At the end of 2017, Lebanon does not know exactly where its economy stands because there is a lack of publicly available quantifiable data to suggest what direction Lebanon is headed in the coming year and beyond. We know that the economy is in a bad way, thanks to a few high-level indicators like stagnant economic growth and rising levels of poverty. But we do not know whether or not we are on the cliff’s edge, staring down into the darkness of the abyss that is an economic collapse. Rather, it seems our viewing lense is situated just far enough back to see that there are fundamental flaws within the economy, but the angle is not wide enough to know precisely where such fissures really are or how deep they go.
At the legislative level, 2017 saw several laws passed by Parliament that will directly impact the economy, such as tax increases, salary increases for public workers, and a state budget—as well as laws that will indirectly affect the economy, like an election law that should usher in the first parliamentary elections since 2009. And there have been political events, like the November 2017 resignation-turned-non-resignation of Prime Minister Saad Hariri that is hard to quantify in terms of its effect on the nation’s economy. To be sure, the laws, decisions, and events of 2017 will affect the confidence of investors and consumers alike, but they will leave their mark in ways that are not easy to forecast. It does not seem likely that Lebanon’s economy will churn more powerfully in 2018, but the legislation at least does provide the bricks that are necessary for any country in the 21st century to build a brighter economic future.
Despite the current and foreseeable difficulties that Lebanon faces, 2017 was a successful year for the government—at least in terms of providing the bare necessities of a functioning state. After such a long period during which the state was non-functioning, putting in place necessary fundamentals, such as regular elections and an annual budget, was good progress.
This return to basic governance after a long absence can have a positive effect on the economy, if the government’s work ethic is carried over into 2018 and beyond. Ahead of parliamentary elections scheduled for May 2017, certain Lebanese politicians must decide that what they really want is to govern, or decide that they do not, and resign.
[pullquote]Lebanese politicians must decide that what they really want is to govern, or decide that they do not, and resign[/pullquote]
Local politicians have for years ignored the country’s economy, disregarding its weaknesses and providing no economic vision and no fiscal policy. With the passage of a state budget, the first in 12 years, Lebanon now has what it needs to begin articulating that vision and policy. But most politicians seem unwilling or incapable to make that a cornerstone of their electoral platforms for the 2018 elections, says Sami Atallah, director of the Lebanese Center for Policy Studies, a Lebanese think tank. Instead, the traditional political parties seem more content to rehash the political messaging of the last decade, which has proven to be uncreative, unproductive, and detrimental to the state of Lebanon and its citizens. Atallah says that when it comes to campaigning ahead of the elections, the traditional political parties “will shift the debate somewhere else, to sectarianism or the disassociation policy or Hezbollah’s weapons, to divert attention from the real socioeconomic issues that matter to the people.”
For Nicholas Chammas, chairman of the Beirut Traders Association, a political crisis like the one instigated by Saudi Arabia in early November 2017 could spell doom for the Lebanese economy next year. Chammas told Executive in a November 2017 interview that the Saudi–Iranian conflict “is reverberating across the Lebanese economy.” Chammas added that the Hariri affair has already, in the month since, had a perceived negative economic impact. “People today are afraid to consume, let alone invest,” he said. “And this is very deplorable because it is happening during the fourth quarter, which is most important [period] for the economy and the trade sector: It typically represents something like 35 percent of our yearly turnover. So if we lose momentum in the fourth quarter, it will be a dire sign heading into 2018.” Any drop in economic productivity could not be solely blamed on the political crisis, and its impact cannot be isolated because the situation is fluid. But was the economic outlook bright for 2018 to begin with?
The central bank steps in
Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank, told a conference audience in November 2017 that he expected Lebanon’s economy would finish 2017 with 2.5 percent growth, according to remarks published in The Daily Star. In September 2017, the director general of Lebanon’s Ministry of Finance, Alain Bifani, told Executive that the ministry estimated that GDP growth for 2018 would “hopefully” reach 2.5 percent.
