Avoiding the resource curse in Lebanon

Avoiding the resource curse in Lebanon

The discovery and extraction of oil and gas off the shores of Lebanon could ultimately translate into a boom in revenues for the government, which in light of current poor fiscal planning could lead to an uncontrolled expansionary budget policy and eventually a ‘resource curse’. If these revenues are spent with no oversight and proper planning, the country m ay well collect and allocate large streams of cash that make limited contributions to economic development. But the ‘resource curse’ could be avoided if appropriate policy adjustments are implemented in conjunction with the development of offshore hydrocarbon resources.

The successful experiences of a few resource-rich countries like Norway have been largely attributed to properly managing resource wealth and its associated risks. The optimal response that takes advantage of the boom while mitigating its potential negative implications includes a set of fiscal, monetary, exchange rate, and structural reform policies.

As Lebanon stands poised to establish its oil and gas sector and possibly profit from new resource wealth, it has become increasingly critical for this small economy to implement public policies that take advantage of the oil boom while mitigating its potential negative implications. This typically includes a set of fiscal, monetary, exchange rate, and structural reform policies which are required to avoid the resource curse.

Indeed, the government must resist pressures to enjoy all the windfall revenues in the short run and recklessly expand its budget expenditure. On the contrary, it must commit to saving part of the revenue proceeds every period in order to attain a permanent wealth increase. Ideally, the government must direct its spending toward the non-resource tradables sector through subsidizing outputs and/or inputs or investing in physical and human capital to enhance productivity in these sectors. In this case, a budget expansion would not necessarily lead to shrinkage of the productive sectors. It is clear, however, that proper public financial management is central to the above macroeconomic policy framework. Key to the above analysis and recommendations is the political economy and institutional setup, especially the role and proper functioning of fiscal institutions. Increasing accountability and transparency in public institutions is essential, and this ultimately requires political reforms that increase the commitment and engagement of citizens in the actions of their government, through proper electoral representation.

This document contains both the English and Arabic language versions.