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CONTENTS Lebanon  Economic AnalysisLegal Information Info-Prod Country Guide
CHARACTERISTICS   INDICATORS   ECONOMIC SECTORS   INVESTMENT ISSUES   PROJECTS   PROSPECTS

Principal Commercial and Political Characteristics

General

Lebanon enjoys none of the natural resources that have spurred the region's development in the last half century. Its domestic market is limited, and its gross domestic product is still suffering the effects of years of war. The damage to the industrial, transportation and communications infrastructure brought on by the Civil War has been estimated at US$ 25 billion. Regardless, Lebanon is now in the process of turning this around.

A tentative peace reached in October 1990 has enabled the central government to begin restoring control in Beirut, to collect taxes and to regain access to key port and government facilities. The battered economy has also been propped up by a financially sound banking system and resilient small and medium-scale manufacturers. Increased demand has been translated into increases in GDP and imports. Family remittances, banking transactions, manufactured and farm exports, the narcotics trade and international emergency aid have become the primary sources of foreign exchange.

In the relatively calm year of 1991, industrial production, agricultural output and exports showed substantial gains. Further rebuilding of the war-ravaged country was delayed in 1992 because of resurgent political wrangling, but in October 1992, Rafiq al-Hariri was appointed Prime Minister, and under his leadership, Lebanon has embarked on the road to economic recovery. Efforts have centered on currency stabilization, budget deficit reduction, an ambitious reconstruction program, attracting foreign aid and investment and regaining Lebanon's role as the banking, trading and entertainment center of the Middle East.

The recovery program led by Prime Minister Rafiq al-Hariri is aimed at constructing a modern, competitive economy that will take advantage of Lebanon's educated and entrepreneurial population. Al-Hariri has developed a two-stage development program, known as Horizon 2000 (the original target date), comprising a short-term emergency reconstruction phase (1993-1995) and a medium-term recovery phase (1996-2003). The program's estimated cost is US$ 11.67 billion, and it boasts the ambitious goal of doubling per capita GDP by the end of the period. Infrastructure projects in the program include the construction and repair of electricity stations, the country's telecommunications network and water and sewerage facilities.

About US$ 1.7 billion has already been pledged by sixteen donors for reconstruction efforts, and the Council for Development and Reconstruction (CDR), the government's executive body for rebuilding, has already awarded contracts worth over US$ 3 billion.

Nevertheless, the implementation of al-Hariri's plan has suffered several setbacks in recent years. The last time was in April 1996, when clashes between Israel and the Shi'ite guerrilla movement, Hizballah, severely damaged homes, businesses and infrastructure, costing the economy an estimated US$ 400 million.

Lebanon's financial sector has been a magnet for international funds, but economic growth slowed in 1996. The reconstruction project is in need of assistance to ensure that capital flows continue. By standing for parliamentary election in 1996, Prime Minister al-Hariri has signaled his commitment to becoming more engaged in the daily ebb and flow of Lebanese politics. This move also indicated that he will be held accountable for his failure to tackle Lebanon's fiscal crisis and his refusal to accord social policies the priority they clearly demand.

Lebanon's public finances, its yawning trade deficit and its high rates of unemployment (up to 20 percent of the work-force) and underemployment are not encouraging. In addition, an influx of Syrian labor has increased unemployment and placed a heavy burden on Lebanon's social security system. As a result of this influx, Lebanon is transferring approximately US$ 3 billion a year to Syria.

It must be recalled, however, that while Lebanon remains a tiny economy, much of the trade imbalance is caused by imports of machinery soon to be put to productive use. Capital is flowing in from diaspora Lebanese and other Arabs (albeit mostly for speculative property deals), and gold reserves are ample. As long as stability lasts and the economy stays on course, the horizon looks reasonably promising.

Commercial Outlook

Lebanon's economic growth slowed to an estimated four percent in 1996 from seven percent in 1995. The country registered a balance of payments surplus of US$ 786.4 million in 1996 compared with a US$ 256 million surplus in 1995.

