COUNTRY REPORT - International University of Japan

COUNTRY REPORT

Lebanon

1st quarter 1998

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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Contents

3 Summary

4 Political structure

5 Economic structure

6 Outlook for 1998-99

10 Review10 The political scene16 Economic policy and the economy22 Reconstruction and infrastructure25 Agriculture, industry and business26 Tourism and transport27 Banking and finance29 Foreign trade and payments

32 Quarterly indicators and trade data

List of tables10 Forecast summary16 Government finances18 Public-sector debt by holder19 Foreign reserves, 199719 Exchange rate20 Commercial bank activity21 Construction-sector activity26 Traffic at Beirut airport27 Consolidated balance sheet of commercial banks29 Balance of payments30 Imports by country of origin30 Freight traffic at Beirut port31 Exports by destination32 Quarterly indicators of economic activity33 Trade with major OECD partners

List of figures10 Gross domestic product10 Lebanese pound exchange rate

Lebanon 1

EIU Country Report 1st quarter 1998 © The Economist Intelligence Unit Limited 1998

December 23rd 1997 Summary

1st quarter 1998

Outlook for 1998-99: The outlook for the Middle East peace process hasimproved with the possibility that the Israeli government might fall in 1998.But the direct benefit to Lebanon could be small. The government may faceproblems raising money on the international capital markets to cover itsbudget deficit. Growth may rise from 3.8% in 1997 to 4% in 1998 and 1999,while the current-account deficit shrinks with falling imports.

The political scene: Fighting has eased in the south, although Israel may stillreact violently to continued setbacks. Martial law has been declared in theBeqaa valley to curb protests led by a Shia Muslim cleric. Municipal electionsmay take place in April, with presidential elections due in November. Bombshave exploded in Beirut.

Economic policy and the economy: The government has proposed atough budget for 1998 and hopes to raise $2bn in foreign loans to cut spirallingdebt-service costs. New government restrictions on the import of many agricul-tural products have finally been introduced. Interest rates have remained high,crowding out private investment, but keeping inflation and economic growthlow. The Lebanese pound has continued to appreciate, despite recent pressure.

Reconstruction and infrastructure: A private property company, Solidere,has delayed a Eurobond issue but gone ahead with other projects. The Councilfor Development and Reconstruction has taken over the Linord project and putit up for international tender. The government is considering switching powerstations to gas.

Agriculture, industry and business: Tobacco farmers have been protest-ing against tough government production quotas. Iran has been consideringrevamping Lebanon’s two refineries. US firms, such as McDonald’s, have beenpenetrating the business market.

Tourism and transport: Visitor arrivals are up compared with 1996, givinga welcome boost to the local tourism industry. But the national airline, MEA,has been embroiled in a corruption scandal.

Banking and finance: Byblos Bank has taken control of Banque de Beyrouthpour le Commerce in a mounting wave of bank mergers and acquisitions, andcontinued efforts to raise money on the international capital market. A carretailer has been listed on the stock exchange, and more firms from other sectorsare expected to follow.

Foreign trade and payments: Imports have fallen, but so too have exports.Increased capital inflows have kept the balance of payments in surplus.

Editor: All queries:

Cherif J CordahiTel: (44.171) 830 1007 Fax: (44.171) 830 1023

Lebanon 3


Political structure

Official name Republic of Lebanon

Form of state Parliamentary republic

Legal system Based on the 1926 constitution (with amendments incorporated in 1990) and theCivil Procedure Code, the Criminal Procedure Code and the Penal Code

National legislature Under the electoral law of July 16th 1992, the unicameral National Assembly has128 seats equally divided between Christians and Muslims

Electoral system Universal direct suffrage over age 21

National elections August-September 1996; next election due by August-September 2000

Head of state The president, currently Elias Hrawi, was elected in November 1989 for a six-year termby the National Assembly. His term was extended in late 1995 by three years. Thepresident must be a Maronite Christian

National government The prime minister is chosen by the president after consultation with parliamentarydeputies; the government is then chosen by the designated prime minister and thepresident. Ministers need not be members of the National Assembly but areresponsible to it. The prime minister must be a Sunni Muslim. Current governmentappointed in October 1996

Main political organisations Kataeb Party (largest Christian party); National Liberal Party (Christian); National Bloc(Christian); Progressive Socialist Party (mainly Druze); Amal (Shia politicalorganisation); Hizbullah (Party of God, militant Shia group)

Prime minister & minister of post & telecommunications Rafiq Hariri (Sunni)Interior minister & deputy prime minister Michel al-Murr (Greek Orthodox)

Key ministers Agriculture Shawqi Fakhouri (Greek Orthodox)Defence Mohsen Dalloul (Shia)Economy & trade Yassin Jaber (Shia)Electricity & water resources Elie Hobeiqa (Maronite)Emigrant affairs Talal Arslan (Druze)Environment Akram Shehayeb (Druze)Finance (acting) Fouad Siniora (Sunni)Foreign Faris Buwayz (Maronite)Health Suleiman Franjieh (Maronite)Housing & co-operatives Mahmoud Abu Hamdan (Shia)Industry Nadim Salem (Catholic)Information Bassem Sabaa (Shia) Justice & administrative reform Baheej Tabbara (Sunni)Labour Asaad Hardan (Greek Orthodox)Oil Shahé Barsoumian (Armenian)Public works Ali Harajleh (Shia)Refugees Walid Junblat (Druze)Social affairs Hmayed Ayoub (Shia)Tourism Nicolas Fattouch (Greek Orthodox)Transport Omar Miskawi (Sunni)

Parliamentary speaker Nabih Birri (Shia)

Central bank governor Riyadh Salameh

4 Lebanon


Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997a

Real GDP growth at 1990 prices (%) 7.1 8.5 7.0 4.0 3.8

GDP at market prices ($ m) 7,537 8,955 10,967 13,014 15,276

Consumer price inflationa (%) 29.0 12.0 13.0 8.9 6.0

Population (m) 3.3 3.4 3.5 3.6 3.7

Exports fob ($ m) 686 737 824 1,018 690

Imports fob ($ m) 4,939 5,990 7,303 7,559 7,388

Current account ($ m) –3,724 –4,450 –5,549a –5,515a –5,558

Reserves excl gold ($ m) 2,260 3,884 4,533 5,932 6,219b

Total external debt ($ m) 1,345 1,718 2,966 3,739a 4,759

Exchange rate (av; L£:$) 1,741 1,680 1,621 1,571 1,539

December 19th 1997 L£1,527.5:$1

Origins of gross domestic product 1992 % of total Components of gross domestic product 1994 % of total

Agriculture 12.6 Private consumption 109.9

Manufacturing 18.5 Government consumption 11.6

Construction 10.0 Gross capital formation 28.3

Financial services 8.0 Exports of goods & services 9.6

Non-financial services 17.5 Imports of goods & services –59.4

Commerce 28.1 GDP at market prices 100.0

Public administration 5.3

GDP at market prices 100.0

Principal exports 1996 % of total Principal imports 1996 % of total

Paper & paper products 32.6 Electrical goods & machinery 17.7

Textiles 9.1 Transport equipment 11.8

Gems & semi-precious stones 8.1 Metals & metal products 9.6

Electrical goods & machinery 7.7 Mineral products 8.6

Vegetable products 7.4 Prepared foodstuffs 7.6

Main destinations of exports 1996 % of total Main origins of imports 1996 % of total

UAE 21.1 Italy 12.1

Saudi Arabia 12.3 US 10.9

Syria 6.2 Germany 8.5

Kuwait 6.9 France 7.8

France 4.9 UK 4.0

Italy 4.2 Syria 4.1

US 2.9 Japan 3.9

Note. Unless otherwise indicated all figures are official actuals or estimates, from the Banque du Liban, the IMF or the World Bank.a EIU estimates. b October actual.

Lebanon 5


Outlook for 1998-99

Peace process could pickup if the government in

Israel changes—

The outlook for the Middle East peace process, on which Lebanon, of all coun-tries neighbouring Israel, is perhaps the most dependent, appears better than itdid six months ago. It is now very possible that the current Israeli prime min-ister, Binyamin Netanyahu, will not survive 1998. Mr Netanyahu is beset byproblems within his own Likud party, which is likely to encourage some of hisgovernment coalition partners, either one of the religious parties or the Russianimmigrant groups, to desert him, bringing the government down and forcing anew election within 60 days. The Labour Party leader, Ehud Barak, is likely towin this election. A former army chief-of-staff, Mr Barak, who served as foreignminister under the former prime minister, Shimon Peres, has a brilliant armycareer behind him, important credentials when it comes to winning an electionin Israel. Since taking over from Mr Peres as Labour leader in the middle of 1997,Mr Barak has tried hard to adopt a more centrist position, appealing to disillu-sioned Likud voters and right-wing Sephardic Jews of Middle-Eastern or NorthAfrican origin.

—but the direct benefit toLebanon is likely to

be small

However, exactly what changes Mr Barak would institute, possibly sometime in1999, is hard to say. He is likely to adopt a more conciliatory attitude towardsthe Palestinians which should generally lift some of the gloom which hasdescended on the Middle East over the last 18 months. While this may benefitLebanon to some extent, in terms of a general improvement in confidence inthe Middle East as a whole, the direct benefits are likely to be slim. Israel’soccupation of south Lebanon, where it maintains a 15-km “security zone”to protect northern Israel’s settlements from crossborder attack, is likely tocontinue.

While the chorus of Israelis calling for a withdrawal from south Lebanon hasgrown over the last six months, it is significant that neither Mr Netanyahu norMr Barak has joined in. Both seem to have calculated, probably correctly, thata peace treaty with Lebanon and Israel’s withdrawal from the south are almostentirely dependent on a peace treaty with Syria. This is highly unlikely in thenext two years. If and when Mr Barak comes to power he will, anyway, be toobusy dealing with the Palestinians to pay much attention to Syria.

