Service: A skill we can’t afford to ignore

by Tommy Weir January 1, 2005

written by Tommy Weir

When we asked a random sample of people their opinion on customer service in Lebanon, we routinely received the same answer: “What customer service? Ha! MAFEE customer service in Lebanon.” This is surprising considering the current economic climate and the level of competition most businesses face. One would think that Lebanese companies would be scrambling to please their customers, to offer them special deals and dazzling service. However, this is simply not the case, and it’s not just our opinion. Over the last few months, we have been surveying men and women on how they spend their money, and if customer service influences their choices. We also asked them to rank establishments according to levels of customer service (the five best and the five worst).

The InterContinental hotel chain has consistently come out on top; starting with the Phoenicia.The Mövenpick also ranked very high. Roadster restaurants (all branches) were continually mentioned as having superior customer service. Spinney’s (Dora branch) seems to be moving in the right direction, as is Roum hospital.

What makes these organizations stand out is that they provided a positive memorable experience for the majority of their customers CONSISTENTLY. People told us that they felt important when they interacted with certain companies. They were thanked, and the staff smiled and treated them well. “Once when I received something that I didn’t like at Roadster, the waiter actually let me order something else and didn’t charge me and he was very nice about it. Now, to me, that’s customer service!” said one patron of the restaurant chain. A local company that we deal with for air conditioning, Frigo Services (Haroutune Beuyukian Est.), has provided incredible service for us in the last year. They anticipate our needs, call us regularly and if they say someone will be there at 9:00am, they actually mean it!

When we asked people if they told others about their positive experiences they all replied ‘yes.’ And we also asked them if they ever spoke about bad experiences and they replied with a louder ‘yes!’ As Customer Service 101 will tell you, “A happy customer will tell three, an unhappy customer will tell ten!” In companies where staff has freedom to make decisions to please the customer, it makes a huge difference. Proactive employees are something that so many companies desire, yet few leaders are able to let go enough to allow their proactive men and women space to be truly service oriented, let alone creative, especially if it involves money. Please see that satisfying your customer in the short-term, even if it costs, will be worth it in the long-term.

Everyone is a client

It is imperative in today’s competitive market that companies (no matter what size) take notice of the level of service throughout their organization. All departments must be seen as customers of other departments. We must develop a holistic service mentality if we are eventually going to sell our skills in the global marketplace, which expects/demands a higher level of professionalism.

Think outsourcing!

What is a service mentality? A service mentality is one that understands that in order to be considered as a member of the service community (which we all aim to be regardless of business), we have be to dedicated to constant improvement and providing exceptional results. Unfortunately, many leaders fail to completely understand that each department has to be converted into behaving like a professional service firm (think Deloitte & Touche, Accenture, McKinsey). Customers have to be seen as the most important aspect of your business: how about even calling them clients. Tom Peters, a man known as the most listened to business thinker, put it into one phrase in 1997: “Life = Client Service. Period.”

Recently, a Lebanese colleague and consultant remarked that he had a difficult time convincing local companies to change some of their basic practices and procedures in order to streamline, saving valuable time, money and enhancing customer satisfaction. He found that many leaders were resistant to adopting new technology that could replace lots of signatures and unnecessary time wasting steps for “service representatives” (employees) and “clients” (customers). “It’s as if they are telling me, ‘I’ve been doing it this way for 30 years and it worked in the past, so I’m going to keep doing it!’” But as Lew Platt, the chairman and CEO of Hewlett/Packard said, “Whatever made you successful in the past WON’T in the future.” This is really unfortunate. We found that actually there are a lot of good employees out there that aspire to be “service representatives,” however, the systems that they have to work with (or around) are so illogical and cumbersome that it makes their jobs nearly impossible. In fact, in some companies, we felt that it was a miracle that people were even able to smile, let alone thank the client, considering the steps they had to go through to complete a transaction.

Think. Government telecommunications!

What steps can leaders make now that can increase the overall performance of their organization and enhance service to their clients?

1. Take time to create a mission statement and vision for your organization. Make sure that this is an original statement of intention, and not something copied from another organization. It has to fit! The importance of service must be included in some way.

2. Communicate this mission to every person who works for you and with you, and ensure that the bottom-line nuts and bolts of why your company is in business in known. 3. Raise the level of customer to client and communicate this constantly and consistently through written and spoken correspondence, business behavior and training.

4. Contact every client (customers, departments, suppliers etc). Review past work. Examine results. What kind of service did you provide? Was your work PROFESSIONAL? If not, correct it. Offer something free, no strings attached. The reward will be felt throughout your organization and the impact on the client will be lasting. Needless to say, companies that have corrected past mistakes have seen their profits soar.

5. Add Value to every employee’s performance by recognizing him or her on a consistent basis for exceptional work. Conduct weekly meetings that focus only on service performance. This includes service between departments.

6. Ensure that you are delivering high quality goods.

7. Communicate…did we already say that?

8. Go to the ends of the Earth to satisfy your clients and understand that teamwork is key. Make it clear that everyone has to do WHATEVER IT TAKES to achieve top performance and Client satisfaction.

9. Spend time and money training your people. Even if you are the only trainer. Most people want to do a good job, however many of them have no idea what they are supposed to be doing or how to do it!

10. Conduct constant evaluations of your company’s performance. There are lots of things that you need to know about your company. The most important is: how are you doing? I mean the big picture, not your profit balance. Insist on continuous evaluations (even of yourself) and use this incredibly valuable information to improve.

11. Invite people in from outside your organization for insight, advice and experience. 12. Market your product and services. 13. Invest in TRAINING…did we already say that?

Reputation is EVERYTHING

We know you are wondering which companies were listed as the worst. Well, sadly there are too many to even discuss. Furniture companies that have no idea what you ordered and paid for; department stores that force customers to search for a place to pay and offer almost no accountability should the item purchased turn out to be faulty; banks that treat their clients like nuisances; automotive repair shops that charge people for something and give them something else (like a used rusted battery). The list is endless. Ad hoc business practices, corruption and resistance to change are definitely not characteristics that will carry us into the Service Age. Tommy Weir and Christine Crumrine are from the Beirut-based CrumrineWeir, the global leadership experts.

January 1, 2005 0 comments

Finance

Q&A: Semaan Bassil

by Executive Staff January 1, 2005

written by Executive Staff

E: Byblos Bank today is very active in addressing new markets. What are the most important developments and what are the reasons behind them?

Three years ago, the bank set up a strategy to start focusing outside of Lebanon, because the economy of Lebanon is small and our bank is big compared to the size of the economy. Last year, we opened a bank in Sudan and have been doing very well together with our partners, the OPEC Fund and the Islamic Development Bank. Also, over one year ago, we applied for a banking license in Syria. Since the country is opening up slowly, we only got the approval to set up there in October 2004. In the meantime, we’ve been preparing ourselves, conducting training and putting systems in place to be able to open in Syria by the first quarter of 2005. Then we very recently got the approval to open a Rep Office in the United Arab Emirates. In addition to that, we have been looking very seriously for the past year at two new markets. We are working on two different countries and are still deciding in which to open a bank first. Basically, we are implementing what we set as a strategy plan a couple of years ago, in terms of expansion for risk diversification and profit stability and diversification.

E: Does this expansion connect closely to your work in Lebanon?

The base of our expertise for the regional expansion will come from Lebanon and our focus in Lebanon has always been to continuously implement best banking practices, including corporate governance and Basel II requirements. Our benchmark in terms of international best banking practices is not the Lebanese market but the EU banking community.

E: What led you to orient yourselves so explicitly on European banking standards?

The reason why it has always been our concern to benchmark with the international banking community is that we already have a presence in Europe. As we follow these best banking practices in Europe, they are not something new to us. But while we are present in Europe, our activities there are limited and very specialized, making it important to have the same best banking practices at our head office. Today, the head office here is implementing all the best banking practices in Europe. We continuously bring in consultants, on information technology, organization, audit, etc. You have to follow international banking rules if you want to be involved in international business today, to be accepted in the international community and be in the club.

E: Do you see yourself as being a role model for other Lebanese banks in this regard?

We are role models in different areas. Whenever we buy an important package or an important system other banks are interested to follow suit, because we have already done the due diligence on this product. There can also be a synergy for other banks because they could benefit from the support. I can give you an example: we acquired a core banking computer system called Globus from Temenos. It is a number one selling banking system in the world today and we are the model because we have implemented the system throughout the bank. We have become like a regional center in receiving all interested banks who visit us here to see how we have implemented it. Also for our Human Resources system, we just now signed with the suppliers of the number one HR system in the world, Peoplesoft. Other big Lebanese banks are following suit and also interested. A lot of suppliers know if they get through Byblos, others will follow.

E: How do you see your role vis-à-vis the community? What makes Byblos Bank important to the Lebanese?

Traditionally and throughout the war, banks used to lend against real security. When after the war everybody had needs to renovate their house, buy a car etc, Byblos was the first to propose long-term residential mortgage loans, car loans, and loans to small businesses. Today, we have 20% market share in the Kafalat loans, which go to small businesses at very low rates. In car loans, retail loans, and housing loans, we were the first to take the risk to create and launch these products and today still have the largest share in the market.

E: It is correct then, that Byblos is known as a bank with emphasis on the retail market?

We also built credibility with international lenders. In order to lend long-term, we needed to raise long-term funds. For example, we are the largest borrower from the IFC, the only user of a fund from the European Development Bank, and the only borrower in Lebanon from the Agence Française de Developpment; we are clients of the OPEC Fund, of the Islamic Development Bank. The credibility we built with international agencies also opened the door for these lending agencies – they asked me to go to Madrid to make a presentation on the benefits of EIB loans to Lebanon, because we have been the most active and professional in packaging and correcting the loans. What are the benefits of that for the country and our bank? When we decided to go to Sudan, a country that is emerging and needs funding, it was very easy for us to convince the OPEC Fund and Islamic Development Bank to come with us. It is a way for us to bring these regional and international financial partners with us into new countries to expand.

