Is Lebanon's economy about to rebound?

Posted in Broader Middle East | 15-Nov-05 | Author: Kamal Dib| Source: The Daily Star (Lebanon Edition)

Lebanese Foreign Minister Fawzi Salloukh (L) and Lebanese Prime Minister Fouad Siniora (R) walk with EU foreign policy chief Javier Solana (C) in the Grand Saray in Beirut November 11, 2005.

while key ingredients are present for boom, collective political will is falling short

Three positive events in Beirut may reveal the the direction the Lebanese economy will take in 2006: (1) an international donor conference, now tentatively scheduled for January or February 2006, that may bring in $4.4 billion in soft loans; (2) an economic plan, announced by Finance Minister Jihad Azour; and (3) progress in the international investigation of the murder of former Premier Rafik Hariri.

The Cabinet, headed by the able Prime Minister Fouad Siniora, has signaled a fresh start for the country and a promise of "Made in Lebanon" policies.

In order to revive the economy, reform public finance and create jobs, there are a number of political challenges that need to be addressed. These include repairing Syrian-Lebanese relations, bringing to justice the Hariri's assassins, disarming nongovernmental armed groups, and introducing legislation to modernize elections and reform the judiciary. The Issues We start with the challenge of public finance. While Azour's economic plan is overly optimistic, any achievement in the direction it suggests would be an accomplishment. It predicts that the debt to GDP ratio could be reduced to 100 percent or 110 percent in five years (from the current 180 percent), assuming an economic growth rate of 5 percent to 6 percent, $4.4 billion in soft loans at the donor conference, and privatization of state corporations that could bring in $2 billion to $3 billion, which would be paid against the debt.

One cannot see the possibility of a drastic reduction in the debt-to-GDP ratio in the medium term, even if the three elements are in place. The debt has become a Titanic that would take more than five years to bring down to manageable levels; the soft loans are not a grant; they may help restructure the outstanding amount and reduce interest rates in the Beirut market, but they would still be interest-bearing borrowed money.

An economic growth rate of 5 percent is possible but is not enough to surpass inflation and growth in the public debt. A 2 percent inflation rate amid continued budget deficits would swallow any real economic growth. In such a climate, it would be hard to justify rosy predictions about employment growth. Other countries in the Middle East and Asia are realizing steady growth rates of 10 percent or higher without the debt burden. Only a double-digit growth rate for Lebanon would save the day, and Azour should work harder to find policies that would achieve high growth, and work with Siniora to seek political consensus from Cabinet colleagues who reflect power centers in the country.

On the social front, poverty and emigration are the toughest issues. Almost a million Lebanese - one-third of the population - have left Lebanon since 1975, most of them never returned, and thousands of young people receive higher education and leave the country every year.

This exodus impacts the Lebanese economy and causes serious loss of human capital. The prosperous middle class that typified the 1970s disappeared and was replaced with a dangerously polarized society. Almost half the population lives on low income, and 29 percent are below the poverty line or suffer from extreme poverty. Sharp income imbalances are visible with 4 percent of the population, enjoying high standards of living (luxurious cars, expensive coastal or mountain mansions, daily meals in chic restaurants, etc.) when most people struggle to meet daily needs.

The tax system should be reformed to be more equitable and effective. As minister of finance, Siniora brought in the much-needed Value Added Tax in 2002, but a better legacy as prime minister would be to do more for income redistribution.

Examples of urgent social needs include securing electricity 24 hours a day and establishing environmentally and economically sound public utilities, affordable education, housing, and medication. Optimistic Potentials The opportunity to realize strong economic growth in Lebanon is possible. If stability is achieved, 2006 may bring prosperity and attract healthy foreign investments.

Lebanon has developed many investment-enabling strengths that have encouraged foreign companies to set up offices. These strengths include a free market, the absence of controls on the movement of capital and foreign exchange, a highly educated and multilingual labor force, good quality of life and limited restrictions on investors.

