Pipe dreams

(Illustration: Karim al-Dahdah)

Politics and economics have always had an abusive relationship in Lebanon, with the latter habitually falling victim to the former’s unpredictable behavior. Like any odd couple, there are times when they get along, if only to fall back into a vicious cycle that consumes them both.

As 2010 began there was optimism in the air; the country had just emerged with a new government after Lebanon’s power brokers finished their long and drawn-out game of musical chairs over who would take which cabinet posts.

The new cabinet of “national unity” effectively meant, however, that basic national issues could not be decided upon without unanimous approval. Even without this inherent impediment to the kind of streamlined decision-making Lebanon desperately needed after years of (at best) ineffective government, results were going to take time. Many of the problems facing the country, from electricity shortages to water supply, require long-term solutions rather than quick fixes.

At the start of 2010, the cabinet approved a new ministerial statement that has since remained the only wide-ranging plan to address the country’s problems, with the stated goal: “to help all Lebanese benefit from economic growth in a proportional way that will allow all categories of society and all the Lebanese regions to profit.” The final part of the statement contains the priorities of each ministry, though most are vague enough to allow the ministers to evade accountability for tangible results.

While no one expected all elements of the ministerial statement to be fulfilled in the first year of operation, the pace of most reform in 2010 has been glacial.

“They didn’t do anything. Really, nothing happened,” says Jad Chaaban, acting president of the Lebanese Economic Association in November. “There are people who don’t want to rule with others on both sides. There are huge differences on how reform should be carried out and there is no real debate on these issues, from traffic, to electricity to water.”

The lack of action is even more unfortunate given that the new government was regarded by many as the first that could actually make some headway in terms of public policy, after previous post-Hariri assassination governments were plagued by political debacles that brought policy to a grinding halt.

Electricity

To be fair, some progress has been made this year, even if it was only at the planning level. Perhaps Lebanon’s most glaring policy deficiency is the abysmal state of the electricity sector, and in June the cabinet approved a comprehensive plan for an overhaul, which aims to provide 24-hour power throughout the country by 2015. It is not the country’s first electricity overhaul plan, though it may the most substantial to date.

Much of its success banks on the private sector, which will be asked to contribute $2.32 billion, or 58 percent of the total cost, to take part in the production and distribution of electricity, while the public sector will retain the infrastructure and control the transmission of electricity from plants to local districts. This collaboration, however, will require a Public Private Partnership (PPP) law to be passed by Lebanon’s parliament, which has barely managed to meet since being elected in June 2009, much less pass essential legislation.

“Clearly there is an interest from the private sector, given a proper PPP law that preserves the interests of the private parties involved, but the key aspect is a transparent, clear and implementable law that has to be very clear on how to solve issues between the private sector and the government,” says Nassib Ghobril, head of economic research and analysis at Byblos Bank.

With the draft law still swirling around parliament, and the latest draft viewed by Executive only referring to “the principles of transparency and equality among competitors,” rather than any mechanism for resolving conflicts, the Lebanese could be waiting some time for a resolution to their chronic energy problems.

Water

Another sector that needs a substantial overhaul is water. A draft strategy is currently being compiled by the Ministry of Energy and Water, which is expected to be ready for submission to cabinet by the end of the year. A supply/demand forecast was completed and presented to domestic and international stakeholders in November, giving some idea of the amount of money that will need to be spent to close the gap in the coming 25 years. New storage alone, mostly in the form of dams and artificial lakes, will require around $2.65 billion in capital expenditures and then some $96 million each year in operating costs. Capital expenditures on transmission and distribution are projected to cost $875 million by the end of 2015, with associated operating costs at $249 million over the same period. New irrigation networks are expected to cost a further $1 billion over the next decade and beyond. Wastewater clocks in at another $1.6 billion by 2020.

Telecommunications

Lebanon’s government-owned telecoms sector is also in need of radical reform. Theoretically, the sector already has a framework that should be implemented in the form of Law 431, which calls for the creation of a corporatized, but not necessarily privatized, entity called Liban Telecom. Under the law, the telecom ministry’s assets would be transitioned to the company, which would be regulated by the existing Telecom Regulatory Authority that presently regulates around 5 percent of the market under its legal mandate. The liberalization of the sector is also called for in the ministerial statement, but when Executive asked Telecom Minister Charbel Nahas why no action has been taken on this front he replied: “I am part of a large governmental block, so don’t talk to me about when to apply the law.”

Nahas had also promised to publish his policy for the sector within one year of taking office in November 2009, but has failed to do so.

