Lebanon has an exasperating array of economic issues which will need to be tackled by the new government that will be formed after the June 7th general elections. Many leaders speak about economic plans and reform, but can their walk match the talk?
“Not one of the current candidates for the upcoming elections has a clear understandable economic vision for Lebanon,” says Oussama Safa, the general director for the Lebanese Center for Policy Studies. “This shows that accountability and checks and balances have no part in the elections. The elections are a battle of slogans not programs.”
As part of this magazine’s election coverage, Executive has asked Lebanese business figures, academics, economists and civil society leaders to provide what they think the economic priorities for the next government should be.
Stability seems to be top priority.
“If there is political stability and security then there will be confidence. Confidence is the key aspect to economic growth,” says Nassib Ghobril, head of economic research for Byblos Bank.
Safa says that to achieve stability, Lebanese politicians must place their first priority on “forming a national unity government and staying away from controversial issues.”
However, March 8 and March 14 have already begun to disagree over the meaning of a national unity government. The March 8 coalition has made clear that, for them, a unity government means that the minority has veto power in the next government. March 8 has already offered March 14 a blocking minority if the opposition wins. But March 14 has made clear that they want direct competition in this election where the winner takes all. Prime Minister Fouad Saniora told Reuters that “a national unity government is not only favorable but it is important… But for us to depend on ‘veto power’ governments means that we will reach… a point where we cannot advance.”
Stability is one priority that does appear to be achievable, despite the current disagreement over the makeup of a unity government. Rapprochement between Syria and Saudi Arabia helps, and increases the prospect of a government with a minority wielding veto power. Antoine el-Khoury, general manager of BREI Real Estate, says “we should be smart enough to find common ground.”
Besides stability, Khoury and other interviewees say the new government should focus on reducing the role of the state, fighting corruption, increasing transparency and containing the economic crisis.
Reducing the role of the state
The cost of doing business in Lebanon is prohibitive for Lebanese businesses and foreign investors. Reducing the role of the state is seen as a key step toward creating a better environment for these business interests. This is seen as particularly urgent given the increased competitiveness of the region and the global financial crisis.
In their report ‘A New Path for Economic and Social Development in Lebanon’, Marc Daou and Jad Chaaban — president of the Lebanese Economic Association and an economics professor at the American University of Beirut (AUB) — articulate how Lebanon is in danger of being overrun by the rest of the region: “Human capital, Lebanon’s main competitive advantage, has deteriorated. Despite spending lots on education, the quality of learning is low compared to other countries, and outcomes are not up to expectations.” One of their recommendations is to “reduce the role of the state to the regulation and provision of public goods.”
Nassib Ghobril of Bank Byblos argues that the new government should go even further than this. Ghobril claims that 2007 was one of the worst years in Lebanon’s recent modern history but the economy still grew by four percent.
“What does this tell us? We only need a minimal government in Lebanon,” he says.
The level of bureaucracy that the state imposes on businesses in Lebanon can be incredibly taxing, says Safa. “It takes 42 days to set up a business in Lebanon which is probably the longest in the world.”
Another reason the private sector wants the state out of its business is because of the negative relationship between the two. Khoury says that when his company goes to the civil service they make him and his company “feel like thieves,” just because they are businessmen. He says that at the same time the government is not doing enough to promote responsible businesses. “We feel alone fighting against irresponsible businessmen draining the resources of the country,” remarks Khoury.
The bloated Lebanese bureaucracy is viewed as needing a complete overhaul, which would include shrinking and reorganizing the government. One interviewee who requested to remain anonymous says that certain parts of the administration are very corrupt. The procedures laid out by the various administrative departments are deliberately unclear and inconsistent; a citizen always needs to hire mediators. He also added that his company must pay bribes to various part of the government administration to get the public documentation.
Corruption and transparency
Lebanon is currently ranked 102nd of 180 countries on the Corruption Perceptions Index (CPI). Other indicators such as the Global Integrity Index, the World Bank Governance Indicators, as well as the Open Budget Index confirm Lebanon’s desperate situation when it comes to corruption and transparency.
The Lebanese Transparency Association (LTA), the Lebanese chapter of Transparency International, has been working hard to bring the government to account. Gaëlle Kibranian, program manager for the Democratization and Public Accountability program at LTA, says Lebanon’s situation is dismal.
