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

Abstract

The paper provides an empirical analysis of Lebanon’s merchandise trade deficit and thecurrent accountfor the 1969-2016 period. Using the Auto-Regressive Distributed Lag approach, it estimatesstandard demand functions for merchandise exports and imports and the trade deficit.The results show that real exchange rates do not have a long-run impact on exports, imports, the trade deficit, and the current account; domestic production has a notableeffect on reducing trade deficits while absorption expenditures, primarily public expenditures, have a strong effect on increasing trade deficits. The main three conclusions and policy implications that emerge from the analysis are: first, the Central Bank of Lebanon’s policy of fixing the exchange rate in the post-war period has not harmed competitiveness and has proved to be a strong basis for monetary stability; second, a more active industrial and investment policy is needed to enhance competitiveness and export promotion and to increase and diversify domestic production; and third, public expenditures ought to be urgently rationalized and conducted within a framework of sound fiscal and governance reforms.