Economics Essays - Lebanon Markets Economy

Lebanon Markets Economy

The Economy: Lebanon's economy and markets are best described at the dawn of the new millennium by a private and liberal economic activity and an openness to abroad with perfect capital and labor mobility. The private sector contributes to around 75% of aggregate demand, a well-diversified sector that covers the totality of economic sectors and is a major pillar for growth and recovery.

The Lebanese economy is also a typical open economy with a large banking sector equivalent to more than 2.5 times its economic sector and providing an important support to aggregate demand.

Major Sectors of the Economy

Lebanon's liberal economy is based on competition and private ownership. Services and banking sectors predominate, representing 70% of the country's gross national product. Agriculture constitutes 10% and the industrial sector constitutes the remaining 20%.

Services

The Lebanese economy is based primarily on the service sector, which accounts for approximately 60 per cent. of GDP (down from approximately 70 per cent. in the 1970's). Major subsectors are commerce, tourism and financial services. Other components include health care and higher education.

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Commerce

The Port of Beirut plays an important role in Lebanon's commercial activities. After World War II, Beirut became the most important Arab port on the Eastern Mediterranean serving the Arab world. A free-port area for re-exports added to Beirut's success. During the conflict, the Port of Beirut virtually closed down and related commerce ground to a halt.

Work has been completed on the reconstruction of the Duty Free Zone at the Port of Beirut to restore its pre-war capacity and a project for the rehabilitation and expansion of the Port of Beirut is underway.

Tourism

The strategic position of Lebanon, its mild climate and natural beauty, consisting of snow-capped mountains, valleys and the Mediterranean Sea, make it a natural tourist attraction. Apart from its privileged geographical and natural situation, Lebanon benefits from qualified and experienced human resources in the tourism industry.

Prior to the outbreak of the conflict, tourism (including hotels and restaurants) contributed approximately 20 per cent. to Lebanon's GDP. This is notable given that, at that time, the international tourism industry was not as developed as it is today.

Significant private investment is currently being made in the modernization and expansion of this sector and international hotel companies have returned to Lebanon. Casino du Liban, which historically constituted a major tourist destination, reopened in 1996. Lebanon is the only country in the Arab world that offers skiing and related winter sports activities.

The largest ski resort in the country has been expanded and modernized. The Government believes that, because of the return of peace and stability to the country and with the development of the necessary infrastructure, tourism will again contribute significantly to Lebanon's economy. Lebanon's tourism industry also relies on the large number of Lebanese living abroad, who return regularly to the country during the summer season.

Financial Services

From the 1950s to the start of the conflict in 1975, Beirut was the region's financial services center. At the onset of the oil boom starting in the 1960s, Lebanon-based banks were the main recipients of the region's petrodollars.

Currently, the main financial services offered are commercial banking, investment banking and insurance. Despite the conflict and a crisis in the late 1980s involving a small number of banks, the commercial banking sector remains a centerpiece of the Republic's service-oriented economy. The Lebanese banking sector witnessed unprecedented growth during the period from 1992 to the present. Total deposits with commercial banks increased from U.S. $6.5 billion at the end of 1992 to U.S. $33.9 billion at the end of 1999.

In addition, since 1996, Lebanese banks have been successfully accessing the international capital markets. Specifically, since 1996, several banks raised over U.S. $2 billion on the international debt markets and three banks raised approximately U.S. $300 million through the issuance of global depositary receipts on the international equity markets. The banking system is seen as having a key role by being the entry point for capital inflows for the region's development.

• Construction: Prior: to the conflict, the property sector had always been important, with a substantial portion of the activity concentrated in Beirut, where the housing needs of the city's rapidly increasing urban population had to be met. Beirut saw an almost uninterrupted boom from the late 1950s to the early 1970s, when it expanded dramatically, eventually to house half of the country's population. Mountain towns and villages close to Beirut favored by tourists, such as Aley and Bhamdoun, also experienced a boom.

Industry

In 1995, the industrial sector (mainly production of cement, furniture, paper, detergents, cosmetics, pharmaceuticals, batteries, garments and processed foods) accounted for 17.3 per cent. of GDP, an increase from 15.9 per cent. of GDP in 1972. Virtually all industry is privately owned.

Exchange rate and price stability: coupled with the gradual fall in Lebanese Pound interest rates have contributed to a better environment for investment and growth in industry. Infrastructural bottlenecks resulting from the conflict are being addressed as improvements in roads, telephones and electricity supply are realized.

