Executive Magazine

Fiscal performance and the debt outlook

by Mounir Rached January 3, 2018

written by Mounir Rached

There has been quite a lot of concern regarding Lebanon’s recent fiscal performance and its debt outlook. In its Article IV reviews for Lebanon, the International Monetary Fund has repeatedly alerted officials that the debt burden could derail the government from attaining its economic objectives and could be the prime risk source on financial stability, stressing that a sustained and balanced fiscal adjustment is essential.

The election of a president and the appointment of a new prime minister in 2016 set the stage for a revitalization of Lebanon’s policy making framework. The passage of the 2017 budget, the first in 12 years, indicated a new policy direction and added to the overall confidence and the potential for improved economic performance.

But fiscal performance was strongly affected by the crisis in Syria, which ushered in new challenges. The tax base stalled as economic growth nearly came to a halt, and the revenue share of GDP dropped from 22 percent in 2010 to 20 percent in 2016, further weakened by the removal of the VAT on diesel fuel in 2012.

At the same time, expenditure was burdened by a cost-of-living adjustment in 2012 that raised wages in that year by over 20 percent and maintained them at a higher level of GDP. Wages and salaries of public-sector workers have been rising annually by nearly 8.5 percent on average, a higher rate than that of any other expenditure component, accounting for 33 percent of total spending. Spending on debt servicing, which constitutes another major item of total spending at 32 percent, has been increasing with the rise in gross debt and the increase in interest rates. The recent wage increase will show its full impact in 2018. Subsidies to the public utility, Electricite du Liban (EDL), have benefited in recent years from the decline of oil prices in international markets—with transfers declining by over 50 percent—but remain a serious fiscal burden. Lebanon’s capital spending has been quite low, at less than 5 percent of total spending, and is plagued by slow execution and managerial problems.

The 2017 approved budget adopted a number of tax-raising measures linked to new public spending via the wage increase rather than to an effort to address the fiscal imbalance. The international community has repeatedly warned of the seriousness of the fiscal outcome and the need to place it on a sustainable footing through both raising taxes and trimming spending. The recent move received broad international support.

In spite of the bleak performance and significant spending rigidities—mainly related to salaries and debt service—Lebanon’s fiscal outlook has an optimistic side. A primary surplus (calculated by deducting interest payments from the overall fiscal balance) has been recorded since 2014, aided by the reduced fuel subsidy to EDL and occasional increases in non-recurrent transfers from telecommunications. During the first half of 2017, the primary surplus reached LL2.4 trillion ($1.5 billion). This, however, does not preclude the need for further adjustment, as Lebanon’s public debt burden will continue to rise, adding to existing vulnerabilities and ultimately crowding out essential public investment and social spending.

Fiscal outlook

The recent wage increases, estimated annually at LL1.5 trillion ($1 billion), will further burden the spending bill, but the tax measures, at LL1.7 trillion ($1.13 billion), are estimated to generate enough revenues to exceed the wage-increase expenditure. The most prominent tax increases raise the corporate profit tax rate to 17 percent from 15 percent, raise the tax rate on interest income from deposits and LL treasury bills and bonds to 7 percent from 5 percent, raise VAT to 11 percent from 10 percent, and raise property capital-gains tax and a host of other fees and charges.

These measures were welcomed by the IMF because without them, the fiscal outlook could worsen significantly. Although the corporate tax hike has been criticized by some local businesses, the increase will raise the corporate tax contribution from a low 7.6 percent of total revenues to just 12 percent. Lebanon’s dependence on direct taxation has traditionally been quite limited—the country has relied mostly on indirect taxation, which constitutes less than 4 percent of GDP and only 20 percent of total revenues. Compared to countries with equivalent income levels, Lebanon has a disproportionate dependence on regressive taxes.

The tax rate on earned interest has been effective in generating a higher direct tax rate, as Lebanon does not apply a global income tax and these earnings were largely exempted. VAT taxes, although raised to 11 percent—with extensive exemptions on spending of low income groups—are expected to have less of a regressive impact than has been predicted.

A key potential reform on the spending side would be to trim subsidies, especially to the power sector. This sector receives significant financial subsidies: EDL’s fuel purchases are capped at $25 per barrel of oil, with the treasury covering the excess cost. EDL also sells electricity at the average fixed rate of 75 LL ($0.05) per kilowatt-hour to distributors, while subscribers are charged on average 133 LL ($0.09). This has resulted in a sector that is plagued with shortages and mismanagement. There is an immediate need for reform in the sector, which remains a large drain on the budget and a key bottleneck to improved competitiveness and equity. Other subsidies also constitute an added strain on the budget, mainly subsidies to NGOs providing supposedly social functions and loan interest subsidies in housing and other sectors, which bring total subsidies to over 10 percent of total spending—equivalent to one-third of the total deficit.

These indicators demonstrate that fiscal improvement with a positive impact on the economy could be introduced over a short period of time, and that it’s quite feasible to cut the deficit in half by 2020. With a combination of spending cuts and revenue-raising measures, Lebanon can halt the slippage in fiscal finances and revert into a more solid and sustainable fiscal position. Lebanon has a revenue potential that can reach 25 percent of GDP by 2020 from the current 20 percent. With public investment and social spending remaining steady at 29 percent, this implies a significant cut in the deficit—to 4 percent of GDP.

Furthermore, there has been sustained international concern with the debt dynamics of Lebanon, but these concerns have been overstated. Lebanon’s debt stands at 145 percent of GDP, down from 175 percent in the early 1980s. Certainly, as noted above, a major concerted effort is needed to cut the growth of the debt dynamics. As is well known, the absolute debt, which is estimated to reach the equivalent of $80 billion by 2017, increases annually by the size of the deficit. Lebanon’s debt service is one-third of total spending and 10 percent of GDP. However, the unique quality of Lebanon’s debt is that it’s predominantly due to Lebanese creditors, both local banks, and resident creditors, in Lebanese lira (60 percent) and US dollars (40 percent). This implies that the large debt service is received primarily by Lebanese investors, constituting an internal transfer process, which in turn eases the exposure of the debt to external shocks. The banking sector realizes that preserving the government’s financial stability is crucial for its overall credit rating and profitability.

The most important task before the government is to stabilize the debt-to-GDP ratio and gradually decrease it with growth-oriented policies, as was done during the first decade of the millennium. One main reason for the recent escalation of the debt ratio is due to the subdued growth that was triggered mostly by the Syrian crisis, plus a period of low inflation rates. Debt ratios increase when price deflators are low.

The government has to make fiscal reform its top priority to reduce financial risk in the banking sector, and to ease pressure on the exchange rates.

January 3, 2018 0 comments

Economics & Policy

Political maneuvering

by Jeremy Arbid December 28, 2017

written by Jeremy Arbid

According to elected officials, 2017 was a year of achievement for the Lebanese state. After years of political polarization that prevented even basic governance, lawmakers made progress this year by passing the first state budget in 12 years, appointing officials to fill vacant positions in security, judicial, and other state institutions, and ratifying a new electoral law ahead of parliamentary elections scheduled for May 2018.

But these developments might not mean that Lebanese politics have fundamentally changed. Sami Atallah, the director of the Lebanese Center for Policy Studies, a Lebanese think tank, says the state’s efforts in 2017 were probably more opportunistic than altruistic. Atallah says that Lebanese politicians are primarily looking to bolster their records ahead of next spring’s elections, and that he does not foresee an opening for non-traditional party candidates in the coming election, unless they succeed in framing the debate on socioeconomic issues and offer serious solutions to address them.

E In November 2017, the parliament approved the first budget since 2005. What does this mean for law and policy-making?

First and foremost, it’s about time that the government submit a budget and the parliament approve it. Putting aside the content of the budget in terms of spending priorities and fiscal reform, the fact that the country was operating without a budget for the last 12 years indicates a governance failure par excellence. While the government was unable or unwilling to put together a budget, the parliament also failed to uphold its responsibility of compelling the government to submit one. In fact, the parliament has facilitated the improper behavior of the government by approving many laws of a fiscal nature, despite the absence of a budget. In effect, the parliament was giving the government a carte blanche and became an accomplice by further undermining public finance management. Through such a prism, one can see how the parliament, which ought to represent and protect public interests, seems at best incapable of doing so—not because of lack of authority, but because it chose to give up on its responsibilities and succumb to political paralysis that governed the period.

E But does the adoption of a budget suggest adherence to a more sound fiscal policy?

No, it does not. Adopting a budget is a necessary action by the government and Parliament. Not doing so is a violation of the country’s laws. Just because they passed a budget, it doesn’t really mean that it carries any fiscal reform with it. It only means that the political elite have agreed on spending allocation and how to finance them.

Any serious fiscal reform should tackle some of the following: For one, they could revise the tax system in a way that reduces the tax burden on middle and low income groups. They could address the expenditure side of the budget. Although spending on public salaries and wages as percentage of GDP is not much higher than the international average, the public bureaucracy suffers from poor productivity. This is largely the doing of the same elite who were complaining about adjusting the salaries of the same people they recruited into the public administration for clientelistic reasons.

