Currency devaluation crisis spillover on economic growth-Lebanese and Syrian crises case study

Abstract

Currency crisis effect on economic growth has been proven by many scholars. But this paper will empirically prove this relationship in two dimensions, long term and short term and in a global and a country specific scale. In a global scale, panel data analysis was performed for 26 countries along a period of 20 years. The ARDL (Autoregressive distributed lag model) analysis shows that in the short term an occurrence of a currency crisis will cause a decline in the GDP growth rate in that year and the next year but then it will rebound into an increase in GDP growth rate for the following year. In the long term, there is a cointegration between GDP growth rate and the exchange rate. In a country specific scale, Lebanon and Syria were chosen as they witnessed a currency crisis and a civil war. ARDL analysis was performed for Lebanon for the past 48 years and realized that there is also a long-term relationship between GDP growth rate and exchange rate and the occurrence of currency crisis. In the short term, a currency crisis occurrence causes a decline in GDP growth rate for that year and the next year but then the economy growth recovers in the following two years. This analysis is used as the benchmark to anticipate the projection of the Syrian currency crisis. The article identified the reasons behind this currency crisis and compared it to its neighboring country Lebanon during its currency crisis in 1970s and 1980s. Finally, the paper identified the reconstruction cost for the Syrian economy as 254.7 billion USD but the longer it takes the war to end the longer the time needed for the economy to recover. As a recommendation for the economy to recover, the main focus the government needs to be working on after the civil war ends is the rebuilding of economic institutions to increase trust and encourage investments in the reconstruction and recovery of the Syrian economy.