By Invitation

Implementing Paris III: what it takes

by Mounir Rached
written by Mounir Rached

As part of Paris III, the Lebanese government has promisedto embark on a number of fiscal reforms addressing primarilythe revenue side “in view of the relatively limited scopefor further cuts in public spending.”

The objective of these reforms is set in paragraph 92 of theParis III reform agenda. It aims at minimizing distortionsand enhancing equity and fairness in the distribution of thetax system.

Can these reforms achieve their objective?

Lebanon’s revenue structure relies heavily on indirecttaxes. Taxes on income and profits constitute only 14.5% oftotal revenues and 3.3% of GDP; while indirect taxes (mostlyVAT and customs) contribute 46% of the total. In spite ofexemptions, indirect taxes are, as generally recognized,regressive.

To recall, the most important tax measure taken recently wasthe introduction of a one rate and one stage value added tax(VAT) in 2002 that resembles more a sales tax. This isregressive tax in spite of exempting basic items andservices. It was a step forward to shore up revenue anddiversify its base. Its impact was visible and raised taxrevenue to a record 15% of GDP. However, it magnified equitydistortions as it was not accompanied by other tax reformsto enhance equity. Customs top rate, for instance, remainsat 90%, and customs provide 25% of tax revenue.

Making adjustments

Will the proposed new measures, as part of Paris III,impact significantly on revenues and its structure? The taxadjustments include VAT increase to 12% in 2008 and to 15%in 2010, and the tax on interest income to 7% in 2008.

These two adjustments, assuming a neutral effect oncapital and on the consumption pattern, could raise taxrevenue by 1.5%, accruing mostly from VAT. Raising taxrevenue to GDP to the desired objective of 18% by 2011 hasto be generated by administrative measures. These include:activating the large tax payer’s office (LTO), fullystaffing the Tax Roll department – a data base department,expanding the withheld tax registration, and adopting a TaxProcedure Code. A Global Income Tax without rate change isplanned for 2008. These measures are expected to raiserevenue by another 1.5% of GDP.

Direct tax collection on income (enterprise and wagetaxes) will, after all, remain very low at 4% of GDP by 2011compared to an unweighted average statutory rate of 10%.This implies the presence of either extensive tax evasionand/ or ineffectiveness in collection. An endemic problem inLebanon, which is not being addressed genuinely by any ofthe proposed measures except in the enhancement of coverageby tax withholding.

The revenue structure will continue to remain nearlystagnant, and to rely heavily on indirect taxes (50% oftotal revenue) and non-tax revenue (32%); without enhancingequity. A comparison of before and after tax income (basedon the family income distribution study CDS, 1998) showedthe ineffectiveness of the pre-1999 structure (a moreprogressive tax) on equity enhancement. The after tax incomeshare of the tranche with the lowest income (6%) increasedto 1.12% compared to 1.09 % of the total before taxes. Forthe tranche with the largest income (3.1%), the after taxincome share dropped only to 15% from a 15.9% share beforetaxes.

These indicators point out to the need to further strengthenincome tax share to enhance equity; especially in the caseof Lebanon, where income distribution is highly skewed. TheOECD countries, for instance, have moved in their recent taxpolicy reform towards reducing marginal income tax rates andplacing more reliance on VAT and other indirect taxes.However, income taxes remained the largest portion of totaltax revenue in these countries (25%, compared to 3.3% inLebanon). Their reforms set priority on fairness andsimplicity, and were based on public support reflected inthe platform of political parties.

New measures needed

In Lebanon, a more effective collection of income tax evenat the current rate structure (five marginal rates) couldraise revenue by another 6% of GDP, thus closing most of thefiscal gap needed to reduce debt accumulation. Income is thelargest tax base that needs to be fully tapped. Currently,civil servants and wage earners are the most compliant. Somereforms are inevitable, however, such as treating financialand on-financial enterprises equally by raising the rate onthe former to 21% and applying this one rate on both.

The direction of reforms in Lebanon needs to be based onpublic choice rather on a centralized decision induced onlyby the objective of raising revenue. An open public debate(or even a referendum) on tax choices could guide thegovernment and garner support for its decision.

Dr. Mounir Rached is a senior IMF economist and a founding member of the Lebanese EconomicAssociation. The views in this article don’t represent those of the IMF. Dr. Ghassan Deeba is Associate Professor at the LAU.

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Lebanon

Looking Overseas – Banks eye lucrative markets

by Executive Staff
written by Executive Staff

Bullish is not a term many would use to describe Lebanon’seconomy in the current situation, or indeed Lebanon’sbanking sector on a domestic level, but when it comes toLebanese banks expanding beyond their own borders, bullishwould seem to be the right terminology.

All the Alpha banks, along with a good proportion of theBeta banks, are getting in on the act, putting Lebanon backon the regional banking map after largely disappearing fromview in the late 1970s when the sector lost out to Bahrainand the UAE as a Middle Eastern banking hub. In manyrespects, the roller coaster ride Lebanon has been on forthe past few years has actually been positive for thebanking sector, compelling banks to diversify away fromLebanon and mirror the movement of Lebanese white collarworkers that have gone to the Gulf and elsewhere in theMiddle East in search of more promising employment.

As Semaan Bassil, vice-chairman and general manager ofByblos Bank put it, “One positive thing of the [July] warwas putting pressure on Lebanon to find new markets outside.This is very healthy, as before the civil war, the marketwas outside.”

Changes to the regulatory environment in the MENA regionhave also been conducive to the banks expansionaryaspirations. Syria’s banking sector came in from the cold in2001, allowing foreign and private banks for the first timein over 30 years; Sudan, Algeria and Egypt have opened up,and Qatar has becoming an increasingly assertive financialmarket.

An additional factor is that the Lebanese market holds fewpossibilities for serious growth. “All banks have reached asaturation point and cannot compete for more market share.The main driving force is [that the banks are] not happy inLebanon,” said Shadi Karam, Chairman of BLC.

Equally, it has only been in the last few years that bankswere able to viably entertain the idea of expansion. “Onlynow have banks reached a certain size to allow them toexpand overseas – whether in total assets or equity,” saidSalim Sfeir, Chairman and General Manager of the Bank ofBeirut (BoB). Chasing the money

The Central Bank has been key to the expansion, relaxingcross border lending and dishing out approvals to encouragethe sector to charter new waters. Indeed, with bank lendingto the government gradually declining – although still thebedrock of the banking sector – the Central Bank, under thesound guiding hand of Governor Riad Salameh, is under nomisconceptions about the potential for cannibalism if bankswere not able to seek new markets.

