Coughin it up

Smoking law lebanon
An all too familiar sight (Photo: The Daily Star)

Every year Lebanon loses the population of a small village, about 3,500 people, not to emigration but to needless death from smoking-related diseases.

For all the furor around Lebanon’s current smoking ban, little is said about the simple policy instrument that has proven the most effective in reducing tobacco consumption and raising government revenue around the world: higher tobacco taxes. When you ask a Lebanese politician why our state does not apply this instrument and each year fails to raise excise taxes on tobacco, the immutable answer is smuggling. At first it seems a logical retort, and there is an historical precedence to back it up. 

Lebanon once increased tobacco taxes as a proportion to pack price from the current 51 percent to 113 percent in 1999. Back then, the revenues of the Regie Libanaise du Tabac et Tombacs (Regie), Lebanon’s tobacco monopoly under the Ministry of Finance, fell by around half. The tax increase was rescinded when an “unstoppable” increase in smuggling jeopardized the Regie’s ability to pay subsidies to farmers who held onto land that was on the frontline of the war with Israel.

The “patriotic” argument for tobacco subsidies appears slim if one notes a recent Gallup survey whereby 88 percent of Lebanese would support dropping these subsidies in favor of a more equitable social safety net. More importantly, it is questionable if the Regie, which maintains a barter agreement with “Big Tobacco”, actually saw revenue drop because of smuggling when taxes rose.    

What likely happened was that Big Tobacco intentionally lowered imports in response to the hike in tobacco taxes. Subsequently, the Regie, being close to tobacco firms, blamed smuggling as the sole cause of its troubles and succeeded in lobbying the government to overturn the tax rise. What’s more, Big Tobacco has a long and documented history of battling tobacco taxes in Lebanon as well as encouraging illicit trade. 

It is telling that tobacco taxes have not risen since 1999 despite all the evidence that it would benefit everyone but those with vested interests. According to a recent study from the American University of Beirut, raising the average price of a packet of imported cigarettes from LL2,500 ($1.67) to LL8,250 ($5.47) would bring down consumption by 22 percent, even if smuggling increased by 200 percent. Indeed, the government as a whole would have gained 55 percent more revenue — $188 million for 2012 sales — from tobacco excise taxes by raising average prices to just LL4,750 ($3.21). This drop in consumption would result in 770 fewer Lebanese citizens dying from smoking-related diseases per year. 

Given that cancer treatment makes up anywhere from 60 to 80 percent of the Ministry of Health’s annual spending, the effect it would have on its ability to address other public health issues cannot be understated. 

The notion that nothing can be done about smuggling should also be stubbed out. Part of the tobacco tax revenue stream could easily be allocated to combat smuggling through better information and identification systems of tobacco products — unique barcodes, invisible ink, radio frequency identification and high-tech tax stamps.

In fact, smuggling has much more to do with corruption — whether it be petty bribes at borders or political involvement in illicit trade — than with prices. Egypt and Morocco are countries that faced similar problems of smuggling and corruption and also have tobacco monopolies. They increased taxation on tobacco with good success, witnessing substantial falls in consumption, rises in government revenue and positive public health outcomes.

In addition to the number of lives saved and money to be made, there is an added urgency to introduce higher tobacco taxes because the relevance of the indoor smoking ban introduced last year is waning. According to the Tobacco Free Initiative, a civil society organization, less than 50 percent of bars and restaurants were applying the smoking ban last month, down from 90 percent at the end of last year. Consumption is also on the rise, as state revenue from tobacco excise taxes in 2012 increased by a whopping 26 percent year-on-year from higher imports. 

But, just like a cancer, Big Tobacco’s unfaithful arguments against tobacco smuggling still permeate the Lebanese body politic. Unless we start to treat it now, that cancer will eventually kill any policy reform, and many more Lebanese.

First published in Executive’s June 2013 print edition


How Lebanon’s Politicians Plan to Foil the Oil

Flames rise from a petrol tanker after it was set on fire by protesters in the northern Lebanese city of Tripoli on 14 March 2013, to halt it from reaching Syria. (Photo: AFP - STR)
Flames rise from a petrol tanker after it was set on fire by protesters in the northern Lebanese city of Tripoli on 14 March 2013, to halt it from reaching Syria. (Photo: AFP)

The consequences of Lebanon becoming an oil or gas producing state have probably not registered among much of the public – consumed as they are by a lack of economic progress, the absence of basic public services, and crippling inflation that continues to decimate wages. Given successive governments’ track records in tackling these issues, people should be a lot more worried about these initial phases, which are already looking like a piece of Lebanese policy plunder.

Put aside the fact that Israel and Cyprus are far ahead of Lebanon in terms of exploring the very same waters that hold untold riches; forget that what has already been found could ignite another conflict with Israel. Instead, consider for a moment that a government that cannot keep good on its promises to its own public servants to pay them will have to manage up to a third of the economy’s size washing ashore. Yet, the government barrels forward nonetheless.

Now try to imagine how that will be managed by existing government structures.

At present, any oil or gas money coming into the government will, after some expected skimping off the top, go into the treasury. At that point it will first be used to pay off the interest on the public debt, which has basically become a cover for paying off the country’s banks that hold over two-thirds of it.