Any serious reform could also streamline social spending, which is mired with problems. Consider that several public ministries and agencies allocate money to the same sector, which undermines efficiency. For instance, the Ministry of Education, the Office of the Prime Minister, and the Council of the South can allocate resources to public education. Furthermore, social spending is not commensurate with outcomes. According to a study by Herera and Pang (2005), Lebanon utilizes 25 percent more input to “produce the same health outcomes [as] best practices countries” and “13 percent more input for education”.

Fiscal reform could also allocate public resources based on equity rather than political considerations. The government could begin evaluating the efficacy of spending on various programs, including those at the Ministry of Social Affairs, whose budget is mostly allocated to charitable organizations. If it’s serious about reform, the government could strengthen the public procurement process and reduce; if not, eliminate corrupt deals that have infested the public sector. It could also review the government’s public properties and assess the extent to which the state is getting its fair share.

If serious about reform, the government could also adopt institutional reforms, including what is referred to as budget comprehensiveness, where all government spending is integrated into the budget. Currently, a fifth of such spending takes place outside the budget and without much scrutiny, consequently undermining efficiency and accountability. The government could also adopt a more transparent budget classification. There are already serious concerns about the credibility of the numbers that have yet to be addressed. These are some of the measures that the government or Parliament can adopt to demonstrate a commitment to reform. However, none of these were seriously brought up. In the last parliamentary debate, some MPs have managed to put on a show highlighting corruption concerns, but effectively, nothing happened. In brief, we’re very far off from any reforms.

E Do you think the tax law and the salary-scale adjustment will begin to redistribute income and wealth in Lebanon?

I do not believe the governing elite had redistribution of wealth in mind. Instead, they passed the legislation out of the imperativeness of the coming election. It’s not a coincidence that previous salary-adjustment bills were passed prior to parliamentary elections. Lawmakers needed to pass the salary-scale adjustment, and the new public spending had to be financed. Imposing regressive taxes would have been counterproductive politically and electorally, so they needed to come up with a compromise. Politicians were stuck between satisfying their electoral bases at the expense of taxing the capitalists who they are very close to, if not from the same circle. Something had to give, so they imposed indirect taxes, like the Value-Added Tax [VAT] increase, but also increased taxes on capital in order to raise more funds to cover the gap of the salary adjustment bill.

We should keep in mind that in the past, lawmakers have favored legislation which indeed redistributed wealth, but in favor of the wealthy. Consider that tax reform in 1993 reduced the highest bracket on income from 45 percent to 10 percent, hence reducing the tax burden on those with high incomes. They have helped the rich avoid paying inheritance tax by exempting the selling, buying, and transferring of shares in real estate companies—which are often set up as holding companies for the family’s assets—from taxes.

Rather than making income tax progressive, the government relied on indirect taxes and fees to finance its budget. In 2003, the government introduced a VAT of 10 percent. The burden of the sales tax, which is paid by consumers, ends up falling disproportionately on the lower income groups. By 2011, the VAT became a significant source of revenue, making up almost one-quarter of total government revenue. These are just few examples to show how the government opted for taxing consumption rather than capital, hence reducing the tax burden on the rich while taxing those with limited income.

E Will fiscal and taxation policy, or other good governance issues, be important to voters in next spring’s parliamentary elections? And, in your opinion, will any of the non-traditional political parties or non-establishment candidates stand a chance of picking up seats in Parliament?

It’s all about how you frame it. These independent movements could succeed in framing issues in such a way that they address people’s concerns and needs head on. This would require a full understanding of the concerns and needs of voters, not just simply running on an anti-corruption platform. They would need to adequately articulate such a message to the people, which requires that the media be on board. They will also have to be ready to respond to or counter the narrative of traditional political parties, which will try to shift the debate to somewhere else, to sectarianism or the disassociation policy or Hezbollah’s weapons, all in order to divert attention from the real issues that matter to Lebanese.

If the elite succeed in maintaining control, then there is very little chance for the independent movements to have a breakthrough. However, if independents can show that they’re up to the fight, at least in terms of highlighting Lebanese people’s concern, then the elite will find themselves in a battle they can’t win because they have consistently failed to deliver basic services.

Many of our traditional leaders have no clue how to address these issues. This is not to romanticize civil society, because it needs to be up to the task of articulating solutions. Sometimes, I find civil society organizations and non-traditional independent politicians to be shallow in how they approach politics. Just because you’re a new face and you’re not corrupt doesn’t mean you have a solution, so this is frustrating, too. Independents or civil-society activists who want to run for elections need to clearly articulate why they are running and the solutions they will be pushing for.

December 28, 2017 0 comments

Economics & Policy Overview

Where do we go now?

by Jeremy Arbid December 28, 2017

written by Jeremy Arbid

At the end of 2017, Lebanon does not know exactly where its economy stands because there is a lack of publicly available quantifiable data to suggest what direction Lebanon is headed in the coming year and beyond. We know that the economy is in a bad way, thanks to a few high-level indicators like stagnant economic growth and rising levels of poverty. But we do not know whether or not we are on the cliff’s edge, staring down into the darkness of the abyss that is an economic collapse. Rather, it seems our viewing lense is situated just far enough back to see that there are fundamental flaws within the economy, but the angle is not wide enough to know precisely where such fissures really are or how deep they go.

At the legislative level, 2017 saw several laws passed by Parliament that will directly impact the economy, such as tax increases, salary increases for public workers, and a state budget—as well as laws that will indirectly affect the economy, like an election law that should usher in the first parliamentary elections since 2009. And there have been political events, like the November 2017 resignation-turned-non-resignation of Prime Minister Saad Hariri that is hard to quantify in terms of its effect on the nation’s economy. To be sure, the laws, decisions, and events of 2017 will affect the confidence of investors and consumers alike, but they will leave their mark in ways that are not easy to forecast. It does not seem likely that Lebanon’s economy will churn more powerfully in 2018, but the legislation at least does provide the bricks that are necessary for any country in the 21st century to build a brighter economic future.

Despite the current and foreseeable difficulties that Lebanon faces, 2017 was a successful year for the government—at least in terms of providing the bare necessities of a functioning state. After such a long period during which the state was non-functioning, putting in place necessary fundamentals, such as regular elections and an annual budget, was good progress.

Maintaining momentum

This return to basic governance after a long absence can have a positive effect on the economy, if the government’s work ethic is carried over into 2018 and beyond. Ahead of parliamentary elections scheduled for May 2017, certain Lebanese politicians must decide that what they really want is to govern, or decide that they do not, and resign.

[pullquote]Lebanese politicians must decide that what they really want is to govern, or decide that they do not, and resign[/pullquote]

Local politicians have for years ignored the country’s economy, disregarding its weaknesses and providing no economic vision and no fiscal policy. With the passage of a state budget, the first in 12 years, Lebanon now has what it needs to begin articulating that vision and policy. But most politicians seem unwilling or incapable to make that a cornerstone of their electoral platforms for the 2018 elections, says Sami Atallah, director of the Lebanese Center for Policy Studies, a Lebanese think tank. Instead, the traditional political parties seem more content to rehash the political messaging of the last decade, which has proven to be uncreative, unproductive, and detrimental to the state of Lebanon and its citizens. Atallah says that when it comes to campaigning ahead of the elections, the traditional political parties “will shift the debate somewhere else, to sectarianism or the disassociation policy or Hezbollah’s weapons, to divert attention from the real socioeconomic issues that matter to the people.”

For Nicholas Chammas, chairman of the Beirut Traders Association, a political crisis like the one instigated by Saudi Arabia in early November 2017 could spell doom for the Lebanese economy next year. Chammas told Executive in a November 2017 interview that the Saudi–Iranian conflict “is reverberating across the Lebanese economy.” Chammas added that the Hariri affair has already, in the month since, had a perceived negative economic impact. “People today are afraid to consume, let alone invest,” he said. “And this is very deplorable because it is happening during the fourth quarter, which is most important [period] for the economy and the trade sector: It typically represents something like 35 percent of our yearly turnover. So if we lose momentum in the fourth quarter, it will be a dire sign heading into 2018.” Any drop in economic productivity could not be solely blamed on the political crisis, and its impact cannot be isolated because the situation is fluid. But was the economic outlook bright for 2018 to begin with?

[/media-credit] (Click on image to view timeline)

The central bank steps in

Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank, told a conference audience in November 2017 that he expected Lebanon’s economy would finish 2017 with 2.5 percent growth, according to remarks published in The Daily Star. In September 2017, the director general of Lebanon’s Ministry of Finance, Alain Bifani, told Executive that the ministry estimated that GDP growth for 2018 would “hopefully” reach 2.5 percent.

Following Hariri’s shenanigans in early November, the Institute of International Finance downgraded growth projections for 2018 from 2.9 percent to 1.8. And the International Monetary Fund, which calculates its projections using government figures, expects only 1.5 percent growth for 2017, with its 2018 estimate coming in at around 2 percent.