Equally, with inter Arab trade estimated at $20 billion,Lebanon would be foolish not to go after a larger slice ofthat pie, given its geographical positioning and commercialas well as retail banking strength. Lebanese bankers alsohave an added advantage over their internationalcounterparts operating in the Middle East – namely, anunderstanding of the culture and language as well as theknow-how of turning a banking sector around, as was the casein Lebanon after the civil war. Lacking such insight, someBritish banks that recently entered Egypt have read themarket wrongly in terms of products and services. But forLebanese banks, such attributes have played into thebankers’ hands, particularly in Jordan and in Syria. Aftertwo and half years in Jordan, Audi “could reach $2.5 billionin assets,” said Freddie Baz, advisor to the chairman atBank Audi. While in Syria, after two years of operations,Audi Syria reached some $400 million in assets. BLOM andByblos have also fared well in Syria.

The fledgling Syrian market is attractive to other banks,with First National Bank (FNB) an 8% stake holder in thesoon to be launched Syria Gulf Bank, and Libano-Francaise,BoB and Fransabank waiting for licenses. The Lebanese-Canadian Bank (LCB) and CreditBank also plan to enter theSyrian market. “It’s a natural expansion into Syria, as itwill benefit the sector and help to converge the two marketsto a common denominator,” said Tarek Khalife,chairman-general manager of CreditBank.

For Libano-Francaise – with 10% to 15% of its business inLebanon consisting of corporate loans to Syria, and 90% oftheir Paris operation catering to Syrians – the bank was“following our clients,” explained Walid Raphael, deputygeneral manager. The bank had planned to enter Syriaearlier, but shareholders in France opposed the move.

Cairo and beyond

Jammal Trust Bank (JTB) is also in expansion mode, planningto rectify their position in the Egyptian market afterlosing their license in 2005. “When the late chairman passedaway two months before the [Egyptian] Central Bankrequirement to increase capital, I couldn’t raise anextraordinary session because the one who passed away held99% of the shares. I had to wind down operations, but nottotally liquefy,” said Anwar Jammal, Chairman and CEO of JTB.

√Meanwhile, JTB is looking to expand to West Africa. “Ithink there is huge potential, be it catering to Lebaneseexpatriates or the locals. We’re also hoping, at a laterstage, to move into the Gulf,” said Jammal.

Other banks are faring better in Egypt, which is proving tobe a lucrative market. Bank Audi bought Cairo Far East Bankwith $47 million in assets, and after nine months, had $1billion. BLOM bought Misr-Romania Bank at the end of 2005for $100 million, $60 million in net equity and $40 million“in good will.” “The first year generated profits of $11million. For the first three months this year, it was $6.3million, so by year’s end, it should reach $15 million,”said Saad Azhari, BLOM’s vice chairman and general manager.After a year of operations, BLOM Egypt had 40% growth inlending and 25% in deposits.

BLOM, Byblos and Audi are already in the Gulf, and otherbanks are also moving to have a slice of the boomingmarkets. CreditBank plans to open offices in the QatarFinancial Center (QFC) and the Dubai Financial Center, aswell as a representative office in Kuwait. BLC, which wasbought out by the Qatari Investment Authority in late 2005and is well established in the UAE, is planning to open inthe QFC.

Driving the move to the Gulf is the surging number ofLebanese expatriates working there, using correspondingbanks or the Lebanese bank equivalent to remit money home.For instance, in 2002 there were some 3,500 Lebanese inQatar, there are now 35,000, according to Khalife. Suchremittances are highly significant to the economy, withworldwide remittances to Lebanon recently estimated at $5.2billion or equivalent to 25% of national GDP.

As Khalife remarked, “The middle class has disappeared fromview, but not from the banks, they are [working] in theregional markets.”

Risky business

While Algeria is proving a promising market for BLOM,Fransabank and the Lebanese-Canadian Bank with its 60% stakein Trust Bank Algeria, banks are wary of the recentlyliberalized Libyan market for political and bureaucraticreasons. Indeed, one of the top five banks recounted how anemployee wasn’t able to visit Tripoli to prospect thebanking sector as he was unable to get a visa. Sudan is alsoseen as potentially risky given the ropy peace and thetroubles in Darfur, but Bank Byblos is already present, asare the Lebanese-Canadian Bank with a 3% stake in Al SalaamBank, Fransabank with a 20% stake in United Capital Bank,and just last month, Bank of Beirut acquired an 18% stake inthe Saudi-French Bank.

Bank Audi is also optimistic about its presence there.“Sudan could bring millions of dollars in assets, its on theright track to increase significantly,” said Baz. Some banksare equally bullish about Iraq, with Byblos andInternational Bank operating in Irbil in the Kurdish areaand FNB angling to get in on the action.

“We are looking very seriously to open in Irbil, probably in2008 with a license for all of Iraq,” said Yasser Mortada,deputy general manager of FNB.

Other banks are hesitant to enter the market until thesituation improves and clearer regulations are establishedconcerning Central Bank regulations, whether from Irbil tooperate in Northern Iraq or in Baghdad to operate in thewhole country. Such issues recently warded off Bank Audi,and as BLOM’S Azhari put it, “we look at countries more andnot less stable than Lebanon.” Given the current situationin Lebanon, that is probably sound advice.

Nonetheless, the benefits of expanding outside of Lebanonare manifold. BLOM and Audi are now among the top 20 banksin the region in assets and ratings, with both estimating50% of deposits will come from outside Lebanon in the nextfive years. Already some 40% of the deposits collected byLebanese banks abroad are by BLOM, said Azhari, while ByblosBank’s foreign operations account for 20% of profits anddeposits, slated to reach 40% in the next five years. “It’sa win-win situation for well established companies to useLebanon as a platform to export products and services,” saidBassil.

Whether Lebanese banks will go even further afield as theygrow larger, banks are reticent to say. Libano-Francaisehinted that they were not confining plans to the MENAregion, and Sfeir said that the Bank of Beirut was activelyseeking acquisitions to establish new branches in differentmarkets.

