meepas - Economic reforms in Lebanon – figure of pre election speech or reality ?



Economic reforms in Lebanon – figure of pre-election speech or possible reality?

By: Meir Javedanfar

06/06/2005

Introduction

Lebanon's economy, especially the state sector has been suffering from inefficiency, corruption and absence of reform for a number of years. This factor is illustrated by Lebanon's ranking in the Transparency Corruption Index which places the country at position 98 - amongst some of the world's most corrupt countries.

The Wall Street and International Heritage Foundations ranking of the Lebanese economy as “mostly unfree” is further endorsement from the international community regarding the difficulties in doing business in Lebanon. For example one of the main areas of corruption pointed out in Lebanon is the considerable impact and influence of police and state security on the judiciary's decision making process. This in the past has meant that the judiciary has on occasions been “advised” by state security about what verdict and sentences to pass. Other example of corruption includes government jobs and contracts being awarded to the individuals or companies with close sectarian links, rather than the application of meritocracy.

Impact and consequences

Such noted problems with the economy have reduced the level of investment in Lebanon due to the fact that the international investor is weary of investing in a country where the system is viewed as being unstable and open to manipulation.

Furthermore problems such as corruption and cronyism have hindered the growth of the Lebanese economy as foreign companies and local entrepreneurs face increasing challenges such as red tape, extra costs and excessive regulations which reduce their productivity and profitability. Corruption has also meant many sectors of the country are owned and operated by government owned companies which operate in monopolistic conditions.

The reduced rate of growth of the economy and reduced investment has meant that the Lebanese economy has not and is not able to generate sufficient income to finance the country's expense bill for outgoings such as health, education, defence and infrastructure investment. The increasing price of oil has further ballooned the Lebanese economy's outgoings. Therefore due to the growing gap between income and outgoings the Lebanese economy has been facing a growing deficit problem over the last number of years.

Lebanon's economic problems, especially lack of economic reform affects the country at every level. There are many examples of how the Lebanese consumer and businessman are affected. For example Lebanese mobile telecom tariffs are highest anywhere in the Middle East as both telecom companies operating in the market are government owned. Therefore they are not under any market pressure to reduce their prices.

The Lebanese private and business consumer is charged some of the region's highest water and electricity rates – again due to monopolistic nature of the market. Meanwhile the services rendered by such companies are considered by many as substandard, especially in rural areas of the country where there are known power and water outages.

It is also a known fact that state monopoly companies running water and electricity lose money to the tune of hundreds of millions of dollars every year (e.g. Électricité Du Liban lost $400 million last year). This is factor has a serious impact on the deficit problem.

To make matters more difficult for the Lebanese consumer the state has recently introduced new taxes (such as a new sales tax) in order to get the public to plug the deficit in the budget. In other words the Lebanese consumer is again expected to finance the government's mismanagement of the economy.

The debt time-bomb

There are growing concerns that the Lebanese government will find it increasingly difficult to honour its debt repayment due to the economy's current lack of performance. This was confirmed recently whereby according to Lebanese sources Lebanon's GDP growth in the first quarter of 2005 reached zero percent, the worst level in many years.

This is a serious concern as Lebanon is one of the world's most indebted countries. The debt problem owes its origins to the $29 billion borrowed from 1993 by the Lebanese government, $20 billion of which has been spent on the 1993 launched “Horizon 2000” reconstruction program. With $33 billion total debt not only are the repayments bleeding the Lebanese budget and causing a deficit; there are increasing concerns that Lebanon could become another Argentina if it defaults on repayments. Although this is not currently a strong possibility, nevertheless the fact that the Lebanese economy has not reformed means that it has not met one of the important conditions set by the Paris club of creditors. As a result Lebanon will not be able to borrow any more money from the Paris club until it reforms. Furthermore unless reforms are made Lebanon's economy will find it more and more difficult to generate the necessary incomes to repay its debts whilst being able to sufficiently finance the country's expenses.

Underlying reaons

There are a number of reasons behind the lack of reform of the Lebanese economy. One of the main reasons is the politician's inability to agree to the reforms required due to sectarian and political differences. Groups such as Hezbollah who represent Lebanon's underprivileged Shiites have resisted reform of the economy as they fear that they may lose the government's financial backing for the development of the south, a factor which increases Hezbollah's popularity. Other groups such as Walid Jumblatt's Progressive Socialist Party are resistant to reform and privatisation of the economy as it is against their socialist ideology. On the other hand Maronite groups who have many entrepreneurs amongst their constituents have been backing calls for reform.

Consequently endless bickering, arguments, counter arguments and resignations in the National Assembly between the different factions in the past has meant that important reform bills have either been cancelled, rejected, postponed or half implemented. One of the most notable examples were plans suggested by a number of MPs to privatise the currently government owned mobile Telecommunication companies. After five years of arguments in the National Assembly the only part of the sector which was privatised was the management of the networks. Both companies are still in government hands. The Lebanese consumer is still fuming about the outrageously high Telecom tariffs which it has to pay.

