Real Estate

Sky’s the limit for real estate sector

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.

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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Economics & Policy

Telecom Voices – Don’t call us…?

by Executive Staff
written by Executive Staff

Ghazi Yussuf: Head of the Higher Privatization Council up until the resignation of Prime Minister Rafik Hariri

E: Is there a realistic chance for the privatization of cellular assets in 2005? What, in your opinion, are the best and worst case scenarios for the development of the cellular sector in the coming year?

There is no realistic chance of privatization in 2005. The two managing companies haven’t a track record with which to show off any skills to potential buyers. There has been no expansion. And the ministry doesn’t want to privatize because it wants to determine the true earnings of the two operations. There have been no new numbering plans, no new packages. The government’s promises haven’t been kept. The sector hasn’t matured.

The best case scenario: a regulatory authority is in place by the end of the first quarter. Then there is a serious call for the sale of the two licenses. Development of the networks is left to the newcomers. They, rather than the government, decide pricing policy and packages.

The worst case scenario: there is even more politicization than now. The regulator is nominated under the umbrella of the ministry of telecommunications, despite the fact that such an authority is supposed to be independent. I am concerned that any regulator nominated now won’t be a regulator aiming to open up the sector but a front for political aims.

For the moment, the sources and uses of cellular sector revenue by the government are questionable. For example, I have heard – although I cannot prove – that the government is saying it wants to spend $70 million on each network. How will those funds be spent? I have heard that MTC Touch needs a new platform which supposedly costs $14 million. But MTC Touch didn’t buy a new platform. It brought in a used one and charged $14 million.

I don’t think things will get better. As long as the government is running both operations, it will always be arm-twisting potential in terms of imposing appointments and purchases.

Louis Hobeika: Professor of economics and finance at Notre Dame University, Louaize

E: What measures would be best suited to improving the market position of Lebanon’s fixed line network and operator in 2005? Would you regard privatization of the fixed line network as positive with respect to increasing operational efficiency? How quickly can privatization of the fixed line network be achieved?

The revising and lowering of tariffs is very important. For the moment the government charges per minute. All calls within a local area should be charged on a monthly fee basis. Benefits of using a fixed line should be marketed to people. For example, they should be told that if they spend more than a certain amount on calls in a month, they will get a second month free.

Connection fees should be lowered. People should be billed at home so they can send checks by mail. Customer service should be improved. There should be a quick service for information on numbers, in fact for information on anything, like restaurants and hotels. They should commercialize it, make it value-added.

Privatization is a must. The fixed line operator should be split up into three or four entities, so we have competition on tariffs and services. With a private monopoly there would be no stimulation to improve service. Splitting up would also benefit rural areas, bringing them into an enlarged mainstream telecommunications market.

Splitting up would also allow a much greater reward from the sale. Ogero is a large entity in a small country. If you don’t split it up, almost no one will be able to afford to buy it. You would need to offer it at a discounted level. By splitting it up you would entice more investors. It should have been done years ago but wasn’t because of political feuding and administrative problems. The intellectual readiness is there. We could do it in a few months. But frankly, I’m not expecting it. I’m not sure the government is ready or willing to do it. It’s lost. It has no objectives.

Maroun Chammas: Managing Director IDM; President & CEO Berytech

E: Do you anticipate that broadband internet will be fully available to interested residential users in 2005? When can consumers expect to be able to choose from a variety of access technologies, including cable? What is needed to create a digital society in Lebanon? Are the problems of pricing and illegal connections the main obstacles to its implementation?

Since November 1, we have been deploying high-speed broadband to homes in the greater Beirut area. Our target is 20,000 in the first year. However, we can’t say if we’re still on track. In late 2004, delays occurred as a result of the weather and also because installing the service in buildings in Lebanon is not always easy. You need proper electricity, access to roofs, and all the cabling.

We’re currently installing broadband fixed wireless –128 kbps at $45 a month, 256 kbps at $75 a month and 512 kbps at $175 a month. The set up fee is $75. We would like to offer greater speeds at a lower price, but the price of the bandwidth is high. We purchased two megs from the ministry of telecommunications at $20,000. In Europe, it costs around $500. We want the price to be in line with world prices. The government must understand that the internet can help the economy grow.

The government will apparently soon be providing internet service using a phone line. The three speeds I mentioned will be available. The price will be very similar to fixed wireless. Obviously people who have only one phone line will need another with which to call.