Atallah pointed out, the government has, in 2017 and in recent years, articulated no economic vision, and the recently passed budget—while necessary—does not begin to set out fiscal policy.

[pullquote]The Lebanese state has no plan for where to take the country economically in 2018 and beyond[/pullquote]

Enter BDL, which has for several years propped up the economy through its stimulus packages. Its latest package came in October 2017 in the form of Circular 475, which makes available up to $1 billion of financial facilities to local banks at the borrowing rate of 1 percent interest, if denominated in the local currency, or at interest rates up to the upper limit of the US Federal Funds Rate for dollar-denominated loans. The latest stimulus package, like previous ones was geared toward Lebanon’s housing-related economic activity. The 2017 package is the fifth from the central bank since 2013. That year, BDL announced a stimulus worth up to $1.5 billion, followed by $800 million in 2014, and packages in 2015 and 2016 each worth up to $1 billion.

The central bank has increasingly taken on the role of a quasi-fiscal policy maker through the issuance of its stimulus packages. The stimulus packages provided by BDL are according to its priorities, which may not be redistributive but are aimed at maintaining monetary stability and keeping Lebanon’s banks liquid. BDL’s mandate by law is to maintain currency stability and to protect the banking sector, to maintain solvency, and to ensure overall growth conditions for the economy. Growth equality is not in its purview.

Rudderless

The Lebanese state has no plan for where to take the country economically in 2018 and beyond. Without such a vision for the national economy, set down in the form of a high-level and multi-year document, it will be difficult to articulate fiscal policies like spending priorities and where to maximize revenue collection.

In August 2017, Parliament passed a law that increased taxes and introduced new ones, including a 1 percentage point increase to the Value Added Tax (VAT) that brought it to 11 percent, a 2 point increase to the corporate tax rate that brought it to 17 percent, tax increases on interest of deposits and on dividends, and an increase in the capital-gains tax. The constitutionality of the tax law was challenged at the Constitutional Court, Lebanon’s highest court, and was struck down in September, only to be re-legislated by Parliament with minor amendments in October. But in arguing their case to the public ahead of the high court’s decision, self-proclaimed opposition lawmakers claimed that the taxation scheme affected Lebanon’s lower class the most. At the time, Executive’s editors fact-checking the lawmakers’ claim found the opposite: The new tax burden would hit mostly idle wealth. The editors concluded that “those who are blocking the tax measures are defending the rich by sticking up for the poor.”

[pullquote]I hope the Lebanese consumer won’t panic when these VAT increases are implemented, because it will probably be absorbed into the system[/pullquote]

Spinneys CEO Michael Wright told Executive in a November 2017 interview that most of the cost of the VAT raise, which will go into effect at the start of 2018, will be internalized by retailers. He opined that retailers will try to downplay the impact of the VAT raise, referring to what happened in 2002 when the VAT was first introduced in Lebanon. “In most cases, except for cars, it was a re-regulation of taxation policy, and a trade-off between implementation of VAT and a reduction of import duty, which in most cases ended up in a [price-]neutral position. Despite the neutrality of the price change, the consumers reacted terribly. [Sales] volumes dropped by 20 percent and never recovered, even though there was no change in prices. So I hope the Lebanese consumer won’t panic when these VAT increases are implemented, because it will probably be absorbed into the system,” says Wright.

The new tax measures have already negatively affected consumer confidence, according to third-quarter results from the Byblos Bank/American University of Beirut Consumer Confidence Index, which were released in December 2017. In a press release, Byblos Bank’s head of research, Nassib Ghobril, explained, “The steep decline [of the index] in July, and its continuing decline in August and September, show that the negative impact of the tax hikes on sentiment is a lot more significant than any potential positive impact of the public-sector wage increase.” Ghobril added, “The results clearly show that the massive tax hike will offset the much-hyped positive impact of the public-sector wage increase on consumption and, by extension, on economic activity.”

In reality, nobody knows how taxes will play out over time, because they were not studied by the government or non-partisan organizations, and statistical modeling appears to not have been done. No one can determine who will benefit and who will be hurt, because there is no data.

The ad-hoc taxation impact might be felt in two years, and it has been driven by political interests and expectations, but not by modeling. No one can say how many households will be affected, because the government has no idea how many people live in Lebanon: No census has been carried out since 1932, and there are no reliable figures on the size of the tax base, the number of individual taxpayers or corporate taxpayers, or the size of the informal economy. Because there are so many variables and unknowns, the impact of taxation on the national welfare situation is not at all predictable.

Similarly, there is no statistical modeling of how the long-overdue salary increase for public sector workers will impact its beneficiaries, or of what will happen to the state’s finances because of this new spending. Proponents of the new taxes argued that they were necessary to finance the new state spending, which came in the form of the salary increase. Alain Bifani, director-general of Lebanon’s Ministry of Finance, told Executive in a September 2017 interview about how many households would benefit, but Bifani was not accurately able to quantify the figure because some households have multiple members in the public sector, and there is not a clear segregation of households and individuals that benefit from the salary increase. What the government’s figures can show is the number of beneficiaries counted as individuals, but the government cannot compute that into a number of households. If the tax base is calculated using the number of households and not the number of individuals, it will be inaccurate.

Also starting in 2018, commercial entities will not only have to pay the increased tax for corporations, but they may be subjected to payment of an annual fee to keep current the commercial registration of their entity. According to lawyers Executive spoke with in November 2017, Law 20, which passed earlier in the year, requires payment of an annual lump sum for every business location, including its branches and points of sale. Offshore and holding companies are exempt, and the lump sum fee is not tax-deductible and is due even if the company makes losses. The law was an amendment to previous laws that went unimplemented, so its impact is unclear, and the number of companies that would be affected is not known, making revenue estimates unpredictable.

Grim employment numbers

Even if the effects of new taxes, of the salary increase for public workers, and of the proper projection of state spending and revenue collection in the form of a budget for 2017 do begin to be measured in either quantifiably positive or negative ways, the economic feeling of many Lebanese citizens and non-Lebanese residents can be described as overwhelmingly anxious.

In the years since 2011, Lebanon’s national economic growth has plunged to negligible rates, because of a region-wide economic depression and the disruption of trade routes with Lebanon’s Arab neighbors due to the civil war in Syria. Lebanese exports have dropped by over $1 billion in the course if five years when comparing year-on-year numbers from 2012 to September 2017. In the same period, Lebanon’s hospitality and tourism sectors have also been negatively affected because of of local political instability, security threats, and a travel boycott by some Gulf countries to Lebanon. While 2017 tourism numbers did signal a better year for Lebanon’s hotels, Pierre Achkar, president of both the Lebanese Federation for Tourism Industries and the Lebanese Hotel Association, told Executive in a November 2017 interview that tourists have “started coming back in small numbers, and we did indeed see an increase in the number of Gulf tourists over the previous year—but it was nowhere near the numbers in 2010 and before.”

The economic bleeding that is visible at the national level pales in comparison to the pain individuals felt in 2017, and they can expect no quick medicine to alleviate their economic suffering in the coming year. The downturn in Lebanon’s economic output has pushed more people into unemployment or underemployment, and poverty rates have risen.

[pullquote]The downturn in Lebanon’s economic output has pushed more people into unemployment or underemployment, and poverty rates have risen[/pullquote]

According to an International Labour Organization (ILO) model, estimates of the total unemployment rate among Lebanese nationals has hovered at just under 7 percent between 2011 and 2017. In the same period, total labor participation for Lebanese nationals older than 15 increased by one percentage point to 47 percent, with the number of people in the labor force rising to 2.2 million by 2017. Unemployment for Lebanese youth, which the ILO defines as the ages between 15 and 24, has climbed steadily to almost 22 percent.

While the employment figures might not seem great for Lebanese nationals, labor participation among the over 1 million UNHCR-registered Syrian refugees in Lebanon is outright bad. According to 2017’s Lebanon Crisis Response Plan (LCRP), the ILO projected the size of the Syrian labor force in Lebanon at 384,000, and estimated that 36 percent were unemployed. The LCRP document also gives ILO figures showing that only 4 percent of Syrian workers reported to be working in Lebanon are skilled workers. Most Syrian refugee workers are employed in three sectors: agriculture (24 percent), services (27 percent), and construction (12 percent).

Mireille Girard, head of the UNHCR in Lebanon, told Executive in a November 2017 interview that the Lebanese economy is not generating enough jobs to absorb Lebanese workers into the labor force, not to mention Syrian refugees. She says competition between Lebanese nationals and Syrian refugees for jobs that would classify a laborer as underemployed (being below their level of education or trade skill, for example) has exacerbated the labor market’s shortcomings, diminished earnings and household spending power, and has put relations between Lebanese and refugees on edge. “The level of Lebanese vulnerability has also increased in that there is very serious unemployment, because the economy is not generating jobs, and skilled jobs are really not created, there is less construction and tourism, [and] there are [fewer] jobs in many sectors. People are going more and more into unskilled labor. This is creating a competition between the Syrian refugees and Lebanese, and this creates tension.”

