Country Report Lebanon
Economic growth was weak at 1.3% in 2013. Growth was adversely affected by the violence that has spilled over from Syria into Lebanon - a worrisome development – and the domestic political situation. Lebanon remains without a government and no reforms are implemented as a result. Instead, the central bank has announced a stimulus package to boost economic growth in 2014.
Strengths (+) and weaknesses (-)
(+) Structurally strong remittance inflows
Lebanon’s vast diaspora has sent home remittances worth 20% of GDP each year for over a decade, making this a strong pillar of the economy.
(+) Strong banking sector
Lebanon’s banking sector is sophisticated, very well regulated and enjoys a solid depositor base, as the country is seen as a safe haven in the Middle East.
(-) Weak fiscal position
Lebanon’s weak fiscal position is characterized by a high level of public debt and continuous budget deficits.
(-) Unstable domestic politics
Governments fall frequently in Lebanon and this short-lived nature of governments has led to an absence of significant structural reforms in years.
1. Syrian conflict spills over
The civil war in Syria has spilled over to Lebanon in the form of violent clashes. Clashes along the border have become more violent in the past year and Tripoli, Lebanon’s second largest city, has in effect been put under martial law to stop violent sectarian clashes. The Lebanese army has been deployed in the city to end the clashes by positioning itself between the neighbourhoods, which are divided along sectarian lines as a deterrent to fighting. But because the army is composed of all of the country's sects, it never actively engages against any particular sectarian force, due to fears that it would fragment (as it did in the 1975‑90 civil war) if troops prove unwilling to attack their co-religionists. Therefore, troops have been isolated in the middle, routinely taking casualties. In the course of the year, clashes have been getting more regular and bloodier. A turning point came in August when two car bombings on Sunni mosques in the city killed at least 45 people and left hundreds injured. This has led to a round of revenge attacks. Political leaders in the capital, Beirut, now fear that these could spark wider sectarian clashes elsewhere in Lebanon. Hopes are that the show of force in the city will quell fighting, but if it fails, the administration has in effect played its last card; if military rule is not able to stop the fighting, the state has to acknowledge it has lost control of the city. Several other areas in the country are in effect already beyond the reach of Lebanon's central government; much of southern and eastern Lebanon is controlled by Hezbollah and mountainous terrain of the Mount Lebanon and Chouf districts has been a historical barrier to strong state control.
2. Political stalemate continues
Lebanon is currently without a government and it does not appear that a new government can be formed swiftly. In March 2013, Prime Minister (PM) Makati resigned and turned his cabinet into a caretaker administration. All political parties recognize that some form of official government needs to be installed soon to address some critical political issues; the constant sectarian violence in the northern city of Tripoli; approval of legislation that would allow offshore oil and gas exploration to take place; and to ensure that a proper presidential election takes place by May 2014. Therefore, Mr Mikati floated the idea of reviving the cabinet, however no significant progress has been made. Given the divisions between political parties, the plan of Mr Mikati will take months to implement if it succeeds at all. Lebanon has been without a government many times in the past due to domestic political disputes which has frequently resulted in the resignation of the government. Also, the process of forming a new government usually takes a long time, since governments in Lebanon are almost always based on a broad coalition of parties and groups, and can therefore only be put together when there is consensus between the main political players. Now, the impact of the civil war in Syria has intensified political tensions between the two largest factions; the pro-Syria March 8th and the pro-Western March 14th. In particular, since Hezbollah, a key member of March 8th, sent its fighters into Syria to assist the forces of Syria’s president, Bashar al‑Assad, March 14th has refused any negotiation with the Shia political-military group.
3. Economic growth was weak in 2013
Lebanon’s economic growth is estimated at only 1.3% in 2013. An important reason for this weak figure is the spill over of the Syrian conflict into Lebanon. Resulting weak investor confidence led to a contraction of gross fixed investments and the important tourism sector, which accounts for 20% of GDP, was also hit hard. The Syrian civil war, in particular the instability in Tripoli and further along the border with Syria, has led to a sharp drop in the number of visitors as a result of perceptions of insecurity while one of the overland transit routes has been cut off. Tourist arrivals fell by 24% yoy in 2011, by 18% yoy in 2012 and by 9.7% yoy in the first eight months of 2013. Going forward, the good news is that the rate of decline is decreasing. However, numbers continue to fall. To support the struggling economy, the Lebanese central bank, Banque du Liban (BdL), announced a new stimulus package of around USD 800m in 2014. No further details concerning the structure of the package have been released, but if it is along the lines of an earlier stimulus package in 2012, it would involve the BdL providing funds to Lebanon's commercial banks, to be passed through to the economy at capped interest rates. This could help push economic growth to around 2% in 2014, however a large downside risk remains an escalation of the conflict in Syria.
Lebanon’s nominal GDP per capita of USD 9,169 is moderate, but adding the sizeable extra-territorial economy (remittances from Lebanese abroad amount to 20% of GDP) to domestic economic activity leads to a Gross National Income per capita of around USD 25,000. The incoming remittances of the often highly educated émigrés de facto form the country’s main export category. In a regional perspective, educational levels are high. Lebanon’s universities are reputed for their quality and Beirut is the ‘hospital’ for the wealthy in the Middle East. The economy is led by the services sector with 76% of GDP (2012), of which banking is he most noticeable. Tourism, especially from the Gulf States and Europe, is another driving sector of the services-based economy. Lebanon has developed into a multi-religious country over the centuries. Since 1860, each of the leading (sub-) denominations of Muslims and Christians are guaranteed a representation in the executive, legislative and administrative powers. The civil war ended in 1990 after it was agreed that the seats in parliament are divided between Christian (seven groups; 40% of population) and Muslim (four groups with 60% of population) members, with each group occupying half of the seats in parliament. The president, the prime minister and the speaker of the parliament have since been a Maronite Christian, a Sunnite and a Shiite respectively. Power blocs are often temporary coalitions of clan leaders, more based on confessional and local interests or on personal/family relations than on political or ideological views. In this extraordinary political complexity, coalitions are rarely lasting, which causes slow - or deadlocked - decision making on critical issues.