Israel’s occupation of thesouth will continue—

Israel’s continued occupation of the south, therefore, will persist, sapping orthreatening to sap confidence in Lebanon. However, this confidence elementshould be divided between domestic and international. Domestic opinionmakes a sharp division between the south and the rest of the country. That iswhy reconstruction has gone ahead since the end of the civil war in 1990despite continued war with Israel. Domestic confidence is only shaken whenthe war intensifies or extends beyond the battle zone. International confi-dence, however, on which Lebanon is likely to become more dependent overthe next two years, tends to view the country as a whole and takes the war withIsrael, particularly when it is plastered across television screens, more seriously.

—with the attendant riskof heavy fighting

The likelihood of another major explosion in the south, which would affectboth domestic and international confidence, remains strong. On two occasions

6 Lebanon


since 1990, Israel has launched major attacks on the south and the rest of thecountry—in 1993 and 1996—over and above the almost daily fighting whichhas killed scores of Lebanese civilians. A total of about 250 Lebanese civiliansdied in the two major attacks.

Now, Hizbullah, the radical Shia Muslim Lebanese group leading the fightagainst Israel, seems to be enjoying new military success against the Jewishstate, much to Israel’s anger. The question is how Israel will react. In the past,the army has targeted villages north of its occupation zone in an attempt toturn the population against Hizbullah. On occasions, this has promptedHizbullah retaliatory rocket attacks against northern Israel. Since 1985, whenIsrael set up the zone, these have killed some 15 Israeli civilians.

Since 1996, when Hizbullah and Israel agreed not to target each others’ civilians,Israel has scaled down its attacks on civilians—but not completely eliminatedthem. In 1997 some 43 Lebanese civilians were killed, either by Israeli forces orby their proxy Lebanese militia, the South Lebanon Army (SLA). Despite theexistence of a joint-Israeli, Syrian, Lebanese, French and US war-monitoringcommittee designed to take the heat out of the impact of these kind of attacks,the attacks nevertheless increase the risk of Hizbullah retaliation against north-ern Israel, and of Israeli counter-measures. While both sides are probably keen toavoid this, mistakes happen and can lead to escalation. Recent Israeli govern-ment statements saying Israel may target Lebanese infrastructure, as it did in1996, to deter the government in Beirut from “supporting” Hizbullah, serve toundermine confidence further.

Elections could increaseuncertainty—

There will also be other major political developments in Lebanon during 1998.Municipal elections, postponed from 1997, are now scheduled for April or May(see The political scene) but these may be postponed once again until after thepresidential elections due in November. Either way, the holding of municipalelections—the last were in 1963—will be a major political event: they aredesigned to devolve power for local service provision from central governmentto the towns and villages. Little, however, is known about how they will bestructured or what the power of the local councils will be. The government hasproposed a total of 15,000 seats, of which it would appoint one-third to pre-serve the religious status quo. Pro-democracy groups oppose this.

The municipal elections and when they are held are also complicated by thepresidential elections. A Maronite Christian from the eastern Beqaa town ofZahleh, Elias Hrawi, has been president since 1989, when parliament (theNational Assembly) voted for him. Under the constitution, the next electionswere due in 1995. But, directly interfering in Lebanon’s internal affairs, Syria,Lebanon’s overlord, pressured parliament to alter the constitution to extendMr Hrawi’s presidency for another three years. Ostensibly, the Syrian move wasdesigned to ensure stability in Lebanon, but uncertainty at the time drovegovernment Treasury-bill rates down to almost 38%. The next 11 months maybe affected by similar uncertainty unless the government acts quickly to dispelit. At the moment, it is even possible that Mr Hrawi’s tenure will be extendedby another three years, thus dealing a blow to Christian hopes for a moreforceful character to represent their interests. Mr Hrawi has no powerbase inthe Christian community.

Lebanon 7


—putting pressure ongovernment economic

policy

It is against this uncertain political background that the Lebanese governmentwill have to formulate its economic policy over the next two years. Its room formanoeuvre appears limited. In terms of its fiscal position, it is in trouble. Itsdebt-service burden accounts for over 40% of spending and, in the proposed1998 budget, is equiv-alent to around 65% of revenue. In 1997 it is estimatedthat interest payments swallowed up over 80% of revenue.

The government’s big problem is raising revenue. Over 40% of revenue comesfrom customs duties. In the short term, this may be manageable, but in thelonger term, the government will have to look to other sources of revenue,given its commitment to reducing customs duties if and when it joins theEuropean Union (EU) in a Mediterranean free-trade area or the World TradeOrganisation (WTO).

The government needs theeconomy to boom—

What the government needs most now is a booming economy, legitimacy andthe infrastructure to collect tax. It has little or none of these. Spending in-creases, therefore, are likely to be limited over the next two years, or it mayeven fall in absolute terms. For 1998 the government has allocated 10% moreto wages and salaries than in the last budget (see Economic policy and theeconomy). But since there has been no information about actual spending onthis item since 1995 the potential impact of the “increase” cannot be gauged.Except for interest payments, other current spending has been cut. Capitalexpenditure has been “increased” from L£709bn ($461m) in the last budget toL£1.67trn ($915m) in 1998. Again, however, there is no recent information onactual spending.

To pay for an overall increase of some 2% in non-interest spending, the govern-ment is proposing a new range of taxes and higher tax levels. These, however,have yet to be approved by parliament. They include, most significantly, a new1% consumption tax—or sales tax. But it is still not clear whether this will belevied on all goods sold or just on luxury items. Either way, the sales tax levelfalls short of what many economists had hoped for and still leads to a largebudget deficit of L£3trn, or more than 12% of projected GDP for the year.

—and hopes to cover thebudget deficit by external

borrowing

Significantly, the government is hoping to cover the deficit by external borrow-ing. Before, it has had to rely on domestic sources, but has then paid a high pricefor such funds. Although borrowing externally should be cheaper, the questionremains whether external lenders will be willing to lend to the Lebanese govern-ment if most of the money is then used to cover existing debt-service oblig-tions. The prime minister, Rafiq Hariri, has suggested raising some $2bn to berepaid over 30 years. But how enthusiastic international lenders will be, partic-ularly given the bad name emerging markets now have, is unclear. This kind ofuncertainty and fiscal risk poses a serious threat to confidence in Lebanon andthe Lebanese pound. The risk of a run on the pound, particularly in the light ofrelatively heavy recent intervention by the Banque du Liban (the central bank)to keep it from slipping, remains strong.

Interest rates will remainhigh—

Interest rates on Lebanese pounds, therefore, are likely to remain high. Theseare set by the government rate on two-year Treasury bills and currently standat nearly 17%. Monetary policy is likely to remain tight over the next two

8 Lebanon


years. Inflation is down from nearly 120% in 1993 to 6% now and the govern-ment appears determined to keep it there. It is also keen to maintain theexchange-rate stability for which relatively high interest rates are vital.

—but public investmentshould rise—

The EIU estimates economic growth in 1997 at some 3.8%, down from 4% in1996. The outlook for the next two years, barring any major positive or nega-tive events, is persistently low rates of growth compared with the early 1990s.In 1998 public investment should rise, given the government’s planned in-crease in capital expenditure. But growth in government consumption is likelyto be minimal. Growth in private consumption, the main engine of economicgrowth, is also likely to be limited. New taxes and higher tax levels will takemore money out of people’s pockets, while high interest rates will restrictgrowth in consumer borrowing.

Growth in private investment could pick up with the introduction of newrestrictions on imports, particularly of agricultural and related products, whilecommercial services could benefit from a free-trade agreement with Syria andthe recent opening of the border between Syria and Iraq. Exports of goodscould also rise as a result, particularly after having fallen to such low levels in1997. Exports of services, particularly banking, should grow as the dynamicbanking industry consolidates its operations.

—helping to push upgrowth rates—

Much, however, depends on the crucial summer tourist season. This, in turn, isdependent on the security situation. Imports of goods and services, particularlygoods, are likely to continue falling as they did in 1997 as the new importrestrictions take effect. With these trends likely to continue in 1999, we projectoverall economic growth of 4% in 1998 and 1999.

—although inflationmay rise

Tight monetary policy should keep inflation under control over the next twoyears. But new inflationary pressures will emerge which could push the rate up.New import restrictions are likely to see prices of various goods rise, despitegovernment statements to the contrary. To some extent, however, such meas-ures could be offset by projected falls in world prices for food and feedstuffs.Government plans to borrow more from banks may also see the money supplyexpand more rapidly and put pressure on prices. As a result, we project infla-tion rates of 7% in 1998, up from 6% in 1997, and of 6.5% in 1999.

Imports will drop— With economic growth still fairly low and new import restrictions in place,merchandise imports are likely to fall in 1998. It is estimated they reached some$7.4bn in 1997, down from $7.56bn in 1996. In 1998 they could fall to around$7bn. Merchandise exports, meanwhile, should pick up from their estimatedlow of $690m in 1997 as the new restrictions promote investment in agricultureand industry, and generate additional production. We, therefore, predict ex-ports of a little under $800m in 1998 and some $900m in 1999. This should seeLebanon’s traditionally large trade deficit fall to around $6.3bn in 1998 from anestimated $6.7bn in 1997. In 1999 it could be down to around $6bn.

—helping to reduce thecurrent-account deficit

In the invisibles account, the services deficit is likely to shrink as more incomeis generated from tourism, and less is spent on import related goods and recon-struction projects. Lebanon’s income surplus, traditionally small, will remain

Lebanon 9


low as no major developments are expected in this area. The transfers surplus,traditionally high, will remain so as Lebanese expatriates continue to sendmoney home. But no additional income is expected from official bodies. Thereis, however, a suspicion that in the event of a currency collapse, the govern-ment of Saudi Arabia, with which Mr Hariri has close connections (he holdsSaudi nationality), may give financial assistance. This would show up as atransfer. Barring that, the current-account deficit, which is estimated to havereached a high of $5.6bn in 1997, should shrink to around $5bn in 1998 and$4.6bn in 1999.

Forecast summary($ m unless otherwise indicated)

1996a 1997b 1998c 1999c

Real GDP growth (%; at 1990 prices) 4.0 3.8 4.0 4.0

Consumer price inflation (av; %) 8.9b 6.0 7.0 6.5

Exports fob 1,018 690 840 950

Imports fob 7,559 7,388 7,088 6,888

Current-account balance –5,515b –5,558 –4,928 –4,558

Average exchange rate (L£:$) 1,571 1,539 1,530 1,525

a Actual. b EIU estimates. c EIU forecasts.