E: Does your outreach also extend to non-banking activities?

In terms of community involvement, we try as much as possible to attract the non-resident Lebanese, who are actually an important part of the Lebanese economy. So we have been launching products like the housing loan for expatriates. We try to bring the expatriate community back but also help the country in history, art and culture. For example, Byblos Bank co-sponsored excavations in Saida with the British Museum and sponsored a book, which traces the archeological findings of Lebanon over the last ten years.

E: Could you encapsulate your vision for Lebanon?

We have been making money in this country. In order to make more money, we have to help the country in terms of improving the standard of living. In a poorer community, we will not be making money. We cannot make money only on a limited wealthy segment. If you have a bigger middle class, you can make more money. Our bank also is not short-term oriented but long-term oriented. We have as much as possible put pressure on the government so that they would take action, because politics here have been affecting the economy and economic growth a lot. If there is no economic growth, we cannot lend more or make more money and businesses will fold. In terms of business lobbying, we have been putting pressure on the government not just to criticize them but for them to improve. I don’t know how successful we have been.

E: When Byblos decided to open in Sudan, was there a special affinity involved?

When we knew that Sudan was going to open up, we knew we could add value there because there were no foreign banks and the local banking sector is very small and under-capitalized, with little professionalism. Instead of going to Canada or America, we can add more value on Sudan and make more money. But what is very important is that in Sudan we compliment the local banking sector and do something that other banks cannot do. We are 100 % Sudanese bank under local law and want to act as a Sudanese bank, not as a Lebanese entity. Sometimes foreign banks can upset a local banking sector and we are very sensitive to these issues.

E: Does this sensitivity reflect your experiences of being a local bank in Lebanon facing the behavior of multinational banks pushing into the country?

Yes, of course. We learned from them not to repeat their mistakes. But we cannot generalize – these were not all of the foreign banks. If the foreign competition is healthy, we respect it. We have not been bothered by foreign competition as such but by certain attitudes that we would like to not have when we go to a foreign country.

E: You have grown up with Byblos Bank. How does it affect and shape you as a person to grow up with a bank? Did you want to be a banker since you were able to walk?

If you decide to do something, you got to be the best in doing it. Otherwise, don’t do it. Having been brought up in a banking environment where my maternal grandfather was also a banker helped me a lot to be interested in that field. I never thought about doing anything else.

E: How do you feel about building a banking dynasty? Is that something that you aspire to, or see your family as having done already?

I am more interested in building an institution. This is my number one priority. We know that our achievement – whether it was my grandfather, my father or myself and hopefully my children if they want to be in banking one day – is that the bank will remain. We do help to put the systems in place to make sure that the institution will continue to survive and our satisfaction is to be able to have been contributing in making it strong and not only a local institution but as a regional institution.

E: If a business wants to grow, it needs to be hungry. Byblos Bank wants to grow. Where does your hunger come from?

The hunger for always being careful and always being ahead of the others comes from looking outside, from looking at the best and the best banking practices, which we don’t have yet.

E: How do you implement leadership in your organization?

The challenge is to create an internal system that when such a crisis happens, there is a check and balance somewhere. That is why we are the only bank to have set up and independent audit committee that reports to the board of directors, not to the chairman. This external audit committee has been very active and has only been in operation for the last six months. But we even now brought in a consultant to make an audit of our audit people, to see whether they are doing a good audit. This openness has been imprinted throughout the organization by both my father and grandfather and it has become a culture.

January 1, 2005 0 comments

Business

Static or democratic?

by Michael Young January 1, 2005

written by Michael Young

The writer Samir Kassir recently published an essay in French titled, “Considerations on the Arab Misfortune,” in which he opened with a laconic phrase: “Is there any need to describe the Arab misfortune? A few figures would be enough to reveal the gravity of the impasse in which Arab societies are blocked.” He observed that what was unusual in this misfortune was how it was “felt even by those who, elsewhere, would be seen as having been spared [misfortune] … which has taken hold in terms of perceptions and feelings.” The year 2005, because of several possibly dramatic deadlines, will arguably be that in which the Arab world can go in one of two directions with respect to open societies: toward their decisive embrace, or their indefinite postponement.

In late January or February, if things go well, Iraq will hold a much-anticipated election that has all the makings of a seminal event, but also the potential to divide Iraqis along sectarian lines and spur a bloodbath. The success (or failure) of the venture will make or break America’s declared ambition of using Iraq as the lynchpin for regional democratization, amid general skepticism (much of it ill-willed) that the Bush administration can succeed. In early January, the Palestinians will hold a presidential election to choose a successor to Yasser Arafat. While less momentous for the region than the Iraqi poll, the event will determine whether Palestinian society can shake off the kleptocratic rule of many in the “old guard” and select a leader with enough legitimacy to take control of the INTIFADA, engage Israel in negotiations and make concessions if or when necessary. In that context, the popular favorite must surely be the imprisoned Marwan Barghouti, who, upon Arafat’s death, saw himself upgraded to the role of “Palestinian Mandela.”

A third episode, or trend, to follow is the progress of various regional reform projects floated in 2004, all aiming to liberalize societies, make governments less stifling and place states on a track to genuine economic and social development and the fair redistribution of capital, while building up institutions to protect an array of rights. Among the things to watch out for is progress in the G-8 reform plan passed at the Sea Island summit, but also the so-called Alexandria document reached by civil society representatives in Egypt early in the year.

A fourth and more general development will be the reactions of other Arab societies to the first three, in particular to those changes brought about by Arab will as opposed to Western writ. Iraq’s elections, in particular, have the potential to be perceived regionally as an Arab affair if the results lead to national unity, greater representativeness and stability. The Palestinian election will be more complicated, as it will resume calls for Palestinian legislative and municipal elections to buttress a more legitimate leadership, but one also, perhaps, one that would support a more hard-line approach to Israel.

In all cases the role of the U.S. will be paramount. The Americans are in the untenable position of backing a democratic Iraq while appearing to sanction the denial of full democratic rights to the Palestinians. More specifically, the Bush administration, while supporting Palestinian elections, also seeks to shape them so they might not advantage Islamists and those most opposed to a settlement with Israel. Their fear is not of an anti-democratic pronunciamento, but of the permanent continuation of the armed struggle. However, how convincing is an argument that says “yes” to Iraqi elections but “we’ll see” to Palestinian ones?

The regional democratization impulse will be tested by two contrary tendencies: the possibility of growing American disinterest in Middle Eastern democracy if the Iraqi situation remains difficult to manage; and refusal of Arab societies to consider how an American presence in their midst might help them, directly or indirectly, loosen the power of states over their own citizens.

With the arrival of Condoleezza Rice at the US State Department, it is likely that democratization will mostly be a function of what US President George W. Bush desires. Rice, who has for long advocated a realist approach to foreign policy, has shown no real proclivity to advance democracy, and unless pushed, she is unlikely to concern herself with more than managing reform efforts while leaving the edifice of Arab autocracy largely intact. Conversely, there seems little hope that Arab civil societies will in their majority take the Americans up on their democratization promises. There has indeed been a response to the G-8 reform project from Arab civil representatives, in the context of the plan’s Forum of the Future, a sort of latter day Helsinki framework to allow an ongoing dialogue on reform between the Arab world and the G-8. However, only an Arab minority is willing to engage the West.

These are the dilemmas for 2005, and they bode ill for future regional democracy and open societies. Yet, rarely in the region’s past has the stimulus for democracy been as powerful and the illegitimacy of old-line Arab leaders so patently recognized. Arabs will have to choose: Do they want democratic reform to succeed, even if America’s hand is partly behind it, or do they prefer to harp on their independence and perhaps see all hope of domestic change evaporate as the democratic superpower sails home?

January 1, 2005 0 comments

Finance

Banking Voices – Size still matters

by Executive Staff January 1, 2005

written by Executive Staff

Georges Abou Jawdeh: President, Lebanese Canadian Bank

E: After encouraging developments on the interest rate front, Banque du Liban has once again adjusted the rates upwards. In such an environment, how can the banking sector develop a more efficient corporate and retail lending culture?

Following the Paris II meeting for donor countries to Lebanon and the Lebanese banks’ contribution of $4 billion at 0%, interest rates on credit accounts in Lebanon dropped. And as of January 2004, the banks started to revise their interest rates on debtor accounts, to be more competitive, particularly on the regional market, where interest rates are lower. It is imperative for us now to revise the costs of funds again: in order to encourage lending, banks must reduce the price of lending. At present, we are at a significant disadvantage, internationally speaking.

Just to give you an example, banks are paying between 2.5% to 4.5% interest rates on US dollar credit accounts. Abroad, the rates are at 0.5%, so the difference is significant. Banks need to reduce interest rates to reach between 6% and 9% on commercial loans in US dollars. For deposits in Lebanese pounds, banks are paying between 6% and 8.5%, thereby landing loans in Lebanese pounds at interest rates between 11% and 14%. This is why we need to reduce the cost of funds. If banks are paying a high credit interest, they will be forced to lend at a high interest rate.

The solution to this problem lies first and foremost in the hands of the government. The Lebanese government must decrease its debt, so as to enable it to borrow at a lower cost. As long as the public debt remains as high as it is now, and keeps on growing, the perceived risk will stay high, and the government will keep borrowing at a high interest rate. This in turn affects the cost of lending for corporations and individuals alike – it is a cycle.

By reducing the debt, interest rates will go down, the credit and the debtor interest rate will fall and the business cycle will regain momentum. Looking ahead, what we need in 2005 is political stability – in the region, but even more so in the country, so that the Lebanese central bank does not need to intervene on a daily basis to maintain the price of the Lebanese pound to the US dollar.

