Nabil Fahed word

 

It is a quite difficult to discuss the challenges facing the Lebanese Economy without recognizing the colossal impact of the political situation in the country since the July 2006 war. We are still at a point where we can separate or at least distinguish the negative effects of the July war and the subsequent governmental crisis and the problems facing the economy as a result of the structural deficiencies which existed prior to these political developments. I will quickly go over some of the indicators to put the economy in perspective:

– The GDP is estimated at 22 billion USD with an expected growth of less that 1% in 2007.

– Public debt is at $40 billion or about 190% of GDP and half of it in foreign currencies USD and Euros.

– Inflation reached about 10% in 2007 but still, at lower levels than the 15% of Egypt and 13% in Jordan.

– Exports have reached $2.5 billion with an average growth rate of 15% over the past 5 years.

– A balance of payments surplus of 290 million in q3 2007.

– Bank Deposits amounting to $69 billion or about 3 times GDP.

– A Budget Deficit representing 30% of the Governments budget or about 8% of GDP.

– Central Bank reserves of $12 billion representing 2 years of the trade deficit or 15 months of imports.

– Dollarization  of the economy is about 76%.

– Remittances from expatriates, has reached $5.5 billion per year.

– There is a peg of the Lebanese Pound to the US Dollar which has remained unchanged for the past 8 years, since 1999, and that is after a methodical and gradual revaluation from 1993 to 1998.

The focus of the talk will be on the trade and services sector which is the dominant component of the Gross Domestic Product GDP. Trade and services represent about 55% of GDP and has consistently maintained its position over the years both with the expansion and the shrinkage of the economy. The sector gets its fair share of bank credits representing about 50% of loans given by banks or about $9 billion USD used mostly for short term trade finance.

The trade and services sector has gained its prominence in the economy as a result of a history of liberal policies and the entrepreneurial spirit of the populace which emphasizes the short term and is a fit adaptation of the instability that the country has been through over the past forty years.

The main challenges facing the trade and services sector are primarily those that arise from the rapid globalization of the region and more specifically the emergence of Dubai (and the UAE) and to a lesser extent the other GCC states as the power houses of trade and services, be it in technology, media, education, health care or plain goods trading. The main characteristics of this regional globalization are the liberalism and the openness of Government’s policies coupled with an ever increasing investment in infrastructure and the stable political systems.

One should then examine each component in order to fully realize the impact on the survival success or demise of the trade and services sector in Lebanon.

– Political stability: No need to get the inadequacy and the fragility of the system in promoting a stable and investment-enhancing environment.

– Infrastructure: Lebanon gets average marks in this component, where there are some successes but more failures. In Telecom the country has regressed by acquiring the private cellular operators who can barely provide basic services now. Electricity as everybody knows is in a pitiful state. The port and airport are providing adequate services, while the road network has never been up to par.

– Government policies:
The Government has attempted to provide the trade sector with a series of assistance programs aimed at strengthening the sector and new laws that have updated or replaced old laws. It has succeeded in passing the Consumer protection law, the anti dumping law and the investment promotion law.
However, the following are still needed to be done;

1- The amendment of the code of commerce which saw its last review in 1967. For example: it is not possible to merge two companies under the current code of commerce, that is it is not possible to re-create shares of a combined entity, but only an acquisition is possible. In another example, bankruptcy proceedings are so long and complicated that lenders are not really protected and suffer harshly over the years and expenses associated with a bankruptcy.

2- A new law on competition and antitrust. Foe example, it is not possible to bring a class action suit against colluding companies by consumers hurt by the antitrust behavior, especially that most monopolies are government owned, such as power, telecom, ports, airports and airlines.

3- A regulatory agency for capital markets and the stock exchange. The stock exchange is being regulated by an authority whose job is to promote it and create profits. Also, it is not allowed to issue stock options to performing senior managers or even provision for an employee participation in the company’s stock.

4- Review and amendment of the income tax and the Value Added Tax laws, especially after 5 years of the VAT enactment.

5- Change of the Labor law that governs the relationship between employer and employee. These laws need to be brought into modern times and adapt them to regional changes. Given the current political situation, it is becoming very difficult to retain qualified employees and even more difficult to fire incompetent ones. Article 50 of the Labor law is a major obstacle to overcome.

6- Streamline Government procedures and aim for the e-government. An often cited example is the time it takes to secure a building permit which might take up to one year.

 

The Paris III reform program has addressed a large number of these issues and the main structural deficiencies of the economy. The government has actually been working on a number of initiatives to solve some of these problems and the latest IMF report gives the Government high marks in this regard. It is the same IMF that has abhorred the peg of the Lebanese pound to the US Dollar and the consumption subsidies, but who has finally acknowledged the need for these measures and their adaptation to the socio-economic and political balance of the country.

In summary, the economic situation is critical but not catastrophic in the very short term turning into problematic in the middle of 2008 as we are still benefiting from the positive results of Paris III without having the ability to implement the required reforms which are supposed to increase economic growth and allow the ills of the public debt to remain in check.