Economics & Policy

It’s the Economy, Stupid

by Faysal Badran
written by Faysal Badran

In assessing the state of the country, at this critical juncture, there is a need to emphasize the importance of placing the economic aspirations and needs ahead of the politics. In fact, for Lebanon to be on a true trajectory of prosperity it should elevate the debate from the confessional distributions and redistributions of the pie, to the development of the economy. The major themes have so far been political. There is almost a fixation on elections, and this is totally understandable, but is it the endgame?


The priority for developing countries, in this day and age, is the ability to attract and maintain capital investment and to attain a degree of economic growth that alleviates fiscal and social imbalances. Where is Lebanon in that framework? It is not enough just to reshape the political landscape and take a broom to Syrian occupation (but it’s a start). The current political stalemate belies an inherent unwillingness of the political players to come up with solutions and face the true problem of Lebanon: its economic performance. The key to the future of Lebanon is its GDP, not in how cleverly crafted the next election law is. Prosperity is the only guarantee that sectarian extremism thinking will fade, and that Lebanon can draw on the strength of its expatriate community as well.

A pivotal legacy of Mr. Hariri was his constant focus on the economic priorities. The revamping of the infrastructure, though criticized by many, was inevitable and founded, rightly or wrongly, on spurring growth through tourism. The helmsman has gone is that we may be in a political spiral.

Getting priorities straight

Despite GDP most likely contracting, the biggest issues seem to be political which seems odd. Yes, the proper holding of elections is crucial not only to respect the will of the people, and to reflect the reshuffling of political poles post 2/14, but also to boost confidence by investors in Lebanon’s political process and cast aspirations in a more long-term light.


Syria is out, and though its influence will probably linger on for some time, it will be less of a drain on Lebanon economically. From there, we will need to find a pax economica. Now that the risks of actual armed conflict having been reduced, the main focus of attention will be the level of commercial activity and the economy’s ability to generate social peace: erasing corruption and reducing the burden of the public sector. Then what? The fighting for a slice of the pie will not matter a jot if the pie itself is miniscule and in years to come it will be the economy that will shape politics, not the other way around.

Most pundits are obsessing on how a better political environment will lubricate the economic engine. This is counterintuitive. Think about the generation that took the streets. Eventually, do they really care more about the politics or their destiny as a prosperous and vibrant society? We are entering a period where the opinions of non-sectarian portion of the economy will matter most.

And given their aspirations, they will demand a meritocracy, and will probably get it. Lebanon’s identity is built on its commerce, its banking and its openness. And these conduits of prosperity require a political agenda based essentially on promoting the economy and restoring fiscal balance.

The rebalancing of deficits will inescapably require a reduction of the size of government, its role in the economy’s fortunes, and a shifting of resources from the public sector to the productive sector. And herein lays the contradiction of Lebanon right now. All focus is on the politics, where it should be on the economy. There is in a sense a need to de politicize life in Lebanon. All current politics, and this despite the inebriating mass unity on the streets, is sectarian and divisive, and this is why it will not survive. It falls short of the aspirations of the educated elite and it goes against the process of change sweeping across the region.

The domino effect from the fall of Iraq will no doubt have repercussions for many years to come, and Lebanon is best positioned in the region to monetize this change both economically and socially. It has the best arsenal of human resources, one of the most vibrant and successful diasporas, and will have soon the most democratic system.

It will not be painless, but we are heading straight toward it. But it is crucial to set out an economic track and not be engrossed in the political system. The new political order will be shaped by the level of prosperity we achieve.

The price of failure in reviving the economy and reducing government would be too devastating to even contemplate and it is vital to work toward boosting collective purchasing power and overall wealth to defuse the confessional time bomb. If the economy plunges further it creates a Petri dish for tensions between communities. One of the overlooked and under analyzed aspects of all wars, especially the Lebanon one is the economic backdrop. We hear of foreign interference, of internal disharmony, when reading about the war, but little is said about the one major catalyst: poverty and class tension and this is what will drive political reform.

Time for a change

Anything short of seismic change toward a meritocracy will be seen as a failure by most. It must be led by the private sector and see a reduction of the size of the public sector. There is no other workable formula. High unemployment and poverty are typically mirror images of the same sequence of symptom and cause. The experience of the past decade in developing economies has demonstrated that the high priority of economic reform and privatization of inefficient public entities is key to long-term efficiency and job creation. Yet this effort, which initially leads to job cuts, is frustrated by the absence of alternative job creating mechanisms, which creates a vicious circle that does not augur well for the future.

What is needed is a private sector framework with public sector support and participation to inculcate a culture of venture capital as an effective means for job creation, accelerated growth, and enhanced innovation and competitiveness in Lebanon. We need to see a structure and a process triggered by which limited investment capital can be combined with entrepreneurial skills to break through the vicious circle of economic stagnation and public sector inefficiencies by laying a foundation for job and wealth creation.

The Gulf is a great example of economics triumphing over politics. The political systems there are slow to change but the role and size of government have been reduced and the promotion of the economy has been given top priority. This is not to say that Lebanon emulate the static monarchies of the Gulf, simply a reminder that after the current spasm of over politicization of the process in Lebanon, mouths have to be fed and it would be meager consolation if we “fix” representation in parliament but build it on the back of economic depression.

 

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Companies & Strategies

Onward and Upward

by William Long
written by William Long

While most Lebanese were transfixed by the final pullout of Syrian troops and a lively confidence vote in Parliament, for Mounir Douaidy, Solidere’s General Manager, April 26 was little different than most of his days – these days, that is – at his office in the heart of Beirut’s Central District (BCD). He was signing contracts.

Ever guarded about revealing too much in the way of exactly how many items awaited his signature in the adjacent conference room, Douaidy was nonetheless both detailed and specific in outlining to Executive why Solidere had finally met its tipping point.

“ 2004, in my opinion, was a turning point in the life of the company,” said Douaidy. “Despite all the obstacles and the difficulties, [the last ten years were crowned] with big achievements that have led to a much stronger financial situation. 2005 is Phase Two in the life of the company. It will allow the company to grow on a much stronger basis because the fundamentals that were strong in the beginning remain strong and are now even stronger.” Indeed, by most accounts, Douaidy’s estimation is correct.

Solid performance

Although Solidere’s 2004 annual report is still to be released later this month, the audited financial results for 2004 made public at the beginning of April provide exactly the kind of performance data points that Solidere always said it could generate – if it was just given the time and the good graces of geopolitical events. At least for the moment it seems, geopolitical events are in fact cooperating. And Solidere has certainly put in the time over the past decade. As Douaidy (the trained accountant and pitch man) is quick to point out, 2004 saw the country’s largest single company post its best after tax profit gain in the last five years – $54.1 million or an amount nearly triple that of 2003.

Most significantly, however, the underlying dynamics were strong. Solidere said it generated its highest sales level in a decade in 2004 – $180 million in all or nearly $100 million better than last year. Rental revenues from leased properties also came in strong at $18.6 million, up from $15.4 million in 2003. And the company’s borrowing level dropped substantially – from $320 million in 2003 to $234 million at the end of 2004 – leaving a reduced debt to equity ratio of 13.9%.

“Our plans are to continue with sustained increases in sales, not necessarily at these levels [158,000 square meters in 2004] but not less than 100,000 to 120,000 square meters of built up space,” Douaidy explained. Of course, even though the sales numbers provided the most fodder for celebration, the performance of the company’s share price – especially in the aftermath of the Hariri assassination – have also played a crucial role in supporting Douaidy’s claim that Solidere is moving inexorably forward with a sustainable, winning formula. Indeed, as was widely noted in both the international business and political pages, the company’s stock registered only a temporary hit after Hariri – Solidere’s founder and most visible backer – was killed in the BCD he helped to build.

The quick rebound of the stock price to just below its pre-February 14 level provided strong evidence for some observers that investors both believed in Solidere and, more importantly, believed in the long-term viability of the entire country.