In turn, those banks will increasingly fund the real estate sector that brings quick and easy profits, and is now subsidized by the central bank to boot. This will continue to push up housing prices, which raises the price of everything else. With affordable housing unavailable, people are forced further away from where they work, forcing them to spend longer in traffic gridlock to get to jobs that pay them a pittance.

With whatever money left, the government will (hopefully) pay its public servants, then siphon off whatever is agreed upon to the different politically-managed funds and institutions such as the Council for Development and Reconstruction (Hariri and co), the Council for the South (Berri and co), and the Council for the Displaced (Jumblatt and co).

Assuming there’s more to go around, all the ministers who have been squawking for higher budgets can then be paid off and people can wait – as they have for decades – for the effects to trickle down.

And this is by no means a hypothetical scenario; rather, it is one that is already playing itself out.

In late February, the energy ministry launched the pre-qualification round for offshore oil and gas tenders – the first tangible action that starts the process of exploration of the coast.

In order to bid for any of the offshore areas where countless riches may linger, a consortium of companies must be set up encompassing at least three firms. While this has become rather standard practice from Brazil to the Persian Gulf, most countries ensure (or at least try to ensure) that a part of the consortium is of national origin. The fact that this has not occurred in Lebanon is likely the first step on a very slippery slope where foreign firms take advantage of Lebanon’s position as an untapped investment opportunity, rather than the other way around.

What most countries do when they start oil and gas operations is set up a national oil company (NOC) that, at the very minimum, can participate in negotiations or be part of bidding consortium. An NOC, even one that did not participate in the first bid round, would greatly increase the nation’s capacity to conduct and monitor operations in the field. The latter is important because large oil companies try to recoup their investments by extracting resources quickly, something that can damage oil and gas fields permanently.

An NOC not only benefits the country in the exploration and production, but also in the much needed areas such as refining the gasoline for cars or purifying gas for power plants, both of which weigh heavily on public and private budgets.

What’s more, the idea of an NOC has been touted by the minister’s own advisors on several occasions. Developing that company now, a few years before the oil tap starts running, would inspire some much needed confidence, because it could take over from the traditional government institutions that have proved so useless at managing sectors in the past.

However, those in a hurry to produce results and deal with consequences later do not always listen to good advice.

By default, some onshore jobs will be created as a result of any operation off the coast. But because there is no legal requirement to hire Lebanese companies, even for ancillary requirements, large international oil companies will likely argue that the Lebanese market is too underdeveloped to serve the sector. Instead, they will probably opt to use their economies of scale and massive global supply chain contracts for these services.

This not only means potential jobs are squandered. As money goes to foreign providers, our balance of payments – the difference between what money comes in and out of the country and the only major economic indicator that remains in the black because of remittances – becomes progressively worse as the sector grows. That means the country’s wealth is exported instead of being reinvested to grow the economy and create jobs.

As there is no national component to the consortiums, it will also make negotiations over what is cost oil (what companies can take to recover their costs) and what is profit oil (what they can then split with the government) even harder to negotiate, especially given whom they negotiate with.

When international oil companies come to the table they will talk to the Petroleum Authority (PA), the so-called independent regulatory body that was appointed last December to manage a notoriously difficult negotiation and monitor oil and gas contracts and procedures. The process of appointment took months because different politicians kept tossing out names of their patrons without realizing that there was actually a professional profile to be filled with some specifications.

What emerged was a six-person body with a member that was the minister’s advisor, another who used to advise former prime minister Saad Hariri and the current premier, and a third who had worked for the finance minister’s foundation. In any case, the energy minister signs off on contracts, not the PA.

And, when the negotiations are finally over and its time to pay the licensing fees to start drilling offshore, the action will likely be technically illegal.

When the maritime petroleum law was being put together, Lebanon’s politicians disagreed on who would manage the funds to be held in a Sovereign Wealth Fund (SWF). Seeing that Israel had found a massive gas deposit off the coast of Haifa, the Lebanese parliament decided to kick the gas canister down the road and add a clause that stipulates the SWF will have its own law. The idea of such a fund came from the Norwegian government that helped Lebanon draft the law.

In theory, and in Norway, such a fund would have built-in mechanisms to prevent money being used in a way that causes a resource curse, a phenomenon where an increase of natural resources can lead to lower economic growth, internal conflict, and increasing corruption – as if we needed more of those.

If you’re wondering how and why a government that cannot make progress on any major policy has been so keen to see the oil and gas issue through, remember that until today, the SWF does not exist. It took decades to pass the current offshore oil and gas law, years to put in place a PA, and a new election is (or should be) around the corner.

Bearing that in mind, it does not seem likely that an SWF will emerge in less than one year when licensing fees for exploration contracts are due to come into government coffers. Instead, that punctured chest of a national treasury, with all its political funnels attached, will have to do.

First published in Al Akhbar English on March 22, 2013

A dissenting voice

Stimulating Lebanon

The Central Bank plans to spend $1.46 billion in hopes of jumpstarting the sputtering economy. In the first of our monthly roundtable discussions tackling lebanon’s top issues, We asked six experts whether it’ll work

A fter a year of internal security troubles, a poor tourism season and the closure of scores of restaurants and other businesses, Lebanon bid farewell to 2012 with a deficit in the balance of payments in excess of LL2 trillion and welcomed the new year amid fears that companies will once again be hindered by political and security challenges as the crisis in Syria looms large over the economy.