Following Hariri’s shenanigans in early November, the Institute of International Finance downgraded growth projections for 2018 from 2.9 percent to 1.8. And the International Monetary Fund, which calculates its projections using government figures, expects only 1.5 percent growth for 2017, with its 2018 estimate coming in at around 2 percent.
Atallah pointed out, the government has, in 2017 and in recent years, articulated no economic vision, and the recently passed budget—while necessary—does not begin to set out fiscal policy.
[pullquote]The Lebanese state has no plan for where to take the country economically in 2018 and beyond[/pullquote]
Enter BDL, which has for several years propped up the economy through its stimulus packages. Its latest package came in October 2017 in the form of Circular 475, which makes available up to $1 billion of financial facilities to local banks at the borrowing rate of 1 percent interest, if denominated in the local currency, or at interest rates up to the upper limit of the US Federal Funds Rate for dollar-denominated loans. The latest stimulus package, like previous ones was geared toward Lebanon’s housing-related economic activity. The 2017 package is the fifth from the central bank since 2013. That year, BDL announced a stimulus worth up to $1.5 billion, followed by $800 million in 2014, and packages in 2015 and 2016 each worth up to $1 billion.
The central bank has increasingly taken on the role of a quasi-fiscal policy maker through the issuance of its stimulus packages. The stimulus packages provided by BDL are according to its priorities, which may not be redistributive but are aimed at maintaining monetary stability and keeping Lebanon’s banks liquid. BDL’s mandate by law is to maintain currency stability and to protect the banking sector, to maintain solvency, and to ensure overall growth conditions for the economy. Growth equality is not in its purview.
The Lebanese state has no plan for where to take the country economically in 2018 and beyond. Without such a vision for the national economy, set down in the form of a high-level and multi-year document, it will be difficult to articulate fiscal policies like spending priorities and where to maximize revenue collection.
In August 2017, Parliament passed a law that increased taxes and introduced new ones, including a 1 percentage point increase to the Value Added Tax (VAT) that brought it to 11 percent, a 2 point increase to the corporate tax rate that brought it to 17 percent, tax increases on interest of deposits and on dividends, and an increase in the capital-gains tax. The constitutionality of the tax law was challenged at the Constitutional Court, Lebanon’s highest court, and was struck down in September, only to be re-legislated by Parliament with minor amendments in October. But in arguing their case to the public ahead of the high court’s decision, self-proclaimed opposition lawmakers claimed that the taxation scheme affected Lebanon’s lower class the most. At the time, Executive’s editors fact-checking the lawmakers’ claim found the opposite: The new tax burden would hit mostly idle wealth. The editors concluded that “those who are blocking the tax measures are defending the rich by sticking up for the poor.”
[pullquote]I hope the Lebanese consumer won’t panic when these VAT increases are implemented, because it will probably be absorbed into the system[/pullquote]
Spinneys CEO Michael Wright told Executive in a November 2017 interview that most of the cost of the VAT raise, which will go into effect at the start of 2018, will be internalized by retailers. He opined that retailers will try to downplay the impact of the VAT raise, referring to what happened in 2002 when the VAT was first introduced in Lebanon. “In most cases, except for cars, it was a re-regulation of taxation policy, and a trade-off between implementation of VAT and a reduction of import duty, which in most cases ended up in a [price-]neutral position. Despite the neutrality of the price change, the consumers reacted terribly. [Sales] volumes dropped by 20 percent and never recovered, even though there was no change in prices. So I hope the Lebanese consumer won’t panic when these VAT increases are implemented, because it will probably be absorbed into the system,” says Wright.
The new tax measures have already negatively affected consumer confidence, according to third-quarter results from the Byblos Bank/American University of Beirut Consumer Confidence Index, which were released in December 2017. In a press release, Byblos Bank’s head of research, Nassib Ghobril, explained, “The steep decline [of the index] in July, and its continuing decline in August and September, show that the negative impact of the tax hikes on sentiment is a lot more significant than any potential positive impact of the public-sector wage increase.” Ghobril added, “The results clearly show that the massive tax hike will offset the much-hyped positive impact of the public-sector wage increase on consumption and, by extension, on economic activity.”