Today, there are 30,000 illegal internet cables hampering development of the sector. The government hasn’t taken real action. Once the government provides ADSL and we can provide high speed internet at reasonable prices, the illegal business will cease. But it is essential that people be offered access to broadband at a reasonable price, and that will only happen when the government reduces the price of the bandwidth.

Kamal Shehadi: managing director at Connexus Consulting

E: Do you expect the independent telecommunications authority to be fully functional by the end of 2005? Does the framework comprise all the elements necessary for efficient regulation of the communications sector? What benefits can cellular and fixed line consumers expect when the regulator is functional?

The government has announced that the Telecommunications Regulatory Authority (TRA) is to be established shortly. If the government displays the political will to undertake serious economic reforms, including the liberalization and privatization of telecommunications, they will need to appoint the board of the TRA very soon. They will need to appoint individuals with a commitment to liberalizing the telecommunications sector – the TRA’s principal responsibility according to Telecommunications Law 431 – the expertise to do the job, and international standing to bring credibility to the process.

If the board is appointed in early Q1 2005, the key staff of the TRA could be in place and fully operational by Q2 2005. The board’s first responsibility will be to outline a strategy for an efficient transition to a competitive market. It will then have to tackle key regulations such as interconnection, the rebalancing of tariffs (mainly requiring the lowering of international tariffs), and consumer protection (confidentiality of information, billing, billing disputes, etc.).

The framework for efficient regulation of the sector is still incomplete – it requires a number of key decrees to be promulgated by the Council of Ministers. The most important decree – presented to the Council of Ministers more than 18 months ago – provides for the organization and financing of the TRA. Other decrees are also needed on licensing; allocation of radio frequencies and their pricing; and access to the right of way and public property.

Consumers should expect the TRA to be not only the regulator issuing licenses and monitoring licensed operators, but also the driver for better consumer choice in services and service providers, better quality of service, and lower prices.

Khalil Daoud: General manager at Libanpost

E: What are the aims and priorities of Libanpost for the year 2005, and where can service be improved in the coming year? Will increased transportation costs have an impact on end prices and is the value proposition of Libanpost secure for all stakeholders: the state, the operator, and the public?

Our key objectives for 2005 are to continue improving the quality of our services at the retail and distribution levels by implementing various training programs, increasing services and retail products and maintaining the renovation program of the post offices. This will also include completing the automation at the post offices; introducing the automation at the letter carriers’ level (handheld computers for the distribution of mail with proof of delivery); refining the existing processes and procedures; and reorganizing the customer service department.

We are also working on a new collection system that would enable us to collect mail not only from the post offices, but also from residences. Libanpost will be introducing new services, like “International Express Mail.” We also want to see the proper implementation of the new warehousing and logistics, and insurance brokerages divisions. Expansion is expected in the post print division by attracting customers other than Ogero, like utility companies and private institutions.

As for the impact of increased cost of transportation, the prices of the postal services are stipulated in a government decree and simply applied by Libanpost. Proposing a change in the tariffs should be dictated by a number of factors, among which the cost of transportation. Considering the tight economic conditions prevailing, Libanpost is trying to postpone such a price change by absorbing the costs variance.

Whilst continuing to improve the quality and variety of services to its customers, and to expand the size of its investments, Libanpost is rapidly moving towards a profitable situation. The majority of clients are satisfied with the Libanpost offerings, be it with its postal or non-postal services. As for the government, and in the event the restructuring proposed by the ministry of telecommunications is implemented, the situation will become profitable.

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Finance

Brighter times for banking in Lebanon

by Nicolas Photiades
written by Nicolas Photiades

In 2003, the Lebanese banking sector showed significant improvement in terms of deposit and asset growth, as well as in terms of profitability. The Paris II conference in late 2002 triggered a more efficient monetary policy from the part of the government and the central bank (BDL), which led to a sharp drop in deposit rates in both Lebanese pounds and US dollars, while debit rates, or rates assigned on loans to corporates and individuals, decreased albeit, at a much more reduced pace. Margins hence increased, and with them profits. Higher profits also generated more capital, as banks realized that it was a good opportunity to increase capital organically, given that external means to raise capital are rare. It is worth noting that profitability during 2003 and early 2004 could have been even higher were it not for a new regulatory reserve imposed by the BDL, which account for 10% of foreign currency deposits. This latter reserve at least had the advantage of significantly improving the banks’ liquidity as well as the BDL’s foreign currency reserves and installing a greater air of confidence in the market.