“The ministry’s policy is not a matter of a statement, it is a matter of practice,” said Nahas when asked when he expected to issue his policy for the sector.

Official policy or not, some progress may be in the works. The Ministry of Finance recently advanced $66.3 million to the Ministry of Telecoms to begin its proposed project to lay a new fiber-optic ‘backbone’ across the country. At the end of November, the telecom minister said the project would begin “within a few days or weeks.”

The project was awarded to Alcatel and the local civil engineering firm Consolidated Engineering and Trading, budgeted at $40 million; the telecom ministry has announced that the project should be ready by March 2012. According to Nahas, 4 to 6 percent of gross domestic product comes from the telecom sector surplus, adding that “it is the least of our duties to give back to the population and to the economy this very small part of this huge rent extortion that we inherited from the past period.”

Improved Internet access will require that the $45 million international IMEWE3 cable becomes operational. It was planned for March 2010, but Egypt has not opened up access on its end in Alexandria (where the cable connects to the rest of the world), due to reluctance on the part of the Egyptian security services, according to Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU).

The debt

But perhaps the most pressing item on the government’s agenda is its largest source of expenditure: the public debt. It is projected to have cost the government $4 billion just to meet interest payments in 2010, with the principal reaching $50.85 billion, around one and a half times estimated economic output.

Finance Minister Raya Hassan admits that there is no foreseeable plan to reduce this principal in the absence of privatization of the telecoms sector, which she herself has said is undervalued on international markets.

Her debt strategy is to switch short-term debt for long-term debt now that Lebanon is enjoying better rates than it has before, and maintain a primary surplus as a “cushion” against debt obligations. “It’s a mixed blessing because even though the debt increase is going to be controlled, on the other side you are not going to have all the capital expenditures that would unleash the full potential of the Lebanese economy,” she says.

The lack of a government budget for the last half decade has created a situation where opening and closing accounts for the years ending 2005 and 2006 do not add up. The issue created a hubbub of accusations over mismanagement of public funds at the end of 2010.

“What they [the opposition] are trying to imply is that there are no accounts. That is totally untrue. There are accounts,” says Hassan. “What is lacking is the auditing. It’s not even auditing, it’s the control of the accounts by the Public Accounting Directorate (PAD),” she says, adding that, because public accounting laws are so old, the PAD has to cross-check around two million transactions a year with their supporting documents, which they are not able to do in any reasonable amount of time. “What we lack is a proper internal audit function — not a control function — and therefore at this point there should be a review of the laws themselves.”

Without modern laws or infrastructure spending on sectors such as telecom and electricity, Hassan and her ruling party’s platform — of relying on growth to spur jobs and keep the debt looking respectable as a decreasing proportion of GDP — look to be in serious danger of failing, especially as the economy has now started a natural downturn. “We are now at a crossroads; to sustain high growth we must invest in infrastructure,” says Mazen Soueid, head of research at BankMed, which is owned by the prime minister’s family.

As Executive went to print in late November 2010, the cabinet had halted its weekly meetings because of political tensions over the Special Tribunal for Lebanon. Parliament had only managed to pass two piecemeal laws, one covering oil and gas exploration — without fleshing out the regulatory requirements or handling the touchy subject of a Sovereign Wealth Fund — and the other a reform of Palestinian refugee rights that maintains the ban on Palestinians owning property or being employed in some 30 professions.

All of this hardly encourages optimism. “Bottom line, I’m not happy with the way things are run as a tax payer,” says Chaaban. “We are still waiting for a push by those who are conscious of these issues to put them on the table.”

But are the country’s policy makers even aware of the gravity? “They don’t know and they don’t care,” concludes Chaaban.

First published in Executive Magazine’s December 2010 issue.

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A word with the minister

(Photo: Sam Tarling)

Raya Hassan is Lebanon’s finance minister. Saddled with a debt  around one-and-a-half times the size of the country’s economic output, a gaping deficit and a lack of infrastructure, she is tasked with making a method out of the madness. In an exclusive interview Hassan sat down with me to discuss everything from her ministry’s performance to the economic priorities of the government.

Q:  The ministry’s strategy to reduce the debt-to-GDP ratio appears to have been successful, but we only have potentially unreliable national accounts figures for 2008 to go on. As such, how can we accurately assess the progress made in the last two years, or even make projections?