Girard told Executive that most Syrian refugees are underemployed, working on average only half the month. “The number of [refugees] that have secured a fulltime job is quite small. [At the] start of the month, [refugees] don’t know how many days they will be able to work, which is extremely destabilizing, because they don’t know if they will earn enough to pay for rent. We know refugees on average pay $200 for rent, $35 to $50 for electricit, and about $30 for water, per month. These are running costs, no matter what. For education, the costs are covered for Syrian and Lebanese in public schools, but there are transportation costs, clothes for children, and a number of other expenditures. If a refugee works two weeks a month and the daily labor rate is about $12 per day, that will be about $177 per month.”

[pullquote]Ten calendar months of functioning governance were a welcome change after years of policy stagnation, but as 2017 came to a close, Lebanon was once again pushed from outside toward the unknown[/pullquote]

The figures on poverty rates for Lebanese are not pretty. The first target of the United Nations Sustainable Development Goals for Lebanon is to reduce the poverty rate to zero by 2030. Lebanon is far from achieving this goal, as the available statistics show. UNDP is preparing to update numbers on Lebanon’s poverty rate, but the latest numbers are not yet available. What is available are 2008 poverty stats from a Ministry of Social Affairs and UNDP joint study, showing that then “28.5 percent of the Lebanese population (or 1.07 million individuals) were estimated to be poor, living on less than $4 per day. About 300,000 individuals were considered as extremely poor, living on less than $2.4 per day, and unable to meet their most basic food needs.” A second study from 2015 from the Central Administration of Statistics, Lebanon’s public statistician, found that before the Syrian refugee crisis began in 2011, “poverty in Lebanon was estimated at 27 percent.”

As for Syrian refugees, the Human Rights Watch researcher Bassam Khawaja told Executive in a November 2017 interview that nearly 70 percent of the population lives below the poverty line only $3.84 per day, and that while data is limited, “all the assessments are that things are getting worse instead of better.” Girard told Executive that worsening poverty and extreme poverty rates for Syrian refugees have made life increasingly desperate. “Between 2014 and 2015, 50 percent of Syrian refugees were below the poverty line; now it has become 70 percent. Twenty-five percent were below the extreme poverty line, or survival line, and that is now 50 percent. The level of vulnerability has increased dramatically.”

U-ncertainty looms again

It is rare to meet a resident of Lebanon who thinks that planning is possible in this country. Ten calendar months of functioning governance were a welcome change after years of policy stagnation, but as 2017 came to a close, Lebanon was once again pushed from outside toward the unknown. With an increasingly vulnerable refugee population, rising resident poverty, stagnation in economic growth, and external dangers creeping up on the economy’s best-performing sector, it is nearly impossible to forecast what may come next.

December 28, 2017 0 comments

Hospitality & Tourism Hotels Overview

The comeback year

by Nabila Rahhal December 20, 2017

written by Nabila Rahhal

After five long years, it seems the dark stormy clouds of dwindling tourist figures and empty rooms have finally cleared from the sky of Lebanese tourism. 2017 was reported by those in the industry to be smooth sailing, for the most part.

There may still be some ominous weather ahead—the fallout from Prime Minister Saad Hariri’s resignation and subsequent retraction remains to be seen—but industry figures are confident the sector will continue to see gains.

A good year

Figures from the Ministry of Tourism show that 1,592,301 visitors entered Lebanon so far in 2017 (until October 2017) compared to 1,365,845 in 2012, the year tourism in Lebanon started to decline.

The boost in tourist numbers this year was reflected in the performance of Beirut’s five-star hotels, all of which reported an increase in room occupancy and revenues from 2016, along with an increase in average room rates. “We closed 2016 with 56 percent occupancy, while this year—comparing year-on-year—we’re at 73.4 percent occupancy with a 17 percent increase in average rates. So it was a fantastic year; one of the best in the last six years,” says George Ojeil, general manager of Le Gray, admitting that while 2017 was not as profitable as 2010, which he described as a “record year,” it did come close.

Maha Atieh, director of sales and events at Phoenicia Hotel, says 2017 was better than 2016 in all aspects. Occupancy grew by 23 percent from 2016, an increase she calls significant.

The Four Seasons also had a good year, with General Manager and Regional Vice President Rami Sayess saying that business significantly increased in 2017 compared to previous years. “The year was not just good—it was great. In terms of business performance, 2017 for us as Four Seasons Beirut was the best year since the hotel opened in 2010. It really showed us that this country has a lot of potential,” he says.

Kempinski Summerland Hotel & Resort also reported a successful first year of operation. “In terms of numbers and occupancy, as the first full operating year, we’re happy with our 2017 performance, despite the last two months negatively affecting our occupancy,” says Daniele Vastolo, Kempinski’s general manager. “Our business growth was very steady since the opening, and we have managed to establish, in a very short time, our place in the market, as well as gain a fair share of the business amongst our competitors.”

Why now?

Hotels’ solid performance in 2017 was the result of several factors, and if these trends continue, Lebanon will again be a viable player on the tourism map.

To begin with, the election of President Michel Aoun in October 2016 set a reassuring tone for the tourism sector. “The positive performance of the last quarter of 2016 contributed to a very strong [Q1] 2017. The fact that Lebanon was no longer on the news in a negative way—but instead positive news was being shared—really helped,” says Sayess, explaining that the image of Lebanon portrayed through the media has a significant impact on tourism.

Some hotels also had individual factors contributing to their growth in 2017. Le Gray, for example, inaugurated an expansion—which included 16 additional rooms, a new lobby lounge, a ballroom, and five conference rooms—and welcomed an increase in corporate and social events. “The demand was very good; on the rooms level the demand was very positive, and occupancy did not drop below 80 percent starting from Eid El Fitr [in June] until the first week of November. Banquet and events became busy mid-September,” says Ojeil.

It takes a village

Efforts made by the hospitality sector to diversify the Lebanese tourism market also contributed to its positive performance in 2017.

When the Gulf Cooperation Council (GCC) countries first advised their citizens not to travel to Lebanon in late 2012, the tourism sector suffered from the loss of a major market. But by mid-2015, the sector was compensating for the lack of Gulf tourists by developing alternative tourism markets for Lebanon.

One of these efforts was the Visit Lebanon Forum, held in May 2017. The business-to-business forum was organized by the Ministry of Tourism, in collaboration with members of the hospitality sector, from travel agents to hotels. The event brought 150 international tour operators, event agencies, and tourism corporations to Lebanon for the first time to network with industry specialists and see what the country had to offer.

All of the hotel representatives interviewed for the article said the forum had a positive impact on business, noting in particular a significant increase in visitors from Europe, where the invitees were from, to their properties. “I truly believe there were many people who were curious about and really wanted to come to Lebanon but were waiting for stability and to hear more about the country. So what the Ministry of Tourism did was very beneficial. Visit Lebanon 2017 was a very smart idea driven by the Minister of Tourism, which tried to do the maximum [it could] in a very short period with limited resources,” explains Sayess.

Another contributing factor was the Ministry of Foreign Affairs’ efforts in reaching out to the Lebanese diaspora through the fourth annual Lebanese Diaspora Energy conference held in Beirut in May, and the related events held worldwide in regions with a large Lebanese immigrant population. “The presence of this conference all around the world—and its annual occurrence in Lebanon—encouraged the Lebanese diaspora to come visit Lebanon and discover their roots. We’re projecting that, in 2018, this market will be a big focus for us because, while [expats and the diaspora] are surely affected by the security situation, they are not affected by political tensions or travel bans,” explains the Phoenicia’s Atieh, adding this market’s strength is that guests tend to stay for at least 10 days—often after a long flight—and usually visit with extended family, booking multiple rooms to fit all the cousins.

All hotel management interviewed said the Lebanese diaspora was a major market feeder this year. “This year we had guests from diverse markets such as the Latin American market—a purely leisure market which comes in the summer. North America and Australia were major markets as well,” says Ojeil, adding that the European market was also active this year.

Hotels played a major role in promoting Lebanon overseas as a destination, and their properties as the place to stay. Hotel representatives told Executive about their promotional efforts within their international chain or sister properties, and of their participation in global travel forums. “We have to work this way because, unfortunately, we don’t have a lot of support on the official level—many countries have representative offices all over the world, which we don’t have. So it depends on us and our connections to bring people to Lebanon,” says Atieh.

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Alternative tourism rules

The Ministry of Tourism launched a rural tourism strategy in 2015 to develop alternative forms of tourism including ecotourism, enotourism, and gastro-tourism, among others, and the influx of European visitors have been drawn to these new options. “Foreign visitors are increasingly interested in staying in rural and provincial areas, and at L’Hôte Libanais, we actively encourage them to spend part of their stay at guesthouses and boutique hotels out of Beirut,” says Orphée Haddad, founder of L’Hôte Libanais (see guesthouses box).

