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.

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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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Economics & Policy

Economy Voices – Reform Horoscope

by Executive Staff
written by Executive Staff

Joey Ghaleb: Economist at the ministry of economy and trade

E: How could the Lebanese Government give new impulses to the economy through public spending in 2005?

Although “Paris II” may be long forgotten, the Lebanese must keep reminding themselves that soothing political sound bites do not pay the bill. Major structural reforms do and they are only a way for us to face the macroeconomic imbalances facing the country. An international organization recently hinted that Lebanon has approached its tax ceiling capacity under the prevailing economic situation, thereby arguing that the only effective way to reduce the crippling public deficit is by slashing unnecessary spending. This statement contradicts the premise of the question raised by Executive. However, there is another answer.

Without disregarding the necessity for structural reforms such as privatization, legislative modernization and the like, a reduction in unnecessary spending will free up much-needed resources that can be invested in projects or ventures with a long-term impact. Such cutbacks might hurt a small group of beneficiaries in the short-term, but it will send a positive signal to all the stakeholders and contribute to rebuilding confidence in the future of the Lebanese economy. This confidence-building measure will have a bigger and wider impact on the economy than an increase in public spending, which only targets a small group of Lebanese who benefit from it for a limited period of time. In order to place Lebanon back on a sustainable growth path at this juncture, the impulse the country needs is to hear more Middle East Airline-like stories and display a strong political will to implement the necessary restructuring of the public spending.

Kamal Hamdan: Head of the economic division of the Consultation & Research Institute (CRI)

E: Do you expect that the new government either now or after the parliamentary elections will be able to alleviate the socio-economic crisis and unemployment problem? What public measures could be adopted to improve the situation?

This government is merely a short-term one – by the time the parliamentary elections come along, it will change. Therefore, I am not convinced that it can introduce measures that will significantly improve the situation, especially with regards to unemployment. What it can and should do however, is start taking first steps that will send signals to the market that there is a will to make interventions and restructure current policies.

Combating unemployment cannot be done in the short-term – it requires long-term intervention in both supply and demand. I would recommend introducing three measures, which can subsequently be fully implemented after the parliamentary elections. Firstly, set up a fund for unemployment; secondly, improve education; and thirdly, introduce much-needed public sector reforms.

Most industrialized countries have unemployment benefits. It’s a way of providing the fragile segment of the population with the means to maintain adequate purchasing power, thereby preventing poverty from gaining further ground in the country. This will contribute to maintaining social stability and, in turn, political stability. Fifteen percent of Lebanon’s working population is currently unemployed – a very high figure. Although emigration provides some relief, it also carries noteworthy negative consequences, such as the loss of valuable human capital. Unemployment benefits could act as an incentive for them to stay.

Secondly, we need to introduce reforms to the education system, both at university level, as well as technical education. This will ensure that the youth entering the labor market are better equipped, more productive, can provide a greater value-added and hence earn a higher salary. The latter is a crucial, seeing how expensive the cost of living is in Lebanon.

Finally, we need to reform the public sector so as to reduce the red tape, the corruption, the lack of transparency and the clientalism that serve as a disincentive both to domestic investment and FDI. This government can start the process now, so as to open new horizons and give the Lebanese people hope that things can change for the better.

Sébastien Dessus: Senior economist at the World Bank

E: How is Lebanon’s debt expected to evolve over the course of 2005 and what measures would the international community like to see the Lebanese government take so as to manage it?

Arithmetically, the new debt is the sum of the past debt plus the deficit. The latter is itself equal to the primary surplus (i.e., public revenue minus expenditures, excluding debt service) plus the debt service. While the primary surplus depends principally on fiscal policy and the debt service on interest rates, the two are not independent. The Lebanese government has little control on interest rates, but could lower its borrowing costs by convincing investors of its capacity and will to tighten its fiscal policy, with a view to put the debt on a steep declining slope – this is the key issue.

But how could the government possibly meet this challenge, once acknowledged that tight fiscal policy can depress growth in the short run (to eventually generate higher growth in the longer run) and will face strong opposition from the main beneficiaries of fiscal largesse? There is no miracle: reforms will need to be anchored in credible commitments and supported by a broad-based consensus. Enhancing the credibility of the adjustment requires tackling governance issues – the overall use of public funds – at their roots. Only when policy measures are viewed as long term and credible will borrowing costs decline. In this regard, a good communication strategy and some key institutional reforms can pay off rapidly. Gaining broad-based political support for the adjustment process will require the even distribution of the burden and the reinforcement of social protection.