The trade balance showed a deficit of US$ 6.541 billion. Imports totaled US$ 7.6 billion, and Lebanon's combined industrial and agricultural exports rose 27.6 percent in 1996 to US$ 1.019 billion from US$ 824 million in 1995. Net capital flows registered a surplus of US$ 7.4 billion.

Exacerbating Lebanon's trade problems is the vast amount of smuggling that has been endemic to the country since the inception of its Civil War in 1975. Due to the collapse of the government as a result of the war, few if any controls were erected to prevent the smuggling of goods, including illegal contraband, into the country.

The bank of Lebanon's gross foreign exchange reserves rose by US$ 30.55 million in the first half of February 1997 to US$ 6.17 billion. The Bank's net reserves stood at US$ 4.2 billion in mid-February 1997, compared with US$ 4.02 billion at the end of 1996, US$ 2.85 billion a year earlier and US$ 2.73 billion at the end of 1994.

Lebanon's public debt rose by more than 41 percent in 1996, reaching US$ 10.348 billion at the end of December 1996, a figure which approaches Lebanon's estimated GDP. The cumulative deficit of income to expenditure fell to 52 percent from 54 percent at the end of November 1996. This compared with a target deficit for the year of 37.6 percent. The Lebanese parliament approved a Lú 6,433 billion (US$ 4.15 billion) budget for 1997, and expects a 36 percent deficit of income against expenditure. Lebanese consumer prices rose 6.65 percent in 1996.

Lebanon's deficit figures may seem frightening at first, but the absolute figures are not large. The 1996 deficit forecast is roughly US$ 1.5 billion, and foreign debt is estimated at US$ 1.3 billion. Nor is the ratio of total debt to GDP unusually high. At about 70 percent, it is roughly the same as Denmark's or Portugal's and just over half of Belgium's.

Lebanon continues to enjoy a free-market economy and a strong laissez-faire commercial tradition. In order to attract investment, the government has recently reduced the income tax rate on individuals, corporations and on dividends. The government is considering privatization of some public services. It has succeeded in awarding some contracts on a build-operate-transfer (BOT) basis. In 1994, it reduced the State's shares in three local medium and long-term development banks to 20 percent in order to encourage private sector participation in economic reconstruction. In 1996, 459 new industrial enterprises employing 3,414 people were founded in Lebanon compared with 431 in 1995.

Political Outlook

Syria, as the main power broker in the country, controls the political system in Lebanon. The government, however, is made up according to a complicated compromise by the three main religious factions, the Marronite Christians, the Sunni Muslims and the Shi'ite Muslims. According to the arrangement, the leaders of the three factions will assume the roles of President, Prime Minister and Speaker of the Parliament, respectively. The three political figures are also known as the Troika. The relationship among the Troika is generally characterized by tension and rift. Currently, Elias Hrawi is the Marronite Presi, Rafiq al-Hariri is the Sunni Prime Minister and Nabil Berri the Shi'ite Speaker of the Parliament. Though historically the Marronite President was the leader of the Troika, presently the group is controlled by the millionaire businessman al-Hariri

The September 1995 parliamentary elections added to Prime Minister al-Hariri's problems in promoting his ambitious reconstruction plan. Al-Hariri began his third term of office with a strengthened parliamentary base although he is likely to meet strong opposition in his new cabinet.

In the parliament itself, Syrian-backed candidates have won the overwhelming majority of seats. On the face of it, the new government lacks outstanding figures likely to bring fresh energy to the task of rebuilding Lebanon. Seeds of rivalry exist similarly to those in the first post-civil war government, which brought al-Hariri almost to the point of resignation several times between October 1992 and May 1995. Nevertheless, it would seem that keeping the Lebanese prime minister in such a weakened position is regarded by Syria as being in Syria's best interest.

December 1996 saw the first violent acts against Syria's presence in Lebanon in seven years. The most significant incident involved a gun attack on a Syrian van in which one passenger was killed and another wounded. Though hundreds were detained following the attack, many point accusingly to the country's Christian community in the North, specifically to supporters of former Lebanese General Michel Aoun, as sponsors of the attack. Aoun led a failed attempt to oust the Syrians in 1990. Although the incident is a sign of growing opposition to Syrian control in Lebanon, the Syrian presence in the country remains as strong as ever.


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