In discussions of the economy in 2013, one word is ubiquitous — Syria. Lebanon, as the feuding state’s smallest neighbor and the one with the largest number of refugees, has been the most heavily affected by the civil war. In January there were 165,000 registered refugees in Lebanon. As Executive went to print, that number had risen to nearly 800,000.
The knock-on effect has been more than merely increased congestion in the country’s already overcrowded cities. The deteriorating security situation has led to a major fall in year-on-year consumer confidence, according to Byblos Bank, and a 10 percent drop in tourism, according to government figures. In terms of trade, many overland routes have become impassable.
The sheer scale of the crisis has put huge pressure on the economy. On a macro level, in September the World Bank estimated the cumulative damage at $7.5 billion from the beginning of 2012 until the end of 2014. More worrying still, the impact is growing each year — from $1.1 billion in 2012 to $2.5 billion in 2013 and a forecasted $3.9 billion next year. Without the crisis, the Bank said, 2013 growth would have been at 4.4 percent. Instead it is at 1.5.
While revenues have declined rapidly, forecast to drop $1.5 billion between 2012 and 2014 according to the World Bank, expenditures have shot up $1.1 billion over the same time period. Of that measly 1.5 percent growth forecast, the World Bank estimates that 1.3 percent comes from government expenditures. In effect, expansionary fiscal policy is the only thing preventing the economy from flat-lining.
Nassib Ghobril, head of economic research at Byblos Bank, thinks the 1.5 percent growth may even be optimistic, saying his bank is working more on the assumption of 0.5 percent growth. “It is not an exaggeration when people say there is stagnation in the economy. It is outrageous that the oldest free market economy in the Arab world is relying on public sector spending [to grow],” he says.
The other cumulative effect of additional spending and reduced revenues is that, at a macro level, the country’s debt-to-GDP ratio is growing again. After falling from around 180 percent in 2006 that figure had gradually declined to around 133 percent on 2011. It has since started to creep back up and is set to reach around 140 percent in 2014, according to World Bank estimates.
These trends of increased spending and growing debt-to-GDP ratio, are, the World Bank Lebanon’s Lead Economist Eric Le Borgne says, “clearly unsustainable.” “Expenditures are growing very quickly. To a large extent it is linked to the number of refugees in the country so if that number continues to grow, there will be more demand.”
While the problems may be clear, the solutions are less so. The easiest one is perhaps the begging bowl — Lebanese officials at the United Nations General Assembly in September were determined to convince the international community to up its support to Lebanon. Just to return the country’s public services to their pre-Syrian crisis levels would cost $2.5 billion, the World Bank figures show. Lebanese officials have been pushing for more support but as of yet donations have not been forthcoming, perhaps due to concerns over the political malaise.
There is one other policy that could ease some of the pressure of refugees on Lebanon’s balance sheet — the formal establishment of refugee camps under the authority of the UN. Le Borgne stresses that the World Bank does not have an official position on the matter but has advised the government. “In Jordan or Turkey where they have very large camps, the costs for these camps are being picked up by the international community under humanitarian assistance. In Lebanon since there are no camps, refugees are going to school in public schools, and instead of the bill being picked up by international community it is being picked up by the central government,” he says. Expect the debate around shelter to rumble on into 2014.
Blaming the victims
Yet while the Syrian crisis is clearly having a major effect on the Lebanese economy, it has become a convenient get-out clause for politicians to detract from their previous failings. Time and again government ministers have appeared in the media to protest impotence in the face of the all-consuming crisis.
While clearly nothing could have inoculated Lebanon from the crisis, steps made in boom years could have lessened the impact. The fundamental structure of the economy before the crisis was weak, making it unable to absorb shocks. “It is easy to blame the Syrian conflict but you have to start with the responsibility of the successive governments who have not implemented the reforms necessary during the period of stability from 2008-2010,” Ghobril says. “[These reforms could have] raised the competitiveness of the economy to help it be able to absorb from a better position any kind of impact — whether it is political, military, economic or financial.”
Électricité du Liban (EDL) is perhaps the best example of how a complete hostility to reform from all political sides sowed the seeds for stagnation. The state energy company runs at a loss of around $2 billion a year, paid for out of the public purse. Despite this huge subsidy, the company is deeply inefficient and pre-crisis provided only an average of 18 hours of electricity per day to Lebanese people. The added pressure from refugees means this number is likely to fall to just 16 by the end of 2014, according to World Bank figures.
So while the trigger for reduced energy is the refugee influx, the root cause is the lack of reform. “If you went to another country where energy was privatized and there was no shortage of electricity, the fact that the refugees ask for electricity — if it was provided at cost — would be more profit for the electricity company and so much better for the country,” Le Borgne says. “The fact that you have a large fiscal cost is because in the first place you have a large subsidy for that service.”
The atmosphere for investment and establishing companies was also deeply unattractive even before the crisis. In late October, the country slipped yet further in the World Bank’s Ease of Doing Business survey — falling from 105th (out of 189 countries) to 111th. The construction sector was again particularly poor, with the country coming 179th in the “dealing with construction permits” category.
