Industry & AgricultureOverview

Regional instability harms Lebanese exports

by Jeremy Arbid
written by Jeremy Arbid

The year 2016 was a difficult one for Lebanon’s manufacturing and agriculture sectors. Exports have been one of the clearest indicators of the challenges the sectors have faced and, in general, of Lebanon’s depressed economy – largely due to the war in neighboring Syria, a conflict that has cut Lebanon off from its larger trading markets.

However, a new government negotiating access to, or expansion of, existing trade deals could help local producers recoup lost market share in the coming year. The hope moving forward in 2017 is to reorient exports to new markets with new investments, spurring local capacity production and absorption of Lebanese products in country. On the latter, foreign assistance will partly look to boost production capacity and new job creation by supporting the establishment of several industrial zones.

Industry Minister Hussein Hajj Hassan said in early November that there was a contraction of the manufacturing sector’s contribution to GDP (gross domestic product), projected to decline from the World Bank estimate of 9.1 percent in 2015. The decline can be attributed to a slowdown in local manufacturing output and a fall in industrial exports – a downward trend perpetuated by the Syrian conflict. The depressed market, combined with the closure of land routes across Syria to Gulf markets such as Saudi Arabia and Iraq, has hurt Lebanese exports overall.

[pullquote] While the Syrian crisis has had its share of negative impact on the Lebanese economy, it has allowed for increased demand  for Lebanese products to compensate for the decrease of Syrian exports [/pullquote]

Refined food products and raw produce exports have suffered in the same period. For refined food products 2014 was the peak year, with exports totalling close to $357 million to the top 10 importing countries, led by Saudi Arabia at $76.9 million. However, in 2015 the value of Lebanese exports to top importing countries fell some $20 million, and the trend points to continued decline in 2016.

As for exports of raw produce, its high came in 2013 when Lebanon shipped $177 million in fruits and vegetables to the top 10 countries (importing 82 percent of all Lebanese produce exports) – with Syria leading the way at almost $39 million. Two years later, those countries imported only $144 million worth of fruits and vegetables (77 percent of total produce exports), with Syria falling to number two on the list at $20.7 million, behind Saudi Arabia. While we don’t yet have data for all of 2016, the trend looks to have continued. By September 2016, Syria had imported only $12.9 million in Lebanese fruits and vegetables.

In an interview last year, Hajj Hassan attributed the decline of all Lebanese exports, and particularly those from the agriculture sector, to the slowdown of regional economies exacerbated by wars in Syria, Iraq and Yemen, and the closure of land routes to the Gulf.

To alleviate the burden on Lebanese farmers last year, the government agreed to subsidize produce exports by sea routes. The allocation of some $20 million to subsidize these exports from August 2015 to August 2016, the minister said at the time, may have helped limit losses to raw produce exports, which fell year-on-year by about $11 million compared to the same period the year before. Clearer data on the effect of covering the increased costs of exporting by sea is not available.

Maurice Saade, Lebanon’s country representative to the Food and Agriculture Organization of the United Nations, told Executive last December that the subsidies would at least soften losses to profit and allow produce exporters to maintain client relations (like supermarkets and food processors) in the Gulf countries. “If you don’t deliver, the client will move on to somebody else … [these subsidies] at least ensured that the Gulf and Iraqi markets were not lost,” Saade told Executive. As a whole, the agriculture sector’s contribution to Lebanon’s GDP fell nearly 2 percent in 2015 from the previous year and is likely to have declined further in 2016, but the calculation is not yet available.

The bright spot for both sectors, says Dany Gedeon, the director general of the ministry of industry, is improved internal consumption of local production. “Our internal market improved, increasing by about 25 percent. It decreased externally and increased internally, so we can say it’s a stable environment,” Gedeon told Executive in November. Gedeon didn’t explain how the ministry calculated the figure, nor did he offer an answer as to what might explain any such increase in domestic consumption of local production.

Higher domestic demand

The increase likely comes from the output of Lebanon’s agro-factories. Local food industrialists probably filled some of the void of food products from neighboring countries whose manufacturing and agricultural production were disrupted by conflict. In Lebanon there has also been an increase in consumption for Lebanese food products that can be attributed both to the sizeable Syrian population seeking refuge in Lebanon, and to the decline of that country’s output because of its civil war. “While the Syrian crisis has had its share of negative impact on the Lebanese economy, it has allowed for increased demand for Lebanese products to compensate for the decrease of Syrian exports,” according to a facts and figures sheet published in 2016 by the Investment and Development Authority of Lebanon (IDAL), the country’s national investment promotion agency.

Lebanese consumption patterns, particularly for food products, may also be changing as consumers’ purchasing power decreases because of the economic knock-on effects of the neighboring civil war. Local consumers have a penchant for more expensive imports of Western brands and products – a look at the year-on-year imports of food products shows a slight uptick this year over 2015, but one that is about $20 million less than in 2014. In the end, there is no clear explanation for the ministry’s claim of a 25 percent improvement of local consumption of industrial output.

[pullquote]It all hinges on  the outlook of a new Lebanese government and a hoped-for peaceful resolution to Syria’s civil war[/pullquote]

“For sure,” Gideon affirms when asked whether there will be positive growth for the industrialists and the sector as a whole in 2017. Lebanese agro-food industrialists could be the source of positive growth for both the manufacturing and agriculture sectors. According to a 2016 IDAL presentation, agro-food is Lebanon’s largest industrial subsector, contributing some 20 percent of the sector’s value to GDP in 2013, as the latest data available shows. In 2013 the entire manufacturing sector contributed 8.6 percent to national GDP, or nearly $3.5 billion of an estimated $44.3 billion, according to figures from the World Bank. According to Blom Bank, overall agro-food output in 2014 was valued at $1.13 billion.

Last year, IDAL chairman Nabil Itani announced the agro-food subsector had witnessed some $70 million in investments, according to a report in The Daily Star. However, it is not exactly clear where all of the money was invested, but some $30 million did go into a new factory in the Bekaa Valley for Master Chips – a local manufacturer of potato chips. Through the first three quarters of 2016, IDAL reviewed project proposals worth nearly $260 million, 60 percent of which the body says qualifies for IDAL incentives (100 percent exemption from corporate income and project dividends tax for up to 10 years), creating almost 2,200 jobs when the investments are realized. While the investment body did not clarify exactly where the number of projects or investment dollars were directed, it did say that $12.4 million went toward an expansion of Algorithm Pharmaceutical’s facility in the Chouf, and that the industrial and agro-food sub-sectors were the largest beneficiaries of the investment activity.

The overall investment potential in the industrial sector, IDAL explains in its November 2016 newsletter, “may be partially due to the Syrian crisis. Many industrial companies in Syria have shut down their operations, resulting in Arab countries switching to high quality Lebanese products.”

Moving forward

Expanding the domestic market is the top objective of the ministry’s 2025 vision. While the document doesn’t spell out how it plans to enlarge the local market, it does list the creation of industrial zones and the support of small and medium-sized enterprises (SMEs) as priorities in order to do so. Both priorities have and will continue to receive foreign assistance.

In early November, Executive attended the announcement of the launch of three planned industrial zones, the feasibility studies of which should be completed early next year. Supported by the Italian government, the plan is to develop a competitive manufacturing sector to act as a stabilizer in underdeveloped parts of Lebanon, and to help the country to develop capacity and competitiveness in its infrastructure and industrial sectors to meet the demands of international markets, according to Cristiano Pasini, the United Nations Industrial Development Organization (UNIDO) representative in Lebanon, who spoke to Executive on the sidelines of the event.

The project calls for three industrial zones – two in the Bekaa Valley at Baalbek and Tourbol-Qusaya, and one at Deir el Moukhalles-Jleilye in the Chouf – affecting some 32,000 jobs (up to half of which will be new jobs) at a total investment of $85 million. “The aim of the zones is to relaunch manufacturing competitiveness, create new jobs and improve labor productivity, enhance country resilience to internal and external shocks, and promote regional and local development,” says Ygor Scarcia, international project coordinator for UNIDO.

In terms of support for Lebanon’s niche creative industries, like jewelry in Bourj Hammoud and furniture in Tripoli, it is still too soon to know the impact of Italian foreign assistance. Last year, Pasini told Executive that the creative industries, taken as a whole, contributed 5 percent to the country’s GDP in 2010 and accounted for four percent of the national workforce that year, which is the latest comparison available. The creative cluster initiatives that the Italian government is supporting – visibly through a new shop in Beirut’s Gemmayze district cleverly named Creative Lebanon – is meant to elevate the quality standards of the products produced to compete in international markets, the Italian ambassador to Lebanon, Massimo Marotti, told Executive (see interview with the Italian Ambassador, page 126).

In the end, 2016 was yet another year of struggle for the industrial and agriculture sectors, though it seems likely that next year will be better. Marotti suggests it all hinges on the outlook of a new Lebanese government and a hoped-for peaceful resolution to Syria’s civil war.