Beirut five-star hotels say they fully support these alternative tourism trends, explaining that any activities that promote Lebanon as a destination ultimately benefit their hotels as well. “What is important for us is to see the number of visitors to Lebanon going up; for me, the destination is more important than the hotel. The rural tourism trend is making people talk more about Lebanon, and this will help [encourage] more people to come to the country. Out of 1,000 travelers to Beirut, not everybody can afford the Four Seasons, so we just want our fair share,” explains Sayess.

Atieh notes that tourists who come for rural tourism one summer and stay in guesthouses out of Beirut, or budget hotels in Beirut, may end up choosing the Phoenicia or another hotel in Beirut for their next corporate meeting.

Work, work, work, work, work, work

The stability in Lebanon starting in late 2016 brought back markets that had been largely absent for the previous five years.

One such market is corporate travel and the meetings, incentives, conferences, and exhibitions (MICE) segment. “MICE made a good comeback this year: As a hotel of 446 rooms, we need big groups to really fill them, so it’s our traditional main feeder. Pharmaceuticals, regional banks, NGOs, and multinationals were considering Lebanon for their cycle meetings and annual client meetings. All those companies that were going to Dubai, Turkey, and Amman now want something different,” says Atieh, explaining that regional and international conferences and activity relating to oil and gas, or rebuilding Syria, were significant contributors to Phoenicia’s revenues in 2017.

Le Gray took advantage of its expansion to fully open up to the MICE segment, and Ojeil says it plans to continue doing so while going forward. Sayess also reported an increase in corporate guests, noting that “Beirut is becoming a destination,” with several weddings for regional visitors held at the hotel in 2017.

(Click on image to enlarge)

Nothing compares to you

GCC nationals began to visit Lebanon again in 2017, and all the hotel management Executive spoke to boasted of an increase in their numbers when compared to 2016. “Regardless of the various roller-coaster events in the country, 2017 was, for us, remarkable: We hosted a wide variety of nationalities with a strong presence from GCC countries, led by Saudi Arabia,” says Kempinski’s Vastolo. Atieh says year-on-year growth from the Saudi market at Phoenicia was 164 percent, and 119 percent from the Kuwaiti market from January to October.

However, these numbers fell short of those of in 2011, before the GCC issued travel warnings for Lebanon. “In 2017, business from the Gulf wasn’t [as strong] as expected, but the European business and other markets that came to Lebanon really compensated for this. Of course, if we can have this, plus the Gulf, it’s even better,” says Sayess.

Although the Lebanese hospitality sector is moving away from its reliance on the Gulf tourism market and toward greater diversification, those in the industry say Gulf nationals will remain a main market for Lebanon. “We’re building for the Lebanese diaspora, but still they’re seasonal travelers and need long vacations to come to Lebanon, while those from the Gulf used to come every weekend to Lebanon, and we used to notice that because our occupancy rates would go up from Wednesday to Saturday and on their holidays, such as the January school break in KSA,” says Atieh.

Sayess says he has high hopes for a return to pre-2011 levels of visitors from the Gulf. “Those from the Gulf are our natural guests because of their proximity to Lebanon. Besides, language is easy for them here, and many even have homes here. They will come back; it is just a matter of when,” he explains.

As unpredictable as tourism in Lebanon

Hariri’s resignation in early November 2017, its retraction, and the subsequent fallout shook the tourism sector. The management Executive spoke to reported cancellations of corporate conferences, as well as individual and group room bookings at their hotels in the two weeks that followed his resignation.

Those interviewed say they will end 2017 on a positive note, noting that activity in December is typically fueled by locals and visiting Lebanese expats. Ojeil says Le Gray is preparing for a festive December and will be hosting international bands and events throughout the month.

What comes next is less certain. “With the new situation and the happenings in Lebanon during these last two months, the year 2018 doesn’t give us the business clarity that we wish to have in order to plan accordingly. This is why, as a hotel, when it comes to business strategy and results, we have taken a very conservative approach, with the hope that the situation in Lebanon will turn positive and help us in proper planning,” says Vastolo.

Ojeil says that with the potential absence of Gulf tourists, the hospitality sector will once again have to focus on the local market. “If we don’t have a [political agreement] soon, we must shift our focus to the local dynamics and try to generate revenue from more local corporate business, weddings, and social events,” he says, adding that Le Gray will also focus on emerging markets such as Latin America, Europe, and Russia.

Sayess also believes that focusing on the European market is an option. “It may be hard to count on the Gulf market in 2018, but if we have a repeat of 2017, where the European market was coming, we will be fine until [tourists from the Gulf] hopefully come back,” says Sayess.

Once again, the Lebanese tourism sector finds itself at the mercy of politics—and only time will tell if skies will remain blue next year.

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December 20, 2017 0 comments

Economics & Policy Waste Management

Lebanon’s waste: another ongoing saga

by Matt Nash December 20, 2017

written by Matt Nash

The long-term effects of Lebanon’s 2015 waste-management crisis will likely linger for years, and chances that the experience will be relived in the medium-term remain high. Incineration is the approved future for nearly half of Lebanon’s waste, despite the fact that opposition has repeatedly derailed incineration plans in the past and opponents to government waste management plans remain adamantly opposed to incineration.

For nearly eight months in 2015, municipal solid waste (MSW) in Beirut and most of the Mount Lebanon governorate (excluding the Jbeil district) was not being collected. Municipalities in this service zone—where waste management, from collection to treatment and landfilling, was conducted by Sukleen and Sukomi, children of parent company Averda—turned to open dumping of trash in the absence of another solution. It also prompted a considerable increase in waste-burning. When the crisis, which was sparked by the closure of the country’s largest sanitary landfill, abated with the reopening of that landfill, Sukleen retrieved waste generated during the crisis from 59 percent of the municipalities it served, the company told Executive in 2016.

A report published in late 2017 sheds light on just how damaging the waste crisis was in Lebanon. In 2011, the Ministry of Environment commissioned a study to determine how many open waste dumps littered the country. That report’s authors found 504 open MSW dumps, 122 of which were not operational at the time. The ministry updated the report with new field research in 2016. This time around, authors found that the number of operational open MSW dumps has actually decreased, but the total number of MSW dumps climbed 22 percent, while the estimated volumes of trash in all of the country’s open dumps jumped 49 percent to over 5.7 million tons (see waste map below).

The temporary solution

To fix this mess, the government took a number of decisions. First and foremost, in 2016, the state launched tenders to award Averda’s work to new companies. Averda did not charge extraordinarily high prices for its work in Beirut and most of Mount Lebanon; in fact, the company’s rates were in line with World Bank estimates for waste management in a middle-income country. But, unusually, it was given a monopoly on waste management, from collection to treatment and landfilling, largely through no-bid contracts. Waste managers tend to handle only one part of the garbage-treatment cycle in a given market (i.e., only collection, only treatment, or only landfilling).

Horizontal integration allows for maximizing efficiencies and can result in profit margins slightly higher than possible without said integration. The result of the government tenders was a continuation of horizontal integration, but by a different company and on a slightly smaller scale. A joint venture between Lebanon’s Ramco and Turkey’s Altas won a collection contract for the Metn and Kesrouwan districts, formerly the northern part of Averda’s service zone. A joint venture between Lebanon’s Al-Jihad for Commerce and Contracting and Bulgaria’s Soriko won a collection contract covering the Baabda, Chouf, and Aley districts. That joint venture also won contracts to operate and maintain sorting and composting facilities, as well as two offshore landfills, the temporary waste disposal sites that will be replaced by incinerators in four years, as per the last government-approved plan of 2016.

Uncertain future

The city of Beirut is handling its waste alone, Municipality President Jamal Itani told Executive in an October interview. The city already tendered a collection contract (won by Ramco-Altas) that will be implemented in the first quarter of 2018 and plans to tender a waste-incineration plant before the end of 2017, with hopes it will be operational by mid-2020. When Executive spoke with Itani in October, details such as total project cost or financing mechanisms were not discussed. That same year is when the temporary, offshore landfills should reach capacity. This means that in two short years, Lebanon must find the land to build enough incinerators to handle its waste stream or 2015 could be repeated all over again.

[media-credit name=”Ahmad Barclay & Matt Nash” align=”alignright” width=”945″][/media-credit]

December 20, 2017 0 comments

Editorial Opinion

From Pax Ottomana to Pax Persica, and everything bloody in between

by Yasser Akkaoui December 20, 2017

written by Yasser Akkaoui

While 2017 began with promises that Lebanon was entering a new era, the year ended with proof that our political culture has not advanced a millimeter in hundreds of years. This land is still ruled through entitlements. Wannabe regional supreme leaders choose our politicians, and in return, they demand veneration and tribute from appointees. We’re still ruled by entitled princes who care only about protecting their own power and wealth, while they extort citizens to the bone.