“We are even now having regional investors coming to Beirut,” Douaidy added proudly. “Even during the last two months, those who were negotiating with us did not stop negotiating with us and in fact a certain number of deals have emerged from these negations and some of them are being signed presently.”

Thus freed, somewhat, from the political situation that gripped the rest of the country, Solidere registered a daily average of 216,388 shares traded on the Beirut Stock Exchange during the tumultuous first quarter of 2005 – up a robust 515% from the same quarter last year. What’s more, the stock price ended up closing out 8.36%percent higher for Class A shares and 9.87% higher for Class B shares compared to fourth quarter 2004. In London too, where Solidere’s global depository receipts are traded, the receipt price rose to its highest level in six years by the end of March 2005.

Of course, a key reason for the rise in both the stock price and the overall trading activity lies in last June’s successful initiation of a land-stock swap program that raised $73 million in 2004.

But another very visible indication of public confidence in Solidere – and Solidere’s own confidence in both itself and Lebanon – came when the company decided to go ahead with its plan to list on the Kuwait Stock Exchange March 8.

“We thought [these actions] would give us a much wider investor base,” said Douaidy. “Last year when we did [the land swap program] we felt as though the share price was trading at a severe undervalue….both this and the listing on the Kuwait Stock Exchange have achieved their objective by increasing our sales and requiring investors who are using the program to go and buy shares on the market,” which has also raised the stock price, he noted.

On with the Souks

Although plagued by prior delays, Douaidy said the much anticipated Souks project, which envisions a large pedestrian area filled with shops and restaurants, was finally ready to go forward immediately. The permits have been secured and all underground facilities, including the parking, have been completed. As a result, even though the January start date was not met recently, Solidere is still aiming for the Souks to come online in 2006. And when this happens, rental revenue, already rising, is expected to double with the 100,000 square meters of floor space that will be available.

Adding to the positive growth outlook over time, Solidere is also set to ramp up its land preparation and infrastructure efforts in the massive reclamation area situated near the Beirut Port and Marina.

“In the next three to four years we will start selling land on the reclamation space because today [this area] is not ready yet,” said Douaidy. “There are still waste treatment [facilities] that need to be finished. Subsequently we will do the infrastructure for the reclaimed land. Then we can start with the marketing of the reclaimed land.”

Noting that the price for built up space had increased from $950 per square meter to as high as $1,400 per square meters over the past several years, Douaidy was quick to point out that the 1.5 million square meters of land reclamation would likely be a crucial component ensuring Solidere’s profitability well into the second half of Phase Two.

During this time though, he added, Solidere intends to pursue somewhat of a different approach than during the last Phase.

Laying down foundations

“We prepare the land, we prepare the design. This is what is happening…[It allows] developers to practically start within a short period of time. This is the kind of thing we really want to do: develop the concept and sell the idea rather than do the development ourselves. We will continue to do one or two developments here and there but we would like to encourage third party developers to do it.”

Of course, despite the recent positive balance sheet, growing investor interest and the much-anticipated movement on several development fronts, risks remain – as is true for the entire Lebanese economy.

Most significantly for Solidere, when Hariri was assassinated, the company didn’t only lose its largest single shareholder, it also lost its most powerful proponent in government circles. Of course, in Lebanon, such influence goes a long way towards solving the routine, and sometimes not so routine problems of bureaucracy and competing private interests that may not just vanish with Syria’s withdrawal. As one recent report noted, before Hariri left office last year he prevailed on the Cabinet to pass a number of critical resolutions that freed Solidere to act in a more expeditious, and profitable manner. In the end, a total of 24 projects with a total value of more than $500 received the necessary permits to move forward.

Douaidy is confident that Hariri left Solidere in “safe waters.” But even though his political stature will be sorely missed, April 26 and the events that led up to it, should be well for Lebanon and Solidere.
 

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Basil Fuleihan 1963-2005

by Peter Grimsditch
written by Peter Grimsditch

If former Premier Rafic Hariri provided the grand plans and vision for how he thought Lebanon could and should grow into a modern prosperous state, Basil Fuleihan injected the precision, the research, the experience and the knowledge to put those ideas into practice. Although most recently remembered as a deputy and former Minister of Economy and Trade, Fuleihan was also recognized as a brilliant academic from the moment he graduated with distinction from the American University of Beirut in 1984 as a Bachelor of Arts in economics.

He was just 41 when he died in the Percy military hospital in Paris, 64 days after the February 14 murderous blast at St Georges that claimed the life of his friend and patron Hariri, as well as 19 others. Before becoming a deputy on Hariri’s Beirut ticket in the 2000 elections, Fuleihan had carved out a career and a reputation as a thoughtful, competent and thorough behind-the-scenes adviser on economics.

His first degree at AUB was succeeded in the following year by a Master of Arts at Yale University in International and Development Economics and the meticulous study continued until he was awarded a doctorate in economics at Columbia University in 1990.

Fuleihan worked as an adviser to the executive director of the International Monetary Fund and was well on his way to a dazzling career on a global level when he returned to Lebanon to become an economic adviser to the Ministry of Finance in 1993. And for six years until entering Parliament he passed on his infectious enthusiasm for the subject as an economics lecturer at his old university, AUB.

It was in large part down to Fuleihan’s patient homework on the subject that Lebanon was able to tap the international markets for cheaper eurobond loans to begin the process of reducing debt costs and, also in his role as an adviser to the finance ministry, he was responsible for devising reforms of the Customs administration, land registration and internal training.

Yet it was not until he became a minister that Fuleihan was in a position to publicly claim credit for his work. He was the lead negotiator for the country’s entry into the EuroMed Association Agreement. He argued persuasively – and successfully – that Lebanon should have a privileged position as far as tariffs were concerned until its economy was strong enough to withstand open competition. He also played a major role in formulating the economic plans submitted to the Paris II talks that resulted in an easing of the burden of debt service and led to the slashing of interest rates. And he took up the causes of copyright and consumer protection, issues both at the core of encouraging investment in Lebanon by major foreign companies.

But Fuleihan didn’t claim credit publicly. He wasn’t that sort of man. Totally devoid of the arrogance that plagues many politicians, Fuleihan had a ready smile, a friendly hello for all who crossed his path and a fluency on matters concerning his ministry that never deviated into the meaningless obscure generalities beloved by so many politicians.

A close and faithful ally to Hariri, Fuleihan was by his side to the last. He was a passenger in the premier’s car when it was blown to pieces.

This gentle, loving husband and father is an enormous loss to his widow Yasma, and their two young children, Rena and Rayan, to whom we extend our deepest sympathy. Our condolences, too, to Lebanon. Men of talent, integrity and honesty, like Fuleihan, are rare.

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The Buzz

Better to be safe than sorry

by Marianne Stigset
written by Marianne Stigset

The February 14th attack, followed by the bombings in New Jdeideh, Kaslik, Sad al-Boushrieh and Broumana have seen increased demand for private security services from banks, shops, hotels, malls and large institutions, as well as real estate developers with substantial works in progress.

Unfortunately, pro-active security remains a novel concept in Lebanon. The current “boom” is still largely ad hoc, temporary and price-sensitive. In fact, security providers say, it’s a regional thing. Lebanon conforms to the Middle East pattern of taking a reactive, rather than preventive approach to private security.

“This is the trend,” says Jinane Zod, assistant managing director of Zod Security. “People only react once the damage is done.”

Although not exactly a revolution, industry insiders believe there might be a gradual shift towards a more preventive-oriented approach to security.

“The measures we are taking now are permanent,” says Shoughari. “It’s a trend happening throughout the Middle East – just look at the last bomb attack which hit Cairo. We are now faced with a new environment, locally, as well as internationally. The enhanced security measures are here to stay.”

Yazigi believes it is too early to tell whether the panic attack which hit the Lebanese will result in any long-term changes, but does detect a trend in the region towards greater security awareness.

One security firm that spoke to Executive, admitted that his company witnessed a 5% increase in demand after February 14th but that figure soon rocketed to 100% after the Jeddah bomb attack.