“Hopefully with peace in Syria there will be conditions for the economy of Lebanon to grow. But basically the most important factor would be the indication from the government of where the country’s resources will go – renewing infrastructures, incentives for the private sector and for SMEs.”

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyForeign Perspective

Limited reset

by Matt Nash & Thomas Schellen
written by Matt Nash & Thomas Schellen

For relations between the UK and the European Union, 2016 was a year of total reboot. Half a year after the historic Brexit vote, details of what the actual Brexit deal will be are still unclear. However, with little impact on the relations between the UK and Lebanon, Her Majesty Queen Elizabeth II’s ambassador is envisioning big opportunities here. Executive visited the embassy to conduct an interview with Hugo Shorter, appointed to the post in September 2015.

E   Did the Brexit decision have any discernable impact on Lebanese-British relations throughout the past six months?

None, I would say. For a couple of good reasons. One is that practically everything we do in Lebanon and with the Lebanese is done bilaterally, whether it is with the Lebanese Armed Forces (LAF) and with the Internal Security Forces (ISF) or with the whole refugee file, and of course in the economic sphere. The second reason is that we are still members of the European Union and what the EU does here is partly on our behalf and is partly funded by us as well.

E   So in terms of imports from the UK, such as cars or pharmaceuticals, everything has been progressing in line with normal numbers?

It has been progressing in line with the economic situation in Lebanon, which has been relatively stagnant this year and last. Our best export numbers were in 2014, which reached a level of 500 million pounds. In 2015, we saw a decline down to 400 million pounds, and there will be a further decline this year because the economy remains flat. I don’t have figures on the effect of the Sterling’s change in the exchange rate after the Brexit vote. I would guess that this would have affected things positively but it is too early to tell.

E    One more question about trade in the past year: how were Lebanese exports to the UK?

You are talking about 40 million pounds in exports from Lebanon to the UK, which are mostly canned foods, ready-made garments and wine.

E   There was no significant increase in 2016 in these numbers, as far as one can see until now?

No.

E   Would you update us on the amounts that the UK has committed in humanitarian aid and development aid to Lebanon and to Syrian refugees in Lebanon?

Our support to Lebanon in the humanitarian file goes back several years and is not something that we started to boost after last year’s migration crisis in Europe. Over several years, we have also been the second largest bilateral donor to Lebanon, after the US. I am very proud of that because it shows that we are not just in this because we are trying to fix an immediate problem. We are in it because we think it is important to help protect Lebanese stability. To protect Lebanese stability, we need to help it cope with this huge number of refugees. To start with our financial year 2016/17 (our financial year runs from April 1 to March 31), we will allocate and spend 114 million pounds for this year. This is money that we are committing in order to implement the results of the London Conference and the agreement with the Lebanese government set out in a statement of intent.

E   How have you allocated this amount, which translates to more than $140 million at current exchange rates?

It is very hard to give exact figures on the breakdown of how this money was allocated, but it is roughly one third humanitarian. [This is] because the humanitarian situation does remain acute and we have to continue to make sure that people have the means to feed themselves, be sheltered and have minimum humanitarian standards. A very important part of what we do is on the education side, where we have been building our support for Lebanon over the past few years. We are going to spend about 40 million pounds this year on education, and we have already committed 40 million pounds every year for the next three years. This illustrates one of the things we think is important: there needs to be more predictability of which support Lebanon is going to get, and so we try to give multi-year commitments so that the Ministry of Education can plan ahead. There is also a set of actions that we do around job creation and around helping the most affected communities in Lebanon cope with stresses and strains of having a large influx of refugees. The United Nations Development Programme (UNDP) has established a system to identify the communities that are under the greatest stress. There are over 200 on their list and of these 200, we are supporting 49 this year with a series of programs to provide basic services, maintain infrastructure, etc.

E   This is bilateral or part of the EU funding for Lebanon?

All the numbers that I am giving are bilateral.

E   Is there any mechanism to account for currency fluctuations, given that the Lebanese lira is pegged to the US dollar against which the pound has dropped significantly following the Brexit vote?

There isn’t an automatic mechanism. We of course need to keep monitoring whether we are achieving the impact that we set out to achieve with the budgets that we have allocated.

E   Besides education, humanitarian aid and job creation, what other programs are you involved in?

We have a very important program on the stability and security side. We essentially have spent about 60 million pounds on equipping the army since 2011, and we have committed to continue this program until 2019. We will have trained over 10,000 soldiers by [its completion] and will have set up four land border regiments. For the first time, the LAF will control their border with Syria properly.

E   One often sees that media coverage puts emphasis on aid to Syrian refugees. But, from what you are saying, you are seeking to strike a balance between humanitarian support of Syrian refugees and support for Lebanon?

Yes, we are striking a balance both in our program with the LAF and the ISF. We have a big program with the ISF that is worth 13 million pounds over three years [starting in 2016], as we announced in March. Also, when it comes to refugees, we ensure that our programs, whether in education or in economic opportunities, are nationality blind in the sense that we are not saying “this is only for Syrians” or “this is only for Lebanese.”

E   Any comments on the thought that it would be beneficial, with view to the reconstruction of Syria one day, to train Syrians now while they are still outside of their country, as one British expert suggested at a recent event at the Issam Fares Institute?

Well, I think the thing to remember is that Lebanese law already allows Syrians to work in certain sectors such as construction, agriculture, cleaning and so on. In those areas, there is no need to change the law or even to provide work permits. Those are important areas for reconstruction in Syria in the future. Sure, there has been some ambiguity on the Lebanese side over where and in what sectors Syrians are allowed to work. We would certainly like to see some understanding of the value for Lebanon, as well as Syria, of Syrians being able to work rather than being idle and not able to supplement their family incomes, having all the risks of people whose position in society is undermined by their inability to work. But we are not asking the Lebanese to change their laws as to which sectors Syrians are allowed to work in.

E   Any other policy expectations that you have from the Lebanese side?

We are not making our assistance for refugees conditional on anything. There never is a position where we would say “if you don’t do this, we will stop doing that.” Lebanon is coping with a huge refugee crisis and is doing a fantastic job in many respects. We owe Lebanon the support that it needs and it is also in our interest to support Lebanon. There are of course areas where we think Lebanon can do more for both Lebanon’s benefit and for the benefit of handling the crisis. To give a couple of examples, one is when donor countries decide where to put their money, they want to find programs that will deliver results which they can then explain to their parliaments saying, “this is what our money has achieved.” The educational field is a good example where the [concerned ministry] has delivered education to thousands of Syrian children, and this is a success story which donors are happy to finance. The other thing that we talk to the Lebanese about is the question of refugees being registered and having residence permits. This is not about refugees being told they can stay forever, but about registering every person over the age of fourteen at a cost of $200 per person, which they are finding very expensive.

E    Are you encouraging the Lebanese government to address this issue?

At the London Conference the Lebanese government agreed to look at ways to address this issue. The other important aspect of this, which illustrates how addressing this is in Lebanon’s own interest, is that a lot of refugees are not fully documented either by the UNHCR or by the Lebanese and have fallen off the radar. To do something about their ability to have residency permits would bring them back on the radar, and it is in everyone’s interest to know who these people are and what their situation is. The day will come when refugees can return to Syria, and having the full number documented ensures that Lebanon will get all the support it needs and that we are able to plan for the right numbers to return and make their return easier, because you can bet that the Syrian state will ask for their documentation.

E   Are there any ideal scenarios under which you would envision companies from the UK to be more enticed to invest in Lebanon in 2017?

That scenario includes the Lebanese economy picking up. An ideal scenario would see growth rates that are a lot better than in the last 18 months. The second aspect concerns the regulatory environment around the ease of doing business here, the cost of doing business here and internet [speed], all things where Lebanon is rated very low if you look at the World Economic Forum ratings. I think a new government should be working to move Lebanon up in these rankings. Another thing is, maybe not for 2017, the prospect of Syrian reconstruction. It is a major economic opportunity for Lebanon, but one for which the government needs to make some preparations on things such as [removing] infrastructure bottlenecks and [implementing] some regulatory issues like the ease of moving goods across the border.   

E   Are you having this conversation already with the Lebanese government?

It is not an organized conversation yet because we are in a transition period. But it is something that I mentioned to the prime minister designate and to others. Also to be mentioned is the oil and gas sector, where we hope for the legislative framework to finally be unblocked. That will represent an opportunity for both Lebanese and foreigners.

[pullquote]Over several years, we have also been the second largest bilateral donor to Lebanon, after the US[/pullquote]

E   Do you have a strategic vision to build something that will last a little bit longer? What are some of the areas where you hope to make a lasting impact beyond assisting in times of the Syrian crisis?

There are three areas to mention. First, in education, we have not just been doing numbers. We have been doing quality in a big way and that of course is something we want to see last beyond the refugee crisis and benefit Lebanese children today and tomorrow. [Second], infrastructure is designed to last, so that local infrastructure around water and so on will leave a long-term positive legacy for the Lebanese. [Third], there is the question of national level infrastructure. One of the perhaps less noticed breakthroughs this year around the London Conference was that we managed to change the rules about concessional finance for middle income countries. Lebanon, which previously didn’t benefit from concessional finance, thus became eligible for concessional finance, effectively meaning finance where donors pay a large chunk of the interest.