At present, the central bank has $12 billion in foreign reserves, which puts us in a good position, but is not enough to ensure long term stability. Political stability would help generate domestic and foreign investments, which could inject fresh capital into the economy, beyond merely the real estate sector. What the banks need to focus on in order to promote healthy lending and credit underwriting is how to encourage small and medium enterprises, so as to gain new clients. In a small country such as Lebanon, where big enterprises are few, the economy stagnating and the number of loans issued dropping, this is the only strategy to pursue.

Shadi A. Karam: Chairman and General Manager, BLC Bank

E: Is there any danger that the current trend of regional expansion by Lebanese banks could lead to overextension, thereby damaging either the bank itself, the sector or the economy?

The regional expansion that some of the leading Lebanese banks have engaged in over the past two years has primarily been motivated by the high level of competition and a quasi saturation of the local market. An insufficient national growth pattern, political uncertainties and the need to reshuffle balance sheets laden with Treasury bills have also been driving factors. Expectations are that a regional expansion would help diversify sources of revenue and smooth out potential fluctuations caused by domestic contingencies. Theoretically, this is a sound strategy.

A closer look reveals that the branching out has occurred in neighboring, relatively familiar markets – Cyprus, Syria and Jordan – which mitigates the risks of expatriation.

Banks such as BEMO, BLOM, Audi and Société Générale are on familiar territory and have established anchor points going back to decades of client networking. This represents an advantage, if only from the sheer risk assessment, “local knowledge” viewpoint.

Naturally, one may deplore that money invested abroad is money not invested in the Lebanese economy, which is in dire need of fresh capital. However, it may be similarly argued that the stronger our banks become and the wider their regional reach is, the higher their added value to our national wealth is. As for the potential dangers this move may represent for the institutions themselves, it boils down to their equity “cushioning” capacity. It so happens that, at least in some cases, there is a satisfactory capital base and financially sound shareholders.

There remains the issue of latent sectorial and systemic risks should this experience turn into a debacle. Obviously one has to acknowledge the risk of local ripple effects should a major bankruptcy in a foreign subsidiary occur. This has happened in the past, and could have far reaching implications. However, given the amounts of capital engaged as a proportion of the banks’ total equity base and assets, the reputation of all concerned institutions for prudent management and their risk-averse track records, I believe the peril to be negligible.

As in every strategic decision management has to make, weighing the alternatives intelligently is half the answer: is it better to stand still and let leaner and meaner banks gradually nibble on your market share or take a measured risk that insures cross-fertilization opportunities and a further reinforcement of your dominant position?

Last but by no means least, a new business opportunity presents itself to banks with a regional presence: the possibility to participate in sizable deals region-wide with clients much larger than what the local market can offer and that could prove to be well “worth the candle” as the French would say.

Gerard Charvet: Advisor to Credit Bank

E: Do you fear any repercussions from political wrangling on the banking sector in 2005? How could this manifest itself and can the banks do anything to limit any unfavorable impact to the sector?

The instability created by the latest changes on the domestic political scene as well as the 1559 UN Resolution have created DE FACTO some degree of volatility in the monetary market. The US dollar has therefore become very much in demand as a result of this instability. The current political environment could over the medium to long-term have a negative influence on depositor behavior during 2005.

The local banks could react to such a situation by raising interest rates on deposits in Lebanese pounds and hence support the local currency for a while. However, such a policy emanating from the banks can only have an impact if the monetary authorities provide their full support. Local banks have no longer the financial capabilities to carry out such an initiative on their own. The local banking environment has become, during the last few years, increasingly competitive and deposit margins have moved downwards from 3.5% to less than 2% in the last five years. In this context of uncertainty, decreasing profitability and preparation for the new Basel II capital regulations, 2005 and 2006 are hence expected to witness a step up in the consolidation process of the banking sector. It is, therefore, desirable that the banking merger law is revived in order to support the much needed consolidation process and, as a consequence, help tackle the social aspect that might derive from such a process.

Nadim Moujais: Chief Strategist at SGBL

E: 2004 saw a classic merger at the top of the industry. What can we expect in 2005, especially among the medium–sized and smaller banks as well as within the Alpha group?

The rule regarding the pursuing of bank mergers in Lebanon cannot be different, although the number of banks per capita is still high. Theoretically, as long as a bank is achieving profits and a return on equity and its risk is well covered, it can continue on a solo trajectory. However, several factors have put pressure on Lebanese banks, irrespective of their size, to move towards the mergers and acquisitions. They include the Basle II capital adequacy, solvency and other requirements; the impact of the new IAS (international accounting Standards) rules and the central bank’s inclination to fortify sound banking practice, counting, in addition to its normal regulatory role, on a bank’s proven capability of management and achieved track record, to enlarge such practice through mergers and acquisitions.

Finally there is the ever-present issue of size, in which size still effectively matters, particularly in terms of capital base and balance sheet size. Whether it is for global asset/liability management (both on and off balance sheet items), or for regional expansion, major Lebanese-based banks have used Lebanon as the cornerstone of their regional development, where the comparison is imposed with some of the regions’ large-scale capital-based banks with their diversified assets composition. Hence, the quest for mergers and acquisitions will still be real in 2005 for banks with vision in Lebanon, CETIRUS PARIBUS on the political level. The real encounter depends of course on the political developments in Lebanon and in the region.

January 1, 2005 0 comments

Industry

Industry retrospective

by Tarek Zein December 28, 2004

written by Tarek Zein

The year 2004 was one of mixed feelings for Lebanese industrialists. The global energy crisis sent crude prices rocketing to a record $55.17 on the New York Mercantile Exchange, battering a local industry already groaning under prohibitive production costs – considered the highest in the region – making them even less competitive. Lebanese industrialists were forced to pay $400 for the ton of diesel, while their regional counterparts were paying a shade under $200 for the ton.

Nonetheless, despite all this, 2004 was the year in which Lebanese industrialists were still able to increase exports by 43.5% during the first nine months of 2004 compared to the same period in 2003 – marking a new export era for the sector.

However, the government has, yet again this year, persisted in believing that the service and tourism sectors were the only engines of economic recovery and has once more refused to set a clear an effective industrial policy, reduce infrastructure costs and ease labor laws.

A prime example was its inefficient handling of Electricité du Liban (EDL), forcing local industry to pay a hefty 13 cents per kilowatt hour, compared to 3 cents in Egypt, 3.2 cents in Saudi Arabia, 3.7 cents in Syria, 5 cents in the UAE, 6.4 cents in Jordan, and 6.5 cents in Turkey. Add this to the high costs of labor, land, industrial components and energy, and the reasons why Lebanon’s industrial sector is still the most uncompetitive in the region are clear. This is reinforced when statistics from the Lebanese Industrialists Association (LIA) point that the cost of production, including the cost of energy, has increased by more than 37% since 2000. And to make matters worse, because of the continuously spiraling debt, local banks’ high interest rates on loans has once again made it difficult this year for industrialists to access much needed money to invest in productivity.

To help relieve the pressure caused by the energy crisis, in the second quarter of 2004 the government promised industrialists to lower their electricity bill by reducing the utility’s price from 13 cents per kilowatt hour to 6.6 cents. As of today, this promise has still not been kept.

Export growth

According to figures from the ministry of industry, industrial exports totaled $1.087 billion for the first nine months of the year compared to $757 million and $624.4 million for the same periods in 2003 and 2002, respectively – a 43.5% increase over 2003 and a 74% increase over 2002 (see box). The main reasons for this substantial increase in industrial exports, which represents approximately 95% of total national exports, can be attributed to the ever-strengthening euro versus the dollar – making Lebanese products more attractive to Europe – and the opening of the American fueled Iraqi market.

But these reasons are not solid enough to anchor a future success of the country’s industrial sector since they are neither orchestrated by the Lebanese government nor controlled by the Lebanese industrialists. However, these events have opened a narrow window of opportunity for the industrial sector in 2004.

Raising quality

Industry in Lebanon, which represents approximately 20% of the gross domestic product, can never produce in large quantities, due to the restricted manpower and the high costs of production, and thus can never compete with regional and Asian countries. However, the potential behind Lebanon’s industry lies within its ability to produce quality products, with a high added value such as agro-food, wine, software, jewelry, furniture or high-end garment, in order to target regional and international niche markets. And if there is one main element to be remembered for 2004, it would be the industrialists’ sudden awareness to raise the quality of its products through quality control mechanisms.

Economists agree that the competitive advantage of an industry comprises two-thirds of macro-economic reasons and one-third on the ability of industrialists to adapt to its environment. And since the government of Lebanon has not yet shown signs of its willingness to counter-balance the disadvantageous macro-economic factors, 2004 was the year in which industrialists started to talk about the cost of not having quality controls or conformity assessment.

Conformity assessment is a tool that has been used by many industrial nations worldwide not only to cut the hidden costs of industrial rejects and increase efficiency through vocational training of employees, but also to penetrate markets with high product regulations and standards. And with the emergence of regional free trade agreements, such as the Euro-Med Agreement and the Greater Arab Free Trade Agreement (GAFTA), as well as Lebanon’s expected accession to the World Trade Organization, it has become essential for local industrialists to demonstrate the conformity of their products if they want to sell worldwide, or even keep a decent local market share.

The EU Association agreement with Lebanon, signed in June 2002, calls for the gradual reduction in Lebanese tariffs on EU industrial products over a twelve-year period. This period started following the entry into force of the agreement trade provisions with a five-year grace period. Thus, tariffs will be reduced from six years to twelve, when they will all be zero. On the other hand, EU markets have been duty and quota free to Lebanese industrial products since the 1977 Cooperation Agreement.

Regarding agricultural processed products (agro-industry), Lebanon received a special treatment that no other EU-Mediterranean partner enjoyed: a total exemption on the industrial element of all exported agricultural processed products in addition to a total exemption on the agricultural element of 77 similar products as well as a quota free system. In return, Lebanon will benefit of a five-year grace period after which it will progressively reduce its custom tariffs on the European processed agricultural products imported over a twelve-year period. This dismantling will be complete as regards the products that are subject to a 5% tariff and will be reduced to 30% for the other products. Such an agreement would, in normal cases, be very beneficial for Lebanon since the 500 million strong European markets is completely open to Lebanese produce.