For 2010 we brought an expert from INSEE [French National Institute for Statistics and Economic Studies] to help us project a growth rate for 2010. On the basis of the 2008 data we extrapolated, we can then determine what the 2010 GDP would be. We also use that same base for a projection for 2011 and 2012. Of course, the projections in terms of real growth rates are reviewed each year based on the projected activities in the economy. It is not based on real surveys for the economy but it is as close as we can get in the absence of work that is [now] being done by the Central Administration for Statistics (CAS).

Q:  For the first time you have projected a decrease in the amount of debt servicing, but the principal continues to grow. With telecom privatization being discounted for a few years to come and other Paris III reforms tied up in parliament, how will you reduce the principal on the debt now that our rate of borrowing is getting better?

In terms of reduction in the stock of debt, I don’t think there is any action in the foreseeable future… because as you said there are no plans for imminent privatization of the telecom sector [which would create capital with which to make repayments]. Of course [the stock of debt] is important, but for us I think what is more important is how to reduce the flow and ensure that the debt is not increasing at an increasing rate. That is why we look at growth as an anchor for controlling debt-to-GDP and at ensuring that we have a primary surplus in the budget in order to ensure that, at least, as the years progress we have a restriction on the increase of the debt stock in a sort of controlled manner. It’s the best we can do, as the primary surplus creates a cushion to any increase in the stock of debt.

Q:  But that primary surplus comes from the lack of infrastructure spending. We are going to have a problem with growth if we don’t catch up with infrastructure, so the primary surplus is not necessarily a blessing.

It’s a mixed blessing because even though the debt increase is going to be controlled, on the other side you are not going to have all the capital expenditures that would unleash the full potential of the Lebanese economy. The 8 percent growth rate that we project for 2010 is very good. However, in order to ensure the sustainability of this growth rate and to ensure that it is being translated developmentally on the ground, it is important for us to address the structural deficiencies in the economy. If the 2010 budget is ratified, all of these capital expenditures hopefully will be released and we will start to see some benefits coming out of it.

Q:  You have said that the current growth has not translated into jobs on the ground. Now that political tension is rising and there is a lag in policy making, have we lost this growth cycle?

There has not been as much job creation as we would have liked [and] I think the golden opportunity that we had in 2010 is now starting to fade away. What is good is that even with all the political upheavals we are still seeing some positive developments. I am a bit surprised frankly. However, 2010 would have been a golden opportunity to really capitalize on these positive developments and move forward in order to capture these good indicators and consolidate them. [The longer] this political environment persists, the less we will be able to do in the short term.

Q:  You seem to have abandoned a value-added tax (VAT) increase again for 2011 and are now saying you would re-examine exemptions. What is the current VAT strategy?

It’s not just [about] VAT. Our tax policy [aims to be] equitable, distributed and efficient. When I first took office this is what I [did] in terms of the assessment of the current tax structure. What we have concluded out of this study is that the tax policy is equitable, believe it or not, efficient and reflects the structure of the Lebanese economy. This economy is based on consumption and mostly on imports and not exports.

Now, if we are going to increase unproductive expenditures this is something that I will fight. But if the parliament approves and ratifies current expenditures that would put a dent on the primary surplus or the budget deficit then I will have no choice except to increase revenues.

Q:  By imposing new taxes?

New taxes, of course, because we are adamant that the budget deficit should be controlled and it should not increase, and we need to have a primary surplus, and we need to reduce the debt-to-GDP ratio. If there is going to be an uncontrollable increase in expenditures, the Ministry of Finance has no choice but to increase revenues. Growth will take care of some of it, but we have to look at other options.

Q:  You say that the tax structure reflects the Lebanese economy, but the economy is changing with real estate constituting an ever-greater proportion of GDP and the productive sector becoming less important. You have suggested an increase of 5 to 7 percent on the registration tax for properties over $500,000 and now say that you want a re-evaluation tax, but there are other real estate taxes that are much easier to apply.

I did suggest a tax on vacant real estate… because [vacant properties] are not taxed today. That is what I proposed in the 2010 budget but it was not approved within the parliamentary committee. For the 2011 budget I proposed a ‘quasi-capital gains tax’ [on real estate]. It’s not a capital gains tax per se because to be able to impose a capital gains tax you would have to have a complete database of the real value of real estate, and we don’t have that today. But in the absence of a complete valuation database, I am saying that we have to impose a 1 percent tax on revenue emanating from the sale of properties.

Q:  How much do you expect that to take in?

Some 200 to 300 billion [LL] ($133 million to $200 million). But this is not an optimal solution. What we are hoping to do is make this a transitory solution until either the valuation exercise is complete or we take a decision, and this will be discussed by the Council of Ministers. There is going to be a cut off point as of, say January 1, 2011, and afterwards we will capture the real value of the property, start to recognize any future transactions, and try to impose a capital gains tax.

