Doom and gloom

Lebanon’s economic outlook for 2004 is bleak, despite expectations of global recovery

Views on Lebanon’s economic perspectives have tended throughout the post-war period to concentrate on macroeconomic and fiscal issues. As a result of the worsening fiscal situation, socioeconomic needs in the last few years became overshadowed to a worrying degree by concerns over the national debt and its servicing. The state’s ongoing and exasperating procrastination in settling long outstanding dues with the National Social Security Funds for medical treatment of civil servants and other obligations in 2003, in itself an inexcusable inaction on behalf of any government, can by no stretch of imagination be explained in any other way.

This year’s social debates were ostensibly fueled by self-serving political agendas, a primary example for the latter trend shown by complaints over the “hijacking” of the October 23 national strike. Power players and interest groups allegedly converted these demonstrations over a variety of popular financial demands into stages for promoting themselves. Nonetheless, 2003 was universally recorded as a year of relative relief and macroeconomic calm for Lebanon. This is owing to the debt reprieve under the Paris II agreements with donor and lender nations and institutions, as well as to financial engineering measures taken under leadership of the central bank and realized under strong participation of the banking sector. For 2004, however, a year in which the presidency of the republic is to be decided upon and overdue commitments in fiscal debt reduction urgently await fulfillment, there seems to be little hope for major improvements in the fitful macroeconomic situation. Expecting less than 3% in growth, international analysts project next year’s development of Lebanese GDP at little variance to 2003. While modest growth is vastly preferable over recession, the country would need to see a stronger economic and productivity gain to rack up hopes for breaking the debt cycle. Additionally, it is unsettling that 2004 elsewhere looks to be much brighter than 2003. The OECD has upbeat expectations, sensing “ample evidence of the renewed strength of the world economy” and a “palpable recovery” not only for the US and Japan. “Global activity is picking up,” stated the organization’s freshly released outlook for 2004/05, “with financial market conditions improving and business investment in the process of taking over the baton from consumption.” In the Arab region, many countries had grown more than Lebanon in 2003. Also for 2004, the Economist Intelligence Unit’s GDP development expectations for countries such as Bahrain (5.4%), Jordan (5.2%), Qatar (5%) and the UAE (4.1%) are way ahead of Lebanon’s 2.5% EIU projection. For the petro-economies of Kuwait and Saudi Arabia, expectations of a major oil price decrease push GDP growth predictions below 1.5%. Iraq, where a 19% leap is forecast, is in a development-need category of its own, but relative to other countries in the Gulf and Levant, Lebanon’s chances for increasing its role in the regional economy do not appear impressive. To impel better growth, Lebanon for one thing will require vast improvements in the quality of governance. At least that is what World Bank assertions of the importance of good public governance for economic development suggested in autumn 2003, in combination with the institution’s assessments of governance deficiencies in MENA countries. Advancing Lebanon beyond meandering steps of sluggish development seems more difficult to conceive without socioeconomic impulses that ease the widespread sentiment of suffering from consistently tougher living conditions. In one recent survey, over two thirds of respondents deemed social spending on health care and education as the budget items the government should prioritize.

While preoccupation with socially less relevant general spending and neglect of reform needs are often associated with the escalation of Lebanon’s public debt and the downturn of socioeconomic living quality, the irony of the present situation is that insistence on keeping social spending accounts low and macroeconomic prudence high are the best course forward. Both Yves de San, the UNDP resident representative, and Selim Hoss, former Lebanese prime minister and economist, espoused this view when asked by EXECUTIVE what they judged to be key economic issues for 2004.

In light of several years without adjustments, demands for wage increases are fair, “but the big question is if the economy can afford it,” Hoss said. “We have an army of employees in public administration. If the minimum wage is increased now, it will have a tremendous negative effect on the budget.”

Both government and employers would offer strong resistance to wage increases, which neither public nor private sector could afford, he cautioned. “Should this increase be accepted, it would have repercussions on the general price level and a possible weakening of the monetary situation. This might prompt the central bank to even increase interest rates to higher than they are now, to safeguard the monetary situation.”