However, one problem emerges: very few Lebanese producers can export towards Europe since an overwhelming majority cannot meet the European standards. And this brings along another problem: if Lebanese producers cannot secure new markets, and tariffs on similar imported products from EU or Middle Eastern countries are to be decreased, then industrialists will soon be facing one of the fiercest competition on their home turf, and many will lose. However, if the quality of products is raised and international standards are met, then not only would Lebanese products be able to enter into the European market, but they will also be more attractive regionally and locally.

This concept has been known by local industrialists for some time now, but very few have undertaken the difficult task of raising the quality of products.

Financing and investments

Nevertheless, when the statistics for imported industrial machinery and equipment are analyzed, one can see that a new trend is taking place. Up to September 2004, some $106.8 million worth of industrial machinery and equipment was imported into Lebanon – a 36.5% increase compared to the same period last year when only $78.2 million was imported. Out of the total industrial machinery and equipment imports, 27.3% came from Italy, 25.8% from Germany, 6.4% from China, 4.8% from the USA, 4.1% from Taiwan, 3.8% from France and 3.4% from Switzerland.

The relative improvement in industrial investments has contributed to the value added creation over the first nine months and fits within the context of the significant needs for enhancing the output and quality of the productive sector.

But when other statistics show that Lebanese banks have granted just a trivial $34 million in loans to the industrial sector in the first six months of 2004 because industrialists are afraid to borrow money at the current high interest rates, then how can the industry sector modernize to survive? How can the comparative advantage of the Lebanese brainpower put its thoughts into action without having quick access to liquidity?

A survey conducted in early 2003 by the Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon (CCIAB) to reveal industrialists’ perception of problems and hurdles that impair their activity shows that a striking 54% of respondents ranked expensive bank credit at the top of the list of financing problems industrialists have to contend with. 29% of the respondents believed that limited access to subsidized financing was the main financing problem, while 15% believed the main financing problem to be that bank credit requires excessive collateral.

It is true that industrialists have been very creative in finding new sources of financing and that there are many new financing programs that banks have implemented with the help of the European Union Commission in Lebanon and the European Investment Bank, but one of the biggest problems that exists today is the fact that there are very few investors which are willing to risk investing in a sector that is not on the top of the government’s agenda and in a country without an independent judicial system that fosters investments.

Over the last 10 years, local manufacturers have invested just over $1 billion to improve output – a figure which is inconsequential when the sector’s potential is put in perspective.

At the same time, statistics from the Investment Development Authority of Lebanon (IDAL) also show how the government’s view of a Lebanon that caters only to services and tourism has hurt the industrial sector: out of the $1 billion investments that went through IDAL between the 2003-2004 period, only 0.3% was invested in industry, 0.4% in the agro-industry and 1% in the technology industry.

Prospects

The potential behind Lebanon’s industrial sector lies within its ability to create high added value products fit for export. For this reason, industrialists’ quest to raise the quality of products will speed up throughout 2005 due to targeted programs initiated by the EU Commission (see box). However, the productive sector will not be able to maximize its returns to the national economy without a long-term industrial plan set by the government. The government has to realize that controlling Lebanon’s spiraling national debt doesn’t only depend on cutting expenditure costs, but also by boosting productivity. According to the latest industrial figures from the Central Administration of Statistics, there were 824 newly registered establishments in 2003, with a working capital of LL178,902 million, creating 6,721 new jobs. It is anticipated that some 10,000 new jobs will be created by the industry sector in 2004. The Lebanese Industrial Association is confident that if the government sets up an equipped industrial park, where infrastructure and natural gas is available and where one can obtain a building permit in adequate time, then industrialists can easily create some 15,000 to 20,000 jobs per annum and increase exports to $3 billion within three years.

(Box) The question of the EU

To help fill a gap and speed up banks’ loaning activity to the industrial sector’s thirst to raise quality, the EU Commission in Lebanon began a new 15 million euro program in October 2004 called Quality Project and will re-activate another one – the European Lebanese Center for Industrial Modernization (ELCIM) – in the first quarter of 2005.

The four-year quality project will seek to start the development of the conformity assessment institutional chain in Lebanon and aims to improve competitiveness and access to Lebanese products to international markets and ensure an improvement of consumer protection. The project includes three main components: to support the government in the definition of a legislative and regulatory framework; support the development of institutions which have an essential role in analyzing the quality and conformity of products; raise the awareness of enterprises to make them adopt better practices for improving product quality.

The ELCIM project, which will be known as ELCIM II, is a program initiated for the support of small and medium sized industrial enterprises and hotels in order to develop their performances and promote their products to achieve international standards. Their services involve Technical Assistance and Financial Assistance. The Technical Assistance begins with a free diagnosis and could go as far as the action plan and the implementation phase.

As for the Financial Assistance, ELCIM provides advice on long-term financing and capital investment, and facilitates the financing process through its prominent contacts with the relevant bodies. The European Investment Bank has set up a 60 million euro investment fund with ELCIM, which will be distributed, under certain terms, via 11 local banks.

(Box) A good year for the export 2004

The industrial sectors that gained the most ground during the first nine months of 2004:

Prepared foodstuffs producers with a 3.8% increase to $108 million.

Mineral products producers with a 107.5% increase in export to $83 million.

Optical instruments and apparatus producers with a 100% increase to $10 million.

Base metals and articles of base metal producers with an 89% increase to $163 million.

Machinery and mechanical appliances producers with a 76% increase to $214 million.

Fats and edible fats and oil producers with a 71.4% increase to $12 million.

Stone, plaster and cement goods with a 66.6% increase to $40 million.

Plastic producers with a 55.55% increase to $42 million.

Wood and articles of wood producers with a 54.54% increase to $17 million.

Miscellaneous and manufactured articles with a 44.8% increase to $42 million.

Footwear, headgear and prepared feather producers with a 42.85% increase to $10 million.

Chemical products producers with a 26.5% increase to $105 million.

Textile and textile articles producers with a 24.4% increase to $56 million.

Transport equipment producers with a 23% increase to $16 million.

Paper and paperboard producers with a 21.6% increase to $73 million.

Raw hides and skins, leather and fur skins producers with a 10% increase to $11 million.

December 28, 2004 0 comments

Region

Region VOX

by Executive Contributor December 28, 2004

written by Executive Contributor

Samir Kassir: Author, university professor and columnist for the Lebanese daily An Nahar.

What can Palestine after Arafat realistically expect in terms of domestic changes, particularly the emergence of a legitimate new leadership, internal unity and a stable domestic political order? How will this affect the ongoing fight against Israel? What can Palestinians expect in terms of international support in their claim for statehood and in terms of concessions, if any, from Israel?

The problem in Palestine is occupation, not the lack of democracy as George W. Bush has argued. True, there are some shortcomings in terms of transparency, but there is no problem of legitimacy, at least until Yasser Arafat’s death. That is why, and contrary to what is commonly said in the Western media, Arafat’s death does not provide an opportunity, but is rather a genuine loss that the Palestinians will only overcome with tremendous effort.

The Palestinian leadership has shown great maturity in managing a smooth transition, but that shouldn’t mislead anyone to assume that everything will be easy. Problems could well appear after the January 9, 2005 presidential election; despite the formal legitimacy the poll is likely to give to the favorite, Mahmoud Abbas. The real problem could be, once again, Israel’s refusal to give Abbas anything in exchange for his commitment to the peace process.

It is clear that Israeli Prime Minister Ariel Sharon is not ready to concede anything to the Palestinians. His plan for a withdrawal from Gaza is not linked to the Middle East “road map.” He is offering “Gaza only,” not “Gaza first.” And it is not likely that the Bush administration will stand by its commitment to the “road map.” The diplomatic efforts that followed Arafat’s death seemed to be more form than content, or rather it was a post mortem effort to prop up the lie that Arafat had been an obstacle to peace. In the end, I don’t think 2005 will be a crucial year unless there is fundamental change in Israel.

* * *

Chibli Mallat: Author, lawyer and law professor at St. Joseph University, Beirut.

How realistic is it to hope that Iraq will make, however tortuously, a successful transition to democracy and stability in 2005? What more needs to be done to win the confidence of all Iraqis that this mission is for the national good?

Beyond the elections of January 2005, the transition in Iraq will be defined by a new parliament, a new government and eventually a new constitution. What happens next year will depend on these three institutional pillars working out. The January elections are key: the configuration that emerges will face a number of constraints, some of them with deep roots in Iraqi history, others more recent.

The major problem in Iraq arises from its tripartite sociological division between Arab Shiites, who make up an absolute majority seeking power commensurate to their numbers, Arab Sunnis, who represent 15% to 20% of the population, and Kurds, mostly Sunnis, who represent about 20% and feel distinct from the Arab majority. Unless all groups are represented in government, Iraq will remain fragile. The secessionist trend amongst Kurds is real, and their accommodation will depend on their effective role in government and the resolution of potential conflicts in areas of Arab and Kurdish settlement, especially Kirkuk.

More difficult to solve is the issue of majority power in Baghdad among the Arabs, as the legacy of Sunni dominance is not easily jettisoned. For stability to be restored, a difficult combination is needed: reducing through force the armed resistance and politically co-opting Sunni leaders under a scheme where they no longer play a dominant role in national politics.

Ammar Abdulhamid: Coordinator of the Damascus-based Tharwa Project on minorities and currently a visiting fellow at the Saban Center for Middle Eastern Studies at the Brookings Institution in Washington DC.

What role can Syria expect to play in 2005? Do you consider the current leadership capable of seriously moving forward on domestic reform, particularly political and economic reform; and if not, what alternatives does the future hold?