This means Lebanon can get very low-interest loans, and we have set up a concessional finance fund that is managed by the World Bank to build new infrastructure in Lebanon and in Jordan. This spring, Lebanon developed a strategy with a prioritized list of projects and by July the [Lebanese] government agreed on three top priority projects. Those projects are now going through the pipeline of decision making in the concessional finance facility. That is, in my view, the beginning of a big opportunity for Lebanon. We will now want to see these projects start quickly and start delivering jobs in the first instance, as they will require a lot of work to deliver better infrastructure in the end.

E   What are these projects?

The three projects at the top of the list [include a project for building] secondary roads across the country, which are very important in local transport, getting goods to markets, etc. The other two projects are centered around Tripoli: the Tripoli port and building a railway line into Syria. That is very interesting from a lot of perspectives, not least from the Syria reconstruction perspective and also because Tripoli is underinvested in. There are big opportunities.

E   Is this about investment into expanding port capacity or merely about upgrading of existing facilities?

I don’t know all the details, but the project is about enabling Tripoli port to handle bigger volumes. This shows that the international community wants to do projects that will have a lasting effect on Lebanon’s economic prospects, but we need the Lebanese side to show that it can deliver those projects in an effective and timely way.

E   Is corruption an obstacle to that?

Corruption is a concern, but we designed these projects in such a way to ensure that we have all the guarantees we need on how the money is spent. The international community spends a lot of money in Lebanon, over a billion dollars a year. I am not saying that there is zero corruption, but the main donors – who are held very strictly to account on these issues – are confident about the way that our money is being spent here.

E   The UK supported the UK-Lebanon Tech Hub. Are you are going to do more in entrepreneurship going forward and will the Tech Hub actually help create jobs, given that entrepreneurship is generally thought to have low job creation?

We are going to do more with the Tech Hub and are going to put more money into it. We have not announced the amount, but we will do more. For entrepreneurship this is the main vehicle. It is very attractive because it is an arrangement model with mutual benefits and one of the reasons that we do want to support it is that the Tech Hub has a plan to generate a considerable number of jobs between now and 2025; they are talking of 25,000 jobs, but this will be dependent on the amount of investment that they can generate and how much we can support it. Each of those jobs, according to research, generates four other jobs in the economy at large. So we are not talking about insignificant numbers at all.

E    How do you judge the efficacy of most of what you do, given that there is no direct research on the impact of the amount of funding and no real data on the Lebanese economy?

As you know there is no data and it’s hard to judge the impact on the Lebanese economy. But, if you think of the actual money that is being spent here, it’s got to have an economic effect. We are spending over a billion dollars a year and that’s upwards of two percent of Lebanese GDP and that has to have an effect as it is largely being spent in the country.

E   Are there other projects besides entrepreneurship that the embassy wants to focus on in the economic direction?

Not directly. We have a few other ideas in the pipeline. We will tender a pilot project in social enterprise, in which Lebanon is pretty strong, and in which the UK is a world leader. But these are early days. 

E   Is it correct to say that you are overall not pessimistic about Lebanon’s future?

I think Lebanon has an ability to exceed expectations. I hope we are at a turning point with a president and a new government. If the new leaders are able to seize the opportunities that present themselves, then I am very optimistic.

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyOil and gas

New strategy needed for Lebanon’s oil and gas

by Sami Atallah
written by Sami Atallah

One of the key issues that Lebanon’s new government must address – and the list is long – is the two oil and gas-related decrees that have been collecting dust in the Council of Ministers (COM) for more than three years.

Despite a relatively upbeat start, led by the Lebanese Petroleum Administration (LPA) in December 2012, the process of building a domestic oil and gas sector came to a halt once it reached the COM in mid-2013. Upon taking office, then-Prime Minister Tammam Salam established an inter-ministerial oil committee in April 2014 whose job, in retrospect, aimed to stall rather than lead the development of the sector.

Beyond meetings with the LPA, the prime minister and the inter-ministerial committee failed to inform the public about what the body achieved, why the two decrees did not pass, and what plans are in place to move the sector forward.

For there to be any hope of the sector being governed effectively, a number of policies should be adopted beyond the approval of the two outstanding decrees. For one, the government needs to seriously develop a strategy for the energy sector. In other words, we, the Lebanese public, need to know how much energy Lebanon requires in the next decade and beyond, how the government plans to meet that need, and what the role of the offshore oil and gas sector is within that strategy.

When speaking with government officials, it becomes apparent that they have no qualms about telling us that they do indeed have a strategy – though it has little substance that would even classify it as a strategy – which was produced in 2008 when the oil and gas markets were very different than today. Nearly a decade after this strategy was produced, there is little consensus about adhering to it even among elites themselves, not to mention the wider public.

Although the LPA has gone to great lengths to organize and participate in numerous workshops related to the oil and gas sector – including those that were held jointly with the Lebanese Center for Policy Studies (LCPS) – there is a need to institutionalize the participatory process. This entails establishing a formal process by which experts, civil society organizations and think tanks can engage with the LPA, while also ensuring more decision makers are directly participating in this process. Such an arrangement would allow all concerned parties to inform one another about their work, exchange advice and constructive criticism, and ultimately result in building consensus about the sector.

While all eyes are on the two decrees awaiting passage, government agencies need to build capacity so they can better manage upcoming challenges in the sector.

One such example is the Ministry of Environment. A recent LCPS policy paper argues that the responsibilities of the ministry must be better defined, its institutions strengthened, and “the procedures by which third parties are used for inspections and investigations should be developed, new legislation should be passed covering management and disposal of drilling and production wastes, and the provisions under which environmental assessments are carried out and environmental permits are issued must be finalized.”

It must also be ensured that the government’s take of petroleum revenues is maximized. To facilitate this, the government must begin by opening up only a few of the offshore blocks, rather than all of them as desired by some of the political elite, so it can intensify competition.

[pullquote]In the last three years, the parliament has not bothered to hold one oversight session where it could pose questions to the government on where Lebanon stands in relation to the [oil and gas] sector[/pullquote]

However, the number of blocks offered for licensing is only part of the story. Out of 46 pre-qualified firms, 12 of them are well-known large operators and 34 are non-operators. Looking at some of the latter, a worrying sign emerges. Some companies were established a few weeks before the deadline, hence calling into question the credibility of their qualifications. The LPA has already collected information about the beneficial owners of these companies using a 20 percent ownership share as a threshold. However, it is essential that the LPA and other government agencies commit to disclosing information about company ownership shares and lowering the threshold for disclosing this information.

In a related matter, the LPA and the government have expressed serious interest in joining the Extractive Industries Transparency Initiative (EITI) and are even boasting about the fact that Lebanon might become a member before issuing a license. However, as much as EITI can be useful in mitigating the risks of corruption, its usefulness is confined to certain phases in the value chain. In other words, EITI can help identity discrepancies between how much the companies paid the state versus how much the government received from them. But EITI does not tell us whether the government received an optimal deal. Also, it does not monitor the management of oil revenue, where corruption is known to take place.

This does not mean that Lebanon should not join EITI, but relying exclusively on it is not prudent. Lebanon needs to strengthen its own oversight agencies and accountability mechanisms to minimize the risks.

Here, the parliament must play an active role not only in legislation but also in oversight. It is remarkable how ineffective the parliament has been in holding the government accountable for stalling the sector. In the last three years, the parliament has not bothered to hold one oversight session where it could pose questions to the government on where Lebanon stands in relation to the sector.

This is not good news for Lebanon, since accountability is a cornerstone of good governance. In fact, in a recent LCPS survey with members of parliament, only 35 out of 65 MPs knew that Lebanon’s economic zone is divided into 10 blocks and only one MP actually knew that there are 46 pre-qualified companies.

Lebanon’s sector is in a precarious situation. If political elites continue to undermine state institutions for their own gain, then it is better that Lebanon’s oil and gas remain buried under the sea, rather than burying us with heightened corruption and exacerbated inequality.

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

A year toward the recovery of Lebanon

by Dima El Machnouk & Gaelle Kibranian Zavzavadjian
written by Dima El Machnouk & Gaelle Kibranian Zavzavadjian

“It’s time to change the world” was the new motto embraced by the leaders of 193 countries during the 70th session of the General Assembly of the United Nations in September 2015. They signed off on a set of 17 ambitious goals, along with 169 associated targets, to together end extreme poverty, sustain prosperity, combat climate change and fight inequality and injustice.

“We resolve, between now and 2030, to end poverty and hunger everywhere; to combat inequalities within and among countries; to build peaceful, just and inclusive societies; to protect human rights and promote gender equality and the empowerment of women and girls; and to ensure the lasting protection of the planet and its natural resources. We resolve also to create conditions for sustainable, inclusive and sustained economic growth, shared prosperity and decent work for all, taking into account different levels of national development and capacities.” (UN General Assembly Resolution 70/1).