In reality, nobody knows how taxes will play out over time, because they were not studied by the government or non-partisan organizations, and statistical modeling appears to not have been done. No one can determine who will benefit and who will be hurt, because there is no data.
The ad-hoc taxation impact might be felt in two years, and it has been driven by political interests and expectations, but not by modeling. No one can say how many households will be affected, because the government has no idea how many people live in Lebanon: No census has been carried out since 1932, and there are no reliable figures on the size of the tax base, the number of individual taxpayers or corporate taxpayers, or the size of the informal economy. Because there are so many variables and unknowns, the impact of taxation on the national welfare situation is not at all predictable.
Similarly, there is no statistical modeling of how the long-overdue salary increase for public sector workers will impact its beneficiaries, or of what will happen to the state’s finances because of this new spending. Proponents of the new taxes argued that they were necessary to finance the new state spending, which came in the form of the salary increase. Alain Bifani, director-general of Lebanon’s Ministry of Finance, told Executive in a September 2017 interview about how many households would benefit, but Bifani was not accurately able to quantify the figure because some households have multiple members in the public sector, and there is not a clear segregation of households and individuals that benefit from the salary increase. What the government’s figures can show is the number of beneficiaries counted as individuals, but the government cannot compute that into a number of households. If the tax base is calculated using the number of households and not the number of individuals, it will be inaccurate.
Also starting in 2018, commercial entities will not only have to pay the increased tax for corporations, but they may be subjected to payment of an annual fee to keep current the commercial registration of their entity. According to lawyers Executive spoke with in November 2017, Law 20, which passed earlier in the year, requires payment of an annual lump sum for every business location, including its branches and points of sale. Offshore and holding companies are exempt, and the lump sum fee is not tax-deductible and is due even if the company makes losses. The law was an amendment to previous laws that went unimplemented, so its impact is unclear, and the number of companies that would be affected is not known, making revenue estimates unpredictable.
Grim employment numbers
Even if the effects of new taxes, of the salary increase for public workers, and of the proper projection of state spending and revenue collection in the form of a budget for 2017 do begin to be measured in either quantifiably positive or negative ways, the economic feeling of many Lebanese citizens and non-Lebanese residents can be described as overwhelmingly anxious.
In the years since 2011, Lebanon’s national economic growth has plunged to negligible rates, because of a region-wide economic depression and the disruption of trade routes with Lebanon’s Arab neighbors due to the civil war in Syria. Lebanese exports have dropped by over $1 billion in the course if five years when comparing year-on-year numbers from 2012 to September 2017. In the same period, Lebanon’s hospitality and tourism sectors have also been negatively affected because of of local political instability, security threats, and a travel boycott by some Gulf countries to Lebanon. While 2017 tourism numbers did signal a better year for Lebanon’s hotels, Pierre Achkar, president of both the Lebanese Federation for Tourism Industries and the Lebanese Hotel Association, told Executive in a November 2017 interview that tourists have “started coming back in small numbers, and we did indeed see an increase in the number of Gulf tourists over the previous year—but it was nowhere near the numbers in 2010 and before.”
The economic bleeding that is visible at the national level pales in comparison to the pain individuals felt in 2017, and they can expect no quick medicine to alleviate their economic suffering in the coming year. The downturn in Lebanon’s economic output has pushed more people into unemployment or underemployment, and poverty rates have risen.
[pullquote]The downturn in Lebanon’s economic output has pushed more people into unemployment or underemployment, and poverty rates have risen[/pullquote]
According to an International Labour Organization (ILO) model, estimates of the total unemployment rate among Lebanese nationals has hovered at just under 7 percent between 2011 and 2017. In the same period, total labor participation for Lebanese nationals older than 15 increased by one percentage point to 47 percent, with the number of people in the labor force rising to 2.2 million by 2017. Unemployment for Lebanese youth, which the ILO defines as the ages between 15 and 24, has climbed steadily to almost 22 percent.