The year 2005 will be critical for the Syrian regime. Pressures on it from the US are likely to continue now that President George W. Bush has been reelected. Meanwhile, Syria’s presence in Lebanon will bring pressure from Europe as well, especially France. If Syria signs its association agreement with the European Union, this puts the regime under nonstop scrutiny and will test its ability to develop a serious program of economic and political reform. If it fails to do so, the regime will likely be seriously isolated internationally by year’s end.

Do the reform elements in the regime appreciate the seriousness of the situation?

Their previous record betrays a propensity for halfhearted steps and for backing down at crucial junctures. Meanwhile, Syria’s political opposition has so far proven unequal to the task of providing alternative visions that can allow it to negotiate a role in the decision-making process.

Independent civil society actors and organizations, therefore, seem to represent the only hope for change. But unless laws governing media and associational activities are liberalized, the ability of these players to have influence and to compensate for the regime’s and the opposition’s shortcomings will remain limited.

Michael Scott Doran: Author and assistant professor of Near Eastern Studies at Princeton University.

Will Saudi Arabia seek to take advantage of the general letup in American displeasure (paralleled by an apparent cutback in terrorist actions) and seek to implement reforms and improve its political and economic transparency? If so, why? If not, why not?

The Saudi family will muddle through, avoiding all serious reforms. It is internally divided and incapable of reaching a consensus. The huge spike in oil revenue and the weakening of Al-Qaeda has taken the heat off, giving Riyadh non-reform policy options that few Arab regimes enjoy.

Politics is a contest between clerics and liberals, who are deadlocked. Traditionally, however, the clerics hold the advantage. In addition, they have helped to strengthen the government against Al-Qaeda. Riyadh, therefore, will appease them by refraining from enacting the liberals’ reform agenda.

Washington will do little to strengthen the liberals’ hand. With Iraq in turmoil, a nuclear Iran looming, and oil prices at record levels, the Americans will, as usual, opt for stability. Riyadh will throw them a bone by enacting meaningless reforms (the municipal elections), which it will trumpet as the bright dawn of democracy.

While the Islamists sometimes talk about transparency, they will be satisfied if the government merely places the liberal reformers on ice while continuing to direct resources to the clerics. Having said as much, the desire for significant reform is palpable. The belief that the status quo is untenable pervades many significant Saudi groups. Such a climate can generate unpredictable outcomes.

Michael Young: Opinion page editor at the Daily Star newspaper, Beirut

If we assume that the second Bush administration is in a position to seamlessly pursue it regional objectives, what changes do you expect to see in the region over the next four years?

The first matter at hand will be for the Bush administration to reaffirm what its regional objectives are. I continue to believe that Iraqi democracy, as a keystone of regional democracy, was a leading US ambition in the run-up to war in 2003, although the administration was too convinced that that justification wouldn’t hold water with the public to over-emphasize it. As the situation in Iraq has gotten worse, democracy is still on the priorities list, but has been kicked down several rungs in favor of Iraqi security. Yet for the US-led war to be meaningful, the administration must reassert the primacy of its democracy objective, on the sound grounds that Iraqi democracy is vital to spurring regional pluralistic impulses, which in turn would make the US safer by providing Arab populations an alternative to militant Islam of the sort that led to September 11.

That, of course, requires success in Iraq, which is still possible if there is patience and far less of the blundering that took place once the war ended in April 2003; it will also mean putting the Palestinian-Israeli negotiations back on track. Given the Palestinian leadership vacuum and Israel’s reluctance, I’m not optimistic, but the U.S. can no longer be seen to advocate democracy and liberty for some Arabs, but not for others. Four years is enough for substantial success in Iraq and progress on the Palestinian issue, but the administration will have to hit all the right buttons, which will depend on the bureaucratic give and take in Washington.

December 28, 2004 0 comments

Region

Mervat Tallawy

by Executive Contributor December 28, 2004

written by Executive Contributor

The Secretary General of the United Nations’ regional agency – ESCWA – speaks up on the factors destabilizing the Middle East and the challenges facing her organization in promoting economic development in the region

Four years into her mandate, Egyptian-born Mervat Tallawy finds herself at the helm of an organization attempting to promote economic development in a region bogged down with conflict, stunted economies and rising trends of religious fundamentalism. Yet despite the overwhelming challenges, the secretary general of the Economic and Social Commission for Western Asia (ESCWA) sees strides being made, through regional cooperation and the gradual prioritizing of socio-economic issues.

It’s been a challenging year for the ESCWA region, not simply in political terms, but also economic terms. Despite record-level oil prices, most Arab countries saw their GDP growth decline, and the region as a whole suffered from a 16% unemployment level and a fall in investment. What do you feel are the dynamics behind this?

The main factor behind this is the political instability in the region. The continuing Israeli-Palestinian conflict, as well as the war in Iraq is affecting the region as a whole. It makes for an environment that is not conducive to investments, raises interest rates, and generally hurts the overall economy. As long as these conflicts persist, the region will continue to suffer, politically, as well as socially and economically.

What are the key economic issues that the region’s governments need to tackle, in order to promote economic and social development?

There are several problems, both on the economic and social front. The region is facing a population growth more rapid than in any other region in the world, which needs to be addressed imperatively. Unemployment is another major challenge, most notably among the youth, and educated youth at that. Furthermore, the afore-mentioned political instability has served as an impediment for regional economic integration. Thus, you find yourself with a fragmented area, composed of several small markets, which limits the movement of goods, people and services. It deprives these countries of opportunities for trade and investment.

Another consequence of the political instability is the rise of Islamic fundamentalism, out of frustration and disillusionment with the perceived incapacity of these governments to solve the ongoing conflicts. The result is the formation of groups that work against the governments, and the propagation of a culture of fanaticism, conservatism and rigidity. What is particularly worrisome is that this trend is spreading among the youth, and you find yourself with a younger generation that is even more rigid that the older one. This is not conducive to change, and it slows down progress in a number of areas, such as women’s rights.

How likely it is that the elections in Iraq will go ahead as scheduled? Is holding imperfect elections on time preferable to postponing the elections until the climate of violence and insecurity has calmed down?

This is a very difficult question to answer. We are hoping the situation on the ground will calm down over the course of the next two months, so as to enable us to go ahead with the elections as scheduled. The two options put forth in your question each have their advantages and disadvantages. The preferred solution is to go ahead and finish with these elections as soon as possible, so as to enable the country to quiet down, become more secure, and have a legitimate government that can start working on getting life back to normal again. But of course we are facing many risks here, notably that of a boycott of the elections by various factions, the possibility of attacks, and this is all very worrisome.

So you expect a stabilization of the country to follow these elections?

I believe this is what will happen. It has to become normal again. The destabilization of Iraq has had disastrous consequences for the local population, as well as for the region as a whole. This is a small region, where the ripple effect of such a conflict is considerable. In the 19th century, the entire region was integrated, and people could move around freely. So talking about regional integration is not just words, it has happened before and it should happen again.

What can the rest of the Arab countries do to improve the situation in Iraq? Is there a genuine political will to assist the country?

There is a will to do so, and it has been demonstrated on several occasions, most recently with the meeting of the interior ministers of Iraq and its neighboring countries held in Tehran to discuss how the region could assist the country. Concrete action is being taken. There is cooperation to monitor the borders, so as to stop foreign fighters from infiltrating the country – a very difficult task considering the length of the Iraqi border. Arab countries have agreed to reschedule or forgive Iraqi debt, they have contributed to Iraqi capacity building by offering training, they are partaking in the development of a coherent and comprehensive international strategy for Iraq by organizing conferences such as the one held in Sharm el-Sheikh in November. Thus, action is taken both at the operational level and at the policy level. It is in their interest to do so.

ESCWA has not yet been able to go into Iraq to assist with the reconstruction of the country on the ground. When is your agency planning on doing so and in the meantime, what are you doing to help the country?

Due to the serious security concerns, ESCWA cannot work in Iraq for the time being. But the agency has actively been assisting the country through a series of training courses held abroad. We held a course on election training for women here in Beirut in July in collaboration with the Woodrow Wilson Center. We had another one for university professors, who toured the universities of Lebanon. We’ve organized ICT (Information and Communication Technology) training for universities. We have also been assisting the Iraqi Ministry of Planning elaborate reconstruction policies for the country, and provided it with statistics. We are submitting a number of projects through the Iraq Trust Fund, which focus on rebuilding basic infrastructure, capacity building and human resources development. With regards to infrastructure, we will be working on alleviating the shortcuts of power and water through mobile units. On the capacity building front, we are strengthening civil society and federal unions so they in turn can assist the government institutions while they are in the process of being rebuilt, and provide services to the population. It is worth noting that ESCWA has always had strong ties with Iraq, which hosted the agency for eight years during the Lebanese civil war.

How good is the UN’s cooperation with Arab organizations and nations in comparison to that in other regions of the world?

Overall the cooperation is satisfactory. It is stipulated in a resolution that the UN should cooperate and coordinate with the intergovernmental organizations of the region in which it is operating. We have regular, bi-annual meetings – the next one is being held in Beirut in May 2005 – where we gather with regional organizations to discuss our collaboration and how to improve it. We need to strengthen it in certain areas, but in many domains, ESCWA is successfully collaborating with organizations such as the Arab League, the Gulf Cooperation Council and the Islamic League. Areas where our collaboration has been particularly successful have been with regards to the environment and sustainable development, social issues such as gender work, help for senior citizens and disabled people. Through our cooperation we have been able to present a unified Arab position at major international conferences such as the Johannesburg World Summit on Sustainable Development, the Madrid Conference on ageing citizens, the Doha trade talks, the Monterrey International Conference on Financing for Development, the 10 Years After Beijing Conference…. On the other hand, we need to further strengthen our cooperation in areas such ICT and transportation – be it ground, maritime or aerial – so as to further integrate the region economically.

Are there any systemic constraints making ESCWA’s progress slower than it should be?