Although profit figures for 2004 are not officially out, the few half-yearly unaudited profit and loss accounts published by some of the larger banks show an improvement in profitability. Indeed, banks have been able to reduce interest rates on deposits even further during 2004, while, as usual, debit rates or rates assigned to loans and T-bill and government debt securities only moved fractionally, further enlarging margins. Although it was the larger banks, which mostly benefited from that situation, the smaller banks suffered more. Some of the smaller banks, or those with total assets well below $1 billion, suffered a decline in profitability, as they could not reduce their deposit rates enough without risking losing their saving deposits to the larger banks. Until now, the main value added of smaller banks to individual customers has been their ability to offer higher rates on both US dollar and Lebanese pound deposits. Lining up their deposit rates with those of the larger banks would clearly signal the loss of business.

The bulk of profits for the overwhelming majority of banks again came from interest income on government debt securities and loans. Banks in Lebanon are still unable to diversify revenues sufficiently, and generate non-interest income of consequent sizes. This reliance on interest income is worrisome, as any downward trend in interest rates and increases in non-performing loans would affect the revenue stream of banks substantially. Lebanese banks are yet to build a reliable and recurrent income stream, and are still highly vulnerable to external conditions (economic, political, social, etc.).

However, the biggest challenge still facing the Lebanese banking sector is the heavy exposure to a debt-laden Lebanese economy and the government, with the latter coming in the form of subscription to Treasury bills and foreign currency bonds issued directly by the State. Assets of banks, which are mainly composed of loans, liquid assets, and government debt securities, are still of a poor credit quality (for some banks it is very, very poor), and the level of non-performing loans in proportion to loans remains abysmal at around 28% (the peer group of banks with deposits between $100 million and $300 million had an average non-performing loans to loans ratio of 46.3% at the end of 2003). This is extremely high, when we can recall that the ratio of non-performing loans to loans for the Argentinean banking sector at the time of this country’s default stood at only 4%. The greatest challenge for Lebanese banks is still to stabilize asset quality and, through higher profits, to increase the level of loan loss reserves to provide better coverage of non-performing loans. Although the trend of bad loans continues, it is widely expected to slow down given the slight improvement of the economy (the highest GDP growth for some years is expected for 2004). Smaller banks will be more hit by a weak asset quality as they usually get retail and corporate debit customers, which are of lower credit quality than those of their larger peers. The smaller banks are expected to be caught in a vicious circle of rising non-performing loans and decreasing profitability, and will find it harder to improve their coverage of non-performing loans with loan loss reserves. Meanwhile, retail lending continues to rise, while corporate loans are being optimized and are stabilizing. Retail loans are more easily controlled, as most Lebanese banks (especially the larger banks) have recent credit models for retail lending, while corporate lending is still an under-developed animal for most banks. Indeed, corporate credit analysis techniques are seldom mastered within a large number of banks.

On the capitalization side, Lebanese banks have so far seen their shareholders’ equity rise to a total of $3.9 billion at the end of September 2004, compared to $3.6 billion a year ago. Such a consolidated level of equity leads to a consolidated equity to assets and equity to loans ratios of around 6.2% and 25.5% respectively. Although such ratios would appear solid in a different country with a more stable economy, in Lebanon they can only be considered adequate, bearing in mind that banks here do not often lend to the private sector (loans account for only 23% of total consolidated assets), and that risk levels are abnormally high. It is also worth noting that more than 80% of the sector’s consolidated equity is accounted for by the fourteen largest banks. The remaining thirty four banks are too small to warrant a meaningful level of equity, and a certain number of them have insufficient capital anyway. Nonetheless, capitalization is improving for the sector in general, as higher profits have allowed a healthy dose of retained earnings and some banks have resorted to capital raising with private investors and issues of preferred shares (e.g. Byblos, Audi, BLOM, Crédit Libanais).