Demand has mainly focused on electronic surveillance, monitoring systems more than security guards and Youssef Mohamed Beydoun, vice-president of the Syndicate of Security and Safety Professionals in Lebanon and general manager of Beydoun Fire and Security, estimates that overall sector business has spurted by 30-35%.

“Most of this new demand is coming from the banks,” he said. “It has now become a priority for everyone to increase their security coverage, but banks in general are especially afraid of robbery and hold-ups due to the current political and economic climate.”

Demand for security guards has also surged. They are an easily deployable form of security service, especially when it comes to carrying out vehicle and personal checks, yet they still trail behind electronic surveillance systems in terms of what is wanted in today’s market. Security firm, Protectron, has estimated the hike in demand for security staff to be at around on normal business 25%, although it admitted that tight budgets force many companies to employ their own staff in a security role.

And maybe this is why the industry sees the employment of extra security guards as a stopgap measure. “We can already see a drop in demand,” says Lotfallah Yazigi, president of Securitas in the Middle East. “It was a reaction to panic. People [in office and apartments] would get together and chip-in for a guard to watch the premises for two weeks to a month, but contracts wouldn’t go much longer than that. It was a quick-fix for peace of mind but most people can’t afford this type of service in the long-run.”

Many major banks, hotels large companies and institutions, such as the Phoenicia InterContinental, which has incurred minimal costs in upgrading an already comprehensive security infrastructure, already have adequate systems in place as part of their commitment to comply with international standards and regulations issued by their head offices and who systems and procedures are regularly assessed by external consultants.

“We haven’t hired more people,” says Jana Sleen of the Safir Heliopolitan hotel. “What we have done is increase the number of security guard shifts and tightened security measures, especially with regards to all cars coming into the hotel. Half of our staff is from Protectron and the other half is our own staff. But otherwise, we already had cameras in place everywhere.”

The Beryte Hotel reported to have increased security staff by four, at an additional cost of $3,000 per month, to which will be added the installation of surveillance cameras, at $2,000-3,000.

“It’s an additional cost, but one that everybody has to incur right now,” says Jihad Shoughari, operations manager for the hotel. “After the attack, the army and the police went around to all the hotels in the surrounding area and asked for the films of the surveillance cameras. We have now in the process of ordering 3 or 4 more.”

But it is the banks and shops – for obvious reasons – that have had to burden the cost of maintaining confidence among their client base. Byblos Bank has retained the services of the international Group 4 Total Security, while ABC’s popular Mall in Achrafieh has hired 20 new security guards, at an estimated $7,000 a month, and is reportedly in the process of installing a new surveillance camera system. Supermarkets Monoprix and Spinneys have also committed themselves to assuring their customers with cursory vehicle checks.

Universities, embassies and international organizations have for their part made few requests for additional security services. Virtually all embassies have their security equipment sent to them from their respective countries and are prohibited from purchasing any local products.

The UN, whose offices in central Beirut were reinforced with cement blocks and sandbags following the attacks, claims this was a measure that had long been in the pipeline.

“We asked the government two years ago to make this arrangement around the building, because the UN building in Beirut was non-compliant with international regulations that have been established for the institution – it had nothing to do with the attacks,” says Elias Daoud, head of security for the UN building. “Otherwise, nothing has changed.”

Despite the recent hike in demand for security services, some industry insiders are not convinced that it will necessarily entail an overall increase in the quality and profitability of the sector. According to Haled Jaber, general manager for Security Engineering, there are no rules in Lebanon governing security services. “We tried to push for this through the creation of a syndicate, but it turned into a forum for social events. Every company now has its own standards. We now have a lot of security providers in Lebanon, probably some 100-150, but out of these, I would say there are only 10 which are really professional, offering high quality services and products.”

“Right now the market is booming, but it’s not really profitable,” said one manager of a security company offering, “human guarding”. “Salaries remain low, contracts are offered on a short-term basis. A lot of people working as guards view it as temporary employment, it’s not one they invest in to make a career out of.”

Partly in response to this lack of regulation and partly – or mostly – in response to the recent events in Lebanon and the region, Securitas will be opening the Swiss Academy for Security in Lebanon in May – a first for the region – to train professional security guards at every level.

And who said there was lack of job creation in Lebanon?
 

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Business

Conflicts of Interest

by Michael Young
written by Michael Young

In April, New York’s Columbia University issued a report that, while focused on a matter related to its Middle East studies program, may end up having a broader impact on the study of the region in the United States. More specifically, what occurred at Columbia highlighted the uneasy relationship between education and public funding, and whether universities can use tax dollars to advance what, to critics at least, are ideological agendas.

The Columbia story revolved around whether Middle East studies professors (principally Joseph Massad and Hamid Dabashi) had abused their position by intimidating students, but also by imposing their pro-Palestinian sympathies in the classroom. When the university administration initially failed to respond to some students’ complaints, the latter made a film documenting their grievances, which was produced by a pro-Israel outfit known as the David Project.

Spurred into action by the film, Columbia appointed a panel to look into the students’ accusations. However, this only led to new controversy when, as a New York Times editorial put it in early April, the administration appointed “one member who had been the dissertation adviser for a professor who had drawn criticism and [appointed] three members who had expressed anti-Israel views that, critics allege, might incline them to soft-pedal complaints.” While the panel report was subsequently considered objective, the university had merely created a new point of contention in order to end another.

The Columbia hullabaloo will not go away easily, largely because it has become so deeply politicized. As Massad told a Times interviewer, “I am simply an entry point for right-wing forces that want to destroy academic freedom.” Massad and his allies believe the issue is whether they can continue to defend the Palestinian cause on U.S. campuses in the face of what they consider a pro-Israel onslaught. For supporters of Israel, the issue boils down to whether the university is the right place to advance, often aggressively, a particular ideology, particularly one which many of them dislike.

There is no consensual answer on either side. However, there is a legitimate protest that has continued to dog the debate, namely whether it is up to the public to continue financing, through Title VI of the National Education Act, Middle East studies centers in American universities where the ideological disputations are taking place. The act, passed in 1958, was designed to allow public funding for area studies on the grounds that the added knowledge could served American national security interests. Partly, this meant that scholars would more readily take one issues relevant to U.S. foreign policy. Over time, however, as the Israeli-American scholar Martin Kramer wrote in his influential pamphlet Ivory Towers on Sand, an indictment of U.S. Middle East studies, the funding became “a secure semi-entitlement” where many academics gradually came to reject the very principle of Title VI funding, namely collaborating with the government on policy issues.

Instead, funded Middle East centers began resisting official efforts to take advantage of their expertise by arguing that academic freedom demanded drawing a clear line between government and university. This self-imposed isolation, in turn, made government less reliant on scholars. Kramer quoted a 1981 Rand report on Middle East studies as saying: “We found in talking with faculty at area centers that their own training often makes it difficult for them to translate scholarly research into an applied format useful to policymakers.”

This perceived irrelevance effectively marginalized Middle East studies centers in American policymaking circles, to the advantage of more practical think tanks. Yet as French Middle East scholar Gilles Kepel recently warned in the Financial Times, “This battle, over the ‘right’ and ‘wrong’ approaches to teaching the region’s politics, history and culture, has already caused considerable damage to academia and is now jeopardizing U.S. ability to decipher a complex area in which America is deeply engaged.”

Meanwhile, the notion that academic freedom meant taking money from the government while giving nothing in return proved unsustainable. That’s why the House of Representatives recently passed the International Studies in Higher Education Act (which is currently being debated in the Senate), to provide greater oversight over federal funding to study centers. Many Middle East academics have reacted by crying “censorship”, and Massad’s insistence that both he and academic freedom were being targeted by “right-wing forces” was directed both at the House legislation and at people like Kramer.

There is little evidence for the charge. The House act protects against anything that would “mandate, direct, or control an institution of higher education’s specific instructional content, curriculum, or program of instruction.” However, if one mistrusts government, doesn’t it make more sense to simply forego its money and search for “independent” funding in the private sector? In that way, disputes like those at Columbia would be less about “censorship” and more about actual competence and significance.
 

