Its all smiles until its time to do some real governing (Photo: Sam Tarling)
Lebanon’s public figures play games instead of getting serious about government
by Sami Halabi
Optimists have lauded the sight of Lebanon’s politicians playing a game of football together, under the banner “we are one,” as a sign of good faith to mark the 35th anniversary of the Civil War. But for those of us less buoyant in nature, the sight was a slap in the face. We would rather see our public figures stop playing games and start getting serious about governing the country.
The players — a mixture of ministers, members of parliament and members of the Lebanese Football Association — managed to muster “unity” for a full 30 minutes, the duration of the match.
However, once the final whistle was blown — much to the relief of Lebanon’s heavier public figures — the youngest player and only goal scorer, Phalange MP Sami Gemayel, did little to contain his contempt for the opposing team’s captain, Hezbollah MP Ali Ammar.
“It seems that Ali Ammar’s defense strategy is a failure,” Gemayel was quoted as saying in the press, ostensibly alluding to the discussions over a national defense strategy currently being mulled at the National Dialogue sessions.
Playing foul-for-foul, Ammar was quick to boot the ball back into the other end: “Our defense strategy is only directed against the Israeli enemy, and our team did not want to defeat the team of PM Hariri because he is the Prime Minister,” he retorted.
Notably absent from the game were the public, who have been banned from football matches since 2005 due to fears of sectarian violence pouring out into the streets. The irony of this, of course, is that some of the same politicians waddling haplessly across the pitch were the ones to stoke sectarian tensions in the first place.
Thus, with the stands empty, the absence of the public from the political field of play — from parliamentary committees to national dialogue sessions — was extended from the figurative to the literal.
The fact is that many of the player-politicians at last month’s “unity” match have done more to reinforce Lebanon’s sectarian divide through sports than anyone else, given that many own sporting clubs and/or interfere with appointments at the various sports federations.
And while our public figures kick out cash for personal prominence in Lebanon’s sporting arena, when it comes to supporting sports as a national institution — through the Ministry of Youth and Sports, for example — the ball gets deflated, with thread-bare funding for the ministry making it little more than a pawn in the greater struggle for power in Lebanon’s cabinet.
In front of the cameras, of course, the player-politicians told a different story. All agreed that sports needed to be encouraged in Lebanon, though as a former member of Lebanon’s national rugby league squad myself, as well as a development officer for the sport, this doublespeak looked clearly offside.
During a meeting with an adviser to a former sports minster, our team was promised only partial funding for travel expenses if Lebanon made it to the 2008 world cup finals; qualifiers would not be funded at all. When Lebanon hosted an international tournament in 2004 and the lights cut out in the middle of a game, then-President Emile Lahoud had to intervene to get them turned on again; a massive poster of Lahoud was later draped over the grandstand for the final, which Lebanon won against France.
If Lebanon’s politicians truly wanted to encourage sports in the country, they could start by giving the people access to “public” municipal sporting facilities — currently off-limits to those without the right political connections or money to pay.
It was the public who paid some $100 million to reconstruct Camille Chamoun stadium, only to be barred from its first event of the year, as the politicians played their “unity” match. Perhaps the referee should have given them all red cards at the opening whistle and consigned this self-congratulatory sham to an early shower.
First published in Executive Magazine’s May 2010 issue
Tax hikes loom as the Lebanese government faces up to $51 billion in debt
By Sami Halabi
Among the more developed countries of the world it is customary to hold the nation’s constitution as sacrosanct, with governments that violate it swiftly shown the door by way of the ballot. The Lebanese constitution, on the other hand, is more a set of rough guidelines that successive governments have invoked when it suited their purposes, ignoring the tedious elements, such as those that deal with drafting the national budget.
Articles 81 to 86 of the constitution specifically lay out the process for Lebanon’s government to pass a budget. Accordingly, the budget for any year should be proposed by the Council of Ministers, Lebanon’s cabinet, during the second regular session of parliament in October of the preceding year. Negotiations can then be extended until January, at which point, if no agreement is reached, “the Council of Ministers may take a decision, on the basis of which a decree is issued by the president.” This enacts the budget as it was submitted to the Parliament.
“When the constitution states such an article, that means that neither the cabinet nor the parliament can violate it,” said Wassim Mansouri, lawyer and constitutional expert. “What has been happening for years now is that they have been violating this.” According to Mansouri, no legal body can actually punish these constitutional violations because none has jurisdiction to do so; that includes Lebanon’s Constitutional Court, which only deals with issues relating to the elections, not the actual constitution. What successive governments have been doing instead of adhering to the constitution is to follow the rule of the “provisional twelfth,” whereby the government spends the same amount each month as they did in the most recently approved budget — meaning the one passed in 2005.
“Now you tell me that it is mentioned in the constitution, but at that time they did not know that there would be [this amount] of political wrangling,” said Raya Hassan, Lebanon’s finance minister allied with the parliamentary majority. “If there is no budget the only way a country can spend is by the principle of the provisional twelfth, otherwise how would you be able to spend?”
Now that Lebanon has a cabinet, without the excuse of pending elections or a lack of quorum to put off the issue, Hassan has been handed the prickly task of drafting the budget and managing some $51 billion in public debt.
But new projects require new money and that does not grow on olive trees.
Perhaps the most controversial proposal on the table is increasing Lebanon’s value added tax (VAT) from 10 percent to 12 or 15 percent, part of the reforms proposed at the Paris III donor conference, in which Hassan was heavily involved before becoming the finance minister. The proposal is highly unpopular with many segments of society and across the political spectrum.
According to a study by the Lebanese Economics Association (LEA), an increase in VAT by 2 percent would more than double the percentage of the population living below the extreme poverty line from 3 percent to 6.6 percent. People who live in “extreme poverty” are defined as earning less than $2.40 per day and being unable to meet basic food and non-food needs.
A 5 percent rise in VAT would send 8.9 percent of Lebanese into extreme poverty. The number of people living at or under the “upper poverty line” (defined as earning between $2.40 and $4 per day) would also be expected to increase, from the current rate of some 28 percent of Lebanese, to between 30.9 percent (with a 2 percent VAT increase) and 34.7 percent (with a 5 percent increase). What makes matters worse is that most of the revenues from any VAT increase would not come from the poor — it will just create more of them.
“VAT is imposed on consumption, so the more they consume the more they pay; but the poor people don’t consume that much, they don’t really pay a lot of it,” said Jad Chaaban, acting president of the LEA and co-author of the report. “The problem is whenever they spend a bit more they are immediately subject to the tax.”
While Hassan has not officially announced that she is planning to include a VAT increase in the next budget, she does concede that there is little more she can do to increase government revenues in Lebanon.
“You have very limited room today to think of any revenue measure except VAT,” said Hassan, who spoke to Executive on condition that figures from the budget would not be released.
In case she does decide to propose an increase, Hassan said she intends to “exempt” those living in extreme poverty and offer upper poverty Lebanese “mitigating” measures. One is exempting certain products from the VAT, and Hassan insisted Lebanon has the largest exemption base on earth.
According to the LEA, the exemptions on food items, which constitute almost twice the percentage of household spending for the poorest families (18 percent) than for the wealthiest (9.2 percent) “appear to be progressive.” However, other exemptions, such as those related to education and books, are “highly regressive.”
Then there are the more striking items which aren’t exactly the target investments of a pauper’s portfolio. Yachts and other excursion boats longer than 15 meters and owned by non-Lebanese are exempt from VAT, as is gambling, air transport, precious stones, sale and rent of built property, as well as banking and financial services. Hassan’s explanation for these exemptions was that they are also exempt in other countries for reasons that are both economic and technical.
The other way
Marwan Iskandar, an economist and managing director of MI Associates, said delaying a VAT increase “can be justified” in part, if the government’s treasury account surplus ($4.3 billion at the end of February) is used to cover half of this year’s projected deficit of some $4.2 billion, according to Byblos Bank. He suggested that the rest of the money could be generated from increasing revenues resulting from general economic growth, as tax revenues have grown 48.7 percent in the last two years. At the end of 2009, government revenue stood at some $8 billion, $5.98 billion of which came from tax revenue. Moreover, Iskandar pointed to another source of funds as being the $480 million currently tied up in the Beirut municipality’s account, due to political wrangling between the mayor and the mouhafiz, or provincial governor. He also reckons that some of the pledges from Paris III can still be secured, but doubts the seriousness of many of the donors since the pledges were made before the onset of the global financial crisis.
“[The government] have no right to tax us when they have assets which are underutilized,” said Iskandar. “They need to think about how they can activate the economy. The solution is not in taxation. The solution is attracting major investments in essential, important projects.”
He stressed the need to develop Lebanon’s water, oil refining and exploration potential — a prospect that is harrowing to others.
“Today we are not taking care of our agriculture, environment or industry,” said the LEA’s Chaaban. “If we find oil we will never take care of it; we’ll become more of a banana republic.”
Talk of increasing taxation seems even less warranted when many of the staples of good financial management are still not in place. According to the finance ministry, last year the government transferred 4.3 percent of GDP ($1.5 billion dollars) to Électricité du Liban (EDL), the state-owned electricity company, with 94.4 percent of that figure going to reimburse the Kuwait Petroleum Company and Algeria’s Sonatrach, Lebanon’s fuel and oil suppliers, for gas and fuel oil purchases.
Hassan said the country’s primary expenditures were split equally between salaries, debt servicing and the cost of EDL. That being the case, one would think that the government would hedge against any future increase in fuel costs as major airlines do to predict their future financing options. However, the Lebanese government still does not have a program to hedge its fuel purchases, which totaled $1.55 billion in 2009.
“It could be something that needs to be explored but today you have structural problems that you need to address irrespective of hedging against an increase in fuel prices. We don’t even have cost recovery; we are not [even] at this stage,” said Hassan in reference to EDL.
Tax evasion is also rampant in Lebanon, with many businesses and individuals keeping two sets of books, one for themselves and one for government auditors. The government has made some headway in terms of tax collection, with the ratio tax collectors to the general population being within internationally accepted bounds, according to the LEA’s Chaaban. But public auditing methodology is outdated, still following Lebanon’s decades-old public accounting law. The finance ministry is now beginning to implement a risk compliance audit system, whereby auditors are not required to assess each and every business — a task that caused public audits to lag behind their respective tax years — but study only segments of the economy that are prone to tax evasion.
An indebted surplus
Ultimately, the issue of Lebanon’s public debt is what weighs heaviest on the budget, with interest payments constituting the largest expenditure item in 2009 at some $3.8 billion. In late-February a media frenzy ensued in Lebanon over the financial management of the governments treasury account, the national equivalent of a personal current account. It was then that the account was found to contain a $4.3 billion surplus [6,500 billion Lebanese lira], while at the same time the VAT increase was being floated as an idea to increase government revenue.
“I didn’t understand the logic behind this and neither did many people in the banking sector,” said Nasib Ghobril, chief economist and head of research at Byblos Bank.
The LEA’s Chaaban added that: “If you hold this [borrowed] money and you don’t invest it you are paying [interest] on it anyway, you have to invest it in the right way. They want to keep it as a buffer which doesn’t make sense.”
Responding to such criticism last month, Hassan called a press conference where she stated that the surplus was “pre-funding” that would not increase the amount of payments at the end of the year and would be used as a buffer to pay off future debt for a period of three months.