Mohamed Samir: General Manager at Procter and Gamble Levant

E: How would you characterize Lebanese spending habits and consumer trends in the current economic situation? What do you expect in terms of the household spending in 2005?

There is a clear trend in terms of Lebanese consumers moving from premium brands to lower priced brands, although it is worth noting that this is a trend which is happening throughout the world. This reasons behind this are multiple – technological advancements, which are enabling companies to offer cheaper alternatives; local stores launching their own look-alike versions of premium brands at a lower price; and also consumers operating on reduced budgets. For 2005, we expect a continuation of this trend. People’s purchasing power has been going down, although not dramatically so. The shift is happening more at the psychological level: people are concerned about the future and are therefore less willing to spend, so they can save for the years ahead. They look around them – at the economic situation of the country, as well as what is going on in the region – and they start thinking more carefully about what to spend their money on. But in real terms, the loss of purchasing power is negligible.

A few years ago, there was a significant difference in prices between brands, but this gap has been reduced over the years, so it’s become a matter of the strength of the brand’s performance. And the Lebanese consumer is very well-informed about this – one of the characteristics that distinguishes them, is notably that there isn’t much brand loyalty. They are willing to try a greater variety of brands, so as to chose the best one. Thus, what this trend means for the producers of consumer goods, is that it is tougher to stay in the lead, because you have to be much more alert about what the consumer wants, and how to offer them products that perform better without costing them much more.

Jawad Adra: Managing Partner at Information International

E: How in your opinion does Resolution 1559 pose a threat to the Lebanese economy and how can Lebanon secure international investor confidence under such circumstances?

Resolution 1559 is a Damocles sword hanging over the Lebanese economy, and therefore, it will inevitably have an impact. It creates a situation of uncertainty, which the government has not been able to deal with successfully hitherto. There has been no analysis conducted as to what legal response could be made to the resolution, no successful attempts at gaining international support for our cause. The government has simply chosen to look the other way.

I am less concerned with the effect it will have on investment – the investment climate in Lebanon is poor anyway, be it for domestic investment or FDI. What Resolution 1559 can do, is bring about an economic collapse, by affecting some of the foundations this frail economy has been based upon. We’ve had a series of irresponsible governments that have persisted in maintaining the same policies over the past 20 years at a very high cost to society. The only way they have been able to do so, has been by relying on remittances from abroad and cheap labor, and borrowing at a high cost, among other things. The minute measures will be taken against Syria and Lebanon – such as the freezing of foreign assets for instance – remittances could drop or people could choose to transfer their money abroad. The system does not have the resilience to cope with this. However, it is important to bear in mind that Resolution 1559 is an exogenous force over which the Lebanese government has minimal control. What the government can influence are the inherent problems that mar our economy: high interest rates, wasteful public spending, corruption, the unsolved crisis of the power sector. Resolution 1559 should not be used as a scapegoat for the country’s persisting economic ailments. Its impact has so far been minimal, but it has the potential of having disastrous consequences, because our economy is weak following years of government mismanagement of it.
 

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Comment

Land of miracles

by Yasser Akkaoui
written by Yasser Akkaoui

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

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

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

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

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

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Cover story

Coup in Africa

by Peter Speetjens
written by Peter Speetjens

On October 9, Jose Olo Obongo, attorney general of Equatorial Guinea, announced to file an extradition request with the Lebanese authorities for three businessmen who we shall call EC, KF, and HM. The trio, all wealthy Lebanese, are suspected to be part of what is rapidly unravelling into an international scandal, stretching across continents and involving some of the world’s most high-profile personalities.

To insiders, it has become known as the “time share coup,” linking over a dozen multi-millionaires from Lebanon, South Africa and Britain, who have allegedly chipped in to finance a group of mercenaries led by a British ex-SAS officer Simon Mann to topple Teodoro Obiang Nguema, president of Equatorial Guinea, the oil rich nation that has become known as the  “Kuwait of Africa.”

The plot could have been lifted from the pages of The Dogs of War, replete as it is with secret agents, front companies, mercenaries, and shadowy links to the intelligence services and political elite of Great Britain, the United States, as well as Spain, which it is alleged, had planned to land a force of 500 marines in Equatorial Guinea as soon as the shooting started.