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Economics & Policy

Talking Economics

by Thomas Schellen
written by Thomas Schellen

There could not be a greater difference of mandates for two successive governments in any country’s history. The current cabinet of Prime Minister Najib Mikati has been charged with terminating a protracted phase of managing Lebanon under a mixed set of priorities, wrapping up the past and handling one single, existentially important practical task: fair elections. For the next government, the responsibilities are overwhelming and broad. Nothing less than an entire new culture of governance is required, new accountability to the electorate and the national interest, new policies and new efficiencies must be developed.

While many areas demand a new approach, beginning with re-ascertaining of the state-defining monopoly of enforcing laws and maintaining internal peace, the practical test of governance effectiveness will be the management of the economy. Here, the competition of interests that ruled the past is in dire need to evolve into a broader competition of authentic interests, concepts, and, above all, competencies, where solutions for national economic challenges are sought, based on a concise understanding of facts, where goals are set and realities are addressed without impediments from hidden agendas and concealed untruths.

The contenders in the Lebanese public decision-making arena are presently formulating their agendas and establishing their positions. The spirit of founding new political parties is surging and a host of new and old political parties and individual contestants are drawing up their programs, which they want to deploy in managing the new Lebanon. Executive wanted to know what economic visions the leading individual and party contenders stand for, what socioeconomic priorities they have and how they aim to implement them. This month its speaks to Dr. Selim Hoss (Third Way), Carlos Edde (National Bloc), Nayla Mouawad (Independent), General (retd.) Michel Aoun (Free Patriotic Movement) and Dr. Ahmad Mallie (Hizbullah)

Selim Hoss: Third Way

With his training as economist and experience in government between 1998 and 2000, Selim Hoss describes himself today as a person active in politics without personal political aims. Hoss is affiliated with the Third Way.

In his economic vision, Hoss holds up the concept of a regional common market and far-reaching integration. Referring to the examples of the United States, China and the European Union, he argues that the Arab region has a stronger case for forming a united realm than the EU, which he calls the “most significant development initiative of the 20th century.” In Hoss’ perspective, a large, unified market is key for achieving a superior economy.

In the matter of the national debt burden, the former prime minister sees the Lebanese public debt under the perspective that no country is free of debt. Pointing out that while in office, his cabinet drew up a 5-year plan aiming to reduce the public debt burden from then 124% to 96% of GDP, Hoss emphasizes the formula of reaching a point where the rate of growth of GDP will be higher than the rate of growth of public debt.

In his view, no country today is free of debt and the focus should be on creating a virtuous economic cycle of development rather than attempting to reduce the debt. “At this point, we can say this year will be better than last and next year will be better than this. The position must be to put the country on the right track,” Hoss says. For this task, he would seek to initiate a new five-year plan aiming to instigate GDP growth and ultimately reach negative growth of the public debt.

In terms of managing the debt, he calls special attention to the unregistered portion of the public debt, such as government dues in social security, to health service providers and contractors. While considering foreign debt to be a potential source of external pressure and thus generally preferring domestic debt, Hoss concedes that the use of debt instruments is inevitable.

On the issue of fiscal revenue, the introduction of Value-Added-Tax (VAT) was one item in the original five-year plan of the Hoss cabinet in 1998. In consideration of the financial burdens that VAT caused for many low and middle-income earners, the politician sees customs duties and VAT as necessary but is averse to increasing either VAT or customs. Hoss favors going for direct taxes as much as possible and increasingly reach the richer classes with taxation.

In matters of international treaties and trade agreements, Hoss is supportive of Lebanon’s accession to WTO and the Euro-Med Agreement. On the Greater Arab Free Trade Area, which went into effect January 1, 2005, he notes that implementation needs to be honest. He considers protection of Intellectual Property Rights (IPR) as important measure, without which Lebanon would loose a lot. The Lebanese law on banking secrecy he would uphold as much as possible under the constraints of the requirements by the international community, but not at any price.

Boosting key industries

In Hoss view, banking and tourism as leading economic sectors deserve further growth incentives because they can be developed effectively and with good results. Additionally, he would want to promote the development of the agricultural and manufacturing sectors. A key concern for him in relation to agriculture is that rural populations can utilize their productive capacities where they are and do not feel urged to migrate to the cities. Because of the fiscal situation, Hoss prefers private investment over subsidies as means to promote the development of economic sectors.

In Hoss’ policy, foreign investment should be strongly encouraged by continued free market environment, liberal labor laws and creation of special investment zones, which, however, should offer equal benefits to foreign and local investors. He is for privatization as a way to encourage foreign and local investments but frowns upon the concept of using privatization as means in trying to settle the public debt.

In the socioeconomic arena, Hoss proposes to tackle the unemployment problem mainly by reactivating the economy, fighting the recession, furthering the tempo of development and expanding the realm of technical education. He supports the transition from the current system of end-of-service indemnity payments to a national pension scheme but in the question of increasing the minimal wage, he calls for a careful study of the matter and its impact on finances before undertaking such a step.

The veteran politician agrees that corruption has impeded Lebanon’s development severely and emphasizes that democracy is identifiable by accountability, of which the country has had a blatant lack. He considers it a major objective for Lebanon to combat corruption by improving democratic practice.

Carlos Edde: National Bloc

The reduction of corruption and financial waste and the introduction of sound administrative policies are cornerstones in the economic vision of Carlos Edde, leader of the National Bloc.

Coming from a liberal perspective, the party’s policy is built around affirmation of economic opportunities. Thus the National Bloc puts the rebuilding of credibility of institutions and political leaders on top of its agenda for change, to be followed by taking initiative to solve the problem of wastage. Based on fair elections, the party’s recipe for governance would be to build a government on the grounds of credibility and competence. According to Edde, this does not imply a government of technocrats but of people who have at the same time political stature and sufficient understanding of Lebanon’s problems to carry out policies.

Emphasizing personal integrity of politicians as requirement of utmost importance, Edde says that the National Bloc’s approach to leadership also underlines transparency and the open description of problems and, if necessary, bitter solutions.

In matters of the public debt, Edde affirms that it is most urgent to address the debt of 200% of GDP, which in his opinion the country could only sustain because it’s banking sector is also of very large size. In managing the debt, reduction of wastage in the public system plays a priority role for the party, along with measures to raise funds from privatization. Further tools in dealing with the public debt should include using of the gold reserves and research into a possible devaluation of the artificially overvalued Lira.

While Edde would consider depreciation of the Lira at the current juncture to be Russian roulette and proposes looking at organized devaluation as a means to promote investments, his long-term strategy would be to float the currency, under the precondition that an accountable government is firmly installed.

Indirect taxation

Also on the revenue side, the National Bloc policy emphasizes to reduce public wastage before looking to increase taxes. Under reasons of practicality, Edde suggests to rely strongly on indirect taxes instead of having “an army of tax agents”. Albeit unfair in socioeconomic terms, indirect taxes are easier to collect and can help in attracting investors to Lebanon as tax haven, is Edde’s rationale. Personally a non-smoker and non-drinker, he would very much favor taxing alcohol and tobacco products at substantial rates. Customs duties should be maintained as source of revenue in absence of direct taxes, but not to the point of making smuggling too profitable.

Membership in international treaties WTO and Euro-Med is supported by the party under the perspective that it not only promotes economic development but also opens the country more strongly to ideas, good laws, and quality standards. The party is also pro-GAFTA but cautions that Lebanon needs some protection against dumping of agro products. The National Bloc aims to create an environment where other countries can be at ease in dealing with Lebanon, which includes safeguarding of IPR. According to Edde, the banking secrecy law is a sentimental issue for the party, because it spearheaded its introduction in Lebanon. Today, however, he would seek to have it meet international standards and be amended in ways to make it impossible for civilian or military public servants to stash away funds illegally and also oblige persons wanting to stand for office to reveal their relevant financial information before assuming public responsibility. Edde reasons that banking secrecy cannot be allowed to facilitate corruption and it was never meant to do so.