Another important factor which blocked reform of the Lebanese economy was Syria. The presence and influence of Syria in Lebanon over the years had permeated well into the government and Lebanon's economy. Many members of Syria's ruling military and political hierarchy had business interests in Lebanon, some of which included stakes in government owned companies. Through their Lebanese front men in the National Assembly Syrian officials resisted all efforts to reform the Lebanese economy as liberalization of the economy would have meant increased competition and loss of their market share.

Warnings

There are plenty of warning signs regarding the consequences of Lebanon's economy not implementing the required reforms. With falling tourism (as much as 15% in first four months of 2004) falling port activity and electricity production (as much as 4% in the same period) Lebanon's under maintained economy is feeling the pressure and may very well overheat. The situation has become more acute after the assassination of Rafiq Hariri which led to bank deposits falling by as much as $1.5 billion.

Furthermore last month the international rating agency Capital Intelligence downgraded Lebanon's long term currency rating to B-. According to the agency the continued delay in implementing fiscal and economic reforms has made Lebanon more vulnerable to domestic and external shocks thus causing the downgrade.

Lebanon can not expect the international community to finance its debts any longer. Institutions such as the Paris Club of donors have provided loans twice before and they want to see reforms implemented before they provide any more money. Arab donors are also likely to reduce their backing in the presence of corruption and lack of transparency of the Lebanese financial system. This is in addition to the millions of Lebanese expatriates who are shying away from investing in their beloved "la patrie" simply because they don't trust the authorities running the economy.

With a growing deficit problem and economic stagnation time is running short for the Lebanese authorities, because their present corrupt and unproductive system of running the economy could have serious political and economic repercussions in the future.

New Hope?

Lebanon is currently going through elections where many former arch enemies are joining together in the new patriotic spirit engulfing the country after Syria's withdrawal.

However the golden question is what are the policies of current candidates running for election with regards to the need for economic reform?

The bad news is that only two of the factions which are the Lebanese National Bloc (LNB) and the Free Patriotic Movement (FPM) have presented a comprehensive economic plan during the recent campaigns for the elections.

According to the Lebanese Newspaper the Daily Star t he LNB called for privatizing state-owned assets and reducing government spending as a way to reduce the debt. It also emphasized the need to modernize the industrial sector by giving more incentives to industrialists, such as cutting the cost of fuel oil and electricity. Aoun's FPM has only drawn up a partial economic plan. The main points the FPM advocates is a program of political reform to cut back on bureaucratic waste, and appoint international auditors to verify public spending figures for the past 15 years.

It is the opinion of meepas© that in the first two years after the elections economic reforms will be implemented only in a small scale. This is based on our observation that we currently don't see any great deal of enthusiasm for privatisation of the state companies before the elections, we are therefore likely to see even less enthusiasm once the politicians are elected and in office. This is despite the fact that Saad Hariri's LNB is currently supporting the reforms. It is the expectation of meepas© that once elected the strength of his current list will weaken as MPs will start backing their sectarian allegiances. This is due to the fact that sectarian allegiances are far more entrenched in Lebanese politics than Saad Hariri's political ideology.

Therefore it is our belief that the reform and privatisation bill for the economy will again become embroiled in sectarian infighting in the National Assembly, due to the fact that it is mostly the Christian and a few Sunni MPs backing the reforms whilst Shiite Hezbollah, Amal, the Druze Progressive Socialist party and a range of other Islamist and leftist parties will oppose it as they have done so before. The willingness to compromise over the economic reform issues is likely to be reduced even further due to the fact that almost the same identical groups (Maronites vs Sunnis, Shiites and others) will be engaged in a political battle over the 2000 Electoral Law program, which Maronites want changed whilst the Sunnis, Shiites and the Druze want to remain as is. Furthermore other urgent issues such as security, especially after the recent assassinations and bombings are likely push down the economic reforms in the government's priority list.

In our opinion the only reforms which we are likely to see in the short term (spanning the next two years) are measures such as passing of anti- corruption laws, plus new laws such as tax breaks in order to encourage investment. Other measures taken to stimulate the economy will be the establishment of Free Trade Agreements with a number of countries. We don't expect to see privatisation of state companies in this time span as it will lead to loss of business interest for government officials, many of whom still have strong sectarian ties, something which their MPs will want to protect.

Our expectation is that the reform and privatisation plans will gather momentum around the 2008 period. This is based on our forecast that Lebanese officials will by then feel increasing pressure from the mounting economic problems such as unemployment and high interest rates. It is also our expectation the deficit problem in Lebanon will worsen due to high government expenditure bill created by loss making state enterprises and high loan repayments figures. However this time it is our prediction that the Paris club will not provide further loans as Lebanon has not reformed its economy as requested. Instead by 2008 the US will become more involved as a possible donor/creditor to Lebanon, due to its rapprochement with France and with the Lebanese government itself. In such a case it is our prediction that the US is most likely to start asking for political reforms such as disarmament of Hezbollah as a condition for provision of loans. In such a case selling government companies and privatisation of the economy will look a lot easier and less controversial to the Lebanese politicians than disarming Hezbollah, thus increasing the chances for the execution of the privatisation plan. In such a case the Lebanese consumer and investor will have Sheikh Nasrallah to thank for –again. This time for inadvertently contributing to the liberation of the Lebanese economy.

End of Analysis

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