IDAL is in the process of establishing free industrial zones in several areas around the country. The Government provides various incentives for the establishment of industrial facilities in Lebanon, including fiscal incentives in the form of reduced customs duties and tax exemptions.

From 1993 to December, 1999, the International Finance Corporation ("IFC") carried out 31 investment and financing projects in Lebanon in an aggregate amount of U.S. $316 million, with an additional U.S. $256 million raised by the IFC through loan participations. Investments during 1999 included loans to three companies for U.S. $50 million. As of December 31, 1999, U.S. $237 million representing IFC loans, loan participations and equity investments had been disbursed and remained outstanding.

Energy

Lebanon has no known fossil fuel resources. Apart from relatively modest hydroelectric resources and the import of 50-100 megawatts of electricity semi-annually from Syria, all energy needs are met with imports of petroleum products, which represented over 4.2 million TOE (tonnes of oil equivalent) in 1995. Two state-owned refineries (one in Tripoli and one in Zahrani) are currently non-operational. The power sector accounts for about one-third of fuel imports.

Lebanon's energy sector is dominated by the state-owned Electricité du Liban ("EDL"). EDL is a vertically integrated utility with approximately 900,000 customers. Lebanon's energy production facilities include three thermal power stations, two gas turbine stations in each of Baalbek and Tyre and seven hydroelectric stations.

In addition, two new combined cycle power plants have been constructed. Besides its own plants, EDL purchases power from four independent hydroelectric power producers and sells wholesale to four private distributors. EDL is also the majority shareholder in the previously private-owned Kadisha company, a thermal and hydro power producer and distributor to about 100,000 customers in North Lebanon.

Agriculture

Approximately one third of the Republic is arable. The most fertile areas are located along the coastal strip and in the Bekaa valley. The diversity of the Republic's topography and climate enables cultivation of a wide variety of vegetables, fruits, industrial crops and cereals. In 1995, agriculture contributed approximately 12 per cent. to the Republic's GDP, as compared to approximately 9.9 per cent. in 1972. Food and agricultural exports, which include forestry products, provide about 10 per cent. of merchandise export earnings

Civil War and Partial Recovery, 1974-82

Lebanon traditionally has had a dynamic economy. In the years leading up to the Civil War, the country enjoyed high growth rates, an influx of foreign capital, and steadily rising per capita income. Although imports were often five or six times greater than exports, earnings from tourism, transit trade, services, and remittances from abroad counterbalanced the trade deficit.

In 1973 (the last prewar year for which detailed figures were available in late 1987), GDP at current prices totaled US$2.7 billion, compared with just US$1.24 billion in 1966. In 1974 GDP rose to around US$3.5 billion because of an increase in the value of the Lebanese pound. Per capita GDP rose from around US$560 in 1966 to US$1,023 in 1973 because productivity increased faster than population growth and because the Lebanese pound gained ground against the dollar.

Invasion and Trauma, 1982-87

Lebanon, torn by its sectarian and political disputes, was further cursed by invasion and a seemingly endless intermingling of internally and externally inspired conflict from 1982 onward. Beirut suffered grievously between June 6, 1982, when Israeli troops first crossed the Lebanese border, and September 16, when they completed their seizure of West Beirut. Normal economic activity was brought to a standstill.

Factories that had sprung up in the southern suburbs were damaged or destroyed, highways were torn up, and houses were ruined or pitted by artillery fire and rockets. Close to 40,000 homes--about one-fourth of all Beirut's dwellings--were destroyed. Eighty-five percent of all schools south of the city were damaged or destroyed. The protracted closure of Beirut's port and airport drastically affected commerce and industry. By 1984 the World Bank and the CDR agreed that Beirut would require some US$12 billion to replace or renovate damaged facilities and to restore services that had not been properly maintained since 1975.

Balance of Payments

Before the early 1900s, Lebanon generally had a balance of payments surplus. After that, however, the balance of payments situation fluctuated considerably. In 1983 the Central Bank reported a deficit of US$933 million; a year later, the deficit was set at about US$1.4 billion. But in 1985 there was an overall current account surplus of US$381 million as Central Bank foreign assets rose and the government purchased fewer weapons.

Progress was not maintained, however; by the end of May 1986, the Central Bank estimated a US$407 million deficit, comprising a US$583 million Central Bank shortfall and a US$176 million surplus at the commercial banks. Central Bank governor Edmond Naim complained that the shortfall was caused by pressure from the government to finance runaway public expenditure and a failure to do anything about the state's withering revenue base.

