Society

Insurers reassured by more visibility

by Thomas Schellen
written by Thomas Schellen

For the Lebanese insurance industry, 2004 was a year of measured improvement accentuated by several highpoints. Visibility and transparency, regional interaction and regional opportunities, the legislative framework, and a healthier solution for social security constituted the portfolio of notable developments or prospects for the nation’s insurance companies.

These matters of domestic importance were embedded in an environment of calming international trends where the recovery from the shocks of 2001 and 2002 continued in 2004 and experts expressed a positive mood also for 2005. Sector concerns in the international insurance scene shifted from the tremors of financial markets and the dangers of terrorism back towards the vast disruptions originating from natural or less evidently man-induced disasters, such as hurricanes and floods. Announcing their global insurance outlook in early December 2004, leading international reinsurance firm Swiss Re expected the sector to operate with profits for 2005 and 2006.

As a small industry with a pronounced dependence on their contracts with international reinsurers, the rate and profitability developments in global markets are very important for the welfare of Lebanese insurers whose rate policies are greatly influenced by interaction with their partners abroad. But independently from those global trends, the local market has to deal with a range of internal issues and homegrown afflictions. One among numerous undisputed truths for the Lebanese insurance sector is that growth hinges on the ability of providers to gain the trust of consumers to larger degrees. The sector is still haunted by image problems stemming from shady practices during the conflict years, and from unsound pricing and bankruptcies occurring up into the second half of the nineties.

Much of those harmful practices have been halted, but even today, insurance managers are concerned that the growth sector motor insurance could again be hit by insolvencies of companies. The low minimum rate that insurers are allowed to sell motor liability insurance for increases the risk of defaults. This danger applies even more so to firms that sell policies below the minimum rates without considering the growing compensation amounts, which courts have begun awarding to accident victims since the introduction of compulsory motor insurance in mid 2003.

An important avenue for credibility growth of Lebanese insurers is increased scrutiny of sector players. Major steps towards a better transparency of insurance companies came in spring 2004 with the arrival of the results of the sector’s first field audits, carried out by independent audit firms on behalf of the Insurance Control Commission (ICC) at the ministry of economy and trade. The field audits allowed the supervisory authority for the first time to assess the operational financial soundness of insurers in reasonable time nearness, instead of gaining access to company results only several years after the end of the financial year. This improvement in supervisory oversight of the sector came in continuation of the measures of the 1999 revised insurance law, which over the past five years gradually increased the soundness of insurance operators and pushed the least solid firms to withdraw from the market. Based on the audits, the ICC could affirm that the remaining sector companies meet the capital and solvency requirements under the law, although consolidation of the over 50-company strong sector remains a need.

For their visibility, 2004 was a much better than average year for Lebanese insurance companies, who generally have few tools for interaction with consumers and experts available – apart from commercial advertisements and the sector’s scarce press coverage through a few specialized supplements and a small range of business magazines. After being aided early in the year through the publication of a first sector profile by a reputed financial firm, the insurance industry could bask in the light of national and regional attention in May when Lebanon hosted the 25th conference of the General Arab Insurance Federation (GAIF).

The bi-annual event’s convening in Beirut was extraordinary in that it attracted insurance managers and experts from the Arab world and beyond in larger-than-usual numbers. Representatives of the Lebanese insurance sector also noted with satisfaction that Beirut and the Lebanese insurance association ACAL was the first host to have been given the privilege of staging the event twice within 12 years.

In its presentations and discussions, the GAIF conference illustrated amply how large a gap still separates the populations of Arab countries from the ratio of “insuredness” accomplished in developed economies. The per capita expenditure on insurance premiums (insurance density) and percentage of GDP invested in insurance (insurance penetration) are only a fraction of the values reached in the highly industrialized countries where global insurance power is concentrated to over 80%.

Although Lebanon regionally ranks in the leading group for both insurance density and penetration, it achieved in recent years not more than 33% of the global average for insurance penetration and 28% for insurance density. The Arab world gap in insurance coverage is especially pronounced in the area of life insurance. Due to the interest gain component in the wealth creation model of conventional life insurance and because of other conceptual differences in regarding life coverage, the acceptance of this insurance in Muslim societies had traditionally been very low. In a development to remedy the lack of financial protection for emergencies and old age, the emergence of TAKAFUL, or Islamic life insurance models, has drawn attention from international providers and was discussed at the GAIF conference.

