Home Economics & Policy How prices have hit the moon

How prices have hit the moon

Inflation is hitting the Lebanese hard

by Zak Brophy

Fuel is expensive. Food is expensive. Rent is expensive. Everything, it would seem, has become expensive. Over recent years trips to the gas station, the supermarket and the landlord have morphed into a recurring nightmare of increasing prices, draining the pockets of the Lebanese. Add to this the sluggish growth in the economy and people are feeling the squeeze.

“Everything has become so expensive recently it is completely crazy,” says Nayla Otrakji. Although she lives in a comfortable middle-class neighborhood in the Beirut district of Ashrafieh and her husband runs a successful engineering company, the rising cost of living is still felt in the home. “The amount we spend on food has increased so much. I have noticed the highest increase in the prices of dairy products,” she says before adding, “Now I make my own labneh and laban.”

Priced from abroad

While dairy products are largely produced locally, many of the inputs needed to stack a bottle of milk on a supermarket shelf (feed for cows, fuel for transport, and even the cows themselves) come from abroad. Lebanon to a large extent is vulnerable to the vagaries of international markets as it imports over half of what it consumes in any given year, and that is not set to change any time soon. As of February this year the balance of trade — the difference between how much Lebanon buys from and sells to the rest of the world — has reached its highest level in recent memory at a $15.9 billion deficit. That means the country’s reliance on international imports is increasing, making Lebanon more susceptible to rising international prices.

In this context, much of the increases in food and drink prices can be understood. The cost of food commodities on the world markets declined substantially from the 1960s till the early 2000s, but then the tide turned and prices surged from 2006 to mid-2008, turning sharply north once again in 2010. Prices have since held relatively steady, according to the United Nations Food and Agriculture Organization. The receipt received at the end of the weekly shopping in Lebanon reflected these rising trends.

There are two main indices measuring inflation in Lebanon, one from the offi- cial Central Administration of Statistics (CAS) and one from the private Consultation and Research Institute (CRI). Yet while they provide good insight into the trends there are discrepancies between the two and many believe they both understate the rates of change. According to CAS, since its base year of December 2007 until April 2012, prices have risen by just 20 percent. The CRI’s base year is 2004 and its accumulative year-on-year inflation rates suggest prices have risen by 28.1 percent from January 2008 to March 2012.

Rima Turk Ariss, Associate Professor of Finance at the Lebanese American University, has led a two-year-long study into inflation measurement in Lebanon and she says that, “people feel there is a gap between the inflation measurements and the reality of the increase in prices. There is cleavage between the two.”

However, in the case of food, Ariss and her colleagues found that the calculations for food and drinks were pretty close to the mark. So the 132 percent increase in sugar and confectionaries between 2004 and 2011 recorded by the CRI may well explain Mrs Otrakji’s complaints that, “My husband and I, we like dark chocolate. It was LL4,500 [$3] and suddenly it has become around LL6,000 [$4] in less than two years.”


Impact on businesses

Rising prices strike not just the consumers but also the nation’s businesses and enterprises.

“In 2010 I was making a plan in my head that if I bring in $30,000 to $37,000 every month to pay all my expenses, salaries, rent, interest, telecoms and fuel, I would be fine. Now if I make $60,000 every month I won’t make anything,” says Barakat Chalhoub, who runs his own customs clearing company, adding that he worries the spiraling cost of running his business is simply unsustainable.

As well as increasing wages in recent years, Chalhoub has taken on some of the increased living expenses for his staff by giving them additional support. “I have three children but now I make plans as if I have 25 children because I am responsible for my staff,” he says. Recently, he has started to pay LL100,000 ($66) to all his staff for their fuel costs and LL150,000 ($100) for their telecoms.

In the CRI statistics transport costs, which consist of the costs of new cars, gasoline prices, tire prices, certain repairs and price of taxis and public transport, have increased 55 percent from 2004 to 2011. The rising cost of transport is intrinsically linked to global fuel prices and therefore, as with food and beverages, the rate of inflation in this sector is predominantly imported. However, Ariss’ study found that Lebanon’s inflation rates within transport costs were less volatile than global trends in fuel prices. The price of a liter of gasoline in Lebanon is now 95 percent of the average daily income of one person within Lebanon, based on the prices of gasoline between April 2 and April 11 2012 according to research by Byblos Bank.

As well as chipping in for their petrol, Chalhoub also supports his staff with the burden of their telephone bills. The Lebanese penchant for a good chinwag, coupled with the unreasonably high cost of telephone credit means that rarely a day passes without hearing someone complain about their phone bill.

However, this sector is perhaps one of the few areas where prices have actually fallen in re- cent years. According to the CRI, tele-coms prices have?fallen by 23 per-cent from 2004 ?to 2011 and Firas Abi?Nassif, advisor to the Minister? of Telecommunications and Post Nicolas Sehnoui, cites a number of achievements during his tenure, such as long-overdue decreases in Internet prices to subscribers by 80 percent and decreased BlackBerry prices by 40 percent.

Yet, despite all of these welcome advance- ments that often go unnoticed, Lebanon still has comparatively high telecoms rates for what are in many cases substandard services. What is more, the room to push prices down is constrained by Lebanon’s huge public debt of some $53 billion dollars, some 140 percent of Gross Domestic Product (GDP) depending on which statistics are used.

The two major telephone providers, mtc and Alfa, are publicly owned and last year raked in some $2 billion for the government’s piggy bank, pretty much covering the servicing of the country’s debt. Further significant drops in telecoms prices would make a serious dent in the country’s coffers if subscriptions do not increase in tandem.

Paying for a pad

One significant cost that is not factored into the nation’s inflation statistics is the cost of property or rent, but this is perhaps where people are feeling the pinch the most. Business owner Chalhoub complains, “For my office’s rent I pay around $15,000 per year, but when I started five years ago it was around $4,000 to $6,000 per year.”

