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Misplaced blame

Inflows of humanitarian aid into Lebanon have helped mitigate economic losses

by Jeremy Arbid

For many Lebanese, from government ministers to taxi drivers, the cause of the country’s economic downturn is clear: 1.16 million Syrian refugees. While a population increase of more than 25 percent has certainly strained infrastructure and further challenged the state’s ability to provide basic services, the notion that the refugees are directly responsible for sluggish GDP growth since 2011 simply does not correspond with the facts. Mirroring its regional neighbors, the Lebanese economy began to cool down as large scale, antigovernment protests moved from one Arab country to the next, beginning in Tunisia in late 2010. The uncertainty the so called Arab Spring inspired helped drag Lebanon’s GDP growth down to 2 percent in 2011 from 8 percent in 2010. The Lebanese economy has been in crisis mode since. Since 2011, the country’s exports have consistently decreased, consumer confidence has steadily declined and the inflows of foreign direct investment into Lebanon have plunged sharply, with demand for high end real estate also falling. Meanwhile, tourism and hotel bookings have dipped in line with travel warnings and bans from GCC governments, citing numerous bombings and other security incidents that have destabilized Lebanon in recent years.

By February 2012, according to the UN, months of protests in Syria had turned into civil war. The conflict in Syria has disrupted traditional trade partnerships and transit routes for Lebanon, but in the first nine months of unrest few refugees headed to Lebanon. By January 27, 2012 — the earliest reference date available on its website — UNHCR had registered only 6,290 Syrian refugees in Lebanon, though economic growth for 2011 had already dropped significantly compared to the previous year. The violence in Syria, however, intensified, forcing more and more Syrians to flee their homes in search of safety — an estimated 7.6 million Syrians are internally displaced, according to November figures from the Internal Displacement Monitoring Center, and an additional 3.7 million Syrian refugees are currently registered with the UNHCR in Lebanon, Turkey, Jordan, Iraq, and Egypt, with the largest number residing in Lebanon.

Previous research had indicated the spillover effects of the conflict in Syria had significantly affected the Lebanese economy. For example, a World Bank report from 2013 identified losses to economic activity, income and public services, and noted direct and indirect impacts on trade and tourism as well as health, education, and other social services. The report estimated that the Lebanese economy would incur a cost of $7.5 billion by the end of 2014 due to the refugee influx. That said, new research from the United Nations Development Program (UNDP) shows that hosting these refugees has not been a total loss for the Lebanese economy. With the refugees came a steady flow of humanitarian aid that has helped mitigate losses incurred from the conflict in general and from the refugee situation in particular.

[pullquote]The results found that each dollar spent by beneficiaries generated $2.13 for the Lebanese economy[/pullquote]

A 2014 study by the International Rescue Committee was among the first to consider whether the refugee ‘burden’ had any positive implications upon the Lebanese economy. UNHCR’s winterization program disbursed $41.4 million in cash, channeled via ATM cards, over a three month period beginning in January 2014. The results found that each dollar spent by beneficiaries generated $2.13 for the Lebanese economy — i.e. a multiplier effect of 2.13. However, the study is problematic for two reasons. First, it uses a general mathematical formula not specifically tweaked for Lebanon to compute a multiplier effect and, second, it uses the spending habits of Jordanians as a basis to estimate how Syrian refugees in Lebanon might have spent aid money.

The more recent UNDP study written by the Consultation and Research Institute (CRI), a Lebanese company familiar with the local economy, found that an estimated $800 million in humanitarian aid that flowed into the Lebanese economy in 2014 brought with it a 1.6 multiplier, meaning every $1 in humanitarian aid resulted in $0.60 in extra spending. The report does not offer a picture of growth in the entire economy for 2014, yet assuming all other factors are constant, it shows that humanitarian aid had a 1.3 percent contribution to Lebanon’s GDP. Adding context, the study factors in losses in tourism and exports in 2014 — “While it helped mitigate the effects of the refugee crisis, the humanitarian package did not completely offset those effects,” the report notes, concluding that “the combined effect of a 23 percent decrease in tourism volume, a 7.5 percent decrease in exports, and the injection of the same aid package ($800 million) results in negative GDP growth of -0.3 percent instead of the initially obtained positive growth of 1.3 percent.” Without the aid money, the study notes, tourism and export losses would have dragged growth down by 1.6 percentage points.

Ceteris paribus

“We wanted to understand, if we inject $800 million into the economy, spent in the particular manner they were spent in, how much you would have a multiplied impact into this economy,” Rola Rizk Azour, a senior economic advisor at the UNDP, explains. Azour also clarified that “we consider the economy [to be] a closed box. We insert the $800 million received and — barring any other changes in the environment — [measure] what is the outcome. We wanted to see where this humanitarian assistance has had the most impact.” To do this the UNDP contracted CRI to simulate the effects of humanitarian spending on the economy in 2014 using expenditures of the four UN agencies from that year — estimated at $800 million.

The exercise measured which economic sectors were affected via the distribution of humanitarian aid. As expected, Azour points out, aid money was spent primarily on food products (27 percent) related to the World Food Program card voucher program. Other sectors where aid spending concentrated were: real estate (which includes rent, 14 percent), chemicals (i.e. medicine and gasoline, 9 percent) and education services (7 percent). The humanitarian aid spent according to the distribution keys within the simulation had an overall multiplier effect of 1.6, Azour explains. 

