Lebanon

Published October 18th, 2000 - 02:00 GMT

Indicators: 

1998 

1999 

2000e 

GDP real growth rate (%) 

3.0 

-1.0 

0.5 

Current Account Balance (% of GDP) 

-5.0 

-4.5 

-5.0 

CPI (annual average, %) 

1.0 

4.0 

3.0 

Total Exports (US$bn) 

0.537 

0.563 

0.75 

Total Imports (US$bn) 

5.9 

5.2 

6.90 

Trade balance (US$bn) 

-5.363 

-4.637 

-6.15 

e - Al-Bawaba forecasts 

 

 

 

 

 

Political Outlook 

 

In late May, Israel completed its redeployment along the international border when all of its soldiers were withdrawn from Lebanon. Following the pullback, tranquility reigned along the border, as Hezbollah and Israeli troops refrained from attacking one another. If such calm persists, south Lebanon will reap the fruits of a massive reconstruction program, the effects of which will trickle down throughout the nation’s economy. 

 

Israel’s ultimate withdrawal followed months of escalating tensions. Once Israel formally notified the United Nations that it would pull its troops from South Lebanon, retaliatory attacks between Israeli troops and Lebanese resistance guerillas intensified. The mid-February Hizbullah missile attack on the Israel Defense Forces' (IDF) Beaufort Castle position in southern Lebanon killed the seventh Israeli soldier within a three-week period. In response to these casualties, Israeli warplanes carried out bombing raids throughout Lebanon. These strikes hit three power transformation stations in Baalbek to the east, in Jamhour near Beirut, and in the northern Lebanese city of Tripoli. The Israeli offensive also hit areas to the west of Baalbek, where Hizbullah bases were situated. The attack on Jamhour (Beirut's primary source of electricity) plunged Beirut, in addition to most of the state's other major cities, into darkness. 

 

Economic Outlook 

 

Official Lebanese estimates set the cost of repairing the Jamhour, Deir Nbouh and Baalbek power stations at between $35 million to $40 million. Fortunately for Lebanon's economy, it received significant international assistance to help restore its devastated infrastructure. France swiftly announced that it would dispatch a team of engineers to help rehabilitate the ruined electricity grid. Additionally, Lebanon obtained $100 million in aid from Iran. 

 

The losses imposed by Lebanon's destroyed infrastructure make it increasingly unlikely that the economy will meet its short-term goals. The 2000 budget forecasts real GDP growth of between 1.5-2 percent. Prior to the chaos, local bankers had already expressed skepticism regarding this figure, stating that without progress in privatization or in regional peace, growth would be nearer to 1 percent.  

 

The 2000 budget is part of a five-year scheme to reform the debt-ridden economy and attract foreign investment. In order to achieve the first objective, the budget includes a $1 billion borrowing plan to restructure the country's debt, which rose to $20.438 billion in March 2000, up over 15 percent versus the same period a year earlier. While local merchants strive to transform Beirut into a financial hub, foreign investors continue to place their funds elsewhere, exemplified by the 40 percent decline in the Beirut bourse over the last two years.  

 

Interest payments on the debt incurred in covering the deficit will account for roughly $1.4 billion, or 45 percent of the government's aggregate expenditure in 2000. In March alone, the debt servicing hit $237 million, more than double the $100 million for the equivalent month a year earlier. Such an onerous debt servicing forces the government to squeeze out public programs in favor of perpetual interest payments.  

 

Finance Minister Georges Corm has repeatedly promised to increase the proportion of public debt that Lebanon finances externally to 35 percent from the present 25 percent. Twelve months ago, the government was paying interest of over 16 percent to holders of two-year T-bills, the longest-dated domestic debt. In comparison, it could issue five-year dollar Eurobonds at a rate of merely 8.625 percent. This interest rate gap has, however, narrowed significantly over the past year. The average yield on two-year T-bills fell almost two percentage points last autumn to its current 14.14 percent, while Lebanon paid a 10.25 percent coupon on last September’s 10-year dollar Eurobond. Moreover, fears of escalating violence might scare away potential investors, thus adding an extra premium to Lebanese debt. 

 

In the event that the security situation in south Lebanon does subside, reconstruction plans could stimulate the country’s entire economy. A recently issued report by the United Nations Development Program entitled “Regional socio-economic development program for south Lebanon” estimates that a total of $1 billion will be required for infrastructure works, assistance to agriculture and industry, environmental rehabilitation and human resource development. South Lebanon is also sure to receive significant assistance from foreign donors. For example, the Italy-South Lebanon scheme, managed by the Italian embassy in Beirut, has allocated a $50 million-budget to address the region’s development needs. 

 

Privatization could also help alleviate the country’s financial predicament. The government stands to gain $2.7 billion if it agrees to transfer cellular mobile licenses to Libancell and France Telecom Mobile, the operator of the Cellis network. Proceeds from such a sale could be used to reduce the public debt by 8 percent, which would translate into cost savings on debt service payments of $200 million per year. Income from assets sold under a wider privatization program could yield a further $5 billion. Within this framework, Lebanon has just signed an agreement with the World Bank providing a 20-year loan to assist in the privatization of Middle East Airlines. Lebanon’s Central Bank holds more than 99 percent of the shares of the airline, which has lost $364 million since 1996 in spite of efforts to reduce expenses. 

 

Conclusion 

 

Lebanon’s economy, impaired by a mounting debt burden, is in danger of collapsing. Even a cessation of conflict will not, at least in the short-term, bring about the required stability for sustainable development. Moreover, future developments are not tied solely to actions of the Lebanese government, since other players are also active in the game. Even though it no longer possesses the powerful bargaining chip with which to exert pressure on Israel to relinquish the Golan Heights, the lingering reality is that Syria, which maintains approximately 35,000 troops, remains the main power broker in Lebanon. Without a comprehensive peace agreement with Israel, levels of violence in southern Lebanon will continue to rise and fall upon Syria’s command. 

© 2000 Mena Report (www.menareport.com)

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