Back to basics
While media reports have quoted the level of expenditures in the upcoming budget at anywhere from $10 billion to $13.6 billion, the finance ministry has remained tight-lipped on a final figure. Aside from enacting procedural reforms, many other options are also on the table, including raising taxes on interest profits in the banking sector and levying higher taxes on Lebanon’s booming real estate sector.
“Taxation serves as a correction facility for sectors that have gone out of control,” said Chaaban. “You cannot keep taxes low on real estate investment. It’s a crime. It’s wrong.”
Quite predictably, real estate executives have balked at the proposal of raising taxes on their operations. Currently taxes in Lebanon specific to real estate fall on consumers, not developers.
As Executive went to print, Hassan confirmed that individual ministerial budgets had been set. In the end however, any budget that does emerge will not be one based on performance because, with the exception of the education ministry, the finance ministry has yet to implement a performance-based budget using key performance indicators (KPIs) to evaluate expenditures.
Not having such a system in place to appraise a ministry’s performance is tantamount to floating money down a river and hoping it arrives where it is intended. The lack of standards also neuters the public’s ability to judge their ministers’ performance come election time. Making matters worse, state-owned entities like the Regie Libanaise de Tabacs et Tombacs, the body which controls the tobacco trade, and Ogero, the incumbent fixed-line telecom operator, are granted unmonitored lump sum payments by the finance ministry, with any surpluses later annexed to the treasury after these entities close their books.
Lastly, entities such as the Central Fund for the Displaced, the Council for the South, and the Council for Development and Reconstruction are funded outside the budget and approved by special laws and ministerial decrees. While there is some financial rationale behind this, given that some foreign financing must adhere to donor guidelines and not government ones, Hassan believes that the amount of government spending outside the budget could exceed 20 percent of total spending.
With so much at stake, so much being wasted and structural reforms only beginning to emerge, the prospects for Lebanon’s public finances are far from rosy. If no new budget is passed — as has been the case for the last five years — no new major government projects can take place in the country; meaning Lebanon’s people and businesses will have to remain content with the country’s decrepit infrastructure, among a multitude of other failings.
Without a budget, “We will not [be] able to do much,” said Hassan. Indeed if the status quo does persist, Hassan may find herself submitting next year’s budget before this year’s — at least then, it might be constitutional.
First published in Executive Magazine’s April issue.
With an end to sectarianism in Lebanon the political and religious class would lose its raison d'etre (Photo: Matthew Cassel)
Every society has its embarrassing moments. Lebanon seems to be based on them. Take for instance a recent study debunking the myth about the consequences of Lebanese women married to foreign men being allowed to pass on their nationality to their husbands and children. The popular argument is expounded as such: If these women were allowed to pass on their nationality, the sectarian make up of Lebanon would drastically change because of the sheer amount of Palestinians that would be naturalized, thus upsetting the delicate sectarian “balance” of the country.
In typical Lebanese fashion, the issue does not stand alone in the context of wider regional conflicts. If all of these stateless Palestinians were naturalized, then they would lose their right of return as they did in Jordan.
So how many Lebanese women are married to Palestinians? Two percent. And, to make matters worse the largest group of foreigners married to Lebanese women is actually Syrians, not Palestinians.
The results are first and foremost embarrassing since we Lebanese do not even know the makeup of our population. It is also telling of how sectarian fear spreads like cancer within the public consciousness and produces the political and social discourse in the country. What it also explains is why the recent proposal to establish a committee to abolish political sectarianism has created such uproar.
One would think that a society that has suffered the ills of sectarian conflict would enthusiastically do away with the political concept that has constrained, not only their political progress, but their economic and social one as well. But don’t be fooled.
This embarrassing political construct is older than Lebanon itself. It was etched into the constitution’s preamble some 20 years before independence and states that political sectarianism is to be abolished according to a “gradual plan” starting with the formation of the proposed national committee. That said, politicians bringing it up now is little more than political posturing.
The figure spearheading the proposed committee, speaker of the parliament and head of the Shia Amal Movement Nabih Berri, has much to lose if such a thing ever occurred. Logic would dictate that any committee would begin by proposing to implement tenants of the Taif accord — which ended the country’s 15-year civil war — that address abolishing sectarianism. One of them states that a senate would be setup “on a national, not sectarian, basis,” comprised of “all the spiritual families” that would have power over “crucial issues.”
However purposefully contradictory this may be, it does not take away from the fact that the speaker’s power would be significantly diminished by such a council. So why is he proposing to take measures to abolish political sectarianism. Well, this is where the political sword-fighting begins.
Since the Lebanese vote along sectarian lines (whichever way their sectarian leaders tell them to), the country’s Sunnis, Christians and Druze are convinced that the burgeoning Shia population will swallow them up if government posts are open to be open to anyone, and voted on by everyone. Knowing this, and the fact that most of those factions want to strip the Shia population (and Hizballah in particular) of their arms, Berri has floated the idea in the hopes that his opponents would forget about the issue or at least tone it down.
To complicate matters further, Berri has also proposed lowering the voting age in this year’s municipal elections. While the municipal elections are not legally based on sectarianism, in effect they maintain it since the different parts of Lebanon are also mainly populated by one sect or another. Lowering the voting age to 18 would give more influence to the country’s Shia population, who have been the fastest growing community in Lebanon and, consequentially mean, more of them voting in the elections.
By doing this, however, Berri may have opened a can of worms he cannot shut. His ally, and the only Christian party in the opposition, Michel Aoun is now in open conflict with him over the measure and Hizballah is in damage control mode.
Not to be outdone, the parliamentary majority has demanded another electoral reform by proposing to allow the Lebanese Diaspora to vote. According to popular consensus and not empirical evidence this population is comprised mainly of Christians. Such a move would tip the sectarian scales back in the Christian’s favor. The only trouble is that no one really knows the sectarian makeup of Lebanon’s Diaspora since records have not been kept outside of Lebanon, not to mention within the country.
The cherry on top comes from Lebanon’s novice Sunni prime minister, Saad Hariri. Having learned a thing or two about Lebanese politics since his father, a former Lebanese prime minister, was assassinated, Hariri stressed that any agreement on these issues should be based on “consensus,” the Lebanese code word for indefinite procrastination.
However disingenuous Lebanon’s so-called leaders’ intentions are regarding the abolition of sectarianism, the issue is a dangerous one for both the country’s leaders and its population.
Typically, Lebanon’s politicians have had a wide array of talking points to steer political discourse away from any structural reform. It’s easy to point fingers when you are occupied by both Syria and Israel and car bombs are almost as frequent as seasonal allergies.
Even through the threat of war with Israel is ever-present, neither Israel nor Hizballah seem to have the appetite for another war in the short term. The results of this, and the relatively stable security situation in the country, have muted the usual political arguments related to security and occupation. Although Hizballah-led opposition bloc was defeated in last June’s elections and was powerful enough to prevent the formation of a new government for almost six months, it did not have enough political momentum to adequately counter renewed calls for disarmament by the parliamentary majority after their election victory. As such, calls for the abolition of political sectarianism by the opposition are little more than political posturing, as opposed to any real commitment to the measure.
Recent statements by opposition leader Michel Aoun about abolishing sectarianism “without getting into classifications,” or as a package deal that would see all reforms tackled at once, seem to point to an agreement by the opposition to push the issue forward despite differences over the details. Thus, some would say the opposition is now ready to show all its cards and going all in on the matter. But while flowery all-encompassing statements are the forte of politicians, the reality of the matter is that if a basket of reforms related to the abolition of sectarianism are enacted, Lebanon’s political and religious class will lose their raison d’etre.
Fifteen years of civil war followed by 20 years of civil strife have cemented the role of Lebanon’s leaders as bulwarks of their communities. If any serious sectarian reform begins to occur, hereditary inheritance and the defense of the tribe will cease to be sufficient reasons for these figures to retain their statuses. That is a prospect Lebanon’s politicians can hardly be expected to accept.
As long as talk of abolishing sectarianism remains mere lip service, Lebanon’s relative politicians will likely protract the status quo. But if that boat begins to rock, Lebanon’s political elite will most likely seek to readjust the political paradigm back towards issues of security and occupation — and of course blame each other for consequences or yet another round of sectarian malaise. It’s up to the Lebanese not to be duped once again and not to forgive their politicians and religious figures; for they know exactly what they do.
First published on Electronic Lebanon on February 11, 2010
Lebanon's political and religious leaders have little to gain from the abolition of sectarianism
By Sami Halabi
As Mediterraneans, we Lebanese like to compare ourselves to our Italian counterparts in more ways than one: our food, our way of life, our weather; the list goes on. But one, perhaps less desirable, similarity is just starting to be addressed by our Mediterranean cousins. Last month, an Italian judge ordered a father of a 32-year-old to pay his daughter’s allowance, which came to $490 per month, as well as $16,850 in arrears or risk having his assets confiscated. The ruling was slammed by Italy’s Minister for Public Administration — who described the ruling as “a slap in the face of good sense” — calling for a new law to force Italy’s bamboccionas, roughly translated as ‘big babies’, to leave home by the age of 18.
Generally speaking, laws that dictate to the public how they should conduct their lives are antithetical to free societies; but considering that more than 59 percent of Italians under the age of 34 still live at home, the proposed law could be a welcome exception.
Looking to our own country, a similar pattern of refusing to fly the nest emerges. The lack of a census makes hard numbers impossible to come by, but the phenomena of the bambocciona in Lebanon is perhaps embodied in a well known Arabic proverb: “Those who live with their parents [can] take it easy.”
Taking it easy, however, has far-reaching economic consequences. Without incentives for progress, societies naturally become inefficient and lose economic footing. Just look at the former Soviet bloc’s economies during the Cold War or that of Cuba’s today. Conversely, societies that push their youth to “find their own path” not only encourage (or force) them to find a job, retain it, and develop their own ideas independently from their family; they also, in effect, encourage integration within society that breaks down cultural stigma and religious discrimination.
With a little help from the Allies in World War II, the Italians managed to scrap their most deplorable political construct: fascism. Even with the horrors of a 15-year civil war, the Lebanese have still not managed to do away with their primary political ailment, sectarianism, since it reared its ugly head in the mid-1800s.
The conflation between the bambocciona and the protraction of sectarianism in society is significant in the Lebanese context since children are first and foremost susceptible to their parents’ ideologies. In a seemingly endless and vicious cycle, children raised in a sectarian household pick up the bitterness of the previous generation, add their own context to it, and inevitably hand it over to their children. What’s more, young men and women typically leave the nest only when they are married, usually to someone from the same sect and political mindset, thus compounding the problem and making any break of the cycle virtually impossible.
It is almost laughable to observe Lebanon’s political class squabbling over the establishment of a committee to merely study the abolishment of political sectarianism, let alone sectarianism in general. Firstly, those spearheading the initiative — the parliamentary opposition and more specifically the parliamentary speaker — have little political interest in implementing tenants of the Taif accord, which mandated that a non-sectarian senate be formed who’s head would rival the speaker’s for political influence. Hence, it’s quite obvious that the call is little more than a political parry to the parliamentary majority’s thrust over the issue of Hezbollah’s weapons.
