Lebanon’s rosy 2006 shattered by war and political killing

As recently as early November 2006, local and regional economic experts were projecting exponential growth across all sectors of Lebanon’s economy, including rapid recovery from the damages caused by the 34-day war between Hizbullah and Israel this summer. But given the assassination of Lebanon’s Minister of Industry, Pierre Gemayel, on the eve of National Day and threats for further eliminations of other high profile political figures, the country’s outlook was put in jeopardy. However, Lebanon is known above all else for its resiliency, and this, experts predict, will pull Lebanon through its political instability into 5% to 8% growth in 2007.

Before it was thrown into another period of turmoil, Lebanon’s economy had made impressive gains in the first half of 2006, and in some sectors, even afterwards. The banking sector—the strongest and most resilient sector in the country—registered strong profits and assets growth, with BLOM Bank leading the pack in terms of profits with LL199.65 billion ($132.2 million) at the end of September, and Audi Saradar coming out on top in assets with LL20.08 trillion at the end of September, up from LL16.42 trillion a year earlier.

The tourism sector, which accounts for approximately 10% of total government annual revenues—saw a first ray of hope for recovery in September with an increase of 153% in the number of incoming tourists compared with August. The real estate sector continues to witness exponential growth despite the political upheaval. Gulf investors’ appetite for Lebanon’s real estate market seemed insatiable as new mega-projects worth billions of dollars were announced in 2006. Property taxes recorded a 51% increase in the first half of the year. The banking sector—which sustained Lebanon’s economy for many years during the civil war, and now continues to do the same after the assassination of former Prime Minister Rafik Hariri—has positioned Lebanon as a regional leader in banking and financial services.

Macroeconomic Check

According to the Lebanese Ministry of Finance, Lebanon’s budget deficit expanded by 54.95% during the first nine months of 2006, standing at LL2,989 billion at end of September, up from LL1,929 billion over the same period in 2005. Today, the country’s total debt to gross domestic product ratio is almost 190%, while the internal debt to GDP exceeds 120%.

According to figures issued by the central bank, Lebanon’s balance of payments (BoP) registered a surplus of $2.2 billion in the first nine months of 2006, compared to a deficit of $191 million a year earlier. In September 2006, the BoP registered a surplus of $640 million, compared to $235 billion in August 2006 and $152 billion a year earlier. September’s BoP came as a result of a $325 million rise in the net foreign assets of the central bank, coupled with a rise of $315 million in private banks’ net foreign assets.

Figures released by the Association of Banks in Lebanon shows the country’s gross public debt reached $39.4 billion in August 2006, up 1.6% from last July, and up 6.9% year-on-year. In turn, external debt rose by 2.4% from last July to $20.4 billion, while gross domestic debt increased by 0.7% to $18.9 billion. Year-on-year, external debt increased by 11% from $18.4 billion in August 2005, while domestic debt went up 2.8% in the same period.

Better late than never

After several tries and many delays, the 2006 Proposed Budget Law was sent to the Council of Ministers for approval in early November. (The 2005 budget was not approved until the start of this year due to political bickering). Although Minister of Finance Jihad Azour said that the 2007 draft budget wuld be ready by December 2006, analysts predict further delays and don’t expect the 2007 budget to be approved until mid-year.

The 2006 budget calls for a total spending of $7.4 billion, up $793 million from the 2006 budget. The Ministry of Finance had predicted a decline in deficit to 20% for 2006. However, the ministry’s plan went out the window when the devastating July-August war increased the projected deficit to 40%, compared with 30.83% in 2005. Azour said that Lebanon’s public debt would reach $41 billion by the end of this year, with the increase mainly due to material damage to the country estimated at $3.6 billion.

Revenues reached $4.4 billion, down from $4.6 billion in the 2005 budget. The drop in revenues and rise in spending is mainly attributed to the rise in military and defense expenditures after the Israeli war, and the decline in tax revenues after the ministry implemented tax exemptions due to the hostilities. The 2006 budget, which has yet to be approved, is expected to terminate the duties of the Council of the South and the Fund for the Displaced by the end of 2008. The 2006 budget deficit of $3 billion will be financed through the issuance of treasury bills.

Reforms? What Reforms?

Economic reforms and privatization of the state-owned companies was supposed to get started in early 2006. And sure enough, news about the good performance and planned privatization of the country’s flag air carrier, Middle East Airlines (MEA) and the rescue and successful sale of BLC Bank was encouraging to many local business leaders and analysts alike. Officials also re-started talks about the country’s power firm, Electricité du Liban (EDL), with plans to sell it to private investors or possibly float it on the stock market. But experts say that if the government is to be successful in its efforts to privatize state-owned enterprises, it must first strengthen the equity market, and make it efficient so that an average citizen—not just the elite—can participate in the privatization process.