Further expansion of Lebanese banks in the region isassured, although the country’s most regionally prolificbank, Bank Audi, was keeping quiet about its expansionstrategies. “Currently in the pipeline are three to fourother markets we are working on, either for a license oracquisition. We will hopefully close the year with a minimumof two new expansions in the region,” said Baz.

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By Invitation

The dire need for acquisition financing

by Imad Ghandour
written by Imad Ghandour

Private equity in the region is like a limbering man: almostall acquisitions of this $20 billion industry are beingfinanced directly from the coffers of the private equityfunds. It is the good, old way of investing, but somethingthat has been abandoned a long time ago in other parts ofthe world.

What is missing from the private equity secret potion is thepower of leveraging: using less expensive debt to financeacquisitions instead of using the more expensive equity.Take an example: Suppose a company is acquired for $100million by equity only (ie all the $100 million came fromthe private equity fund) and is sold at $130 million in oneyear, then the IRR is 30%. However, if the same investmentis financed by $50 million bank loan at 10% interest rate,than the remaining $50 million invested directly from thefund own pocket will be returned as $75 million aftersettling the loan and the interest of $5 million, thusyielding an IRR of 50%. This is the power of leveraging!

With relatively low interest rates on the US dollar and thecarry trade from yen to other currencies, it became veryattractive to use debt to finance private equityacquisitions. Today, more than 80% of an acquisition isfinanced by different flavors of debt, and 20% is financedby the fund’s own money. With record global private equityvolume of $650 billion in 2006, the acquisition financemarket has ballooned to reach more than $400 billion.

Mezz & Co

In order to drive the maximum benefit out of leveraging,private equity players have perfected the art of leveragingnot only through traditional bank financing, but throughusing mezzanine financing as well.

A typical private equity deal will have several layers ofdebt put on top of each other in order to reach the maximumlevel of debt based on the companies operating cash flowswhile at the same time optimizing the interest and principalpayments. A typical deal will have two layers of senior bankdebt, one amortizing quickly and another one with back-endedpayments. On top of that, there will be several layers ofmore exotic debt: second lien debt, subordinate unsecureddebt, high yield bonds, mezz debt with equity kickers,preferred shares, etc.

Commercial banks are the typical suppliers of senior(secure) debt. The more exotic flavors are supplied from anincreasingly diversified group of financial institutions.Pension funds, insurance companies, and endowments will beseeking to have higher yield debt with long tenors in orderto meet their long term obligations. There are also aspecialized number of mezzanine funds, and hedge funds areone of the newest entrants, seeking complex structures thatwill yield even higher returns.

Middle East is still behind

Unfortunately, the debt providers in the region are stillbehind in this area Most PE transactions in the region arestill financed largely through equity due to the limitedavailability of proper debt financing, and less than 10% ofPE transactions are leveraged at the target company level.

The limitation of debt financing in the region is drivenby a limited understanding for the PE asset class by lendinginstitutions, shallow debt capital markets, andunsophisticated lending focused on balance sheet assets,collateral and personal or mother company guarantees. Thesefactors are leading PE firms to seek financing frominternational players while others are attempting to educatelocal lenders on the concept of cash flow based lending.

Given that it is expected that the private equity industrywill have $20 billion of assets under management in 2007,Arab banks simply cannot ignore the opportunity to financeacquisitions. International banks are starting to offerlocal PE players this product, and local banks have startedto take notice. Given the attractive margins on acquisitionfinance, local banks will sooner or later set up specializedunits targeting this niche. However, the more exotic formsof debt, like mezzanine, will probably take slightly longerbefore becoming readily available in the region.

Imad Ghandour is Principal – Gulf Capital andHead of Information & Statistics Committee –GVCA

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Lebanon

Alternative Strategies – Banks staying strong

by Executive Staff
written by Executive Staff

The Lebanese banking sector has always had an exceptionaldegree of resilience given Lebanon’s checkered politicalhistory. The current political crisis and economic malaiseis no exception, with Lebanese banks reporting stronggrowth, launching new products, and diversifying throughexpanding into new markets.

But challenges do lie ahead for the sector. The situation isaffecting banks’ overall strategies – driving externalgrowth in particular – and with the implementation of theBasel II Framework only six months off, the requirements arelikely to act as a catalyst for further consolidation of thecountry’s heavily banked sector.

“The major problem we banks face stems from the differencebetween risk and uncertainty. Risk is something measurable –there are tons of models to manage risk – but uncertainty issomething not measurable. By its very nature, its parametersare flimsy,” said Shadi Karam, Chairman of BLC.

“The situation is creating a huge question mark onfunctional decision making in institutions. If you havequestions about tactical moves, it affects strategicalmoves,” he added.

And as Walid Raphael, deputy general manager of BanqueLibano-Francaise pointed out, “most players are onwait-and-see mode. We still see new projects, but the paceof investments are lower than early last year.”

Nonetheless, due to the unique role of Lebanon’s bankingsector in the economy, the real economy might be in thedoldrums, but the monetary sector is not. The reasons forthis are manifold: the huge remittances from Lebaneseabroad, which brings in an estimated 25% of the country’sGDP; banks’ high capital ratios; interest on lending to thegovernment; and a buoyant real estate sector.

“The major driver is GDP not foreign investment,” saidFreddie Baz, advisor to the chairman at Bank Audi. “TheLebanese are still the most important trigger for aggregateddemand, so is therefore GDP growth. We are not borrowingfrom domestic income but national income, from inflows fromexpats. As long as this exists, inflows are unrelated to thesituation in Lebanon and the monetary sector is immune,” headded.

This was evidenced last year when the war dampened growth onthe real sector and monetary sector deposits increased in2006 by $6.5 billion.

The cumulative assets of Lebanese banks also reflect thesector’s strong position. At $78 billion, or 375% ofLebanon’s GDP, the sector is far and above the regionalaverage of 90% of GDP, 107% in emerging markets, and 132% indeveloped economies.

This is in large part due to profitability of financingLebanon’s public debt, which is currently at $41 billion.

“Most profit comes form the government and will take time todiversify away from that,” said Semaan Bassil, Byblos Bankvice-chairman general manager. “So as long as the governmentborrows and pays, and keeps costs under control, banks willmake money but can’t rely on that forever.”

After all, returns on investments have slid from highs of40% in the 1990s to less than 10% after the Paris II donorconference. BLOM Bank’s TBs and Eurobonds, for instance, nowaccount for 17% of its balance sheet versus 24% to 25% in2003.