The 25th GAIF conference drew some criticism for what observers perceived as an intellectually anemic line-up of presentations in some of its sessions. Questions also linger over the lasting potency of the anniversary event for reshaping and focusing the Arab insurance providers towards much needed further improvements in professionalism and performance. However, besides granting opportunities to meet with international partners and the region’s insurance elite, or gain knowledge in a consecutive conference on priorities in engineering an insurance merger or acquisition, the GAIF conference also highlighted many new opportunities that are surfacing across Arab countries due to opening of markets such as Saudi Arabia and Bahrain to regional players.

Starting with market leaders MedGulf, a good number of Lebanese insurance companies are increasingly active in regional markets, especially in Gulf countries. Local insurance experts see the skill level and skill reservoir in the Lebanese market as advanced in comparison to most of the region. Lebanese insurance providers in 2004 increased their efforts to leverage this advantage in expanding their reach in the Gulf as well as in Levant countries where the emerging Syrian market is regarded as most promising.

Although disadvantageous taxes levied on premiums and life insurance payouts remained obstacles to insurance growth related to public sector fiscal policy, Lebanese authorities in 2004 took new steps towards improvement of the national insurance regime. In April, under the leadership of then minister of economy and trade, Marwan Hamadeh, an entire new draft law for regulating the insurance sector was presented to stakeholders in the sector.

The new law had been drawn up by international experts. Its protagonists, with Insurance Control Commission head Walid Genadry in the forefront, hailed the draft as an epochal chance for Lebanon to pass insurance legislation that could serve as a model for many developing economies. Even as insurance legislation here had undergone significant progress in the 1999 revision of the national insurance laws, experts and members of the industry generally agree that the revised law is not enough to address all issues important for modern insurance administration. However, Lebanon is not known for high speed processing of insurance legislation and in the second half of the year, industry leaders, including ACAL president Abraham Matossian, commented on aspects of the draft law in ways that increased doubts over the prospects of it being adopted very quickly.

Another legislative initiative of very high relevance for insurance came in the third quarter of 2004 through introduction of a national pension scheme proposal. After having kept the proposal under wraps for several months, representatives of the Hariri cabinet and president Lahoud confessed public agreement over the need to revamp the system of retirement payments, currently managed by the National Social Security Funds.

With its restrictions to one-time payments and limits on funds management, the NSSF is widely understood to be in need of substitution with a new system, which would partly involve private sector operators. Although implementation of a pension scheme also is contingent on – habitually complex – political decision making processes and rapid legislative adoption of the project thus seems overoptimistic, being able to enter the realm of compulsory pension plans for individuals and groups could open many opportunities for commercial insurers. Through life plans, local insurance companies have been active in the area of retirement provisions for years, affirming life insurance as the leading prospect for sector growth.

With annual premium volume in the range of $500 million, the Lebanese insurance sector is looking for growth in every respect. While estimated numbers for the development of insurance premiums in Lebanon in 2004 are not available before late in the first quarter of 2005, industry managers said that growth in 2004 was good by the market’s standards and prospects for insurance sales through agents, brokers and banks (bancassurance) are up for 2005.

The new draft law

Developed between September 2003 and April 2004, the new draft for a Lebanese insurance law was prepared under leadership of Canadian insurance experts and with funding support from the World Bank. The proposal stipulates a further increase of capital requirements over several stages, from today’s $1.5 million to $3.5 million. Among other regulatory innovations, it provides for a strict separation of life and general insurance business and specific audit standards. The draft also foresees an insurance control commission that is run by a board of directors and an insurance commissioner with more direct authority and accountability, making the oversight body more autonomous from potentially political decisions at the ministry of economy and trade.

As they described the draft law as complying with advanced insurance developments in international markets while being comprehensive and adapted to the needs of an emerging insurance market in a small nation, supporters of the draft pointed to the need for its quick acceptance into law. More discussion and eventual modification of the draft was urged by industry representatives who pointed to the need for making the draft more compatible to the local insurance culture and legal tradition.