In order to stimulate the stagnant economy, the Central Bank put together a financial plan that is expected to inject LL2.2 trillion ($1.46 billion) in loans to commercial banks at an ultra-low interest rate of 1%. Banks will then be responsible for lending the cash to businesses and consumers at a maximum rate of somewhere between 5% and 6%.

The Central Bank hopes the stimulus plan, which earlier reports estimated at LL2 trillion, will help reinvigorate various productive sectors of the economy, the housing market, projects subsidized by Kafalat, renewable energy projects, and research and development ventures.

In its inaugural Roundtable feature, BOLD assembled a panel of economists, businesspeople and other experts to offer their views on the potential effect of the stimulus package on the struggling Lebanese economy.

The Roundtable will be a monthly feature that puts a question on an issue affecting Lebanon before leading thinkers from a variety of backgrounds.

Question For Our Panel: Can the Central Bank bring the economy back to life?

Jad Ab Haidar
Financial Analyst
Credit Libanais

We are confident that the Central Bank’s initiative to inject cash into the Lebanese economy in the form of subsidized loans will provide a boost for the real estate and productive sectors and ultimately spur economic growth. Moreover, we believe that any imminent solution for the Syrian crisis will magnify the impact of the Central Bank’s initiative.

Walid G. Touma
Baraka Holding

It’s a beautiful step by the Central Bank that is always the first to help out the private sector. I’m definitely positive since the Central Bank is motivating the injection of capital in real estate and in the economy. The loans should be encouraged and extra loans should be made available since banks become more confident in giving out loans and consumers are encouraged to take loans with manageable rates.

Georges Corm
Economist, historian and
former finance minister

I don’t have any criticisms for the Central Bank’s measures in theory, since the measures are economically sound and follow in the footsteps of the US Central Bank pumping liquidity into financial institutions. However, there might be business sectors other than construction – as well as some regions within Lebanon – that need public financial support.

Sami Halabi
Journalist and consultant

The Lebanese don’t need more inflationary policies; they need jobs that pay living wages that are not eaten up by inflation. The fact that almost half of the package will reportedly go to housing does not bode well for this prospect given its already over-bloated nature, inflationary effects, and the fact that it creates few local jobs. If money goes to sectors that will have a substantial multiplier effect on productive economic growth that actually creates job opportunities for Lebanese citizens, as opposed to maintaining capital in the upper echelons of society in anticipation of a trickle down effect, then it will have a positive impact.

Adnan El Hajj
Economist and
Assafir columnist

It’s a good step from the Central Bank in economic stagnation to prevent recession. This step will need 12 to 14 months to be used and it would cause a 2-3% growth. Since some sectors like trade and investments are likely to have little growth, these loans might stimulate business activity that would help cover the growth deficit.

Assem Safieddine
AUB’s Corporate Governance Program

The subsidized housing and private sector loans previously supported by the Central Bank proved to be an economy booster in the past. The move from BDL has similar objectives in perspective. On top of boosting the economy through reviving the real estate sector and private sector investments, it is expected to create competition among banks and support the sector at times when its profits are hampered by regional turbulences.

First Published by Bold Magazine in the February 2013 print edition

A realistic goal for progress

Lebanon's parliament needs to break out of the vicious sectarian it finds itself in
Lebanon’s parliament needs to break out of the vicious sectarian circle it finds itself in

In 2005 an exiled former general of the Lebanese Army stepped off a plane in Beirut to meet the throngs of supporters coming to welcome him after 15 years abroad. Once amid his loyal followers on the tarmac and with the obligatory kisses complete, the general made his way to a podium where he spoke his first words to the cacophony of enthusiasts and press gathered before him; he told them to “shut up”.

You can say what you want about Michel Aoun and his party, but you can’t deny that the general speaks his mind. But when last month the Free Patriotic Movement (FPM) decided to run an electoral ad supporting the Orthodox Gathering Law (OGL) many of his previous supporters were taken aback, given that for decades the FPM has prided itself on being a ‘secular’ party, even if Aoun himself based his credibility on the ‘majority’ of the Christian vote.

For those unfamiliar with the proposal, the OGL basically mandates that each member of each sect votes for the seats in Parliament allocated to their religious confession on a proportional basis. All the major Christian parties in Lebanon, who are just as sectarian as the FPM, if not more so, have agreed to the law. Yet the FPM’s ad stands out. It parades several Lebanese Christians who state their names, their confessions and voicing their support for the OGL because it “represents” them and their interests while previous laws did not. In essence, what the FPM and other Christian parties are now saying to their supporters, and the Lebanese at large, is the most honest electoral appeal to date. They have done away with the façade of ‘Change and Reform’ and other empty policy-based promises. Instead, they are telling the Lebanese that they are nothing more than a collection of sects who have no common interests beyond their narrow sectarian identities, who must acknowledge this as their fate and vote accordingly.