No wonder Jerusalem was recognized as the capital of Israel by US President Trump. Arab leaders did not want it enough, they only politicized the Palestinian cause to keep their citizens quiet without making any attempts to defend the holy city. Who can blame them? They are all manipulated and appointed themselves. Certain leaders love putting on a show of dedication, when behind the curtains lurks the truth of their hidden agendas. Jerusalem can only be claimed by those who are willing to truly want it. For now, it’s the Palestinians, Iranians, and the Israelis.

The resignation of Prime Minister Saad Hariri followed by the speeches of Hassan Nasrallah demonstrated how hard it is to hope for change, despite a new election law and promises of long-overdue parliamentary elections. The law was written in a way to protect those in power. Reformists and idealists stand little chance of taking over Parliament and changing the county’s direction. Sectarian rhetoric and dirty tricks will dominate in the first quarter of 2018. The establishment will do all it can to bury the opposition, which, because it is still divided, is unable to voice a clear and consistent message.

Since the beginning of the Syrian crisis in 2011, our end-of-year issue has been increasingly difficult to produce. There’s very little good economic news coming out of Lebanon, and plenty of uncertainty coming from external forces, be it US pressure on Lebanese banks, or a regional power struggle that impacts people’s daily lives. From bankers to hoteliers to industrialists, all are helpless in front of geopolitical developments, worried about Lebanon’s economic future.

What we need, and what 2018 can help lay the foundations for, is the collective will to be a nation and build a nation. Our princes will lead us to ruin. They’ll keep us divided to enrich themselves, each community subservient to entitled crooks. We can’t move forward as a country until we all see ourselves as citizens of one country, instead of as communities competing for foreign entitlements that come with licenses to steal the spoils of a failed state.

December 20, 2017 2 comments

Economics & Policy Oil and gas

Lebanon’s oil & gas sector

by Mona Sukkarieh December 18, 2017

written by Mona Sukkarieh

Lebanon is finally stepping into the exploration phase. The Council of Ministers approved the awarding of exploration and productions licenses mid-December to a consortium made of France’s Total, Italy’s Eni and Russia’s Novatek. Contracts are expected to be signed in January 2018.

Given the context that surrounded the organization of Lebanon’s first offshore licensing round, the result can be considered a success. A lot of hard work was needed to overcome the numerous obstacles that stood in the way since 2013. On the other hand, expectations were so poorly managed during the previous years that many in Lebanon are not aware that the country was only at the pre-licensing phase. A more measured and realistic approach is advisable for the next phase.

What can Lebanon expect in 2018

Local legislation requires companies to establish a legal presence in Lebanon that is appropriately staffed and authorized to carry out rights and obligations arising from their exploration and production license. Also within a period of 30 days of approving the exploration and production agreement (EPA), the companies are expected to establish a management committee to supervise petroleum activities, composed of at least one representative for each company. The State retains the right to appoint representatives to attend, as observers, the committee’s and any subcommittee’s meetings. However, companies may organize working groups among themselves without the presence of a State representative, though they are subject to decisions made at the level of the management committee and the State retains the right to review reports submitted by these working groups to the management committee.

Companies are expected to submit an exploration plan for the first period of exploration within two months of approving the EPA. They have committed to drill two wells in 2019, during the first period of exploration, one in each block. And, although the Lebanese offshore is extensively covered with seismic surveys, more surveys will be conducted prior to any drilling.

In addition, local legislation includes a number of local content clauses to encourage the local economy, including a clause requiring 80% of employees to be Lebanese nationals. An ambitious target that will be hard to reach at the beginning of activities. That is why companies will be asked to present a detailed recruitment and training program within six months after approving the EPA, to be updated on a yearly basis, and are expected to assign a budget for training public sector personnel working on the oil and gas sector.

Strategic environmental assessment

Prior to carrying out petroleum activities, Lebanon will update its Strategic Environmental Assessment (SEA) to ensure that the impact of such activities will be minimal. A first SEA was prepared in 2012 by an international consultant but was later deemed unsuitable. The good news is that an update to the 2012 study is currently being prepared and is expected to be completed in the first months of 2018.

Legal and institutional framework

In parallel to these preparatory activities, work on the legal and institutional framework governing the sector is expected to continue. An onshore petroleum resources law is expected to be discussed by the Parliament in the coming months, because the 2010 petroleum law is restricted to offshore activity and authorities would like to pave the way for future petroleum activity onshore as well.

Two other draft laws are on the agenda of parliamentary committees and are expected to draw intense debates among the various political factions: a bill to establish a sovereign wealth fund and a more controversial bill to establish a national oil company (NOC), prior to any commercial discovery. Before a commercial discovery is made, it may be premature to establish a NOC at this stage.

LNG imports

Also in 2018, the government is expected to launch a tender to acquire up to three floating storage and regasification units (FSRUs) to be located in Tripoli, Zahrani and Salaata, and a tender to import LNG. A project that has been repeatedly revised and pushed back since 2013. In 2017, it was featured once again in the Ministry of Energy and Water’s plan for the electricity sector.

Maritime border dispute

On another front, the issue of the maritime border dispute between Lebanon and Israel will certainly resurface in the coming year, especially with the awarding of an exploration and production license in Block 9, which includes an area that is disputed by Israel. Are companies going to operate in this area? Previous Energy Ministers tried to contain tension when blocks on the border were put up for bidding by saying that putting these blocks on offer is a way to ensure sovereignty over the area, but companies would not necessarily conduct activities within the disputed zone.

The uncertainty and the tendency for tensions in this part of the world to quickly escalate will hopefully underscore the need to resume the currently neglected mediation.

Lebanon is finally stepping into the exploration phase. This is a time to look ahead. It’s also a time to reflect on the previous phase and evaluate how it was managed in a bid to draw the right lessons from our mistakes.

Correction: December 20, 2017

An earlier version of this story incorrectly stated Lebanon would conduct a new strategic environmental assessment ahead of offshore petroleum exploration. The 2012 strategic environmental assessment will be updated using data collected during the period since.

December 18, 2017 0 comments

Industry & Agriculture

From the olive to the oil

by Nabila Rahhal December 11, 2017

written by Nabila Rahhal

Olive trees are arguably as entrenched in Lebanon’s identity as its cedars. The country is home to 16 olive trees known as the Sisters, or the Olive Trees of Noah, which are among the oldest olive trees in the world. Located in Bcheale, in northern Lebanon, these olive trees are said to be 6,000 years old, according to local folklore.

Historically, Lebanese growers have cherished their olive trees and counted olive oil among their most prized possessions, taking quantities of it with them when forced to leave their homes during the war. This esteem has not faded over time. To date, the olive-picking season is much anticipated, with many families gathering annually for olive harvesting.

Rooted in the long tradition of olive farming in Lebanon, the modern olive oil industry is thriving—but it is not without its complexities and challenges.

The facts, please

According to the Ministry of Agriculture, Lebanon has a total planted area of 270,000 hectares; olive trees constitute 20 percent of that area, or around 54,000 hectares.

There are over 100,000 commercial olive tree growers in Lebanon, according to Mariam Eid, who is responsible for overseeing the olive oil division at the Ministry of Agriculture’s agro-industries department.

According to Roland Andary, value chain manager at USAID’s Lebanon Industry Value Chain Development (LIVCD) project, more than 80 percent of olives grown in Lebanon are used for the production of olive oil, with the rest consumed as table olives.

As such, it is no surprise that the olive oil industry is considered among the most significant agro-industries in Lebanon. “You cannot talk about agro-industry in Lebanon without talking about olive oil, especially since it covers this much space, employs a big number of people, and has so many challenges,” says Andary.

The olive growers

According to those interviewed, the majority of olive plots in Lebanon are owned by small-scale farmers with around two to three hectares of trees. While many of these farmers contract their land to traders who handle the olive harvest and process the oil, there are others who still work their own land.

Working on such a small scale drives up the cost of production, which in turn increases the price of Lebanese olive oil, explains Eid, adding that other expenses such as electricity and labor also impact production costs. This makes Lebanese olive oil expensive when compared to olive oil production elsewhere, for example, a 20-liter container of olive oil costs an average of $150 when bought directly from the grower.

“The price of Lebanese olive oil is high, which makes it hard to sell. But this is because the cost of production is high, starting with the price of the land to the salary of the farmer. So we are working to reduce the price through the olive picking machines we distribute, or the benefits we are offering cooperatives,” explains Andary.

Eid says the Ministry of Agriculture encouraged growers to come together to form cooperatives or unions of cooperatives, so that they can divide expenses among themselves and also be able to pool their olives together and supply large quantities when asked.

Oléa, the growers’ cooperative of Lebaa and its neighboring villages in south Lebanon, has benefited from both these initiatives, receiving assistance from the ministry and the LIVCD program as well. “As a collective, USAID provided us with automatic harvest equipment—they paid for 70 percent of it and we paid the rest—and they give us technical support. In turn, I rent out the equipment to growers for a reasonable fee of $20 per day. This helps reduce the cost of olive oil production, since labor is expensive in Lebanon,” says Denise Tegho, president of the cooperative, explaining that three people working the machine can harvest a field that would take 20 people twice as much time if harvesting by hand. Tegho also explains that as a cooperative combining their small quantities of olives together, they were able to develop their own brand of olive oil and sell in bulk when needed.