But on March 7, a Boeing 727 carrying 67 South African mercenaries landed in Zimbabwe at Harare International Airport. They were to meet with Mann to buy weapons from the Zimbabwean Defense Industries. The shopping list was extensive: 61 AK47 assault rifles, with 75,000 rounds of ammunition, 20 light machine guns, RPG launchers and 150 hand grenades.

Unfortunately, the Zimbabwean army was waiting. The next day in Equatorial Guinea Nick du Toit, a South African mercenary turned arms dealer and 15 ‘associates’ were also arrested. The two governments had been tipped off by the South African intelligence services that the two gangs were part of the same private army. For his part, South Africa’s intelligence minister, Ronnie Kasrils, praised his security services, which he claimed had infiltrated his country’s swollen ranks of guns for hire.

After his arrest, Mann, speaking through his lawyers, maintained that he and his men were on their way to guard a mine in Congo, even producing a contract to back up their claim, despite the fact that he and his men were carrying an awful lot of hardware to just guard a mine.

Rather more embarrassing was Du Toit’s admission on March 25 that Mann’s story was “a smokescreen” and that he, Du Toit, was in fact leading an advance party for Mann’s main group.  While hardly a unique military master plan, this was a similar modus operandi to that used by Executive Outcomes, the mercenary outfit that operated in Angola and Sierra Leone in the mid-1990s and which employed both Mann and Du Toit.

Then there was the issue of who was financing the whole operation. This is where the story is elevated from a botched coup attempt into an international scandal; and this where the three Lebanese come in. In his confession, Du Toit mentions EC, a wealthy and high profile London-based Lebanese businessman, along with several British millionaires as the financial backers of the coup. Mann backed the claim. “EC had done his homework and knew I had worked with Tony Buckingham,” wrote Mann in his confession, while he maintains it was EC who introduced him to Severo Moto, Equatorial Guinea’s opposition leader living in exile in Spain.

“I met Moto in Madrid,” Mann also wrote. “He was a good and honest man. He once studied to be a priest, but had stopped to better take care of his people. They asked me if I could accompany Moto home, the moment a military and popular uprising would take place. I agreed in an attempt to help the good cause.”

According to the authorities of Equatorial Guinea and Zimbabwe, Moto had offered Mann $1.8 million and a considerable oil concession. They also accused the Spanish government of being involved, citing as evidence, the presence of two Spanish naval vessels off the coast of Equatorial Guinea on March 8. Spain has, of course, denied the allegations.

Du Toit and Mann later withdrew the confessions, arguing that they were made under torture. In a letter smuggled out of prison to his wife but later intercepted by Zimbabwean authorities, Mann urgently pleaded for help. Again EC is mentioned.

Mann writes that he met him in January 2003 and goes on to say: “Our situation is not good and very urgent. What will get us out is MAJOR CLOUT. We need heavy influence of the sort that Smelly, Scratcher and David Hart can provide,” adding: “our lawyers get no reply from Smelly and Scratcher, who [were] asked to ring them back after the Grand Prix was over. This is not going well. It may be that getting us out comes down to a large splodge of wonga! Of course investors did not expect this to happen. Did I?”

 “Smelly” is EC, while “Scratcher” is none other than Mark Thatcher, son of former British Prime Minister Margaret Thatcher. It is not the first time his name has cropped up in this shadowy world. For years the British press has wondered how a private school dropout, amassed an estimated $90 million fortune.

It is thought that, apart from marrying an American millionaire’s daughter, “the boy Mark” received ‘payments’ of up to $12 million in the $20 billion Al Yamami arms deal between Britain and Saudi Arabia. In 1989, the British National Audit Office (NAO) conducted an official investigation into Thatcher’s finances, the details of which remain a state secret. It is the only inquiry in the NAO’s 100-year history that remains off limits to the public.

Mark Thatcher also happens to be Mann’s neighbor in, Capetown’s affluent Constantia neighborhood. When he was arrested in his pyjamas in XXXX, his suitcases were packed and his $3.5 million house put on the market. His wife and children had already left for Texas. Understandably, Thatcher’s lawyers maintain their client had nothing to do with the coup. They claim the $200,000 Mann was owed by Thatcher was for a mining operation in Sudan.

But Mann’s letter is not the only reference to EC and Thatcher.

