LEBANON: Economy grows but reform outlook is poor

OxfAn: Excerpts:

Lebanon is attempting to meet its remaining commitments to the 2007 Paris III aid package. Increased political stability, accompanied by economic reforms, could convince donors to disburse the remaining 3.8 billion dollars of the total 7.6 billion dollars pledged. Such a move would provide the economy with a significant boost and enable the government to write off some of its huge public debt.

ANALYSIS: Lebanese politics ended 2009 on a positive note with the visit to Damascus on December 20 of Prime Minister Saad al-Hariri....This year has started in the same vein: Druze leader Walid Jumblatt, another staunch government critic of Syria, has now moved to what he calls a 'centrist' position, leaving open the possibility that he, too, will achieve reconciliation with Damascus. Since regional reconciliation holds the key to national reconciliation in Lebanon, the thaw between Syria and its enemies in Beirut bodes well for national unity, political reforms and economic progress during 2010. 

Strong recovery. By Lebanese standards, last year was a quiet year. The chief development was the drawn out government formation process, which concluded in November with the election of Hariri to the premiership. The improvement in political stability had a positive effect on the economy, which showed signs of having completed its recovery following the politically disastrous period of 2005-08:

• Lebanon saw the second highest growth rate in the region after Qatar, with government and World Bank estimates at 7%. The conservative lending strategy of its banks protected it from some of the effects of the global recession. The World Bank estimates that growth will continue at the same rate in 2010.
• Bank deposits grew by 20% thanks to increased savings from Lebanese nationals living abroad. Foreign exchange reserves also increased to a record level of 28.6 billion dollars. Despite the fact that many Lebanese expatriates lost capital in the downturn, this has been outweighed by the fact that local banks are now seen as a safe haven .
• Stability boosted tourism. .... the tourist sector thrived on increasing numbers rather than fewer but wealthier visitors from Arab and European countries.
• The balance of payments recorded a surplus of 12 billion dollars, the highest in recent history.

Debt burden. Lebanon's remarkable ability to prosper amid the global recession has boosted investor confidence, both at home and abroad. Yet the heavy debt burden continues to cloud the outlook: it is now estimated at 51 billion dollars, or 155% of the country's GDP, and is expected to rise by a further 5 billion dollars this year. 

Reform proposals. Inefficiency and corruption are endemic in state institutions and must be addressed if the country is to reduce its debt. Finance Minister Raya Haffar Hassan (let us tell you horror stories from her Ministry!) has vowed to focus public spending in 2010 on a number of key areas:

• Transport. A high-speed railway has been proposed along the coast to alleviate the heavy environmental costs imposed by road traffic.
• Education. Modernisation of public education is planned in order to bridge the gap between public and private schools, and to alleviate sectarian divisions among the youth.
• Power. New power plants are envisaged to alleviate frequent power cuts and reduce high electricity prices.
• ICT. Improving the efficiency of the information and communications technology (ICT) sector is crucial to facilitate private business activity and attract foreign investment.

Such large public projects are likely to require an increase in Value Added Tax (VAT) (we hear, to 15%)-- a move which could undermine the government's current popularity. On the other hand, these projects will create new jobs and further reduce unemployment, which was down from 18% in 2008 to 10% last year. 

Privatisation prospects. Reform of infrastructure and education are in line with the pledges made to donor states at the Paris III meeting in 2007. So far, only half of the total 7.6 billion dollars pledged to help authorities reduce the public debt, achieve reforms and stimulate the economy, has been disbursed. The remainder is tied to proposals that are still awaiting parliamentary approval, the most important of which involve privatisation. Here the government will find itself in some difficulty:

• The composite nature of the coalition and deep divisions among ministers threaten to stymie economic reforms.
• Hizbollah, which holds two ministries, is opposed to privatisation. Its ally, Michel Aoun's Free Patriotic Movement, controls the Telecoms and Energy and Water Ministries, seen as crucial to privatisation efforts.
• Telecoms Minister Charbel Nahas has expressed concern that selling the entire cellular network to private companies could turn a public monopoly into a private one. However, the current providers will come under scrutiny and be forced to improve their services, which are among the most expensive in the world.
• Although Lebanon is plagued with an acute power shortage, and the national Electricite du Liban is in poor financial shape, a viable private alternative is still lacking. This suggests that no restructuring of the electricity sector, which accounts for almost half of the national budget, is likely in the short term..."