Nonetheless, BLOM is managing a new Eurobond issue withCitibank to raise $400 million for the government.

Products and more products

With so many factors at play, banks are adopting twofoldstrategies – consolidate market share and expand regionally(see page 40). With one eye on the region and the other onthe domestic market, banks have spent millions in the lastfew years on infrastructure and upgrading services.

In such a highly competitive market where the top threebanks – Audi, Byblos and BLOM – have over 50% of the marketand the other 61 banks vie for the rest, banks are coming upwith innovative ways to sell products.

“Lebanese banks are making big efforts in advertising andmarketing to attract new segments of the population,” saidElie Azar, marketing manager at the Lebanese-Canadian Bank.“It’s harder to attract new customers than keep customers,”he added.

As a result, banks have repackaged personal loans with newnames to entice customers, from solar panels and dental careto computers and plastic surgery. First National Bank (FNB)has been at the forefront of such campaigns, offering thehighly publicized plastic surgery loan.

“We are number 14 in size, but in relation to our peergroup, we spend a lot more on publicity than ourcompetitors,” said Yasser Mortada, deputy general manager ofFNB. “We offer different products from the plain vanillaproducts on offer.”

But, such advertising splurges are not seen as overlysound, some bankers say, given the outlay in relation to thereturns.

“These advertising campaigns cost a huge amount of money andthe products are not profitable per se, they are better forimage building,” said Salim Sfeir, chairman-general managerof the Bank of Beirut.

For banks not in the top 10, brand building is essentialto attract more local customers, but given the economicconditions, this is proving difficult.

“This year, there will be no growth in the economy, maybe1%. We need stability to promote products and grant loans.You cannot have a prosperous banking sector if there is apoor economy, and vice versa,” said Azar.

As a result, most commercial banks are now focusing onprivate banking, wealth management and insurance todiversify their portfolios.

“We want to establish private banking and investment bankingas we believe markets are not accessible enough. This isstill lacking in the economy and something to be developed,”said Tarek Khalife, chairman-general manager of CreditBank.

FNB is also looking to expand its investment portfoliothrough its 60% ownership of the Middle East Capital Group.“The time is not good for investment banking services, butonce back to normal there will be plenty of opportunities,”said Mortada.

Credit and charge cards are also a growing segment forbanks, with the number of cards issued surging in the lastfew years as electronic payments become more widespread.

“Until three or four years ago people paid cash, but now useelectronic transfers. That has increased the bankingpopulation,” said Anwar Jammal, Chairman and CEO of JammalTrust Bank (JTB).

Banks have adopted the same strategy to market cards as inthe West, using point reward schemes, free insurance,mystery prizes, and by teaming up with mobile phoneproviders to offer free calls.

Banks are, however, essentially chasing a limited numberof economically viable clients, prompting some institutionsto cater to small- and medium-sized enterprises (SMEs) andlower income customers.

“The possibility for expansion within Lebanon is somewhatlimited if you just go by head count. How many of the fourmillion are bankable?” questioned Jammal. Indeed, with anestimated 60% of the country’s wealth in the hands of 6% ofthe population, serious increases in GDP per capita areneeded for the sector to take a closer interest in theoverall population.

JTB itself is focusing on the SME sector, which now accountsfor 85% of the bank’s clientele.

Personal vs. automated

There appear to be two schools of thought in Beirutbanking circles about how to expand and reach morecustomers. One school favors bricks and mortar, as Jammalput it, investing in new branches in the less banked areasof the country and in the capital.

“The aspect of face-to-face interaction with clientele isvery important. The click entity doesn’t work, you need abrick and mortar entity,” said Jammal, citing thedifficulties British banks had that went the solelyautomated route.

The other school has embraced a mix of automated andpersonal.

“A physical presence is important, but penetration of themarket is not necessarily through banks. In the developedworld, it is less important, and this is where we think theindustry is going,” said Mortada.

The number of FNB branches has soared from four to 18 inthe last six years, and more are planned.

“Having a physical presence helps but it’s not the only wayto have contact with prospective clients. Today, withelectronic banking and mass communications, you can attractclients by providing special customer services,” addedMortada.

BLOM, the Bank of Beirut and Banque Libano-Francaise areto open new branches in the coming months, with the majorityof banks also investing in online services.

Bank Audi plans to continue its expansion. “Every year wewill expand our network. The Lebanese banking market is seenas over banked, over banked in numbers, but explicitmeasures – accounts per household, banks per capita – youfind it’s not over-banked despite reaching a size large fora domestic economy,” said Baz.

From Basel I to II

The smaller banks that rely more on the personal bankingrelationship might suffer from the Central Bank requiredimplementation of Basel II by the beginning of next year.

The vast majority of banks are in the final stages ofimplementing the Bank of International Settlements’ RevisedInternational Capital Framework, drawn up in Basel,Switzerland last July to replace the 1988 Basel I Accords.

Basel II provides measures and minimum standards forcapital adequacy for banks to better handle risk, along withrequirements to implement compliance, under a three pillarconcept: i) minimum capital requirements; ii) supervisoryreview; and iii) market discipline to promote greaterstability in the financial system. The cost of implementingBasel II poses the main headache for the smaller banks.

“We expect more consolidation as a lot of banks cannotafford the system,” said Azhari.

Such costs will cut into profitability, and unless bankscan weather profit loss in the short-term, mergers or sellsout are likely for either regional Arab banks or the bigthree.

“We would like to consolidate further to leverage more outof our extensive branch network, and by increasing marketshare to 15% to 16%,” said Byblos’ Bassil.

Baz said that due to the high capitalization of Lebanesebanks, mergers and acquisitions will be kept to a minimum.“It won’t generate any systemic crisis in the banks. I don’tforesee any pressure at this level,” he said.

With banks nevertheless eyeing prospective targets, theCentral Bank should act pro-actively in anticipation ofpotential fallout from Basel II.

“The Central Bank and the authorities have a major role toplay now to revive law on mergers and encourage banks toundergo consolidation,” said Karam.

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Capitalist Culture

Goodbye, but not good riddance

by Michael Young
written by Michael Young

For some people, the humiliation of Paul Wolfowitz, who atthe end of this month will step down as president of theWorld Bank after allegedly showing favoritism for his femalecompanion, Shaha Ali Reza, was his second defeat at thehands of the Middle East. The interpretation is tendentious,but it’s true that Wolfowitz paid the price in Washingtonfor his involvement in the Iraq war. And that was theproblem.