For their part, the Christian parties in the parliamentary majority and opposition are up in arms and clinging to the rights accorded to them by the institution of political sectarianism. Those with the most to gain from sectarianism, the country’s religious figures, predictably balked at the mere suggestion of setting up the committee. The last time civil marriage was proposed, the Sunni mufti rejected it outright, as did the Maronite patriarch out of “solidarity” with his Muslim counterpart. To top it off, the prime minister could only muster the sentiment that any agreement should be based on a “consensus,” the Lebanese code word for indefinite delay.
With all this bickering in the political sphere just to establish a committee, waiting for our “leaders” to resolve the issue is tantamount to “Waiting for Godot.”
While enacting policy in Lebanon to force youths out of their homes and into the real world may be a tad excessive — not least given the economic hardships Lebanon has faced since the end of the civil war — creating the societal structures to produce a healthier and more economically vibrant country has to start somewhere. It’s not going to start in the halls of government, so it might as well start at home. Babies have to stop crying sometime, no matter how big they become.
First published in Executive Magazine’s February issue.
Lebanon, Lebanon making dough, but can’t catch up to what she owes
Prices of bread rose 4-fold in 2008 because of rapid inflation and increasing food costs (AFP)
Judging an economy solely by the numbers rarely reflects the situation on the ground, especially in Lebanon. In 2009, the country experienced an economic roller-coaster with gross domestic product growth estimates ranging from a pessimistic low of 2.4 percent at the beginning of the year — due to the perceived effects of the international financial meltdown — to the optimistic high-end estimate of 7 percent growth some were proffering by year’s end.
While growth of some sort was almost certain, the Lebanese economy is still vulnerable, especially when it comes to managing or reducing its gargantuan debt.
The greatest success story has been in the banking sector, which has seen a 21 percent rise in deposits from September 2008 to September 2009, reaching $92.2 billion, with total assets rising 16.6 percent to $109.9 billion in the first three quarters of 2009, according to the Association of Banks in Lebanon (ABL). Compare that figure to Lebanon’s GDP projection of $32.7 billion — according to the International Monetary Fund — and, considering that banks and governments around the world were reeling from a lack of liquidity, Lebanon’s situation at the end of 2009 is enviable.
Industrial devolution
But a banking sector alone does not an economy make. The high energy prices in 2008 had a knock-on effect for many in the industrial and manufacturing sectors, who finally threw in the towel in 2009. The most remarkable closure was arguably Uniceramic, one of Lebanon’s flagship manufacturers, which produced 82 percent of the ceramic tile market share in March 2006. The company went bankrupt in September after high energy costs, cheaper imports and being stripped of safeguard measures saw its margins plummet. One of the few companies listed on the Beirut Stock Exchange in its early days after the Civil War, Uniceramic was finally delisted once and for all in November 2009.
Another sector that has seen better days is the agricultural sector, not least because of the scandal that erupted late in the year when lax regulation led to poisoned fruit appearing on local market shelves. The issue prompted many agriculturalists to lambast the government for its lack of focus on a sector that is the main source of labor for much of Lebanon’s rural population.
While reliable figures are not readily available, the sector is estimated to be worth some $1.5 billion by those in the industry, and the Economist Intelligence Unit’s (EIU) latest figures, from 2007, put its share of GDP at some 5.2 percent. According to Bank Audi, Lebanon’s agricultural exports amounted to a meager $69 million in the first six months of 2009.
“The share of GDP that agriculture and industry hold is around 15 percent,” says Kamal Hamdan, economist and managing director of the Consultation and Research Institute. “It’s not at the heart of the club,” he adds, referring to the Lebanese government’s focus on other economic sectors such as banking, real estate and services.
The amalgamation of these two faltering sectors, industry and agriculture, may prove to be their salvation. The agro-industry sector has seen double digit growth in the past few years, as well as in 2009, according to Nabil Itani, chairman and general manager of the Investment Development Authority of Lebanon (IDAL), the governmental institution that promotes investment in the agro-industry sector and other “productive sectors.” Again, exact statistics are unavailable.
“We don’t have industrial, tourist or sectoral censuses. We don’t count the production in each sector,” laments Jad Chaaban, acting president of the Lebanese Economics Association (LEA) and associate professor of economics at the American University of Beirut.
Even without sector specific data, indicators show that the tourism sector has done exceedingly well and real estate held relatively stable in 2009 riding, respectively, the 2 million tourists expected to have visited Lebanon by year’s end and a constant flow of real estate investment from inside and outside the country. According to Byblos Bank, by October 2009, a total of more than 1.4 million tourists had arrived in Lebanon, an increase of 46.3 percent over the same period in 2008.
Real estate sales transactions over the year declined by only 3 percent to total 55,482 in the first three quarters of the year, according to the General Directorate of Land Registry and Cadastre (GDRLC). The figures are a marked decline from the 24 percent yearly growth in transactions from 2007 to 2008. The total value of transactions during the first nine months of the year reached $4.3 billion indicating a 6.4 percent drop over the same period in 2008. Be that as it may, the accuracy of these figures has been questioned by some who deem their source, the GDLRC, as susceptible to false declarations from real estate firms and other obfuscating elements.
Karim Makarem, director at Ramco, a Lebanese real estate advisory company, says that one reason for this is because many sales are made off-plan and don’t get registered until buildings are completed.
“Transactions may be done a long time before [they are registered],” he says. “So you might have a situation where the real estate market is very stagnant and the figures being released are ever increasing.”
An elusive formula When all the figures are tallied, Lebanon’s real economy is expected to have recorded bumper growth in 2009, albeit less than the IMF’s figure of 8.5 percent seen in 2008. The real amount of growth, however, is a contentious topic in the country’s economic community. The latest figures from the IMF predict a total growth of 7 percent for 2009. However, according to Bank Audi’s research department, the last GDP figures provided by the government are those from 2007.
“You have several problems with estimating GDP. Even the government accounts are not up to date because they run on arrears,” says Chaaban. He predicts that 5 percent GDP growth is a more accurate number considering that “too few companies report their accurate figures. Even when it comes to real estate registration, hardly anyone puts in the right figure. You end up with a system of estimation and not accurate measurement.”
Much of the debate over the country’s accurate GDP centers on methodology. According to Hamdan, the government is currently using the French National Institute for Statistics and Economic Studies’ (INSEE) methodology to calculate GDP. This method offers three different ways to calculate GDP (see box on next page) and uses several parameters that cannot be calculated if sectoral or income-based reporting does not exist or is indeed inaccurate.
“Unfortunately we have no surveys which confirm the situation at the level of the economic sector,” says Hamdan.
The difference in methodologies has prompted organizations such as the EIU to maintain an estimation of 5.1 percent real GDP growth in 2009 as of end-October.
Marwan Iskandar, economist and managing director of MI Associates, however, agrees with the 7 percent IMF estimate made in early October, saying that the figure is not just down to a bumper tourist season and real estate investments.
“The financial crisis had a beneficiary effect on the Lebanese economy because many Lebanese felt that their money abroad was not that safe, brought it back and are now looking at possibilities,” he says.
Iskandar’s point is substantiated by the fact that recent remittance figures have allayed fears of a decline in non-resident inflows to the country. According to the IMF’s most recent projections, Lebanon will attract a total of $7 billion worth of remittances in 2009, registering a contraction of only 2.5 percent on the previous year. According to Hamdan, some of this is a result of assets being liquidated by non-resident Lebanese, which could result in this phenomena being a one off.
The prognosis of many experts however, is that remittance levels will remain relatively stable in 2010, as the global economy is expected to see some kind of recovery and Lebanon has not seen the massive influx of expats from the Gulf that were expected due to the global downturn.
“There was a presumption that there was going to be massive unemployment in the Gulf and the reality was that while growth was stunted, massive unemployment was not created,” says Rabea Ataya, chief executive officer of Bayt.com, one of the largest recruitment firms in the Middle East.
The increased non-resident interest in Lebanon is also reflected in the growing amount of foreign direct investment in the country. In 2008, FDI reached $3.61 billion, according to a statement made by the United Nations Conference on Trade and Development, and is expected to hit $4 billion this year, says IDAL’s Itani.
Certain elements of Lebanon’s investment climate helped as well, such as the number of procedures needed to start a new business, which remain at five, lower than the Middle East and North Africa’s average of 7.9, according to the World Bank’s “Doing Business Report.” The report also stated that the time needed to complete these procedures had decreased from 11 to nine days in 2009 compared to a regional average of 20.7 days.
Despite the increasingly friendly investment environment, legal recourse in the country remains an obstacle for investors, because of Lebanon’s infamously tedious litigation process and inefficient judiciary.
“For the last 10 years, investors have depended on arbitration [instead of judicial process]. This is a solution because time is money,” says Itani.
As Executive went to press, the Court of Accounts — the judicial body responsible for Lebanon’s Financial Court — had not yet submitted its annual reports for the years 2006 to 2008. Neither had it appointed a new president. The president’s post has been vacant since 2007.
Moreover, the special economic zone in Tripoli that was slated for construction at the end of 2008 was not created, although Itani expects it will be completed by the end of 2010.
Balance it out One thing the Lebanese economy can also count on is a large and positive balance of payments (BOP) boosted by inflows of remittances, non-resident investment and a positive net increase in the foreign assets of the central bank.
According to the ABL, the first nine months of 2009 saw the BOP come in at a record $4.84 billion with the trade deficit narrowing to reach $952 million in September. Speaking at the Union of Arab Banks annual conference in November, Central Bank Governor Riad Salameh even stated that the balance of payments had reached $6 billion in October.
That bloody debt As for public finances, there has been little progress. Lebanon’s gross public debt, which is held in most part by local commercial banks, continues to mount and is expected to reach $50.46 billion by the end of 2009, according to Byblos Bank projections. The cost of interest payments on the debt is the heaviest burden the government carries. According to Lebanon’s finance ministry, debt servicing amounted to $2.91 billion in the first nine months of 2009 alone, well on its way to the 2009 budget’s target of $4 billion for the year. That budget, released in August 2009, is just a proposal, however, and has no legal bearing since no budget has been ratified since 2005 by the Lebanese Parliament.
Iskandar predicts that the final amount of debt for the year will come to around $4.4 billion, but he insists the situation is not “destitute” except when it comes to political decisions.
“The government can do something about it [the debt] but they don’t because the political system is based on clientelism and nepotism, not achievement or performance,” he says. Still, Iskandar believes that the situation is better than the numbers suggest, because 83 percent of the debt is held by both Lebanese individuals and institutions that have an interest in continuing to hold this debt, because “it pays rates that you don’t get anywhere else in the world.”
According to Byblos Bank’s estimates, return on Eurobonds ranged between 7.25 percent and 7.35 percent in November 2009. “As long as they are getting their interest and the principal is being paid by issuing [more instruments]…they don’t want to unload because they are earning,” says Iskandar.
Some even suggest that the real burden of the gross public debt is much less than the expected 154.3 percent of GDP projected by Byblos Bank at year’s end. The IMF says that if the government continues to enact “unchanged policies” the ratio could decrease to 151 percent by the end of the year.