It should, however, be abhorrent to anyone who believes in democracy to elect their representatives purely on the basis of sect, and hopefully this proposal will expose how sectarian our political parties really are and lead more people into the secular camp. However, we also have to be honest about the nature of the country and not expect everyone to become anti-sectarian overnight. A balance must be found between appeasement of the established status quo and progress toward a better electoral system.

Realistically, it is too late this year, and there is not enough political investment in true electoral reform for proportional representation and a single district for all of Lebanon to be implemented in full before the election — not to mention the laundry list of other reforms such as pre-printed ballots to prevent vote buying. And yet, many countries with complex circumstances such as ours have found new and inventive ways to run elections for seats in their parliament, and there is no reason Lebanon should be any different.

Ultimately, the aim of electoral reform is to provide a more representative government. But the old party leaders will not accept election reforms unless they are assured their power bases will be maintained. Thus, the dilemma is how to appease these sectarian parties and those who support them, while both holding the elections on time and implementing electoral reforms. The answer might just be the use of mixed-member proportional representation with countrywide proportional representation for a half of the parliament — ideally on a non-sectarian basis — while allowing sectarian parties to squabble over a way to elect the other half; this is probably the most progressives can realistically hope for at this juncture. Similar voting systems have been used in Germany, New Zealand and the United Kingdom, albeit in different forms adapted to the circumstances of each nation.

This would allow small constituencies and sectarian interests to elect their own people — which is all they care about anyway — while also opening the door to proportional representation in Lebanon as a single constituency, as well as push for other electoral reforms. Even if such a system were implemented on a sectarian basis it would incentivize issue-based politics, given that candidates would have to appeal to voters across the country, rather than being able to concentrate their vote-buying and patronage networks on a particular fiefdom. In the longer term, this might even nudge members of the electorate to consider casting their ballot for leaders that represent their issues, rather than those that don’t but happen to be from the same sect.

First published in Executive’s February 2013 print edition

Book Review: The Lebanese Connection


By the third page of Jonathan Marshall’s new book, “The Lebanese Connection: Corruption, Civil War and the International Drug Traffic”, anyone who knows Lebanon can see why the book has raised so many eyebrows. In one stroke of the pen, Marshall accuses modern Lebanon’s founding fathers Bechara el-Khoury and Riad el-Solh of profiting from the drug trade as they were putting together the pieces that is Lebanon today. By 1990, the glue that held those pieces together, and almost tore them apart, was hashish and heroin.

The Lebanese Connection is Marshall’s third book about drug trafficking, covering the history of the Lebanese drug industry, its supporters (both internal and external) and the extent to which it constituted a major linchpin in the global narcotics trade from independence until the end of the civil war. In doing so, Marshall runs the gauntlet of implicating major Lebanese families, politicians, political parties, banks, airlines, external actors and intelligence agencies, by name, for dealing in, or at least being affiliated with, the drug trade during that time.

Any Lebanese citizen reading the book will likely feel a sense of unease and suspicion of any author who points a finger squarely at many of the figures and families that form the crux of today’s body politic, even if it is across sectarian and communal affiliations. Merely listing names of all the actors identified by Marshall would not do his research justice, not to mention the fact that a Beirut-based publication would not last very long after printing them.

Marshall’s research is extensive; a fifth of the book’s girth is dedicated to notes and appendices. But, by the author’s own admission, the work is nevertheless skewed. It relies heavily on documents he obtained over many years from United States drug enforcement agencies and personal interviews with their agents. He also draws heavily on English-language publications without attributing much bias to publications based out of the US that are known to have a pro-Western slant.

Marshall offers this book as a mere addition to the discourse about what allowed the Lebanese conflict to rage for so long. And even if half of what Marshall says is true, he has proven that the length and devastation of the protracted conflict would not have been possible without the political, financial and international support for Lebanon’s drug industry.

Yet the principal strength of this work is not that it is well researched or identifies people by their names, but that it is written in a manner which allows readers to appreciate the history, relevance and consequences of how drugs fueled the civil war. Instead of the accusatory tone that most are used to in their national publications, Marshall calmly and matter-of-factly shows how, not just today, but historically the Lebanese authorities have shirked their responsibilities.

Hashish and poppy farmers never got nipped in the bud because the authorities either colluded with them, did not have the political ability to do so or could not offer them economic alternatives. Marshall details how financial institutions turned a blind eye to the billions of dollars in drug money entering their vaults in the 1960s and 1970s and the apparatus that supported the smuggling efforts from transit routes to “illegal” ports during the 1975-1990 war, as trade value shifted from hashish to the more valuable opium-based products that were either sourced and processed in Lebanon or shipped through.

When accusations are exaggerated he points out that they are likely not true. This is the case when he deals with Israeli accusations against the Palestine Liberation Organization, Hezbollah or the Syrians, not that he exonerates them either. The bulk of the trafficking, however, is attributed to the Christian militias that controlled the ports along the coast, but he does not fail to mention the political protection the Muslim farmers of the valley received in the first place and the minorities that facilitated the international network of smugglers and mafiosos needed to market the drugs to the West.

By the end, Lebanese will have an awkward feeling that they are still ruled by figures that ravaged the country for years and paid for it by smuggling drugs. The fact that ordinary Lebanese have been imprisoned for years, without trial, for possession or dealing in drugs, not to mention acts that pale in comparison to those committed by today’s political class is but further evidence of how the trade has warped the nations sense of justice and accountability.

