Economy Voices – Reform Horoscope

Key Lebanese figures offer economic predictions for 2005

Joey Ghaleb: Economist at the ministry of economy and trade

E: How could the Lebanese Government give new impulses to the economy through public spending in 2005?

Although “Paris II” may be long forgotten, the Lebanese must keep reminding themselves that soothing political sound bites do not pay the bill. Major structural reforms do and they are only a way for us to face the macroeconomic imbalances facing the country. An international organization recently hinted that Lebanon has approached its tax ceiling capacity under the prevailing economic situation, thereby arguing that the only effective way to reduce the crippling public deficit is by slashing unnecessary spending. This statement contradicts the premise of the question raised by Executive. However, there is another answer.

Without disregarding the necessity for structural reforms such as privatization, legislative modernization and the like, a reduction in unnecessary spending will free up much-needed resources that can be invested in projects or ventures with a long-term impact. Such cutbacks might hurt a small group of beneficiaries in the short-term, but it will send a positive signal to all the stakeholders and contribute to rebuilding confidence in the future of the Lebanese economy. This confidence-building measure will have a bigger and wider impact on the economy than an increase in public spending, which only targets a small group of Lebanese who benefit from it for a limited period of time. In order to place Lebanon back on a sustainable growth path at this juncture, the impulse the country needs is to hear more Middle East Airline-like stories and display a strong political will to implement the necessary restructuring of the public spending.

Kamal Hamdan: Head of the economic division of the Consultation & Research Institute (CRI)

E: Do you expect that the new government either now or after the parliamentary elections will be able to alleviate the socio-economic crisis and unemployment problem? What public measures could be adopted to improve the situation?

This government is merely a short-term one – by the time the parliamentary elections come along, it will change. Therefore, I am not convinced that it can introduce measures that will significantly improve the situation, especially with regards to unemployment. What it can and should do however, is start taking first steps that will send signals to the market that there is a will to make interventions and restructure current policies.

Combating unemployment cannot be done in the short-term – it requires long-term intervention in both supply and demand. I would recommend introducing three measures, which can subsequently be fully implemented after the parliamentary elections. Firstly, set up a fund for unemployment; secondly, improve education; and thirdly, introduce much-needed public sector reforms.

Most industrialized countries have unemployment benefits. It’s a way of providing the fragile segment of the population with the means to maintain adequate purchasing power, thereby preventing poverty from gaining further ground in the country. This will contribute to maintaining social stability and, in turn, political stability. Fifteen percent of Lebanon’s working population is currently unemployed – a very high figure. Although emigration provides some relief, it also carries noteworthy negative consequences, such as the loss of valuable human capital. Unemployment benefits could act as an incentive for them to stay.

Secondly, we need to introduce reforms to the education system, both at university level, as well as technical education. This will ensure that the youth entering the labor market are better equipped, more productive, can provide a greater value-added and hence earn a higher salary. The latter is a crucial, seeing how expensive the cost of living is in Lebanon.

Finally, we need to reform the public sector so as to reduce the red tape, the corruption, the lack of transparency and the clientalism that serve as a disincentive both to domestic investment and FDI. This government can start the process now, so as to open new horizons and give the Lebanese people hope that things can change for the better.

Sébastien Dessus: Senior economist at the World Bank

E: How is Lebanon’s debt expected to evolve over the course of 2005 and what measures would the international community like to see the Lebanese government take so as to manage it?

Arithmetically, the new debt is the sum of the past debt plus the deficit. The latter is itself equal to the primary surplus (i.e., public revenue minus expenditures, excluding debt service) plus the debt service. While the primary surplus depends principally on fiscal policy and the debt service on interest rates, the two are not independent. The Lebanese government has little control on interest rates, but could lower its borrowing costs by convincing investors of its capacity and will to tighten its fiscal policy, with a view to put the debt on a steep declining slope – this is the key issue.

But how could the government possibly meet this challenge, once acknowledged that tight fiscal policy can depress growth in the short run (to eventually generate higher growth in the longer run) and will face strong opposition from the main beneficiaries of fiscal largesse? There is no miracle: reforms will need to be anchored in credible commitments and supported by a broad-based consensus. Enhancing the credibility of the adjustment requires tackling governance issues – the overall use of public funds – at their roots. Only when policy measures are viewed as long term and credible will borrowing costs decline. In this regard, a good communication strategy and some key institutional reforms can pay off rapidly. Gaining broad-based political support for the adjustment process will require the even distribution of the burden and the reinforcement of social protection.

Mohamed Samir: General Manager at Procter and Gamble Levant

E: How would you characterize Lebanese spending habits and consumer trends in the current economic situation? What do you expect in terms of the household spending in 2005?

There is a clear trend in terms of Lebanese consumers moving from premium brands to lower priced brands, although it is worth noting that this is a trend which is happening throughout the world. This reasons behind this are multiple – technological advancements, which are enabling companies to offer cheaper alternatives; local stores launching their own look-alike versions of premium brands at a lower price; and also consumers operating on reduced budgets. For 2005, we expect a continuation of this trend. People’s purchasing power has been going down, although not dramatically so. The shift is happening more at the psychological level: people are concerned about the future and are therefore less willing to spend, so they can save for the years ahead. They look around them – at the economic situation of the country, as well as what is going on in the region – and they start thinking more carefully about what to spend their money on. But in real terms, the loss of purchasing power is negligible.

A few years ago, there was a significant difference in prices between brands, but this gap has been reduced over the years, so it’s become a matter of the strength of the brand’s performance. And the Lebanese consumer is very well-informed about this – one of the characteristics that distinguishes them, is notably that there isn’t much brand loyalty. They are willing to try a greater variety of brands, so as to chose the best one. Thus, what this trend means for the producers of consumer goods, is that it is tougher to stay in the lead, because you have to be much more alert about what the consumer wants, and how to offer them products that perform better without costing them much more.

Jawad Adra: Managing Partner at Information International

E: How in your opinion does Resolution 1559 pose a threat to the Lebanese economy and how can Lebanon secure international investor confidence under such circumstances?

Resolution 1559 is a Damocles sword hanging over the Lebanese economy, and therefore, it will inevitably have an impact. It creates a situation of uncertainty, which the government has not been able to deal with successfully hitherto. There has been no analysis conducted as to what legal response could be made to the resolution, no successful attempts at gaining international support for our cause. The government has simply chosen to look the other way.

I am less concerned with the effect it will have on investment – the investment climate in Lebanon is poor anyway, be it for domestic investment or FDI. What Resolution 1559 can do, is bring about an economic collapse, by affecting some of the foundations this frail economy has been based upon. We’ve had a series of irresponsible governments that have persisted in maintaining the same policies over the past 20 years at a very high cost to society. The only way they have been able to do so, has been by relying on remittances from abroad and cheap labor, and borrowing at a high cost, among other things. The minute measures will be taken against Syria and Lebanon – such as the freezing of foreign assets for instance – remittances could drop or people could choose to transfer their money abroad. The system does not have the resilience to cope with this. However, it is important to bear in mind that Resolution 1559 is an exogenous force over which the Lebanese government has minimal control. What the government can influence are the inherent problems that mar our economy: high interest rates, wasteful public spending, corruption, the unsolved crisis of the power sector. Resolution 1559 should not be used as a scapegoat for the country’s persisting economic ailments. Its impact has so far been minimal, but it has the potential of having disastrous consequences, because our economy is weak following years of government mismanagement of it.