An uphill struggle at best

The destruction and the economic fallout from the war may prove too much for even the most resilient Lebanese

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The July war had many similarities to the outbreak of the 1975 hostilities – most notably in how it began, with a political party dragging the nation into conflict – suggesting that 31 years and $45 billion of (unofficial) public debt later, not much has changed. Lebanon and its government were bypassed in the decision to wage war with the fourth-largest army in the world, and both today face serious economic consequences. Early estimates of the economic impact of this short but nasty war show that billions are needed to rebuild the damaged infrastructure; further billions have been lost in the form of income and opportunity costs. Economic growth and investment activity have been reduced to a crawl.

Adding up the bill

According to the Council for Development and Reconstruction (CDR), the largest single infrastructure cost is rebuilding housing units, which until now has been estimated at around $2.2 billion by some of the country’s leading economists. The cost of rebuilding other vital infrastructure – roads, bridges, electric plants, water works, industrial factories, and storage facilities – will probably amount to around $1.4 billion, bringing the total cost of the direct infrastructure repairs to $3.6 billion at the time of the ceasefire announcement. It is also estimated that the job will take around three years, provided funds continue to flow in from friendly nations. So far, Saudi Arabia has deposited $550 million with the Lebanese government towards reconstruction, in addition to in-kind humanitarian aid and a commitment to rebuild 10 southern villages; Kuwait has also given $320 million in aid – and both of these contributions should be disbursed relatively quickly. A further $940 million was raised from participants at the Conference on Lebanon’s Early Recovery held in Stockholm on August 31. A second conference, slated for late 2006, will seek funding for longer-term recovery. In addition, the reconstruction of some of the destroyed infrastructure, such as key bridges, is being financed by the private sector and individuals, including former PM Najib Mikati, the Hariris, and Casino du Liban.

Iranian funding

Despite the generosity of the international community, Lebanon cannot possibly finance the rest of the infrastructure repair on its own. Although it has sufficient foreign currency reserves (around $13 billion), these funds are needed to support the currency and to provide liquidity to the banking system. Hizbullah’s provision of, on average, $11,000 in cash to each family whose home was destroyed, regardless of sect or political affiliation, has helped consolidate its support among many of the war’s victims. Although the government has pledged even larger amounts – at time of printing, the Prime Minister had promised $33,000 per family – the money has yet to be delivered to those in need. The speed and scale with which embattled Hizbullah was able to provide support has led to widespread speculation that the cash being offered has come directly from Iran. The race with Iran’s aid (via Hizbullah) may be even more unequal due to the bureaucracy inherent in state relief efforts, and potentially give Hizbullah more ammunition to criticize the government’s ability and willingness to rebuild a damaged infrastructure.

In addition to the direct cost to the economy in terms of destruction, there is also the loss of income from tourism. The losses in tourism and government revenues, as well as the expected drop of around $1 billion in private consumption should lead to negative growth in this year’s GDP. The latter was estimated to stand at around $22.2 billion in 2005, which in itself was not a great year, and is now estimated to regress by a slight 0.3% to 0.5% by year end 2006. The limited negative growth would be explained partly by a potential increase in public investments or consumption, as the government should step up spending to accelerate the reconstruction effort, while the trade balance is now expected to remain at around the same deficit as previous years. Prior to the crisis, exports were expected to grow by up to 40%, reducing the trade deficit.

Thousands of workers, especially in seasonal and informal sectors, are already unemployed in the wake of the conflict. Fall out from the war could see the loss of as many as 50,000 jobs in the short-run; a massive blow for an economy such as Lebanon’s, undoubtedly leading to a massive drop in private consumption. Other economic sectors, including the public sector, which will not make redundancies, will nonetheless incur substantial costs as salaries are being paid without parallel revenues flow. Indeed, taxes, private bills and revenues were not collected during the 33 days of fighting and it will take time before payments start to be received on schedule. Some companies in the private sector are even considering transferring, at least on a temporary basis, their offices and, in some cases, their production facilities abroad. This is reminiscent of the dark days of 1976, and may lead to a reduction in the size of the economy.

Confidence hit

But most significantly, this latest war was the final straw for many Lebanese and foreign investors. Significant numbers of professionals and young talent have left for greener pastures, while companies, banks and entrepreneurs are left cogitating on whether it is worth going on in a country where the government has no control over its own destiny.

Although wartime deposits of $1.5 billion from Saudi Arabia and Kuwait with the Central Bank are a sign of support to the Lebanese currency and the state’s ability to meet its obligations, the uncertainty of living a“normal” business life, let alone generating profit and prospering, is too big to bode well.

The future of Lebanon now rests on two important factors: Hizbullah’s realization that they have to share a country with a silent and liberal majority and that fighting wars on behalf of regional powers and developing a culture of martyrdom are not the right ingredients for economic prosperity or for challenging controversial US strategy in the Middle East.

While Lebanon cannot control the second factor, starting to sort out the first would definitely constitute a step in the right direction, by bringing the country one step closer to its elusive, long-stated aim of true independence. One cannot hope for more.