A version of this article was published in Executive’s February 2013 print edition

Rushing through history


Since the civil war, many revisionist historians have debunked popular theories of Lebanon as the historical bedrock of ‘Phoenicianism’ or a haven for persecuted minorities. The works of these authors challenge the rhetoric of those attempting to abuse history for political ends, and act as a rational voice amid the cacophony that is our political and socioeconomic narrative. “Lebanon: A History 600-2011,” written by the Levantine historian William Harris, however, is no such work.

Instead, the author attempts to portray himself as an outside observer chronicling the history of how our deeply torn nation, devoid of any real reform, still exists today. This outsider status does have its uses in assessing how the fragmented pieces that make up Lebanon have not yet crumbled, in that Harris lacks the sectarian proclivity that many modern Lebanese historians naturally possess.

The book proceeds in chronological order through two parts: 600 to 1840 and 1840 to 2011. The accounts of what occurred in the area we call Lebanon today are exhaustively researched and sourced from, rather uniquely, a multitude of languages. Harris’ historical assessment up to 1840 goes to great lengths to detach itself from judgement and purely states the facts. At times he doubts the work of his colleagues, but never presents an outright challenge to their assessments of why certain events occurred.

When considering the Druze accession in the ninth century he doubts the work of the late Kamal Salibi but never offers an alternative reading. Harris only sticks his neck out when considering the role of Fakhr al-Din Maan, who he discounts as the historical founder of Lebanon but rather someone who got the ball rolling.

In this, Harris employs large, and at times exhausting, volumes of the historical records to prove his argument. Indeed, up until the end of the first section of the book it reads like machinegun fire of historical bullet points: one bit of information after another with little analysis or deeper observation to keep readers interested, bar the most academic.

Yet, given that it is a work of history and sources are necessarily sparser the further back one goes, this is perhaps understandable. What is not so forgivable is why this factual barrage continues into the second half, but peppered with Harris’s contentious political pretentions that he worked so hard to conceal in the first half.

To his credit, Harris does a good job of pointing out particular historical elements that still plague our society today. He nicely weaves in socioeconomic facts and figures showing how historical cronyism in business and politics maintains the economic wealth in the upper classes; makes a point to expose the failures of the modern Lebanese state toward women (something most scholars overlook); chronicles the destruction of heritage for commercial interests; picks apart Syrian hegemony; rightfully derides the Amnesty Law for forever marring our sense of justice and accountability; and he is critical of leaders for instilling, rather than opposing, sectarianism. Yet, these positives are few and far between and none are fleshed out in a way that, for instance, changes in Ottoman tax farms are. 

What’s more, Harris manages to recount the Lebanese Civil War with mere allusions to Israel’s role in the destruction, avoiding any outright criticism of this invading army and not even mentioning the 20-odd thousand civilians killed by Israel’s bombardment of West Beirut. He lays a disproportionate amount of blame for the war on the Palestinians and leftists, who come off as a thorn in the side of Western interests and Christian militias that “predictably vented their rage” in the Sabra and Shatila massacre. By the time he gets to the post-war period, Prime Minister Rafiq Hariri is “frustrated” with corruption, the Special Tribunal for Lebanon investigating his assassination signifies “hope for renewed judicial authority in Lebanon” and Hezbollah is to blame for the country’s ills.

In all, despite some merits, what starts out as a well-researched history book one could put on a shelf as a reference tool, later turns into a rather hurried and wanting attempt to boil down all the massive complexities of modern Lebanon to zero-sum politics; in doing so, Harris offers little new to the contemporary understanding of this country or its people.

First published in the January 2013 print edition of Executive


Stimulating the Few

Protecting the rich since inception, the BDL ask them for a  paint job at some point
Protecting the rich since inception, the BDL could at least ask them for a paint job at some point

Hailing from Kfardebian, one of Lebanon’s culinary capitals, Central Bank Governor Riad Salameh likely knows the importance of a good tatbileh, the instinctual addition of a few spices just as a dish is about to be served. But, if reports are true, his latest recipe to spice up the Lebanese economy with a stimulus package risks leaving those with full bellies fatter and most of us a little hungrier.

Salameh announced his stimulus plan in interviews last November and has since offered some, but not all, the details. On the surface, the plan is simple Keynesian economics: stimulate a sector of the economy that creates a knock-on effect on others, thus increasing overall output, known as GDP. This strategy has the added advantage of decreasing unemployment as more businesses seek to expand and hire more staff as a result. The downside of both decreasing unemployment and increasing output is that it also raises inflation, something Lebanon hardly needs at this juncture.

Since the outbreak of the global financial crisis, Keynesian stimulus packages have made a comeback. In the US it staved off another depression by, amongst other things, buttressing the housing market. But in the US, inflation is relatively low and interest rates are zero, which isn’t the case in Lebanon. What’s even more worrying is the sector Salameh appears to have chosen to drive the stimulus forward: the housing sector.

What we know of Salameh’s proposal so far is that he intends to give banks access to cheap credit in order to fund more mortgages early next year. For several reasons, this will mean the financial sector is again prioritized over the general economic good, and widening income inequality will be the pill we Lebanese will have to swallow, again.