Q:  Many of the MPs, if not most of them, have interests in real estate and some of the ministers as well. Is this the main problem with imposing real estate taxes?

[Sigh,] Look, we passed a 2 percent increase in the registration tax. There is [a possibility of] the tax on vacant property. There were going to be three tax measures that were going to be imposed on real estate. However, I think the concern was that in the advent of this slowdown in the economy, especially in the last two months, there is a fear that all three measures would really impact the real estate sector very hard. Whether we like it or not, the real estate sector is part of the growth pillar. I think this is where they are coming from. The fact that we passed at least one, and the fact that we are still going to discuss the 1 percent on revenue, I think would be fair for the time being.

Q:  In terms of salaries and related payments (the second largest expenditure item) the salary scale is not changing, the organizational structures proposed by the Office of the Minister of State for Administrative Reform (OMSAR) are not being implemented, the public bodies remain bloated bodies of patronage and the United Nations Development Programme (UNDP) is doing a lot of the work that the public sector should be doing…

Not a lot of the work; the policy work.

Q:  When does this stop and the transfer of capacity happen and we start cutting the edges?

I agree with you fully but the underlying factor is the political will to do it. This is not just up to the Ministry of Finance or OMSAR. We believe that the public sector could be much more productive. We think the public sector is bloated and needs to be reformed: the laws, the regulations and the capacities. However, that would mean that maybe we need to do some retrenchment in the numbers and need to look at the salary scales and look at training and this is a huge political decision. I think, and I discussed this with the Prime Minister, that the time is opportune to look at the salary scales and review them because the last time we reviewed them was more than 10 years ago. But, the review of the salary scale cannot be done independently…

Q:  It has to be changed along with the organizational structures of public administrations. But at the same time you are proposing to increase the number of security services significantly and this will mean more salaries and pensions. Frankly, the security services cannot fight Israel or fight battles in the streets. What is the point?

[Laughs] But, ok. You need them not just to maintain security within Lebanon but also you need them for traffic control, for ensuring the proper functioning of the state. For the army, we are trying, as much as we can, to get grants from abroad. This is a priority. Listen, if you don’t have security, you don’t have an economy.

Q:  But it is a political decision for them to come into Bourj Abi Haidar when there is a clash. This has nothing to do with if there are 20 or 100 troops.

But you are talking about the sovereignty of the state and the prestige of the state; you can’t have that if you don’t have a strong army and a strong internal security force that would allow you not to depend on non-Lebanese or non-official sources.

Q: You have already advanced the money for the fiber-optic broadband cables plan to the telecom industry to get the ball rolling. First of all, how much has been advanced and how did you do it without parliamentary approval?

It’s a treasury advance. And we are always attacked for treasury advances [by] the Ministry of Energy and the Ministry of Telecoms… We advanced the Ministry of Telecom around 100 billion [LL] [$66.7 million] to start the fiber-optic plan in the absence of a telecom sectoral plan. Now the fiber optics is a given and we have to do it, but how does this fall into an overall plan? We still don’t know.

This [issue] is the most detrimental in terms of the competitiveness of the Lebanese economy. We have been waiting now for more than a year, we have not even discussed any potential sectoral plan. Nothing. Not even a discussion. The TRA [Telecom Regulatory Authority] is crying. The whole economy is crying. This is where I think we are at our weakest. There should be something done very quickly. We could take years to come up with the perfect plan but that time is costing us huge amounts of economic growth. It’s going to be a huge detriment to the economy.

Q:  What is your forecast for 2011?

Well, that depends on what will happen in the next short period. If this political impasse persists then I think we are going to be seeing a tangible slowdown. In the last couple of months we have seen somewhat of a slowdown but this has been compensated by the very high growth we witnessed in the first six months of the year. If this persists then I’m going to be really concerned about the state of the economy in 2011.

First published in Executive Magazine’s December 2010 issue.

Times of mixed fortunes

Lebanon's poor know little of the economic growth in the country (Photo: AFP)

During the civil war, Beirut’s Commodore Hotel acted as a shelter for the various journalists and dignitaries who would brave the chaos to try and understand why this small but promising Mediterranean nation had fallen prey to the ravages of conflict.

Twenty years since the guns fell (relatively) silent, and with many a former warlord now a politician or member of cabinet, it was fitting last month that the Lebanese Economics Association (LEA) chose the same hotel to launch its own assault on how the powers that be are again squandering opportunity and endangering the country.

