Friday, January 12, 2007

Forecast in Paris III plan dismissed as 'nonsense'

Forecast in Paris III plan dismissed as 'nonsense'
Reform package assumes price stability despite considerable evidence to the contrary

By Michael Bluhm
Daily Star staff

BEIRUT: The government was far too optimistic in forecasting the country's 2007 inflation rate at 2.2 percent in its reform plan for the Paris III donor conference, economists and business leaders said Thursday. Prices have risen about 14 percent since the summer 2006 war with Israel, and the economy has continued to wilt under the pressures of the ongoing opposition demonstrations. The government reform plan, presented by Prime Minister Fouad Siniora on January 2, estimates the 2006 rate of inflation at 7.5 percent and projects the 2007 rate at 2.2 percent without any foreign assistance. The plan forecasts inflation for 2008 at 2.7 percent and for 2009 at 2 percent.

Nassib Ghobril, head of economic research at Byblos Bank, said that at a meeting with Finance Minister Azour on Monday, he told Azour the 2007 projection was too low. "Inflation will be more than that this year," Ghobril said. "This is a very conservative estimate. Prices have increased because of the war." Azour left for Paris Wednesday to prepare for the conference, and could not be reached for comment. Lebanon's inflation rate mainly remained in the low single digits in the five years before the war, as the Central Bank vigorously pursued a stable monetary policy. However, merchants have hiked prices to make up for losses suffered during the conflict. Political instability has led traders to hedge their bets by maintaining inflated prices, said Fadi Abboud, who heads the Association of Lebanese Industrialists. "Prices will go up," Abboud said. "In an uncertain atmosphere like we are living in, I find this to be normal." The deteriorating political situation is partially responsible for rising prices, and its resolution, as well as the outcome of Paris III, will surely affect the extent of inflation in 2007. If implemented, the reform package will also significantly affect prices - the reforms call for the Value Added Tax (VAT) to rise from 10 percent to 12 percent in 2008 and 15 percent in 2010. With those plans in place, some economists questioned the Cabinet's entire long-term schedule of inflation forecasts. "I think that they have underestimated the rate of inflation for the next five years," said Kamal Hamdan, head of the economic division at the Consultation and Research Institute. "Assuming that inflation will be stable is nonsense. This model is creating each parameter independently of the other. They haven't calculated the overall effect."

Still, some economists see potential deflationary factors on the horizon that could keep inflation in check this year. The economic tailspin could stabilize, and the slump in oil prices may help keep a lid on inflation. If, however, the inflation rate surpasses the government's target, as economists expect, this will mean a noticeable decline in consumer purchasing power. "Inflation is one thing that people will feel," Ghobril said. "This is a very visible effect." Zuheir Berro, head of Consumers Lebanon, is drafting a letter to the government in response to the reform plan and asking for a meeting with officials. The proposal, to be delivered Friday, will discuss spiraling prices and the economic malaise, and ask that the Chamber of Commerce and Industrial leaders be included in the dialogue. "We ask the government to do something about inflation and we see what they do - they do nothing," he said. "The economic policy of the government and the paper for Paris III don't change anything." If prices continue to rise, combined with higher postwar unemployment and stagnant wages, the mix could make for a combustible situation. "The impact on the population is very dangerous," Berro said. "We must do something."

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