In selecting economic sectors for development, the National Bloc includes banking on its list because of its high degree of development and additional potential. Special priority in Edde’s view, however, should be allocated to becoming a country that attracts outsourcing of services because of its skilled labor force and other advantages. The party wants to support tourism and the potential for IPR sensitive industries to be based in Lebanon, such as publishing. The agricultural sector should receive incentives for shifting from commodity produce to top end and higher value products. A specific resource that Lebanon should develop in the opinion of the National Bloc is water, under the perspective of supplying it profitably to the region.

For Edde, the public sector should not play a large role in the economy but he supports to implement investment incentives for Foreign Direct Investment (FDI), saying that one cannot expect people to invest in Lebanon because they like Lebanon. In such incentives, the party agrees to full freedom for movement of capital and profits and views the creation of special investment zones favorably but would not concede to rights for unlimited foreign ownership of real estate.

Michel Aoun: Free Patriotic Movement

Preparing to return to Lebanon from Paris, the head of the Free Patriotic Movement (FPM) outlined for Executive his movement’s four main policies. The FPM intends to rebrand itself by creating a political party and introduce a program shortly after the arrival of the former general and head of government. For the purpose of this investigation, Executive retains the term FPM as descriptor of the political group.

In Aoun’s words, the economic recovery of Lebanon is one of four main objectives on the FPM agenda for Lebanon in the process of building a new state. The first objective is to reinvigorate political institutions and confine political debates within national institutions. The second objective is to restructure the national security forces and undertake a fundamental purge of this institution in order to enable it to safeguard the country from any drift towards instability. The third objective is to reform the judiciary as a precondition for economic recovery. The fourth objective is to devise a recovery plan for the economy.

Genuine reforms

In its economic vision, the FPM sees the departure of Syrian forces and intelligence units from Lebanon as giving positive signals to the market forces but warns these signals would not translate into genuine economic drivers unless genuine reform is put in place. As such, the FPM’s economic recovery plan entails a two-step approach of first addressing the public debt and encouraging growth.

According to FPM official and economic expert Sami Nader, the future party assesses the national debt as solvable after achieving a further reduction of the interest rate paid on the debt. Its economic policy aims to devise means that will increase the primary surplus, decrease the amount of the debt and create a framework and tools that will enable Lebanon to become a regional financial center that protects and catalyzes private initiative.

On the revenue side, the FPM regards the VAT and corporate tax rates as appropriate for the country, while it favors a lowering of customs duties. The central tool that the group seeks for increasing fiscal revenue is an enlargement of the tax base, so rather than increasing taxes to have more people pay.

In relation to international treaties, the group supports Lebanon’s membership in WTO, Euro-Med and GAFTA under a no fences, no borders philosophy. Intellectual Property Rights should be enforced in full and the Lebanese banking secrecy law should be maintained in compliance with international laws.

Besides finance and banking, the FPM favors to provide development incentives to enterprises in tourism, information and communications technology (ICT), media, and health care. Its means of choice in providing public support for development of economic sectors would be tax breaks and indirect subsidies, such as loan guarantees, in addition to empowering a strong financial market place.

Labor policies

On the socioeconomic front, the group follows a line of trusting in market forces to increase employment opportunities in combination with promoting market-oriented education, examples being computer training and capacity building in tourism. It is not in favor of an increase in the minimum salary and opposes any increase in public spending to provide employment but the FPM takes a positive approach to the presence of Syrian labor in Lebanon, provided that foreign labor is properly licensed and regulated. The group supports a reform of the social net, with introduction of tiered pension and social care system. It also is for privatization, naming utilities and telecommunications as primary candidates.

According to Michel Aoun, the FPM was not in agreement with late Prime Minister Rafik Hariri’s economic policies, because they hampered economic development and created high costs by pouring money into unproductive projects. He would seek to cooperate with any party willing to do so and also rely on technocrats but emphasizes that a clear plan and political leadership will be required for facilitating reform in Lebanon and that the reform is likely to involve a change of both policies and people. In Aoun’s words, “I think there will be radical change, we cannot work without morality, we cannot work without technology, we cannot work without honesty. Many things have to be established in our society. The corruption was generalized (sic) in our system and accepted by society. We have to establish some morality.”

Nayla Mouawad: Independent

As member of parliament and contender for the Lebanese presidency (she is the widow of the assassinated ex-President Renee Mouawad), Nayla Mouawad has been a strong individual power in the political arena and leader of the Qornet Shehwan opposition gathering. In preparation for the future, the MP is currently pursuing the realization of long-held ambitions to form a nation-wide political party with representation from all communities.

In the views of Mouawad and her associates in the founding a political party, human capital and globalization are important guideposts. She maintains that a well-established slogan for Lebanon should be that human capital is the fuel of its economy but that the impact of this slogan has been eroded in the past three decades and must be restored through improving education and vocational training. A core target in her economic vision is to bring Lebanese society and Lebanese individuals to interact with globalization and create an environment to empower and free society and let individuals fulfill their potential, maximizing the competitive advantages of Lebanon in a post-industrial global society.

Cleaning up public sector

Further priorities are slimming of the state’s administrative machinery, the elimination of corruption and clientele structures in public administration and a review of expenditures for the armed forces.

In dealing with the economic situation and addressing the public debt, Mouawad admits that the debt is heavy by any standards but manageable by economic growth, for which she sees great potential in attracting foreign and expatriate Lebanese investors if the cost of government is reduced and corruption is curbed. Efforts to contain the debt would have to begin with its stabilization and promotion of economic growth, lest attempts of debt reduction could lead to greater impoverishment of the population. While she would have preferred floating the Lebanese currency several years ago and considers a high share of debt in foreign currency to carry elements of danger, she regards the decision for using foreign currency debt instruments as irreversible under present circumstances and would not seek to liberate the Lira.

For discussing fiscal reform and ways to increase fiscal revenue through specific taxes, Mouawad’s team would require more data, which have not been available until now. In general terms, the group’s policy for fiscal reform would include a progressive scheme of taxation on individual incomes for a certain period of time. Indirect taxes should play a lesser role and customs duties should be phased out gradually over 10 to 15 years, in order to facilitate Lebanon’s integration in international trade agreements.

In context of her globalization-oriented vision, Mouawad stands for accession to the WTO as quickly as possible and for a very strong relationship with the EU under the Euro-Med agreement. She strongly advocates adoption of the laws required for WTO accession, noting that they had been initiated by late former minister of economy, Basil Fuleihan, and undertaking a campaign to explain these legislative initiatives to the public. In relation to GAFTA, Mouawad seeks a gradual implementation of the Arab trade area. The total implementation of Intellectual and Industrial Property Rights carries a leading function in her policy, which envisions a capacity of Lebanon that could rival that of Israel in generating revenue from IPR. Mouawad’s team sees the preservation of Lebanon’s banking secrecy law as important and supports the law as it stands after having been modified to meet international standards for prohibition of money laundering.

In promoting economic development, Mouawad would prioritize substantially lowering the cost for telecommunications in order to enable the internet and communications infrastructure to serve as basis for economic growth in businesses such as call and contact centers. ICT and new technology enterprises could be the main engine of job creation in Lebanon and provide economic opportunities in all parts of the country. After ICT and related enterprises, banking and health care would be sectors high on the list of priorities for economic development, along with agriculture.

In the area of privatization, Mouawad favors fast privatization of the electricity utility and creation of competition among telecommunications providers. She supports economic interaction with Syria and is an advocate of facilitating employment and earnings opportunities in rural areas, for which she sees a strong potential based on the experiences of the Rene Mouawad Foundation in rural production of high quality food products, namely olive oil, that could successfully be marketed internationally.