Le Borgne thinks that while major changes, such as those to EDL, are likely to remain politically impossible, there are dozens of uncontroversial ways to help the country grow.
“There are a lot of reforms that could be done to unshackle the entrepreneurs in Lebanon — who we know are second to none,” he says. “There are reforms in terms of registering businesses, legal protection and so on. They are technical in nature but make a big difference for a startup looking to establish themselves.”
But the hostility to even minor reforms is a long-term trend, and it is one that was exacerbated by the political class’ unwillingness to work together in 2013. In a deeply polarized system, there have been few attempts to create common ground, allowing the security situation to deteriorate.
In March the government collapsed. Prime Minister Najib Mikati announced his resignation after he was unable to get the cabinet to extend the term of the head of Lebanon’s internal security forces. With this coming just a few months after the assassination of security chief Wissam al-Hassan, Mikati concluded his position had become untenable.
And so the veil of Lebanese democracy dropped even further in 2013. Tamam Salam, the designated successor to Mikati, appeared to have the backing of most significant powers but he has been unable to form a government, with the governing March 8 block and the opposition March 14 unwilling to make a deal.
Protests outside parliament have again proved pointless
Then in May, citing dubiously vague ‘security concerns’, the country’s parliamentarians voted to shelve planned summer elections and extend their own terms by 17 months. The decision was hugely controversial, and both President Michel Sleiman and the Free Patriotic Movement — a leading party in the March 8 coalition — challenged it in the courts. Yet, with clear disregard for the separation of powers, political figures appeared to apply pressure on judges at the Constitutional Council to neglect their duty to attend. The court failed to reach quorum and parliament’s extension was declared legitimate by proxy.
With the legislature and executive both in limbo and the judiciary’s independence called into question, the only functioning part of the country’s political system right now is President Sleiman. His term is due to run out in 2014, and there are few reasons to expect an orderly transition.
Increasing wages, no extra money
This lack of a functioning political system has meant that none of the major reforms that this magazine has consistently advocated for were made or even started in 2013. What few policies that have made it through the political malaise have been badly executed, with the raise in public sector salaries being perhaps the most evident.
Many of Lebanon’s public sector workers are vastly underpaid, not having received a wage increase since 2008. But the wage hike — originally backed in 2011 but implemented in the public sector in 2013 — has, critics say, been pushed through with little planning and no attempt to reform the deeply inefficient public sector. “There is a total lack of transparency [over] what kind of salaries are being raised and what benefits are being increased,” said Ghobril. “In this period of economic stagnation and declining public revenues, I would have thought the priority would have been reducing expenditures, not increasing them.”
As a result, in the first seven months of 2013, public sector salaries, wages and related benefits were at $1.6 billion, up 8.8 percent on the same period in 2012. This will likely be paid for by increased government borrowing, exacerbating the balance sheet deficit.
Perhaps the most successful policy maker in 2013 was not a politician at all, but the head of Banque Du Liban (BDL) Riad Salameh. Jacques Sarraf, a former head of the Lebanese Association of Industrialists, told Executive that Salameh in 2013 had been acting “not just as a governor but as minister of finance, minister of industry, minister of economy. On the economic side he is really a vice-president.”
In January, frustrated at the government’s lack of action to firm up the economy, Salameh pushed through a $1.46 billion monetary stimulus package aimed at offering interest-free loans to banks on the agreement that they lower their interest rates to customers. Over 50 percent of the loans were targeted at the real estate sector — a traditionally important sector in the economy, though not one which creates long-term growth. The feedback on the package from the business community has generally been positive and it is widely believed to have been a major factor in keeping growth above zero.
In September Salameh announced another round of stimulus for 2014, though the precise details had not been released as Executive went to press. However, the serious lack of confidence in the economy means that any further stimulus packages are unlikely to have major multiplier effects, as the Lebanese remain incredibly risk averse. In short, the BDL risks throwing good money after bad.
Discussing the housing market, Le Borgne says “in a context where prices are very high and given the uncertain environment, it is not certain why people would want to commit for 15-20 years when prices may go down or they may lose their job due to economic uncertainty. The fact that you get a discount on your mortgage rate is definitely good but might not be enough to encourage people to write the biggest check of their life.” Expansionary monetary policy may have run its course for Lebanon, at least in the short term.
Into the crystal ball
There are, unfortunately, few reasons to believe 2014 will be significantly better than 2013. “The Lebanese economy is largely based on confidence — consumer confidence and investor sentiment,” Ghobril says. “Unlike in the West, where economic factors determine confidence, in Lebanon it is almost exclusively related to political and security developments,” he adds.
“For that reason what you need is a positive political shock of the magnitude of the 2008 Doha Accords [the deal between rival Lebanese factions, which led to improved relations] to restore political stability and border security. That would restore consumer confidence to its levels of 2008-2010,” he said. “For me that means a political solution to the Syrian conflict.”
With the endlessly delayed Geneva Conference on the agenda for the coming months, there are hopes of a negotiated settlement to the Syrian crisis. But the regional political polarization means that if and when the world’s top politicians do meet, a deal is perhaps likely to be elusive. In the absence of that, expect another tough year ahead.