The Nexus Between Oil Prices and Current Account Deficit: An Empirical Analysis for Lebanon

Abstract

The study investigates the impact of short- and long-term oil prices on Lebanon’s current account deficit using monthly data from 2002 to 2008. The Johansen Cointegration Test confirms a stable long-term relationship between oil prices and the current account deficit, indicating their significant interconnection. To analyze short-term dynamics, the study employs the Vector Error Correction Model (VECM). The results reveal a negative and statistically significant error correction term, suggesting that deviations from the long-run equilibrium tend to self-correct over time. This implies that while oil price fluctuations influence Lebanon’s current account deficit in the short term, the economic system naturally moves back toward stability. The study highlights that oil price movements play a crucial role in shaping Lebanon’s external balances. A rise in oil prices worsens the current account deficit, as Lebanon is a net oil importer, increasing import costs and negatively affecting trade balances. Conversely, declining oil prices provide temporary relief by reducing import expenditures. The findings suggest that Lebanon’s economic stability is highly sensitive to global oil price volatility. Policymakers should implement strategies to mitigate the adverse effects of oil price fluctuations, such as diversifying energy sources and reducing dependency on imported oil. Strengthening foreign reserves and adopting fiscal policies to cushion external shocks can also enhance economic resilience. This research provides valuable insights into the relationship between oil prices and Lebanon’s current account balance, guiding policymakers toward more sustainable economic planning and risk management strategies.