Regardless of how the fiscal debt problem had built up to its present magnitude, the macroeconomic situation needs to be the focal concern, said de San. “I don’t think that we have a choice,” he said. “One cannot let the country go belly up because then, the social impact would just be impossible to manage. I think that is the priority.”

As long as the country steered clear of fiscal meltdown, the UNDP official did not anticipate a social explosion, except for improbable scenarios such as “if suddenly the banking sector were to crash or the country itself would go bankrupt. As a result of that, the shock would be too great for the poorest third of the population and very heavy on the middle income group.”

Also according to Hoss, a social explosion is not likely. People had found an escape route from the economic pressures through emigration, he maintained, and this outflow of labor (and the inflow of remittances) should not be taken lightly.

The government’s economic objective for 2004 should be to overcome the cycle of debt and deficit. “This vicious circle can be broken only at the point where the rate of increase in GDP is higher than the rate of increase in public debt. When we reach that point, we reach a virtuous cycle,” he said. “The clue is encouraging foreign investment and encouraging Lebanese domestic capital to be invested inside the country. Investment is the clue to the whole issue.”

For de San, efforts for economic improvements ought to put the human being back at the center of development decisions although this was not always easy to achieve conceptually. “The country is not doing too bad when compared to others, especially when seen against peer group of economies of similar size,” he said. “Where it is not doing so well is in comparison to itself. Segments of the population suffer and are less well off than before. Poverty and disparities, they are so obvious.”

However, when seen against a baseline from the mid-90s, the country had been advancing in certain socioeconomic issues and was not too far from achieving some results, he added. Improvements in fields such as securing equitable class sizes and teacher ratios in rural and urban schools were not primarily an issue of cost, and awareness had grown that funds could be used more productively. A recent country report on Lebanon’s situation in relation to the targets of the UN Millennium Development (MD) Goals showed a reasonably high probability for achieving those goals, which are built around the key target of halving by 2015 the proportion of people living in extreme poverty. While all available statistics and figures had been put to use in drawing up the report, the task now at hand would be to examine how much it would cost to realize those goals. “What we need to do now, is to see what reaching the MD goals in 2015 means in real cash needs. That job is still to be done,” de San said. “But I don’t have the answer yet. Once we have it, we will be probably able to see whether the country can afford it. Whether it can afford it with the current situation is one thing. Whether it can afford it three years from now depends very much on decisions that have to be taken on a number of issues.”

It bears repeating: these urgent decisions begin and end with macroeconomic matters. The World Bank (WB) in the course of 2003 left no doubt over its growing concerns at delays in privatization commitments and fiscal promises by the government in Beirut. The WB quarterly assessment of Lebanon’s latest developments was still impending in early December 2003, but the institution’s senior country economist, Sebastien Dessus, made it clear enough. “If there is one issue in this country, it is the fiscal issue and debt sustainability,” he told EXECUTIVE.

With presidential and parliamentary elections on the agenda within the next year-and-a-half, inertia is much likelier in 2004 than any enlightened decision-making where it is most critical – namely, the political arena and public sector administration. Some countries in the region are looking at better economic prospects. At the end of 2003, the Middle East is a changed but not necessarily better place than 12 months ago. However, this moment’s most positive difference is that people have no impending invasion of Iraq to dread. Hopes for a better future are always abound when a new, however untried or out-of-the-ordinary, attempt is launched towards solving the region’s real essential problem: the Palestinian-Israeli conflict. For Lebanon, however, both local and international experts confirm that the region’s stability or instability will not be the key influence on the economy in 2004, and certainly won’t do as an excuse for not making progress in solving homespun problems. At least for one more year, socioeconomic concerns again will not be receiving the attention and support they deserve. Before aspiring for regional roles and addressing any other issues, the country may have to demonstrate that it can handle its own decision needs. As one local influential in the younger generation of business executives suggested, perhaps national decision-making should try a time-tested recipe to encourage agreement: put all involved into one big hall, lock the doors and misplace the keys until unity has been reached and a comprehensive course of action signed. The question is if events in 2004 would suffice to reach that desirable victory.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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