Dr. Ahmad Mallie: Hizbullah

Executive inquired with the Party of God, Hizbullah, about their economic policy and vision. When Dr. Ahmed Mallie, member of the party’s politburo, agreed to discuss the matter with Executive, he stated that the party appreciated the economic achievements of late Prime Minister Rafik Hariri but did not agree with all of his policies. Comparing Hariri’s economic approach to that of European politicians Margaret Thatcher and Silvio Berlusconi, Mellie elaborated that the Shiite party was oriented more strongly to provision of services under the theme of social justice. Mellie also confirmed that Hizbullah is looking at increased participation in governmental responsibilities after having been preoccupied over many years with its leading role in the Lebanese resistance.

On the matter of economic policy and the party’s positions on specific development issues, Executive subsequently communicated on two separate occasions with Hizbullah media liaison Hussein Naboulsi who informed us at our first attempt that the party does not presently have an economic policy or an economic expert authorized to speak on behalf of Hizbullah. In response to a second inquiry one month later, Naboulsi again related that the party is not ready to discuss issues of economic policy with Executive.

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Economy & Finance

Fast Track to Growth

by Executive Staff
written by Executive Staff

Until the assassination of Mr. Hariri and the subsequent uncertainty, Lebanon had, for the previous 18 months, enjoyed relatively robust economic activity, which allowed for the replenishment of reserves, better GDP growth in 2004, vigorous financial sector liquidity, and, through swaps, more efficient management of the country’s debt stock, which in turn allowed for the lengthening of Lebanon’s foreign debt’s maturity.

The fact that these positive gains were set back by one, albeit enormous, bomb blast, proves that no post-war government has yet been able to build the necessary foundations to reduce the vulnerability of the economy to unexpected trauma, nor for that matter set up a sound economic base to generate recurring revenues, diversify the economy or create jobs.

This situation has not been helped by the Lebanese government’s failure to implement administrative reforms – especially the privatization program demanded by the 2002 Paris II conference – and by shelving attempts to reverse the current political and social status quo, which has so far been characterized by corruption, waste and incompetence.


 

Palestinians would make an ideal blue-collar labor force in Lebanon, if allowed to work more freely

International donors, investors, lenders and rating agencies repeated time after time that Lebanon badly needs to implement structural reforms, meet Paris II objectives, and build a basis that would allow successive governments to comfortably service and repay debt.

Today, there is a consensus that any political impasse will lead to an erosion in international confidence that would precipitate a financial crisis. It is therefore time to act with maturity and vision and tackle problems head on.

A brave new world

Any post-election government should be bulging with technocrats and specialists, species that, with a few exceptions, have been overlooked by all post-war governments, who saw them as an obstacle to the self-interest, cronyism and corruption that has defined the Lebanese political system for the past 15 years. It is imperative that they now be given free reign to reform and restructure the country, in particular focusing on:
 

Political and geopolitical risks
Consolidating economic development and improving external liquidity
Maintaining long term growth rates
Implementing a serious policy of privatization
Debt and overall fiscal management

Sound politics are crucial for a sound economy

Political stability is crucial if the pillars of a healthy social and economic structure is to be created.

It is important that Lebanon recovers its full democratic character by allowing for consistent, regular and impartial elections. The extent of popular participation must be significant and clear for the world to see, as this is generally considered one way of building up international credibility and reassuring foreign investors, just as a country with a perceived Third World election process is certain to lose credibility with the international community.

Lebanon must have a consistent and high degree of consensus on economic policy objectives and global trade and financial organizations. There must be a strong will to carry out reforms and privatization, and political institutions must be unanimous on issues of that ilk.

Politicians and public institutions have to show, through meticulous marketing, a strong capacity to adapt to changes in political trends on an international, regional and domestic basis. Any stubbornness and inflexibility will be immediately be interpreted negatively.

Lebanon must show a degree of reform in leadership succession.

Lebanon must reduce to a minimum, internal and external security risks. This has partially been accomplished and the departure of Syrian forces should enhance the security aspect even further.

Public Sector bliss

The Lebanon of the future will have to ensure that the public administration become more of a meritocracy. In Western countries, particularly in Europe, the public sector is the major source of employment amongst the youth and specialized professionals. In Lebanon, the abysmal image of the public sector is fuelled by incompetence across the board and by the complete lack of accountability of civil servants, who have no concept of serving the interests of the people. An efficient, competent public administration, free of unnecessary bureaucracy, would be key in attracting foreign investments and restoring confidence in the local economy.

Regional obligations and political realities

Another priority for any new government is the Palestinian “problem.” Any Lebanese government must face up to the fact that the 400,000 Palestinians in Lebanon must be given a less constraining economic status and be allowed to work freely within the country. Lebanon must therefore seek financial aid to allow for the smooth integration of the Palestinians, whose would be re-injected into the domestic economy. A blue collar Palestinian workforce would also be more stable than any foreign workforce, as it would be born and bred in Lebanon. The integration of Palestinian workers would, in time, give Lebanon important economic links with neighboring countries in the Levant, namely Jordan, Palestine (the West Bank and Gaza), and, in the event of a peace treaty, Israel.

Reaffirming a tradition

Since its independence, Lebanon has always been a market economy and, although this tradition is not in danger, it is still important for the country to emphasize its commitment to the concept. Lebanon has always been an example in terms of economic liberalization in the region, especially amongst other Levant countries and in North Africa, but has been lacking economic reforms and restructuring since the end of the war to genuinely play the free-market role. Living standards, income and wealth distribution have been erratic at best for the last fifteen years, and very little has been done to diversify both the economy and the revenues generated, mainly as a result of incompetence, corruption, waste and racketeering, leaving no room for resource endowment. The result is a complete reliance on free entrepreneurship and the private sector, and very little economic guidance and help from the government.

Any future government will have to risk investing in projects that will yield significant economic and social benefits in the medium to long term and cannot forego opportunities just for the sake of avoiding financial or political risk. The development of the water and transport sectors – arguably the most strategic at the moment – is crucial to the future diversification of the Lebanese economy and the creation of jobs. Although Lebanon is blessed with substantial water reserves, due to its favorable geographic layout and weather, nothing is being done to exploit them.

The creation of an efficient water distribution system would create significant revenues for the country and establish Lebanon as a strategic geopolitical nexus, ensuring its long-term protection by the international community from bellicose neighbors. Selling water to its neighbors, while being self-sufficient at home, is a scenario that many countries would have worked hard to realize decades ago. Likewise, a developed motorway and rail network, linking Lebanese ports and cities to neighboring countries would not only create important direct revenues, but also make Lebanon a regional hub in the modern sense. The development of water resources and their distribution, as well as transport links (mainly through toll roads and passenger and freight railways) would boost GDP exponentially, easily doubling the current GDP figure of US$19 billion.

Water, rail and toll roads must all be privatized, with the government maintaining a golden share in these newly privatized companies, and having a say in their strategies. Such projects must take a regional dimension, as the Lebanese market on its own is too small. Privileged relations with countries like Syria, Iraq and Jordan are crucial to the future economic prosperity of Lebanon, which as a country, must exploit its comparative advantage in terms of know-how, geopolitical positioning (on the Mediterranean coast and in between Europe and the rest of the Middle East), and wealth in water resources, to position itself as a regional intermediary and springboard.

Improving growth prospects

Lebanon will only achieve consistent economic growth through:

Economic diversification, such as creating new sectors (ecology-related, technology, capital markets, specialized finance houses, heavy industry, etc.), developing existing ones (light industry, tourism, banking and telecommunications), and using current subsidies spent on inefficient public sector companies such as EDL (which drains the public coffers with US$1 billion in subsidies on a yearly basis) to invest on economic diversification and job creation.

The restoration of confidence and trust in the domestic economy and economic infrastructure, through the eradication of bureaucracy and corruption, setting solid and realistic political objectives related to the economy, and updating the existing infrastructure.

The re-building of the middle class and their savings base. One way of facilitating this is to keep the taxation as light as possible to avoid impacting the country’s savings. It would also discourage capital flight and slow the “brain drain”.

The creation of tax incentives, especially to woo expatriate Lebanese.

The development of the country’s capital markets provide companies and banks with alternative sources of funding.