“Lebanon remains [a] confessional [system], which shapes the relationship between citizens and state, as well as the lack of separation of powers,” Kibranian says. “This leads to nepotism, clientalism, and patronage.”
Kibranian argues that one of the first measures the government should be taking is to “implement the United Nations Convention against Corruption (UNCAC), which was ratified by Lebanon.”
Khoury confirms the need for more ethics, particularly in regards to the real estate sector, “which is not only important for us but also in attracting investors.”
But it’s not all bad news and there is some hope that politicians will take corruption seriously. The elections and the new election law are a case in point. Kibranian notes that the monitoring and controlling of this year’s campaign spending has made a difference.
“It has meant that politicians are taking the question of corruption very seriously, trying to abide by the law, in order to avoid future challenges,” claims Kibranian.
Apart from outright corruption through bribes, Safa gives another view of the problem in relation to overlapping interests. He says close relationship between the government and the Lebanese banking sector is too close for comfort.
“The bankers and financers are in bed with the government — the prime minister is a former banker and the Lebanese government owes billions to the Lebanese banking system,” Safa says. “The result of this is that different economic sectors are ignored.”
The power of the banks was recently illustrated in their rejection of a proposed interest rate increase and a social security proposal that was stopped by the Bank Association. According to Nassib Ghobril, 54 percent of the public debt is owed to Lebanese banks, illustrating what a stranglehold the banks have on the Lebanese government.
But the banks have recently been held up as Lebanon’s savior, and rightly so, in the face of the global economic crisis. The firm foundations of the Lebanese banking system, demanded by the Lebanese Central Bank, have saved the economy, thus far, from significant harm amidst the turmoil of the global economic crisis. The economic crisis continues however, and the experts say the new government should focus on protecting Lebanon.
The global economic crisis
The president of the World Union of Arab Banks, Joseph Torbey, recently called for the Lebanese government to create a ‘national strategy’ to strengthen the financial and monetary system against the financial crisis. Torbey says a strategy is urgently needed, given Lebanon’s large public debt.
This was backed by Freddie Baz, general manager of Bank Audi sal-Audi Saradar Group, who wrote in the Daily Star that the financial crisis was worse than anyone could ever imagine. A similarly gloomy view was reflected in a comment by an anonymous J.P. Morgan adviser quoted in the Star. The advisor didn’t see an end to this crisis before 2015.
So, despite the fact Lebanon has so far escaped the consequences of the global economic crisis, and even benefited from the crisis through increased deposits, there may still be a long, rough road ahead.
Although Lebanon may have benefited from increased deposits, Bank Byblos’ Ghobril says many of the resources for financing the public debt are now gone due to the financial crisis and the lack of liquidity.
The chance to privatize the telecommunications sector and Middle East Airlines has now been missed. Ghobril says even if the privatizations continue, it will be a long time before investors are willing to pay the prices they were eyeing just a year ago, in 2007.
“A Credit Suisse report stated that the government could have received $5 billion for the telecom network but in the current financial crisis the valuation has collapsed,” Ghobril stated.
Most significant for Lebanon is the predicted fall in remittances, which account for 27 percent of Lebanon’s current account receipts — the highest such share in the region. Ghobril warned that the future is precarious for Lebanon economically because of the likelyhood of a huge drop in remittances.
“Standard and Poor’s carried out a stress test that showed that if remittances drop by 20-30 percent, as expected, this would lead to a current account deficit of 17 percent of GDP,” Ghobril says.
Not only does Lebanon have to cope with its citizens abroad not sending money back, but Safa says the new government will also have to cope with “waves of Lebanese [who] may return.”
“A main challenge for the government will be finding jobs for all of these returnees,” says Safa.
The challenges for the Lebanese economy and next government are enormous. It is clear that the main priority for the next Lebanese government should be stability, and once this is achieved then the many challenges to the Lebanese economy can be addressed.
These challenges are intertwined and can be solved through the creation of good governance policies. Good governance in the current sectarian system is yet to be achieved and many doubt the upcoming election results, regardless of who wins, will change this feature of Lebanese government.
However, if the above priorities are addressed in an economic strategy that is then implemented, the economic woes of the budget deficit, the balance of payments, social inequalities and the trade deficit could all start to be ameliorated. Being content with stability, however, may be more realistic.