“It’s always about how they split the kaaki [traditional Arab bread],” said Elias Saba, two-time former Lebanese minister of finance, at the press conference. “When they [politicians] agree on that, all the bickering ends and it’s over.”

By the end of 2010, that kaaki had yet to be divvied up, and the cabinet had come to a complete standstill over the United Nations’ Special Tribunal for Lebanon. Not to be outdone, Parliament had yet to convene to pass a budget for the year, despite being constitutionally mandated to do so in October.

“When the Council of Ministers [Lebanon’s cabinet] gets postponed it turns out to be an achievement, instead of them fighting,” sighed Nassib Ghobril, head of economic research and analysis at Byblos Bank.

While Lebanon’s policy makers tussled over wider political issues, the economy was witnessing — on the surface at least — what many observers deem to be the end of Lebanon’s economic honeymoon. The current economic recovery cycle began its upward curve in 2006 when real growth hit a low of 0.6 percent. Since then, the economy has bounced back to register 7.5 percent real growth in 2007 and peak at 9.3 percent in 2008, a figure that only became apparent in April, 2010, when the 2008 National Accounts were released to the public.

A lack of reliable data means that everything from that point onwards is more or less a blur. However, economists from the International Monetary Fund (IMF), the finance ministry and the Economist Intelligence Unit (EIU) all agree that growth has begun to slow and move into a trough, which will result in anywhere from 5 to 8 percent growth in 2010, and even less in 2011.

That means that even though growth is still high by global standards, the chance to take advantage of this opportunity has been missed, “as always, as usual,” said Jad Chaaban, acting president of the LEA, “because the politicians are bickering.”

The dearth of economic data notwithstanding, it has become apparent that the political tensions that have materialized in the second half of 2010 are hitting the country’s economic standing hard.

The coincident indicator, an average of eight weighted economic indicators published on a monthly basis by Banque du Liban (BDL), Lebanon’s central bank, shows that economic activity mushroomed during the first three months of the year, climbing 8.3 percent to reach 264.5 points in March and fell back to a still respectable 251.9 points in July.

In August it saw a sharp decline to 228.3 points, ostensibly a result of political tension rising after a cross-border firefight between the Lebanese and Israeli armies and clashes between the Shia Hezbollah and the Sunni Al Ahbash groups. Tacked on to this was the fact that Ramadan fell in August, resulting in hotel occupancy rates of just 43 percent at a time when they are usually full to the brim with Gulf tourists escaping the summer sizzle.

As Executive went to print, the indicator was resting at 229 points for the month of September, the same month Prime Minister Saad Hariri admitted that it was a mistake to have accused Syria of his father’s assassination and that “false witnesses” misled the investigation. The latter sparked an explosive row which put the cabinet’s policy agenda on the backburner.

“Since July everything has shifted to politics and the tribunal and the president’s role has been limited to trying to assemble the Council of Ministers. So who is talking about other things at this stage?” said Ghobril.

Uneven growth

Whatever growth has been achieved has been unevenly distributed to limited segments of the economy, according to Eric Mottu, the IMF’s resident representative in Lebanon. He estimates that 4 to 5 percent of real economic growth came from retail trade and 2 percent stemmed from construction, leaving agriculture and industry with marginal to negative growth. This corresponds with his organization’s estimate of 8 percent growth in 2010.

As Lebanon’s economy has been dominated in recent years by services industries, productive sectors have more or less taken a backseat. According to Toufic Gaspard, economic consultant and former director of research at BDL, this historical phenomenon is lamentable, because even though in many developed countries industry now constitutes a small share of total gross domestic product, they developed high productivity within their manufacturing sectors in the past, before transitioning into services and other sectors.

“No country in the world has developed without manufacturing, and it’s not because we like the smoke stacks, it’s because manufacturing creates jobs and is a driver of productivity,” said Gaspard. He added that the growth experienced from 2007 to 2010 was mostly the result of pent-up demand following the withdrawal of Syrian forces and was constrained to the real estate, construction and tourism sectors in the center of the country. “If we have the same [de-industrialized] structure we [will] produce the same performance. No matter how you look at it we are not doing well at all.”

Looking at the numbers, it’s no surprise that many are pointing to real estate as the main source of uneven growth across sectors. According to the General Directorate of Land Registry and Cadastre (GDLRC), the sector saw the value of property sales skyrocket by 60.6 percent during the first three quarters of 2010 to hit a record-breaking total value of $6.96 billion, some 20 percent of the EIU’s 2010 GDP estimate.