The holy grail of olive oil

Because Lebanon is small, its olive oil production is relatively low compared to other countries. Lebanon cannot hope to compete with mass producers such as Italy, Spain, Tunisia, or Greece. Instead, those interviewed for this article said that Lebanon should focus on producing high-value products like extra-virgin olive oil (a classification of olive oil which has less than 0.8 percent of fatty acid in it) or premium extra-virgin olive oil (which must contain less than 0.3 percent fatty acid).

However, according to Eid, extra-virgin olive oil accounts for less than a quarter of Lebanon’s production. “The grower and the mills don’t know any better, and we’re trying to develop training programs for that. The challenge is to get the grower to change his traditional ways,” says Eid.

Improving the quality of olive oil starts with the growers, and therefore, many programs, including the LIVCD program, offer training for growers on how to take care of their trees to improve yield. The program also provides training on post-harvesting techniques. These include processing olives on the day they were harvested because olives start to deteriorate the moment they are picked.

The quality of mills for extracting olive oil is another area that can negatively impact quality. Traditional presses, which use grindstones in an open tub to mill olives, are still common in Lebanon. However, it is almost impossible to produce a high-quality oil with such presses, because the tubs do not have covers, which exposes the oil to oxidation.

Also, in traditional mills, the discs used to press the olives are made from hemp—as opposed to synthetic fibers in modern mills—which is difficult to clean. If the mills are not cleaned well between each press, the olive residue from the previous press begins to ferment and leaves a bad flavor.

Eid explains that the Ministry of Agriculture has no control over the quality of olive oil produced, because its jurisdiction is over food safety only. The ministry regulates the hygiene of the olive mills, setting guidelines for cleaning the presses between each extraction and general cleanliness.

Gradually, more mills have become aware of the limitations on quality imposed by traditional methods, and are embracing modern equipment. NGOs have donated or contributed to the purchase of up-to-date equipment, and mill operators have noted the difference.

Tegho explains that her family’s olive mill benefitted from the modern equipment provided by LIVCD. Her family was finally able to enter the export markets by producing extra-virgin olive oil, which had been impossible using a traditional mill.

Brands such as Zejd or the recently launched Adon & Myrrh are leading by example in their usage of modern mills and branding techniques to produce high-quality olive oil. These two brands also purchase olives from growers under strict quality-assurance guidelines, which incentiviz growers to follow best practices.

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Developing a taste

However, it may be the Lebanese consumer that is affecting the quality of olive oil present in the market, having gotten used to oil pressed the traditional way. “Lebanese don’t yet have the culture of appreciating olive oil like they do with wine, which is more developed. This is why we have a challenge in convincing the customer to appreciate a good-quality extra-virgin olive oil, which is rather bitter. They want the sweet flavor of oxidized olive oil, but this does not have the health benefits associated with olive oil,” says Abed El Karim Al Rifai, head of the business development department at Litat Group, which owns Adon & Myrrh.

Youssef Fares, general manager of Olive Trade, which owns Zejd, believes consumer education is key. “We should have national campaigns to raise consumer awareness on what good-quality olive oil is. Otherwise, they are not reaping health benefits, and we are not helping the farmer improve the quality of their olives, nor the mills their methods of extraction,” he says, explaining that activities such as olive picking and visits to the mill—which he organizes—go a long way in developing a more modern olive oil culture in Lebanon.

A large percentage of Lebanese consumers, especially the older generation, buy their olive oil in 20-liter tanke from villagers based on personal relationships or referrals. But the younger generation, according to Fares, is more aware of the varieties of olive oil (like flavored olive oil) and their different qualities. They therefore tend to buy from specialty stores or ask more questions when buying from the source.

Growers themselves are now aware of the importance of marketing, and have become more aggressive in promoting their olive oil by participating in festivals and events where they can interact directly with the consumers, according to Oléa’s Tegho. Growers have been developing their own brands and labels, explains LIVCD’s Andary, hoping to sell a larger percentage of their production independently to get the best rates—otherwise, they would be forced to sell their olive oil to traders who buy at low rates.

Through these small but steady steps, Lebanon’s olive oil industry, which has been slow to modernize, is slowly transforming into a competitive industry that the Sisters would be proud of.

December 11, 2017 3 comments

Agriculture

The thyme trailblazers

by Nabila Rahhal November 17, 2017

written by Nabila Rahhal

A heavenly aroma greets you when passing by a bakery; tangy flavors linger on your taste buds long after you have swallowed that last bite. Yes, we are talking about zaatar—the faithful companion of the man’ousheh, a Lebanese breakfast favorite.

Jordan, Syria, and Lebanon each have their own versions of zaatar, mixing different herbs and seeds with dried thyme leaves. The Lebanese zaatar mix typically includes dried Lebanese thyme (scientific name Origanum syriacum), sumac, toasted sesame seeds, and salt.

This simple staple has been the object of innovation in Lebanon, through the cultivation of the thyme itself or, more recently, through twists to the original recipe.

Wild thymes

Lebanese thyme is a wild herb found in almost all of the country’s mountainous areas. It is plentiful, as it needs very little water to survive. It is collected mainly by rural families, who dry it and mix it with the other zaatar ingredients. It is then either sold it to commercial distributors and resellers, or to friends and family.

However, careless harvesting—ranging from pulling the plant from the roots to cutting the leaves before they have fully matured—is harmful to the herb and risks depleting Lebanon’s resource of wild thyme.

To reduce over-harvesting and protect Lebanon’s thyme, Law 179 was published in 2012 in coordination with a project funded by the UNDP. Under this law, those who want to collect thyme have to abide by several regulations, including obtaining a license, which indicates the area they want to harvest in, and harvesting only once a year, between June and October.

The power of planting

While measures were put in place to monitor those harvesting wild thyme, international NGOs also encouraged farmers to grow thyme themselves.

After the Israeli withdrawal in 2000, these organizations worked on projects that would provide families in rural areas of south Lebanon with a source of livelihood. It was then that the idea of cultivating thyme took root—although many farmers resisted, believing that cultivated thyme would be of a lower quality than the wild variety.

Cultivating thyme ensures a steady supply of the zaatar mix, which, due to its high demand in the local market, makes it a viable source of income.

Although some are still reluctant to plant thyme, Mohamad Nehme, a construction worker turned thyme farmer, is a firm believer in the practice. He was one of the first farmers to fully embrace thyme cultivation back in 2000, and he says he began to plant thyme even before it was encouraged by international NGOs.

A brave new world

As Nehme recounts, he and his family, who are from the village of Zawtar in south Lebanon, collected modest quantities of thyme every year. They would then turn it into zataar and sell it as a supplement to the family income.

This activity was not without risks, according to Nehme, as they were on the frontlines with Israel and were subjected to sniper attacks or risked setting off cluster munitions whenever they would collect thyme from certain fields. It was then that Nehme thought of finding a way to grow thyme in a safe place, instead of risking his family’s lives by collecting wild thyme in these dangerous areas.

Nehme says it took a lot of trial and error—especially at first, since he was working alone with no support—to be able to plant thyme that survived the season.

When the UNDP took an active interest in thyme cultivation in 2006, after the July war, it found Nehme and helped him develop his planting techniques to increase his yield. In turn, Nehme helped UNDP promote thyme cultivation among Lebanese growers, using his own success story as an example.

Nehme slowly began to develop his business, renting more land on a long-term basis to plant thyme on whenever his profits allowed. Today, together with a partner, he has planted 120,000 square meters of land with thyme. The land is divided between a small plot in his hometown of Zawtar and a bigger plot in Baalbek, where, as he explains it, land is cheaper and more likely to be available.

Nehme produces 10 tons of cultivated thyme per year, which translates into 50 tons of zaatar that he sells for $13 a kilogram. Ninety percent of his production is sold in Lebanon to restaurants, high-end bakeries—because his zaatar is more expensive than what bakeries that sell mana’ish (plural for man’oushe) for half a dollar can afford, and small-scale traders. He exports the remaining 10 percent to the USA.

Nehme also sells distilled pure thyme that can be used for medicinal purposes, and whole thyme plants, offering free consultations and advice with each plant sold.

Where it all started

Innovations in thyme do not stop at the farm—the traditional recipe for zaatar was recently given a modern interpretation by Fady Aziz, a branding specialist and designer.

Aziz had always loved being in nature—he was a scout as a child and in various hiking and eco clubs in his youth—and so after 15 years of working a desk job, he decided to find a career that allowed him to be in nature. Aziz also wanted his children to spend more time outdoors, especially in his hometown of Kfar Houneh, in South Lebanon.