This summer, Simon Mann’s accountant, 24-year-old James Kershaw, turned himself in to South African police. He had had in his possession the so-called “Wonga (money) List,” which names all those who invested in the coup, including EC and Mark Thatcher. Kershaw has since entered a special witness protection program.

And Thatcher’s is not the only name drawn from the upper-echelons of British politics. So too is millionaire David Hart, the man who, as part of Margaret Thatcher’s government, broke the power of Britain’s miners in the mid-80s. Another on the list is disgraced Conservative peer and bestselling author Jeffrey Archer, who recently spent 2.5 years in prison after being convicted of perjury. Archer, also a friend of EC, initially claimed to have had no contact with Mann. However, when it was proven he transferred some $135,000 to one of Mann’s many offshore accounts, he claimed he didn’t know the money was meant for a coup.

Back in Zimbabwe, Mann has been sentenced to seven years imprisonment, while his men face up to 12 months in jail. Nick du Toit awaits trial in Equatorial Guinea. The country is also actively seeks the extradition of Mark Thatcher and his fellow investors. Their chances of success are slim, especially as much of the evidence was obtained under torture. Equatorial Guinea also has a poor human rights record and still carries the death penalty.

 

Meanwhile the battle to extradite EC, KF and HM goes on. Last month, Jose Olo Obongo presented his case for extradition, accompanied by his lawyers, Henri Page from the British law firm Penningtons and his Lebanese counterpart Michel Tueni. According to Page, the request is based first of all on the confessions made by Mann and Du Toit. “I prefer to call them statements,” he said, “for they are much more than just an I-did-it confession.”

Next to the statements, Page pointed to the letter written by Simon Mann to his wife, the famous “wonga list” and especially to the contract signed between a company owned by KF and HK, Asian Trading and Investment Group SAL, and Mann’s Logo Logistics. The $5 million contract details a “mining, fishing, aviation and commercial security projects in a country in West Africa.”

“Finally,” he said, “we have further evidence that cannot be disclosed at this stage yet.” Page has also taken legal action against several banks in the Channel Island tax haven of Guernsey in an attempt to force them to open Mann’s accounts, which will not be an easy nut to crack.

The case continues.

(BOX)

KF is a 30-something Lebanese businessman, who runs an oil and gas servicing company in the Middle East and Sudan. Speaking exclusively to EXECUTIVE, KF admitted that EC and HM are both friends and business associates. He also admitted to being a good friend of Severo Moto, the Equatorial Guinean opposition leader who lives in exile in Spain, the country’s former colonial ruler.

“I love that man,” KF said. “He is a man with a vision. He is well respected in Spain and the USA, the main powerbrokers in Equatorial Guinea, and I believe sooner or later he will become president.”

KF went on to say that he met Simon Mann and went into business with him. He denies, however, that he knew anything about a coup. “The proof they have,” KF said, “is first of all the confession of Simon Mann and Nick du Toit, but both were obtained under torture and have been since been retracted. They are worth nothing, while the letter to his wife is not admissible in court.”

“Thirdly,” he said, “our contract with Mann’s Logo Logistics is registered and completely legitimate, and it had nothing to do with a coup.”

According to KF there is something fishy about the whole case. “EC did introduce Mann to Moto,” he said, “but it was Mann who first contacted EC.” Mann was asked by a powerful Russian diamond dealer to make a risk assessment of Equatorial Guinea with an eye on mining opportunities. That’s why Mann not only met Moto, but many Guineans. So far, no one has examined that road.”

“Another strange thing,” he added, “is the fact that Nick du Toit founded a company called Triple Options with the brother of several Obiang family members. The company dealt with fishing, air transportation, as well as training the presidential guard. Why would he risk all that in a coup?”

According to Page, however, “it is clear that Du Toit’s Triple Option was but a front company, and you need local partners in Equatorial Guinea to set up a company.”

KF concluded by saying that: “If the whole thing was a coup attempt, it’s clear that the money we invested was used for quite different purposes. And if it was a coup attempt, it’s unfortunate it failed, as Obiang is a ruthless dictator, who is even accused of having eaten his opponents’ testicles.”

It might be more than coincidence, KF maintained, that Du Toit’s lawyer was found dead on October 11, the niece of Severo Moto was found dead a few days earlier and the head of the Red Cross, Elias Marco, who made remarks about the prison system, was killed in a mysterious hit and run accident in September.”