Review

The political scene

The war with Israelremains limited to

the south—

The political climate in Lebanon continues to be dominated by regional politicsand, in particular, the guerrilla war in south Lebanon where the Iranian-backedLebanese group, Hizbullah, is battling to oust Israel from a 15-km-deep strip ofoccupied land. However, fighting over the last three months has been limitedmainly to the occupation zone and the area immediately around it. Beirut hasnot been touched. Nevertheless, the uncertainty the war creates, particularly

0

1

2

3

4

5

6

7

1995 96 97(a) 98(b) 99(b)

Lebanon

Middle East and North Africa

Gross domestic product % change, year on year

(a) EIU estimates. (b) EIU forecasts.Sources: EIU; Banque Audi; Banque du Liban.

n/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/an/a

1,580

1,570

1,560

1,550

1,540

1,530

1,520

1996 97(a) 98(b) 99(b)

Lebanese pound exchange rateL£:$; annual averages (inverted scale)

10 Lebanon


among foreign investors, has continued to affect confidence and investmentdecisions.

The intensity of the war itself has eased compared with the June to Augustperiod. From the beginning of 1997 to mid-December, 42 Lebanese civilians,39 Israeli soldiers, 18 members of the Israeli-backed South Lebanon Army (SLA)and 59 Hizbullah guerrillas were killed in the fighting, most of them in the firstnine months of the year. This excludes 73 Israeli soldiers killed in a mid-airhelicopter collision in bad weather over Israel in February while on their wayto south Lebanon. No Israeli civilian in northern Israel was killed.

Israel established the occupation in 1985 after it pulled out of the rest ofLebanon following its invasion of the country in 1982. The zone is supposed toprotect Israeli civilians in Israel from crossborder attacks. Since 1985, 15 Israelicivilians have been killed. Around 400 Lebanese civilians have been killed overthe same period.

—as opposition withinIsrael to its presence there

mounts

Within Israel, opposition to the army’s involvement in south Lebanon hasmounted over the last few months. Israel’s defence minister and a seniorcabinet member, Yitzhak Mordechai, recently admitted that the occupationwas unsustainable in the long term. The architect of the 1982 invasion andnow infrastructure minister, Ariel Sharon, earlier called for a withdrawal fromthe area. And in December a key participant in the 1993 secret talks with thePalestinians in Oslo, Yossi Beilin, released a detailed plan for a withdrawal.

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Lebanon 11


However, two vital voices have remained missing from the chorus: that of theprime minister, Binyamin Netanyahu, and that of the leader of the LabourParty and main opposition group, Ehud Barak. Neither has said anything aboutwithdrawing and, until they do, the chances of an Israeli pullout are slim. It is,anyway, highly unlikely that Israel will feel secure enough to withdraw with-out guarantees from the Lebanese government, backed by Syria, for the securityof northern Israel. And this is unlikely until Israel reaches a deal with Syriaabout the occupied Golan Heights.

SLA morale plummets— On the ground, Israel’s recent attempt to shift greater responsibility for theoccupation zone to the SLA appears to have failed. As a result of growing callswithin Israel for a pullout, which, if it happened suddenly, would leave SLAtroops at the mercy of their enemies, morale within the Lebanese militia hasfallen to new depths. Its head, Antoine Lahd, has made several approaches tothe Lebanese government to start a dialogue, and appeared on Israeli televisionto attack his pay-masters for their lack of support. He has even threatened toturn his guns on Israel if it pulls out.

However, the government in Beirut has refused all contact with General Lahd,who, together with other senior SLA officers, has been sentenced to death fortreason. Any deal between Syria, Israel and Lebanon over the south will have toinclude some provision for the SLA. Top SLA leaders are likely to leave thecountry and some may even be offered Israeli citizenship. The rank-and-file arelikely to be incorporated into the Lebanese army.

—as Hizbullah’seffectiveness improves

As SLA morale has plummeted, the effectiveness of the militant Shia group,Hizbullah (Party of God), as a fighting force appears to have improved over thelast three months. In particular, its destruction of at least three of Israel’s latesttanks, the Merkava Mark III, has sent shock-waves through the Israeli army.Israel has been trying to sell the tank to Turkey, with which it has signedtwo military co-operation deals. The tank’s new-found vulnerability is anembarrassment to the army, which is now faced with either withdrawing all itstanks from Lebanon, which would damage morale and perhaps weaken its gripon the area, upgrading its armour or taking offensive action. Military observersbelieve that Hizbullah, which draws almost all its support from the ShiaMuslims of the south, the Beqaa valley in the east, and the southern suburbs ofBeirut, has started using US-made anti-tank TOW missiles supplied by Iran toreplace older equipment.

Hizbullah has also restructured itself. Membership is now open to all Lebanesemen—but not women—regardless of their religious affiliation, and a new bri-gade of part-time soldiers has been formed. Although the moves have largelybeen made to gain publicity, they nevertheless reflect the relatively strongcross-confessional support for the resistance movement and its bid to expelIsrael. Hizbullah has also amended its byelaws to allow the head of the organ-isation, Hassan Nasrallah, to run for a third term as secretary-general.

Two bombs explode inBeirut—

Two bombs exploded in Beirut in October raising fears that the security situ-ation was taking a turn for the worse. The first bomb, a small device by Lebanesestandards, was thrown over the wall of the American University in Beirut (AUB),

12 Lebanon


apparently in protest at the arrival of the university’s new US president, JohnWaterbury. The following day, a second bomb exploded in an abandoned busstation in near the port of east Beirut.

Explanations for the attacks, for which no one took responsibility, vary. Theattack on the bus station was attributed to anything from rivalry between taxidrivers to anti-government protests. The AUB attack could have had a moreserious purpose: the bomb’s small size and the fact that it went off in the earlyhours of the morning clearly meant it was not intended to cause casualties butperhaps to send a message to the US. Some commentators believe that theSyrians were either directly or indirectly responsible. Before visiting Beirut inSeptember, the US secretary of state, Madeleine Albright, visited Damascus.There she apparently refused to discuss Lebanese affairs with the Syrianpresident, Hafez al-Assad, much, it is believed, to his chagrin. The attack on theAUB, therefore, could be a Syrian message to the US that Lebanon is “Syrianterritory” and that overall Lebanese affairs have to be discussed in Damascus,not Beirut.

—as the US removesLebanon and Syria from

drugs list

The US has removed Lebanon and Syria from a list of countries it says produceillegal drugs, a move which the Lebanese government hopes will rehabilitatethe country in the eyes of the international community and encourage foreign

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Lebanon 13


investment. The Beirut government, which has long sought the move, hasbeen working hard—together with the Syrians—to stamp out drug productionin the country, mainly in the Beqaa Valley where Syrian control is strongest.

This recently led to civil unrest in the valley where farmers have been demand-ing compensation for switching from marijuana and poppies (for heroin)to producing less lucrative crops such as potatoes and tomatoes. The UNDevelopment Programme (UNDP) also has a switch-over programme in thevalley, but progress has been hampered by a shortage of funds. In the past, theUS has blocked funds because of fears that they will be diverted to Hizbullah,which has strong support in the Beqaa, particularly in the town of Baalbek.

The move follows the lifting of a US travel ban on US nationals to Lebanon andMrs Albright’s visit to Beirut in September. During the civil war, when law andorder broke down completely in Lebanon, the Beqaa Valley, with its plentifulsupply of water and warm weather, was a major drug-production area, safefrom US and Western intervention. Lebanese drug and war lords joined seniorSyrian government officials in making fortunes out of the drug trade withwhich they funded the war and their political ambitions. The lifting should beseen in the context of US encouragement to Lebanon and its economic revival,and to Syria to adopt a more conciliatory attitude towards Israel.

Beirut reimposes militaryrule in the Beqaa Valley—

In the Beqaa itself, the Lebanese authorities have imposed military rule in a bidto quash political unrest. This follows demonstrations by followers of a formerHizbullah leader, Sobhi Tufeili, in Baalbek in June protesting at a lack ofgovernment support for the poor, most of whom are Shia. Supporters of SheikhTufeili, a firebrand former Hizbullah secretary-general now shunned by theHizbullah leadership, also prevented the interior minister, Michel Murr, fromvisiting the Baalbek area, threatening to do the same with all parliamentarians.This prompted the government to send in the army under the direct authorityof the chief-of-staff, Emile Lahoud.

The move is significant because the Beqaa was largely under Syrian control.The Lebanese army’s growing presence marks a significant shift in power in thearea, although not of ultimate control, which remains in Syrian hands. Morethan anything else, it signifies the high degree of co-operation between thegovernments in Beirut and Damascus, and the faith Damascus has in theLebanese prime minister, Rafiq Hariri.

—and municipal electionsare set for April or May

Municipal elections for town mayors and councils, which have not taken placesince 1963 and were postponed in 1997, may now be set for April or May 1998.In fresh proposals put forward by Mr Murr, up to one-third of seats in areassuch as Beirut, Tripoli, Sidon and Tyre, and villages near or in the Israelioccupied zone, may be filled with government-appointed candidates. Thegovernment says the aim of this provision is to ensure traditional sectariandomination in certain areas. Presidential elections are due in November (seeOutlook for 1998-99).

The multi-confessional Association for Democracy and Elections, however, hascriticised the proposals as undemocratic. A remark by Mr Murr that “we [thegovernment] would be idiots if we appointed opposition figures to these seats”

14 Lebanon


has attracted particular criticism from opposition members of parliament.Ruling politicians also worry that the emergence of up to 15,000 elected repre-sentatives could undermine their power base, although this figure includes theone-third that the government are considering appointing. If and when elec-tions took place, the government would have to release municipal funds with-held since the 1980s. MPs would then lose their influence with constituents,who would instead turn to their local authority for provision of services.The electoral procedure is complicated by the fact that, because of the 1975-90civil war, hundreds of thousands of voters previously registered in particularlocations no longer live there.