The pension scheme

An actuarial plan for a scheme of continuous pension payments for Lebanese retirees was drawn up by pension and insurance advisors, Muhanna Group. The plan envisions a mandatory membership in the national pension scheme for all employees newly entering work life as well as employees born after 1969 who are currently registered with the NSSF. Optional membership is available to employees born until 1969 on condition that they did not already withdraw their end-of-service indemnities and will have at least 20 years of insured employment at their retirement.

For all members in the scheme, the minimum period of employment to qualify for a pension would be 20 years, according to the plan. Salary contributions would be collected from both employer (7.25%) and employee (5%), for a total pension contribution of 12.25% of an insured’s salary, up to a ceiling of LL 5 million ($3,340). Additionally, employers would be mandated to pay a contribution equivalent to 5% of the salary into an employee’s retirement health insurance. Under the plan, the minimum monthly pension for a retiree would be set at $120, or 60% of the salary based on steadily earning a minimum salary of $200 over 20 years of service. After 40 years of employment, the pension would reach 80% of the minimum salary. Exemplary calculations of pensions reached under the scheme allow future members to see projections of replacement rates – i.e., the share of the final salary that a pension would amount to – under a number of possible salary growth scenarios.

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Society

Q&A: Fateh Bekdache

by Executive Staff
written by Executive Staff

E: Is insurance awareness growing in Lebanon?

Definitely; for several reasons. The first boost was the introduction of compulsory insurance for expatriates working in Lebanon. Before, there had been many stories about foreign workers having problems. The introduction of this insurance requirement helped not only the ministry and eliminated problems with embassies, but it also helped the consumer in seeing the benefits. Then there was the introduction of motor insurance, which has become more and more accepted over the past one-and-a-half years. Lately, we hear a lot that people do not only want bodily injury coverage but also say it is time to have liability cover for property damage. The most important factor in increasing insurance awareness has come from the banks. In giving retail loans, banks required the proper insurance, such as life, motor or home insurance, from their clients whether it was for a $1,000 consumer loan or a $100,000 loan to buy a house. We experience today that when the loan is paid off, people keep the insurance. We can really feel that awareness has grown and also that people have become sophisticated when it comes to insurance. We noted for example at the Beirut Motor Show that people have become very picky and want to know the terms of a policy. If one bank gives better terms on insurance, they choose this bank instead of going with one that has lower rates on the loan.

E: How do you explain the importance of insurance to Lebanon?

If you look at the whole activity of economy, the insurance sector is not contributing what it is contributing in developed countries. It may be better than most of the countries in the Arab world but it should constitute much more than that. One important role that our sector can play is that once we have started getting involved in the pension program we can give the Lebanese people the incentive to secure their future. We can also give people the incentive to buy Lebanese, if all the extra taxes can be removed for instance on the marine business. It makes no sense that you have to pay nine percent on marine cargo insurance here in Lebanon while you can go next door and don’t pay any taxes. Instead of making people go and buy from offshore companies, I think it is better to remove these barriers. These are major factors that will make the insurance sector a major player in the economy.

E: Arope is affiliated with leading bank, BLOM. Does that translate into a role of leader in the sector?

Definitely. When BLOM started Arope back in 1974, they had bancassurance in mind. Bancassurance, or selling insurance through the banking channel, started to move in Europe in the 80s. I believe it was the first time that a major reinsurance firm – the largest French reinsurer, SCOR, which still is today shareholders with us – a major bank and at that time, a British insurance company entered a partnership. It was a real blend of banking with insurance and reinsurance. I think these partners had really a vision but because of the war, we had to put the brakes. The British then left but the French stayed with us and you can see today what we did and that it is paying off for a lot of people. We are helping many in getting their loans. In the retail loan business, thousands of people are buying their cars and getting loans for their house, all these are done together between Arope and BLOM. We secure that the customer has the best deal in banking as well as insurance. So we always try to accommodate the bank’s customer and get him the best deal possible. If he is not satisfied, he can ask for an upgrade and most of the time he can get better conditions. Indirectly, we are really improving the economy.

E: How is bancassurance going?

It is going very well.

E: Do you mean for Arope alone or sector wide?