After almost a year, our own leadership has also been driven by the appetite for change, electing a new president, taking the country out of its comatose condition and delivering promises of economic revival, administrative and electoral reforms, and social resilience.

In this era of global and national transformations, these Sustainable Development Goals (SDGs) set out by the UN offer the solutions to Lebanon’s fundamental development challenges. These range from inadequate infrastructure, transportation and telecommunication networks, provision of commodities, high levels of corruption, mismanagement of environmental catastrophes, brain drain and lack of economic opportunities, to increasing levels of extreme poverty largely resulting from the Syrian conflict, so far the worst humanitarian crisis of the 21st century.

Toward a sustainable growth

As such, SDGs are a unique opportunity for the Lebanese leadership to rise above the phantoms of the past. Lebanon had only partially committed to the Millennium Development Goals – the predecessor of SDGs set to be achieved by 2015 – successfully addressing universal education, reducing child mortality, and improving maternal health. But given the national and regional turmoil, Lebanon lagged behind in terms of gender equality, environmental sustainability and curbing extreme poverty.

[pullquote]It is time for action. It can be as easy as saving electricity, recycling, composting and conserving water.[/pullquote]

Today, if our leaders choose again not to meet the commitments made towards SDGs, the country will be threatened by socio-economic risks, which will compound Lebanon’s current vulnerability and fragility.

The scale of the SDGs’ ambitions might raise concerns; yet, if properly adopted, they provide a realistic roadmap that addresses all areas necessary for our country’s recovery. This is based on three dimensions of development: economic, social and environmental sustainability. They will entail commitments from present and future leadership. If SDGs are adapted to priorities and limitations, they will work for Lebanon. From the plethora of goals and targets, Lebanon can choose a few in the first years, deliver them per primacy sector, and gradually implement them to witness early successes. 

SDGs are a holistic package that will guide policy and funding for the next 15 years. It is therefore time for our leaders to invest in institutional and policy reforms, to bring forward resources, enhance and monitor performance, and most importantly, have the will to do so. The political discourse should also be aligned with the SDGs in order to engage every citizen in the development process.

As such, if development is a right, participation is a duty. As citizens we should have expectations, but we also have the responsibility to partake and observe. A struggling government alone will not be able to reach the objectives. This requires multi-stakeholder concessions for us to all participate in the improvement of our country.

We are all equally responsible. Goal 17 of the SDGs calls for a global partnership for sustainable development. We can undeniably learn from other countries, but we need to ask ourselves what we can internally do to coherently coordinate our efforts for SDGs. How can we, as individuals, companies, NGOs, public officials and university students mobilize all resources, reach our full potential and transform Lebanon?

It is time for action. It can be as easy as saving electricity, recycling, composting and conserving water. It can be steps to boost consumers’ confidence. We can shop local and shop smart. We can help local producers improve the livelihood of their families, which would provide their children with access to quality education and enough food on the table for their next meal. We can establish support chains by donating what we don’t use: clothes, books, furniture and toys that can be given a new life in a family who needs them. We are not alone. We can improve the bottom line through partnerships. We should speak up, lobby, let our leaders know what we care about and, most importantly, support them to achieve results.

Speaking at the Habitat III conference in Ecuador in October 2016, UN Secretary-General Ban Ki-moon said: “Elected officials, mayors, governors and councilors are at the forefront of the battle for sustainable development.” Fortunately, the current Lebanese (caretaker) government has embarked on the process by developing the National Sustainable Development Strategy, a comprehensive plan of concrete actions, based on the SDGs, that will set the framework for development until 2030.

To avoid wasting effort, this can be used as the basic framework, institutionalized and further integrated and aligned with national priorities and the SDGs by succeeding governments. A parliamentary toolkit will be deployed in February 2017 – with the support of the United Nations Development Programme (UNDP) – to assess conformity with SDGs, resulting in the establishment of a working group to identify good practices, gaps and opportunities, and determine what can be done to better engage Parliament in the national development agenda.

Another initiative taken by the government was becoming a signatory to the Paris Agreement at the United Nations Climate Change Conference (COP21) in December 2015. Lebanon publically committed to reducing its greenhouse gas emissions by at least 15 percent, and up to 30 percent conditional to the provision of international support, by 2030. The shift to sustainable energy is not only the responsibility of prominent businesses, but is also a social responsibility for all citizens who want to improve livelihoods and the wellbeing of their community.

Our country today needs social innovators, individuals with an unconventional vision to change the future. It is clear that business as usual will not cut it anymore. The boundaries between government, civil society and the private sector are fading, giving way to more blended enterprises to solve the greatest challenges. Reducing poverty requires financial innovation. One example is the emerging trend of impact investment funds, where investors achieve both impact objectives and commercial returns. The SDGs provide context for investors to fit their strategies and objectives into broader sustainable development efforts. Increasingly, firms are using the SDGs to develop and communicate their Corporate Social Responsibility initiatives and as a framework to measure the social impact of each company. Our aim is that such innovative solutions will see the light in Lebanon and not be blocked by corruption. 

Over the next twelve months, we will introduce the different themes under the SDG spectrum and suggest areas of intervention for different stakeholders. We will leave no one behind. The agenda will be based on concrete information and statistics for informed decision-making. This will be a wish list to address our frustrations as Lebanese citizens. It will make us reconsider actions and consider whether this is the country we want to leave to future generations. It is indeed a time for change.

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyRefugees

Unemployed and underemployed

by Scott Preston
written by Scott Preston

Perhaps few issues in Lebanon are cause for more spirited debate than access to employment for Syrian refugees. Yet due to insufficient data, the economics of the issue have only been credibly argued in the most macro of terms. Nevertheless, a series of new development projects and policy reforms could provide more employment opportunities for both displaced Syrians and Lebanese citizens. This was a key theme of an international donor conference held in London in February 2016. Speaking at the end of the event, the UK’s then-International Development Secretary Justine Greening announced, “And today we’ve also made a second critical choice on supporting jobs for refugees and economic growth in the countries hosting them.”

The donor conference – which secured pledges totaling $12 billion in grants and loans aimed mainly at Syria, Jordan, Lebanon and Turkey – also resulted in the creation of the Concessional Financing Facility for the Middle East and North Africa (MENA CFF), which gives the aforementioned middle-income countries access to low-interest, long-term loans that they were previously considered too wealthy to qualify for. One project to be financed via this facility is being proposed by the Council of Reconstruction and Development (CDR) that will be enabled by $200 million in concessional funding, according to a description obtained by Executive. Through the rehabilitation of 500 km of Lebanon’s deteriorating roadways, the Road and Employment Project is expected to create 1.5 million labor days of work, but is not expected to begin issuing contracts before the start of 2018. Supply chain industries and up to 25 contractors are also set to benefit from the project, which is to be conducted in partnership with the World Bank.

[pullquote]Two thirds of those refugees considered as employed worked less than 15 days, and 92 percent earn less than the survival minimum expenditure basket of $435 per month[/pullquote]

Trouble cooperating

Prior to the refugee crisis, Syrians were permitted to work without permits in Lebanon due to a bilateral agreement (the “Treaty of Cooperation”) between the two countries that resulted in an open-border policy. Estimates of how many Syrians were working in Lebanon before the crisis are imprecise (ranging between 300,000 and 600,000). The consensus of several reports on the topic, however, suggests that regardless of the actual number of Syrian workers, they were a source of cheap labor heavily utilized by the construction and agriculture sectors. However, as refugees began streaming across the border, Lebanon began to implement a number of policy shifts that largely reversed this precedent.

In October 2014, the government began a series of legal changes that inhibited refugees’ access to employment. Syrians residing in Lebanon were restricted to working in three sectors where competition with Lebanese counterparts was thought to be low. These sectors are identified as construction, agriculture and cleaning services – and the latter was expanded to ‘environment’ in 2015. In January 2015, a new regulation required refugees registered with UNHCR to sign pledges not to work at all. The government dropped this regulation in mid-2016, enabling UNHCR registered refugees to seek employment within the three preauthorized sectors.

An uncertain impact

Measuring refugees’ impact on the job market, or the efficacy of protectionist restrictions, has proven difficult due to a lack of baseline statistics on the Lebanese workforce. Annabella Skoff, the chief technical advisor to the International Labor Organization (ILO)’s Syrian Crisis Response team, laments: “We don’t have updated data. The latest comprehensive data set is still dating back to 2009 and everything else is computations.”

Reliable figures on Syrian work inclusion have also proven inadequate for similar reasons. Lebanon’s Central Administration of Statistics has not monitored Syrian employment and any other datasets maintained by government ministries have not been released. The Ministry of Labor, which issues work permits, did not respond to interview requests. Without more detailed information on domestic or foreign labor forces, experts have struggled to determine which economic trends are attributable to the refugee crisis and which result from the more general economic problems Lebanon is facing. 

While most economists acknowledge that the refugee crisis has created competition among low-skilled positions – potentially lowering wages in some sectors – displaced Syrians are not thought to have substantially affected Lebanese unemployment. Nisreen Salti, associate professor of economics at the American University of Beirut, says that “It’s mostly the workers in basic occupations that have suffered, and these workers… had a large contingent that was non-Lebanese from even before the crisis; so Syrian, Palestinian, but also Iraqi and South Asian in general.”

