The recession is making itself felt in the number of new businesses starting

up and capital investments. According to the latest statistics published

by the ministry of industry, the number of newly established industrial

firms by the start of August this year totaled 276. That’s down 17%

from the 333 firms that were started up during the same period of 1999.

Capital investments declined by 16.5% from $63.5 million during the first

seven months of last year to $53 million during the same period of 2000.

“Considering the discouraging recession Lebanon is facing, a lot of

entrepreneurs and businesses hesitate before investing and setting up ventures

locally,” says Nassib Ghobril, analyst at Lebanon Invest.

Signing on

A Canadian delegation

that was

in Beirut during the

first week of October

signed agreements worth$ I 0.5 million. The

objective of the visit was to

boost trade links between

Lebanon and Quebec, where an estimated

100,000 Lebanese reside. One of the deals, worth $10 million, consists

of building and equipping a research center for cancer, which

will employ up to 50 people in Lebanon. The delegation was headed

by Guy Julien, Quebec’s minister of industry and commerce, and

included representatives from 22 businesses. Several Quebec based

companies are already present in Lebanon, including the

National Bank of Canada and Techni-Serv. And Liban Post is two thirds

owned by a Canadian consortium that includes SNC-Lavalin

and Canada Post Systems Management. During 1998 and 1999,

annual exports from Quebec to Lebanon totaled $16.7 million, of

which pharmaceutical products and automobiles accounted for

20%. Exports from Lebanon to Quebec were just $6.7 million, half

of which was accounted for by cement.

Southern discomfort

The International Labor Organization (ILO) has earmarked over

$16 million in aid for the former occupied zone and plans to

start work in the region immediately. Few other donor agencies have

sent any kind of assistance to the South, an area that is facing its

worst financial crisis ever. The international donor conference for

the South that was scheduled to take place in October was postponed

due to a lack of interest on the part of donor nations, who wanted

first to see Lebanon send its army to secure the border with Israel.

The Lebanese government has since turned to non-governmental

organizations in search of financial aid. ZeinaAli-Ahmad, from the

United Nations Development Program (UNDP), says that so far, $2

million has been sent to the South. This sum, which was sent by the

UNDP and the council for development and reconstruction

(CDR), was mostly for the execution of small projects, job training

and local mobilization. Ali-Ahmad says that additional aid from

the Kuwaiti Fund and the Islamic Fund is on the way.

A boost for Bekaa

A $300 million agro-industrial project has been announced for the

Bekaa. Financed by the Egypt-based Arab Brothers Group, the venture

will include a flourmill, a sugar production plant, a sunflower and soybean

oil press, a water-bottling plant and a pasta plant and will take four years

to complete. Middle East Food Industries, which will be in charge of

implementing and managing the project, plans to build a warehouse with

a 50,000-ton capacity and a cargo dock at Tripoli port that can handle 20,000

tons a day. While 20% of production will meet Lebanon’s need, about 80%

will be exported to the Arab world.

But the local milling industry view the development as a threat to their

operations. “Investing in a sector that is already so saturated will eventually

cause the project to fail, pulling other milling industries down with

them,” predicts Arslan Sinno, CEO of Dora Flour Mills, adding: “They’re

here to take advantage of the subsidy system.”

Oil from Saddam

Lebanon is exploring future possibilities of oil cooperation with

Iraq, according to the ministry of hydroelectric resources. The

sanction-riddled nation has a similar agreement with Jordan, whereby

Iraq provides the Hashemite kingdom with oil and oil byproducts

in return for concessions that ease Iraq’s crippling debt. Samih al Rayess,

general director of oil at the ministry, says that although the

agreement is still pending, there is great probability that Lebanon will

adopt a policy that closely resembles Jordan’s. “Oil will be imported

from Iraq,” he says, “and either used for domestic consumption or

exported to other nations, using the Port of Tripoli as a transit point.”

Iraq has been under UN sanctions since it invaded Kuwait in I 990.

Taxi on the runway

S yria’s official news agency SANA reported that Syria and

Lebanon are working on a joint airline to service cities in both

nations and in neighboring countries. Called Air Taxi, the company

will operate much like a cab service, flying businesspeople from

Beirut, Damascus and other cities to such destinations as Amman,

Limassol, Larnaca and Cairo or to virtually anywhere requested by

potential customers. Air Taxi will consist of several modem business

jets and has a reported capital base of $80 million. Arab businessman

Yassin Doghmosh is the company’s major shareholder.

High hub hopes

Can Beirut become a transport hub for the region? A task force created

by the Beirut international shipping chamber, Trans

Mediterranean Airways (TMA) and the syndicate of Lebanese ship

owners certainly hopes so. “We are trying to form a working group

to tackle issues such as multimodal transport,” says Roula Hamadeh,

TMA’s marketing manager. “We are cooperating with other representatives

of the sea and land transport sectors in order to establish an

integrated transport network to, from and through Lebanon.”