Shortage and spending
Even if the country is not on the verge of financial collapse, the real problem of the debt is that servicing it does not allow the government to close the “black holes” that absorb so much of its current spending. The public electricity company, Electricité du Liban (EDL), is a case in point, as it is expected to drain some $1.5 billion from government coffers, according to Mohamad Chatah when he was finance minister in 2009. In the first three quarters of 2009, the government had already spent $1.16 billion on EDL, according to the finance ministry. The budgeted amount to be spent on EDL in 2009 was $1.23 billion, which will likely be overshot by the end of the year.
Most of EDL’s expenditure continues to be allocated to fuel oil imports that are shipped instead of piped, causing them to be even more costly. In September 2009, after repeated delays over issues relating to pricing and quantity, Lebanon began to receive cheaper and more environmentally friendly natural gas piped from Egypt via Syria to run its power plants. The agreement spans 15 years and stipulates that Egypt will supply Syria with 250 million cubic meters (mcm) of gas every year. In turn, Syria will pass on an equivalent amount to Lebanon whose total should eventually increase to 600 mcm per year. In total, the gas is expected to save Lebanon around $240 million based on an oil price of $75 per barrel, according to the investment bank EFG-Hermes, which also owns a minority stake in Bank Audi.
“It’s good to take gas from the Egyptians because the Syrians cannot interfere with it. This is a multilateral agreement and that is the only reason why we received the gas,” says Iskandar.
The agreement is renewable by mutual consent with pricing renegotiated every three years, meaning that the gas is seen as more of a non-stick band aid than a stitch-up for Lebanon’s electricity finances.
“If the Egyptians suddenly don’t like us, they will shut off the gas,” says Chaaban.
In the short to medium term, the government looks set to implement former energy minister Alain Tabourian’s plan of buying smaller generators, which will cost around the same as the amount the government saves from using Egyptian gas. The agreement comes after months of political quarreling over the issue between the ex-minister and former Prime Minister Fouad Siniora. The generators are expected to produce 300 megawatts of electricity, slated to begin operations in the summer of 2010 during the months of the year when electricity consumption peaks.
Gas in hand, the Lebanese government will have some room to maneuver on the electricity issue. However, to make up much of the lost ground, the government will have to enact reforms, such as remote meter reading to replace the “1,900 people who come to measure your meter,” says Iskandar.
Another option is to increase costs of electricity to consumers, given that 38 percent of electricity in Lebanon is generated by private generators, according to Iskandar, and are much more expensive than state-provided electricity.
The proposal seems to be a sound one, according to Hamdan, who says his firm conducted a survey of 2,500 households in Lebanon, the majority of which stated they would be willing to pay higher prices if they were guaranteed 24-hour a day electricity. According to Hamdan, the sector itself will take about five years to reform if the government is serious about undertaking the task. Time looks to be of essence since he also states that electricity consumption is rising at around 10 to 15 percent a year.
A social insecurity
Another state-owned entity that is draining government finances is the highly politicized National Social Security Fund (NSSF). Iskandar, who previously consulted the government on how to reform the fund, says the NSSF is “cancerous and is not going to improve.” There are no reliable figures that detail the government’s liabilities to the fund. One chief executive officer of a Lebanese bank who spoke off the record stated that in the lead up to 2009, the NSSF’s records had not been audited for eight years.
“It is facing a crisis. They are spending money without accounting for it,” says Chaaban.
The 2009 budget proposal bluntly states, if only in small print, that, “NSSF dues have been paid by the Ministry of Finance in previous years but these amounts were not allocated in the national budget.”
Media reports have suggested that the fund is running a deficit of around $456 million and Chaaban states that only 35 percent of workers are registered in the fund because many employers and employees choose not to register. Another statistic that points to the fund’s inefficiency is that government spending on public health was estimated at 12 percent of total spending, or $820 per capita, while Syria spent only $110 per capita and Jordan $500 per capita in 2005, according to the 2009 UN Arab Human Development Report. Spending on health and the NSSF are accounted for separately in the 2009 budget proposal.
Spending without fixing The central bank has been swapping short term debt for long term debt to maintain the semblance of financial stability. At present, the Banque du Liban has succeeded in “buying time,” as Hamdan puts it.
Time, however, does not seem to be a luxury the Lebanese government can afford, as it has to budget for an increase in expenditure of 42 percent, or $10.82 billion, even with a budgeted spike in revenues of 36 percent, or $7.55 billion. As Executive went to press, total budget deficit in the first three quarters of 2009 had reached $2.22 billion. As such, it seems highly likely that the budget deficit target of 10.6 percent of GDP set for the Lebanese government by the IMF, could well be met.
Notwithstanding the fact that the government has to bear the burden of interest payments on the debt, the NSSF, EDL and other expenditures, it still ran a primary surplus of $693 million in the first three quarters of 2009 and budgets for $746 million by the end of the year. The government is still using the budget of 2005 as a baseline, according to Chaaban, by allocating what is overspent to the next year; but without the interest payments on the debt, the government would in fact be profitable.
Promises, promises The Lebanese government has few options to get out from under its mound of debt. It will have to make several political decisions, including those related to the Paris III commitments, the enactment of administrative reforms and privatization of key state-owned enterprises such as telecommunications and electricity, to garner enough revenue to pay off at least some of the debt in the hopes of having it reach a manageable level.
With new finance minister Raya Haffar stating that she will pursue Paris III commitments, there is renewed pressure to enact many of the initiatives proposed. According to the finance ministry, $5.7 billion worth of Paris III pledges have been signed as of end-September 2009, with disbursements increasing by $600 million from April to November 2009.
Paris III’s planned initiatives are expected to be opposed by many — from the parliamentary opposition to local commercial banks.
“The terms were negotiated in a different political atmosphere,” says Iskandar, in a reference to the former Rafiq Hariri government that drew up the initial program. “I don’t think there will be any progress because politically it is not feasible.”
Indeed, considering recent proposals, changes appear unlikely. Increasing the value added tax (VAT) to 12.5 percent is highly unpopular amongst the parliamentary opposition and will require a new law to be drafted and passed. Hamdan says that between 1998 and 2008 the average national wage has increased by only 20 percent, and cumulative inflation by 80 to 90 percent. Thus, he says, it is doubtful that an increase in VAT is possible in the near future.
“I know most of these ministers and I don’t think they will sign onto this approach,” he says.
With the threat of inflation looming because of a falling dollar and rising oil prices, this possibility seems even less likely to be popular with the wider public. Officially, the consumer price index registered at 106.7 in September 2009, according to official figures. Chaaban has little faith in official figures since, he says, a useful methodology was only recently adopted.
“They used to count only Beirut and the basket was not representative of the actual consumption pattern. At some point even housing was not included,” he says, warning that inflation, while steady in 2009, could rise by at least 5 percent in 2010.
While this figure is much less than the rates experienced during the oil boom of 2008, Chaaban says the phenomenon of asymmetric transmission, whereby prices go up but don’t come down, continues to affect Lebanon’s consumers. Even according to official figures, which use December 2007 as a baseline, CPI for the items with some of the highest weights such as housing, food, beverage and transportation have all risen by more than 10 points as of September 2009.
This may not bode well for those keen on implementing the global income tax, for which a draft law currently exists, making it more “possible that it might be implemented with some changes,” says Chaaban.
Increasing taxation rates from 5 to 7.5 percent on interest earned from banks also seems to be a highly unpopular move with many local banks that hold much of the public debt and thus have considerable political influence.
“If there is no reform, the banks will be reluctant to go in this direction,” says Hamdan. The only Paris III earmarked requirements that seem likely to continue are those associated with reforms in the public sector, from which Chaaban believes the government can only receive around $1 billion to reform EDL in 2010.
The only other option seemingly available to decrease the debt is to privatize the telecom and electricity industries. The former looks set to remain a contentious issue between the various national and international players who have diverging opinions on whether the sector should go private or stay public.
“I think that the minister of telecommunication will defend increasing the assets [of the telecom industry],” says Hamdan, in reference to the proposal to increase the assets of the telecom sector by improving its current infrastructure and selling it off at a higher price. That may well prove to be an arduous task if the telecom ministry’s operations continue to be politicized. “Selling it in this form amounts to giving the investor the current structure of prices and revenues, so you are essentially securing the flow of hidden taxes,” says Hamdan, who supports this proposal.
Others, however, disagree. “The sector is not going to move in the right direction without really having momentum from the private sector,” says Kamal Shehadi, chairman of the country’s Telecom Regulatory Authority. “By that I mean all of the economic associations will have to get on board.”
And given the track record of public ownership, his sentiments are echoed by many consumers who are tired of having some of the highest telecom costs in the world.
As Executive went to press, a ministerial policy statement had yet to be approved by the Council of Ministers. Expectations are that it will closely resemble the previous statements adopted by the past two governments.
There is still a sense of optimism that the new government ministers can overcome some of the economic hurdles, even if they will have to fight over details in the process.
“They are not politicians that are there just to oppose each other. Even if they oppose each other they will reach a compromise, as they are technical people who can discuss things,” says Chaaban. “Because the government took so much time to form I think now everybody is expecting it to deliver.”
First published in Executive Magazine’s December 2009 Lebanon issue
Duabi's man-made islands were just one of the many projects that Duabi World borrowed a still unspecified amount to build (AFP)
Common sense is the currency of rational minds — in this respect Dubai may be short on change. On November 25, Dubai World, the wholly owned subsidiary of the Dubai government, announced that it would request a 6-month standstill on all payments and debt servicing of some $11 billion due to creditors in December — effectively giving notice that the further $49 billion the company has outstanding may also be beyond its means.
The announcement came after the markets closed for the four-day Eid al Adha holiday, during which time the company maintained complete silence while the news shook the financial world, prompting panicked investors to line up at the doors of Gulf markets to dump exposed portfolios when bourses reopened on November 30. As they waited in the Gulf, financial markets from London to Beijing shed share value in fear of their own exposure.
Dubai and Abu Dhabi markets dropped instantly at the opening bell, followed closely by other regional markets. The next day, Dubai World released a statement confirming it was in talks with United Arab Emirates banks to restructure $26 billion in debt. The company said restructuring could consist of “deleveraging options,” “asset sales,” and “formulation of restructuring proposals.”
“We would expect a decision to come out of [the discussions] on what assets underlay the liabilities, and what the plan is for liquidizing those assets so that bondholders get some partial repayments,” said Raj Madha, director of equity research at EFG-Hermes.
As executives and Dubai authorities prioritize Dubai World’s obligations behind locked doors, the rest of the financial world can do nothing but wait and watch the markets.
The markets react By the middle of November 2009, the financial world seemed optimistic — and with some justification. The Morgan Stanley Capital International (MSCI) index had recovered 48.9 percent of losses incurred during the downturn, while the MSCI Emerging Markets index had fared even better, recovering 58.13 percent. The MSCI Arabian Markets index — Gulf Cooperation Council, Egypt, Jordan, Morocco, Tunisia and Lebanon — also followed suit, albeit with a little less vigor, recovering 30.89 percent of their losses.
After the announcement that Dubai World could effectively not pay its debt on time, that recovery quickly went into regression. In just two days of trading the Dubai Financial Market (DFM) dropped 12.5 percent and the Abu Dhabi Stock Exchange fell by 11.6 percent. Dubai’s indices for real estate, as well as investment and finance, saw some of the worse losses, down 18.1 percent and 15.5 percent respectively.