I believe it is good sector wide. However, the problem with our insurance sector is that it is not transparent. We don’t have any ways of getting any figures. We suffer a lot from that just as you press people also suffer because you cannot really get any figures on the sector. It is certain that the companies working in bancassurance have shown the strongest growth rates in 2003 and the trend may continue in 2004 because bancassurance is going well. I don’t think any of the providers is complaining. It is a good marriage, a win-win situation.

E: How do you assess 2004 overall in terms of your performance?

For Arope, figures show that 2004 was a good year. With a lot of hard work from our team and the support from our mother company and board and the trust that our customers gave us, we were able to finish the year better than the last. It was our 30th anniversary; we celebrated these 30 years of growth and hard work and are very confident about the future of Arope and are here to stay.

E: What was the most encouraging and what the most challenging experience in the 30 years of Arope?

The most rewarding thing was that we were able to benchmark ourselves as one of the leaders. As you know, we are not one of the leaders in terms of premium income, because we are not after size but after solidity and profit and being well run. We were able to do that.

In terms of challenges over 30 years, we went through a lot. There was the war and changing the head office from one place to the. After the years of war, it was chaos in the insurance sector. The insurance control commission and the insurance department at the ministry of economy and trade were not functioning. The laws were obsolete and almost inexistent. In the last six, seven years, we saw a lot of progress. The 1999 insurance law was a turnaround, even though this revised law was not modern enough. It didn’t cover all aspects of insurance and doesn’t go with the pace of our insurance companies and worldwide trends in the industry but at least we know that there is a law that we can count on.

E: In 2004 a different, entirely new draft for a Lebanese insurance law was introduced to the sector stakeholders. What do you think about the new proposal?

The new proposal is a very modern, very interesting project. I personally found many positive aspects in it, but at the same time, this draft will not go with the laws that we use every day. The old and new cannot synchronize, because all our laws are founded on the French legal code and this new law would not mesh with this. I say this not from the perspective of an insurance man but from the legal perspective. The legal advisors whose point of view we heard, including the vice-president of the National Insurance Council, Dr. Albert Serhal, and our own legal counsel all found that we have to define a lot of things to make this law function.

E: How do you motivate your team of agents and employees to keep a long-term outlook of customer relations and follow your vision and ethics?

All our agents are employees. We don’t have freelance people that come for a quick dollar and go. In Europe it often is seen as better that people move around and corporations think that it is bad for executives and employees stay in a company for a long time, we were keen to create a nice family ambience. For us, it is a plus that we have people who have been with Arope since inception of the company. We try to think globally and see what is happening abroad but when we want to implement here, we act locally.

E: How important are employee incentives in making the company grow?

Bonus is a major part of our structure. Everyone is rewarded at the end of the year based on many criteria. And every job well done is rewarded; sometimes we don’t wait till the end of the year to award employees. If an employee shows something good, he is rewarded on the spot. We give very good incentives and we like to give the encouraging pat on the shoulder. This is something that people appreciate. We emphasize teamwork. We don’t like lone rangers.

E: What was the greatest crisis that you ever had to manage as an insurance executive?

It was back eight years ago in a sector-related crisis. Two companies were established at that time and started by taking a lot of employees and portfolios from brokers and insurers, including us. One of these firms closed down in the meantime and the other went through a restructuring and reshuffling of shareholders. This mass migration of employees and portfolios hit us overnight as a major crisis but it was a good challenge, a very good lesson to learn from. It was not nice to go through a storm like this and it would be nice not to repeat it, but we learned a lot from it.

E: What makes working in insurance exciting for you personally?

Everyday is a different day, every case is different, every claim, every policy is different from the other, so it is really exciting. I think it is the only industry where you work with clients and third parties. We don’t work only with the customers, so you can expect any time to have a claim for a third party coming to you, maybe somebody you know, and maybe somebody you don’t know. We have no two claims that are alike. You meet all kinds of people every day, that’s nice, and the work is diversified in its legal aspect and the technical aspect. The technical aspect is very wide and complex, so everyday I learn something new. I love the interaction.

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Society

Insurance Voices – Taking the pulse

by Executive Staff
written by Executive Staff

Walid Genadry: Head of the ministry of economy & trade’s Insurance Control Commission (ICC)

E: The supervision of sector companies and implementation of a fair regulatory framework are crucial for the sector and for your mandate as head of the ICC. What are your expectations as far as further improving sector compliance with supervisory requirements in 2005 is concerned? What will be the main focus of ICC activities in the coming year? Do you have hopes that the new insurance draft law can be adopted within the next 12 months?