Government repressionmounts—

Lebanese security forces have killed a demonstrator during a protest against thegovernment’s closure of a television station in the northern city of Tripoli. Thekilling in September was the first resulting from a series of protests againstgovernment plans to shut down several hundred television and radio stationswhich sprang up during the war, reducing the total to less than 20. Ostensibly,the moves are designed to bring some structure to the unlicensed system whichemerged during the war when virtually every warlord, militia and politicalgroup had a television or radio station to broadcast their propaganda.

Government opponents, however, believe that the underlying aim is to restrictpress freedoms. For instance, of the television stations that will remain, severalare owned by cabinet members. In the last few years, the relative freedomwhich the Lebanese media enjoyed before and even during the war, has dimin-ished. Government control of the media is now much stronger than whenMr Hariri came to power in 1992. Since then, self-censorship, particularly indiscussion of Syria’s role in Lebanon, has grown.

—as Amnesty accuses it ofhuman rights abuses

Backed by Damascus through Syrian intelligence, the Lebanese state has grownmore repressive over the years. Street protest, for instance, is banned. A London-based international human rights group Amnesty International recentlyaccused the Lebanese authorities of human rights abuses and “unfair politicaltrials”. The accusation followed the publication earlier in 1997 of a report by theUS-based Human Rights Watch detailing alleged human rights violations. Bothorganisations have said that some 200 Lebanese, many of them supporters ofMichel Aoun, who led a “war of liberation” against Syria in 1989, are being heldillegally in Syria.

Cardinal Sfeir holds talkswith exiled Christian

leaders—

The spiritual leader of Lebanon’s Maronite Christian community, CardinalNasrallah Boutros Sfeir, has travelled to Paris for talks with Christian Lebaneseexiles, including General Aoun, a former president, Amin Gemayel, andthe head of the National Party, Raymond Eddé. Reports suggest that CardinalSfeir also lobbied the French president, Jacques Chirac, for help for Lebanon’sChristian community to regain some of the political influence it lost during the15-year civil war. General Aoun, who launched his “war of liberation” in 1989,is still popular among many Maronites in Lebanon.

—as the government bansan interview with General

Aoun

So sensitive is the government about General Aoun that in December itstopped local television stations from broadcasting a live interview with him.The interview, the latest in a controversial series shown on two TV chat shows

Lebanon 15


competing in a bitter ratings war, was banned by the information minister,Bassem Sabaa, in an attempt to “maintain public order and prevent sectariantension”. The ban was seen by many opposed to Syria’s domination ofLebanon as an attempt to encourage anti-Syrian feeling. After the ban, thenational lawyers’ union went on strike and students at Christian universitiesorganised three days of demonstrations.

Economic policy and the economy

Government plans an“austerity” budget for

1998—

After weeks of intense debate, the cabinet in October approved an “austerity”budget for 1998 designed to reduce the budget deficit from an estimated equi-valent of around 18% of GDP in 1997 to nearer 12%. In absolute terms, thegovernment is trying to keep expenditure for 1998 at roughly the same as theL£7.9trn ($5.16bn) estimated for 1997. A little over 40% of this—L£3.2trn—hasbeen allocated for debt-service obligations, although no information has beenreleased about how this is to be split between the interest due on domestic debtand that on foreign debt. Most, however, is likely to go on domestic debt. In1997 interest payments on domestic debt totalled some £3.1trn, 25% morethan in 1996. Interest on foreign debt was L£170bn, up by just over 2% on1996, according to EIU estimates.

Government finances(L£ bn unless otherwise indicated; end-period)

1996 1997 19981 Qtr 2 Qtr 3 Qtr 4 Qtr Year Budget 1 Qtr 2 Qtr 3 Qtr 4 Qtra Yeara Budget

Revenue 812 787 862 1,071 3,532 4,100 719 969 1,031 1,264 3,983 4,956 of which: customs duties 390 378 401 463 1,632 1,800 377 396 470 537 1,780 1,950 property transaction fees 45 53 70 115 283 n/a 51 59 73 121 304 470

Expenditure 1,325 1,658 1,889 2,353 7,225 6,433 1,771 2,022 2,083 2,070 7,946 7925 Current n/a n/a n/a n/a n/a 5,724 n/a n/a n/a n/a n/a 6,268 of which: interest payments 346 460 735 1,152 2,693 2,700 683 896 862 870 3,311 3,200 domestic debt 332 443 665 1,068 2,508 2,500 664 878 799 800 3,141 n/a foreign debt 14 17 70 84 185 200 19 18 63 70 170 n/a wages & salaries n/a n/a n/a n/a n/a 2,257 n/a n/a n/a n/a n/a 2,491 Capital n/a n/a n/a n/a n/a 709 n/a n/a n/a n/a n/a 1,657

Memorandum item non-interest expenditure 979 1,198 1,154 1,201 4,532 3,733 1,088 1,126 1,221 1,200 4,635 4,725

Balance –513 –871 –1,027 –1,282 –3,693 –2,333 –1,052 –1,053 –1,052 –806 –3,963 –2,969 excl interest payments –168 –411 –292 –130 –1,000 367 –369 –157 –191 64 –652 231

Other public-sector deficits –64 –174 –157 –166 –561 n/a –107 –106 –11 –11 –235 –200

Overall balance –577 –1,045 –1,184 –1,448 –4,254 n/a –1,159 –1,159 –1,063 –795 –4,198 –3,169

Financing requirement 577 1,045 1,184 1,448 4,254 n/a 1,159 1,159 1,063 n/a n/a n/a Domestic 502 721 1,022 1,255 3,500 n/a 1,067 828 905 n/a n/a n/a Foreign 75 324 163 192 754 n/a 92 331 158 n/a n/a n/a

Ratios (%)Overall balance/annual GDP –2.8 –5.1 –5.8 –7.1 –20.8 –9.9 –4.9 –4.9 –4.5 –3.4 –17.9 –12.3Overall balance/expenditure –43.5 –63.0 –62.7 –61.5 –58.9 –36.3 –65.4 –57.3 –51.0 –38.4 –52.8 –40.0

a EIU estimates.

Source: Banque du Liban, Quarterly Bulletin.

16 Lebanon


Of current expenditure, L£2.5trn—or 31% of total spending—is to go on wagesand salaries, some 10% more than the amount budgeted for 1997. The govern-ment has also promised to reduce the size of the civil service and cut costsby merging ministries and departments after the presidential elections inNovember 1998. It has outlined a six-year programme to reduce the number ofstate employees from 160,000 to 100,000. Since the government has not postedactual figures for spending on wages and salaries since 1995 no comparison canbe made between budgeted and actual spending from year to year.

The same goes for capital expenditure, which is likely to more than doublecompared with the budgeted figure for 1997, to some L£1.7trn, accounting forjust over 20% of planned spending. However, the government has said thatspending will only go on essential reconstruction projects. Total non-interestspending, then, is set to rise by just under 2% from an estimated L£4.6trn in1997 to L£4.7trn. Following allegations of corruption and mismanagement,allocated funds to the Ministry of Refugees, headed by the Druze Muslimwarlord, Walid Junblat, are to be cut by 30% to L£10bn. However, it is not clearhow this divides between current and capital expenditure.

—and raises taxes in orderto boost revenue

In a bid to increase revenue, the government has moved to introduce a numberof tax increases. These include:

• a 400% rise in annual vehicle tax;

• a 233% rise in tax on local cement sales;

• a 150% rise in tuition fees at the state-run Lebanese University;

• an increase in charges for new passports, foreign residency permits and somereal estate transactions, such as prime coastal properties;

• a new 1% sales tax; and

• as yet unspecified measures for better revenue collection.

The government hopes the measures will help lift revenue for 1998 to nearlyL£5trn from an estimated L£4trn in 1997. It envisages an increase of some 10%in customs duties—its largest single source of revenue at nearly 40% of thetotal—from L£1.78trn to L£1.95trn. Other revenue, excluding property trans-action fees, is set to rise by around 33%, from L£1.9trn to L£2.5trn.

Together with expenditure, this gives a budget deficit of just under L£3trn.With a provision of L£200bn for other public-sector deficits, which in 1997were estimated at around L£235bn, the overall budgeted deficit for 1998 issome L£3.2trn, equivalent to 12.3% of forecast GDP. The good news for thegovernment is that, if it is able to keep to its spending plans and its forecastrevenue materialises, then, excluding interest payments, it should post abudget surplus of around L£230bn in 1998, compared with an estimated deficitof L£650bn in 1997.

Deficit financing willcome from foreign

sources—

Perhaps the most significant element of the budget plan, which, as this reportwent to print, had yet to be approved by parliament, is how the government isgoing to finance the deficit. Breaking with previous years, the cabinet has agreedto finance most of the shortfall by overseas borrowing, raising some $2bn to be

Lebanon 17


repaid over 30 years; $1.6bn in Eurobonds and $400m in foreign currency fromlocal banks. The new 1% sales tax is intended to service this debt.

Failing that, the government is also considering raising the $2bn through asingle zero-coupon bond, where the full amount, including accrued interest, ispaid on maturity. Since the end of Lebanese civil war in 1990, budget deficitshave largely been funded through Lebanese pound Treasury bills for whichinterest rates currently range between 12.7% and 16.7%. The planned switch toexternal financing is designed to reduce the cost of servicing debt—foreigncurrency borrowing is much cheaper—and increase liquidity in the economy.Government demand for money has led to high Lebanese pound interest ratesand made investment and consumer borrowing expensive.

—as government debtcontinues to grow

Government debt has continued to grow in the three months to the end ofSeptember, reaching nearly L£20trn, compared with a little over L£16trn at thestart of the year. This is equivalent to nearly 85% of estimated GDP for the yearcompared with 79% at the beginning of the year. However, the rate of growthhas slowed, with debt up by 32% year on year in September compared with37% in May. External debt has also continued to climb and reached $2.31bn atthe end of October, up from $1.8bn at the beginning of the year. This isequivalent to around 15% of estimated GDP for the year and compares withnearly 14% at the end of 1996.

