Raya Al-Hassan said Lebanon saw a limited capital outflow of around one percent of bank deposits in January, when Hezbollah and its allies toppled the unity coalition of caretaker Prime Minister Saad Al-Hariri.

“Starting from the end of 2010 we started witnessing a slowdown in some of the indicators because of the political situation,” Hassan said.

“The most important indicator was the inflows. It started to slow. It was 11 percent in 2010 and 23 percent in the past two years. We were expecting this normalization in the inflows,”

“The deposits to GDP is 277 percent. Already deposits are very high to GDP. So we were expecting that this growth in deposits will normalize in 2010 but in January 2011 we have witnessed an outflow..it was around one percent.”

“The turbulent situation we were living in led to a limited flight of deposits from the banking sector,” she said, adding that only some of it returned the next month.

“Slow down in capital inflows with a higher dollarization rate this (means) the confidence in the economy is being questioned,” she said.

Lebanon, which escaped the effects of the global financial crisis, has been enjoying a relatively strong growth as GDP grew by nine percent in 2009 and around seven percent in 2010.

“We were hoping the growth rate would be translated to more job opportunities, translated into developmental impact and into better social expenditures,” Hassan said.

Lebanon is famous for its robust service-oriented sectors, but many investors are discouraged from setting up businesses in a country where power cuts are frequent, road networks beyond the capital are insufficient and communication lines are slow.

Political division also blocked the 2010 budget in parliament, preventing the government from spending $2 billion allocated to much needed infrastructure projects. A 2011 draft budget is also stuck in cabinet.

“I think a new government will withdraw it and prepare a new budget that would reflect the new reality. The assumptions are different, the growth rate is different,” Hassan said.

Lebanon has been without a functioning government since January. Fights among parties over jobs have delayed the formation of the new government.

Hassan said a rising dollarization is causing a liquidity problem in Lebanese pounds, and Lebanese banks are keeping their local currency rather than subscribing to treasury bills.

“There is no worry regarding the stability of the Lira (Lebanese pound) or the stability in the banking sector but there is worry from the reflection of dollarization and the lack of liquidity, in financing the needs of the public sector,” she said.

“The dollarization rate went up, some people preferred to exchange their money from Lebanese to dollar so it went up to 65 percent in February from 62 percent in June,” she said.

Lebanon is one of the most highly indebted countries in the world with public debt at around $51 billion. Debt is expected to rise to $55 billion in 2001 and analysts warn that it could hit $65 billion in next three to five years with deficit widening more.

Lebanon’s central bank sits on high foreign currency reserves of around $30 billion, or around $41 billion if the reserves in gold are added to it. Foreign reserves make up to 70 percent of GDP.

“We finance the deficit from t-bills (in local currency, but) when the banks prefer to save their cash and keep it rather than subscribe in the t-bills then the liquidity available for the Lebanese state to refinance its debt in Lebanese pounds or to provide new liquidity to pay its expenses tightens.

Hassas said in order to overcome the liquidity problem in local currency the ministry has done two swaps so far.

“We have swapped the certificate of deposits carried by banks part of it to treasury bonds for seven years in Lebanese Lira and then in another operations we swapped T-Bills which are maturing from now until June in treasury bills for seven years with interest 7.9 percent.”

“Am giving banks higher interest rates but for longer maturity.”

Hassan said Lebanon was missing a chance to draw money from the Gulf which is flush with petro dollar money as a result of high oil prices.

“The tourism has already slowed, investments from Arab (countries) have declined..because the Lebanese situation is not very good all of (the petro dollar money) is going to Dubai and other areas.”

“If the situation in Lebanon was better we would have seen a positive economic movements. More tourists, more invested and conferences here. But as usual, we have wasted this chance too.

“As we stand right now with no operating government, I am not very positive because all monetary, fiscal and real estate indicators for Q1 are either declining or slowing.”

“If there is no operational government that would solve the challenges we are facing.. a.m. not very optimistic.”