The majority of our member states give primary emphasis to political issues – the occupation of Palestine especially. Seeing how our mandate is to promote economic and social development, this has posed a challenge to us. It will take some time for the Arab countries to give these issues the attention and priority they deserve. However, I do believe things are starting to change. There has been a gradual shift toward paying more attention to economic issues. Hopefully, this trend will persist and come to encompass social issues as well.

How much can ESCWA do to help promote a fairer picture of the Arab region internationally?

There is a very fine line to tread here. The UN is obligated to accurately portray what is happening on the ground, including the negative aspects and the lack of progress in certain areas. However you are right to say that generally, the Arab countries are portrayed as being worse than they are. Yes, this region is fraught with problems, but there has been some progress, and this is not being reflected in the portrayal of the region. Take the progress that has taken place with regards to women’s issues for instance. Morocco now has a revolutionary new Family Law that grants women equal rights in a number of areas, and has introduced a 30 seat quota for women in parliament. Sudan has the largest number of women in parliament in the region, and the highest number of women judges. Oman now has two or three women ministers. In Saudi Arabia, a successful businesswoman – Lubna al Olayan – was elected to the board of a major bank. Nobody ever talks about this.

From your own personal perspective, what have been the challenges in running this organization, especially considering the fact that the beginning of your mandate was shortly followed by September 11?

From a management perspective, the challenge has been to change the bureaucratic mentality as ESCWA, adapting the organization to the global changes taking place and getting it to work as a collective team, rather than as separate, compartmentalized units. But these are standard management challenges. In terms of the agency’s mandate, the challenge has been to show the governments of this region the value of having a locally-based, mini-UN here to help them, and to promote regional cooperation so as to achieve a more integrated Arab market.

What have been the highlights of the four years of your mandate so far?

There have been many: the fact that we have succeeded in gaining respect, recognition and credibility with the governments of this region; the fact that our reports are as widely read as they are; the fact that we have contributed to establishing a unified Arab position in the context of international negotiations, such as the forum of the WTO. I am also proud to have been able to show to Arab leaders that an Arab woman can successfully run a big international organization.

December 28, 2004 0 comments

Real estate

Real Estate Retrospective

by Peter Speetjens December 7, 2004

written by Peter Speetjens

Fuelled by the continued influx of Arab nationals and capital, Lebanon’s real estate sector continued to grow in 2004 by an estimated 20%. Solidere had an outstanding year, as the Beirut Central District experienced increased demand for property, while on the retail side, big is beautiful seemed to be the theme as ADMIC braced for the end-of-year launch of its Dora shopping mall, the biggest so far in Lebanon.

Overview

Key indicators, such as cement sales and the number of construction permits, showed a healthy growth in the construction sector, while the number and value of property transactions increased significantly compared to 2003. Despite a rise in price, cement deliveries amounted to 1.23 million tons during the first half of 2004, an increase of 6.2% compared to the same period in 2003. It should be noted though that part of the increase was due to increased exports to Iraq. The Order of Architects and Engineers reports that construction permits grew from 4 million m2 during the first half of 2003 to 4.3 million m2 in the six months of 2004, which is similar to the tail end of the 90s reconstruction boom.

The geographical distribution of permits shows that Mount Lebanon maintained its 2003 lead as it accounted for 46.4% of the total, followed by the north of Lebanon with 20.2%, South Lebanon with 14.8% and Beirut which witnessed an increase of 4.5% to reach 12.8% of the total. According to Banque Audi data the number of property transaction during the first half of 2004 rose by 7.2% to 51,899 compared to the first half of 2003, while the value of property transactions grew by 27% over the same period to reach LL 1.7 billion. In the third quarter it slowed down to 22%, well above the 15% annual growth recorded in 2003, yet still a far cry from the 30% growth figure of 2002. Beirut maintained the lead in terms of value of properties sold, accounting for 35% of the total, followed by Baabda with 22%, Metn and Mount Lebanon with 15.8% and Kesrwan with 9.8%. The figures confirm that the market was dominated by high-end construction and property transaction, as the increase in the real estate market was largely driven by the Arab investors, who since the events of 9/11, continue to see Lebanon as an alternative home, holiday destination and place to invest.

Most players in the sector observed a relative slowdown by the end of 2004, which they attributed to the events surrounding the presidential elections and the attempted assassination of Marwan Hamade. The departure of Rafik Hariri as prime minister and the loss of his international clout were seen as less of a blow as many Lebanese are still optimistic that he will stage a comeback.

A 2004 report issued by Ramco Real Estate Advisers concluded that Gulf investors bought land worth some $680 million between 2000 and March 2004, noting: “taking into account the additional investment on project development the amount could easily more than double.

In that period a total of no less than 2.3 million m2 of land were sold in 109 major deals. The Arabs’ preferred destinations are the mountains, not too far from Beirut. With this in mind, 38% was bought in Baabda, 27% in Metn and 18% in Aley. Only 1% of all land deals concerned Beirut, which still represented the largest value for the Lebanese economy. Apart from the controversial Sanine Zenith project, the $1.4 billion, 100 million m2 tourism extravaganza on Mount Sanine, boasting several tourist villages and 5 hotels, as well as 18 ski slopes and a golf course, the two largest purchases of land, 368,723 m2 and 123,492 m2 respectively, were concluded by Kuwaiti investment groups in the region of Qornayel.

Residential: Manhattan on the Mediterranean

Even though most construction permits and land sales centered around Baabda and Metn, the most eye-catching and valuable developments were taking place in Beirut, especially the ongoing seafront development facing the Beirut marina in the BCD. The $200 million Marina residential tower, which will be some 150 meters high, has been half built, while the foundations of the Beirut and Platinum Towers have been laid. Next to the trio, the slightly lower tower of the Four Seasons Hotel is being built. The four high rise buildings represent a total investment of some $600 million and will significantly change Beirut’s façade in the course of 2005 and 2006. With a price tag of $4,000 to $6,000 m/2 the towers’ highly luxurious apartments are arguably the most expensive property currently available in Lebanon. Some 80% of the apartments has already been sold and this seems to be trend for most of the high end residential developments in BCD, including the Capital Gardens and Saifi II projects, which are due to be built in 2005.

Not surprisingly, Solidere had an excellent year in terms of land sales, helped by an initiative, which encouraged shareholders to sell their stock for a 15% discount on the land. More residential projects and two hotels are slated for the sea front, while the Abu Jamil area is to become a purely residential district. In spring 2004 it was also announced that the $200 million and 155-meter-high Landmark Building Riad el Solh would go ahead, adding to the BCD’s ever changing skyline. As a consequence demand for the price of land has increased, varying between $1,200 m2 inland to some $1,700 m2 on the seafront. Last but not least, after four years of delay and for a reportedly inflated price of some $12 million, Solidere announced that they are about to obtain the necessary permits needed to complete construction of the 100,000 m2 Souqs retail project by 2006.

Downtown Beirut, however, was not the only area to witness significant developments. Contrary to downtown, where 80% of investors and buyers are Gulf Arabs, Ashrafieh remains popular among the Lebanese. New, high-spec apartments are smaller, on average between 250 to 350 m2, and more reasonably priced, on average between $1,700 to $2,500 m2. The same is true for developments in areas such as Ain Mnreiseh, Hamra and Ramlet al Baida.

One of the fastest changing areas in Beirut is no doubt Gemaizeh (see box), while large areas behind the Phoenicia hotel, west of the Damascus road and along at Rue Spears have been cleared. No doubt, these current ghost towns are next in line to see some major developments throughout 2005 and 2006.

Retail: The rise of the mall

2004 was the year of the mall and 2005 will continue to be so. The $120 million ABC Ashrafieh, Lebanon’s first genuine mall opened in November 2003 and went into full gear last year. Apart from its size, the difference between ABC and existing malls, such as Verdun 730 and Dunes, is that the first truly offers a world of shopping, entertainment, food and beverages all under one roof.

Critics had doubted there would be sufficient demand for such a major development, but ABC has proved them wrong. Its 40,000m2 of retail space are fully occupied and shops, restaurants and cinema attract a constant flow of customers. In 2005 however, ABC will have to compete with BHV at Dora. About twice the size of ABC Ashrafieh, BHV is Lebanon’s first mega-mall with under its roof the country’s first Casino hypermarket, a grand department store, shops, boutiques, restaurants, café’s and a cinema. Most experts expect it to do well, seeing its excellent location between the two highways that form Beirut’s northern exit.

With rents of as much as $1,000 per m2 per year, ABC and BHV are among the hottest properties around as far as retail space is concerned. The downtown follows with rental prices varying between $800 and $1,200per m2 per year. Verdun has an average price of some $800 per m2 per year and, as a shopping district, continues to perform steadily. Prices in Hamra vary between $300 m/2 per year at both ends to some $600 for top locations in at the heart of Beirut’s only genuine high street. Following the completion of the restoration works in summer 2004, hopes remain high for Hamra to regain its leading position as shopping district. With its hotels, hospitals, banks, and universities, its history and character, the area has every potential.

In Chiah, the 50,000m2 Beirut Mall should open for business next year. In Sin el Fil, the 14,000m2 Metropolitan Mall is currently being constructed, while at Concorde square the 50,000m2 V5 Mall is planned. In comparison, the V5 will be no less than 20 times bigger than its Dunes counterpart on the other end of Verdun.

The future will tell if there is a demand in Lebanon for such a large quantity of added retail space and if there is still space for the traditional high street such as Hamra and to a lesser extent Verdun. Experts predict that shoppers may tire, after the initial excitement, of indoor shopping. One thing is certain, the increased supply of retail spaces will no doubt lead to a decrease in retail rents, which is an advantage for shopkeepers, and in the end for consumers as well.