Lebanon boasts the most sophisticated banking sector in the region, a well-developed tourism infrastructure and excellent telecommunication networks. Beirut sets trends in fashion, performing arts, media and avant-garde thinking for much of the Arab world.

IDAL, the Investment Development Agency of Lebanon, has specified five major areas for foreign direct investment, namely, (1) tourism, recreation and transport, (2) manufacturing, (3) information technology and media, (4) food processing and agriculture, (5) education and healthcare.

Promising sectors with innovation potential include banking, tourism and some service industries, as well as the information technology. Lebanon attracted over $1.5 billion in foreign direct investment (FDI) in 2004, of which $1 billion came from Arab countries.

The tourism sector is hungry for investments. In 1974, Lebanon had a population of 2.5 million people and attracted 1.4 million visitors (almost six tourists for every 10 residents); in 2005, Lebanon had 3.5 million people but received less than a million tourists (less than three tourists for every 10 residents). The tourism infrastructure is modern and relatively competitive (transportation, accessible sites, facilities, hotels, resorts and telecommunications) but there is a need for more accommodation and better development of attractions.

The inflow of visitors is constrained by the small number of hotel beds (20,000) and the lack of funds to develop more attractions (beaches, Roman ruins, scenic mountains and ski ranges). With proper investments in more hotels and site development, Lebanon has the potential of doubling the number of tourists in five years.

Recent major investments in Lebanon are the Habtoorland, the largest theme park in the Middle East, and the Virgin Megastore, owned by the Virgin Group of the U.K. Currently, hotel projects worth over $300 million are under construction in Beirut, involving Hilton, Four Seasons and Starwood, creating new market opportunities for foreign suppliers of hotel and restaurant equipment.

The banking sector, a main pillar of the economy, holds $53 billion in assets, equivalent to 300 percent of the country's GDP, one of the world's highest ratios. There are 66 banks with 900 branches operating in Lebanon - Banque du Liban et d'outre-mer (BLOM), the largest bank in Lebanon, has $10.9 billion in assets.

The more than 300,000 Lebanese working in Arab Gulf nations send annual remittances of over $2 billion, most of which are deposited in Lebanese banks.

Recently, Makram Sader and Joseph Tarabay, leaders of the Lebanese Bankers Association, and Riad Salameh, governor of the Central Bank, made positive assessments of Lebanon's economic potential, and renewed faith in the country's ability to realize high growth.

Other sectors worthy of FDI include information technology (IT) and pharmaceuticals. Despite its outdated and costly IT and information infrastructure, Lebanon has the fundamental building blocks needed to become a regional center for technology: a skilled workforce, a strong private sector, world-class advertising firms, and multilingual media content providers and Web portals.

As for pharmaceuticals, foreign investment in prescription drugs production is promising. Lebanon is a leading importer of pharmaceutical drugs in the region, generating $400 million every year in retail sales, but local pharmaceutical manufacturing is very weak.

The Made in America Trade Fair that took place in the second week of November this year in Beirut attracted 314 American companies and was a positive sign of renewed international confidence.

However, Foreign Minister Fawzi Salloukh who attended the event, made an unhelpful statement that meant little economic sense. He questioned whether "Made in America" would benefit Lebanon, saying: "It will not benefit Lebanon because we are spending money on this event and spending money on U.S. products, so it is taking money from our economy."

Such fairs promote trade and economic relations and help create a U.S. lobby that cares about the Lebanese market. The trade fair this year comes eight years after the U.S. State Department lifted restrictions on U.S. nationals visiting Lebanon, and since then almost 200 large U.S. companies have opened branch or regional offices.

American franchises are all over Lebanon today, with upscale establishments in trendy locations including Starbucks, Pizza Hut, Kentucky Fried Chicken, McDonald's and Dunkin' Donuts. Many U.S. brands, including Tommy Hilfiger, Polo, and Ralph Lauren are top sellers in the Lebanese market.

Kamal Dib is a Canadian economist of Lebanese descent and author of many books, most recently "Warlords and Merchants: The Lebanese Business and Political Establishment." He is a frequent contributor to The Daily Star.