Although regulatory capital (the required level of capital by the BDL) appears more than adequate for the entire sector, with a Cooke ratio (a ratio of equity to risk weighted assets) standing on average between 15% and 23%, economic or real capital is low because of the high risk exposure to the government. Such an economic capital should be expected to drop even further in the coming years, as the Basel II Capital Accord is to start being implemented across the world, including Lebanon. Basel II is a set of regulations that increases the risk weightings on assets if the risk profile of the same assets is high. In fact, it is even expected that regulatory capital for Lebanese banks will drop significantly as a consequence of the implementation of the Basel II regulations, as risk weightings on some assets (mainly government securities) will go from 0% up to the dizzy heights of 100%. A recent calculation by many independent research organizations, including the Union of Arab Banks, showed that the implementation of the Basel II rules should lead to a decrease in the Cooke ratio below 8% (which is the legal minimum) for some banks, and certainly below the current 20% average for most other banks. By then a lot of banks will be thinking about seriously increasing their capital, or even joining hands with other institutions with a better grip on risk management.

The banks’ liquidity appears more than satisfactory on the other hand, with liquid assets (excluding government debt securities) covering more than 56% of total deposits for the sector. Such a ratio is regarded to be higher than the norm by international standards but is appropriate in the case of Lebanon. Although the post Paris II BDL regulation, forcing banks to place 10% of their foreign currency deposits with the BDL at 0% interest, has affected the banks’ profitability a little bit, it has nevertheless forced a massive improvement in liquidity and deposit coverage with liquid assets. Banks can now face any runs on deposits with greater confidence, and have the BDL’s conservative vision to thank. However, funding remains a problem, with most banks having to live with significant maturity mismatches year after year. Indeed, customers’ deposits are only short-term in nature and are used by most banks for medium and long-term lending. Some banks have resorted to issues of medium-term bonds and other kinds of debt securities with longer maturities to fill up this maturity gap, but it is still largely insufficient, and in some cases, just a drop in the ocean. What prevents banks for issuing long-term bonds is simply the high cost of it, which is inevitably benchmarked against the high financing cost of the government.

The need for long-term borrowing by retail and corporate borrowers has never been so urgent, particularly as regards to housing loans. Some banks have been stepping up their mortgage lending and offer long maturities (ten and fifteen years), but the interest rate is still high and conditions quite onerous for borrowers. The housing and mortgage markets in Lebanon are yet to really take off and should be considered a priority by the banking sector on one side, and the regulatory and monetary authorities on the other. The enhancement of the mortgage market would create many opportunities for the Lebanese economy, not only in terms of financial products (issues of long-term bonds, securitisation of mortgage loans, etc.), but also in terms of construction activity. A developed mortgage market would also gradually meet the massive demand for housing by Lebanon’s younger population.

Qualitatively, many Lebanese banks have been addressing the issues of corporate governance (or lack of) and institutionalization. 2004 did not bring about significant changes on that front, with the exception of the Audi-Saradar merger, which created a banking group with a greater degree of institutionalization than many peers, which are still owned and managed by families. Decision making has been slightly diluted amongst the larger banks in particular, but many banks still concentrate strategic decisions in the hands of one individual. This individual is usually the founder or the heir to the founder of the bank and carries the dual title of CEO and chairman. Banks in Lebanon have not yet embraced the Western concept of having a CEO, a CFO, and COO, as the senior managers of the bank. The chairman should in principle be representing the interests of the shareholders and not mingle in the operational aspects, which should be left to the CEO-CFO-COO triumvirate.

The banking sector in Lebanon does, however, benefit from substantial support from the regulatory authorities, which motto is to maintain a solid banking system, that would gradually consolidate into a more compact and efficient group of institutions. The BDL is keen not to let banks collapse, as such events would shake a fragile economy. The larger the bank, the greater its importance to the domestic economy, and the more implicit support it can expect from the regulatory authorities.

Banks are aware of the difficult operating environment, which has lead so far to a rise in bad loans and a lack of earnings diversification, and their current high exposure to the weak credit of the government. They realize that diversification should be carried out away from Lebanon, if revenues are to strengthen and become more recurrent in time. Many banks have already started opening branches in other countries in the region, as well as strengthening their existing franchises in the countries where they are already present. Such a strategy can only be beneficial in the medium to long-term and could in time very well transform Lebanese banks into regional, and perhaps international players. For the moment, the Lebanese banking sector is still considered small in relation to the GCC banking sectors, and lacking asset and earning diversification.

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The Buzz

Service: A skill we can’t afford to ignore

by Tommy Weir
written by Tommy Weir

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

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

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

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

Everyone is a client

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

Think outsourcing!

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

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

Think. Government telecommunications!

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

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

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

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

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

6. Ensure that you are delivering high quality goods.

7. Communicate…did we already say that?

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

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

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

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

Reputation is EVERYTHING

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

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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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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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