Wolfowitz’s legacy will long be debated by historians, muchlike that of Robert McNamara, who was defense secretaryduring the Vietnam war, before being named as head of theWorld Bank. Yet where McNamara spent decades ploddingthrough personal atonement for the war he had played a keyrole in sustaining, Wolfowitz has never doubted himself, orallowed anguish to push him to the edge of mental collapse.

That is what seemed to irritate so many employees at theBank, after the Bush administration named Wolfowitz toreplace James Wolfensohn. Here was a man who personifiedevil in the minds of many employees, who had supposedlystarted a war that no cultivated person could endorse; yetwho also had the bad taste not to admit it. Precisely whyWolfowitz was under any obligation to come clean before aconfederacy of international bureaucrats remains unclear –bureaucrats who are among the most pampered on the planet,therefore, phonier for wearing their self-righteousness on their sleeve, and appointed by governmentsthat often amorally deal with the most corrupt statesaround.

The specifics of the Wolfowitz case notwithstanding, hisposition was untenable from the moment the news leaked outthat he had provided an especially high pay raise to AliReza, after she was forced to temporarily leave the Bank toavoid a conflict of interest. Wolfowitz’s defenders say he’sthe one who admitted to the relationship in the first place,and that Ali Reza was entitled to a high pay raise becauseshe was unfairly removed from her post and paid heavily forthis. Moreover, Wolfowitz believed the Bank’s board hadokayed the step. The president’s critics said the board didno such thing, and that Wolfowitz knew something was amissby trying to cover it up. The point was moot, however, oncethe president found himself disowned by both his staff andby the Bank’s governors.

When the Europeans dropped Wolfowitz, he was pretty muchfinished. While it would be nice to see it as a case of asystem righting bureaucratic abuse, the fact is that much ofthe staff and the governors probably saw a goldenopportunity to get rid of someone they never really caredfor, who rarely tried to compromise with the institution’sbulky bureaucracy.

Which takes us back to the Iraq war. We may not know howmuch of a role Iraq played in Wolfowitz’s removal, but it’ssafe to say that he arrived at the Bank’s headquarterstarred and feathered by the conflict. Similarly, Ali Rezanever fit the mold of Arabs mostly critical of Americanbehavior in the Middle East. She was a believer in USinterventionism to help democratize the Arab world. Herintimacy with Wolfowitz was, if nothing else, a sign thatwhen considering the Middle East, he had a face off which tobounce his grand ambitions; it was not mere manipulation ofpower. Indeed, Wolfowitz was one of the rare Bushadministration officials who actually seemed to care aboutArab democracy, and who brought ideas to the table indefending his choices – albeit sometimes overly abstractones.

I recall interviewing him in 2004 and hearing him mention,with considerable precision, his worries that the Kurds hadgotten too much autonomy in the Transitional AdministrativeLaw, the interim Iraqi constitution. He went on to refer toFederalist No. 10 on how to avoid factionalism, which eventhen he realized was emerging as Iraq’s greatest bane. Thereis no doubt that Wolfowitz bears a great deal ofresponsibility for the fiasco in Iraq, and that won’t goaway, but the war was not for him what it was for manyothers in the administration: an expedient item allowing asenior official to keep his place in the presidential loop.

That’s why the outcome at the World Bank was sounsatisfactory. Wolfowitz erred, but just as he needed tobetter engage the bureaucracy of the World Bank, the Bankcould have responded better to a person well placed toremind entrenched pencil pushers what their job was allabout. There is a moral dimension to the Bank’s work thatthe staff often ignores. And while there are those who willargue that Paul Wolfowitz has no claims to moralitywhatsoever, they will have to prove that the World Bank,frequently a monument of amorality through its devotion tothe status quo, deserves to be the one distributing thebrownie points.

Michael Young

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Comment

Taking the hejab heat

by Gareth Smith
written by Gareth Smith

Summer arrived early in Iran this year, and withthe hot May days the annual drive against “bad hejab” tookon greater force than usual. Police arrested thousands ofwomen deemed to be flouting laws requiring covering inpublic, seizing women with hair spilling out from headscarves or whose coats were too short or too tight.

There has been talk of offending women being exiled fromTehran, although nearly all are released quickly aftersigning a pledge to dress better in future.

The crackdown has also targeted shops selling shortmanteaus, the lighter body-covering coat chosen by manyupper-class and younger women in preference to the moretraditional, all-enveloping black chador.

Pressure for the police action had been building up for sometime. Senior ayatollahs in the holy city of Qom have longbeen disgruntled with what they see as the lax socialpolicies of president Mahmoud Ahmadinejad, epitomized by hisdecision last year – later suspended by supreme leaderAyatollah Ali Khamenei – to allow women to be spectators atfootball matches.

Conservative parliamentary deputies had claimed visitorsfrom other Muslim countries, especially the Arab states ofthe Gulf, were shocked by the display in Tehran of highheels, heavy make-up, and dyed blonde hair. “Men see modelsin the streets and ignore their own wives at home,” saidMohammad Taqi Rahbar, a prominent parliamentarian. “Thisweakens the pillars of the family.”

At the beginning of May, conservative students at Tehran’sAmir Kabir university protested after a lecturer hadallegedly insulted a student by pulling her hair out. Therewere similar gripes among the conservative media after thepresident kissed the gloved hand of his formerschool-teacher, now an elderly woman, whom he met by chanceat a ceremony for National Teachers Day.

Like many other aspects of life – including business andsport – women’s clothing is highly politicized in Iran, withfactions eager to gain advantage against rivals. Few areinterested in the point made by Mohammad Ali Abtahi, theformer reformist vice-president, that religious laws arebetter advanced through persuasion than through penalties.The conservative parliament elected in 2004 has spent manyhours debating the need for a ‘national Islamic dress’ andeven encouraged Islamic fashion shows.

On the other side, ‘secularist’ satellite television, whichis beamed into Iran from exiled opposition groups mainly inLos Angeles, features unveiled women announcers and evenskimpily dressed Iranian pop stars. Western media coverage,meanwhile, often reduces women’s rights to opposition tohejab.