Furthermore, reforms and privatization require a united will by all the parties involved in the governing of the country. Given the current tense political atmosphere, analysts say privatization plans will not see the light in early 2007. Possibly, if the Siniora government manages to create a united cabinet in the next three months, the privatization process and other economic reforms may start to move forward towards the end of 2007.

To Paris III or not to Paris III?

Lebanon is expected to receive major financial aid from the Paris III conference, scheduled for January 25, 2007. According to some analysts, the country needs about at least $8 billion for the reconstruction process and to repay its $2.4 billion Paris II loan that is maturing in December 2006. The Paris III meeting will mark the third time the French capital has hosted an aid conference to help Lebanon since 2001, when the Paris I conference raised 500 million euros.

However, realistic expectations for Paris III are estimated around $4 to $5 billion. Economy and Trade Minister Sami Haddad pointed out in early November that Lebanon would need to raise a minimum of $4 billion at Paris III in order to avert a financial crisis. "We expect to get double the amount of Paris II and we expect to get soft loans and grants,” he said. Haddad also hinted that Lebanon is “seriously” considering an IMF program and officials are working out the details before an announcement can be made.

Paris III was due to convene last year, but the conference has been repeatedly postponed amid political bickering over an economic reform program, including IMF requirements. The government is pressing the opposition to accept an IMF program to help the country—not simply to finance reconstruction, but also to restructure the economy. Prime Minister Fuad Siniora and his team have put together a comprehensive five-year economic strategy that includes plans to reduce the fiscal deficit, bring down state debt and spur economic growth. Other top items on the Paris III agenda include serious commitments by the Lebanese government on privatization, specifically the country’s two mobile telephone providers and EDL, increasing tax revenues and implementing measures designed to improve and increase private investment.

Discussions in business halls say that Paris III may not happen this year if a comprehensive solution for the country’s internal political disputes is not found soon. The opposition—made up of Hizbullah and other pro-Syrian groups—has made it clear that if they do not get the concessions they are looking for, they will derail any economic programs and obstruct the government from carrying out its duties. Almost 1/3 of all government expenditure is in interest payments on existing debt, and if Paris III and other forms of assistance could reduce this debt, Lebanon’s troubles could be quickly reduced. And should Siniora’s five-year plan play out, the country’s debt-to-GDP ratio would stabilize, raising GDP growth to an average of at least 3% over the life of the plan.

2007 projections

Central Bank Governor Riad Salameh has emphasized that prospects for growth in 2007 depend on a positive political environment, which in turn would provide a favorable investment climate. He also pointed out that a successful outcome to the Paris III conference would buttress projected growth.

Although it wasn’t an easy feat, Lebanon was able to maintain financial stability during the war with Israel and this has raised confidence in the country’s ability to protect its currency in the short term. With the assistance of $1.5 billion transferred to the central bank by Saudi Arabia and Kuwait, the Lebanese pound’s peg to the US dollar was sustained throughout the conflict. Nevertheless, a prolonged political crisis, adding pressure on reserves to meet demand for foreign currency, could still place the pound under serious strains.

Lebanon must now resolve its political disputes and allow the country to enter a new era of rebuilding its infrastructure, economy, social core—and its status on the world stage. All involved know that changes of such magnitude usually come with a heavy price, but alas, Lebanon has already paid a great price many times over. The time has come to move forward with all reform plans aimed at stimulating growth, creating employment and improving social indicators. For Lebanon, 2006 was a dramatic year. The economy ended the year almost unchanged in size from the beginning, with widespread forecasts of zero GDP growth or possibly a 5% contraction. Now, Lebanon must reduce the large public debt and its heavy burden, and foster a stable business environment conducive to investment and job creation.

Furthermore, it is time to pass a law promoting fiscal accountability limiting the government’s borrowing and reducing the risk of inflating the deficits. The capital market must be further developed and promoted among the country’s citizens, many of whom hold substantial savings that could be used in the privatization process, thus creating liquidity and encouraging internal investments. This will also encourage additional cash-flow from the GCC and other foreign investors.

Lebanon’s friends have already proven their willingness to assist Lebanon on all levels. Lebanon must now seize this opportunity to meet the people’s desire to live in dignity and prosperity, to live in peace, building a future based on consensus and coexistence. For citizens and foreigners alike, Lebanon’s diversity, multi-confessionalism, freedom of expression, democracy, tolerance and liberty is equal to none. Simply said, this must be preserved.