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.
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.
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.”
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.