Public-sector debt by holder(L£ bn unless otherwise indicated; end-period)

1996 1997Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Central bank 100 98 98 100 98 98 113 119 127 142

Commercial banks 12,662 12,863 12,933 13,140 13,376 13,593 13,702 13,773 13,868 13,811 Treasury bills 12,556 12,761 12,828 13,039 13,275 13,490 13,605 13,673 13,768 13,707 Others 106 102 105 101 101 103 97 100 100 104

Treasury bills held by non-banks 4,467 4,981 5,304 5,552 5,677 6,113 6,297 6,216 6021 5798

Gross domestic debt 17,229 17,942 18,335 18,792 19,151 19,803 20,113 20,108 20,016 19,751

Government deposits with the central bank 3,871 4,295 4,256 4,199 4,119 4,424 4,577 4,403 3957 3379

Net domestic debt 13,358 13,638 14,081 14,593 15,032 15,277 15,439 15,705 16,060 16,381

External debt ($m) 1,831 1,822 1,829 1,888 1,890 1,959 2,140 2,233 2,249 2,289

Total (net of government deposits with the central bank) 16,199 16,471 16,913 17,529 17,968 18,297 18,733 19,138 19,514 19,891

Ratios (%)Net debt/annual GDP 79.2 70.0 71.9 74.5 76.4 77.8 79.7 81.4 83.0 84.6 Net domestic debt/annual GDP 65.3 58.0 59.9 62.1 63.9 65.0 65.6 66.8 68.3 69.7External debt/annual GDP 13.9 12.0 12.0 12.5 12.5 12.8 14.0 14.6 14.7 14.9 Sources: Banque du Liban, Monthly Bulletin.

Government deposits with the Banque du Liban (the central bank), with whichthe authorities soak up excess money to keep inflation down, fell in the threemonths to the end of September, and were up by 22% year on year comparedwith nearly 100% in May. Growth in debt has worried investors in bothgovernment instruments and the country as a whole because of the high costof servicing and the effects on economic growth and currency stability.

18 Lebanon


The central bankintervenes to prop up the

Lebanese pound—

Growing concern over fiscal policy and turmoil in the international moneymarkets have obliged the central bank to intervene more heavily in supportingthe Lebanese pound in the three months to October than at any time since theend of the war. After rising to a high of nearly $7.4bn at the end of June,reserves, excluding gold, fell by a total $1.17bn in August-October, with theheaviest selling in October when reserves fell by $625m. The government, too,moved to help the pound by offering to exchange Treasury bills which wereapproaching maturity with new longer-term bills offering rates up to 3% abovemarket rates. Two-year Treasury bills, which represent the benchmark interest rate,were offered at a rate of 16.73% in the seven months to September. However, aleading Lebanese bank, Banque Audi, later reported that reserves were climbingin mid-December.

Foreign reserves, 1997($ m; end-period)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Cash 6,309 6,445 6,639 6,731 7,126 7,389 7,277 7,093 6,844 6,219

Gold 3,178 3,331 3,226 3,141 3,181 3,085 3,007 2,991 3,035 n/a

Total 9,487 9,776 9,865 9,872 10,307 10,473 10,284 10,084 9,879 n/aSource: IMF, International Financial Statistics.

—as the currencycontinues to appreciate

Despite pressure on the pound and because of the central bank’s heavy inter-vention, the value of the pound continued to climb over the period. By Octoberit had risen to L£1,532:$1 compared with an average of L£1,551:$1 at thebeginning of the year, an average monthly rise of about L£2. By the end ofthe year the pound had strengthened a little more to L£1,527:$1.

Exchange rate(L£:$; period averages)

1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year

Rate 1,590 1,577 1,564 1,555 1,571 1,549 1,543 1,536 1,530a 1,539a

a EIU estimate.

Source: IMF, International Financial Statistics.

Uncertainty promptsswitch to dollars

Nevertheless, increased uncertainty led to a pronounced switch in funds fromLebanese pound deposits to foreign currency. Dollarisation, which measures theratio between Lebanese pounds and foreign currency in the domestic bankingsystem, had been falling year on year, reaching a low of 54.7% at the endof March 1997. Then, it began to rise and in the following six monthsclimbed more than it had fallen in the previous two years to stand at 60.6% atthe end of September. Lebanese pound deposits fell from the second to the thirdquarter, for the first time in years, but were still 22% higher than a yearpreviously.

Lebanon 19


Commercial bank activity(L£ bn unless otherwise indicated; end-period)

1996 19971 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Total assets 30,096 31,573 33,354 37,183 38,237 40,571 42,673 of which: credits to customers 11,379 11,970 12,376 13,290 13,452 14,218 14,951 foreign currency ($ m) 6,309 6,655 6,957 7,517 7,585 8,016 8,477 % of total 87.8 87.3 87.6 87.8 87.2 86.8 86.9 local currency 1,389 1,514 1,533 1,623 1,728 1,875 1,954

Customer deposits 24,900 26,295 27,663 30,685 31,916 32,553 36,084 Foreign currency ($ m) 9,537 9,990 10,266 11,169 11,288 12,515 14,251 % of total 60.6 59.7 57.8 56.5 54.7 56.3 60.6 Local currency 9,799 10,601 11,664 13,351 14,468 14,960 14,233Source: Banque Audi, Quarterly Economic Report 3rd Quarter 1997.

The governmentintroduces new import

restrictions

After six months of intense public debate, the government finally introducedon November 1st, a month later than originally planned, a series of restrictionson the import of agricultural products and processed foods. The restrictions,drawn up by the minister of agriculture, Shawqi Fakhouri, are designed toencourage consumers to change from relatively inexpensive high-quality im-ported foods to home-produced products, and in the process reduce the annual$1.5bn imported food bill by around 10%. The government hopes that therestrictions will give a boost to domestic food production and raise agriculture’sshare of GDP from the present 6% to 20%, although no time frame has beengiven. The limitations, which are as follows, are also designed to increasegovernment revenue.

• Completely banned: Olives, olive oil, pine nuts, vinegar, potatoes andpotato products, canned beans, frozen fruit, fresh milk, yoghurt, eggs, chickensand certain vegetables. Certain fresh fruits are also banned when local produceis in plentiful supply.

• Subject to new duties of between 15% and 100%: Watermelons, kiwi fruit,avocados, pineapples, dates, certain frozen and canned vegetables, honey,some kinds of cheese, cut flowers and reconstituted milk powder.

• Goods to be imported “in co-ordination with the Ministry of Agriculture”:jam, jelly, ice cream, hot sauce, tomato paste, ketchup, fruit juice, fruit andnatural vegetable extract.

Mr Fakhouri has dismissed fears that the restrictions will be inflationary,arguing that “most items subject to new duties are not consumed by the lower-income class and will therefore not be a burden”. He has said that duties will berevised every July. Many economists, however, believe the restrictions are infla-tionary and will also reduce consumer choice. Lebanon’s trading partners, theyargue, will hit back. Jordan has already imposed some restrictions on certainLebanese goods.

Economic growth isestimated at 3.8%

in 1997—

Economic growth, which in 1992 the government had hoped would rise atsome 8% a year because of its reconstruction programme, is likely to the end1997 at about 3.8%, following an improvement in investment, particularly in

20 Lebanon


construction, and tourism. Price rises, meanwhile, have remained steady, withfull-year inflation expected at around 6%.

Construction activity grew by nearly 3% in 1997, according to EIU estimates,despite a general malaise in the industry which had suggested earlier in theyear that it might contract. However, prospects for future growth appear dimgiven an estimated 17% decline in the total construction area for which theAssociation of Engineers has issued permits. These fell from nearly 13.5m sqmetres in 1996 to a little over 11m sq metres in 1997, according to our esti-mates based on nine months’ figures.

Construction-sector activity

1996 1997 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr 3 Qtr 4 Qtra Yeara

Cement deliveries (’000 tonnes) 700 957 1,163 992 3,812 633 970 1,146 1,166 3,915

Construction permits (’000 sq metres) 3,338 3,413 3,175 3,562 13,488 2,122 2,936 3,080 3,042 11,180

a EIU estimates.

Sources: Banque du Liban, Quarterly Bulletin.

Construction activity for the year, measured in tonnes of cement delivered,was up from 3.8m tonnes to 3.9m tonnes. After spearheading economic growthin the years after the war, growth in construction activity has slowed markedlyover the last two years, pushing overall economic growth rates downwards. Thegeographic distribution of permits shows that the most active area of thecountry is Christian-dominated Mount Lebanon with 52% of the total, fol-lowed by north Lebanon with 18%, south Lebanon with 16%, the Beqaa Valleyin the east with 9% and Beirut with 6%.

—although the propertymarket is still sluggish—

Lebanon’s commercial and residential market still suffers from two major struc-tural problems; a mismatch between supply and demand at the top end of themarket (supply outweighs demand), and a shortage of property for middle- andlower-income families. The latter is mainly due to a lack of long-term financingfor property developers and insufficient housing loans for private individualpotential buyers. In the past, this has forced property developers to focus onluxury ventures, speculating on quick returns and more readily availablefinancing. A number of banks, notably Byblos Bank, have tried to increase theavailability of housing loans, but these remain tiny in comparison to otherforms of bank lending.

Despite the importance of construction, however, it is trade that dominatesLebanese business activity, according to a new survey by the government’scentral statistics bureau. In Beirut, more than 50% of companies describe them-selves as “commercial traders”; 78% (9,995 firms) are in the retail trade, 9.3%in wholesale and 12.6% in the motor retail industry. Second to trade is theservices sector, which accounts for almost 30% of all businesses. Of these, 25%are in the hotel and restaurant trade. The services sector is also more importantthan trade in the Christian-dominated Mount Lebanon governorate where it

Lebanon 21


employs some 41% of the workforce, followed by trade at 31.5%. In Beirut, theservices sector employs 24% of the workforce, trade 55% and industry 20.4%.

—and industrial unrestintensifies

Industrial unrest has intensified over the last three months culminating in athree-day strike in October by 5,000 public-sector electricity workers whichplunged Beirut into darkness. They were protesting about low salaries and jobinsecurity. This was followed in a December by a one-day strike of public-sectorteachers again demanding better pay and conditions, which shut down 90% ofstate-run schools across the country. However, a general strike call by the pro-government leadership of the General Labour Confederation (GLC)—whichgroups together most of the country’s major public- and private-sector tradeunions—went almost unheeded, when only a fraction of its 350,000 members—less than 25%—walked out. Their principal demand was to triple the minimumwage to L£800,000 ($522) a month and double pensions payments.

