Assessing Economic and Fiscal Reforms in Lebanon: A Dynamic CGE Analysis with Debt Constraints

Abstract

Since the early 1990s, Lebanon has undertaken a number of economic reforms, covering international trade and internal fiscal policy issues in particular. Simultaneously, debt has been skyrocketing, partially justified by reconstruction needs after the end of the civil war. Fostering economic growth seems to be the only way out of the debt trap, but reforms intended to stimulate growth may well have adverse short-run effects on public and external deficits. We construct a dynamic open-economy computable general equilibrium (CGE) model with debt constraints in the sense that external debt requires physical capital as collateral. The CGE model allows us to study the effects of a number of important economic policy issues, such as fiscal policy reform, World Trade Organization (WTO) membership, and foreign direct investment, in a multisectoral dynamic setting under the realistic assumption that debt constraints relax when the economy starts growing. Included in the results are reports on scenarios of trade liberalization and political stabilization.