The long wait
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The long wait

Lebanon’s political gridlock has eased but the country has yet to make progress on key economic reforms

The grind of generators in Beirut is a noisy reminder that Lebanon’s problems did not end with May’s agreement in Doha between its warring factions. Power cuts are at least three hours a day as Electricite du Liban (EDL) heads for a $1.5–2 billion loss in 2008.

EDL has long been marred by cronyism, corruption and the non-collection of around 50% of bills. In the past year, it has also faced rapidly rising fuel costs. But even EDL’s colossal losses cannot alone account for a government deficit likely to be around $3.2 billion this year, which has pushed the country’s accumulated public debt to $44.5 billion.

Lebanon has made scant progress on a reform programme agreed with international donors at the Paris conference of January 2007 – the so-called Paris 3 – which has been monitored by the International Monetary Fund through an Emergency Post-Conflict agreement (EPCA).

The programme was based on a mix of privatization, increased revenue and removing inefficiency in administration and enterprises like EDL. But the current ‘unity’ government – made up of the previous ruling group led by supporters of former prime minister Rafiq Hariri and the previous opposition led by Hizbollah – is paralyzed as the politicians await parliamentary elections next year.

“They were supposed to privatize telecoms [sell cellular licences] and use the proceeds to reduce the size of the debt and so the cost of servicing the debt,” says Riad Salameh, governor of the central bank. “They were supposed to reform Electricite du Liban, and to introduce more taxes.”

On the shelf

All these moves are shelved, including this year’s scheduled increases in VAT from 10% to 12% and taxes on bank deposit interest from 5% to 7%. Some ministers still talk of selling by early next year, for around $7 billion, the two cellular networks – currently run by MTC Touch, a subsidiary of Kuwaiti telecoms company Zain, and Alfa, a joint venture of Germany’s Deutsche Telekom and Saudi Arabia’s Fal Holdings. But the sale is opposed by Hizbollah and others on the grounds the government would thereby forfeit $800 million to $1 billion in annual receipts.

At the central bank, Salameh is not expecting early decisions. “We have a national unity government, but their economic views have not yet been agreed,” he says. “I suspect no one will dare to say anything on these issues before the elections.”

In 15 years as governor, Salameh has weathered his share of crises. Under five prime ministers and through invasions and internal clashes, the governor has maintained the stability of the currency and the integrity of the banking system.

But even though the figures are stacking up, the politicians are focused on shoring up their sectarian support rather than on moving the country forward. Salameh concedes that with rising commodity prices, options like raising VAT or freezing government employee wages became difficult. “Any politician is concerned about social unrest, and perhaps the country cannot afford more taxation,” he says. “This is a real issue in Lebanon.”

Mohammad Chatah, who became finance minister in July, warned last month that the budget deficit could top 37% of spending in 2009, due to the mounting losses of EDL and to the extra $500 million required to implement the recent decision to raise government employees’ wages. Chatah suggested that without early privatization of the two cellular licences, the debt would reach $49 billion in 2009, making a mockery of the reduction target set by Paris 3.

No worries?

The government seems unperturbed. “The real expectation,” says one analyst, “is that there will be a further bailout by international donors and governments in the Gulf, who have come to Lebanon’s rescue many times, including the 2006 Israeli onslaught.”

Salameh says the growth in the debt is less of a worry that the failure to control the deficit. “At around $44 billion, the debt is not completely in the market: $29 billion is in the market and the remaining balance held by the central bank, the social security [fund] and various countries that lent to Lebanon during Paris 2 and Paris 3. With this year’s growth and inflation, the market debt is 10% more than the size of the economy, and if you add to this remittances of around $6 billion, in fact the market debt is below the total availabilities of the Lebanese economy.

“What is worrying is the structural, built-in deficit that no government has been able to decrease or reverse. Paris 2 and 3 helped to reorganize the debt, but linked to it were certain necessary reforms to bring the deficit near zero. Without these reforms, the deficit will remain, and the nominal debt will increase.”

On the bright side, some creative accountancy has helped reduce the debt by $3 billion, mainly through the bank transferring from itself to the government unrealized re-evaluations of gold reserves. The real value of the debt, says Salameh, has also been eroded by the falling dollar.

Reserves are also at record levels, says Salameh, with $17 billion liquid, $8 billion in gold and around $2 billion in shareholdings and real estate, a total of $27 billion, or roughly the same size as GDP. But the governor concedes that the long-term, significant reduction of the debt requires economic growth of 8%. This requires in turn, he argues, a serious reduction in a public sector bloated by political appointments.

“Productive investment is not encouraged when investors see high yearly deficits and when they fear new taxes,” he says. “Once you have proper public finances, Lebanon would be upgraded from B-. Most emerging countries are now at an average of BB+. Higher rating means a lower interest rate structure.”

Turning point

Nassib Ghobril, head of Economic Research and Analysis at Byblos Bank, one of Lebanon’s largest, does expect a quick return to the days of 2004, when real GDP growth reached 7.4%, the highest for a decade. “The Doha Accord was a turning point in improving confidence, restoring a positive outlook, and returning normalcy to economic activity. But authorities need to implement several additional confidence-raising measures as well as maintain stability in order to attract sizeable FDI [foreign direct investment].”

The instability of the past three years has negatively affected Lebanon’s ability to attract FDI as reflected by the increase of just 1.6% in FDI to Lebanon in 2006 compared to a rise of 38.4% in FDI to the whole Arab world, he says. “FDI to Lebanon was $2.8 billion in 2006, equivalent to only 4.5% of FDI to Arab countries.”

With the private sector struggling, even before any world economic downturn, Salameh argues the worst problem facing the country is the lack of jobs for young people: “Of 24,000 graduates each year, only around 2–4,000 find decent jobs.”

As the economy falters and the politicians defend their patronage networks, a lack of direction is palpable in daily life, and not only in electricity cuts. Most Lebanese are keeping their heads down and trimming their ambitions.

“You take your money, you go home, and you pray for the best,” says one Christian commentator. “That’s all you can do.”

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