The Lebanese economy is in trouble.In two years a succession of disruptions – strikes, various forms of political protest including sit-ins and, most seriously, war with neighboring Israel – have slowed the economy to a crawl. The economy is additionally burdened by a $40.5 billion public debt that is almost 180 percent of GDP. But what is of most concern is government paralysis: too little has been done to speed recovery from the war to get business back on its feet.

The International Monetary Fund and Moody’s rating agency warn of further economic decline if a way out of the political stalemate that set in following the 2006 summer war with Israel is not found. “Economic prospects continue to be hostage to political developments,” stated a November IMF report that was otherwise bullish about developments in the country. There can be no progress, the IMF said, without stability, or at least continuity, in government.

A measure of the paralysis gripping the country can be gleaned from the events in late November when President émile Lahoud left office upon the expiration of his term. In a vote of no confidence in Prime Minister Fouad Siniora’s government, Lahoud used the occasion to declare a state of emergency, inviting the army to make the country safe. That month, even though Lahoud’s alarmist pronouncements were comprehensively ignored, Standard & Poor’s Ratings Services gave Lebanon a B- grade, voicing serious concerns over the administrative capacity of the government to service its debt.

François Bassil, president of the Association of Banks in Lebanon,warned that investors would stop investing in the country if the political picture didn’t become clearer and complained that Lebanon was missing a great opportunity to benefit from the oil price-fed liquidity that was spurring development elsewhere. “The petrodollars will go to Syria, Jordan andYemen in addition to the United States and Europe,” he said.

According to Nabil Itani, head of the Investment Development Authority of Lebanon, Lebanon could have attracted more than $3 billion in investments this year if the political situation had been relatively stable.Instead, new investors are ignoring Lebanon; worse, those who invested before the war are now disinvesting.Gulf investors have put their ventures on hold: in downtown Beirut, the $600 million Beirut Gate project has stood idle for a year. The Phoenicia Village, at $1.1 billion Lebanon’s biggest real estate investment ever, has given its investors their money back.

In a country heavily dependent on foreign direct investment for growth and sustainable job creation, the political wrangling has dealt a heavy blow. All sectors have been affected, tourism and exports the most, though a handful of sectors have turned a profit. Banking has been doing rather well despite, or perhaps because of, the political uncertainty. Most banks are in good shape, retaining enough liquidity to withstand any furthers shocks because, surprisingly, clients have mostly kept their deposits of Lebanese pounds.However, Lebanese banks hold nearly half the government public debt and some are overly exposed to sovereign risk. Moody’s, which fears that the political crisis will persist into 2008 and that the government will therefore not be able to implement reforms, placed three leading Lebanese banks on CreditWatch due to their extensive exposure to public debt.

Deaf ear. Business associations and trade unions have long called on the government to take decisive steps. In 2006, business associations and banks observed a two-day strike that met with limited success. Today the moodis uglier. According to prominent industrialist Jacques Sarraf, activists are even considering “civil disobedience and much larger strikes.”

“The political class continues a long tradition of displaying complete disregard for the welfare, stability and prosperity of the Lebanese. It seems that the political class only has its own narrow interests at heart; the rest of us can go to hell for all it cares,” wrote Fadi Abboud, president of the Association of Lebanese Industrialists, in TheDaily Star newspaper in October, calling on political figures to end their bickering and start thinking of the Lebanese people. Abboud had harsh words for officialdom: “Every time a Lebanese manufacturer voices a set of concerns on the state of the sector and the economy, officials turn a deaf ear and suffer severe convulsions, as if a shutdown in bodily functions has become an instinctive reaction to views in general and opposing views in particular.”

Help, when if comes, is fitful and inadequate. For months, industrialists petitioned the government to reduce electricity charges – the highest in the region and among the highest in the world –during peak hours of operations.The government responded by reducing electricity tariffs for select sectors such as hotels and manufacturing companies, but only during off-peak hours. Requests for tax relief and a decrease in customs fees on raw-material imports have fallen on deaf ears: the government, perhaps understandably, needs every cent it can get in these times of expanding budget deficits.