To start off, the housing market has been on fire for years, and homes within a commutable distance from economic centers (especially Beirut) are already beyond the reach of many ordinary citizens. Allowing banks to give out cheap credit will only inflate the sector further and thus make worsen the situation by incentivizing developers to build more buildings for wealthy and foreign residents who make up the bulk of current demand.

Unless Salameh is intending to support low-income housing (an unlikely scenario), those customer segments will make up the lion’s share of the new mortgages because – as anyone who has tried to get a loan in Lebanon knows – they already have the collateral. For those who don’t, they can either stake everything they own on a home or simply leave town, a choice that may come soon.

Speaking to Reuters about the stimulus last month, Salameh looks to be in quite a hurry: “You have to operate, not to wait until everything is clear and quiet, because you would lose opportunities and lose time. It’s like asking Japan not to do anything until they don’t have earthquakes.”

This is an incredulous notion.

For years the Central Bank has been claiming that the rapid growth of the home loans portion of bank loan portfolios is not a problem. Now, suddenly, they need support when they have lower profits, because economic activity is down due to the war in Syria?

Of course, the banks are complicit in all this. It’s much easier and less risky to offer a housing loan to someone who has collateral than a loan to, for instance, small businesses that could actually benefit less well-to-do citizens and break up the monopolies of large families. Instead of allowing the banks to continue to achieve such short-term returns on real estate, the Central Bank could actually let the market finally cool off so that prices don’t continue to rise; maybe they could even fall one day.

But let’s not forget that many local banks also have real estate arms and thus maintain a vested interest in the sector that goes beyond portfolio security.

The government appears to be in on the game too. There is a tax proposal for the real estate sector aimed at raising funds to pay off the protesting public sector workers who are demanding a pay raise – otherwise known as purchasing patronage.

Of course, one can argue that more housing consumption drives GDP – and it has: The years of economic growth were driven in large part by the real estate boom. But those who actually benefited from the multiplier effect it created were sector subsidiaries such as cement, cabling, and steel finishing. The Jumblatts, Hariris, other so-called “big families,” and the Maronite Patriarchy already own large stakes in the cement sector – the primary real estate subsidiary – while the banks fund all other subsidiaries. MPs such as Amal’s Yasin Jaber, to name but one, also own real estate firms, and parliament has consistently vetoed budget proposals to regulate or tax the sector.

Whatever employment came from real estate expansion did not help the Lebanese much either. Most jobs in construction and its subsidiaries are filled by relatively cheap Syrian labor, not by Lebanese. So even if the stimulus works and growth occurs, it won’t help the whopping 64 percent of Lebanese that are of working age and either inactive or unemployed, according to official figures.

Those who could not afford the houses being built during the boom had to deal with the inflationary effects, and this time will be no different. While every freshman economics student knows that introducing a stimulus in an inflationary environment only makes prices rise and ordinary consumers worse off, that is exactly what is being proposed. And it’s not as if the Central Bank doesn’t know this. It recently revised its 2012 inflation estimate from 4.5 to 6 percent.

In a country where the richest 20 percent consume six times more than the poorest, according to the UN, more inflation will only entrench dependence on the wealthy spending more and widen inequality. What’s more, while those are the latest figures, they are from 2008, meaning the current situation is much worse.

As usual, there is some patchwork being done. The governor has said the package will support productive sectors, but it’s obvious the housing component is the focus, not least because it was announced as such. Salameh also says the stimulus will spur the Beirut Stock Exchange through new listings by start-up enterprises, small businesses, and oil and gas firms. However, the bourse is not going to all of a sudden come into its own, or benefit us Lebanese at large, when a few small companies list. As for oil and gas, it will need at least seven years to start producing if (and that’s a big if) hydrocarbons are found. Neither means much to ordinary citizens who can’t afford stocks anyway.

Something that would have truly stimulated the bourse would be the listing of Middle East Airlines or the Casino du Liban, both owned by the Central Bank. Those were delayed several times over the last years because it was not the “right environment.” If you are wondering where Salameh’s sense of urgency was then, consider that the bourse is now regulated by the Central Bank under the new capital markets law.

To his credit, Salameh has on several occasions helped Lebanon’s economy remain shielded from fractious politics, international crises, and maintained the value of the currency. Yet for the most part his decisions also favored the interests of the banking system over reduced inflation, reversing the accumulation of debt, and supporting productive sectors.

At a time when people are increasingly worried about Syria, this package could pass without notice and we will only pay for the effects later when housing prices rise further and inflation kicks in. By then, things in Syria may have changed, but the Lebanese economy will be more unequal and people will have a harder time just finding an affordable place to live.

Thus, if the stimulus is implemented as a housing package, it will likely serve the Lebanese with a dish that leaves a bitter taste in our mouths and less money in our pockets.