Government Revenues

In the pre-Civil War days, receipts from customs duties accounted for nearly half of total government income. In 1984 customs receipts fell to US$69.4 million, barely one-third their 1983 level. The Ministry of Finance stated that customs receipts should be ten times higher than they were in 1984 to meet its targets for this revenue source.

Instead, they fell further--to US$ 24.3 million in 1985. In 1986 total government spending was estimated at US$413 million against income of barely US$23 million. Of this already paltry sum, customs receipts amounted to just US$9.7 million.

In the mid-1980s, the government still had assets to cover its financial obligations. A November 1985 report listed as the nation's principal assets its gold reserves (about US$10 billion in foreign exchange reserves) and holdings in its Intra Investment Company.

In addition, the report said, there were more than US$440 million in public sector deposits with the Central Bank, about US$200 million in secured debts owed to the state, and about US$86 million in various Central Bank assets. Against this, however, domestic public debt totaled US$2.5 billion, while foreign debt totaled US$200 million.

External Debt and Foreign Exchange

Lebanon had many economic problems in the 1980s, but foreign debt was not one of them. As late as 1986, the total official foreign debt was estimated at no more than US$250 million. The Bank of International Settlements put the country's external bank indebtedness at US$1.7 billion at the end of 1985, a decline from US$1.78 billion in 1984 and US$1.8 billion in 1983. Of the 1986 total, US$356 million was short-term (one-year) debt.

The Organization for Economic Co-operation and Development put total external debt, excluding International Monetary Fund (IMF) credits, at US$938 million at the end of 1984. Long-term debt amounted to US$481 million, and total debt servicing, excluding IMF credit, amounted to US$268 million.

Total foreign reserves greatly exceeded debt. Throughout the 1980s, the Central Bank maintained a tight grip on the country's gold reserves and tried to do the same with its foreign currency reserves. The government held 9,222,000 ounces of gold, officially valued on the bank's books at US$42.23 an ounce and ostensibly worth only US$389 million. In reality, however, it was worth at least US$3 billion.

Inflation

Statistics from the General Labor Federation of Lebanon showed that for the first three months of 1985, there was a cost of living increase of 30 percent. The statistical directorate at the prime minister's office, however, put the increased cost for a single person living at subsistence level at 100 percent over the same period. The federation's statistics showed an 86- percent inflation rate in the 12 months ending June 1986, with food prices showing the highest increases.

At the end of 1986, the federation estimated that during the first 10 months of 1986, the cost of living for a family of 5 had risen by 150 percent. Monthly expenditure on basic items--excluding education, rent, and medical expenses--had risen from L£5,652 to L£14,083. Overall, the federation estimated that 1986 had witnessed a 226-percent increase in prices. By March 1987, the federation was reporting a 250-percent inflation rate, with food prices having increased 300 percent over the previous 12 months.

The Budget

The government of Amin Jumayyil had to face the seemingly insuperable problem of securing revenues and curtailing expenditures in 1987. Sectarian politics made the problem even more complicated. On the revenue side, the government lost its power to collect customs receipts because the militia forces controlled the unofficial, or illegal, ports. (Illegal ports are those not under the control of the Lebanese government; no official customs duties are collected at these ports.)

Militia activity also hampered the government's ability to collect direct taxes and even to collect utility fees for electricity, water, and telecommunications. During good years, however, the government was successful at collecting revenues in some areas around Beirut.

But in other parts of the country, and sometimes in the Beirut area, the militias were the only revenue collectors, imposing their own tax systems on areas under their control. This situation was extensive in the area controlled by the LF. The LF set up an organization in 1980 to supervise revenue collection from approximately eight illegal ports under its control. The LF also imposed levies on a variety of private retail establishments, from hotels and restaurants to gasoline stations and shops.

Summary

Lebanon's economy is liberal and open, and traditionally heavily oriented toward services. Lebanon served historically as a haven for Arab capital and as a Middle East transit point and enjoyed a vibrant and largely unregulated private sector. Lebanon's banking and tourism sectors flourished between the Gulf oil boom of 1973 and the beginning of Lebanon's civil war in 1975 by serving regional needs. Real GDP growth was 6% per year from 1965 to 1975.

Despite the civil war and mounting government budget deficits resulting from an inability to collect taxes, Lebanon kept its currency stable and inflation rate manageable until the early 1980s. Expatriate workers' remittances, the flow of capital from abroad to support various militias, the PLO's economic activities, and the narcotics trade all contributed to a positive balance of payments.