There is no national real estate index in Lebanon so it is unknown exactly to what degree real estate prices have increased in recent years. However, bemoaning the crippling rise in land, property and rent prices, especially in Beirut, has become something of a national pastime. Karim Makarem, director of real estate advisory company Ramco, calculates, “If you bought a flat in 2005 for $300,000 with a yearly average increase of around 25 percent you could be paying at least 3 times that now.” Rents in Lebanon tend to provide a yield of around 3 percent on the property price, so the significant rise in the latter helps explain the predicament Chalhoub now finds himself in.

The balloon in property prices in Leba- non, especially up until 2010, was par- tially fuelled by optimism after the Syrian withdrawal in 2005. Then followed huge inflows of money after the signing of the Doha Agreement to end the civil conflict in May 2008, and investors seeking safe havens in Lebanon’s real estate after the global financial crisis hit, and property prices crashed in the Gulf and later that same year. However, there is also a structural nuance in the Lebanese economy that can go a long way to explaining the inflationary pressures in real estate and all of the non-productive service sectors.


Lebanon's economic oddity

Lebanon enjoys huge inflows of capital, such as remittances from expatriate Lebanese and oil money from the Gulf which, along with easy credit from the banks, boost the local money supply. As Lebanon is such a small player on the global stage, both in terms of consumption and production, prices for nearly all things tradable are determined externally, as we saw in the case of food and drinks. However, for any non-tradable goods or services these large inflows of capital drive up prices.

“I used to park for LL500 10 years ago and now I pay LL10,000,” says Abi Nassif from the telecoms ministry. “The workers who come to do maintenance at your place used to be cheaper than most places in the world, now, many services are more expensive than New York City.”

Restaurants and bars are another area of non-tradable goods and services where inflation has been pronounced. While filling the fridge has become expensive, it is fair to say going out for dinner has become an overpriced novelty. “It is now very seldom that we go out to restaurants,” says Otrakja. “It is so expensive now. There is nothing below $30 per person. Only recently you could easily go out for less than $20. If we want togo for a meal we will now only take the family perhaps once every two months.”

The implications of this nuance in Leba- non’s economy go beyond having to pay through the roof just to have a plumber fix a leaky pipe or to enjoy a romantic dinner with your loved one. The rising prices for real estate and locally sourced services raise the costs of production, eroding the competitiveness of productive sectors such as manufacturing, technology and agriculture. In 2002, agriculture and industry made up around 17 percent of GDP — 5.7 percent and 11.5 percent, respectively. In 2010, the latest figures available, they made up less than 12 percent collectively. Conversely, trade and services made up around 54 percent in 2002 and in 2010 comprised 61 percent of total GDP.

As sure as night follows day, where money goes people follow. With the huge inflows of capital into the non-tradable goods and services sector this is also where Lebanon’s workforce is being directed. However, Abi Nassif, both an engineer and economist by training with extensive experience in finance, warns, “People are flocking into these very low skilled kinds of jobs in which we can be out competed by cheap foreign labor in any case. So this only adds to unemployment.” Alternatively, scores of talented Lebanese youth flee to economies that offer them real potential from where they send back a chunk of their earnings to the homeland. The vicious cycle is completed once again.

Pricey education

With a state education system that many complain is ill equipped to educate, those who can send their children to a private school do. However, the fees for these centers of learning often amount to several thousand dollars a year per student, and they are also on the up.

“My three children go to one of the best schools in Lebanon, Notre Dame de Jamhour. They recently increased the school fees by $1,000 [on average],” says housewife Nayla Otrakgi. “It has become $4,500 [on average]. When we began it was around $2,000, then $3000, then $3,500 and now $1,000 extra in one go.” The school confirmed to Executive that it had indeed raised fees by “eight to 10 percent” on average this academic year. Another leading private school, International College, increased fees by 9 percent from 2008 to 2009, 7 percent from 2009 to 2010, 8 percent from 2010 to 2011 and 8.9 percent from 2011 to 2012. That is an accumulative increase of 37.2 percent over a four-year period.


Purchasing power

While the rising cost of living in Lebanon is patently clear to everyone in the country, what is less discernible is how this translates into the individuals’ purchasing power. That is to say how the rising prices relate to levels of income. “As for the change in the purchasing power of the consumer, it is not really captured by the inflation rates as they are currently computed,” says economist Ariss.
However, while certain strata of society may be riding above the tide of surging living costs many Lebanese are struggling to keep afloat. Simon Neaime, professor and chair at the American University of Beirut’s Department of Economics, says “We don’t know by how much exactly but purchasing power is decreasing, and it fair to say the middle class is getting wiped out. The middle classes in the 70s and 80s used to be about 60 percent of the population and now I think it is little more than 20 percent of the population.”

It is also uncertain who bears the majority of the burden from rising prices, the consumer or the producer. There is still no producer price index for Lebanon to measure changes in production costs, although CAS say they have the methodology in place but just need a political commitment to collect the data.

Chalhoub complains that while his costs are rising, business is not following suit. “As costs have risen I am struggling to bring in even the same revenues as before,” he says. With the International Monetary Fund predicting growth this year at a modest 3 to 4 percent—an assumption based on “strong domestic policies and an improved regional environment,” neither of which have been forthcoming this year—his qualms are likely shared by many more of Lebanon’s entrepreneurs.

And while it is not exactly clear on whose shoulders the greatest burden of rising costs falls, it is fair to say that no one escapes unscathed. The seemingly inexorable rise in prices, coupled with a frail economy offers no break anytime soon for homeowner or businessman alike.

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Zak Brophy

Zak Brophy was Executive's Economics and Policy Editor from 2011 until 2013.

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