(Box ) Lebanon’s millionaire man of mystery 

Born in Nigeria, EC, who is accused of having put $750,000 into the coup, is a very wealthy and influential business tycoon of Lebanese descent. He is worth an estimated $250 million, supposedly from oil trading. He owns villas in Nigeria and Switzerland, as well as a $25 million mansion in Chelsea, London. Not much is known about EC, now in his late 50s. He was, until very recently, known as “the kingmaker of Nigeria” with business interests all over Africa, including Chad, Libya, Sudan and Senegal.

He is very discrete, yet well connected and counts friends Syrian millionaire Wafic Said, Mark Thatcher and Lord Jeffrey Archer, the latter two being implicated in the Equatorial Guinea coup plot. He married three times, once to Hayat Mroue, now Lady Palumbo. One of his daughters is a photo artist, while a son is a minor actor in Holby City, a UK hospital drama. He also starred in Steven Spielberg’s Band of Brothers. (In June 2003, he was involved in a minor scandal when his girlfriend, a fellow actor in Holby City fell to her death in suspicious circumstances from his Chelsea apartment.

EC categorically denies his involvement in the coup

(Box) Gentleman soldier Simon Mann

Simon Mann is the son of George Mann, a former English cricket captain and heir to the Watney Mann brewery. Mann first studied among the sons of princes and politicians at Eton and went on to Sandhurst to embark on a military career. He eventually joined the elite Special Air Services (SAS) and served in Cyprus, Northern Ireland and Central America. In 1981, he left the army to set up his own security company, specializing in computers and bodyguards.  In 1989 however, he was asked to return to the British army to be the right hand man of General Peter de la Billiere, the commander of the British forces in the Gulf War and himself a former SAS officer, who in the 1960s fought Britain’s secret war in Yemen.

In the early 1990s, Mann met with Anthony Buckingham, a former marine and owner of a string of oil and diamond companies, in which he made a fortune in Africa. In 1993, Mann, Buckingham and Luther Eben Barlow, a former commander of the elite South African Buffalo 32 battalion, registered the company Executive Outcomes (EO) on the Isle of Man.

EO offered everything from military training and security to actual warfare. In 1993 it signed a contract with the Angolan government to clear the country from rebels. Value: some $40 million and an oil concession. In 1996, it signed a contract with the government of Sierra Leone to do the same. Value: some $36 million and a diamond concession. In both operations, Nick du Toit served as commanding officer.

After South Africa introduced a ban on mercenary activities, EO officially ceased to exist, yet it continued its activities under other names, such as Sandline International and Lifeguard. Mann, with Tim Spicer, returned to Sierra Leone in 1998 and Papua New Guinea in 1999. EO, or remnants of the company, still has interests in several African countries, among which are Angola, Sudan and Uganda.

Until he was arrested in Zimbabwe, the former British special forces officer led a millionaire lifestyle, owning the former Rothshild estate in Hampshire, a multimillion dollar villa in Capetown and flew the world in his private jet. In early September, he was sentenced to seven and a half years imprisonment for possession of illegal weapons and spends his days in the notorious Chikurubi prison in the Zimbabwean capital of Harare.  

(BOX) President Teodoro Nguema Obiang and family

Born in 1942, Teodoro Nguema Obiang came to power through a coup d’etat in 1979 that toppled his uncle Francisco Macias Nguema, Equatorial Guinea’s first post-independence president. Nguema was one of Africa’s most notorious dictators, who banned anything that remotely reminded him of ex-colonial masters Spain and the Catholic Church. By the end of his reign, one third of the population was either dead or in exile.

The current president has a slightly better reputation. He started his reign robustly by executing his uncle and releasing some 5,000 political prisoners, but today heads one of the world’s most repressive regimes. According to organizations such as Human Rights Watch and Amnesty International, there are no free elections, no freedom of speech, while torture is common practice.

But what else can one expect in a country where last year state radio declared that the President is “a God who is in permanent contact with the Almighty and can kill anyone without being called into account.”

With an eye on the country’s abominable human rights record and a death threat sent to its US ambassador, the USA closed its embassy in 1995. Under the reign of George Bush however, the embassy was reopened following intensive lobbying by US oil firms such as Exxon, Chevron, Marathon and Amerada, which profit from Africa’s third largest offshore oil reserves, found in the mid-90s in the bay of Equatorial Guinea. So far however, the population has not benefited from the black gold. According to the IMF some 75% of the income goes directly in the pocket of President Obiang and his family.