Reconstruction and infrastructure

Solidere delays Eurobondissue—

Because of the recent uncertainty in the international capital markets, theprivately owned company appointed by the government to rebuild anddevelop the destroyed downtown heart of Beirut, Solidere, has delayed plans toissue a five-year $165m Eurobond which it was due to launch at the end of1997. The bond issue, which was being managed by a US investment bank,JP Morgan, and France’s Crédit Agricole, would have been Lebanon’s secondprivate non-bank issue. Before the turmoil in the markets following thecollapse of East Asian economies, it was expected that the bond would go for180-200 basis points over equivalent five-year US Treasury bills. Now it is notclear when the issue will go ahead.

—but goes ahead withother projects

Solidere, which is capitalised at some $1.2bn and traded on the local stockexchange, has meanwhile moved ahead with a number of development projects.

• A prominent Saudi businessman and member of the Saudi Royal family,Walid bin Talal bin Abdel-Aziz al-Saudi, is to invest a total of $150m in threenew hotels, all of which are to be in the Solidere area. Prince Walid, whosemother is Lebanese, has taken a 50% stake in a $100m project to build a370-room Four Seasons hotel, and another 50% stake in a second $100m pro-ject to build a 302-room Moevenpick hotel. The local Maryland TourismProjects Company is to own the hotel, but Moevenpick, a Swiss group, is tomanage it. Prince Walid’s third investment is a 50% stake in a $100m projectto build a Meridien hotel, again in the downtown area. These investmentsfollow his recent purchase of a stake in a local finance house, Lebanon Invest,and a partnership agreement to develop a Planet Hollywood theme restaurant.

• A leading Lebanese bank, Banque Audi, has awarded an $18m contract to alocal firm, Moawad Eddé, to build a new headquarters covering 140,000 sq ft inthe Wadi Abu Jamil quarter of the downtown area. Construction started inDecember and will take two years.

• Middle East Capital Group, a leading local finance house, has bought a plotof land from Solidere to build a new $45m head office.

22 Lebanon


Reconstruction workbegins on the Phoenicia

hotel

Reconstruction work has also begun on Beirut’s Phoenicia hotel, one of theMiddle East’s most famous hotels before the civil war, which now borders theSolidere area and lies in the heart of the old “hotel district”. In 1996 LebanonInvest raised $35m to help rebuild the 533-room hotel. Tenders went out thatOctober, but the process was delayed because no contractor would do the job,including putting in soft fittings, for $70m.

The hotel’s owners, the local Société des Grands Hotels du Liban (SGHL), thenengaged in protracted negotiations with a Saudi group, Binladen, but theseremained deadlocked for most of 1997. Then in November the deputy chair-man of SGHL, Mazen Salah, awarded the deal to the local contractor, KaragullaEngineering, which took on the project for close to $80m. SGHL has since beenpreparing to borrow $60m from the Beirut-based Banque de la Mediterranée tofund the reconstruction. Plans so far include a loan of $20m in convertiblebonds, with an option to take a stake in the hotel. Banque de la Méditerranéeis owned by the Lebanese prime minister, Rafiq Hariri. The hotel is scheduledto open towards the end of 1999. Before the war, the Phoenicia was said to bethe most profitable in the Intercontinental hotel management group whichran it. Occupancy rates averaged more than 70% between 1965 and 1975,according to the hotel.

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Lebanon 23


CDR takes over Linordcoastline development

project—

The quasi-government body, the Council for Development and Reconstruction(CDR), which is overseeing much of Lebanon’s reconstruction programme, hasissued a major tender for the development of a 2.4m-sq-metre area of theMediterranean coastline just north of Beirut. Initially, the project was supposedto have been run by the quasi-government company, Linord, which was tohave issued shares in the same way as Solidere did to raise capital. However, thegovernment abandoned the plan because of concern about Linord’s ability toraise an initial $200m, given the shortage of liquidity in the country. Theproject was also racked by a dispute between the head of Linord, Fadi Fawaz,and the government over who would be responsible for basic infrastructuredevelopment, and foreign share ownership restrictions.

Now CDR is offering the work as a single project in an international tender.Any firm or consortium can create a Lebanese company and raise $200m towin the deal. In return, the company will—in the same way as Solidere—begranted a portion of land reclaimed from the sea which it can sell for profit.The whole cost of the project is put at $580m. The balance—$380m—is to beraised during the life of the project by land and property sales.

—with part of Beirutairport terminal to open

in January

Part of Beirut airport’s new 150,000-sq-metre terminal building is to open inJanuary in the first major completion in the long-delayed $500m airport re-development project. A local firm, Consolidated Contractors Company (CCC),and Germany’s Hochtief are being paid $387m to build the terminal and a new3.4-km runway which extends into the sea. Once the terminal section opens,the old terminal building is to be demolished to make way for the second half ofthe terminal. The new runway is expected to receive its first inbound flightin mid-1999.

Plan to switch powerstations to gas move

ahead—

International consultants have been invited to bid for consultation work inbuilding a liquefied natural gas (LNG) re-gasification plant and related pipeline.Several contractors, including a number of US companies—Bechtel, ABBLummus Global and Parsons Corporation—have expressed an interest in theproject which is designed to serve Lebanon’s five power stations. The scheme,which is expected to cost around $450m, is to be carried out on a build-operate-transfer (BOT) basis with a 25-year concession. Two new electricity plants, atZahrani in the south and Beddawi, both of which were commissioned lastAugust, are expected to be converted to gas within three years if the project goesahead, reducing the cost of power generation. Lebanese officials have recentlybeen negotiating with Qatar to buy 500,000 tonnes/year (t/y) of LNG after 2001.

—as electricity gridextension work proceeds

The Saudi Cable Company has won a $42m contract to supply and erect twooverhead 225-kv cables, one of which is to link the southern towns and areas ofTyre, Zahrani, Sidon and Aramoun, and the mountain village of Sofar. Thesecond cable will link the Mount Lebanon areas of Maameltein, Bihsas andHalaat. The contract is part of a second phase in government work to rehabil-itate and extend the electricity system. The first was power generation. Afterrestrictions on the supply of electricity from Syria to eastern Lebanon were liftedin August, bids have also been submitted to the government for consultancywork on connecting the Syrian and Lebanese electricity grids. Bidders includeElectricité du France, Italy’s Enel and Germany’s Lahmeter International.

24 Lebanon


The number of fixedtelephone lines is still

increasing

Lebanon saw the installation of its millionth fixed telephone line in December,according to the state telephone company, and the government is planning toprovide another 500,000 telephone lines by 2000. Foreign companies, includ-ing Alcatel of Italy, Ericsson of Sweden and Siemens of Germany, have playeda major role in rehabilitating the telephone system destroyed during the civilwar. The war led to the emergence of Lebanon as one of the highest usersof mobile telephones. The country boasts some 200,000 Global Standardsfor Mobiles (GSM) lines operated by two companies, France Télécom MobileLiban, which is 66% owned by France Télécom, and Libancell, in whichTelecom Finland has a 14% share.

Agriculture, industry and business

Tobacco farmers protest“low” government

production quotas—

Tobacco farmers have been protesting against tight government restrictions onoutput following overproduction in 1996, which threatened to push downprices. The state-owned monopoly buyer, Régie de Tabac, set a ceiling earlier thisyear of 5,000 tonnes for the south, 1,600 tonnes for the north and 1,800 tonnesfor the Beqaa Valley in the east. But producers have complained that thesequotas are too low for them to make “a decent living”. In 1996 the governmentbought the entire crop of 11,800 tonnes at a record of L£100bn ($64m); this yearit is paying L£7,500-16,000 per kg.

The government’s problems are compounded by that fact that it is trying tokeep people in the south from moving north to avoid Israeli attack (see Thepolitical scene). It is also trying to encourage farmers in the Beqaa to switchfrom growing hashish and other illegal drugs. If a livelihood in, for example,tobacco farming becomes more difficult these objectives will be harder toachieve. On the other hand, local producers will be helped by the govern-ment’s introduction of restrictions on the import of agricultural products andprocessed foods (see Economic policy and the economy).

—and Iran considersupgrading oil refineries

Iran is considering plans to rebuild and upgrade Lebanon’s oil refineries, one atZahrani in the south and the other near the northern city of Tripoli, both ofwhich were put out of action during the civil war. Before the war, Zahranirefined 15,500 barrels/day (b/d) and the Tripoli refinery 36,000 b/d. In the early1990s the Ministry of Industry announced plans to reopen the Tripoli refineryand upgrade it to 50,000 b/d, but these were shelved because of financingproblems. Now, Iran’s involvement appears to be a serious possibility. Overthe last few years, Lebanon has been importing increasingly large quantitiesof refined products. In 1996 these reached 2.3m tonnes and then rose to2.8m tonnes in the first nine months of 1997. The total for 1997 is estimated at3.7m tonnes, more than 60% up on 1996.

Cement companies toincrease capacity—

Lebanon’s leading cement producer, Société des Ciments Libanais (SCL), hascommissioned Polysius of France to build a $170m cement kiln to raise prod-uction capacity from 1.6m t/y to 2.2m t/y. And a smaller producer, Société desCiments de Sibline, is expected to complete work on expanding its capacityfrom 350,000 t/y to 1.25m t/y in a $100m project fulfilled by Technip of Franceand Consolidated Contractors International Company (CCC) of Athens.

Lebanon 25


Currently, SCL has a 42% share of the cement market, Cimenterie Nationale36% and Sibline 10%. The remaining 12% is imported (see Economic policy andthe economy).

—and US firms to expandoperations

The US fast food giant McDonald’s has signed an agreement with a localbusinessman, Jean-Claude Zoghzoghi, to open a number of outlets in Beirut,the first in 1998. The move reflects growing US confidence in Lebanon after theUS government in mid-1997 lifted a ban on US nationals travelling to Lebanon(see The political scene).