In the resulting melee, more important issues facing womenin Iran tend to be brushed aside. On the president’sprovincial trips, he receives tens of thousands of lettershanded in at special collection points. The vast majority ofthose who write them are women, and they concern theunemployment of their sons, or the cost of housing, or amyriad of day-to-day issues rather than hejab. Others writeabout the hardship of raising a family alone after losingtheir husband in the 1980-88 war with Iraq.

Iran is a deeply conservative society. A young man may wearhair gel and curse “the mullahs,” but may still not take hiswife to Dubai on holiday for fear of other males looking ather in the mall.

For Ayatollah Ruhollah Khomeini, leader of the 1979Revolution, hejab was a means for women to come out of thehome and move in society. The Islamic Republic’s legalrequirement of hejab reconciled many fathers to theirdaughters attending university. Of the 600,000 enteringhigher education every year, 60% are women.

Woman can vote, stand for most public office, drive andsmoke in public. The contrast with Saudi Arabia, and someother Arab Muslim countries, could hardly be greater.

But various other inequalities persist. Although polygamy israre, it is still allowed, and women’s inheritance anddivorce rights are inferior to men’s.
Syma Sayyah, who stood in Tehran unsuccessfully as anindependent in December’s local elections, says Iranianwomen need a “reality check” to concentrate on what’simportant.

“We keep hearing that 60 odd percent of university studentsare women, but where are these graduates in the work place?”she asks. Most who dare to tip their toes into reality andget a job do so temporarily and until they or their familyfinds the ‘right husband.’ Middle and upper-middle classwomen are the worst.”

Sayyah’s advice to women is therefore straightforward. “Geta good solid education and training that leads to a decent,well-paid job. Then work on the legal inequalities withregard to marriage, inheritance and so on.”

GARETH SMYTH is the Financial Times Tehran correspondent

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Boomtown: managing UAE growth

by Riad Al-Khouri
written by Riad Al-Khouri

The Gulf economies have moved ahead in the currentdecade. The extent of change is apparent when we rememberthat only eight years ago, the price of a barrel of OPECcrude went as low as $9, and vast Arab investment went tothe US or Europe compared to the money put into business athome. In sharp contrast, today’s oil prices are nudging $70a barrel; all GCC states have now joined the WTO and areliberalizing their economies; and Gulf investment in theWest has slowed while capital accumulation soars regionally.This has been especially true of the UAE, where growth hasoutpaced the rest of the GCC.

Among the emirates, glitzy Dubai, of course, is the mostfamous example of growth, due in large part to the abilityto diversify away from oil. However, other parts of the UAEhave moved in the same direction.

Sharjah is a case in point: Dubai’s northern neighbor hadlagged behind the rest of the country a few years ago butSharjah’s double-digit growth rate surpasses that of the UAEtoday, partly due to success in diversification. Analyzingthe economy of Sharjah, the share of agriculture,hydrocarbons, and government in GDP fell from just over 29%in 2001 to about 23% today, while the combined total for thepower, banking, manufacturing, trade, tourism, andconstruction sectors has risen from 47% to around 53%.

Some of Sharjah’s success comes from targeting people andbusinesses that in the past would only have consideredDubai. However, higher costs have driven investors andcustomers away from the latter.

Benefiting from this trend, Sharjah has, for example,notable success with free zones that offer lower prices thanthose of Dubai and so have seen business boom in the lastfew years. For instance, the Sharjah Airport InternationalFree (SAIF) Zone had less than 100 companies in 2000; today,it hosts around 2,900. At less than $3 a square meter,office space in SAIF is over 40% cheaper than in Jebel Ali.The cost of obtaining trade licenses in SAIF is also muchlower – a small start-up there, including a trade licenseand a year’s rent, costs around $6,800; Dubai is about fourtimes that.

However, the negative side effects of the boom may alsostart to trouble Sharjah. Inflationary pressures there havealso been increasing due to rent rises and high liquidity.As in Dubai, a main factor behind rising prices has beeninfrastructure that has not been able to keep up with strongeconomic growth, and increases in the inflow of people whilehousing supply rises more slowly, thus leading to rises inrent. In Sharjah, rents went up as people relocated fromDubai. This resulted in Sharjah rents increasing by close to32% in 2006; that in turn led to rises in other areas,including education costs, which jumped by about 28% inSharjah last year; and wage demands have also escalatedbecause of higher rents and education bills.

High inflation hampers economic diversification away fromoil by repelling foreign investment. Areas ofdiversification, such as tourism and financial services, arebecoming less competitive in Dubai, but there is now adanger of that happening in Sharjah as well. So, the optionfor some businesses has resulted in looking outside the UAE.

New housing in Dubai and Sharjah will have some impact oninflationary pressure by dampening rent rises. Nationally,ending the peg of the UAE currency to a weak dollar wouldalso help keep inflation down.

Meanwhile, the country as a whole as well as individualemirates have to take measures to make the effect ofinflation less severe in the short-term. For example, theSharjah government decreed a 30% rise in salaries for publicsector employees a few weeks ago. That is fine for

The lucky recipients of the raise, but of course, it onlydeals with the impact of price rises, not their causes.

The IMF reckons that inflation is currently at an annualrate of above 10% in the emirates as a whole. That is upfrom an estimated 8% last year, though the official numbergiven by the UAE Central Bank is somewhat lower. However,this is the national figure – for Dubai, and maybe Sharjah,the inflation rate could be much higher.

The UAE boom does not look like it will stop, and may noteven slow for the next few years, so the question thenbecomes how to manage strong GDP growth and at the same timehold down prices. If that problem is not resolved, the UAEeconomy could see a slowdown, and not just in overheated Dubai.

Riad El Khouri is Director, MEBA Amman and a Senior Associate, BNI Inc New York City

 

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France enters new era

by Claude Salhani
written by Claude Salhani

The night Nicolas Sarkozy celebrated his presidentialvictory over Socialist Party candidate Segolene Royal atFouquet’s on the Champs Elysee, some 6,000 kilometers away,President George W. Bush must have also been celebrating –albeit in a somewhat more modest manner.

There is good reason to believe the American president musthave been relieved that Sarkozy, who has made no qualmsabout his pro-American sympathies, will be the next tenantat the Elysee Palace. He is an admirer of the Americaneconomic model and wants to inject some similitude of the UScapitalist system into the French business world. Indeed inhis book, Testimony, timed to coincide with his victory, thenew French president states: “I have no intention toapologize for feeling an affinity with the greatestdemocracy in the world.”