We must consolidate the process begun two-and-a-half years ago including the introduction of new supervisory forms that will increase the transparency of reporting. These will have to be enforced seriously this year. We must also work on the enforcement of the new reserves and corresponding investment approaches. We have to continue growing in numbers and developing our competence. We are about to conclude an agreement with the Spanish authorities on a roughly two-year ‘twinning’ process, within the framework of the EU-Lebanon agreement. We are also being helped by the French supervisory authority and a contract with the World Bank for issues related to on-site inspection. We will also continue to have support from the auditors Price Waterhouse Coopers and Ernst &Young, because we will need for a while external support to get results. Among the fronts we will continue working on together is the improvement of the new project law. Some people are worried a new law may cause the closure of many companies. This is not the objective of a law that aims at improving the sector’s financial health, market conduct and credibility. There are also favorable opinions, both local and foreign. In fact the law will put us up to international supervision standards. As to when it will be passed, it is difficult to speculate. All one can say is that work is continuing on it.

Fadi Chammas: General manager at Arabia Insurance

E: The life insurance market in Lebanon has seen good percentage growth but has yet to evolve to become more significant in both social and economic terms. Where do you see the life business going in 2005, what are the most promising product types and distribution channels? Do you believe that the industry will be able to make a concerted effort towards increasing the population’s general awareness of life insurance needs?

The life insurance market in Lebanon has seen good percentage growth but has yet to evolve, to become more significant in both social and economic terms. Arabia’s sales – in terms of total life insurance production growth – grew by 51% in 2001, compared to 2000. In 2002, they grew by 25%, in 2003 by 38.3% and in 2004 by 12.3%.

The most promising life insurance product types are: 1) educational plans that allow policyholders to secure the education of their children through periodical contributions, without having to worry about unexpected hazards; 2) unit-linked saving plans that allow policyholders to guarantee a retirement fund by contributing to renowned international funds, while securing their dependents through a variety of insurance coverage schemes; 3) term insurance (the most common), which provides a fixed death cover for a chosen period of time.

The most promising distribution channels are banks and consultants. Banks offer the greatest distribution potential for readymade products since people trust their banks and the services they offer. Consultants constitute the best distribution channel for custom-made products tailored to suit individual needs. They play the role of advisors.

Consultants are constantly trying to increase general awareness by explaining to prospective clients the positive social impact it will have on their lives. Governments also have a big role to play in improving the general perception of life insurance products by, for example, reducing tax on income used to settle life insurance premiums; joining forces with insurance companies to bolster public awareness; and drawing up more flexible laws that encourage insurance companies to give higher returns on life insurance-related investments.

Elie Ziadeh: President of the Lebanese Insurance Brokers’ Syndicate (LIBS)

E: Many experts see insurance sector consolidation as a necessity and a process that has a long way to go before it is completed. How much importance do you attribute to consolidation activities for 2005, a) among insurance companies and b) for brokerage firms? What factors could drive mergers and what incentives would help the private sector in increasing the speed of consolidation?

International insurance industry developments over the last few years have led players, including those in Lebanon, to refocus on basics. I don’t, therefore, really see a need for brokers and insurers to acquire or merge. We can stick to core business and use the existing business model to win new clients. This is how we can be successful in the long term. But there is a serious risk for small brokers because they won’t be able to compete if they don’t upgrade their technical knowledge and software etc. In such circumstances, insurance brokers need to consolidate because a broker needs a minimum income to be competitive. The market and the customers are demanding and the broker needs a certain size that allows him to maintain and expand by investing in training, technology, and market awareness. For insurance companies, I hope the consolidation and re-capitalization of the last few years will continue. Re-capitalization will allow insurers to concentrate on the core business of underwriting risk and paying claims. This will help a portion of the insurance companies to avoid acting as hidden brokers, which can be detrimental to the insured.

The fundamentals of the insurance industry are now being reinforced. Consumers are much more aware of the risks than they were before. There is a need for brokers to take a real in-depth look at finding a scientific scenario for two brokers to merge, the fundamentals of which could be confidence, global vision, and long-term thinking. The government and regulator could help by examining the capitalization requirements for two brokers to merge, what money they might need and how their re-capitalization might be supported.