“Properties have nothing to do with the economy because it’s a transfer of a deed for a check. Where that check goes is what [really] effects the economy,” Charbel Nahas, economist and minister of telecommunications, said at a press conference in November. Opposition minister Nahas called the real estate boom a “flu” whereby money comes into the banks to buy property, property is bought, and money goes back into the banks, resulting in little output for the country, but increasing the amount of capital which, in turn, increases inflation and expedites immigration.

Consumption, the other area where growth in 2010 is concentrated, also originates from, and serves, only a small slice of the Lebanese population.

Lebanon does not officially collect consumption data, but the latest study conducted in 2008 by the International Policy Centre for Inclusive Growth shows that the least wealthy 20 percent of the population account for around 7 percent of consumption, while the wealthiest 20 percent of Lebanese constitute 43 percent. In addition, a paper published by the European Commission (EC) in April 2010 and authored by the LEA’s Chaaban found that “the consumption expenditure of half of the Lebanese [population] is approximately 20 percent of the average consumption level, and significant regional inequalities persist.”

Since growth “is trapped in inputs and consumption,” according to Nahas, any increase in growth, coupled with an increase in capital in the country, will necessarily place upward pressure on prices. Capital inflows receded this year by some 39.3 percent during the first nine months of 2010 compared to the previous year, but still add up to some $2.9 billion. Indeed, the consumer price index (CPI) had risen 4.9 percent by October, according to the Central Administration for Statistics, Lebanon’s official statistics body. There have been doubts raised about the applicability of this data given that the baseline month for CPI calculation is December 2007. The IMF has affirmed, however, that since May 2008, Lebanon’s CPI has been calculated according to internationally accepted methodology.

Despite inflation, 2010 witnessed a surge in the purchase of essential goods, while “immediate consumable items have gone through the roof,” according to Marwan Iskander, economist and Chairman of Banque de Crédit National. The price surge brought rare cooperation between ministers from opposing political sides when the economy and agriculture ministry’s collaborated to re-enact regulation on controlling profit margins, which former Minister of Economics and Trade Sami Haddad had removed.

Iskander, however, said this move was political posturing without tangible substance.

“The Lebanese market is not regulated in any meaningful manner. Forget about all this profit margin talk — it’s hogwash,” he said.

None of this bodes well for equilibrium within Lebanese society. The United Nations estimates that 28.5 percent of Lebanese live in poverty (under $4 per day based on household income) and, while Iskander doubts the accuracy of this figure due to the shortcomings of data collection in Lebanon, he agrees that high poverty rates coupled with increasing inflation and uneven growth will increase income inequality amongst the Lebanese.

Jobless growth

Finance Minister Raya Hassan has already admitted that “the current growth cycle has not translated into jobs” for the Lebanese. Lebanon does not produce timely employment data and the last official estimate from 2007 puts unemployment at 9.2 percent. However, the veracity of this figure is questionable, with the IMF saying in its latest annual survey that it suffers from “serious weaknesses.”

According to the paper by the European Commission (EC), almost 22 percent of graduates leave Lebanon each year, and the country needs to create 15,000 jobs annually until 2020 in order to provide for new market entrants. Despite this, 2010 did not see Lebanon adopt, much less propose, a national employment strategy. The EC report also estimates that joblessness costs Lebanon $630 million per year in lost productivity.

“Despite the fact that we are having real growth of 8 to 10 percent, nothing is trickling down,” said Simon Neaime, professor and chairperson of the economics department at the American University of Beirut. “When you have capital coming into the real estate sector you are not producing jobs.”

Without oversight Lebanon's construction boom soaks up growth and destroys heritage (Photo: Sam Tarling)

Unable or unwilling to attempt to slow the emigration of labor, Lebanon became increasingly dependent on external revenue in 2010, leaving the country less able to control its own economy. Remittances from abroad currently constitute a large part of the money coming into Lebanon, but there is scant agreement on exactly how much flows in from émigrés.

According to World Bank estimates, total remittances hit $8.17 billion dollars in 2010. This constitutes a $619 million increase from the previous year and a continuation of the upward trend that has led to a 72 percent rise since 2003. The calculation of remittances, however, is far from a precise science. The minimum and maximum levels of what constitutes a remittance are still not clear, neither is the purpose for which money is being sent to the country, while banking secrecy laws do not allow for transfers to be scrutinized unless they are suspected of terrorist funding or money laundering.