The fallout from the Dubai World announcement is expected to send foreign investors’ capital looking for economies with lower risk factors. This will almost certainly have an adverse effect not only on public markets, but other financial institutions as well.
One Abu Dhabi-based private equity (PE) executive commented that the “huge interest we have seen from foreign investors in the region will subside considerably over the next few quarters.”
This is seen as a harbinger of public sector encroachment on the private sector’s lending space.
“Banks will be less keen to lend to the private sector, and governments will prefer to tap into local resources. What is left over for the private sector will be reduced significantly,” said the executive.
While the immediate impact of the Dubai World announcement was felt worldwide, expectations are that outside the region the negative repercussions are temporary, as many markets are already bouncing back from their initial fall.
“This crisis will not find roots on the international level. It will stay regional,” predicted Fadi Khalaf, secretary general of the Union of Arab Stock Exchanges and former chairman of the Beirut Stock Exchange. “No one has any interest in pushing Dubai too much to make it pay at any price. We have to wait until they liquidate some assets at a reasonable price, but I think we will find a solution. We will pass through a difficult period but it will not be as long and as deep as the international crisis.”
Khalaf’s only fear is that the latest announcement could imply that the curve of the financial recovery will be “W-shaped” rather than “V-shaped.”
“With a ‘W’ we will need more support and have to test the bottom before going up again, and that takes more time,” he said, citing the United States financial crisis of 1972 that took on a W-shape and lasted until 1982.
Were this limited to a local phenomenon, Dubai could merely pay for what it had done, literally and figuratively, and the issue would be somewhat resolved. However, given the nature of financial institutions, the shockwave that started on the artificial islands off Dubai is having drastic consequences for the region. Markets from Qatar to Egypt have been dragged down and further fallout is expected.
Save the banks! Though the lack of transparency of UAE banks makes it difficult to say for sure, general sentiment holds that the rising rate of non-performing loans has led banks to slow lending. The banks remain well capitalized, however, and appear to have the support of the authorities. Dubai World, on the other hand, does not, as the government refuses to guarantee its debts.
“Mixing up between the Dubai World Group and the government of Dubai is wrong,” said Dubai ruler Sheikh Mohamad bin Rashid al-Maktoum on December 1. The statement, issued by the state-run WAM news agency, cited Maktoum as saying that citizens should “roll up their sleeves.”
Still, local banks have seen immediate effects in their insurance costs. As the first news coverage broke of the requested standstill, the price of insuring Dubai’s debt shot up almost 28 percent.
Between November 24 and November 25, the cost of insuring $10 million of debt from default over five years jumped from $360,000 per year to $460,000. Abu Dhabi saw a similar effect with its corresponding prices going from $100,000 on the Tuesday to $157,500 the next day.
Two days after the Dubai World announcement, Fitch Ratings announced that it had downgraded three banks that are partially owned by Sheikh Mohamad’s Dubai Holding, stating, “The outlooks on Dubai Bank and TAIB Bank are negative. Tamweel remains on rating evolving watch.”
On November 29, the UAE Central Bank announced that it would “stand behind” its banks, making additional liquidity available to both domestic and foreign banks at 50 basis points above the three-month Emirates Interbank Offered Rate (EIBOR), which fell from 1.941 percent on November 30 to 1.905 percent on December 1.
In an attempt to quell depositor panic the emirates’ central bank also stated that: “The UAE banking system is more liquid than a year ago.”
Emirates National Bank of Dubai has taken the lead as Dubai World’s largest creditor, according to the Financial Times, with an estimated $3 billion in exposure. Abu Dhabi Commercial Bank is likely to come in second, with a senior executive telling Reuters they were owed up to $2.45 billion, while another senior official at First Gulf Bank told the news agency their exposure is $1.36 billion, though First Gulf Bank later refuted this statement.
What exactly is on Dubai World’s books is unclear, as the company is not in the habit of issuing complete and transparent disclosures, but most financial experts estimate it’s total tab at near $60 billion.
European banks are quickly tallying their own exposure to Dubai World, and reports thus far point to a number in the range of $40 billion, with approximately $5 billion owed to banks in the United Kingdom.
The Financial Times estimates that HSBC, Standard Chartered and Lloyd’s Banking Group hold around $1 billion in exposure each. Royal Bank of Scotland is expected to be the most exposed with estimates of between $1 billion and $2 billion. Other European Banks heavily affected include the ING Group, BNP Paribas, Societe General and Calyon, who saw their shares plummet in early trading after the scandal broke.
Major banks across Europe saw share prices drop following the announcement of the debt standstill, with HSBC Holdings down by 4.8 percent, BNP Paribas down 5.1 percent and Deutsche Bank shares down 6.4 percent.
Asian banks are also sharing in the woe. According to Reuters, Japanese banks have $1.16 billion in exposure to Dubai World, while South Korea’s Financial Supervisory Service stated that the country’s banks were exposed to approximately $32 million.
Despite the fact that Moody’s global credit rating agency maintains the current crisis would not alter the UAE’s sovereign credit rating, the debt problems of Dubai World have many looking farther up the food chain, and worrying about the solvency of the emirate itself. The Wall Street Journal estimates that the total exposure of European Banks to Dubai is $83.7 billion.
The Bank for International Settlements (BIS), a Swiss international organization for cooperation between central banks, estimates that as of June 2009, UK banks had claims of $50.2 billion across the entire UAE, followed by French institutions at $11.3 billion, and German banks with $10.64 billion on their books.
The US appears to have less at stake, with the BIS reporting that American banks held $10.62 billion in exposure (as of June 2009). Southeast Asia’s biggest bank, DBS Group Holdings, said it had $1.3 billion of exposure in Dubai, calling the situation was “manageable.”
Family feud As Executive went to print, Dubai’s big brother, Abu Dhabi, had yet to signal a willingness to help its smaller headline-grabbing sibling pay off its debt, which Moody’s estimated at $100 billion. For the moment, it seems Abu Dhabi is more concerned with propping up the country’s banking sector, evidenced by its most recent acquisition of $5 billion of Dubai-government issued bonds to two Abu Dhabi banks in which the larger emirate holds stakes.
“There was a decision taken a year ago that Abu Dhabi would not let Dubai fall but if they intervened they would do so only in terms of buying assets that actually have value,” said the head of a regional financial association that spoke on condition of anonymity. “They are not going to throw money on the streets, because they are responsible in the eyes of their population, so they won’t buy up too many of the distressed assets.”
The possibility is that Abu Dhabi will want stakes in flagship companies that are doing well, such as Emirates Airlines, which economists from French bank Societe Generale described as potential “collateral” for a bailout.
Abu Dhabi’s most significant means of asset acquisition is through its giant sovereign wealth fund (SWF), the Abu Dhabi Investment Authority (ADIA). Sven Behrendt, visiting scholar at the Carnegie Middle East Center and a specialist on SWFs and political risk management, said he didn’t believe that injecting massive amounts of cash into Dubai’s firms would fit ADIA’s core strategy.
“The idea is to spread your risk and then you come up with a certain formula,” he said. “If you have to bail out your friends from Dubai then this will have an impact on your investment portfolio.”
How much Abu Dhabi can afford to spend picking up Dubai’s assets — ostensibly protecting its own sovereign risk factor and the economy of the UAE — is not certain. Although the ADIA is purported to be the largest in the world, there is little transparency; estimates as to how much it holds in cash reserves — or its losses sustained during the global financial crisis — vary wildly, with assets estimated anywhere between $330 billion to $900 billion.
“Should we just think that Abu Dhabi has ‘a lot’ and that is sufficient?” quips Behrendt. “We don’t know their holdings, how much they have, or their asset allocations. We don’t know anything about them.”
The bloom is off the rose
Dubai World has said its debt restructuring will include the liabilities held by its property development subsidiaries Nakheel and Limitless, but not other companies it owns which are “on a stable financial footing.”
Arbitration procedures look set to be the next step as auditing firm KPMG has been selected to represent Dubai’s creditors. “They have to negotiate, to sit together and find a solution. If they don’t do this they won’t get a cent,” said Khalaf.
Dubai took hits, this year and last, as the global financial downturn struck home, but now it seems the gloves have come off. “The global markets are going to punish Dubai in the long term, and they are going to have to pay for the risks,” said Behrendt. “Perhaps that will lead them to a point where they reform their system… It probably didn’t work well as a model for others when it went well, and it doesn’t work as a model when it falls.”
Marred by a lack of transparency, where investors can only guess at how much has been borrowed, Dubai’s track record regarding risk management leaves much room for improvement.
“If you have a government that is going to default on its debt, you [normally] also have the parliament, media, banks and all sorts of stakeholders that are going to push the government to get its house in order. Normally these would be the checks and balances, but in Dubai this doesn’t exist,” says Behrendt. “You can build the biggest building, bridge or airport but at some point you have to keep your clients. Who is going to put money into Dubai now? I certainly wouldn’t.”
First published in Executive Magazine’s December 2009 Middle East issue
Saudi Soldiers gather on the Yemeni border to fight Huthis with the Yemeni Army
The summer months are usually quiet in the Arabian Peninsula, the searing heat prompting expats and locals to pack their bags and head for greener, cooler pastures. But to those paying attention, a war has been raging since August. For several months now, the Yemeni army and rebel Huthi fighters, belonging to the Zaidi offshoot of Shiite Islam, have been engaged in a pitched battle with government forces, leaving tens of thousands displaced and hundreds more dead.
On October 14, Yemeni President Ali Abdullah Saleh pronounced to supporters that the northern rebels would be crushed “in the next few days.” Saleh, perhaps tongue in cheek, was careful to attach the archetypal Arab suffix “God willing” to the end of his statement.
This may prove a wise move given that the regime has little control over the mountainous north, where fighters with “conventional weapons” have already taken down a number of Yemeni air force planes. The offensive in the north, coined Operation Scorched Earth by the regime in Sanaa, leaves little to the imagination as to how Saleh intends to deal with his opponents.
Fighting has also broken out in the south, where separatist groups continue to prove a thorn in Sanaa’s eye. Also lurking in Yemen’s underworld are various “al Qaeda types” credited with the USS Cole attack in 2000, before the group became a household name. (Luckily for Saleh, the United States has been more than willing to assist him with the latter problem.)
Pouring fuel on the fire, there are those who are keen to portray the northern conflict as yet another manifestation of the increasing regional tensions between Sunnis and Shiites. In Yemen, this translates into a “proxy war” between Iran and Saudi Arabia, the latter backed by the US. However, the notion that the problem is merely religious is about as accurate as saying that the Lebanese Civil War was a simple Muslims-versus-Christians conflict.
The Zaidi sect is in practice surprisingly close to Sunni Islam, so much that it does not deem the Imam Ali or his descendants as quasi-divine entities. In fact, without the support of one of Yemen’s top Zaidi tribal chiefs, Sadiq al-Ahmar, the regime could hardly maintain its offensive in the north.
To comprehend the conflict’s root causes, one needn’t look further than the walls of Old Sanaa, where homeless, bare-chested men reside in unsanitary squalor, just a stones throw away from the central bank.
One of the world’s poorest countries, Yemen is without a doubt the economic black sheep of the Gulf. One-third of the country is unemployed and 40 percent live in poverty, which has doubled since the country’s unification in 1990.