There was a piece of land next to to a monastery in Kfar Houneh with abandoned centenarian terraces that Aziz says he had always loved, and so he considered renting it as the base for his undecided project.

Aziz says that when he approached the monastery’s father for the land, the priest was surprised as Aziz had no background in agriculture. He asked Aziz to produce business plan, upon which he would lease him the land.

[pullquote]Innovations in thyme did not stop at the farm—the traditional recipe for zaatar was recently given a modern interpretation[/pullquote]

It was then that Aziz started seriously studying potential uses for the plot. His ideas ranged from starting a snail farm to planting chestnuts or organic fruits and vegetables, but nothing captured his interest—until the idea to plant thyme suddenly struck him, when he thought of how much zaatar is a part of his daily breakfast routine with his children.

With his plan in place, Aziz rented the land from the monastery on a long-term basis in 2016. He then began meeting with zaatar producers, thyme growers, and agriculture experts to familiarize himself with the industry. It was Nehme who sold Aziz his first thyme shrubs and taught him some of the practicalities of planting it.

After cultivating the thyme, Aziz began thinking of where to go with his venture, and turned his marketing and creative experience inwards to his own brand.

Because his research had exposed him to the challenges in the local zaatar industry, Aziz had already decided to develop a creative zaatar brand that, as he puts it, Lebanese could be proud of. “Because there is no quality control or regulations in the zaatar market, it is chaotic. Also, most Lebanese take zaatar for their relatives when they travel, as do most tourists, so I thought, why not have a well-presented and well-branded zaatar to go out of Lebanon?” asks Aziz.

Thyme twists

Aziz wanted to take his project further than the typical zaatar mix and. “I wanted to create a new concept from the zaatar that we know, especially now that everything fusion is trendy,” he says.

The Good Thymes, officially launched in September 2017 during Beirut Design Fair (BDF). Aziz has developed 38 zaatar mixes, eight of which have already been introduced to the market and include hot zaatar, zaatar with nuts, and zaatar with fruits. Whenever possible, he gets the ingredients for the mixes from rural families in his village and surrounding areas, to support the local community. His workshop is also in Kfar Houneh, where he employs local youths to help him with the preparations and packaging.

The Good Thymes is primarily available for purchase through the company’s website. A bag of zaatar ranges from $10 to $20, depending on the mix, and LibanPost delivers orders over $20 for free across Lebanon.

You can also find the zaatar in Sandwiched, Salt and Butter, Voltfit, and J Grove for now—but Aziz says he has received interest from delicatessens and high-end retail stores. Aziz is also in the process of completing the paperwork to begin exporting The Good Thymes.

Building Success

Since BDF, Aziz has participated in several festivals and exhibitions across Lebanon, and says the response has exceeded his expectations. These festivals served as a platform to introduce The Good Thymes to the market, and since then opportunities have been pouring in.

[pullquote]Aziz says he aims to elevate the status of zaatar production in Lebanon to that of wine production[/pullquote]

So far, Aziz produces a total of 4,500 bags of zaatar per month. “Once you dry the herb, the zaatar can stay for two years, maximum, and I can have a steady supply all year long. This is why I am expanding my land to have a bigger stock to work with in the winter when harvest is over,” he says.

In addition to the initial 8,000 square meter plot in Kfar Houneh, Aziz has rented 7,000 square meters in Karkha (also in southern Lebanon), and is in the process of acquiring additional land. Aziz also plans to works with thyme farmers, guaranteeing he will buy all their crop if they abide by the quality-control standards which he sets: no usage of pesticides, specific time and method of harvest, etc.

Initially, Aziz invested $100,000 of his and his wife’s savings into the land, the equipment, and the branding and marketing (which Aziz says has been the biggest investment). He hopes to continue working alone for as long as possible, but says that he would consider taking on a like-minded investor if needed.

Aziz says he aims to elevate the status of zaatar production in Lebanon to that of wine production. “I want to create the fame that Lebanese wine is gaining locally and abroad, but with zaatar cultivation. And we can do it: The infrastructure and land is there,” says Aziz, who has already begun working toward that goal by welcoming many friends to his farm in Kfar Houneh, and planning a thyme harvest day where visitors can experience zaatar-making first-hand.

By taking a second look at agrifood products—whether it is zaatar or wine or any other Lebanese production—Lebanese entrepreneurs are breathe new life into them.

November 17, 2017 0 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

Don’t miss out on innovation

by Sofia Koller & Dirk Kunze November 10, 2017

written by Sofia Koller & Dirk Kunze

Instead of finishing his degree in IT engineering at Damascus University, 25-year-old Ayham* fled Syria with his family to Lebanon in 2012. At first, he worked on a banana plantation, then as a graphic designer. With the help of a scholarship that covered half his tuition, he finally finished a degree in computer science at the Lebanese International University. But rather than pay for a printed diploma, Ayham is using his income as a software developer to launch an artificial-intelligence coding platform.

Examples like Ayham’s are rarely discussed in Lebanon, where Syrian refugees are often depicted as a burden on the country’s infrastructure and labor market. But the reality is more complex. High unemployment rates had been a feature of labor markets in the region even before the start of the Syrian Civil War, and recent data suggests that the resulting refugee crisis has had a positive impact on job creation. An IRC report laid out the complexity of the economic situation: While data shows that the influx of refugees has increased competition for jobs and lowered wages, Syrian refugees have also stimulated host economies by providing new sources of labor and buying power. The potential upsides could outweigh the drawbacks in the long term, especially in some key sectors.

An opportunity for Lebanon

Some studies suggest that with the right support, refugees can become successful entrepreneurs, earning a sustainable income rather than relying on humanitarian assistance and social services. Refugees also attract investment: In Turkey, companies established by Syrians in the past few years saw an investment of $220 million in 2015 alone. Since more than half of Syrian refugees are younger than 24, making use of the next generation’s innovative potential would be an investment in Lebanon’s future, especially if focused on microenterprises and the ICT sector, which the UN Development Programme described in a 2016 report as a “promising industry.” Lebanon is already positioning itself as an innovation hub: In 2013, Banque du Liban, Lebanon’s central bank, launched a nearly $650 million package to encourage investments in startups to boost the entrepreneurial ecosystem. Yet high-quality startups and tech companies worth investing in are still lacking. People like Ayham show the entrepreneurial potential of Syrian refugees—but they face many obstacles in Lebanon.

Challenges for Syrian entrepreneurs

Syrian refugees’ access to the Lebanese labor market is limited. Those registered with UNHCR are not allowed to work, and those not registered can only work in the agricultural, construction, and environmental sectors—if sponsored by a Lebanese kafeel. As a result, most Syrians work in the informal sector. In 2015, only 1,045 new work permits were issued, and 801 permits renewed for the over 1 million Syrian refugees registered at UNHCR Lebanon, according to the country’s Central Administration of Statistics. A report from the International Labor Organization says that “there is a great deal of confusion surrounding the implementation of the laws and regulations … in relation to their entry, stay, employment, [and] property ownership.” Other difficulties include a lack of access to funding, information, and banking.

In addition, traumatic memories of the Syrian presence in Lebanon are still fresh. Samer, another Syrian who fled to Lebanon, is working as a software developer in Beirut and developing a smart-device startup. Samer says that when he tells Lebanese that he is from Syria, their attitude toward him cools. Ayham feels comfortable working in Lebanon, but he has also experienced harassment. “Lebanese have suffered, and I can understand their pain, but I wish we could put behind the past and look forward together,” he says. Samer also says he finds it difficult to integrate in the startup scene. Syrians often have limited English skills, while in Lebanon many of the the meet-ups are in English, he says.

Supporting entrepreneurship

Few organizations are supporting promising Syrian startups with training and funding. One of them is Jusoor, which was founded by Syrian expats. According to Ahmad Sufian Bayram, Jusoor’s entrepreneurship program advisor, “Lebanon is losing a lot of opportunities” because it lacks qualified software developers, while many qualified Syrians cannot work legally. Another example is the Friedrich Naumann Foundation, which organizes hackathons on social entrepreneurship and game jams—where the games produced promote social causes—among other projects, to bring together Lebanese and Syrians interested in entrepreneurship and technology while connecting them with the startup ecosystem in the region and internationally.

Several steps could be taken to support Syrian refugee entrepreneurs in Lebanon, such as issuing special work permits for well-educated Syrians with sought-after skills like expertise in technology. More research on entrepreneurship could help policymakers identify parts of the Lebanese economy that would benefit from admitting Syrian refugees in the long term. Since 2013, the ILO has recommended that Lebanon develop a wage policy, formalizing the informal economy and providing more statistical information. In addition, microenterprises could be promoted through small loans and grants, accessible to anyone living in Lebanon.

If Lebanon wants to become a hub for innovation and technology, it cannot afford to miss out on the potential and motivation among Syrian refugee entrepreneurs. Investing in them is investing in the future of both Lebanon and Syria.

*The Syrian refugees in this piece preferred to be identified by first name only.

November 10, 2017 0 comments