Office: smart space sells

No major developments regarding office space took place in 2004. With an average rent of $300 per m2 per year, the BCD remains among the 30 most expensive business districts in the world, which is part of the reason that some 40% of office space in the downtown remains empty. The problem however is not only price-related. Most office space in the BCD does not meet modern international standards, but those that do, such as Atrium and the An Nahar buildings, are performing remarkably well, which is why the construction of Atrium II will begin in 2005.

Tourism:

Last year, also saw the long awaited opening of the imposing Le Royale in Dbayeh and, following the success of the $10 million Eddé Sands beach resort in Byblos, business tycoon Roger Eddé has big plans for the ancient harbor city. Aiming to attract investment of nearly $5 billion over the next 10 years, Eddé envisions turning Byblos into the Cannes of the Middle East, with a luxury marina, hotels, restaurants spas and health clubs. Most importantly however, was the government’s official approval of the controversial Sanine Zenith project. The $1.4 billion project measures some 100 million m2 of BUA on which it is planned to build several tourist villages and hotels, as well as 18 ski slopes and a golf course.

Box: Gemaizeh

The area changing most rapidly is no doubt Gemaizeh. The old quarter bordering the downtown, which still has a flavor of old Beirut, threatens to become the next Monot, as a string of small cafés, bars, restaurants, boutiques and galleries have recently opened. The revolution began in 2001 with the renovation of the Ahwat Azaz (Glass Café) and French bakery/café Paul, which “made” the corner. In 2004, a dozen more commercial establishments opened and more are expected follow, transforming what used to be a shabby if charming, quarter into arguably the hippest quarter in town.

A handful of residential projects are also in the pipeline, especially on the strip of land bordering the downtown, but also well into the quarter. Following the success of Convivium I and II, developer Kareem Bassil is building a third halfway down the main street towards Electricité du Liban. Apart from its character, one of the main attractions of Gemaizeh was the relatively low prices. That is rapidly changing. The price of land has in some locations risen from less than $400 up to $800 per m2. The rent of retail space has in top locations tripled since the beginning of the year, while asking prices for residential property has increased by 50%, though it remains to be seen if these will be realized.

December 7, 2004 0 comments

Economics & Policy

It ain’t broke but it needs fixing

by Faysal Badran December 1, 2004

written by Faysal Badran

The year 2004 revealed a great dichotomy between the “feel” of the economy – i.e., the anecdotal chatter and the empirical improvements. The primary reason for the downbeat mood was, and continues to be, the lack of political vision, and the continuing wrangling between the poles of political power. While very little true reform was achieved in the year due to this political paralysis, there were factors, not directly controlled by the local body politic that provided stability and some hope for future improvement. Taken in isolation, the net effect of the political landscape, if it continues in its trajectory of deception and unreliability, could quickly backfire and destabilize the positive elements in place. The sustained health of the real estate sector and the inflows of capital, while encouraging, are rendered fragile by the lack of true political drive to capitalize on these factors and push confidence in the economy even further. The departure of former prime minister, Rafik Hariri, for instance, has led some Gulf investors to pause for thought. Overall though, the statistical performance of the economy showed resilience, despite a political environment that continued to plumb new depths.

All available indicators point to a significant acceleration in growth, which is projected to reach 5% for the year. Strong export and tourism receipts, and a recovery in construction activity, are the driving factors behind this recovery.

The increase in growth also reflects a catch-up effect from the adverse impact of the war in Iraq in 2003. A modest acceleration of inflation to about 3% is expected in 2004, owing to increases in import prices, mostly related to the depreciation of the Lebanese pound against the euro, and of course, higher fuel prices. The external current account deficit is expected to decline by about one percentage point to around 12% of GDP in 2004, while the surge in external demand for Lebanese goods and services, mainly from the region, is expected to outweigh the impact of higher oil prices. Exports to Iraq have grown dramatically, albeit from a very low base. At the root of the improvement in the current account is a substantial improvement in the government financial balance, offset only in part by a decline in the saving-investment balance of the private sector. This development reflects the adverse terms-of-trade shock related to oil prices and the decline of private savings due to lower interest rates. This clearly shows that although the drop in rates is a positive, its net effect on the pool of savings is negative.

Sustained private capital inflows are financing the current account deficit. Although the surge of inflows recorded after Paris II is slowing down, the general reflow of Arab capital to the region continues to benefit Lebanon. If, however, the broken promises of Paris II remain, the government, especially this one, will have a tough time lining up more international sponsorship later on. Still, a potential reversal in investor confidence constitutes a major risk for the economy and highlights its overall fragility.

In addition to deposit inflows into the banking system, Lebanon continues to attract large foreign direct investment ($2 billion net in 2003), mostly into the real estate sector. Here it is important to bear in mind that although the real estate sector has been a contributor to growth, it remains to be seen whether this sector is benefiting from speculative flows from the Gulf, or whether it is a leading indicator of sustained improvement that will spillover into other areas. It is unlikely that Lebanon can rely on real estate to the degree that some pundits suggest. Without improvements in local disposable income and/or housing affordability, the real estate sector remains an anomaly, underpinned by anxious Gulf money.

On the monetary side, fueled by capital inflows, monetary growth remains strong at 12% over the 12 months ending June 2004 and the fact that domestic interest rates have not risen in tandem with international rates. As financial inflows into Lebanon moderate, monetary growth is expected to slow down in the period ahead. The level of international reserves has helped reinforce confidence, but the pace of depositor inflows will also be affected by developments in international and domestic interest rates as well as regional political developments. This remains a potential pothole, as the drop in the US dollar worldwide and the benign level of interest rates has kept pressure off the Lebanese central bank. If and when these trends reverse, it is unclear what the impact would be, though a safe guess is that it could exacerbate potential crises.

Banking sector capitalization and profitability remain high. Capitalization in major banks has increased, return on equity was 11% in 2003 and early 2004, and banks remain highly liquid. With the pick up of economic activity and the decline in lending rates, the trend increase in the share of problem loans was reversed in the first half of 2004, and problem loans now stand at 12.2% of the loan portfolio (net of provisions). Banks are also making use of the new loan-restructuring framework. However, private sector credit growth remains anemic, reflecting widespread over-leveraging in the non-financial private sector. Bank profitability may come under pressure in the period ahead as high-yielding government paper comes to maturity and international interest rates increase.

Budgetary performance in the first half of 2004 has been much stronger than expected, due largely to solid revenue growth. The primary budget surplus for the first six months of 2004 improved by about 1% of GDP, over the same period of 2003, to 2.5% of annual GDP. VAT receipts have been particularly buoyant, but revenue performance has been strong across the board. Non-interest budgetary expenditure was contained effectively. Owing to a sizeable reduction of interest charges and a projected increase in the primary balance of payments the overall government balance could decline from 14.6% of GDP in 2003 to about 8% of GDP in 2004, provided recent trends are sustained. On this basis, the debt-to-GDP ratio would decline to 178% of GDP by year end thus bringing the ratio back to its level in 2002. The decline in the interest bill (by 5.5% of GDP in 2004) reflects the effects of Paris II refinancing and low global interest rates, but also a continued decline of interest rate spreads vis-à-vis international rates. Based on recent trends, the primary budget surplus is projected to rise by about 1 percentage point to 4.5% in 2004. However, this is short of the authorities’ primary surplus target of 6% of GDP under Paris II. The positive revenue trends of the first half of 2004 will be offset in the second half of the year by the cost of a newly established cap on gasoline prices and anticipated additional transfers to the loss-making electricity company Electiricité du Liban. The downward revision to the wage bill for 2004 reflects lower than projected outlays in the first half of the year due to a nominal wage freeze. Lower outlays for other current spending are based on sizeable savings in subsidies and health care spending in the first half of 2004.

The situation of the Electricité du Liban remains a fly in the ointment. Government expenditure and revenue efforts are being undermined by the losses of EDL and imbalances in two of the social security funds. The operating losses of EDL reflect not only a gap between operating costs and the tariff structure, but also production inefficiencies; large non-technical losses, due to theft and non-collection; and governance problems. Although the government has covered operational losses of EDL, the central bank has also provided about $300 million in loans since June 2003. The central bank loans are unlikely to be repaid and thus constitute a contingent liability for the government. Total financial assistance to EDL from the government and the central bank amounted to 2.6% of GDP in 2003, and is projected to be 2.3% in 2004. Another source of contingent liabilities comes from the imbalances in the health and family allowance arms of the social security system. The deficit (1.1% of GDP in 2003) is being financed by drawing down social security reserves and is masked by the surplus in the pension fund (1.8% of GDP). In a word, don’t sell your generators.

The overall picture of the Lebanese economy, one of improvement, is clearly at risk from the political side. If authorities do not act quickly to protect the gains achieved, those gains can quickly evaporate and the fragility of our system can be exposed almost overnight. In order to protect recent achievements on the budgetary front, expenditure pressures will have to be contained, and the risks from open-ended transfers and contingent liabilities will need to be addressed. Continued expenditure discipline is required. The IMF recently expressed concern that expenditure discipline would weaken in the election period, particularly in regard to capital spending. The authorities seem confident that they would be able to contain spending, but this remains to be seen.

The problems of EDL require urgent attention. Ongoing efforts to reduce operating costs and improve collection should reduce losses at the margin. However, restoring the financial health of EDL will require deeper restructuring, political action to address widespread nonpayment, and possibly tariff adjustments. According to the authorities, a broad political consensus for reform needs to emerge for such measures to be taken.

As a first and immediate step, the IMF mission urged that EDL be made more accountable about its financial situation and that the financial support to EDL be made more transparent, rather than disguised as central bank lending. In this regard, an external assessment of EDL operations and finances would be desirable. The incorporation of EDL as a joint stock company and its removal from direct political tutelage are also key to improving governance and eventually privatizing EDL. In a sense, a depoliticizing of EDL is urgently needed, as it is both a symptom and a cause of the current impasse in many respects.