Yet, the severe economic downturn that ensued with the outbreak of the Syrian war compounded resentment against refugees in Lebanon. Geopolitical complications, such as reduced trade with and through Syria, exacerbated structural weaknesses within the Lebanese economy, stifling the growth of gross domestic product (GDP) by 7.1 percent in 2011 and increasing local unemployment. Rayan Koteiche, a liaison officer at the UNHCR, says, “Potentially, 30-35 percent of [Lebanese] youth are impacted by unemployment and because [most] refugees reside in areas where poverty is quite high – [in] historically underserved areas – the job issue becomes a real source of tension, and that’s why it’s a really thorny policy matter.”

Best guess

The UN’s International Labour Organization (ILO) is preparing a study on the Syrian labor force in Lebanon (including both those registered as refugees and those not) and shared some findings with Executive prior to publication. According to the upcoming report, the Syrian labour force in Lebanon constitutes an estimated 384,000 people who had worked at least one day in the month prior to the survey. The estimate includes both Syrians registered with UNHRC and those not registered – again based on estimates of population data – of which about 36 percent are thought to be unemployed. The draft report states that two thirds of those refugees considered as employed worked less than 15 days, and 92 percent earn less than the survival minimum expenditure basket of $435 per month (which is therefore lower than the $450 minimum wage in Lebanon), suggesting high rates of underemployment. Furthermore, the labour force participation rate of Syrian females is very low at about 12 percent.

The ILO’s findings on high rates of underemployment correlate with the worsening living conditions Syrian refugees are reporting. As of late 2016, approximately 70 percent of Syrian refugees living in Lebanon have fallen below the poverty line, up from 49 percent in 2014, according to UNHCR research.

Opening up?

In addition to the $200 million infrastructure project the CDR is planning, the ILO is spearheading a major development project focusing on the construction of roads and agriculture-related infrastructure, Skoff says. She explains that details are not yet finalized, but notes the initiative is being developed in line with the Lebanon Crisis Response Plan that prioritizes labor intensive job creation for low skilled workers in sectors that maximize positive impacts for the economy.

Prior to the London Conference, Lebanon drafted a “Statement of Intent.” According to the statement, the Lebanese government will attempt to conduct a “review of existing regulatory frameworks related to residency conditions and work authorizations. It is seeking… ways to facilitate the streamlining of such regulations, including a periodical waiver of residency fees and simplifying documentary requirements such as waiving the ‘pledge not to work’ requirement for Syrians… to ease the access of Syrians to the job market…” The statement also proposes the creation of between 300,000 and 350,000 temporary jobs, of which up to 60 percent, (or 210,000 positions), could be available for Syrian refugees.

However, due to a number of caveats, many remain skeptical of the potential increased Syrian employment.

Existing barriers to legal residency, work permits and even inadequate administrative capacities could severely restrain employment uptake as well. While the ILO’s infrastructure project plans to support the Ministry of Labor in issuing work permits, Risha Jagarnathsingh – a research officer at Lebanon Support, a research and information center – points out that “The Ministry of Labor is underfunded, understaffed and the minister of labor himself has to approve work permits.” As a result, Skoff says the government only issues an average of 2,000 work permits per year, renewals accounting for about half of that number.

The future of Syrian refugees’ right-to-work hinges on the actions of the Lebanese government and the international community. In Jagarnathsingh’s view, the opening of the labor market is a mutually beneficial policy option, and she encourages Lebanon to facilitate refugees’ access to basic services and human rights, among which are decent living conditions. “[Lebanon] has a huge labor force right now that is not very expensive as employers are not obliged to pay taxes or social security for Syrian workers. So if it wants to build a railway or renew the country’s infrastructure, this could also be a chance; it could use this crisis as an opportunity,” she says.

0 comments
0 FacebookTwitterPinterestEmail
Climate changeEconomics & Policy

From Paris to Marrakesh and beyond

by Vahakn Kabakian
written by Vahakn Kabakian

Back in 2015, the world agreed to a new climate regime, dubbed the Paris Agreement. A new order was set, where both rich and less fortunate countries jointly engaged in the fight against climate change. This requires action to reduce greenhouse gases – those behind climate change – as quickly as possible. The agreement came via a document submitted by all countries that detailed their nationally determined contributions (NDC) – the actions they will undertake domestically to reduce their gases and avoid dangerous climate change. For example, Lebanon’s contribution consists of an unconditional greenhouse gas reduction target of 15 percent, raised to as much as 30 percent dependent on the provision of international support, both by 2030, relative to a business-as-usual scenario. Lebanon plans to reach its targets by implementing several policies and actions pertaining to the energy, transport, waste and forestry sectors. The NDC also contains adaptation measures that plan to increase Lebanon’s resilience toward climate change by tackling the water, forestry and agriculture sectors.

These commitments became the aggregate force of action toward lowering greenhouse gas emissions and avoiding the rise of temperatures to  1.5 or two degrees Celsius above pre-industrial levels, as was the objective of the adopted Paris Agreement. This was the pinnacle of the Paris Climate Conference. This year’s climate conference took place from November 7–18 in Marrakesh, Morocco. From the outset, the objective was to operationalize the Paris Agreement, and therefore from a political standpoint the agenda and expectations were modest, despite a growing sense of urgency and alarm among climate scientists that time is running short to prevent extraordinarily dangerous climate change. The only “political” surprise – perhaps the result of the US elections – was the early entry into force of the Paris Agreement (not expected before 2020) on November 4, 2016. As of November 29, 2016, 114 countries out of the 197 had ratified the agreement. During the Marrakesh meeting, with the objective of carrying the Paris momentum through and establishing the way ahead for the Paris Agreement’s effective implementation, the negotiators were able to navigate through the unresolved issues from Paris, which primarily pertained to differences between developed and developing countries. The conference concluded with countries agreeing to finalize the stipulations of the Paris Agreement by 2018 as well as other key decisions to advance implementation of the global pact. The Paris rulebook includes procedures for its implementation to be applied by all parties and will be delivered by 2018. For each item, substantive homework will have to be done by every party.

The national level

At the national level, the past year witnessed the initiation of several actions. On the policy front, the Lebanese government reaffirmed its commitment to the new climate change deal when then Lebanese Prime Minister Tammam Salam signed the Paris Agreement at the UN Headquarters in New York City on April 22, 2016, during a high-level ceremony convened by the outgoing UN Secretary-General Ban Ki-moon. Shortly after, the national process for ratification kicked in, and with the approval of the Council of Ministers in August 2016, the draft law was forwarded to parliament for final ratification (by virtue of Decree 3987). Once parliament ratifies the Paris Agreement, its provisions will become legally binding.

Under the Paris Agreement, the progress on national commitments will have to be reported biennially, while the national targets need to be updated (and ratcheted up) every five years. Therefore, an official NDC committee to follow-up on its implementation has been established by a Council of Ministers decision (in October 2016). The committee is composed of the governmental entities that contributed to the formulation of the NDC and were therefore directly responsible for the actions (as part of their strategies and plans) included as part of Lebanon’s commitments under the Paris Agreement. Foreshadowing this coordination, a mitigation NDC working group meeting took place in July 2016 with the objectives of clarifying the status of the implementation of the Lebanese NDC. This meeting also served as an opportunity to identify sectoral needs and gaps, including financial, capacity-building, regulatory or legal aspects, and shedding light on areas that potentially can be translated into project proposals for international support. In 2017, a roadmap for NDC implementation and reporting will be established to serve both national and international reporting requirements. This requires an overhaul (to say the least) of the existing system. In addition to the aforementioned updating and reporting on the NDC implementation progress, Lebanon will have to improve the quality of its reporting of greenhouse gas inventories, report on its adaptation plans, priorities, progress and projections, and prepare and submit a long-term greenhouse gas emissions development strategy.

[pullquote]The most recent findings foresee a burden of nearly $17 billion from the negative impacts of climate change on the Lebanese economy in 2040 if world temperatures increase beyond two degrees Celsius[/pullquote]

Meanwhile, the Lebanese private sector showed interest in supporting the government toward achieving its NDC target. Therefore, the Lebanon Climate Act was established to have Lebanese companies commit to a practical climate initiative to scale low-carbon solutions pertaining to energy, water, transport, waste, forestry or agriculture, or support NGOs who have similar climate endeavors. A series of quarterly scheduled sessions that aim to enable companies to plan and implement the climate-related projects are underway. The results of their actions, especially if upscaled, will have tremendous impact toward Lebanon’s progress vis-à-vis its international commitments.

Moving forward

It is evident that the international process requirements will benefit domestic goals and enhance institutional arrangements. The Paris Agreement is an opportunity for Lebanon to achieve sustainable development, and the government is gradually understanding the risks of inaction. The most recent findings foresee a burden of nearly $17 billion from the negative impacts of climate change on the Lebanese economy in 2040 if world temperatures increase beyond two degrees Celsius.