Sanaa’s answer to these problems so far has been to cling to power by maintaining control over profitable economic sectors through patronage networks or direct ownership. Oil, gas, transport, finance, cement and foodstuffs are either government-owned or controlled, keeping a tight leash on the portion of the population that does have a job.
By 2018, however, Yemen’s oil revenue, from which it paid more than 75 percent of government expenditures last year, is expected to run dry. As a result, its ability to exercise this system of patronage over its economy will weaken. Even if liquid natural gas production, which began last month, does see exponential growth, the prospects for economic disaster are still in the cards.
To sidestep this outcome, Saleh’s regime will have to reverse its “scorched earth” policy, begin to negotiate, release its grappling hold on profitable sectors and enact an inclusive and progressive economic policy.
The US and Saudi Arabia could easily force Saleh in this direction given that the Yemeni government is now begging the Saudis for $2 billion to make up for a 75 percent drop in oil revenue in the first half of this year. For Saleh to change course, however, Iran will also have to cease its meddling and make good on its promise to mediate between the Yemeni president and the Huthis, albeit with a wink and a nudge from Washington and Riyadh.
It all seems like a tall order. The alternative, however, is to let a country with a large and volatile array of extremist groups, situated on one of the world’s most strategic shipping routes, tear itself apart and become the Gulf’s only failed state. If that happens, the implications for the region would be far worse than the present crisis. In short, its time to stop fanning the flames of conflict and to start pouring water on a country that is already ablaze.
First published in Executive Magazine’s November 2009 issue
Leaders trade horses, kill reform and cripple the country
By Sami Halabi
Policy is a mask Lebanon's politicans wear well
There’s a popular quip that speakers love to use at press conferences in Lebanon. An orator will typically begin by chastising the government for its lack of efficiency, then point to the several hundred railway workers the government employs despite there being no rail network in the country since the 1970s.
While Lebanon’s pontificators may disagree on the exact number of railway employees (estimates range between 200 and 900), the fact that this situation has been allowed to perpetuate is emblematic of the nonchalance of the country’s politicians when it comes to implementing reform.
Lebanon’s latest political debacle renders the lethargy of the country’s public figures ever more palpable.
The divvying up of cabinet seats in Lebanon has always been a game for the numerous political and commercial interests of international players, who kick Lebanon around the proverbial stadium until they get what they deem is rightfully theirs. Whichever unlucky soul is assigned the task of balancing these interests ends up in the firing line and the debate over who should get what duly turns into a political crisis.
Cabinets come and go, but no one seems to ask the obvious question of why politicians actually deserve to have control over basic public services, besides having curried favor with one of the powerful political parties in the country.
The current political quandary facing Lebanon is no different. But this crisis could be resolved if the politicians were willing to address the issues that will build the foundations of a functioning state instead of a banana republic.
Instead of being interested in Israeli microwave signals providing the Lebanese public with much-needed Internet capacity, the next prime minister could steer the debate over the next telecom minister toward the creation of the non-existent and legally mandated company, Liban Telecom, that will begin to reform the sector. If, as stated, telecommunications privatization is the ultimate goal of the ruling coalition, a plan contrary to the one proposed by the current minister needs to be articulated. That may be a wiser course of action than to nominate a candidate for the post whose party has come out against privatization of the sector.
Given the lack of political interest in reform, it is not surprising that there is also little debate over who will be burdened with becoming the next energy minister — in charge of the state-run electricity company that continues to drain the government’s coffers year after year.
Instead of pawning this ministry off, the next minister could be nominated on the basis of implementing a law that would facilitate offshore oil and gas exploration at a time when energy companies are licking their chops in anticipation of a bidding round. That may be a good option, considering that Israel has already found a large deposit of natural gas off its northern coastline next to the Lebanese border. Implementing the electricity law that would create an independent regulatory authority would also be a good first step.
Perhaps the 28 percent of the country’s population that lives under the poverty line would appreciate it if the next minister of social affairs spearheaded a plan to allow microfinance organizations to practice financial intermediation and increase their outreach. That might be a better alternative to politicians giving the poor handouts come election time, then ignoring them for four years until the next time their votes are needed.
The gridlocked commuters on Beirut’s crowded streets may find it useful if their roads were widened through a policy to create more parking in the city. The post of transport minister could be awarded to a nominee based on a solid plan to decrease congestion, instead of wasting government funds on traffic lights in areas where they are unnecessary and redundant, given that there is often also a police officer directing traffic instead of fining drivers for running red lights.
Another way to start may be by opening up the unused Charles Helou parking lot that has stood eerily vacant for years to alleviate the parking problem around the Gemayze district. Perhaps the next minister could also have a degree in civil engineering or urban planning instead of physics. Getting rid of those railway workers might help as well.
It is natural that after a civil war as devastating as Lebanon’s the country needed time to put the pieces together. But after almost two decades there is no excuse for the current state of affairs, let alone a cabinet that is disinterested in implementing reforms. Unless the next cabinet has a real intention to truly begin working on reforming the public sector, there seems little point in appointing them in the first place since their presence will be just as relevant as their absence.
First published in Executive Magazine’s October 2009 issue
Access to small-business credit could lift thousands of Lebanese out of poverty
by Sami Halabi
With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.
Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.
The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.
The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.
According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.
“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.
At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.
Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.
What’s wrong with it?
The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.
The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.
At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.
“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.
Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.
“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”
This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.
“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.
Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”
Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.
“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”
Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.
“The big banks don’t believe in microcredit — we do,” said Jammal.
Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.
“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”
The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.
“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.
Such practices are not what most banks are accustomed to.
“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.
Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.
The Politics
While there may be a sound business case for microfinance in Lebanon, many of the organizations in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.
Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.
According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.
As a result, many in the industry have complained that the market is being grossly distorted.
“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.
However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.
The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.
“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.
Government support
Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.
What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.
Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.
One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’
But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.
“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.
Plan? What plan?
Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.
“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”
First published in Executive Magazine’s October 2009 issue
With the United Nations reporting that almost a third of the Lebanese population is living in poverty, and many more are classified as low-income workers, one thing is certain: Lebanon has a huge poverty problem. Yet one of the most efficient ways to address the issue of poverty, and make some money in the process, has not been high on the list of priorities for Lebanon’s government or its private sector.
Microfinance (MF) is the provisioning of financial services to low-income segments of the population with little or no collateral requirements. These clients would otherwise be shunned by traditional financial institutions and banks. The sector has seen substantial growth in Lebanon in recent years and is expected to continue to expand. Nevertheless, the industry remains under-developed and suffers from a lack of regulation.
The concept of microfinance and microcredit came to Lebanon in the mid-1990s, spearheaded by the United States Agency for International Development (USAID), the US government’s development investment arm. While the agency may have its own political agenda, it did lay the groundwork for an industry that has proved to be both a social good and a sound investment opportunity.
The industry itself, however, remains only partially measured. Some of the only reliable figures come from a report conducted in 2008 by the International Finance Corporation (IFC), the arm of the World Bank that provides investments and advisory services to the private sector in developing countries.
According to the report, as of September 2007 the estimated potential market was some $286.1 million, calculated by multiplying the number of “eligible potential borrowers” multiplied by the average loan size of $1,500. As such, the IFC states that only 11.5 percent of potential demand is being met, leaving 88.5 percent of the market untapped, equal to some $2.2 billion. On the lower end of microfinance, loans can be for as little as $300. The requirement for such a loan is simply a viable business plan to be able to pay the money back.
“The market is still way underdeveloped and more people will need microcredit,” said Anwar Jammal, chairman and chief executive officer of Jammal Trust Bank (JTB), which has provided over 45,000 microfinance loans in Lebanon since 1999.
At present, the number of Lebanese who are “unbanked” remains a statistical anomaly since there has not been a study on the matter since 2000 — there has also not been an official population census in the country since 1932. The study conducted by the World Bank in 2000 estimated that the unbanked numbered around 200,000.
Youssef Fawaz, executive director of Al Majmoua, Lebanon’s first formal microfinance institute, estimates that the number of unbanked in the country is much larger, at some 30 to 40 percent of the population, or 1.2 to 1.6 million people. Since 28.5 percent of Lebanon’s population lives below the poverty line, the inherent needs of the people combined with the potential the market offers, could hardly make for a more opportune time to invest in the sector.
What’s wrong with it?
The explanation for why this sector has not been nourished is multi-faceted and reflects many of the socioeconomic and political realities of Lebanon. To begin with, the bulk of the industry is comprised of only five microfinance institutions (MFIs): Al Majmoua, Ameen, Al Qard Al Hassan, the Makhzoumi Foundation, as well as Emkan, which began operations shortly after the June parliamentary elections.
The funds that these organizations use to do business come either from bank loans that carry market interest rates, or from donors, which carry lower interest rates or no interest at all. The situation has pitted a financial model against a philanthropic model in a battle for existing and potential market share.
At present, Ameen is the only MFI in Lebanon that is registered as a financial institution and receives the majority of its funding from banks, including JTB, which it then divvies up and distributes to its clients. The advantage of adopting the financial model is the access to a large pool of funds other organizations don’t have. That also means their cash flow is based on paying back interest set by banks, which are markedly higher than those of MFIs who operate using grants or soft loans.
“Definitely our job is much more difficult because we have a cost of funding the others don’t have, but our pricing to the end client is very similar,” said Ziad Halabi, general manager of Ameen. He explained that Ameen makes up for this through “having more efficiency.” Ameen offers loans between $400 and $15,000 with loan terms between four months and five years, and charges interest rates averaging 12.5 percent.
Samer Safah, deputy general manager of the Makhzoumi Foundation, claims that because his organization does not have to pay dividends to investors or commercial interest rates, they can provide better services such as offering their “beneficiaries” life insurance with each loan. Makhzoumi is currently the smallest market player and offers a maximum interest rate of 1.2 percent.
“Microfinance was not created to make money, it was created to elevate the poor to a better standard of living,” said Safah. Nevertheless, he concedes that “money makes the world go round and money is going to win.”
This has become more evident lately as the donor money, which organizations like Makhzoumi and Al Majmoua depend on, now looks to be in short supply due to the global economic downturn. The billions of dollars lost by investors worldwide because of greed and lack of financial oversight have left less money available for MFIs.
“The grant money available for MFIs has completely dried up and it’s very difficult to identify any cash outright,” said Fawaz.
Safah agreed, noting that, “If you look at the request for proposals at the embassies, there is nothing that has anything to do with microfinance anymore. It wasn’t like two years ago when it was all about microfinance.”
Potential microfinance market gaps in Lebanon
Microfinance supply in Lebanon, excluding commercial banks
Without international investors, many MF organizations are now looking towards Lebanon’s banking sector, which is full to the brim with liquidity. Today, Al Majmoua is actively seeking bank loans as a source of funding for the first time since its inception in 1994.
“The grants are not here and we need to finance our growth,” said Fawaz. “If you can’t get it [the money] from grants we need to get it from somewhere else.”
Lebanon’s banks have so far taken little interest in this sector, even when it offers returns of 10 to 15 percent and carries a default rate of 2 percent. The top 20 banks control some 80 percent of the market and their decisions can make the difference.
“The big banks don’t believe in microcredit — we do,” said Jammal.
Of Lebanon’s 50-odd banks, only a handful have adopted microfinance programs.