A consortium of US companies has signed a preliminary agreement with alocally owned medical firm, International Medical Centre, to build a 300-bedhospital for $148m in the museum area of Beirut on the old frontline.Dewberry & Davis, is to draw up the project, Ace Group is to build it and ClarkConstruction to maintain it.

Tourism and transport

Visitor numbers climbover the year—

The number of people visiting the country through Beirut’s international air-port in the three months to the end of September rose by more than 15% overthe same quarter in 1996 to 336,000 from 291,000, lending statistical supportto reports that Lebanon enjoyed a “good” tourist summer. Traditionally, thesummer months, particularly August, are the time when thousands of Lebaneseexpatriates visit their families, giving an important boost to local hotels, restau-rants and car-hire companies.

Traffic at Beirut airport(’000 people)


Arrivals 150 201 291 177 819 173 260 336 212 981

Total 308 367 611 360 1,646 352 464 717 435 1,968

a EIU estimates.


Hotel occupancy rates in Beirut, for instance, were said to be at a post-war highthroughout June-August, the larger hotels reporting rates of 80% or so in thesix months from the beginning of April. Car-hire firms also reported goodbusiness. We estimate that the total number of visitors in 1997 was 981,000,nearly 20% more than the 819,000 in 1996. All in all, just over 2m people usedthe airport in 1997, up by 18% on 1996’s 1.7m.

Vitally missing, however, is a breakdown of visitors by purpose of visit andcountry of origin. While thousands of Lebanese expatriate visitors are a wel-come boost to the economy, the country is also hoping for visitors from therich Gulf Arab states. But any hopes of attracting Western tourists en masse areunlikely to be fulfilled in the near future.

—as MEA is embroiled in acorruption scandal

Senior managers at Lebanon’s state-controlled national airline, Middle EastAirlines (MEA), which is now owned by the Banque du Liban (the central

26 Lebanon


bank), are under official investigation for alleged irregularities over the leasing-in of three Airbus A310 passenger aircraft in June 1997. The state alleges thatMEA could have bought the aircraft for less than the $39m it paid for them inthe five-year leasing deal. MEA was also paying $17,000 more per month forthe aircraft than the “normal” leasing rate of $200,000 per month. It is alsoclaimed that relatives of MEA’s chairman, Khaled Salaam, are co-owners of theleasing company, Singapore Airlines Leasing Enterprise, which was set up bythe owners of the aircraft, Singapore Airlines.

Whatever the validity of the allegations, the investigation is being seen bysome within the airline as a politically motivated attempt to oust the presentboard of the company in order to allow the central bank to prepare the airlinefor privatisation. Losses for 1997 are estimated at $20m, but airline insidersbelieve they could be as high as $60m. In 1996 MEA lost $50m.

Banking and finance

Banking activitycontinues to intensify—

Increased activity in commercial banking has continued to make the sector themost dynamic in the economy, with total assets rising to L£42.67trn at the endof September, a 1.6% rise on the previous month and a 28% rise year on year.Total customer loans rose 3.6% in the third quarter compared with the secondand by 9.8% year on year. Foreign-currency loans, which make up 87% of banklending, rose by 20% year on year, and Lebanese pound loans 2.5% year on year.

Consolidated balance sheet of commercial banks(L£ bn; end-period)

1996 1997Dec Jan Feb May Jun Jul Aug Sep

AssetsReserves 4,378 4,488 4,743 5,518 5,777 5,648 5,607 5,639 of which: deposits at the central bank 4,282 4,393 4,634 5,420 5,669 5,542 5,494 5,521Claims on the private sector 12,687 12,880 12,851 13,441 13,760 13,965 14,105 14,479 Local currency 1,623 1,614 1,639 1,849 1,875 1,935 1,954 1,954 Foreign currency 11,064 11,267 11,212 11,592 11,885 12,030 12,151 12,525Claims on the public sector 12,060 12,144 12,305 12,755 12,917 13,071 13,203 13,134Total incl others 37,183 37,326 37,394 39,734 40,571 41,174 41,971 42,673

LiabilitiesPrivate-sector deposits 27,505 27,868 28,036 29,571 29,929 30,542 31,113 31,390 Local currency 12,816 13,386 13,521 14,224 14,302 14,231 14,163 13,634 Foreign currency 14,689 14,482 14,515 15,347 15,628 16,311 16,950 17,755Total incl others 37,183 37,326 37,394 39,734 40,571 41,174 41,971 42,673Source: Banque du Liban, Monthly Bulletin.

Intensified activity has seen a number of banks post improved profits for theyear. Bank of Beirut, for instance, announced a nine-month profit increase of93% to $6.95m from $3.59m in the same period in 1996. Analysts describedthe results as “excellent”, pushing up the price of the bank’s shares on theBeirut Stock Exchange (BSE). By the middle of December, the share price was200% higher than when the shares were first listed in April.

Lebanon 27


—as institutions tap theinternational capital

market—

Lebanese banks have continued to tap the international capital markets atincreasingly advantageous cost and maturity conditions to raise capital fordomestic lending.

• One of the leading banks, Banque Audi, raised $81m in a second GlobalDepository Receipt (GDR) in October. The offer was four times oversubscribed,according to analysts. Listed in London, the issue was lead-managed by aUK finance house, Robert Fleming. Banque Audi also launched a ten-yearsubordinated loan worth $75m with a 250 basis point spread over equivalent—US Treasury bills, and a coupon of 8.5%. The bank was the first in the MiddleEast to issue a GDR when it raised $34m in October 1995.

• Another leading bank, Fransabank, launched a five-year $150m bond undera newly established $300m global deposit programme in October. Followingstrong demand, the issue, with a coupon of 8%, was increased from $100m to$150m. Launched at 219 points above equivalent US Treasury bills, it was thelowest Lebanese corporate spread to date.

• Banque Libanaise pour le Commerce is believed to be preparing a Eurobondworth $100m-$150m with Nomura Securities, to be launched in 1998.

• Banque du Liban et d’Outre Mer (BLOM) is expected to launch a subordi-nated dollar-denominated Eurobond worth $75m with an eight-year maturity.SBC Warburg Dillon Read is to be the sole lead-manager. Moody’s recentlyrated BLOM a B1, the same as Lebanon’s sovereign ceiling.

—and banks merge Bank mergers and acquisitions, driven by a central bank liquidity regulationdesigned to prompt consolidation of the country’s 80 or so banks, has con-tinued apace. In November Byblos Bank and Banque Beyrouth pour leCommerce (BBC) announced plans to merge, with Byblos in effect taking con-trol of the smaller bank. BBC has 19 branches, Byblos 33. In 1996 Byblosranked sixth in Lebanon in customer deposits, and BBC 15th. The merger willbring assets totalling L£3.85bn and a market share of 8%.

Eurobond gets off to arocky start—

The market price of Lebanon’s latest sovereign Eurobond, in common withother emerging market debt, has been hit bit by the turmoil affecting theinternational capital markets following the collapse of east Asian currencies.The issue on October 22nd was priced at 250 basis points above similar ten-yearUS Treasury bills. The spread widened within days to 435 as markets plunged,but by October 28th it began to narrow to around 320 points as Arab investorsmoved in.

Despite its troubles, the bond fared far better than those of leading emergingmarkets, such as Russia, which saw a bond priced at 320 reach 750 points.Managed by SBC Warburg and Credit Suisse First Boston, and placed by asyndicate of five Lebanese and nine global banks, the bond carried a coupon of8.3%. To date, Lebanon has so far issued $1.05bn in sovereign issues

—and finance house set tolaunch new fund

A Hong Kong-based finance house, Regent Pacific, has announced plans tolaunch a $30m-50m closed-ended fund for Lebanon, with Banque Libanaisepour le Commerce as adviser. The fund, to be called Regent Lebanon Fund, isto invest in unlisted stocks, IPOs and Treasury bills. It is Lebanon’s second fund

28 Lebanon


and follows the launch of a $50m country fund by a local finance house,Lebanon Invest. In the third quarter, a leading French bank, Société Générale,also launched a regional equity fund with a Lebanese component.

New firm joins BeirutStock Exchange—

Rasamny Younis Motor Company (Rymco), a leading car retailer, has listed40% of its capital stock on the BSE. The placement of 10m shares valued at$30m-32m raises to nine the number of companies listed on the exchange, andintroduces a new commercial sector to a bourse dominated by banks and indus-trial firms. Volume on the stockmarket grew rapidly in 1997. In September itwas 4.49m shares, up from 209,000 in August 1996. The most active share inSeptember was Solidere A, with 1.6m shares traded.

—as government plansinsurance sector

consolidation

Bahrain-based MedGulf insurance has a acquired a 51% stake in Lebanon’s fifthlargest insurance firm, Strikers. Proceeds of the sale are to go towards increasingthe company’s capital as the industry begins a phase of consolidation. Strikershas $14m of gross premiums. Another leading insurer, L’Union National, saidin November that it was planning a stockmarket listing. Consolidation haslong been expected in Lebanon’s highly fragmented $400m insurance sectorwhere up to 85 companies trade. In early 1998 the Ministry of Finance isexpected to announce new capital adequacy requirements, as it did with thebanking sector, with minimum capital set at $1.5m and a solvency margin of8%. An insurance law is also expected to require firms to split life and non-lifebusiness in order to prevent life premiums being used to fund losses in othersectors. Lebanon is said to be highly underinsured. Only one-third of cars areinsured, for instance.

Foreign trade and payments

The trade deficit growsin 1997—

Lebanon’s substantial trade deficit, which in the past has been driven largely byimports of capital goods to meet reconstruction needs and now is determinedmainly by falling exports, increased in the third quarter to nearly $1.8bn. Onthis basis the deficit for the whole year is estimated at around $6.7bn, com-pared with $6.54bn in 1996. After falling dramatically in the first quarter of1997 compared with the previous three months, imports, which are more thanten times greater than exports, grew gradually over the rest of the year but thenprobably dipped in the last three months to end 1997 on about $7.4bn, downby a little over 2% on 1996.