The consolidation of its position as the sole Arab bond issuer to develop as a regional capital markets hub, hopefully leading to an influx of regional companies, seeking to raise funds both in terms of debt and equity.

Other ways to ensure economic growth include the development and proper re-organization of a wide range of economic sectors such as :

Tourism: despite the mini-boom in 2004, the sector is still severely under-exploited, due to a lack of adequate marketing and communication. Major infrastructure investments and a committed, long term policy from the government are essential if Lebanon is to realize its full potential.

Industry, which is suffering from high operational costs (electricity, fuel, social security on labor, etc.), unfair competition from neighboring countries and a lack of understanding from bankers, who generally penalize industrial companies heavily in terms of debtor interest rates. Lebanese industry desperately need private equity and venture capital funds, as well as specialized financial institutions that would cater to their financing and financial advisory needs.

Banking and finance, which is still desperately undiversified. New types of institutions need to be created and developed, mainly on housing finance, public works finance, financial engineering and securitization, industrial finance, etc. The current banking sector must also be restructured (even if it means changing the law) to resemble the Honk Kong model. The latter divides banks into three categories: savings banks, merchant banks and international universal banks. The central bank would decide on the classification of each bank.

Agriculture, which is currently in an abysmal state. Subsidies for that sector have been constantly diverted and dilapidated, and there has never been a state master plan for that sector. Lebanon’s weather is so appropriate that the country can ultimately become a net exporter of agricultural products, mainly in fruits (including exotic) and vegetables. Lebanon should seek to emulate the Chilean model, which has made Chile the most efficient agricultural country, deriving a large chunk of its revenues from this sector.

Real estate. Here it is essential that the political climate remains stable over a long period of time, that interest rates on deposits decrease and that legislation and fiscal stability be maintained over long periods of time. Real estate suffers significantly from constant changes in legislation and fiscal regime, which drive away investors.

ICT, with rock solid patent and copyright laws, and significant subsidies to develop research and development. The potential of the Lebanese in this sector is significant but under-exploited. Lebanon should also position itself, in a similar vein to India, as a major outsourcing of ICT services for Western countries.

Trade and transport. Here, laws must be fine tuned to allow everybody to trade freely. A climate of competition must be created and exclusive agencies must be become a bad memory. Trade barriers must also fall and Lebanon must join the WTO and the Euromed. As mentioned earlier, transport is crucial for the development of the economy, and Lebanon is ideally positioned to become a hub for at least the Levant region in the next decades, if an efficient motorway (with toll roads) and rail network system, linked to Beirut and other cities’ ports and Beirut airport, are built as soon as possible.

Health care. Lebanon has a comparative advantage in terms of the quality of its doctors and hospitals, and should develop a strategy to become, like Cuba, a regional centre. Subsidies must be diverted from inefficient state-controlled sectors into the health sector, which should become one of the best in the world.

General services, which will be efficient once efficiency is realized in the above sectors. Education, however, should become part of the new government’s priorities, as the country enjoys a considerable comparative advantage in this area. An education second to none would attract expatriates, foreign companies (their executives and families), and students from all over the Arab world. Job creation in this field is potentially significant too.

Privatization and a tight monetary policy are key

The development and diversification of the economy cannot be successful if they are not accompanied by privatization and a healthy monetary policy. The Banque du Liban (BDL) and the Ministry of Finance have done as much as they can given the past constraints, but today these areas are a priority.

Lost opportunities

The privatization program has been stalling since its inception by the Hoss government in the last quarter of 1998. Any privatization in an emerging market such as Lebanon has been very difficult to achieve, as international investors of equities are less keen on emerging market securities offered by institutions in countries such as Lebanon, especially in the wake of the Asian and Russian crises of 1997-98, which brought the emerging market trend to an end and the stock markets’ bear years of 2001-2004 rang the death knell for any emerging market initial public offering (IPO).

The current poor state of the Beirut Stock Exchange (BSE) is a reflection of the failure of the Lebanese privatization program and of the Lebanese government’s lack of judgment as to the timing of such a program. In short, Lebanon missed a major opportunity in terms of privatization. Were the government to have privatized in 1995-97, when emerging markets were so fashionable, more than US$10 billion would have flooded into the state’s coffers. EDL could easily have been sold for around $1 billion back in 1996, but can’t even attract one strategic investor for less than 10% of the 1996 price. In fact, today it is in such a mess that privatization for a symbolic $1 is the only option available.

The aim of any future government is to commit politically and unanimously on privatization, and announce to the world’s financial markets its intention to resume the privatization program, this time seriously. A privatization authority or ministry must be put into place, which task would be to monitor the entire privatization process and ensure transparency at all times, while road shows and presentations to international investors must be carried out on a regular basis at the same time that a serious restructuring of state enterprises is accelerated.

The privatization of any state company must carried out in such a way as to include:

A major strategic shareholder (an international company involved in the same field and whose role would be to actively manage the newly privatized company).

A diversified local and regional investor base that would include the state.

Finally, privatization must not be carried out just for the purpose of raising fresh money. It must be done to improve public services. EDL could easily be sold for nothing, on the condition that whoever buys it manages it properly and ensures a good service to end users. The state would benefit from such a privatization in the medium to long term, as electricity services become more efficient and less costly to the local industry while tax revenues (i.e. taxing the private electricity company) increase over time.

Other companies to be privatized and which could yield significant cash returns are the tobacco regie and the fixed line telecommunications company. The introduction of affordable broadband internet services is imperative for the development of the telecommunications sector and for the establishment of Lebanon as a regional hub. The state should also sort out the mess that had been created in the mobile phone operators’ case, and restore its credibility with international investors. The mobile phone saga was a shambles, never to be repeated and any new government must seek to actively make amends with investors in order to restore credibility.

Fiscal husbandry

Privatization must be done in parallel with a national debt restructuring, which would include swaps and debt consolidation. The later would only be possible within a favorable and less risky political environment, as it would imply the help of supranational institutions such as the World Bank. In the case of debt consolidation, the latter would lend Lebanon substantial sums amounts ($ billions) over a long period of, say, 20 years, at favorable interest rates. Such a loan would then be used to repay most or a large chunk of the existing public debt, which is due in the next five years, giving, as a result, enormous breathing space to the economy.

Such a debt structure would allow Lebanon to reach financial equilibrium within five to six years. Of course, interest rates will have to decrease across the board, as the country improves its credit rating and the general risk level (particularly the political risk) is reduced significantly. In particular, debtor rates will have to be dropped, as local corporates are currently using their entire cash flow to service debt and are left with spare cash to invest in their businesses. Interest rates on deposits will also have to be dropped accordingly.

Other immediate measures to be taken by a new government would be to :

Reform the pension system and social security. An adequate state pension plan ensures the renewal of the work force, particularly at public sector level, and allows for the creation of jobs for the younger generation. For the moment, civil servants work beyond their retirement age, as their pension is insufficient to sustain them in their old age. Therefore, younger people have fewer opportunities for work, as all possible positions are filled, and are forced to emigrate.

Develop a more effective institutional and legal infrastructure, emphasizing on company protection from bankruptcy and implementing practices that are conducive to the functioning of markets, including property rights legislation and bankruptcy, contract and collateral laws.

The government must also :

Monitor the local banks’ progress in implementing the Basel II regulations for banks, through the national supervisor or the Banking Control Commission (BCC). Basel II will focus more on risk and capital management and on a more efficient way of lending, which can only be beneficial to debtors.

Use gold reserves, amounting to around $4 billion at current prices, either as collateral for cheaper long-term debt or sold outright for cash that could be re-invested in a government development fund. The current law forbidding any government to use or sell gold reserves is obsolete and must be annulled, provided, of course, that the future government be held responsible and accountable in case of fund misappropriation.