Rizk Khoury: President & CEO Cumberland Insurance

E: Medical cover and hospitalization insurance is a leading activity for the Lebanese insurance industry. Do you consider the health insurance market mature in terms of the achievement of sufficient profitability, professionalism and transparency? Where do you see the greatest potential for the development of new products and other ways of expanding the market?

Medical insurance in Lebanon constitutes approximately 60% of the premium income of the whole sector. This segment of the insurance market is dominated by a few insurance companies that have established their know-how and experience in this relatively new line of business over the past 15 years. The Lebanese medical insurance market is very developed in comparison to other countries in the Middle East and even North Africa, in terms of product design, claims management, administration of managed health care schemes, and information technology. Insurance companies that administer programs efficiently achieve profitability. However, with the rising cost of healthcare around the world and the underlying economic problems Lebanon faces our margins have been squeezed. In terms of transparency and professionalism, the companies that control the market understand that unless they deal professionally with clients, health care providers and the general public they will be cast out and lose their market share.

Capitalizing on the successes achieved in the Lebanese market, focused companies can expand the local market and leap into new markets. The consumer in Lebanon realizes that medical insurance is a necessity and is willing to buy it but purchasing power varies. People are looking for the cover their money can buy. So flexibility in product design is very important if those consumers who want to buy private medical insurance but ‘think’ they can’t afford it are to be reached. The Gulf medical insurance market is growing at an unbelievable rate. It is only natural for leading Lebanese insurance companies to capitalize on their know-how, experience, and IT systems and expand into such markets.

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Industry

Industry retrospective

by Tarek Zein
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.

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Region

Region VOX

by Executive Contributor
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.

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Region

Mervat Tallawy

by Executive Contributor
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.

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Real estate

Real Estate Retrospective

by Peter Speetjens
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.

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Comment

Land of miracles

by Yasser Akkaoui
written by Yasser Akkaoui

Never has the Lebanese entrepreneurial spirit been so successful in confronting adversity. Not since the freewheeling days of the civil war has it risen to the challenge of leading the way in its journey from underdeveloped economy into emerging market and its role as the region’s creative hub, in a time of raging uncertainty, both at home and abroad.

In Lebanon, a complete absence of public policy for economic growth, coupled with the eroding effects of self-interest by those who claim to serve the national good, has contrived to sabotage the natural instincts of free enterprise, while from Ramallah to Falluja, the region continues to bubble and spit on the region’s hotplate. Where economic freedom is either snuffed out by the specter of terror or squeezed by those who refuse to embrace sound economic principals, the Lebanese entrepreneur survives and thrives.

Lebanese industry should be out for the count. Faced with an indifferent government and the region’s highest fuel bill, it not only lives on but, in 2004, recorded increased exports. The banking sector continues to demonstrate its vision by expanding beyond its borders, while Lebanese capital markets have also shown they can punch above their weight. Then there is tourism, touted as the cornerstone of Lebanon’s future, has been wholly driven by the private sector. The Lebanese property developer has also been busy, accepting and meeting the challenge of increased demand for luxury living and new retail developments. It is amazing that such growth can occur in such a seemingly barren economic landscape. Imagine what could be done in a more transparent and competitive environment.

In this annual issue, EXECUTIVE is, more than ever before, fulfilling its editorial mission by reporting the local, regional and international achievements of corporate Lebanon across all sectors, giving it the importance it deserves. EXECUTIVE has proved that it is the true voice of corporate Lebanon by bringing together in this remarkable publication the ideas, thoughts and opinions of over 50 experts and insiders. Their collaboration is a mark of mutual respect and an affirmation of the partnership that EXECUTIVE has fostered over the years. The result is an unprecedented, objective and genuine portrait of the forces that drive the engines of our economy.

EXECUTIVE salutes Lebanese industry, Lebanese business and Lebanese businesspeople; they have shown that the free entrepreneurial mind is bigger than ignorance and parochial dogma.

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Economics & Policy

It ain’t broke but it needs fixing

by Faysal Badran
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.

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Economics & Policy

Q&A: Georges Corm

by Executive Staff
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.
 

 

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