An official investigation led by US Senator Carl Levin has found that the US oil firms mentioned above directly transferred funds into Obiang’s accounts at Washington’s Riggs Bank, reaching estimated $700 million. The accounts have been frozen, while the prestigious Riggs “diplomats” Bank has been fined $25 million. Meanwhile, America’s financial supervising body, SEC, has started an official investigation into the behavior of US oil firms operating in Equatorial Guinea. Though on paper, one of the richest countries in the world, Equatorial Guinea and its 500,000 inhabitants remain among the very poorest.

Finally, mid-October President Obiang arrested his brother Armengol, head of security, and 27 of his followers, accusing them of attempting to stage a coup against him. According to opposition figures in Spain, the cash-stripped Obiang had asked his brother to give up part of the $450 million he has stashed away in Egypt, but Armengol allegedly refused.

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Des Hetherington

by Executive Contributor
written by Executive Contributor

British Mediterranean Airways, the carrier offering daily service between Beirut and London Heathrow, has added two new destinations to their schedule this year and just resumed flying to Georgia’s capital Tbilisi. Although attracting less media attention than its larger partner, British Airways, commands BMED has interesting stories to tell and things to celebrate. On reaching the corporate milestone of accomplishing 10 years of operations, BMED CEO Des Hetherington came to Beirut. Executive talked to him about the airline’s experience with the Lebanese market and its performance in a time that brings many challenges to the air transport business.

Why did you choose Beirut to stage a birthday bash on your 10th anniversary?

The 10th anniversary is a significant anniversary in any industry and particularly the airline industry, and of course Beirut is our spiritual home because that’s where it all started.

How was BMED performing over the last 18 months in Beirut and the Levant?

Business hasn’t been as good out of Beirut as we had hoped it to be. But overall, our business here has been approximately the same this year as it was last year.

If performance here was less than perfect, was that related to the fact that Beirut has open skies while the hinterland airports do not, meaning you cannot offer flights between Beirut and nearby destinations such as Amman or Damascus?

No, that’s never been the most important. The most important thing in terms of getting the economics right is the number of customers we bring from the Lebanon to the UK but also from the Lebanon to the rest of the world. As you know, BMED is a franchise partner of British Air and 40% of the customers that we transport between London and Beirut actually go from the Lebanon to other parts of the world, or from other parts of the world to the Lebanon.

Isn’t it correct that BMED was going up and acquiring planes at a time when your partner airline BA was forced to downsize in 2002/2003?

The start to answer that question is that people have to understand that BMED is a completely different sized animal from BA. British Airways operates about 350 aircraft; we operate six. We therefore have the ability almost to go against the trend where every airline in the world has had a very difficult three years after the tragic events of 9/11. As you rightly said, we have expanded our operations. We have increased our number of customers, number of aircraft, the number of destinations. So for example, in the last two years we started new routes to Tashkent in Uzbekistan, to Khartoum in Sudan, to Yekaterinburg in Russia.

How many destinations do you have now in total, and how is the situation in Georgia where service had been halted over a year ago?

We have 15 destinations in 14 countries, and I am delighted to say that on this Sunday [October 31] we resumed service to Tbilisi where we had had very artificial differences with the old government. After the new government came in as part of the rose revolution at the end of October 2003, we were immediately contacted and the differences have been resolved.

And your basic business split is between the Middle East – North Africa region and central Asia?

We like to think of it as three businesses within our business. One is the heartland, that is Lebanon, Syria and Jordan. The second area is Egypt, Ethiopia and Sudan. The third area, which is growing faster than the first two, is central Asia, that great sway of countries from the Caucasus to the western borders of China.

Can you disclose any turnover figures and passenger numbers?

Yes, last year was the best year in the company’s history, following the previous year, which was also the best year in the company’s history, and which we hope will be followed by this year. This year, we will look after about 370,000 customers. We have a turnover of about $180 million and provided fuel – that is the one difficulty we will all have to come to terms with in the industry – we will have record numbers compared to previous years.

How much of that turnover comes out of Beirut or the heartland business?

Specifically out of the Lebanon, approximately 13% of all the revenue in our business.

Apart from the volatility of oil prices, how important is the potential volatility of political circumstances on your particular business model, as you fly to some destinations that are slightly more volatile than the big markets?