The road ahead is clear, and the train has left the station on both the national and international tracks. During the Marrakesh conference, the Lebanese delegation actively participated in negotiations and had the chance to speak on various platforms. One achievement was the launch of the Eurasian Network on Measuring, Reporting and Verification (related to the NDC progress), and Lebanon is set to become the pro-tempore Secretariat for the first year. Moreover, Lebanon became a member of the Climate Vulnerable Forum, a platform for vulnerable developing countries to drive ambition to avoid average global temperatures going beyond 1.5 degrees Celsius, to have one common voice in international negotiations and to share lessons learned on mitigation and adaptation.

At the national level, there needs to be a strong and continuous follow-up, and stronger coordination among all national and international parties involved. This also requires stronger intra-sectoral coordination, especially for the energy sector, where the renewable and thermal electricity agenda should go hand in hand. It might be beneficial to introduce renewable portfolio requirements for independent power producers (IPPs) for the fossil fuel-based electricity power plants, where the share of national renewable energy commitment (15 percent of electricity generation) is embedded and therefore all IPPs are required to source, at minimum, 15 percent of their annual electricity generation from renewable sources. There is also talk of establishing a sovereign wealth fund to manage anticipated hydrocarbon wealth. It might also be useful to explore the idea of earmarking revenues from any future fund to be invested in renewable projects and climate-related action. The cornerstone of the national process toward a greener and low emission economy has started. However, several challenges at the national level remain.

The coming few years will be crucial in laying the strong foundations of a long-term process that will enable Lebanon to comply with the deep decarbonization pathway by the second half of the 21st century (as stipulated by the Paris Agreement). For this to succeed, systemic thinking needs to be incorporated into Lebanese planning, which will inevitably result in more efficient and long-term development.

0 comments
0 FacebookTwitterPinterestEmail
Banking & FinanceOverview

An awfully quiet year

by Thomas Schellen
written by Thomas Schellen

When compared with the banking sector and the initiatives taken by Banque du Liban (BDL), the year was unnervingly quiet for the country’s insurance industry. Preliminary information on the performance of insurance companies suggests that the 4 percent growth in gross premiums to $1.2 billion at the end of the third quarter was low when compared with growth rates achieved in most of the past ten years. However, growth was not devastatingly low when one compares it to the inflation rate in the Lebanese economy, which edged into positive territory this year, but was too small to provide the economy with growth incentives.

According to figures by the Association des Compagnies d’Assurances au Liban (ACAL), premium growth rates in several lines of non-life insurance were negative at end of September 2016. Indications of positive premiums growth came only from two small business lines, miscellaneous and public liability insurance and from motor, medical, and life premiums. Granted, the latter three lines are the high-volume lines and represent some 93 percent of total insurance sector turnover in 2016, but at growth rates of 7 percent for life insurance – which includes savings contracts – and 6 and 3 percent, respectively, in motor and medical premiums, no single coverage line or subsector of insurance was reporting figures that could be described as encouraging. 

The impression of underwhelming growth in the sector and its link to the wider economy was corroborated by Karim Nasrallah, general manager of the Lebanese Credit Insurer (LCI). “The problem with Lebanon in 2016 was that there was no business growth, and [specifically in the area of] Lebanese export insurance because there is really no growth in exports,” he tells Executive on the sidelines of a regional conference.

Notably however, regional export and trade related problems are not limited to this country, and Lebanon in some respects performs well. “The [Lebanese] market behavior in terms of payments, which is what we are exposed to, is actually quite good. There is perhaps some greater delay of payments, but there is no increase in the rate of payment defaults or anything such, unlike some countries in the region. In some Gulf countries, things have been much more volatile and we had more claims due to defaults. Moreover, the business environment is challenging everywhere in the region. In Egypt, you have the currency situation, in the UAE, Qatar, Kuwait and Saudi Arabia you have the problem of commodity prices, which is impacting public spending and liquidity. So Lebanon is not the only country impacted by problems,” he explains.

As an insurer with operations in several Middle Eastern countries, LCI, which is the first non-state affiliated credit insurance provider in the entire region, is taking a more holistic view on regional issues and also can compensate for lack of business growth in one country with acceleration of performance in another. While Nasrallah likens the Lebanese businesses’ need for political stability prior to the presidential elections to a need for oxygen when suffocating, he can afford to be upbeat about the future. “LCI was growing outside of Lebanon in the past two years, underwriting exports and domestic trade in countries such as Jordan, UAE, and Saudi Arabia, but [we] hope that growth will return to Lebanon in 2017. You need stabilization to grow. I am optimistic, otherwise we should pack up and go,” he says.   

Many insurance companies active in other business lines, specifically local companies without global or regional affiliations such as those enjoyed by Allianz SNA or AXA, do not have the option to wait out downturns in the Lebanese economy. By conventional business logic, Lebanon should see a wave of mergers and acquisitions in insurance, including consolidation among local providers with turnovers near the low end of the sector’s income range. However, such moves have still not yet been reported in 2016 and the ACAL, according to its website, continues to have more than 50 member companies.

Besides their regular business activities – subdued as they were because of inertia in Lebanese politics and the economy – insurers mainly stood out through social activities, such as gathering for the 25th anniversary celebrations of GlobeMed Group, a third-party administrator affiliated with several Lebanese insurers. The highlight of the year in this regard was the hosting of the 31st Conference of the General Arab Insurance Federation (GAIF) in Beirut at the end of May.

Topics of interest at the conference were the debate over oil and gas related insurance services by Lebanese providers, which is an ongoing concern in the local insurance industry, the discussion of insurance pools (collective funds for coverage of specific risks) in several fields, including oil and gas, and the exploration of digitization as the main challenge that looms over insurance and reinsurance companies worldwide. A further conference on the digitization issue is planned to be held under GAIF auspices in Beirut in mid-2017. 

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyEnergy

Outlook brightens for renewables

by Jeremy Arbid
written by Jeremy Arbid

Renewables are the energy source of the future. Not too many years back it was hard to conceive that the sun’s rays could be harnessed into electricity – those what-will-the-future-look-like Laserdisc videos students were forced to watch when the substitute teacher covered 8th grade Life Science just didn’t seem that realistic. While planet earth may not be the utopian dream thought up then, today renewable energy is more and more the source of power charging our smartphones, lighting our homes and cooling our places of work.

Today the outlook for renewables is promising, linked to international commitments to reduce greenhouse gasses agreed to at the Paris Agreement in December 2015. There, Lebanon committed to reducing gas emissions by up to 15 percent unconditionally and by as much as 30 percent, depending on the provision of international support, both by 2030 (see climate change article). Alongside installing more renewables on the path to achieving emission reduction targets, Lebanon will need to restructure its electricity sector but, as it stands now, there is seemingly no will to reform.

In terms of renewable energy generation Lebanon has made progress. By the end of 2015, Lebanon had installed 9.45 megawatts of solar photovoltaic, according to a September report published by the United Nations Development Programme’s (UNDP) Small Decentralized Renewable Energy Power Generation (DREG) project. The cost of installing solar photovoltaic at factories and commercial facilities has fallen from $5.3 per watt in 2010 to $1.7 per watt in 2015, while operating savings from Lebanon’s photovoltaic installations have risen from $191,000 per year in 2010 to $2 million per year in 2015, according to the DREG report. In terms of climate change, solar installations have a measured carbon reduction, initially removing 351 tons of CO2 in 2010 and increasing to 18,000 tons of CO2 in 2015. The cost of removing one ton of CO2 can thus be calculated at $198, a figure that would dramatically decline were Lebanon able to install utility-scale (20 megawatts or more) solar photovoltaic projects (see The Lebanese solar revolution).

The cost of removing carbon is an important indicator to finance renewables. For international donors it doesn’t matter where in the world the reduction of carbon occurs as long as it’s done at competitive costs – for them. The impact of their funding will be the same globally whether a ton of carbon is no longer emitted in Lebanon or elsewhere.

Despite the obstacles preventing renewables’ scalability, there is local money available to finance installations. Lebanese businesses have the option of subsidized loans for renewables and energy efficiency projects through low interest rate loans distributed by commercial banks – a funding mechanism known as the National Energy Efficiency and Renewable Energy Action (NEEREA). Of the more than $350 million that NEEREA is said to have channeled into renewables and energy efficiency between 2012 and 2015, solar photovoltaic reached only $30.5 million cumulatively since 2010, according to the DREG report. That small chunk put toward solar may be due to the obstacles blocking its scalability and because of the political and financial risks in reforming the electricity sector. But the limited uptake of NEEREA money for solar might suggest that some energy efficiency projects are crowding out more worthy emission reduction investments, Executive has previously reported.

There are legal and technical obstacles preventing the scalability of renewables that will need to be addressed moving forward – namely the lack of a net-metering scheme (a billing mechanism crediting renewable energy providers for feeding electricity into the public grid) and the gap in Electricité du Liban (EDL)-supplied electricity blocking renewables from offsetting carbon emissions from the dirtier electricity produced by private generators that many homes and businesses connect to off-grid. The electricity sector demands reform, but, as it stands now, there is simply no will. Without restructuring, foreign donors will have zero appetite for fixing the grid, and private investors see no upside in pouring money into the bankrupt utility.