The goal is to facilitate and coordinate air, land and sea shipping to bring cost

and time savings to companies. The group also plans to work with government

authorities to amend laws and create strategies to help

Lebanon regain its role as a regional transit hub. That won’t be an easy

task considering Lebanon’s cumbersome bureaucracy – and most

notably the outdated and snail-paced customs procedures.

Dial away

The ministry of post and telecommunications is offering new fixed

line services to Lebanese consumers. Khaled Ghazal, from

Ogero (the phone company operating under the ministry’s umbrella),

explains that a variety of services are now available, including

call forwarding, wake-up calls, and conference calls. Each option costs

LL25,000 for the first month; subsequently the price drops to

LL5,000 a month per service. Ogero is also offering two new hotlines

for both customer service and repairs, and will soon have a website

to provide users with phone bill information. These options are expected

to help the MPT better compete with the cell phone industry.

Deal, what deal?

Minister of information Anwar Khalil recently

announced that the government had sold 49% of

Tele Liban to Arab Radio and

Television (ART), which is

owned by a Saudi company.

Although Tele-Liban’s president

of the board Ibrahim

Khoury refused to comment

about the sale, sources close to

him have revealed that the

shares were sold for about $7

million – an extremely low figure,

since the station is worth an

estimated $50 million. The

government and ART have also

supposedly agreed to lay off all

station employees and to limit

the government’s share of airtime

to a maximum of 30 hours

a week. Elias Abu Rizk, head

of the General Labor

Confederation, denied any

knowledge about the deal, saying that the news was nothing

more than unfounded rumors and that the government hadn’t

concluded a signed agreement with ART or any other company.

Workers of Bata unite

The closure of Bata’s shoe factory in Dekwaneh has created a flurry

of controversy and negotiations over the 120 employees who

lost their jobs. Bata officials claim to have offered its former long-term

employees generous severance packages that go beyond its legal obligations.

But after workers staged protests in front of store outlets,

demanding their jobs back or better compensation, Bata revised its offer.

The new package included a month’s payment for each year

worked plus an extra four months paid notice, five months for those

who worked for the company for 20 years and six months for those who

have worked longer. But that still wasn’t good enough for laid-off workers,

who found support from the ministry of labor in their demands for

double the original compensation package. Bata accepted to pay in

installments but is still being pressured to pay the full amount upfront.

Although taking the matter to court may be financially better for

Bata, the company says it hopes not to use that option. “Most of the

employees have been working with us for years, and we prefer to

solve the problem in a reasonable manner,” claims Rafic Saloum,

industrial manager at Bata, adding: “We are close to reaching an

agreement on the matter.”

Both the retail and manufacturing division of Bata have been present

in Lebanon, and the former will continue its operations.

Bata’s local manufacturing division was shut down due to an

accumulation of $10 million in debt.

For sale: one national airline carrier that has lost $360 million

in the last four years. Doesn’t make for a very appealing

advert. Could there possibly be any takers if Middle East

Airlines (MEA) isn’t first whipped into shape?

The International Finance Corporation (IFC) is the latest organization

to be contracted by the Lebanese government to assess the air

carrier and devise an action plan for the sell-off. Oddly enough the

central bank owns 99.37% of MEA; it would like nothing better than

to get rid of such a burden. Last July the bank signed a $1.3 million

agreement with IFC to help it do just that.

Reports have indicated that the study

would take 17 months to complete. But the

financing arm of the World Bank told

Executive that the report could be finished

much sooner. The plan seeks to find a

suitable partner for the carrier and to save

it from the political tug-of-war that has

turned the airline into an albatross.

Despite its worldwide experience in privatizations,

IFC faces a monumental task of convincing the government to take action. And, according to an official

at MEA, this is just the latest in a series of studies that have been

commissioned with the appointment of each new chairman. Since

1997, at least four foreign companies have performed a similar study.

But despite the wealth of reports, no decisions have ever been made.

The eternal question at MEA is the employee issue. Because of politically

appointed personnel, the airline has a staff of 4,500 to operate

a fleet of just nine planes. That carries a monthly cost of $5.5 million.

MEA’s employee-to-plane ratio is about 380 more than required to run

an efficient and profitable airline, according to international standards.

The employees’ union of MEA has claimed that the staff is just 2,700,

 while some three to four contractors each with about 200

employees are hired on a contractual basis. Regardless, that would still

put the number of employees at 180 more per plane than required.

Administrative reform of state-owned enterprises faces strong political

resistance because of the layoffs that would involve. The IFC is

expected to extend a 20-year loan of $40-$60 million to Lebanon for

end-of-service indemnities as a result of privatization. But because

politicians would interfere to protect their fiefdoms, it’s questionable

whether that money could ever be put to use.

