As the political process stutters back to life in Lebanon, the prospects for economic growth in the country have brightened. But various obstacles remain and, while not all of them lie within the government’s control, one of them is government itself.
Following a run of good years when gross domestic product (GDP) growth ranged between 8% and 10%, the Lebanese economy crashed to earth in 2011, after the outbreak of civil war in neighbouring Syria. The war has played havoc with export logistics in Lebanon, hurt the all-important tourist trade and put a damper on investment. Economic growth in 2015 and 2016 was no more than 1%, according to the International Monetary Fund.
A multitude of Syrian refugees has added to the burdens on the economy. But the most damaging factor of all has been the absence of good government – or any government at all. Sectarian politicians have consistently failed to agree on anything that does not satisfy their own interests. By October 2016, this had left the country without a president for nearly two-and-a-half years, and without a budget since 2005.
Growing debt
While ministers and MPs have indulged in political gamesmanship, infrastructure and public services have crumbled, and public debt has grown. The debt-to-GDP ratio in Lebanon is among the highest in the world, at an estimated 149% in 2016 and heading for 158% this year, according to the World Bank.
Current account and fiscal deficits are substantial, at an estimated 21% and 10% of GDP, respectively. At the same time, in the absence of enabling legislation, positive opportunities such as new offshore gas discoveries have remained unexploited.
So by far the most promising development of the past 12 months was the October 2016 election of a new president, Michel Aoun, a former general and founder of the largely Christian Free Patriotic Front. His election was followed by the formation of a so-called ‘national unity’ government under prime minister Saad Hariri, head of the Sunni Future Movement and son of former prime minister Rafik Hariri. (It was Rafik Hariri’s assassination in 2005 that triggered Lebanon's Cedar Revolution and more than a decade of parliamentary chaos.)
The new government, a 30-member Council of Ministers in which most of the important religious and clan groupings are represented, has since taken two important steps. It has passed two decrees that allow the first licensing round for oil and gas exploration (stalled since 2013) to begin, and it has adopted the 2017 budget and sent it to parliament, where it awaits ratification.
Problems with parliament
If only it were that simple. In Lebanon, contention and dispute surround not only the contents of the budget but also the parliament itself. Although elections are supposed to be held every four years, the current parliament was elected in 2009, and its life has been extended twice.
Elections (or yet another extension) are due again this year but the current parliament first needs to agree on a new electoral law to replace the existing deficient system. As the mid-May deadline for announcing elections approached, it showed no signs of doing so.
While exact details of the new budget have not been made public, it needs to deal with what has accumulated in the long years when there was no budget at all. So one measure it may contain is a long-deferred salary increase for public servants costing $800m. An earlier draft contained various tax measures to fund this increase, including a hike in value-added tax (VAT).
After mass protests, the draft was reportedly amended to refer the VAT increase to parliament but to include a windfall tax on extraordinary bank profits in 2016. That too is thought not to have made the cut.
Other revenue-raising measures may include a capital gains tax on hitherto untaxed property profits; an increase in corporate taxation from 15% to 17%; and higher taxes on interest from deposits. However, Mr Aoun has insisted that final approval of the budget cannot take place until a new electoral law has been passed – which could be a recipe for more deadlock.
Pulled in several directions
Rather than espousing a single policy platform or ideology, the Council of Ministers merely reflects the sectarian make-up of parliament. While that may be partly a good thing, it means that government lacks a cohesive economic vision. Nonetheless, Alain Bifani, director-general of the Ministry of Finance, believes the scale of the problems faced by government has focused minds.
“The best news from the draft budget is a dramatically increased awareness of how important it is to define a vision and tackle issues before they become too big,” says Mr Bifani. “Before, the attitude was ‘it’s not going to happen, so why discuss it?’ Now there’s a positive momentum and an expectation that solutions can be found.”
Some think the budget is putting the cart before the horse. “After 12 years of no budget, six years of economic stagnation and 30 months of political paralysis, the government needs two priorities,” says Nassib Ghobril, head of economic research and analysis at Beirut-based Byblos Bank. “It should stimulate growth and provide incentives for expansion and investment. And it should reduce the borrowing needs of the government. The budget has done neither – instead, it increases spending and is looking to increase taxes.”
Consumer confidence shot up in the wake of October’s presidential election. The Byblos Bank/AUB Consumer Confidence Index rose 38% from a third-quarter 2016 average of 36.4 to an average of 50.4 in the fourth quarter. “But the pick-up is conditional on what happens in parliament, and whether that translates into a better standard of living,” says Mr Ghobril.
Raising standards
For most, the present standard of living in Lebanon could do with a great deal of improvement. Unreliable state-owned electricity supply forces many people to pay two energy bills – one to the state and another to illegal private generators. Waste removal is as dysfunctional as electricity, and the roads are full of potholes. Meanwhile, in a country with the highest rainfall in the Middle East, people still have to buy potable water.
The population of 4 million Lebanese is now housing more than 1.5 million Syrian refugees, and another 200,000 long-standing Palestinians. This imposes considerable costs on the state, in areas such as security, environmental degradation, infrastructure, education and health. In recent years, more Syrian babies have been born in Lebanon than Lebanese babies.
With increased competition for low-skilled labour in particular, youth unemployment has risen to more than 20%, and in 2016 the country lost $2bn in cash remittances to Syria. Mr Bifani says that, since it began, the Syrian fallout has cost some $20bn in non-achieved growth and increased expenditure.
Remarkably, the resident population has not yet displayed any notably violent resentment towards their uninvited guests. But the state needs help, in the form of humanitarian and security support, macro-financial assistance and development aid. It has about half the humanitarian assistance it needs, a certain amount of concessional funding for rural road and employment projects, and no macro-financial support.
Mr Bifani points out that the election of a president is a positive for attracting international financial assistance, since he will have the ear of key donors. “We now have proper representation of Lebanon at the highest level,” he says.
Hydrocarbon hopes
One of the more promising hopes for the Lebanese economy may be the eventual production of offshore hydrocarbons. Surveys show reserves of 2700 billion cubic metres of gas and 850 million barrels of oil, the government says. That would be more than enough to satisfy the country’s own fuel needs for a long time to come and generate plenty of foreign exchange.
But while some politicians talk of revenues in the hundreds of millions of dollars, cooler heads warn that until wells have actually been drilled, no one really knows what is down there.
For now, the economy grinds on. First-quarter 2017 tourist arrivals and Beirut hotel occupancies were up by 13% and 14%, respectively, compared with a year earlier, suggesting a modest recovery in tourism. Construction permits, another important indicator, were slightly down, however.
The latest Bloomberg quarterly survey of economists shows a consensus real GDP growth forecast of 1.6% in 2017. The World Bank is more generous, predicting 2.5%, as long as the political process does not slide back into stalemate. Its figure assumes improvements across the tourism, real estate and construction sectors.
The World Bank sums up the view of many when it says, in its latest Economic Monitor, that Lebanon now has a “unique window of opportunity” to mitigate impending risks and tackle pressing development challenges. It itemises a menu of reforms to “turn the page of inaction and decline”, including the enactment of pending laws on public procurement and public-private partnership, fiscal reforms and power generation projects. Top of the list, however, is ratification of the 2017 budget.
