Lebanon, saddled with one of the world’s highest debt-to-GDP ratios, expects its 149 per cent debt level of last year to carry over into 2018 as sluggish growth and a lingering fiscal deficit continue to exacerbate the country’s public finances, a senior finance ministry official said.

“Lebanon is an island nowadays from an economic point of view,” said Alain Bifani, the director general of the finance ministry. “We are not anymore connected to many countries around us because many of those countries have wars.”

Lebanon’s economy is hurting from Syria's seven-year war, which curtailed an important trade and business route, and led to the influx of one million Syrian refugees. The country’s heavy debt burden is also a concern for investors, who are not as eager as before to invest in a country that is struggling to control it finances. Lebanon's economy is forecast to expand 2.1 per cent this year in line with the estimate of the IMF, and about the same as 2017, Mr Bifani said. The fiscal deficit is forecast to widen to 8 per cent of GDP in 2018, from 7.7 per cent deficit last year, he said.

The country, which finances its deficit through the issuance of treasury bills and Eurobonds, does not expect to tap the Eurobond markets soon as it can currently finance the shortfall for at least three months, he said. Lebanon suffered from a temporary shock last year with the surprising resignation of Prime Minister Saad Hariri, which was later rescinded. The political turmoil had a limited impact on the economy, which included some withdrawal of bank deposits and a widening of spreads on Lebanese Eurobonds.

According to Bank of America Merrill Lynch, Lebanese Eurobonds are cheap compared to similar-rated sovereigns.

“Lebanon's external debt has cheapened recently following political developments, but the domestic political situation appears to be stabilising,” said Jean-Michel Saliba, the bank's Mena economist. “Eurobonds are tightly held by domestic banks and, as such, they have generally enjoyed defensive and low-beta status."

However, the economic conditions in the country remain anaemic, according to the Purchasing Managers’ Index, a gauge of the health of the economy which is sponsored by Lebanon’s Blom Bank and compiled by IHS Markit.

According to the gauge, business conditions in November continued to remain weak, although the PMI reading of 46.2 was a three-month high and better than October’s 45.8. A reading above 50 indicates an improvement in business conditions and a reading below 50 indicates a deterioration.

“Anecdotal evidence found that political instability continued to undermine economic performance, with issues around security and cash flow also playing a part in the latest contraction,” said the PMI report.

Lebanon, however, is banking on new initiatives to help lift growth and improve the country’s public finances. The country approved last year its 2017 budget, for the first time since 2005, giving an initial boost to the economy.

The government is also mulling an increase in public investment, which could be partly funded by domestic financing if there are guaranteed high returns, Mr Bifani said.

“It is an exercise that is being done in light of infrastructure needs of Lebanon and potential donor money that could be mobilised in the coming months,” he said.

The IMF, though, cautioned the Lebanese authorities to refrain from financing the increment from its own pockets to avoid exacerbating its public finances.

“Any such scaling up must be embedded in a fiscal consolidation plan that ensures debt sustainability,” Chris Jarvis, IMF’s mission head to Lebanon, said in December after visiting the country. “It will also be important that as much as possible of the financing for increased investment be on grant or concessional terms. Domestic financing of public investment should be avoided.”