“I don’t know why they are happy about them [remittances] and marketing them left and right,” said Ghobril. “They include many things that should not be included in remittances such as profit repatriation and compensation of employees.”

A sick economy

Such reliance on money coming from outside its borders has led many, such as Chaaban, to postulate that in 2010 Lebanon has developed worrying symptoms of its own particular strain of the ‘Dutch disease.’ The theory is that the focus on, and excessive currency inflows to, Lebanese property and banks crowds out investments in other sectors.

“All the money that is coming in goes into real estate, inflates prices, kicks people out of the cities, which breaks up communities that trade together,” said Chaaban. “You break up markets and make agriculture unsustainable because nothing you can plant [on a plot of land] will match selling it or putting a building on it.”

While it has yet to be determined to what extent Lebanon’s ‘Dutch disease’ has progressed, with the trade deficit in October at $11.2 billion — its highest level ever and a 6.9 percent increase year-on-year — the country’s economy is looking ever more primed for intensive care.

“The culture has become completely dependent, either on the government, non-governmental organizations or family abroad, which has created a ‘transfer-dependent mentality,’” said Chaaban.

With so much at stake, one would think that government offices would be clamoring to come up with measures to rectify the situation. When Executive contacted the Office of the Prime Minister for an interview, the request was initially accepted; but after receiving the preliminary interview questions via email, the office had a change of heart and said it was not available for comment. The prime minister’s office also did not provide a list of economic priorities after a follow-up request was made.

Whether the government becomes more interested in the economy in 2011 is yet to be seen, but as the year came to a close the signs were not promising, with the cabinet “crippled,” in the words of Interior Minister Ziad Baroud, speaking to the Central News Agency in November.

“You need at least political stability [in order] to hum along and if the politicians don’t make economic and financial issues the priority, we will continue to lose opportunities,” said Ghobril. “If we are stagnating it doesn’t mean we are still, because others are moving forward. It means we are going backwards.”

First published in Executive Magazine’s December 2010 issue.

A ripe time for taxes?

The time for a new fiscal policy is ripening (Photo: AFP PHOTO/MARWAN NAAMANI)

With a rocky but ultimately necessary 2010 behind it, the United Arab Emirates looks like it may finally have become more mature about its economy and policy. Gone are the days of unending credit that financed a real estate bubble which, when it popped, nearly dragged the rest of the economy over the cliff. But as the new year beckons, many of the prickly issues that could be ignored during the boom years have bubbled to the surface and how the Emirates deals with them will likely define its prospects for 2011.
For starters, there is the issue of tax. The most recent International Monetary Fund (IMF) report on the UAE reveals that the organization was told value added tax (VAT) would be implemented by 2012, while the Economist Intelligence Unit (EIU) predicts “the government is likely to increase charges for transport and public services in an effort to increase revenue.” Despite the speculation, the government has kept quiet.
“They are also talking about increasing utilities, which would be good because they are too cheap,” says Eckart Woretz, visiting fellow at Princeton University and former program manager of economics at Dubai-based Gulf Research Center. “It’s always a question of the social contract between government and locals,” he adds.
Any future VAT would have to be a federal decision, but increasing the costs of utilities will be easier for individual emirates because such decisions can be taken without consulting other members of the union. Dubai, for instance, recently announced a 15 percent hike in fees for both water and electricity for households and industrial consumers in addition to a surcharge that will fluctuate with global prices. The only other real government-imposed rise on the cost of living — a 5 percent annual housing tax on leases that starts in January 2011 — falls mostly on expats.
“There are some issues which need to be addressed like residency permits for foreigners who buy real estate, because it’s unlikely people would take the financial burden if they don’t see themselves staying in the country for the foreseeable future,” says Fabio Scacciavillani, director of macroeconomics and statistics at the Dubai International Financial Center.