Balance of payments($ m)


Exportsb 225 224 294 275 1,018 221 148 162 159 690

Imports 1,785 1,686 1,995 2,092 7,559 1,703 1,849 1,946 1,890 7,388

Trade balance –1,560 –1,462 –1,700 –1,818 –6,540 –1,482 –1,702 –1,784 –1,731 –6,698

Net invisibles, transfers & capital inflows 1,589 1,471 1,984 2,282 7,326 2,047 1,810 1,953 2,051 7,861

Overall balance of payments 29 9 284 464 786 565 108 169 320 1,163

a EIU estimates. b Does not include unrecorded re-exports which may be equivalent to around 50% of recorded exports.

Sources: Banque du Liban, Monthly Bulletin.

Lebanon 29


The composition of imports has also shifted markedly over the last year as aresult of changes in economic activity and new government policies. For thethird quarter of 1997 the largest single group of imports was food products,accounting for 20% of the total, according to a leading Lebanese bank, BanqueAudi, which produces a quarterly report on the economy. These were followedby electrical equipment at 16%, vehicles at 10%, mineral products at 10%,metal products at 8% and chemical products at 7%.

Italy has remained Lebanon’s main supplier, but between 1991 and 1996 theUS greatly increased its share of Lebanese imports.

Imports by country of origin($ m)

1991 % of total 1996 % of total

Industrial countries 2,227 59.4 4,768 63.1 of which: EU 1,771 47.2 3,293 43.6 Italy 518 13.8 915 12.1 Germany 251 6.7 644 8.5 France 327 8.7 588 7.8 UK 170 4.5 306 4.0 US 182 4.9 825 10.9 Japan 118 3.1 293 3.9

Syria 362 9.6 308 4.1Source: IMF, Direction of Trade Statistics 1997.

—and the volume ofimports has fallen—

The volume of imports at Beirut port, through which the bulk of Lebanon’simports pass, dropped by around 4% from 5.86m tonnes in 1996 to 5.6m tonnesin 1997, according to our estimates based on nine months of official data.Imports in the third quarter fell by 10% compared with the second to1.44m tonnes, reflecting easing capital good imports.

Freight traffic at Beirut port(’000 tonnes)


Incoming 1,494 1,484 1,475 1,407 5,860 1,400 1,386 1,437 1,380 5,603

Outgoing 80 54 73 77 284 65 67 64 65 261

Total 1,574 1,538 1,548 1,484 6,144 1,465 1,453 1,501 1,445 5,864

a EIU estimates.


—as has that of exports Exports, too, have fallen but even more rapidly than imports, with the biggestyear-on-year fall coming in the third quarter of 1997 when they were down bynearly 45% compared with the same three months in 1996. By the end of 1997it is estimated that exports totalled $690m, more than 30% (or $300m) lowerthan in 1996. The slowdown is also attributed to the steadily appreciatingLebanese pound, which is making Lebanese goods progressively less compet-itive in international markets, and the slowdown in private investment inproductive capacity over the last two years which is affecting output.

By 1996 the United Arab Emirates (UAE) had replaced Saudi Arabia as Lebanon’smajor export destination.

30 Lebanon


Exports by destination($ m)

1991 % of total 1996 % of total

Middle East 282 51.6 657 57.0 of which: United Arab Emirates 56 10.2 243 21.1 Saudi Arabia 111 20.3 142 12.3 Kuwait n/a n/a 79 6.9 Syria 27 4.9 72 6.2

Industrial countries 210 38.4 268 23.2 EU 117 21.4 205 17.8 of which: France 29 5.3 56 4.9 Italy 28 5.1 49 4.2 Switzerland 60 11.0 15 1.3

Developing nations (incl the Middle East) 337 61.6 825 71.6Source: IMF, Direction of Trade Statistics 1997.

A trade agreement withSyria brings few benefits

A free-trade agreement signed with Syria earlier in 1997 has yet to have muchpositive effect on exports. Anecdotal evidence suggests that Lebanese goods arenot being given free access to the Syrian market, whereas Syrian goods are beingfreely imported to Lebanon. Food products account for the largest share ofexports (at 20% in the third quarter of 1997), followed by textiles at 12%, metalproducts at 11% and jewellery also at 11%. The volume of exports passingthrough the port of Beirut also fell by a modest 4.5% to 64,000 tonnes in thethird quarter, from 67,000 tonnes in the second. The EIU estimates total 1997exports through Beirut at 261,000 tonnes, down from 284,000 tonnes in 1996.

Inflows climb to give alarger balance-of-payments surplus

Lebanon’s traditional trade deficit has historically been offset by a large surpluson invisibles, transfers and capital. In 1997 this totalled nearly $8bn, accordingour estimates. In the third quarter of the year, net inflows were $1.95bn, 8% upon the second quarter, offsetting the trade deficit to leave a balance-of-paymentssurplus of $170m. For the year as a whole, we estimate the balance-of-paymentssurplus to have been in the region of $1.2bn, more than 40% higher than the1996 surplus of $786m. There is no information about how these inflows aresplit between the current and capital accounts, but it is believed that the bulk gointo the capital account, leaving a large current-account deficit of around 40%of GDP.

The EIB lends thegovernment an extra

$133m—

The European Investment Bank (EIB) has agreed to lend the Lebanese govern-ment a further $131m for infrastructure projects, including $109m for a waste-water project in the northern city of Tripoli, $22m towards rehabilitating partsof the coastal highway north of Beirut, and $12m to build a national electricitycontrol centre in Beirut.

—and US gives aid The Lebanese government has signed an agricultural aid package with the USgovernment designed, in part, to encourage development in the dairy business.The package includes a $650,000 donation to buy 3,000 dairy cows, a $15mloan and $6m grant to finance agricultural development, and $5m in short-term export credit guarantees for buying agricultural products in 1998.

Lebanon 31


Quarterly indicators and trade data

Quarterly indicators of economic activity

1995 1996 1997

3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Money End-Qtr

M1, seasonally adj: L£ bn 1,573.6 1,503.5 1,607.1 1,736.2 1,731.3 1,690.9 1,967.4 2,012.0 1,841.0 n/a

change year on year % 12.5 8.7 11.6 17.2 10.0 12.5 22.4 15.9 6.3 n/a

Foreign trade Qtrly totals

Exports fob $ m 225 246 226 225 295 275 n/a n/a n/a n/a

Imports cif “ 1,891 1,868 1,790 1,692 2,001 2,097 n/a n/a n/a n/a

Exchange holdings End-Qtr

Banque du Liban:

golda $ m 2,659 2,666 2,769 2,698 2,661 2,602 2,429 2,372 2,238 2,247b

foreign exchange “ 3,114 4,487 4,757 4,779 5,176 5,886 6,594 7,343 6,799 6,173b

Commercial banks: assets ” 4,638 3,971 3,698 3,716 3,762 4,329 4,077 4,318 5,054 n/a

Exchange rate

Market rate L£:$ 1,610.5 1,596.0 1,583.5 1,571.0 1,558.5 1,552.0 1,545.8 1,539.8 1,533.3 1,531.0b

Note. Annual figures of most of the series shown above will be found in the Country Profile.a End-quarter holdings at quarter’s average of London daily price less 25%. b End-October.

Sources: IMF, International Financial Statistics.

32 Lebanon


Trade with major OECD partnersa

($ ’000; monthly averages)

Italy France US Germany UK

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep

Exports to Lebanon fob 1995 1996 1995 1996 1995 1996 1995 1996 1996 1997

Cereals & products 825 1,081 396 363 7,035 8,634 201 173 410 456

Tobacco & manufactures 8 0 248 289 14,839 15,394 93 127 314 267

Textile fibres & waste 70 26 26 34 95 116 278 326 64 64

Chemicals 4,436 4,380 9,165 9,721 1,545 1,506 4,762 4,962 5,549 6,337

Rubber manufactures 301 330 102 115 307 402 244 225 198 248

Paper & manufactures 805 734 667 602 1,147 861 803 564 222 277

Textile yarn, cloth & mnfrs 3,447 3,445 2,018 1,691 804 707 655 623 354 325

Non-metallic mineral mnfrs 3,859 3,343 1,375 1,236 265 222 539 628 338 271

Iron & steel 2,506 2,536 654 773 19 91 533 560 571 248

Non-ferrous metals 697 849 464 397 49 66 104 124 97 122

Metal manufactures 4,293 6,692 1,309 1,582 309 425 971 890 479 632

Machinery incl electric 15,947 21,597 11,170 12,553 7,563 6,734 13,646 18,156 4,562 5,727

Transport equipment 2,229 3,441 3,040 2,555 4,717 5,748 9,947 10,716 2,497 2,177

Clothing 5,319 5,808 4,489 3,792 503 462 1,147 949 195 336

Scientific instruments etc 1,301 1,337 1,216 1,248 730 691 1,156 1,431 1,028 1,327

Total incl others 73,811 87,489 51,366 54,059 48,043 50,774 42,607 46,821 21,301 25,323

Switzerland US France UK Germany

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Sep Jan-Sep Jan-Dec Jan-Dec

Imports from Lebanon cif 1995 1996 1995 1996 1995 1996 1996 1997 1995 1996

Fruit, vegetables & products 6 6 187 184 77 77 18 31 43 46

Tobacco unmanufactured 0 0 657 958 0 0 0 0 0 0

Hides & skins, undressed 0 0 0 0 18 0 2 0 0 0

Wool & other animal hair 0 0 0 0 22 31 36b 20b 0 0

Metal ores & scrap 0 2 9 3 25 11 179 105 191 12

Crude animal & vegetable

materials 1 0 20 2 255 204 0 0 650 766

Textile yarn, cloth & mnfrs 2 0 7 11 127 146 75 90 11 7

Non-metallic mineral mnfrs 2,489 6,066 140 101 1 6 2 7 2 5

Machinery incl electric 38 6 73 35 229 222 300 459 68 56

Jewellery 3,295 6,219 622 488 95 151 78c 253c 0 5

Total incl others 6,598 12,986 3,030 3,585 3,110 3,396 1,495 2,216 1,721 1,652

a Figures from partners’ trade accounts. b Including other textile fibres. c Including other miscellaneous manufactures.

Sources: UN, External Trade Statistics, series D; UK HM Customs & Excise, Business Monitor MM20.

Lebanon 33


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