“The banks are not so interested,” said Mayada Baydas, executive director of Emkan. “If the banks were keen, growth would be much faster and higher.”
The reason that most banks don’t adopt microfinance as a revenue making initiative seems to be the operational model that microfinance necessitates. By nature the industry is labor and management intensive requiring a ‘hands on’ approach and lots of field work to reach such a low default rate. According to Jammal, the overhead costs of a microfinance loan can vary from 5 to 8 percent as opposed to the overhead of a normal loan which is 1.75 to 2.5 percent.
“In the end you have to go and knock on their [debtors] doors to remind them to pay,” said Jammal.
Such practices are not what most banks are accustomed to.
“The operational method is outside the realm of how banks operate and target [clients],” said Baydas.
Labor costs typically make up 80 to 90 percent of the total cost of running an MFI, according to Halabi.
The Politics
While there may be a sound business case for microfinance in Lebanon, many of the organizations in the market also have a political slant. Emkan is funded by the Hariri Foundation and Al Qard Al Hassan is funded by Hezbollah. Baydas did not comment on how much money has been given to her organization by the Hariri Foundation, but said it was “in the several million dollar range.” She also insisted that having a political interest fund Emkan does not restrict it to concentrating on areas where the Hariri family has political interests.
Calculation of potential eligible microfinance borrowers, September 2007
Al Qard Al Hassan — which translates into English as “the good loan” — offers Sharia compliant loans and uses gold or gold jewelry as collateral. The organization, whose main office was destroyed during the 2006 war with Israel, is estimated to have more than 26,000 clients, and even a “martyr’s fund” to support the families of Hezbollah’s militants killed fighting Israel. Al Qard Al Hassan did not respond to repeated requests to comment for this article.
According to Al Majmoua’s Fawaz, Emkan and Al Qard Al Hassan together make up some 50 percent of the market. Since both organizations are funded by political interests other MFIs say they are able to offer interest rates, or the Sharia compliant equivalent, at lower levels to garner revenue.
As a result, many in the industry have complained that the market is being grossly distorted.
“The biggest challenges for us are to deal with the market distortions that we are seeing from the politically oriented funds and political instability,” said Ameen’s Halabi. Emkan currently offers a flat rate of 10 percent which, Baydas admits, is “a couple of points lower” than the rates of Ameen and Al-Majmoua.
However Baydas, who previously managed Ameen, added that her competitors’ “sources of funds have often been quite subsidized from a number of international political donors,” and that they also carry products that are priced lower than those of Emkan.
The entrance of large subsidized funding in the market could prove fatal for non-subsidized funds. According to Fawaz, political funds will necessarily deplete their funds because the interest they charge is unsustainable, and this could eventually push them out of the market.
“The problem is if they can distort the market long enough to put you out of business.” But can they? “If they have the means… yes they can,” he said.
Government support
Not only do Lebanon’s political parties have deep pockets, they also form the government that has done little to encourage growth in the sector. The only form of support has come from the central bank, which has issued a directive allowing local banks to use 5 percent of their required reserves for microfinance initiatives. However, according to one banking executive who spoke off the record, the central bank has been unresponsive to requests to use this liquidity. The central bank did not respond to requests for information on the subject.
What the government does have is a fund called the Economic and Social Development Fund, which is mostly funded by the European Commission and has cooperated with Al Majmoua on some microcredit activities in the past. The fund now concentrates on the small to medium-sized enterprise sector and no longer engages in traditional microfinance.
Other than that, it seems nothing has been done. The ministry of social affairs, whose job it is to address the issue of poverty, “has not done much and I don’t know why,” said Makhzoumi’s Safah.
One of the main issues that has not been addressed by any government in Lebanon is to actually pass a law that would allow the industry to be regulated. This would involve setting up a credit bureau and potentially allowing MFIs to perform financial intermediation, the process by which funds are channeled between surplus and deficit. Having this would enable MFIs to act as ‘bankers for the poor.’
But that doesn’t seem to be in the cards anytime soon; today not even a draft law has been completed.
“The government is busy trying to establish a government and their thoughts are very far from establishing microfinance legislation,” said Baydas. MFIs in Lebanon, with the exception of Ameen, are currently regulated by the ministry of interior and not the ministry of finance or the central bank.
Plan? What plan?
Given the amount of poverty in Lebanon, the time to enact a clear cut policy could hardly be more critical. But while microfinance may be a tool to help eradicate poverty, people in the industry agree that it is not a panacea. In order to adequately address the matter the next government may have to start enacting a wider policy of poverty alleviation that also incorporates microfinance instead of just ignoring the issue.
“Microfinance is one component of the big plan to eradicate poverty,” said Halabi. “And unfortunately, we don’t have the big plan.”
The long hours Lebanon’s Internet users spend sitting in front of their computers waiting for content to download is not the fault of some computer conspiracy. The decrepit state of the Internet is the result of poor governance, suffocating bureaucracy, illegal internet providers and sectarian politics.
Illegal Internet networks made headlines last month when a microwave transmission connection installed on top of the Barouk Mountain in the Chouf region of Lebanon was alleged to have been taking bandwidth from Israel.
The incident set off a wave of accusations from Member of Parliament Ahmad Houry, part of the March 14 parliamentary bloc that won last June’s elections, against the present care-taker telecom Minister Gebran Bassil, who is part of the Free Patriotic Movement (FPM) opposition party. Houry claimed Minister Bassil was somehow involved in facilitating the illegal connection.
Hezbollah, allies of the FPM, said that the connection was discovered in April but “a large political party” had prevented the station from being raided earlier. The minister, who did not respond to requests for an interview, has denied the allegations. The station was installed in 2006, however, when Marwan Hamade — a March 14 ally — was telecommunications minister.
Sources in the telecommunications industry, who asked not to be identified in order to speak freely, told Executive that the station owner has not been arrested, which is “very weird,” said Habib Torbey, head of the Lebanese Telecommunications Association (LTA).
Mohamad Safa, an adviser to Bassil — who stressed that he speaks for himself and not the minister — said there were “many partners involved” in the Barouk business, which he claims is now being made an issue in order to maintain the “oligopoly” of Lebanon’s legal Internet providers, who are losing market share to unlicensed providers.
“Some of them [the partners] have been arrested and some have not, but there are no real details because these are security-related matters,” he added. “No one will be able to tell you who the ‘godfather’ is, and if they do they are lying.”
Ironically, the Barouk incident has also cast light upon how technically uncomplicated it would be to increase bandwidth in the country.
“The official sector has [a bandwidth of] only 1 gigabit per second (Gbps). The Israeli antenna of Barouk alone had 10 Gbps,” said Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU), a UN agency for information and communications technology; Bahsoun also advises the Lebanese government on telecom issues. Telecom Minister Bassil recently contradicted this statement though, saying the station was only transmitting 300 megabits per second (Mbps).
Does Lebanon have broadband?
Illegal Internet providers in Lebanon service more than half the market, and for good reason — Lebanon’s legal internet is slow. Even with these illegal suppliers, however, Lebanon’s market is grossly undersupplied.
Many Internet service providers, like Cyberia and IDM, as well as state provider Ogero, claim they provide broadband internet service. That assertion is debatable.
“Nothing [in the market] is really broadband,” said the LTA’s Torbey when asked why his company, GlobalCom Data Services, which owns Inconet Data Management (IDM), one of Lebanon’s largest Internet Service Providers, advertises their Internet service as broadband.
The definition of broadband is foggy. The International Telecommunication Union (ITU) defines broadband as a transmission capacity that is 1.5 to 2 megabits per second (Mbps). In the United States, the Federal Communication Commission is currently seeking public comment on what should constitute broadband, with the goal being to help consumers. The current minimum bandwidth to qualify as broadband in the US is 0.75 Mbps. The Organization for Economic Co-operation and Development defines broadband as 0.25 Mbps in at least one direction. This rate is the most common baseline that is marketed as “broadband” around the world.
Salam Yamout, co-founding member of the Lebanese Broadband Stakeholders Group, a local lobby group that pushes for broadband in Lebanon, defines broadband as 100 Mbps “at the access point for businesses and people who require it.”
The Internet speeds available to the Lebanese public today vary from 0.125 Mbps to 2.3 Mbps. Lebanon’s Internet download speed averages 0.59 Mbps, according to Ookla Net Metrics, an Internet diagnostic company. Ookla says the world average is about 10 times that, at 5.5 Mbps.
It’s astonishing to think that these speeds represent major progress since Digital Subscriber Line (DSL) technology became available in the summer of 2007.
“The introduction of DSL was a very good step although it was long, long, long overdue,” said Leila Serhan, country director at Microsoft Lebanon. “It is still a very shy step and [the slow speed] is definitely hindering the introduction of a lot of the services you can get on the Internet.”
That hindrance has led to a low penetration rate for Internet service, resulting in a vast untapped market for broadband Internet. With ADSL penetration, a precursor to broadband Internet, at less than 10 percent of the population and consumers willing to adopt new technologies, there is ample room for the market to grow, yet it has not.
“There is no network and there is no infrastructure,” said a multinational telecommunications executive who asked to remain anonymous in order to speak freely.
The lack of decent Internet has also hindered Lebanon’s business world. Khalil Letayf, deputy general manager of Société Générale de Banque au Liban and a member of the Lebanese Broadband Stakeholders Group, explained that because of the lack of broadband, his bank has to incur extra costs to make physical backups instead of transferring data over the Internet, due to of the lack of reliable infrastructure. He said that, as a result of operating in such an environment, the risk factors associated with all the banks have increased.
Why so slow?
Lebanon’s Internet market does not run on a network made for data, but rather one made for voice. The current network was built by Siemens, Ericsson and Nokia in the early 1990s with $1.3 billion of funding from the World Bank. There has been no comprehensive plan for improving the infrastructure since then.
“What Lebanon has done since 1994 is build [its telecom infrastructure] in blocks,” said the ITU’s Bahsoun. Bahsoun explains that in the 1990s telecom operations like Internet and mobile were separate, and “back then they didn’t know that all these [Internet and communications technology] services, were going to converge.”
Since then, there has been little restructuring and Lebanon’s telecom ministry today is a fragmented body with two general directorates, a separate office that deals with mobile communications and miles of red tape holding it all together.
Meanwhile, regional telecoms have stayed on the cutting edge of Internet technology and service. Telecom services have been combined and broadband with hassle-free, high-speed upload and download is a reality across the region — but not in Lebanon. Transfering data is a costly and cumbersome process that involves the converting the data into a format suitable for transmission over Lebanon’s archaic network. The result for consumers is low quality and speed in tandem with high costs. The economy surely suffers, as broadband penetration has become a key economic indicator. The World Bank estimates that every 10 percent increase in broadband penetration accelerates economic growth by 1.3 percent.
Where’s the problem?
Because the government only allows Internet service providers (ISPs) a miniscule amount of bandwidth — the measure of available data communication resources — there is no variety in the market. The packages offered by the county’s ISPs are identical in terms of speed, meaning all the options available are relatively similar. What makes matters worse is that the ISPs impose download ceilings or charge for additional downloads above a certain level. This has resulted in a situation where the typical Internet user in Lebanon pays eight times more than a typical user in similar countries like Jordan and Egypt.