Sarkozy reminds the reader of his love for, “the valueAmericans place on work and the desire for excellence youfind everywhere, from CEOs to the most modest workers.” Hegoes on to say that, unlike the French, “who would have youbelieve that work is a sort of punishment from which peopleshould try to escape,” Americans “understand that work welldone is liberating.”

The new French president in fact wasted no time sending amessage to his American counterpart, telling him that the UScould henceforth count on France in times of need. Quite achange from the icy relations President Chirac entertainedwith the Bush White House.

Indeed, Sarkozy may turn out to be Washington’s best friendin Europe, now that Blair is leaving No. 10 Downing Streetin late June and will be replaced by his Chancellor of theExchequer, Gordon Brown. Brown is a very differentpolitician than Blair, and chances are the no-nonsense Scottwill distance himself ever so slightly from Bush and hispolicies, particularly over Iraq.

The irony today is that the two countries accused by formerUS Secretary of Defense Donald Rumsfeld of belonging to an outmoded “old Europe” – France under Chirac and Germany under Helmut Kohl – are now set to become Washington’s best friends with Sarkozy in Paris and Chancellor Angela Merkelin Berlin.

However, he also said that friends also have the right to disagree and that does not make them any less of a friend.One of the first points “Sarko,” as the new French president is often referred to in the French media, brought up was theKyoto Treaty that is meant to regulate global warming and which was signed by most countries, except the US. Sarkozy said in his victory speech that addressing the Kyoto accords would be his first challenge.

The environment is not the only point of contention that will surface between Washington and Paris during Bush’s remaining 600-plus days in the White House. There will be strong disagreements over Turkey, for example. Sarkozy is a strong opponent of Ankara’s entry into the EU and will, in all likelihood, move to prevent Turkey’s accession to theBrussels club. Already in his victory speech last month, Sarkozy spoke of creating a “Mediterranean Union” based on the EU model. Bush, on the other hand strongly supportsTurkey joining the EU because he sees Turkey playing a moderating role in the Middle East. Bush sees Turkey, aMuslim country though one that thanks to its strict separation of mosque and state – so far – has managed to remain moderate in its approach to religion. Sarkozy just sees 80 million Muslims.

Elsewhere, the two will certainly disagree over the war inIraq but should cooperate closely over Afghanistan, whereFrench troops have been fighting the Taliban from the very start. Ditto Syria and Lebanon. One of Sarkozy’s very first meetings on foreign policy after winning the election was to meet with Saad Hariri, Lebanese parliamentarian and son of assassinated former Prime Minister Rafik Hariri.

Finally, Sarkozy is likely to be as opposed as Bush is toIran becoming a nuclear power. So if their will be disagreement over Kyoto and Iraq, there remains plenty of room for cooperation in other areas. It is safe to say that a new era, one of rapprochement between Paris and Washington has begun.

Claude Salhani is international editor and a senior political analyst with United Press International in Washington, DC.

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The ‘Shiitization’ of Syria

by Andrew Tabler
written by Andrew Tabler

The latest conspiracy theory to grip the Middle East is theShiite Crescent – an emerging Iranian-backed Shiite alliance stretching westward from Iran to Lebanon that threatensAmerica’s Sunni allies in the region. In the arch’s keystone, Syria, many say a Shiite takeover is in the works.Syria is majority Sunni Muslim, but it is ruled by the Assad regime, which hails from the Alawite Shiite Muslim sect. Akey part of Tehran’s alleged regional coup are rumors of“Shiitization” – the conversion of Sunnis to Shiite Islam.

Many if not most of the gaggle of growing Syria experts deny Shiitization is happening, but their contradictory statements indicate otherwise. Syrian ParliamentarianMohammed Habash, head of Damascus’ Islamic Studies Center and a major source on Islam in Syria for foreign journalists, told me following last summer’s war in Lebanon that talk of conversions was “Wahabbi propaganda” – a reference to the conservative version of Sunni Islam practiced in Saudi Arabia, Iran’s regional rival andAmerica’s chief ally. He added that Shiitization was a“phenomena,” however, “especially in the Jazeera” – the area of Eastern Syria between the Euphrates and Tigris Rivers.

Shiite converts I have interviewed in Syria over the last few months say that many Sunni Jazeerite families aren’t really converting, but rather returning to their Shiiteroots. Shiites recently celebrated Ashura, the commemoration of the slaying of the Prophet Mohammed’s grandson, Husseinbin Ali, in 680 CE by forces loyal to the Damascus-basedUmayyad Caliph Yazid bin Muawiya at Karbala in present dayIraq. A “Sunni” or traditional leader from outsideMohammed’s family, Yazid ordered Hussein’s decapitation, mounted his dome on a pike and paraded it alongside surviving members of his family throughout the UmayyadEmpire. After brief stops in Kufa and Mosul, the procession headed through the Jazeera to Aleppo, then south towards theSyrian cities of Idlib and Homs before ending the journey inDamascus.

The spectacle backfired, however, turning Hussein’s cause into a local crusade. Small Shiite communities sprouted along the procession’s route, who were later joined by Sunni tribes from southern Iraq familiar with Shiite customs. Some built “maqaam” or shrines. Other Shiite communities in Syria gathered around Ahl al-Bayt (family of the Prophet Mohammed)tombs in Syria. During the Ottoman Caliphate (1415-1918),many Shiites in these communities converted to the dominantSunni Islam to avoid harassment.

Hundreds of years later, Shiite converts say that innovations such as satellite TV and the internet are helping Jazeerites understand Shiite Islam. They also help converts keep in touch with marjaa’iyat, or Shiite “Sources of Emulation” worldwide, including Iran’s Supreme Leader AliKhamanei and Iraqi Ayatollah Ali Sistani.

Shiite religious satellite TV programming has been growing for decades, but converts say the man who moved it to primetime in the region was Hizbullah leader Hassan Nasrallah. His calm and collected televised addresses, even as Israel attempted to bomb Lebanon “back 20 years” last summer, ledSunnis to take a second look at Shiite Islam.

“Hizbullah’s victory broke the ice wall between Sunnis andShiites,” one convert told me. “Many Syrians hosted LebaneseShiite families in their homes during the war. This opened people’s eyes and humanized Shiites.”