Conclusion

Lebanon has had two wars within a period of 30 years: a military one that ended in 1991, and an economic and social one that is now almost over. Two generations of Lebanese were lost in this devastating period, which nevertheless must serve as a strong lesson for future generations. Lebanon must adapt to world trends and build strong political and economic pillars as well as use its abundance of capable technocrats who would make it their absolute priority to build a realistic and efficient political consensus and strategy, which would drive the economy forward for the coming decades.
 

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Editorial

Watching the belly dancer

by Yasser Akkaoui
written by Yasser Akkaoui

Never have the events that led to the civil war of 1975 been so clear. The subject that would ignite a Byzantine quarrel has been demystified by the events following the February 14 blast and put an end to the endless finger pointing.

A vulgar assassination with a ton of explosives, a series of bomb attacks intended to create civil unrest and most recently the arming of local militias, most notably those belonging to the Palestinians, with WWII missile launchers, is evidence that whoever is using these tactics is still lost in the 60s.

Back in the early 70s, while everybody’s eyes were transfixed to the waists of generous belly dancers at places like Grotte Des Pigeons, the armed Palestinian militias were surrounding Beirut, drooling over our cultural, financial and economic riches.

Once we sacrificed our sovereignty to the Arab cause, we became the playground of foreign sponsors of war. No one has paid as dearly for this cause as the Lebanese. The irony is that each time Lebanon tried to re-establish its sovereignty, it was accused of treason.

In this issue, Executive tries to make sure our future parliamentarians understand that this time their performance will be appraised with economic results. That is how today’s nations are run. It’s ok to think selfishly and put the nation’s well being first and any armed party that challenges sovereignty by maintaining a separate agenda that is not approved in parliament will be labeled a militia and dealt with by the state. Now is the time for those groups to join the army, acknowledge sovereignty and point their guns outwards, while the real wars of today are fought on the economic battlefields, where the spoils victory are translated into national riches.

They should also understand that real sovereignty coupled democracy is the prerequisite for any economic plan and genuine national movement to transform our country to a fortress where Lebanese lives, culture and investments can be protected.

Meanwhile, the Lebanese public is braving the bomb threats and taking to the streets, shopping and dining to show that they cannot be bowed by violence. But this time, while they are still enjoying the belly dancer, they are keeping one eye on their country, lest any conspiracy robs them of it again.

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Grow up

by Yasser Akkaoui
written by Yasser Akkaoui

With the rate of political assassinations slowing, life is returning to our city. The Lebanese have proved that they have little time for bad memories and even less interest in a propensity to save.

We are big spending, short-termists who have learned to live for the moment, but with such a precarious lull in the violence, we can’t but live each day as if it is our last.

Politically, the respite in targeted killings has been interpreted as a sign that, as usual, a deal was made between the Americans and the Syrians at the expense of Lebanon of course. However, judging by the relentless American pressure on Syria, the nation’s collective intelligence, this time at least, could be wrong.

The Americans simply decided not to use Lebanon as a front against Syria. They realized that some Lebanese politicians were capable of sacrificing their country, fragmenting its society, destroying all what has been rebuilt and witnessing the liquidation of all its politicians and thinkers (while the rest flee), all for the sake of other nations. The risk of loosing whatever democracy is left in this country would definitely have made the Americans look bad.

Simply put, Lebanese politicians are easier to tear apart than bring together. They are also unable to sit at a table long enough to reach an agreement. And if, by some miracle they do, they are experts in tearing up previous understandings. Our politicians always seem to look for la petite bete to start a war of words. And all the while, as their standing shrinks along with their petty quarrels, regional tensions take on nuclear proportions. One wonders how low they are prepared to go. The private sector has lost interest and has decided to go its own way, disappointed by its so-called leaders who have refused to grow up.

In this issue, we remember Dr. Basil Fuleihan, who was part of a movement for change at a time when huge ambition, not cheap sniping, was the order of the day.

At least, one year on from his death, the seeds of this dream of a beter Lebanon are still bearing fruit. Last month alone, the BCD, the much-maligned but nonetheless resilient, symbol of a new Lebanon, saw the investments from Kuwait and Abu Dhabi, of more than $1.2 billion. With this demonstration of faith in the face of an uncertain future, one is forced to ask who the true Lebanese are. Those who want to build or those who wish to dismantle.

The true Lebanese are builders.

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Lebanon – Policy left hanging

by Michael Young
written by Michael Young

Ask many Lebanese what the summer season this year meant to them, and the answer you get will probably be different than the upbeat assessments of Lebanese officials. Final figures are not out yet, but we can certainly feel that this year was a special one. However, for those in Lebanon not on vacation, we were able to measure this success most often through the breakdown in state infrastructure.

Capitalist culture is more than entrepreneurship; it’s the capacity to deliver on your promises, and Lebanon has yet to convince that it is a premier tourist destination. Here’s a layman’s view of this past summer:

On the negative side, Lebanon’s road, electrical, and telephone infrastructure were very weak links. Even in Beirut, the three-hour power cuts were not enough, as extra rationing was imposed. Outside of the capital the situation was near catastrophic, so much so that from Tripoli to Zahleh people took to the streets in protest. Resorting to generators imposed a financial burden on everyone, but particularly on those establishments catering to visitors, imposing higher costs on all. To run a country on haphazard, unregulated power generation is embarrassing when you lay claim to being an attractive tourist destination.  

The traffic situation was equally lamentable — in Beirut and from the capital toward places where tourists were likely to go. The northern highway until Jounieh was, as a norm, blocked most hours of the day, while even inside Beirut a combination of mediocre traffic management, road construction and a high volume of cars meant drivers could spend hours getting from nowhere to nowhere. This imposed further costs on the economy, well beyond what it meant for visitors from abroad. 

One can go on. The cellular telephone network was just as bad during the summer season as before. Conversations were routinely cut off, while on several days there was such volume in the system that people couldn’t even complete calls. Gasoline prices, at over a dollar per liter, were onerous, and while this reflected world prices, it was also the result of the uneconomical oil pricing system. If that wasn’t enough, as the summer ended the water began running out, so that in Beirut the national water company was roughly halving the amount of water distributed in winter.

Everywhere, the inability of the state to make basic services available shifted the financial burden onto providers and visitors, so that Lebanon was far more expensive than it needed to be. This year, most visitors were Lebanese expatriates or Arabs from the Gulf who seemed more willing to put up with this. But for the tourism market to grow dynamically, Lebanon’s appeal must spread to other target groups. The international financial crisis won’t soon be absorbed, so the country’s high prices could turn into a major Achilles heel down the road. Meanwhile, many tourists may decide that the headache of this year is not something they want to repeat for some time.  

On the more positive side, Lebanon was fun this summer, a place that managed to position itself on the radar as an international niche destination, whether as a party town, a cultural venue — given the many festivals organized around the country — or even as a gay destination, a detail that made its way into the New York Times last month, though precisely how the Lebanese authorities will react to this remains to be seen. The country is rarely boring, and even the beach infrastructure has expanded to include attractive locations all the way up the coast to Batroun, and new venues between Beirut and Sidon. The main problem is the high cost to get in, not to mention the sporadic cleanliness of the sea.

Most flagrant was the absence of any real sense that Lebanon had developed a unified tourism strategy. No one should want the state to organize Lebanon’s summer season; the state can barely organize our off season. However, government institutions could have thought up initiatives to clarify what was taking place this summer, or incentives to make the season more profitable and comfortable. Yet even simple things like an official tourism ministry brochure advertising and highlighting summer events, or more policemen deployed to regulate traffic on major thoroughfares at peak hours, were absent. Special passes to allow tourists to enjoy unlimited bus services, like all other efforts to expand or promote the use of public transportation, were simply off the agenda.

There are a host of strategies that countries will use to promote tourism, including discounts at specific tourism sites, coupons to go to certain restaurants or bars, or the opening of welcome centers in towns or areas to advise visitors about the nearby sights. These require coordination between the public and private sectors. It’s up to the state to set this strategy, even if it relies more heavily on private initiatives. Nowhere was this visible in Lebanon this summer, where the sense of free enterprise may have been high, but the imagination of officials hopelessly low. 

Michael Young

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