Keeping the taxman at bay
Even though prospect of VAT has been in the cards for some time, many don’t expect one to be imposed by the government for an array of reasons. The UAE maintains a comparably attractive tax environment, which it has used to bolster investment in the country. Any change to that will likely have to carry with it widespread fiscal advantages and come at a time when the books are balanced.
“One of the reasons they are holding off is because the situation in the UAE is still quite uncertain,” says Ayesha Sabavala, deputy editor and economist for the Middle East and North Africa at the EIU. “You have Dubai World coming to terms with its creditors, but you also have a whole new set of possible restructurings and definite extensions on loan agreements by Dubai’s holding companies. For them to introduce VAT now, even if it is low, would probably affect residents quite a lot.”
What may be more important is that VAT, along with a host of other thorny issues such as de-pegging from the dollar, are seen by many to be more regional than local. The logic of this thinking stems from a proposed 5 percent VAT acting as a substitute for the customs tax that Gulf Cooperation Council countries have been unable to agree to scrap, even though they announced a common market as far back as 2003.
“Definitely the VAT is something that might happen. It has been talked about but I don’t see any developments any time soon,” says Philippe Dauba-Pantanacce, senior economist for the  Middle East and North Africa at Standard Chartered in Dubai. “If something happens in that field, it would probably be in coordination with the rest of the GCC and the same goes for the [currency] peg.”
In early December the UAE’s Minister of Economics, Sultan Saeed al-Mansouri, told the Alsharq Al Awsat daily that Gulf countries should consider pegging to a basket of currencies to be able to better protect their currencies and investments. A few days later the central bank governor left no doubt about the UAE’s intentions. Speaking on the fringes of the annual GCC summit he reportedly said that the country did not intend to de-peg from the dollar or join the planned monetary union it left in May 2010. “What are the choices? There is yen and euro. The choice is limited. The US dollar is still the best choice,” he was quoted by the state-run news agency WAM as saying.
“[The peg] has taken them through thick and thin so there is going to have to be an extremely high level of inflation or a collapse of the dollar in the short term to justify wanting to de-peg,” says Sabavala. “Even if they come up with a basket of currencies, it’s very likely that the majority of that basket will comprise of the US dollar simply because oil is priced in dollars.”
As such, the UAE’s ability to affect monetary policy will remain limited. In any case, inflation looks to remain low in 2011, although the EIU still expects government policy to be focused on this issue. Prices of items such as foodstuffs already saw significant hikes in 2010 and economic recovery may well place upward pressure on the cost of living. Even so, the inflationary barbarians are unlikely to be storming the gates in 2011.
“Besides Saudi [Arabia], which has specific problems, in the GCC inflationary problems are almost non-existent,” says Standard Chartered’s Dauba-Pantanacce. “The reason for that is simple: the biggest component of [the consumer price index] all over the region is housing. As long as you have a housing market that is completely muted, it’s difficult to see how you would have headline inflation coming back.”

Change in the offing
One area where change seems to be likely, however, is the sponsorship system. A recent move in late 2010 by the labor ministry to decrease the amount of time expats have to stay with their employers looks to be the first step to liberalizing the kafeel (guarantor) system to make the labor market more flexible.
Another area that looks to be changing is Dubai’s historical trade relationship with its Persian neighbor. Last year Executive reported that Emirati financial institutions had stopped offering letters of credit to facilitate trade with Iran, requiring traders to use cash instead. The pressure has come from Abu Dhabi, which has always taken a more hawkish stance towards Iran and now has leverage over its little brother Dubai because of the some $20 billion the latter owes it.
“The United States is still the UAE’s key partner in terms of having military bases and there has to be a very delicate balance between appeasing the West and keeping Iran as its trade partner,” says Sabavala.  “Growth in Dubai is uncertain to begin with, so for it to lose its massive business with Iran at this point in time, when the economy is already suffering, would be quite detrimental,” she said, adding that the true impact of United Nations Security Council sanctions and Abu Dhabi’s pressure to stem trade with Iran will only be evident in Dubai’s third quarter results, which have not yet been released.
On the other hand, growth in Abu Dhabi is almost certain, with prospects for the emirate bolstered by steady oil prices that are its main source of revenue and investment. The emirate’s recent $7 billion investment in a semiconductor plant in Abu Dhabi signals that it’s looking to a diversification strategy that has a manufacturing base as its foundation.
“The key policy [for Abu Dhabi] will be to divert its oil revenue more toward an industrial base rather than just having clusters of manufacturing,” says the EIU’s Sabavala. “The concentration is definitely to turning Abu Dhabi into a manufacturing hub. Whether that happens within the time frame and the cost that they hope remains to be seen because past projects have not. Simply investing $7 billion in the semiconductor industry is not enough.”
Whether it likes it or not, the UAE will still have to grapple with restructuring its debt and raising revenue. Most estimates are that gross domestic product will rise by around 3 to 4 percent next year. While there will be growth, “there will not be a boom,” says Dauba-Pantanacce.
“A lot more has to be done in order to attract investor confidence and keep it,” says Sabavala. “They are going to have to make investors believe that this is not just a policy for the sake of policy — they have to implement it.”

First published in Executive Magazine’s 2010 year-end double issue