Anger and anxiety have grown along with the rising consumer price index, which jumped by 3.8 percent in the first half of 2007, according to the Beirut Chamber of Commerce, Industry and Agriculture. The price of food rose by 8 percent in the same period.The appreciation of the euro, in a country that does 60 percent of its trade with the European Union, has also hurt the economy.

Meanwhile, pressure is building from trade unions, which want the $200 minimum wage, unchanged since 1996, to reflect the increased cost of living: Ghassan Ghosn, head of the Lebanese Labor Confederation, has asked for a $600 minimum wage, to which Economy and Trade Minister Sami Haddad replied that such an adjustment will trigger an inflationary rise in the cost of commodities and that it is beyond the means of most companies. Haddad prefers wage increases to result from new wealth creation, which is to be realized through an opening up of the economy, mainly through privatization, such as that of the telecoms sector planned for February 2008, and a generally more comptetitive business environment.

Trust deficit. It’s worth remembering,however, that the IMF’s report on the Lebanese economy was generally favorable: real GDP growth for the last year is expected to be between 2 and 3 percent. “Figures are proof of an improvement over the previous years,” said Albert Nasr, director of the Center for Economic Research at the Beirut Chamber of Commerce, Industry and Agriculture. “VAT revenue grew by 4.3 percent in the first ten months of 2007, whereas it had dropped by 4 percent in 2005 and 2 percent in 2006. That shows that Lebanese people are consuming more, even if the 2007 figures won’t fill the gap cumulated in 2005 and 2006.” Similarly, sales in durable goods such as cars and housewares have not dropped by much.

What the country needs is continuity, but there’s no guarantee that the next government will proceed with privatization, or with the other reforms the country committed itself to at the Paris III conference last January. Jihad Azour, the finance minister, has already said that “any delay in reforms and privatization, irrespective of the reasons, will have a dire impact on the public debt, revenues and above all the economy.” But Lebanon lacks a commitment to a program that will be implemented no matter who takes charge. In the absence of such a consensus, the country remains in a state of chronic unease. “What is most disquieting is the fact that Lebanon is now perceived as being prone to instability,” said Nasr. “Something must be done politically to boost investment and help people to indulge in consumption, even if there’s already a high propensity to consume in Lebanon.”

Worse to come? The outlook for 2008 is pessimistic, even if the economy could consume its way out of trouble, which is doubtful. “If major instability results from the presidential vacuum,the economic situation will become very difficult and the Lebanese people will be affected by mid-2008,” said Bassil, of the Association of Banks in Lebanon. The outlook is clouded by other complications, among them the reasons why reform was agreed to in the first place, and the aggravating factor of aborted or partial reform. For example, in line with the reform plan elaborated under IMF patronage, the 2008 draft budget awaiting parliamentary approval includes a 2 percent increase in VAT. “Such an increase is unthinkable under the current circumstances,” said Nasr. “The idea is to easily increase public revenue through fiscal means but the Lebanese economy isn’t that flexible; consumers won’t be able to bear it. Recession will be inescapable if in parallel the economy is not quick started.”

The economy has not yet felt the full effects of the rising oil price and appreciating euro. “The current cycle is not over yet,” said Nasr. “We’re still running on 2007 conditions, as oil and euro rates started to climb late in theyear, during the summer. When merchants start ordering for 2008,  that’s when things will get tough.” The government, which until now has subsidized the price of oil and its derivatives, will likely not be able to keep on doing so next year. Since the price of oil passed $75 a barrel two years ago, the government has collected almost no tax revenues from gasolineand kerosene.

“There are many other issues that will urgently need to be addressed, other than who’s going to get the presidential chair,” said Nasr. “Businessmen will probably have a lot more to nag about in a few months, whether a president is elected or not.”

   Email This Post      Print This Post