Social security imbalances should be addressed before they snowball. The gaps in the family allowance and health funds reflect a combination of unfunded mandates and escalating health costs. Some measures are being taken to contain health expenditure, but more fundamental reforms will need to be identified to protect the government budget from these growing contingent liabilities. Plans are under way to extend social security coverage in the form of minimum pensions and health insurance for retirees.

The government’s draft proposal to fund the bulk of the added benefits through increases in contributions, rather than shifting the burden to the state is a step in the right direction, but implementation will depend on the timing needed to secure parliamentary approval.

One is almost tempted to think that the improvements in the Lebanese economy are a fluke, since there does not seem to be the political will to strengthen the economy going forward, but more a continuation of the wrangling, and an attitude of denial and neglect vis-à-vis international pressures and obligations. The cornerstone of the economy in 2004 was the confidence of investors from abroad. Maybe they look through the short term political dynamics, but the fact is, without a clear path of reform on all fronts, and a drive to strengthen Lebanon’s institutions, the improvements witnessed in the year will dissolve, and we will be facing, head on, a fiscal nightmare with no one credible at the helm of power. One must look at 2004 as a year where hope triumphed, but credible policy remained illusory. The next step is for a political improvement to match the statistical one, and a clear focus on Lebanon’s economic sovereignty.

December 1, 2004 0 comments

Economics & Policy

Q&A: Georges Corm

by Executive Staff December 1, 2004

written by Executive Staff

Despite regional instability, a soaring public debt and the threat of international sanctions under UN Resolution 1559, the Lebanese economy experienced its strongest growth in seven years, largely due to a record number of tourists, increased exports and vigorous real estate activity. Yet, according to Georges Corm, the key to sustainable economic growth and greater competitiveness for Lebanon lies elsewhere. EXECUTIVE finds out why the former minister of finance is advocating a radical shift in the mentality of the nation’s economic dogma.

E: Broadly speaking, what are the major economic issues you see facing the new government for the year 2005?

Bearing in mind that this government will only be in power for a very short period of time, it will nevertheless have to tackle challenges such as the budget issue, the refinancing of the public debt, the electricity problem, and try to solve, if it has time, various problems relating to social security. Generally speaking, the social issue in Lebanon is become more and more acute, despite the improved economic performance.

E: Lebanon did indeed benefit from its strongest growth since 1997 in terms of GDP this year. Largely thanks to exports, tourism and the construction industry, the economy grew at 5%. Do you foresee this growth as persisting in 2005?

Figures of growth are very political in Lebanon – they are not based on any serious national accounting. They take a few indicators and make their own basket, giving a certain weight to each component, and according to how much weight you give to the various components, you may end up with figures indicating a negative growth, or a very positive growth. Thus, I would not give too much importance to this 5% figure of growth. Just the other day in the paper there was somebody from an industrial association saying that the figures for exports are artificially boosted by the price of gold for instance, because we export a lot of raw gold. There hasn’t been any real improvement in the productive capacity in the country.

E: What about the boom in tourism and construction? Has it not played a crucial role in boosting the economy?

The tourism industry has indeed benefited from significant growth, but I wouldn’t say the same for construction. There have been a lot of Arabs buying nice flats or pieces of land, which for me is quite preoccupying because we have a law that restricts ownership of land by foreigners and it is no longer being respected in this country. I am not at all in favor of selling land to foreigners – this is too small a country, we need to strike a balance. When you have a group of people with so much wealth coming in and buying up large parts of Beirut and plots of land in the mountains, it has a very negative impact.

E: What sort of negative impact? What are the economic ramifications of this?

Firstly, it means that the money doesn’t stay in the country – it goes abroad to these people or to Lebanese real estate traders whose profits primarily go to accounts abroad – they are not being reinvested in the country. Secondly, if you take downtown Beirut, this was an area where you once had 150,000 to 250,000 Lebanese owners and renters. Today, you see that the Lebanese are no longer there – most of the buildings are owned by foreigners. This is an expropriation of the capital from the Lebanese, who can no longer afford to live there. It doesn’t bode well for the future. Some Lebanese are making large profits from this, but it does not benefit the economy as a whole in the long run.

E: In your view, has this hailed economic growth had any significant impact on society at all?

The impact has been extremely limited. You may be recruiting more waiters in restaurants, or more personnel in hotels, or have a few luxury shops selling more, but overall, this constitutes 10% to 20% of the economy. What is happening with the rest of the economy? What is happening with regions such as the Bekaa, or the north, or the south? You have high unemployment, a permanent social crisis, a brain drain of all the bright students who graduate from our universities and don’t find jobs here. And with this terrible brain drain, the productivity of the economy goes down.

E: Does this mean that the current drivers of economic growth are simultaneously holding Lebanon back from becoming a high value-added economy?

The problem is that the reconstruction policies that were adopted in this country were extremely short-sighted. Believing that launching big infrastructure projects in Beirut would enable the country to get back in business the way it was before the war, was a demonstration of unbelievable short-sightedness, even if it had the support of some 80% of the population. And many people still refuse to see how this policy reduced the productive capacity of this economy.

E: What do you see as the necessary policy measures to reduce the unemployment problem of the country, and improve productive capacity?

The entire economic policy, including the tax policy, of this country has been geared towards the banking, trade and tourism sector. There has been no vision as to how to encourage the productive sectors of the economy, nor how to take advantage of the highly qualified professionals that come out of the universities here. We have a reservoir of human capital that can enable us to go into the high value-added service and industry sectors. We can invest in medicinal plants – Lebanon is known for its biodiversity – we can invest in high-end organic agricultural products, to name but a few. We have everything to succeed, and we are not taking advantage of it. You need to invest outside the real estate sector. Since the end of the war, more than 80% of our investments have gone into construction and related contracting work. This is not what is going to get the Lebanese economy booming again – there is no value-added to this.

E: What industries do you think the government should focus on promoting, and in which Lebanon might have a comparative advantage?

Industries such as agribusiness, medicine and pharmaceutical products, data processing and subcontracting for international software companies, upscale textile industries, bio-organic foods…. There are many areas we can expand into, which would be extremely valuable.

E: What can the government do to promote the development of these industries?

It’s not just a question of what the government can do, it’s more than that. It’s a question of changing the mentality of the economic establishment, which is presently only focusing on trade, construction and banking. The banking sector has actually been a huge burden on this economy, with its high interest rates and its reluctance to provide financing for venture capital. They stick to very traditional types of lending, at outrageously high interest rates. It’s not just the government that is suffering from this, it is also affecting the private sector. The fact that you have the equivalent of three times the GDP in banking deposits is a burden on the economy. It has siphoned the profits of the private sector. And as a result of this policy, the Lebanese have become accustomed to the additional income coming from interests – even those with small bank deposits. I call it the “premium addicted depositor.”

E: Do you believe that Resolution 1559 is likely to have an impact on the economy?

Without a doubt. It has already raised alarm among people about the stability of the Lebanese pound. And there are some ruthless politicians who have made public declarations about the central bank losing its foreign reserves, despite the fact that the level of reserves remains quite high. This made people nervous. Furthermore, Resolution 1559 has created sharp divisions within the Lebanese political class, which increases public perception that there is a risk. The government has not been taking the resolution seriously enough. They have not done enough to show international public opinion, and the UN itself, the negative aspects of this resolution, notably that it sets a very dangerous precedent in international law – allowing the UN to interfere in domestic parliamentary affairs.

E: The government is hoping Lebanon will enter the WTO in 2005 – how likely is this to happen?

It is likely to happen if certain people stop giving such a negative image of the present state of affairs in Lebanon. Some people are describing Lebanon almost as a socialist economy, despite the privatization of hundreds of public enterprises. It is ridiculous. Lebanon has traditionally had one of the freest economies in the world.

E: Will the Lebanese businesses be capable of competing successfully once the trade barriers are brought down?

No. They won’t be until they’ve changed their mentality so as to be able to survive in a globalized world. We have to become productive, we have to be able to sell something more than luxury flats and five star hotels for tourists. There is a change in atmosphere that needs to take place. We have proven ourselves capable of being productive in the past – during the war, the private sector was exceptional. The banks, the industries, everybody was making incredible efforts to continue to produce, to reach clients, to secure services to people. So, I know we have tremendous capabilities. They are simply being suppressed by the primacy of the tourism and real estate sectors. And I think only a big economic crisis can bring about the required change in mentality.

E: Could the public debt of the country potentially bring such en economic crisis about? And if so, what can be done to reign it in?

The debt is the biggest challenge facing the current government, although it won’t have time to do much in six months. If you want to reimburse the debt and avoid a financial collapse in Lebanon, you have to produce. The official debt now stands at 190% of GDP – if you take the official debt figures – and it will continue to increase. There is a still a big reservoir in terms of government revenue that remains untapped – all rent income is virtually tax exempt. Furthermore, the fixed phone lines need to be privatized, as do a number of other companies: MEA, EDL, the management of the Port of Beirut, the management of the airport. The previous government never even discussed any of this – all we ever heard about was the mobile phone companies. The government also needs to come to an agreement with the banking association to cap the debt service at a certain percentage of tax receipts. We can’t continue having a debt service that is eating away 80% of our tax revenues – this is unsustainable. The banks did become more reasonable after Paris II, but following the recent political disturbances, the interest rates have gone up again, swaps are being made at a higher cost, and a higher portion of the debt in Lebanese pounds is being transformed into US dollars, which is extremely dangerous for the government. If the debt is in Lebanese pounds you can service it, but if it’s in dollars, you need to ensure that the dollars are brought in. When I was minister, I committed myself before parliament not to let the US dollar portion of the debt exceed 35% of the total debt amount. Following the previous government, the percentage now stands at 50%. And the governor of the central bank recently told AN NAHAR we are about to go up to 60%. This is an irresponsible policy. The banks are more comfortable with having more assets in US dollars, but we cannot have the entire economic and fiscal policy of this country be determined by the level of profits the banks can make from lending.

December 1, 2004 0 comments