Lebanon’s Economic and Financial Crises: Impact of the Current Account Deficit on Gross Fixed Capital Formation

Abstract

After the financial globalization, concerns rose over the dynamics of current account balance and its relationship with capital investments in developed and developing countries. Understanding the factors behind persistent current account deficits and their relationship with investments in emerging market countries would help policymakers in the economic decision-making process. This thesis aims to assess the impact of the current account deficit on gross fixed capital formation in Lebanon, a developing country that has recently experienced an economic and financial crisis. Using annual data from 1990 to 2021, the study employs Vector Autoregression (VAR) econometric technique to analyze the relationship between these variables over time. We use the Granger Causality test to investigate the causal relationship between them. The results suggest that there is no proof of any impact of the current account deficit on gross fixed capital formation in Lebanon. However, the opposite is true; such that gross fixed capital formation Granger causes the current account deficit. The findings of this study have important implications for policymakers to stimulate economic growth and development in the country.