First published in Al Akhbar English on December 27, 2012

Endangered prospects

Would you trust them with billions of dollars?
Would you trust them with billions of dollars?
The Lebanese proverb probably most apt for doing a good business deal roughly translates as follows: Always give your bread to the baker, even if he eats half of it. That’s because bakers know what they are doing with bread; someone else will probably just burn it. So when the Lebanese cabinet finally formed the Petroleum Administration last month, many feared the bread was toast before it even began to bake.
There is no doubt the appointment of the Petroleum Administration by the cabinet is, in theory, a welcome measure. If our country is to ever reap the rewards of what hydrocarbon riches likely lie below our seabed, the Petroleum Administration will be needed, not only to negotiate with international oil companies (IOCs), but also to provide policy continuity when governments and ministers play musical chairs, as they so often do.
The manner in which the energy minister and affiliates of the parliamentary speaker pushed confirmation of the makeup of the board through cabinet in the waning minutes of a cabinet meeting last month — offering almost no time for the prime minister and other participants to scrutinize the list — is not reassuring. Nor is the fact that, after nearly an 11-month delay in appointing the Petroleum Administration, the names on the final list largely lack the international clout called for in the job descriptions for the different board posts.
Lamentably, this kind of behavior can be expected of politicians who barely bother to read or debate most policy issues that are pushed through the executive or the legislature. In due course, government (both the opposition and the governing majority who voted for the petroleum law) managed to make sure that the fate of the Petroleum Administration will likely follow the course of the other so-called independent regulatory bodies that were intended to provide policy continuity. Take, for instance, the Telecommunications Regulatory Authority (TRA), finally appointed in 2007. It is in contravention of the law that actually created it (in 2002) because it is still financially dependent on the telecommunications ministry, and the tenure of its board (from which two of five members have already resigned) is long up. Today, the TRA is little more than an “advisory body” to the minister by the admission of its own board members.
Perhaps thankfully, that may not be a problem for the Petroleum Administration since it is not even nearly as independent as the TRA. While it enjoys “financial and administrative independence from the minister” the latter also “provides oversight for the body,” according to law. A quick read through the law reveals that the body is beholden to the minister first and the cabinet second to organize the “essentials of its work, its organization, its hierarchy and its salaries.” And it is the minister’s signature that is needed on any exploration and production contracts, not the Petroleum Administration’s or the cabinet’s.
The much-heralded achievement of reaching a consensus on rotating presidency for the board is hardly cause for cheer. While it may mean that no single party can consolidate power over the administration, it also means that each politically affiliated board member (which they all are) may easily come to loggerheads with the minister if their bosses don’t agree.
To boot, there is no historical precedent to show this has worked to the benefit of any nation pursuing such a policy. In an industry such as oil and gas where procedures can span years and exploration and extraction can take decades, an annual rotating presidency will likely mean the opposite of the much needed policy continuity, not to mention the influence IOCs will be able to bring to bear on the disempowered Petroleum Administration members. And given that IOCs will have around six months to prepare their bids once, or if the cabinet passes several implementation decrees, it is almost certain that no bidding round will occur until after the next elections. That means the possibility of a new minister in town, with which the Petroleum Administration might not find itself in such good standing.
Finally, the Petroleum Administration will have no authority over the areas that are in dispute with Israel in the south, nor the sovereign wealth fund that is legally mandated to be set up in one year, when the first bidding round is tipped to launch. Both issues have the potential to derail the entire process and transform any discovery of oil into an unmitigated disaster, both politically and economically.So, before we lick our lips in anticipation of untold wealth being served up to us, we may want to have a good think about who’s baking up the deal, and what’s going to happen to all that bread.

First published in Executive’s 2012-2013 end of year issue

Gassing up against Uncle Sam

Iraq-Iran-Syria pipeline a potential kaleidoscope of geopolitical complexities

Amidst the fog of war in Syria, the clamor of sanctions and the threat of conflict in Iran, some transnational business deals in the region have slipped quietly. That was certainly the case in July 2011 when the Western press largely ignored the announcement by Syria, Iran and Iraq that they were to build a gas pipeline to transport Iranian natural gas from the South Pars Field in the Persian Gulf through Baghdad to Damascus.

At the time the saber rattling over the Iranian nuclear program was in full swing and protests in Syria were turning to armed conflict. Many, as a result, thought that the project would prove to be stillborn. But the announcement on Monday that Iran has already commenced building the first stage of the project — running from Kuhdasht in western Iran to Baghdad — has come as a wake up call to many, even though several of the original objectives of the scheme may never be met.

The project proposes a 110 million-cubic-meter-per-day (mcm/day) pipeline that originates in Kuhdasht and traverses some 1,500 kilometers end-to-end. The pipeline is tipped to cost some $10 billion in total, and the initial agreement sees guaranteed stock purchases of some 25 mcm/day by both Iraq and Syria. The first phase, costing $3 billion, will see a 225-kilometer pipeline come to Iraq (apparently through Baghdad) to supply its power plants. Rates and payment structures of the project have not been made public and the entire project is supposed to be completed by mid-2013.

The likelihood at this stage that the pipeline will ever reach Syria is small. Building a pipeline is a serious construction effort and the route needs to be secured — something the Assad regime will have a hard time doing in the midst of a civil war.

What is more likely is that the gas reaches Iraq and stays there. For starters, Iraq desperately needs the natural gas imports. The country’s estimated natural gas consumption is rapidly increasing and has grown almost a third this year — from 1,084 kilotons of oil equivalent (ktoe) to 1,423 ktoe — and is forecast to rise by a further 18 percent next year, according to the Economist Intelligence Unit. Of that consumption much will go to electricity generation, predominately in gas-powered electricity projects that are currently in development. Already two 1,750-megawatt power plants have been contracted out and are tipped for completion in 2013, and another tender was launched for a 1,500-megawatt project in May.

