A London-based institute warned that the growing political and security risks in Lebanon could slow economic growth and impede reconstruction efforts. The report by IHS Markit also expressed fear of a devastating war with Israel over the next five years.
“A new president and Cabinet will allow some improvement in infrastructure and government services, without addressing underlying structural issues. A war with Israel is likely in the next five years, causing extensive damage to utilities, industry, and infrastructure. Without Gulf aid, a war would most likely trigger a debt and currency crisis,” IHS said in a comprehensive report on Lebanon.
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IHS stressed that the Gulf States and most notably Saudi Arabia will be reluctant to help rebuild damaged infrastructure after any future showdown between Israel and Hezbollah.
“Israel, Syria and Hezbollah are increasingly likely to fight a war that devastates Lebanon’s infrastructure. This would weaken the Lebanese army and Hezbollah, polarize politics further and significantly increasing civil war risks. The risk of refugee militancy and of sectarian fighting among Sunni, Shia and Alawi factions in Beirut, Tripoli and the Bekaa Valley is falling, but would rise again in the event of an Israel-Hezbollah war,” the report said.
Saudi Arabia, UAE, Kuwait and Qatar helped rebuild most of the infrastructure damaged in the 2006 war with Israel.
IHS also stressed that the Lebanese government has yet to seriously address important issues such as corruption and growing public debt.
“The government is unlikely to address structural issues such as endemic corruption in security services and the judiciary, excessive public debt or the impact of over a million Syrian refugees,” it said.
“Border incidents between Hezbollah and Israel, as well as attacks against Israeli assets abroad, risk escalating into broader war that would be devastating for transport and energy infrastructure,” it added.
The report projected that Lebanon’s GDP growth over the next few years will remain weak.
“Lebanon’s real GDP growth is expected to remain weak at 1.7 percent in 2017 and 2.0 percent in 2018. Prime Minister Saad Hariri resigned in early November, and then rescinded his resignation in early December, averting a crisis but still raising political and economic risks. Moreover, the conflict in neighboring Syria and up to 1.5 million refugees in Lebanon continues to affect consumer and business sentiment and fiscal resources,” the IHS report argued.
It added that consumer price inflation is expected to average 4.3 percent in 2017 on rising energy costs and base effects, following -0.8 percent average inflation in 2016.
“October 2017 inflation was 4.6 percent year on year (y/y), driven by utilities (8.7 percent y/y) and food (4.5 percent y/y). Industrial production is expected to rise 5.1 percent in 2017 (average annual basis) following 3.9 percent in 2016; it has already risen 5.4 percent y/y in the first three quarters of 2017,” the report said.
It also pointed to the failure of the successive governments to improve tax collection.
“Corporate income tax is at a flat rate of 15 percent, and personal income tax is levied at progressive rates of between 2 percent and 20 percent. However, authorities struggle to collect taxes effectively. Tax evasion is rampant. Reform of the system is held back by the vested interests of leading government figures. The need to expand the tax base to raise revenues may well lead to limited reform. A 10 percent value-added tax is levied, but attempts to raise it to 11 percent or 15 percent have failed,” the report said.
IHS also cautioned that foreign investments will remain shy and subdued if the authorities do not tackle red tape and rampant corruption.
“Foreign investment is encouraged, but foreign businesses are often dependent on the patronage of leading families and politicians. As such, corruption is widespread, and bribes often determine the allocation of public contracts. Furthermore, excessive red tape makes the operational environment problematic for international businesses,” the report said.
It underlined the need for investments to improve the infrastructure and solve the electricity problem.
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“Lebanon’s roads are inadequate, and require significant investment to meet the needs of the economy. Water and sewerage systems are rudimentary. Electricity supply is unreliable and expensive. Population growth due to refugee flows is straining all infrastructures. Lebanon offers a good supply of both skilled and unskilled labor,” the report said.
IHS believes that there is an urgent need to overhaul the legal and judiciary system in Lebanon.
“In theory, regulations on establishing businesses are liberal, although political leaders control government contracting. Regulations are often vague and applied inconsistently. The court system is hard to navigate, owing to underfunding, lack of judges, lack of commercial or technical expertise, excessive red tape, and extensive corruption. Attempts at reforming legislation have stalled, although the Ministry of Justice has occasionally implemented some,” it said.
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