“It’s a huge number crunching exercise — [and tells] only part of the story of this economy,” she says, adding that the UN system and humanitarian aid should not be celebrated for any growth the economy might record for 2014. The report cuts straight to the point in its conclusion, and Azour stresses the notion, “while it helped mitigate the effects of the refugee crisis, the humanitarian package did not completely offset those effects.”

[pullquote]Humanitarian aid flowing into Lebanon was not the only thing affecting Lebanon’s GDP for 2014[/pullquote]

Azour repeatedly points out that the humanitarian aid flowing into Lebanon was not the only thing affecting Lebanon’s GDP for 2014 — “there were other factors in this economy that were also not taken into consideration, like the stimulus package of the [central bank].”

Lebanon’s central bank introduced its first stimulus package of $1.4 billion in 2013, which the bank says contributed 1.5 percent to GDP growth that year. The bank injected another $800 million into the Lebanese economy in 2014, though about half of that was leftover money from the previous year’s package, Executive has reported. The bank’s governor, Riad Salameh, announced in October another stimulus package of $1 billion for 2015.

Clearly the results of the simulation show that aid distributions centered on the staple items of food, housing and medicine to alleviate suffering and mitigate the refugee crisis that the war in Syria instigated — the UNHCR and the WFP are among the largest distributors of these subcategories of aid in Lebanon. The study, it should be noted, looked at only four UN agencies delivering humanitarian aid in Lebanon — UNDP, UNHCR, WFP and UNICEF. While the four account for “at least 70 percent of UN humanitarian aid within the context of the Syrian refugee crisis” in Lebanon, the study reports that other donor money arriving through other channels was excluded, meaning the true impact of humanitarian aid money was not fully assessed. 

Living on little 

The aid Syrian refugees have received has been significantly inadequate. Due to the shortfall in funding, the WFP announced in December that it had suspended payments of food aid to Syrian refugees, not only those in Lebanon but also across the region.

In 2014, organizations distributing humanitarian aid in Lebanon received only 50 percent of the $1.7 billion appealed for in that year’s Syria Regional Refugee and Resilience Plan. Ninette Kelley, head of the UNHCR in Lebanon, addressed the impact of funding shortfalls to the organization in a December interview with Executive saying, “the level of assistance that we can provide continually needs to be heavily targeted and we’re simply unable to meet all needs.”

In the Syria Regional Refugee and Resilience Plan for 2015, humanitarian organizations, including the UN agencies, have appealed for $4.5 billion to address the refugee crisis across the region. As of late February, those organizations distributing aid in Lebanon have received only 3 percent of the nearly $2 billion requested in appeals.

Preparing for a long war

The UN Commission for Inquiry on Syria — set up to investigate violations of international human rights occurring during the country’s four year civil war — said last month in a press release announcing its latest report that “unthinkable crimes continue to occur daily in Syria.” The report neither implies that stabilization in Syria is likely soon nor does it suggest Syrian refugees will be able to safely return to their homes in the near future. That is to say the refugee crisis will likely continue for years to come.

The outlook is grim. The ongoing war in Syria suggests that Lebanon’s economy will continue its poor performance due to the turbulence and barriers to economic stability that an unpredictable security situation implies. Likewise, funding shortfalls in humanitarian aid donations means less money that refugees can spend in the Lebanese economy on basic necessities for their families. Syrians seeking refuge in Lebanon have no other choice but to stay and scrape by. But addressing the immediate needs of refugees is not Lebanon’s only dilemma — the country is also concerned about crumbling physical infrastructure and the declining quality of health and education services. The World Bank estimated in 2013 that $1.6 billion would be needed to maintain access to quality health, education and social safety nets for the period 2012–2014, and investing in these services has been found to have a significant impact on economic growth in the long term.

Due to the state of Lebanon’s infrastructure, the international community needs to support the country in maintaining service delivery to refugees, the president of the World Bank Jim Yong Kim noted during a school visit in Beirut in June 2014.

“The data now is overwhelming,” Kim says in a recent interview with Freakonomics Radio, “in that investments in health and education, for example, are critical aspects of a growth strategy [and that] fundamental investments in human capital lead to growth.” A group of economists, led by Lawrence Summers — a former director of the National Economic Council advising US President Barack Obama — wrote in Global Health 2035 that “the returns on investing in health are impressive,” with the study concluding that in low and middle income countries roughly 24 percent of economic growth experienced between 2000 and 2011 was due to better health outcomes.

[pullquote]Lebanon’s economic woes will not simply evaporate[/pullquote]

With no end to either the refuge or economic crises in sight, Lebanon will need support to maintain and improve its basic services such as water, sanitation and roads, as well as in social services like health and education. To do this, the World Bank had partnered with Lebanon’s government to establish a multidonor trust fund in March 2014. “The Bank deals with development issues,” writes Mona Ziade, a communications officer in the World Bank’s Beirut office, in an email to Executive, adding that the fund “is strictly for development projects that will help boost the resilience of the Lebanese host communities.” Derek Plumbly, former UN Special Coordinator for Lebanon, remarked in a statement announcing the fund that “this is the only one established specifically to provide assistance to the government and municipalities, established specifically to mitigate the impact of the Syrian crisis.”

Lebanon’s economic woes will not simply evaporate — more humanitarian and development aid will be needed in the coming years. Aid will continue to help Lebanon alleviate refugees with money to be spent meeting basic needs of food, clothing and shelter, that does flow back into the economy; similarly, development aid will help Lebanon to invest in maintaining infrastructure and services, setting up the economy for future growth.

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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