level around which the rate tended to settle appeared to be satisfactory. The lessons of the 1971-74 period are still inconclusive. When the requisite data becomes available, a measurement of the responsiveness of exports to the appreciation of the pound would be highly useful from a policy point of view. But it should be borne in mind that the post civil war conditions are expected to be substantially different from those which prevailed in the pre-1975 period. As a result of this war, the productive capacity of certain exportoriented industries has been damaged, domestic costs have risen markedly, and export markets have to be recovered. Further exchange rate policy cannot ignore the impact of exchange rate on the import side and domestic price level. The preliminary results of chapter 7 indicate that exchange rate movements could exercise an important influence on domestic prices. A policy judgment as to the desirable range of the exchange rate can be arrived at only after all the above considerations have been weighted in the light of the overall policy targets which the authorities plan to achieve. The issue which then follows would be: Would the authorities be able to guide the exchange rate via Central Bank intervention or should they rely instead on domestic incentives and promotion measures as the major stimuli to exports? Given the gradual movements of the exchange rate prior to 1971, this issue did not arise. Central Bank intervention would appear to have been a sufficient tool for policy purposes. But the experiences of 1971-74 point out 133

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that a policy of intervention on its own may not succeed if there is a persistent underlying trend for a continuous appreciation or a depreciation of the pound. Supplementary domestic measures would need to be contemplated. This, in turn, underscores the importance of establishing a resilient and flexible fiscal policy which can be adapted to support the policy aims of the foreign sector and permit a high degree of consistency between the external and internal policy objectives. In brief, the central role of a flexible exchange rate in the adjustment mechanism should be maintained as before. But domestic policy objectives may require in the future a more active policy of intervention, supplemented by appropriate domestic measures to insure the required consistency between internal and external policy measures: the formulation of multiple objectives should be accomplished by the willingness to utilize multiple tools.

IV. T H E

POLITICAL SYSTEM CHANGE

AND

ECONOMIC

To the extent that policy decisions are taken within a given political framework, policy reform, or any other reform, is dependent upon the ability of the political body to respond to the need for change. The pre-1975 Lebanese political body did not respond to the need for change in the making of economic policy. It may even be contended by some observers that it was incapable of responding adequately. To have initiated reform in the pre-1975 system would have required the fulfillment of two important prerequisites: (a) the ability on the part of the political parties and groups which could have influenced political decisions to recognize the need for change, and (b) their willingness to respond by permitting major reforms in the management 134

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of the public sector; this would have been predicated on the drawing into that sector of the required human resources, especially at the higher executive and decision-making levels. The existing system, based on the sectarian sharing of power and permeated by traditional outdated attitudes regarding the concept of government, was unlikely to have permitted a fulfillment of these two prerequisities, except perhaps in a very gradual manner. 25 The shock to which the system was subjected in 1975-76 is likely to leave this question unsettled to the extent that the causes of the 1975— 76 war were not solely related to domestic elements. Factors exogenous to the system appear to have played an important role. Indeed, attempts at administrative reforms were made, notably in 1959.26 However, they were very limited and their impact was hardly significant. Accordingly, in terms of planning and efficiency of execution, the public sector, as observed in chapter 5, remained a lagging sector in the Lebanese economy. Policy reform continued to face major obstacles and policy decisions continued to be taken on an ad hoc basis with no overall direction. While the system's "Western-type" democratic institutions were upheld by traditional parties and political groups, their continued insistence on politico-religious sectarianism and adherence to traditional political thinking 27 obstructed the proper evolution not only of modern political parties but also of public administration and the public sector as a whole.28 In a wider context, it acted as a negative factor in the development of a governmental apparatus which could have been capable of planning and helping lead the evolution of Lebanese society along desired lines. A devastating war might not have been a necessary condition for the required political change in the Lebanese system. However, the war in 1975-76, whatever its basic 135

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causes might have been, 29 fundamentally disrupted the prevailing system. It is hoped that in the process, it may have provided the opportunity for the country's post civil war leadership to effect the necessary changes in the political and socioeconomic fields and in the management of the public sector. This remains to be seen.

136

Statistical

Appendix

STATISTICAL APPENDIX TABLE 1A LEBANON: VALUE OF AGRICULTURAL PRODUCTION, 1 9 7 0 - 1 9 7 3

(£L million)

Fruits Vegetables Industrial crops Cereals Leguminous crops Total

1970

1971

1972

1973

281 100 49 16 7

326 93 62 16 7

330 114 71 23 8

359 117 77 23 8

453

504

548

584

S O U R C E : Lebanon, Ministry of Planning.

TABLE 1B LEBANON: COMPOSITION OF EXPORTS (F.O.B.), 1 9 7 0 - 1 9 7 3

(£L million)

Animals and animal products Fruits and other foodstuffs Processed foods, beverages and tobacco Chemical products Textiles and textile products Jewelry and precious metals Metals and metal products Mechanical and electrical machinery and equipment Transportation equipment Other industrial exports Other exports Total

1970

1971

1972

1973

37 101

55 124

57 140

52 153

55 58 57

49 79 80

62 53

51 80

81 108 122 115 96

88 126 172 333 114

66 48 100 14

99 58 122 17

124 127 166 32

168 150 208 36

651

815

1,168

1,598

S O U R C E : Lebanon, Ministry of Planning.

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STATISTICAL

APPENDIX TABLE 2

LEBANON: CENTRAL GOVERNMENT REVENUES,

Direct taxes/total tax revenue (%) of which: income tax Fees and dues/total tax revenue (%) Indirect taxes/total tax revenue (%) of which: customs duties Total tax revenues (£L million) Total revenue (£L million) Tax revenue/total revenue (%) Tax revenue/GNP (%) Total revenue/GNP (%)

1970

1971

1972

1973

29 (15)

24 (14)

20 (18)

20 (13)

14

15

15

18

57

61

65

62

(38) 100

(42) 100

(43) 100

(45) 100

504

602

711

808

663

776

906

982

78 10.7 14.1

SOURCE: Lebanon, Ministry of Finance.

140

1970-1973

80 11.6 15.0

78 11.8 148

82 11.9 14.5

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STATISTICAL

APPENDIX TABLE 9

LEBANON: STANDARD DEVIATION AND COEFFICIENT OF VARIATION OF W E I G H T E D EXCHANGE RATE

(December 1972-November 1974) Deviationa

Standard Year

1973 1974 (excluding Dec.)

V

Coefficient of Variation CT

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