Questions are also being raised about management

decisions in running the airline’s

operations. MEA doesn’t own any planes;

instead it pays about $250,000 per plane a

month in leasing fees. Although the price of

planes can range from about $70 million to

$180 million, few carriers choose to lease

when they can own the airplanes and pay the

same monthly installments over 20 or 30

years. MEA sold its three jumbos for a total

of $60 million in 1997, a deal that included $18 million worth of spare parts. That’s way below the estimated value

of$60 million each. The decision resulted in lost market share for MEA

as the jumbos had a capacity of 428 passengers compared to 186 for

the largest plane in its current fleet. ‘These decisions are part of years

of corruption and abuse that still contribute to the airline’s annual losses,”

says the MEA official.

Corruption and a lack of vision have brought the company to its current

situation, robbing the treasury of much-needed funds. Will the government

make the necessary decisions and implement the IFC’s recommendations

or will this report end up with the previous ones?

Welcome to Lebanon -the land that has forgotten its role as

the region’s free economy, where levying taxes has

become the national sport and stupid government decisions

run free. The latest doozy was a gift from sports minister Mohammed

Youssef Beydoun. He decided to tax visitors $IO for each night spent

at any hotel during the Asian Cup and for the entire month of October,

claiming it w~ the best way to recover costs for the three new stadiums.

That’s on top of the current 5% tax on transactions at hotels, restaurants

and tourist attractions. The only people exempt from the new tax

were the football players participating in the Asian Cup.

The hotel industry cried foul – and rightfully so. Pierre Achkar, president

of the association of Lebanese hotel owners, resigned from his

post last month in protest. Josianne Chaccour, sales and marketing executive

at Palm Beach Sofitel, was appalled by the new tax. “We’ve had

many groups cancel their bookings,” she says. “The government

thinks that it’s going to make more money, but in fact it’s going to lose

money in the end.” Viviane Sarkis, public relations manager at Le

Bristol, also reports cancellations as a result of the tax.

But if the hotels are livid, those forced to pay the extra money aren’t

any happier. “Many visitors are outraged at the $10 tax,” says Ziad

Sarkis, director of sales at Holiday Tower in Dbaye, “because they are

not even here to view the sports matches. But they have to pay the exorbitant

tax anyway.” Tanios Kassis, development manager for Choice

Hotels, says that many visitors come to Lebanon as part of a package

deal and pay an average of $30 a night for hotel accommodations. “For

these visitors, the $10 tax translates into a 33% cost increase,” he says.

Noha Saliba, public relations manager at Phoenicia Intercontinental,

sounded the one positive note. ‘The tax is not a problem,”

she says, “because those who want to attend the Asian Cup will not be deterred by an extra$10.”

But its effects are mostly

felt by the smaller hotels,

not big outfits like

Phoenicia, according to

Enrique Byrom, CEO of

the Asian Cup accommodation

bureau: “If you’re

paying $200 a night and

you have to pay an extra

$10, that’s just a 5%

increase. But if you’re

paying $40 a night, that’s a

25% increase.” Clearly, if

a new tax was indeed needed, a flat $1 0 fee for all hotels was an irresponsible

decision, a half-baked idea at best.

A total of 26,000 reserved hotel nights were cancelled as a result of

the tax, according to Achkar. And of the 25,000 visitors expected to

come to Lebanon for the Asian Cup, just 2,000 actually showed up.

Kassis adds that the maximum amount that the government will raise

through the tax is $ I million (not nearly enough to cover the cost of the

stadiums), while it is estimated that the cancellations have resulted in

multimillion-dollar losses for Lebanon. The cancellations have been

particularly distressing for Choice Hotels, which has just opened a

Quality Inn hotel in Tripoli in honor of the Asian Cup.

While many point to the $10 tax as the main culprit behind

October’s mass cancellations, border tensions were also responsible for scaring away visitors. Just

before the Asian Cup’s official start,

Hizbollah captured three Israeli soldiers.

In response, Israel threatened

to bomb Beirut. While the Lebanese

may have become blase about

Israeli strikes, the same cannot be

said of the majority of tourists.

Byrom believes that the political situation

was the major reason for the

cancellations – more so than the $10

tax. “Lebanon’s problems are

always political,” Achkar concurs, but he’s also quick to single out the government as the party responsible

for the Asian Cup fiasco. ‘The ministry of tourism didn’t even

promote the Asian Cup outside Lebanon,” adds Kassis.

And herein lies the real problem: an inefficient and bloated government

that never accomplishes anything. ‘The ministry of tourism

should have top professionals,” believes Francesco Borrello,

Starwood Hotels and Resorts area manager for Lebanon and Syria,

“and it should play the most important role in the country’s government.

Instead, it’s doing absolutely nothing for Lebanon.”