Unlike the rest of the telecom sector in Lebanon, which is owned by the government, the retail Internet market does operate under conditions of limited competition. That fact has spurred the growth of several ISPs and Data Service Providers (DSPs). Both are licensed by the Telecom Regulatory Authority (TRA), Lebanon’s telecom regulator — the only difference being that DSPs are assigned a certain frequency they can use to provide services. At present, there are around 20 ISPs and 6 DSPs and many are owned by the same people who typically have connections to politicians. One example is the CableOne DSP, which also owns the Lynx ISP, and is partly owned by Karim Hamade, the son of Lebanon’s previous telecom minister Marwan Hamade. One of the largest DSPs, Sodetel, is half owned by the Ministry of Telecommunications itself and Solidere, the large real estate developer which was founded by the late Prime Minister Rafiq Hariri. The Hariri family also hold a major stake in the Cyberia ISP.
No matter how many connections exist or how much competition there is, without adequate infrastructure and capacity the market cannot grow. The problem is rooted in the amount of available bandwidth in the country and who controls it. Officially, the total amount of bandwidth in the country last january did not exceed 260 Mbps, according to the Telecom Regulatory Authority (TRA), but most observers put the figure today at around one Gbps. This, however, does not take into account the illegal market which controls “40 to 60 percent of the market,” according to Torbey. The Ministry of Telecommunications distributes all the bandwidth in the country and does not release detailed information, even to the TRA.
How to make it better?
In order to legally increase the level of bandwidth however, sizeable investments have to be made to create a “national backbone” in Lebanon. The national backbone will be like an information superhighway that connects the major cities of Lebanon.
“Instead of a superhighway, what you have are small, small roads,” said Kamal Shehadi, chairman of the TRA. “The connectivity between these places is not what it should be.”
Bassil has announced several projects in order to upgrade the current infrastructure, including an upgrade of the existing system like the backbone project.
One development expected to take place is a pilot project in the Hamra and Ashrafieh districts of Beirut that will, in theory, lay down fiber cables. The $14 million project aims to supply better connectivity to residents as well as provide a reference for a previously announced project to build a national backbone that the ministry estimates will cost around $64 million. But even the pilot project has yet to commence and the budget has not been approved by the Council of Ministers.
“They need decisions and they have not got all the decisions,” said the ITU’s Bahsoun.
The decisions in question must be made by the telecom ministry. The telecom ministry today consists of two general directorates, the Directorate of Operations and Maintenance and the Directorate of Construction and Equipment. Moreover, the Directorate of Operations and Maintenance, headed by Abdulmenaim Youssef, also controls the government-owned company that runs the current Internet infrastructure holder, Ogero.
A mess of a ministry
“It is one of the most embarrassing aspects [of Lebanese telecoms] that the person implementing and supervising [the implementation] is the same person,” said Safa, the telecom minister’s advisor.
Youssef did not respond to repeated requests for comment. He was appointed to both posts by Lebanon’s former telecom minister Marwan Hamade in 2005. Beyond being a gross contravention of efficient corporate governance, the position that Youssef maintains has made it almost impossible to ascertain who is in charge of what at the ministry. When Executive called Naji Andraous, the director general of construction and maintenance, to acquire information about the status of the pilot project’s progress, Andaous’ office said that Youssef was in charge.
Kamal Shehadi is the head of Lebanon's telecomminications regulator
“Abdulmenaim Youssef is reluctant to progress in Lebanon [sic],” claimed Bahsoun.
Youssef held the position of general director of the Directorate of Operations and Maintenance from 1995 to 1999, when he was imprisoned and later released in an extremely politicized struggle for control over the telecom industry. He is widely seen as the representative of current caretaker Prime Minister Fouad Siniora and his political coalition’s interests.
“[Youssef’s] appointments were made at the behest of the previous governments and Prime Minister [Siniora],” says Safa.
It is worth noting that Safa is an advisor to telecom minister Bassil, who is part of the opposition to Siniora’s ruling March 14 coalition. The minister has become the focal point of Lebanon’s most recent political debacle between Michel Aoun, Bassil’s father in-law, and Saad Hariri, the prime minister-designate. Aoun is insisting that Bassil maintain his position at the helm of the telecom ministry.
But the fight over control of the sector seems to run much deeper than the ordinary squabbling between Lebanon’s politicians. Lebanon’s telecom law, Law 431, outlines the legal procedures that should be followed in order to reform the sector. The trouble is that the law has been implemented in pieces, and as such, its interpretation has been a contested topic between the TRA, the telecom ministry and all the political and commercial interests pegged to both bodies.
“If you implement [the law] in parts, especially when politics are involved, you take the parts that you like and the spirit of the law is lost,” said Safa.
The law calls for the creation of a joint stock company called Liban Telecom that will be granted a license to operate for 20 years and provide all other telephony services to the public. Liban Telecom will also acquire the assets of the current operator, Ogero, which includes the current Internet and phone network and any upgrades made to it.
The latest point of contention between the ministry and the TRA is how to increase the bandwidth in the country. Having already announced the expansion projects, the ministry’s current direction is to start by increasing the bandwidth themselves. Critics say the process is hampered by the inner workings of the ministry, especially Youssef’s offices.
Evasive and unaccountable
“The minister asked in a letter about how the E1s are being distributed and the Abdulmenaim Youssef says ‘don’t respond,’” said Bahsoun. (An E1 is a measure of bandwidth equal to 2 Mbps). “When the minister calls [to follow up], he says ‘I don’t know, the letter went missing.’”
Even the Telecom Regulatory Authority’s annual report criticizes the telecom ministry because it will “only release limited information” about the current DSL market, “and as a result, it has been difficult to analyze the root causes of this slow development.” The report goes on to state that “it can be concluded that while some of the problems stem from anti-competitive behavior, others relate to the lack of appropriate investments.”
Factor in the political rivalries in Lebanon and the prospect of broadband becomes even less probable.
“If your objective is to make the minister fail then, you move like a tortoise and tell people that the minister does not act,” said Safa. [As stated above, calls to Youssef’s office to respond to these, and other statements, were not returned].
The other option on the table would be to allow the private sector to install, operate and provision broadband services. However, this too has become a point of contention between Lebanon’s ministry and its regulator.
The TRA wants to offer three “National Broadband Carrier Licenses” to the private sector which would allow them to install the fiber optic cables needed to facilitate broadband Internet and sell the services to end users. One of these licenses would legally have to go to Liban Telecom and other two would be offered in an open international auction. The proposal has been opposed by the minister who has issued his own policy paper stating that he would offer the already existing DSPs (data service providers) one of the two remaining licenses.
TRA vs the telecom minister
The ministry’s position has in part been facilitated by the fact that the law has not been fully implemented and Liban Telecom, the body that the TRA is mandated to regulate, does not exist.
Bassil was telecom minisiter until late 2009
“The [ministry’s policy paper] has a schizophrenic nature,” said Shehadi. “On the one hand it said the TRA is not respecting the law and it is being autonomous. On the other hand it said clearly ‘I want to change the law to make the TRA depend on and report to the minister.’”
Law 431 does say the minister is granted the authority to “establish the general rules for the regulation of telecommunications services in Lebanon” but it also says the TRA has the authority to “organize the bidding process, and issue, execute, oversee, amend, enforce, suspend and revoke licenses.” The minister’s policy paper also criticizes the TRA for not issuing licenses.
“That is bull,” said Shehadi angrily. “The TRA prepared the tender for the mobile licenses and this process was suspended by political decision, not by the TRA. The TRA has [also] issued licenses to about 6 DSPs and about 20 ISPs.”
Shehadi also criticized the minister for not forwarding the TRA’s draft licensing regulation to the Shura council, Lebanon’s highest court, in order to begin the bidding process. Safa defended the minister’s right to amend the legislation if he sees fit.
As far as the DSPs are concerned, they are happy to go along with the minister’s policy because it serves their purposes by protecting them from large international players.
Shehadi, on the other hand, says this policy and the position of the DSPs are putting Lebanon’s economic future at risk by erecting barriers to trade and going against the government’s stated liberalization policy.
“The four wireless service providers who claim, pretend or call for protection from foreign investors are jeopardizing Lebanon’s accession to the World Trade Organization, and Lebanon’s trade commitments to the European Union and to all of our trading partners, for very specific, vary narrow private interests,” Shehadi said, adding that any international player in his right mind “will ally with one of the incumbents,” so they should not fear international entrants.
“We are not trying to recreate a new monopoly or oligopoly,” protests the LTA’s Torbey. “We do believe in competition and free markets. He said that the TRA “cannot start with a clean slate as if nothing has happened in the past,” referring to their presence in the market and the preferential treatment they seek to gain.
Law 431, however, does state that “no discrimination or restrictions shall be imposed on providing the services, as no such restrictions shall be imposed on owning or operating the necessary infrastructure to provide these services.”
But it seems politics have once again stunted the implementation of the law. “In principle the TRA is right, but the minister is the political representative and implements the politics of the government,” said Safa.
Liban Telecom and sectarian politics
When it comes to political appointments in Lebanon, horse trading is commonplace and as such the country’s politicians have yet to come to a consensus over the chairman and board of directors of Liban Telecom. Each delay makes the situation in the telecom industry worse and facilitates the wrangling for power over the sector. So why hasn’t Lebanon Telecom been established?
If it is ever created, Liban Telecom will be regulated by the TRA, thus releasing the control the ministry currently wields over the network as well as dissolving the current operator of the network, Ogero. This will mean that Youssef and the interests that he represents will also have less control over the sector.
Law 431 also states that the government “may, within a period of two years of the establishment of the company [Liban Telecom], sell a portion not exceeding 40 percent” to a strategic partner. That strategic partner could be anyone from the operators who are present on the market, such as Zain and Orascom, or those allied with political parties in Lebanon that have a stake in the telecom industry.
Whether or not there is a setup in the works may be one thing, but the creation of Liban Telecom also seems to hinge upon another of Lebanon’s more unpleasant sectarian realities.
“The [future] board of Liban Telecom will need to split according to the confessions of the members and a lot of power has been given to the chairman. The chairman will have to be decided on the basis of confession,” said Safa.
Here again there seems to be some horse trading at play because to appoint a member of one confession to a major post means there has to be a balance somewhere else. Sometimes that balance is not maintained and institutions function (or malfunction) without the presence of supervisors, or the intended accountability structures. The Lebanese government to date has failed to even appoint all of its mayors — the very officials who are responsible for providing basic services to the country’s population — let alone appointing the board of a nonexistent entity like Liban Telecom.
“You are in a country where there are sectarian issues,” said the ITU’s Bahsoun. “You have ministers who don’t know why they are ministers; it’s a system.”
Supposing Lebanon’s bickering politicians do eventually work out their differences over the telecom ministry, Liban Telecom, privatization, the national licenses, international commercial interests and the implementation of Law 431, serious work will have to be done to implement a national backbone. This would seem to be a tall order for Lebanon’s politicians who still cannot agree over the formation of a cabinet, let alone implement a progressive economic policy. One can’t forget that the same politicians who are hampering the advancement of an essential economic development tool were also elected last June by the people who still pay exorbitant fees for archaic Internet access.
But, as the ITU’s Bahsoun said: “If the people are happy, what can you do?”
First published in Executive Magazine’s September 2009 issue
Sami Halabi 