While the employment figures might not seem great for Lebanese nationals, labor participation among the over 1 million UNHCR-registered Syrian refugees in Lebanon is outright bad. According to 2017’s Lebanon Crisis Response Plan (LCRP), the ILO projected the size of the Syrian labor force in Lebanon at 384,000, and estimated that 36 percent were unemployed. The LCRP document also gives ILO figures showing that only 4 percent of Syrian workers reported to be working in Lebanon are skilled workers. Most Syrian refugee workers are employed in three sectors: agriculture (24 percent), services (27 percent), and construction (12 percent).
Mireille Girard, head of the UNHCR in Lebanon, told Executive in a November 2017 interview that the Lebanese economy is not generating enough jobs to absorb Lebanese workers into the labor force, not to mention Syrian refugees. She says competition between Lebanese nationals and Syrian refugees for jobs that would classify a laborer as underemployed (being below their level of education or trade skill, for example) has exacerbated the labor market’s shortcomings, diminished earnings and household spending power, and has put relations between Lebanese and refugees on edge. “The level of Lebanese vulnerability has also increased in that there is very serious unemployment, because the economy is not generating jobs, and skilled jobs are really not created, there is less construction and tourism, [and] there are [fewer] jobs in many sectors. People are going more and more into unskilled labor. This is creating a competition between the Syrian refugees and Lebanese, and this creates tension.”
Girard told Executive that most Syrian refugees are underemployed, working on average only half the month. “The number of [refugees] that have secured a fulltime job is quite small. [At the] start of the month, [refugees] don’t know how many days they will be able to work, which is extremely destabilizing, because they don’t know if they will earn enough to pay for rent. We know refugees on average pay $200 for rent, $35 to $50 for electricit, and about $30 for water, per month. These are running costs, no matter what. For education, the costs are covered for Syrian and Lebanese in public schools, but there are transportation costs, clothes for children, and a number of other expenditures. If a refugee works two weeks a month and the daily labor rate is about $12 per day, that will be about $177 per month.”
[pullquote]Ten calendar months of functioning governance were a welcome change after years of policy stagnation, but as 2017 came to a close, Lebanon was once again pushed from outside toward the unknown[/pullquote]
The figures on poverty rates for Lebanese are not pretty. The first target of the United Nations Sustainable Development Goals for Lebanon is to reduce the poverty rate to zero by 2030. Lebanon is far from achieving this goal, as the available statistics show. UNDP is preparing to update numbers on Lebanon’s poverty rate, but the latest numbers are not yet available. What is available are 2008 poverty stats from a Ministry of Social Affairs and UNDP joint study, showing that then “28.5 percent of the Lebanese population (or 1.07 million individuals) were estimated to be poor, living on less than $4 per day. About 300,000 individuals were considered as extremely poor, living on less than $2.4 per day, and unable to meet their most basic food needs.” A second study from 2015 from the Central Administration of Statistics, Lebanon’s public statistician, found that before the Syrian refugee crisis began in 2011, “poverty in Lebanon was estimated at 27 percent.”
As for Syrian refugees, the Human Rights Watch researcher Bassam Khawaja told Executive in a November 2017 interview that nearly 70 percent of the population lives below the poverty line only $3.84 per day, and that while data is limited, “all the assessments are that things are getting worse instead of better.” Girard told Executive that worsening poverty and extreme poverty rates for Syrian refugees have made life increasingly desperate. “Between 2014 and 2015, 50 percent of Syrian refugees were below the poverty line; now it has become 70 percent. Twenty-five percent were below the extreme poverty line, or survival line, and that is now 50 percent. The level of vulnerability has increased dramatically.”
U-ncertainty looms again
It is rare to meet a resident of Lebanon who thinks that planning is possible in this country. Ten calendar months of functioning governance were a welcome change after years of policy stagnation, but as 2017 came to a close, Lebanon was once again pushed from outside toward the unknown. With an increasingly vulnerable refugee population, rising resident poverty, stagnation in economic growth, and external dangers creeping up on the economy’s best-performing sector, it is nearly impossible to forecast what may come next.