But the opportunity for Lebanon to restructure its electricity sector has never been more ripe. The momentum of the climate change agreement and a fall in oil prices provide a unique platform for debate in 2017 on how the country powers itself.

Failed reforms

Imagine investing the $2 billion of annual subsidies to EDL into renewables for one year, a dream scenario that the head of the ministry of environment’s climate change team, Vahakn Kabakian, proposed in an interview to Executive earlier this year.

EDL is a huge drain on the state’s coffers because of the significant subsidy at which electricity is generated and sold to the public. Since 1996, the government has helped cover the cost of generation, capping the purchase of fuel by EDL at $25 per barrel, with the treasury covering the difference. EDL also sells electricity at the fixed rate of 75 LL ($0.05) per kilowatt hour to distributors, while subscribers are charged on average only 133 LL ($0.09). “This decision has to be changed – we are simply unable to continue to subsidize the sector in the same way,” Ministry of Finance Director General Alain Bifani told Executive last year. The treasury was transferring some $2 billion per year until oil prices dropped in 2015 – leading to a decrease in subsidies to EDL from $1.4 billion during January to August 2014 to $520 million over the comparable period for 2016, according to ministry of finance figures (see EDL subsidies chart).

But rather than take advantage of the chance for reform it was, in the past year at least, business as usual in Lebanese politics.

[pullquote]EDL is a huge drain on the state’s coffers because of the significant subsidy at which electricity is generated and sold to the public[/pullquote]

Last fall, the Amal Movement and the Future Movement accused former Minister of Energy and Water Gebran Bassil and his Free Patriotic Movement of incompetence in the tendering and implementation of contracts for electricity projects and of misspending some $1.2 billion. In 2010, everything looked good on paper for the electricity sector. Bassil had put forth a master plan that by now would have delivered 24 hours of uninterrupted electricity generated cheaply by clean burning natural gas.

Ghazi Youssef, a Future Movement parliamentarian, accused Bassil in a September 2015 interview with Executive of focusing on the wrong priorities, incompetence and corruption. He says Bassil focused on rehabilitation projects at the Zouk and Jiyeh power plants, calling them low-hanging fruit, when he should have been focused on big picture projects that would significantly upgrade Lebanon’s generating capacity.

Bassil seemingly did bungle a tendered contract to build a 535 megawatt power plant at Deir Ammar worth $660 million by consortium Abenor-Butec, reneging on the contract when the consortium refused to lower the agreed upon price by $160 million. The project was re-tendered and awarded to a consortium led by Cypriot firm J&P, but a dispute over the payment of the project’s $50 million VAT delayed construction.

Accusations aside, Bassil’s plan to install an additional 1,500 megawatts of electricity generating capacity made no progress, largely because the plans to construct new power plants stipulated public-private partnerships – a scheme requiring legislation that every politician seems to support but that has not been passed into law by the parliament. Lebanon currently has 1,500 megawatts of installed capacity, with that number set to rise as new reciprocating generators were scheduled to come online at the Zouk and Jiyeh power plants in 2016 – sources tell Executive that the Zouk installation is complete but not yet switched on.

Demand, however, continues to exceed production capacity by an average of some 800 megawatts, with the gap being filled by private generators. Every month the Ministry of Energy circulates a list suggesting a price at which private generators should offer 5 and 10 amps to subscribers – and the ministry of economy has a hotline for consumers to report price violations – but it is not clear how well the policy is enforced. The business of private generation is a lucrative one which, according to a 2011 ministry of energy study, was worth $1.7 billion per year.

Progress was made in privatizing some of EDL’s activities – those tasks of network operation and maintenance, metering and bill collection. But the revenues collected by the three main contracted distributors, BUTEC, KVA and NEU, are not published, nor are the financial books of EDL. The only indication is from EDL’s contribution to the bill of oil imports, $25 million in 2015, according to BlomInvest Bank.

Private initiatives

Bickering at the political level has highlighted opportunities for Lebanon’s private sector to step into the business of electricity generation, some with more success than others.

Bassil’s plan for 24 hour electricity has, obviously, not fully materialized. That has left individual areas to come up with their own plans to produce electricity – starting in Zahle in 2015, with plans announced for Jbeil (Byblos) and Tripoli.

[pullquote]Bickering at the political level has highlighted opportunities for Lebanon’s private sector to stepinto the business of electricity generation[/pullquote]

In 2015, Zahle implemented a local plan to bring some 53,000 subscribers 24 hours of electricity by generating 48 megawatts of power. Assaad Nakad, chairman of Electricité de Zahle (EdZ), has not responded to Executive’s requests to fully understand the plan. Byblos Advanced Energy (BAE) has plans to build a 64 megawatt power plant in Jbeil to serve nearly 28,000 customers, a total investment requiring $68.4 million, Executive reported last December. The project is shovel ready but is awaiting license approval by cabinet. Its principal Mario Chelala said that no progress had been made – “from promises to promises, we are still stuck,” he wrote to Executive in an email in December 2016.

For Tripoli there are two plans to supply the city with 24 hour electricity. Najib Mikati, a former prime minister, established Nour al-Fayhaa, but in announcing the new electricity company in September 2015, he offered few details on how the new entity would generate electricity for the some 600,000 customers in Greater Tripoli. The other plan announced this October, by Tripoli businessman Mohammad Adib and EdZ chairman Nakad, would generate 150 megawatts. Representatives for the plans did not respond to Executive’s inquiries to understand the technical details.

Lebanese would welcome 24 hour electricity; in most countries what is a basic public service is in Lebanon a luxury for those who can afford two utility bills. The private sector initiatives are certainly welcome and are not to be discarded if the plans achieve what they promise – around the clock power for homes and businesses. But it may be too much to ask for private sector plans to incorporate renewables in their electricity generation schemes, especially given the legal, technical and political obstacles they face.

0 comments
0 FacebookTwitterPinterestEmail
Economics & PolicyOverview

Lebanon’s economy weathers a tough 2016

by Jeremy Arbid
written by Jeremy Arbid

If there is one resolution Lebanon can commit to this coming new year, it is making good on the opportunity for a fresh start, to restart government institutions and implement sound policies that will guide the country toward a more promising future.

A sputtering Lebanese economy, exasperated by a disruption in regional trading due to the ongoing civil war in neighboring Syria, the refugee crisis it has perpetuated, the deterioration of public services like garbage collection and electricity because of an impotent government and American financial sanctions targeting Hezbollah, among many more crises, brought Lebanon to the brink of state failure in 2016. With the election of a president in October, there could be a way out of the darkness, and if the almost two and a half year political stalemate is nearing an end, then the question on many minds is: what steps can a new government take to right the economic ship? Everyone seems to be wishing for the same thing this holiday season: a better economic outlook in 2017.

For Lebanon, economic growth has slowed dramatically. In 2010 gross domestic product (GDP) growth reached 8 percent. This year, the World Bank estimates the economy might grow by up to 1.8 percent, while the International Monetary Fund (IMF) projects only 1 percent growth in 2016. But, from the point of view of several Western ambassadors that Executive spoke with in November, the hope is that a resolution to the country’s political impasse is in the cards. The election of a president, followed by the appointment of a government, hopefully before the end of 2016, that would oversee parliamentary elections (whose current members were elected in 2009 and extended their terms twice) in late spring 2017, could, depending on its policy priorities, usher in a period of stability encouraging economic growth.

Exports have been one of the clearest indicators of Lebanon’s economic slowdown. In 2012, the country exported almost $4.5 billion worth of Lebanese goods and produce. By 2015, those products had declined to less than $3 billion in value, and so far this year exports totaled almost $2.3 billion by September.

[pullquote]The hope is that by the end of 2017 Lebanon will be able to reorient its exports to new international markets and spur absorption of Lebanese products in the local economy[/pullquote]

The reason for the decline is largely due to the disruption of land routes through war-ravaged Syria to markets in the Gulf and a drop in Lebanese exports to the Syrian market, one of its larger trading partners. Exports to Syria declined from a 2013 high of $500 million to less than $130 million through September of this year. More generally, Lebanon has also witnessed a slowdown in local manufacturing output due to the depressed local and regional economies. The hope is that by the end of 2017 Lebanon will be able to reorient its exports to new international markets and spur absorption of Lebanese products in the local economy (see industry overview).

Lebanon has not been alone in its economic woes. The entire region has been in a recession since the start of the so-called Arab Spring in 2011, compounded more so by the civil war in neighboring Syria. The region’s GDP by 2015 had declined on average to a growth rate of less than 1 percent, a recently published report by the UN Economic and Social Commision for Western Asia (ESCWA) found.

The report cited falling oil prices, slower domestic demand expansion and weaker business confidence for the overall economic slowdown in Gulf countries, as well as knock-on effects from regional conflicts and the refugee crisis from Syria’s civil war.