It has an impact and it would be a lie to say otherwise. However, it is extreme political circumstances that have an impact on our business. The events in Iraq were the most extreme version of that, and during the April-May 2003 period, our business to Syria, Jordan, and Lebanon, was significantly lower. The interesting fact is, however, that immediately after the formal end of the war, our business has recovered very quickly.

In terms of your corporate culture, are you more “B,” as in British or more “Med,” as in Mediterranean?

I think we are more B – that’s the proper B as opposed to the unmentionable B. One of the things that we have done recently is that we changed our branding, from British Mediterranean Airways to BMED. The reason we made that change that the name was a bit of a mouthful, particularly when you using it in advertising or PR. So BMED actually no longer means Mediterranean, it doesn’t actually mean a great deal, just BMED.

What core values do you espouse in your corporate culture?

When we opened the business we were just 40 people and we had a great esprit de corps, everybody knew everybody. We have grown to a business with 650 people with different cultures and different languages but we wanted to maintain our esprit de corps, and I think so far, we have been able to do that. Our three priorities are safety, service, and having fun. That’s what its all about. And if you want to test the corporate culture of BMED, the best place to test it overseas is here in Beirut. We got a fantastic team here.

The hot topic in Lebanon over past six months was increase in inbound tourism. Did that show in your business?

I am a very, very pleased to say that we started to see an increase in European business and in particular British customers coming back to Lebanon. The other interesting development in terms of tourism is that Beirut is starting to be seen as a short break destination. Certain British customers can come here and spend three nights over a long weekend, enjoy the sights of Beirut or go up to the Bekaa. That market is growing.

What are your plans for developing the service to Beirut in the near or mid term?

We now have 16 services per week, so just slightly more than two services per day to cover four destinations, two in Syria, one in Jordan, one in Lebanon. I would like to get back to a level as in the year before the intifada was declared, in October/November 2000. In that year, we had a daily terminating service to Beirut, eight flights per week and we had our services to Jordan, which essentially were stand-alone services. 

So one year from now, how many BMED flights would you like to see coming into Beirut?

I’d like to see a straightforward daily service that comes to Beirut and goes back from Beirut. I’d like to see us get back up to about 20, 22 services a week to the region but I think it is going to take a couple of years to do that.  

How about the diplomatic interference and possible repercussions on Lebanon and Syria from UN resolution 1559? Could that affect you?

You are now taking me to areas of politics and I find business difficult enough…. No, because my understanding of the political scene is that the British government would need to place those sanctions on my business. I don’t see any of that. I see a great willingness particularly from the European Union to engage in not only with the four countries in the region but I see great willingness from the EU and very much from our own government in the United Kingdom to assist in the process of regional stability and I applaud that.

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IMF opens up

by Executive Contributor
written by Executive Contributor

The International Monetary Fund (IMF) has opened its regional office in Beirut tasked with helping Middle East countries, including Afghanistan, upgrade their economic, monetary and fiscal policies. The Middle East Technical Assistance Centre (METAC) will initially provide Afghanistan, Egypt, Iraq, Jordan, Lebanon, Libya, the Palestinian territories, Sudan, Syria and Yemen with technical assistance in the domains of central banking (banking supervision, structuring, payment systems, resources management and monetary operations) as well as public expenditure, revenue and tax management.

METAC, which will employ between 10 and 12 staff, is the fifth regional IMF office of its kind. Others already exist for East and West Africa, the Caribbean, and the Pacific. Initially, the emphasis of this office was to be focused on post-conflict countries such as Iraq, Afghanistan, the Palestinian territories, and Sudan. But its scope has since been broadened.

Significantly, the inauguration coincided with a warning in Beirut by visiting IMF managing director Rodrigo de Rato that Lebanon is still economically vulnerable (primarily because of its massive public debt) and he urged the government to enact long overdue reforms.  METAC will be offering assistance. But observers caution that in the absence of political will on the part of the Government this assistance will be worthless.

“We can design a program,” said METAC Coordinator Sami Geadah, “but if there’s no political will it will lead to nothing. Why establish the office?”

“I am afraid that in the absence of a local Government policy, this office will play a substitute role,” said economist Kamal Hamdan. “The pre-requisite for its success is a Government predisposition to the implementation of big reforms.”

Asked if that predisposition existed in Lebanon, he responded: “I don’t think so.”

The choice, he added, is stark: “Either they go for reform, or we will continue approaching a catastrophe.”

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