Mohammad Knio, PhD in Economics – UK Cardiff University
In light of the ongoing revolution that is literally making history in our beloved and dear Lebanon, it is very imperative to understand the key pillars of our economy to start building up on strategies and policies that will help combat our triple-faced fiscal deficit.
Recovering or closing any economical gap requests an interference from the central bank using monetary policy or the government via fiscal policy.
Economically speaking, any growth in any economy should be measured by the GDP (Gross Domestic Product). The GPD has 4 major components which are: consumption, investment, government and the next export.
The consumption of the goods and services is usually affected by several factors such as, purchasing power, taxes, and interest rate.
Starting with purchasing power, one of the key indicators that affect the purchasing power are the consumer price index and the GDP deflator which reflect the percentage change in prices (Inflation).
Once the inflation starts increasing, people will not be able to spend and consume more as before. Thus, this will affect negatively the expenditure for household along with GDP.
On the other side, the other factors that affect the consumption or the expenditure from the household sector side is the taxes.
Taxes are divided into two types: direct and indirect taxes. Starting with direct taxes that is imposed on income, our disposable income (income after tax) will decrease once the taxes are high which lead to decrease our spending and this will affect the GDP of the country negatively.
Moving forward to the second taxes, such as TVA, increasing TVA leads to decrease the level of expenditure again or consuming less thus will affect the GDP negatively.
Unleashing the power of the third factor that affects the consumption level, increasing interest rate leads to prevent people from borrowing commercial loans. Thus, people are not able to take more personal loans and in return, hence, the circulation of money will be less and will affect the GDP negatively.
Concerning the second component which is the investment level, investment level is affected by the interest rate, a high interest prevent firms to borrow more loans thus firms are less optimistic to establish new business thus will negatively affect the GDP in the country.
Concerning third components which is the Government expenditure, the government funds itself by itself through taxes, which means if the government has a budget surplus(Taxes greater than government expenditure), it can spend more and more thus will affect the GDP positively, however, having a budget deficit prevent the government to spend more thus will affect the GDP negatively.
The last component, which is the Net Export (the difference between export and import). The net export is affected by the purchasing power of our currency, our currency can appreciate or depreciate and here it is actually affected by the role of the central bank. Depreciating our currency leads to increase our export (our goods become less expensive to the citizens of other countries)and to slow down our import thus will lead to a positive impact on the Net export thus will improve the GDP of the country (I am not saying that the Lebanese currency must be depreciated)
We cannot find a solution unless we have an in-depth understanding on how the mechanism works.
This is why I am sharing with you the basics of the Economy in any country.
I Promise to share with you statistical data, solutions and strategies that must be used by the central bank or the government to close the economical gap and lift our dear country where no one is left behind.