It is the fall of oil prices that could reshape the political and economic landscape of the Middle East in the coming year, according to energy and political analysts. “Now that oil prices are declining and will likely continue to remain low for several years, if not permanently, the Middle East’s rentier systems face a significant challenge…If Middle Eastern countries do not start making real progress on fundamental political and economic reforms, further regional turmoil is inevitable,” Marwan Muasher, vice president for studies at the Carnegie Endowment for International Peace, deduced in a November 2016 article.

Rentier economies, such as Saudi Arabia, have previously propped up other regional countries with financial support, and the recent shift from grants to investments, Muasher continues, “will put pressure on those governments to pursue private-sector growth to improve their own countries’ economic performance…expect to see further opposition from state bureaucracies, which lack any vision for a transition to an inclusive and sustainable economic model.”

[pullquote]The government and parliament have largely reduced their activity to reactionary decision-making and emergency legislation[/pullquote]

In Lebanon, lower oil prices have provided some flexibility in terms of lower financial transfers from the treasury to the public utility, Electricite du Liban (EDL), because of its shortcomings in bill collection revenue and other inefficiencies in producing and distributing electricity. This has resulted in a decrease in subsidies from some $1.4 billion from January to August 2014, to $520 million over a comparable period for 2016, according to ministry of finance figures.

Last year, Ministry of Finance Director General Alain Bifani told Executive that subsidies to the public utility are not sustainable and that while the fall in oil prices has provided some breathing space in terms of the state’s fiscal situation, this “should be pushing us for immediate action whilst we have this breathing space.”

Taking advantage of the opportunity does not appear likely in the near term, as political and confessional obstacles have continually hindered a restructuring of the electricity sector despite its drain on public finances and have led to a 2010 government plan to reform EDL to be ignored. The accruing debt on investments in and transfers to EDL, according to the World Bank, amounts to 40 percent of Lebanon’s gross public debt – and transfers to EDL now account for over 50 percent of the fiscal deficit.

Deficit grows

Despite smaller allocations to EDL, by August the budget deficit had widened to $2.5 billion, a rise of nearly 27 percent over the same period in 2015, with government expenditures totaling around $9.4 billion so far this year. Public debt is estimated by the World Bank to reach some 149 percent of gross domestic product by the end of the year (the IMF projects the debt-to-GDP ratio to reach 144 percent in 2016), and gross public debt is expected to continue to grow largely due to the servicing of public debt.

It is unlikely, however, that the new government, whenever it is formed, will adopt the budget proposal for 2017 (Lebanon has not ratified a budget since 2005) to reign in public spending because its main priority will be the organization of parliamentary elections sometime next year, despite the urging by economists, bankers and international monetary institutions to pass a budget.

With no fiscal policy in place, Banque du Liban (BDL), Lebanon’s central bank, has stepped in to shore up Lebanon’s sputtering economy. BDL claims that its stimulus packages ($1.46 billion in 2013, increased by $920 million in 2014, an additional $990 million in 2015 and another $1 billion more announced this November), whose primary role has been to spur job creation, have made a “sizeable contribution to GDP.” BDL says that “the stimulus packages of 2013 and 2014 proved to be successful, contributing around 50 percent of real gross domestic product growth,” as Executive has previously reported, but the data to corroborate the claim has not been made available to the public.

In its fall 2016 issue of Lebanon Economic Monitor (LEM) the World Bank, in assessing the efficacy of BDL’s stimulus packages since 2013, points out that “no elaborate studies…of the effects of BDL’s subsidized lending programs on economic growth or job creation exist.” In a 2013 issue of LEM, the World Bank projected that the impact of the first stimulus was expected to be limited: “BDL’s stimulus package could boost GDP growth by 0.2 to 0.3 percentage points.”

Where the stimulus packages have had a large impact is in propping up Lebanon’s real estate sector. Nearly 76 percent of loans subsidized by the stimulus packages have gone to the housing sector between March 2012 and March 2015, according to figures cited by BDL’s director of financial operations, Youssef el Khalil, at an event hosted by the American University of Beirut (AUB) in November, in order to keep the sector afloat (see real estate overview).

Strain on the banks

One of the biggest stories of the year was the implementation in May of an American law targeting Hezbollah – the Hezbollah International Financing Prevention Act (HIFPA). Once again, BDL stepped in to fill the void of foreign policy, financial and economic leadership vacated by an impotent government – issuing circular 137 for Lebanese banks to comply with the US law.

While parliament did pass legislation to patch up anti-money laundering and counter-terrorism financing rules to meet international standards and safeguard Lebanon’s banking sector, it had virtually no leverage to soften the impact of American rules. Remembering the forced closure of the Lebanese Canadian Bank in 2011, local officials earlier this year were concerned that HIFPA would disrupt Lebanon’s banking sector, blowing up the Lebanese economy in the process.

For the most part that didn’t happen. One source familiar with Lebanon’s banking sector told Executive in November that the American legislation has had a significant psychological effect on Lebanon’s banking sector and among the political elite, but the actual impact in terms of the number of bank accounts affected is not clear but probably limited. Of the more than 100 individuals and entities sanctioned due to that law, one might presume the number of accounts and assets frozen are not significant. The source said that there is less concern of money being moved through the banking system, but rather of it being moved through informal cash and goods transfer networks like Hawala. Citing banking secrecy, BDL’s Special Investigation Commission, Lebanon’s anti-money laundering authority, in November would not disclose to Executive the aggregate number of accounts affected by the US law. When reached by telephone in early November, Yassine Jaber, a member of parliament representing the Amal Movement, a Hezbollah ally, said nothing has happened in the interim and that there wasn’t anything to talk about, declining to comment further.

While the American legislation did not blow up the Lebanese economy (the main office of Blom Bank, however, was bombed), it did further emphasize BDL’s role in the absence of real governance and policymaking. The government and parliament have largely reduced their activity to reactionary decision-making and emergency legislation, rather than proactively addressing the many systemic challenges that the country faces.

Speaking generally on policy making, Hiba Khodr, a professor of public policy at AUB, says Lebanon has good policy proposals and policy research. “We just don’t have a policy agenda, and we don’t define our policy interests,” Khodr said at a November panel discussion hosted by AUB’s Issam Fares Institute for Public Policy. Fadia Kiwan, the director of the Institute of Political Science at Beirut’s Université Saint-Joseph, added that political parties do not focus on policymaking because they are mostly concerned with confessional quotas and obtaining ministries that have the most power or resources they can use to benefit their constituencies.

The election of a president was the first step toward defining government priorities and a renewal of state institutions that will give decisionmakers in the private sector, the banking community and other economic stakeholders a sense of direction moving forward. Whether Lebanon’s economy will improve in 2017 is a question that only time can answer.

0 comments
0 FacebookTwitterPinterestEmail
EditorialOpinion

Starting afresh

by Yasser Akkaoui
written by Yasser Akkaoui

While 2016 was full of surprises, in our own backyard the year’s developments simply helped reconfirm what we already know and once again exposed the extent of our vulnerability and dependence. Our region’s fate is in the hands of superpowers, influenced by any number of special interests except, of course, the best interest of local populations. The year proved human life has no value to those who will decide our fate. It proved our lot is not to make decisions, rather to wait until decisions are made for us.

In Lebanon, the effects of this are becoming embarrassing. We have a president now, but it seems that we are still destined to wait for international deals to be struck that will help define our future. In the meantime, gross mismanagement in the public sector deprives us of even the most basic services (electricity, water, garbage collection and disposal). The only functioning institution in this country is Banque du Liban (BDL), the central bank. We cannot prove that the BDL stimulus package contributed to half or more of our GDP growth in each of the past three years, but it’s hard to think of a positive development in Lebanon since 2010 that does not have BDL to thank. Subsidized environmental loans are building a renewable energy industry, subsidized housing loans and other assistance are propping up the real estate sector and guaranteed investments are giving a turbo-charged boost to an entrepreneurship ecosystem, building on over a decade of organic growth. Imagine if our ministries were all as well managed. Imagine the cumulative effect if each minister could say he or she helped contribute half a percentage point to growth in 2016. The more I think about this country, the more I’m convinced that economic independence is a prerequisite for political independence, both locally and internationally.

Individual Lebanese are often as dependent on their local political bosses as those bosses are dependent on their foreign sponsors. If we can’t break the links at the top of the chain, our only hope is to break them at the bottom. It seems clear that spring will bring with it parliamentary elections, albeit with an unfair law. This is not ideal, but it still provides at least an opportunity for liberal-minded candidates with a real vision for this country’s future to succeed.

My hope for 2017 is that at least a few of these candidates can contaminate our corrupt, rotten parliament with new blood and new ideas. We are encouraged by foreign voices, who all expressed their trust in Lebanon on this issue. I hope for members of parliament to be guided by their conscience and love of country, not blinded by political allegiance. I hope for representatives who will alleviate the people’s suffering and mitigate the effects of mismanagement that have been holding Lebanon back for too long. We have to break the chain. In 2017, we start.        

0 comments
0 FacebookTwitterPinterestEmail