Teachers in hauzas – Shiite religious schools – say the recent restoration of shrines and tombs in Syria and the building of more hauzas are paving the way for a Shiite revival. It is here that Iranians have entered the Shiitization fray over the last few years by financing the renovation of tombs of Sayida Sukaina near Damascus and Ammar bin Yasser, a close companion of Mohammed, in theEuphrates Valley city of Raqqa. Iranians support a Shiite school as well, the Damascus-based Hauza of the SupremeLeader.

Before a Shiite crescent moon rises in your mind, Shiite converts admonish that the alliance’s religious base is fragmented. The zealots of the Islamic Republic and Hizbullah await the return of “Al-Mahdi” – the 12th ImamMohammed ibn Hasan. The Assads are Alawites, however, a secular Shiite Muslim sect that reveres the 11th ShiiteImam, Hassan al-Askari. Protecting Syrian Shiite converts’ right to choose a new faith isn’t Shiite brotherhood, but, ironically, the Assad regime’s use of Ba’athism – secular, pan-Arab ideology that has guaranteed freedom of religion forSyrians of all faiths for over 44 years.

There are signs that a Shiite Crescent might not be in theregion’s political stars as well. Many Syrians say they are worried Iraq’s sectarian strife might spread to Syria,especially after the execution of former Iraqi President Saddam Hussein, a Sunni, at the hands of Iraq’sShiite-dominated government. Inside the Iranian-Syrianalliance, Damascus is reportedly unhappy over Iran’s recent dialogue with Sunni Saudi Arabia to end the stalemate inLebanon between Hizbullah and the Siniora government.Tehran, in turn, is rumored to be questioning Assad’s recent peace overtures with Israel. Both sides denied the rift during Assad’s visit to Tehran in February. But only days after Assad’s return, a group of Syrian intellectuals and parliamentarians lambasted Deputy Iranian Foreign Minister Manouchehr Mohammadi in a closed-door (but widely reported)dialogue session. The point of contention? Iranian support for Shiitization in Syria.

ANDREW TABLER is Editor-in-Chief of Syria Today Magazine

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Selling a war

by Peter Speetjens
written by Peter Speetjens

“Even the most brilliant propaganda technique will yield no success, unless one principle is borne in mind: the message must confine itself to a few points and repeat them over and over,” said former Nazi propaganda minister, Joseph Goebbels.

Goebbels may have committed suicide on May 1, 1945, but his golden rule of “simplicity and repetition” is still the backbone of any effective mass communication campaign, regardless of whether or not the slogans are true. As Goebbels said: “A message repeated a thousand times becomes the truth.”

So too was the case with Iraq. Time and again we were told that the war was needed to protect our freedom and security.Saddam had nukes, was in contact with Al Qaeda and threatened the stability of the world. Today, we know that Saddam did not have weapons of mass destruction, was not connected to Al Qaeda and that the intelligence on which conclusions were based was, at best, jaded. When the war started in March 2003, however, one poll showed that 66% ofAmericans thought Saddam was behind 9/11, while 79% though the was close to having nukes. How did they do it?

According to Laura Miller at PR-Watch Quarterly, the techniques used to sell the Iraq war were classic PR strategies. “The message is developed to resonate with targeted audiences through the use of focus groups and other types of market research and media monitoring. The delivery of the message is tightly controlled. Relevant information flows to the media and the public through a limited number of well-trained messengers, including seemingly independent third parties (read: think tanks).”

The campaign to sell the war in Iraq started in 2002, with the establishment of the Office for Global Communication(OGC) as part of the White House. According to White HouseCommunications Director, Dan Bertlett, its aim was to create the American foreign policy message, “so no one, not evenDick Cheney, can freelance on Iraq.” The Times of London reported that the OGC had a $200 million budget to unleash“a PR-blitz against Saddam.”

The message peddled by government officials and spokesmen was one of freedom and fear. Of course, the decision to goto war was taken as early as 9/11 (even earlier think many).At that point, however, the administration had other things on its mind: Al Qaeda, Afghanistan and the question: “why do they hate us so much?” To Washington, it was clear from the start that the latter was an image problem: people misunderstood America’s freedom, and its overwhelming support for Israel had nothing to do with it.

To deal with this, shortly after 9/11, Secretary of StateColin Powell appointed Charlotte Beers as Undersecretary forPublic Diplomacy. Her task, according to Powell, was the“branding of US foreign policy.” Known as the “Queen ofMadison Avenue,” Beers made her name with campaigns for Head& Shoulders and Uncle Ben’s rice before heading two ofAmerica’s biggest ad agencies.

Having defined America as “an elegant brand,” she received an estimated $500 million as her budget and set out to produce brochures, booklets and commercials emphasizing freedom in America, which included a TV campaign “MuslimLife in America,” which (falsely) claimed nothing had changed for Muslims after 9/11, and a glossy poster campaign entitled “Mosques of America.”

Most of her budget, however, went to polls and surveys, which by December 2002 showed that her campaign had failed miserably. All over the Muslim world, the US had gone down in popularity. Beers blamed the Arab media, which she found difficult to penetrate. “We only have one choice in theMiddle East,” she said. “We have to buy the media.” She resigned shortly before the Iraq war for “health reasons.”

Donald Rumsfeld had his own PR star: Victoria Clarke. She too headed several ad agencies and wrote the book Lipstickon a Pig: Winning in the No-Spin Era by Someone Who Knows the Game.

According to John Stauber and Sheldon Rampton, authors of the book Weapons of Mass Deception, it was Clarke who emphasized that, for the American public to buy the war inIraq, it was essential to stress a link with rogue nation states as sponsors of terrorism. The shift from Al Qaeda to nation states was first made in Bush’s State of the Union speech on January 29, 2002, when he defined North Korea,Iran and Iraq as “an axis of evil, arming to threaten the peace of the world.”

In a later stage of the war, and a further attempt to control the message, Clarke masterminded the phenomenon of embedded journalism and established “Batallion Camera,” an army unit of 800 photographers and cameramen, which provided the world with (positive) imagery, but eventually causedClarke’s downfall when it staged the “heroic” rescue ofPrivate Jessica Lynch.

Finally, even the Pentagon itself worked with a PR firm, the shadowy Rendon Group, widely believed to be the brain behind the Iraqi National Congress of Ahmad Chalabi. According to the Chicago Tribune, since 2001, the Pentagon awarded the company at least $56 million in contracts.

It appears “wagging the dog” is now policy.

PETER SPEETJENS is a Dutch writer and freelance consultant

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