Thus, Iraq needs gas, and quickly. And as the United States continues to draw down its resources and influence in the country this pipeline project would tie Baghdad ever closer to Tehran. Depending on the type and efficiency of the plants and networks, the pipeline could cover much if not all of Iraq’s projected demand for gas, especially if the pipe never reaches Syria.

There is a litany of possible complications, however, from simply securing the pipeline route through a still volatile Iraq, to the contradicting alliances and animosities between the US, Iraq and Iran. How exactly will it play out with the Americans attempting to enlist allies — among them Iraq — to tighten the sanctions noose on Iran and squeeze its energy export revenues at the same time that Iraq is entering a billion-dollar energy deal with Tehran? Interesting times await indeed.

Baghdad is becoming well practiced at playing multi-faced international diplomacy, however, having thus far maintained both its alliance with Washington and helping to prop up the regime of President Bashar al-Assad in Damascus while Washington backs the opposition seeking Assad’s removal. But the discovery by the Financial Times last month that Iraq has agreed to export 60,000 tones of fuel oil for power generation and industry to Syria suggests Baghdad remains willing to help the Assad government stay afloat.

Whether Iraq will be able to continue playing on so many sides remains to be seen. What is clear, however, is that a pipeline project that was quickly dismissed last year as a public relations stunt could turn into one of the most sensitive and controversial geo-political issues in tomorrow’s Middle East.

First published in Executive’s online edition on November 22, 2012

Smiling through our pain
What was that? How much?

Honesty and transparency needed at the top to build confidence

An economy that can serve the interests of all our people requires confidence. The necessary conditions for that economic confidence are both security and straight talk from those who are entrusted to protect our nation’s growth. That is why it is so damaging that no one called out the president or the prime minister for inflating Lebanon’s economic progress to the public and international community last month.

According to our Prime Minister Najib Mikati’s office, “estimated results” for last year’s economic growth have come to 5 percent and growth in the first quarter of this year increased by “leaps and bounds”. If that makes you think that one of his speechwriters has a substance abuse problem, you are not alone. No one — from the international financial institutions, to local academics, or even the humble journalists who monitor our economy — thinks growth last year exceeded 1.5 percent, not to mention those who believe the economy has been contracting since the third quarter of 2011.

Not to be outdone, at a United Nations conference last month President Michel Sleiman heralded the achievements of the agricultural sector, claiming it now makes up 6.5 percent of the economy while it had previously made up 5 percent. Of course, he neglected to mention that value added in the sector fell in 2010. There are no national accounts for 2011 and certainly not for 2012.

The relatively productive agriculture minister, Hussein Hajj Hassan, who flanked the president at the conference last month also trumpeted his ministry’s development platform for the sector, issued in 2009. A paper was issued in 2009 that contains a laundry list of issues facing the sector, followed by bullet points and badly drawn Microsoft Word Tables stuffed with the keywords governments love to use: “enhance” this, “develop” that, “reduce costs”, “create jobs”. Naturally, the only real targets in the document are those aimed at increasing staff (read: patronage) within the ministry. Since then none of the laws he proposed have passed parliament and the strategy ends next year anyway.

Instead of trumpeting overly rosy figures and touting their outstanding visions, perhaps some more humility would befit a political class that has not managed to have a census in more than 80 years, or even knows what the country’s gross domestic product, employment or inflation rates really are. The statistical, administrative and monitoring frameworks needed to accurately calculate these things are still some way off. In the meantime, there are real indicators that can be monitored in a much easier fashion to appraise the government.
Take, for instance, another half-nation of around five million hard-nosed people with limited government ability to make decisions: Scotland. In a surprisingly successful effort to reform government, the Scots have come up with a system that, on the surface, reads very much like the agriculture ministry’s ‘strategy’. Their ‘National Performance Framework’ starts with a purpose (basically ‘increasing sustainable economic growth’), drills down into five purposes of equally loose language: ‘safer & stronger’, ‘healthier’, ‘smarter’, ‘greener’, ‘wealthier & fairer’. Each category then has indicators (such as improved levels of educational attainment) and measurement criteria (such as gaps in student performance between Scotland and countries from the Organization for Economic Cooperation and Development), with progress reports posted online and updated regularly. The government doesn’t meet all of its targets, in fact they maintain the status quo much of the time, but people believe them when they succeed and listen to them when they explain why they fail. This approach to governance was a contributing factor to ruling Scottish National Party winning an outright majority in 2011 in an electoral system that was designed not to allow that to happen.

Lebanese politicians should take heed: honesty and transparency in governance builds confidence — from international institutions and partners, from the business community, and from those who are supposed to be paramount in all this, the Lebanese. When our economy is suffering, smiling to us and telling us everything is fine will not make it easier to pay rent or get a decent job. Rather, what is needed is an honest appraisal of where things are failing and what is lacking — at least then we will know where to begin to fix things.

First published in Executive Magazine’s November 2012 print issue