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LEBANON: ‘Switzerland of the Middle East’ Looks for Revival

Mona Alami

BEIRUT, Aug 29 2008 (IPS) - Lebanon was long dubbed the ‘Switzerland of the Middle East’ for its advanced banking sector. It lost its status 23 years ago at the dawn of the 1975 civil war, which lasted 15 years. The country has since been unable to regain the title, in spite of the brief economic revival witnessed in the 1990s.

Since 2005, Lebanon has teetered on the brink of civil strife, in a country where politics and economy are forever intertwined.

“The budget deficit is hovering between 3 to 4 billion dollars, the public debt at about 45 billion dollars, with a 2009 forecast of 49 billion. That is approximately twice our GDP (gross domestic product), making it the highest debt to GDP rate in the world,” says Dr Louis Hobeika, professor of economics at the American University of Beirut.

Lebanon’s economy took a dramatic plunge in 2005, after former Lebanese prime minister Rafik Hariri was assassinated. While GDP growth had reached 7.4 percent in 2004 – despite the rocky political situation caused by the extension of former president Emile Lahoud’s term in office – real GDP growth in 2005 reached only one percent. “Although 2006 started off as a promising year, with 5 percent to 6 percent real GDP growth, it ended with a 3 percent contraction due to the July war with Israel,” says Nassib Ghobril, head economist at Byblos bank.

In 2007, the economy managed to achieve a GDP growth of 3 to 4 percent, even in the midst of war between the Lebanese army and a group of Islamic fundamentalists in the northern Palestinian refugee camp of Nahr el-Bared. “Together, the years 2005, 2006 and 2007 show lower combined GDP figures than 2004 levels. Lebanon has been faced with three years of lost opportunities, especially in light of the unprecedented riches and excess liquidity in the Gulf, which Lebanon could have certainly tapped into,” says Ghobril.

This year, levels show moderate growth. “The government is forecasting a 5 percent GDP growth, although in my opinion, only half can be realistically expected,” says Hobeika. Ghobril’s estimations are, however, more positive, putting growth at a minimum of 4 percent – provided the political situation remains stable.

Since 2005 there has been a major – and at times, crippling – rivalry between Lebanon’s parliamentary majority and opposition. As a result, there has been a paralysis of all institutions over the past three years, starting with the presidential seat, which remained vacant for more than six months, and extending to parliament, which was closed for over a year.

“The Doha accords, however, turned things around and positively enhanced Lebanon’s economy, with the restoration of political institutions and the ensuing cabinet formation, which resulted in an upgrade by Standard and Poor’s and Capital Intelligence (credit rating agencies),” says Ghobril.

The economist also underscores the exceptional tourist season witnessed this summer in Lebanon, with occupancy rates in June up to 61 percent after plummeting to 40 percent during the first four months of the year. “The return to normalcy is by itself an important factor that bodes well for improving confidence levels and reviving investment projects,” he adds.

The new government formed in the wake of the election of President Michel Suleiman three months ago is now faced with many challenges, namely reducing public debt through reforms such as the privatisation of the telecom sector, electric plants, the Casino du Liban and the national carrier Middle East Airlines, as well as cutting expenditures.

“Privatising these industries would generate as much as 10 billion dollars in revenues for the government, and bring down debt levels from 45 billion dollars to 35 billion,” says Hobeika. The AUB economist also emphasises that since Lebanon has been without a budget for the past four years, this year it should be submitted within the legal timeline.

The government is also confronting significant corruption. “Although no serious studies on corruption have been conducted, international figures estimate it contributes to about 30 percent of government expenditure,” says Hobeika.

Ghobril adds inflation to the government’s to do list. “At 6.2 percent for the first six months of the year, inflation is expected to reach as much as 12 percent by the year-end,” says the banker. “And of course, ensuring security and stability ultimately affects the economic environment.”

Hobeika too speaks of the need to improve the political situation. “Putting in place a new electoral law will definitely improve the economic environment and bolster investments in the long-term by, hopefully, ensuring four years of stability.”

The Lebanese economy been dependent on the tourism and service sectors since the 1990s, which is, according to Hobeika, a mistake brought to light during the 2006 war. “The agricultural and industrial sectors, already weakened by the government strategy, were further impaired by the war, while the service industry came to a full stop during the entire time of the conflict. I believe this should prompt the new government to rethink its economic approach.”

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