The only thing it’s accomplishing is dreaming up new forms of taxation.

The result is that the government is making Lebanon too

expensive and thereby discouraging visitors from coming here.

Devaluation. Is it a dirty word? These

days you can find doomsayers on

what will happen to the Lebanese

pound – but they don’t want to get

caught on what they say. “I believe that

devaluation is inevitable,” says one analyst,

“but don’t quote me on that.” Hiding

behind reports, graphs and charts, they say

the topic is ”too sensitive,” or, as one economist

says, “I’ll be blamed for the fall; I’ll be

seen as the catalyst if the pound drops.”

B ut it’s not only the fatalists that have kept a tight lid on

things. The central bank won’t reveal how much it intervenes

to keep the pound stable, and the total amount of net

reserves is always in safe storage. It’s as though the best thing to

do is to keep quiet about what might happen to the pound and any

danger will vanish.

But warning signals have been coming from abroad. In Merrill

Lynch’s latest report on Lebanon’s debt instruments, it states clearly

that the risk of local currency plummeting next year is real. ”The

country has reached the point that if steps aren’t taken right away,

the debt will get so high that it will be impossible to control,” says

Eric Lindenbaum, vice president of the emerging market fixed

income research department at Merrill Lynch. Merrill Lynch has recommended

avoiding eurobonds and holding T-bills only through

maturity in the first quarter of200 l. And it’s not the only foreign institution

showing lack of faith in Lebanon’s future. BNP Paribas has

said flat out to stay clear of investing in Lebanese debt altogether.

In September, Standard & Poor’s downgraded the country’s sovereign

debt and Moody’s put Lebanon on credit watch.

Up to now fiscal imbalances have been out on the loose. The government’s

deficit target at the end of the year – 37% – will be

missed by a long shot, while the gross public debt at the end of August

reached $23.7 billion (see graphs). “Lebanon is caught in a vicious

circle,” says Lindenbaum. ”There is hardly any growth while the debt

keeps on climbing.” According to Banque Audi, at the end of the third

quarter debt to GDP hit 142%. Audi also estimates that the economy

contracted by 0.5% in the first half of 2000.

On top of the fiscal fiasco, worries have been amplifying, putting

significant pressure on the pound. Even though strife between

Palestinians and Israelis sent ripples across the Middle East, most of

the uncertainties have been homegrown. Some believe that Rafic

Hariri could save the day, but the delay in appointing him prime minister created uncertainty.

And for many his image as savior is wearing off. While trying to rebuild the country during his first term,

he was the one who created a pile of debt. His plans are also vague:

No platform was presented during or after the elections. “There is

more confidence in Hariri than the previous government, but I recommend

caution,” says Lindenbaum. “He raised the debt and is now

in a very different situation. He can’t spend his way out of it.”

Analysts estimate that during the month and a half following the

elections, the central bank dished out an average of $150 million

per week to meet demand for foreign currency. That adds up to about

$1 billion. ”That’s a lot of pressure on the pound,” says Habib

Haddad, head of treasury at Beirut Riyad Bank. Most believe that

the motive behind the government issuing the last two eurobonds

was to help shore up reserves. ”That’s no solution,” says Tony

Hchaime, financial analyst at Arab Finance Corporation. “It’s

adding water to a bucket that has a leak.”

On the upside, solutions are clear and simple. Analysts are adamant

that the economy needs a kick-start, which will increase revenues for

the government to balance its budget and lower the debt. ”The government’s

main objective in the last two years was to decrease the debt

as much as possible. But as they concentrated on that – and failed

they also killed the economy,” argues Hchaime. ”We’re in a recession

and we have to get out of it. We have to concentrate on reviving the

economy, using the proceeds from the revival to reduce the debt.” An

attempt can be made without increasing government spending. The

initial step is to sell licenses to the two mobile phone operators,

LibanCell and Cellis, followed by selling another to a third operator.

Privatizing state assets – something that has been talked about for the

last two years but hasn’t been implemented- is another must, especially

the telecom. Not only would these actions bring in billions of

dollars in debt relief, but they would also generate confidence here and

abroad. ”There would be a positive reaction on the markets that would

allow interest rates to drop,” says Marwan Barakat, head of Audi’s

research department. With interest rates heading south and investments

coming in again, the economy would show signs of recovery.

The government has the tools it can use to disprove analysts expecting the worst-case scenario for this

country’s currency. But will the government

grab those tools and use them?

“There has not been any political will,”

says analyst Philip Khoury, ex-vice

president in the emerging markets equity

research department at Merrill Lynch .

“In the last two years the government talked about action, but there was no action on the ground. They agreed on

problems but never discussed solutions.”

The fate of the Lebanese pound

now depends on the new government to act. “Unless the government

takes drastic measures soon, it won’t be a question on if devaluation

will happen,” says Khoury. “It will only be a question of when.”