Economy and Trade
Following the capture of Syria from the Ottoman Empire by Anglo–French forces in 1918, France received a mandate over this territory, and separated out the region of Lebanon in 1920. France granted the area independence in 1943. A lengthy civil war (1975–1990) devastated the country, but Lebanon has since made progress toward rebuilding its political institutions. Under the Ta’if Accord—the blueprint for national reconciliation—the Lebanese established a more equitable political system, particularly by giving Muslims a greater voice in the political process, while institutionalizing sectarian divisions in the government. Following the Israeli invasion in 2006, the international community agreed to support an ambitious Lebanese program of reconstruction and macroeconomic stabilization. Army Commander Michel Sulayman was elected as president in May 2008, and a unity government was formed in July 2008, with Fuad Siniora as prime minister. Lebanon has a free market economy and a strongly laissez-faire commercial tradition.
Economic Policy over 12 Months
According to an International Monetary Fund (IMF) report published in December 2009, progress in implementing structural reforms in 2009 was limited due to the political impasse in the period leading up to the June 2009 parliamentary elections and subsequent protracted negotiations toward the formation of the new national unity government.
The new unity government is committed to implementing economic reforms and improving public infrastructure and services. The IMF believes that continued debt reduction will be key to addressing Lebanon’s main vulnerabilities. The government certainly faces many economic challenges. Lebanon’s government debt/GDP ratio (at nearly 150%) remains among the highest in the world, its large banking system (with assets of more than three times GDP) is excessively exposed to public debt issued by the Government of Lebanon (56% of assets) and dependent on inflows of nonresident deposits, while the country also lies at the crossroads of regional political tensions.
In April 2010, the government proposed a 14% increase in spending over the coming fiscal year and said that it expects public debt to rise to US$55 billion. Finance Minister Raya al-Hassan said that the draft budget allocated US$4.3 billion for debt servicing, and added that the country’s projected deficit in 2010 is set to increase to US$3.7 billion (10.7% of GDP), from US$3.25 billion (8.6% of GDP), in 2009.
Public debt in 2009 stood at US$51 billion. However, Hassan said that the increase to US$55 billion in 2010 would barely change the debt/GDP ratio, which stood at 147.98% of GDP in 2009.
The government has maintained a firm commitment to the Lebanese pound, which has been pegged to the dollar since September 1999. The IMF believes that due to “large government and private sector currency mismatches, the maintenance of the Lebanese pound’s peg to the US dollar remains essential for continued financial stability.” Lebanon’s central bank resumed the sale of certificates of deposit in March 2010 to help absorb excess liquidity in the banking system and keep control of inflation, which it estimates will be 3% or lower this year. The bank also reduced the overnight lending rate to 2.75% from 3.25% to try to curtail investment inflows into the country.
In April 2010, Moody’s Investors Service upgraded Lebanon’s sovereign rating one notch, from B2 to B1, citing sustained improvement in external liquidity, the banking system’s strengthened ability to finance deficit, and the formation of a new government.
Economic Performance over 12 Months
Real GDP is estimated to have grown by around 7% in 2009, helped by prudent policies and an improvement in the political and security situation after the May 2008 Doha Agreement (which ended six months of political stalemate that followed the departure of President Emile Lahoud in November 2007), according to an IMF report published in December 2009. Large capital inflows and high confidence have fueled a boom in real-estate investment and tourism activity in 2010 and 2011.
According to the World Investment Report for 2010, issued by the UN Conference on Trade and Development in July, Lebanon’s foreign direct investment rose 11% in 2009, with US$5 billion entering the economy, compared to an overall decline of 24% in the Middle East region, with only Qatar and Lebanon posting an increase in capital inflow.
In August 2010, regional investment bank EFG Hermes forecasted growth for Lebanon at 6.5% in 2010 and 5% in 2011. The bank added that renewed tensions between Israel and Lebanon in early August were increasing risks to the country’s economic outlook, which were already exacerbated by rising domestic political tensions in July in relation to the UN tribunal probing the assassination of former premier Rafik Hariri.
EFG’s optimism has been mirrored by the IMF, which in August 2010 raised its growth forecast for the country to 8% from 6%, ranking the country second regionally after Qatar and fourth globally.
EFG Hermes projected the inflation rate to average 3.5% in 2010 and 4% in 2011, and forecasted the annual growth of money supply at 9.7% in 2010 compared to 19.5% in 2009. Furthermore, it projected the fiscal deficit to widen from 8.9% of GDP in 2009 to 10.2% in 2010 and 9.8% in 2011. The bank also forecasted the external debt to decline from 64% of GDP at end 2009 to 58% of GDP by end 2010 and to 53.2% of GDP by end 2011, and for the domestic debt to reduce from 89% of GDP in 2009 to 87% at the end of 2010 and to 85.4% by end 2011.
Despite receiving substantial aid, the government made little progress in reforming its economy, and by 2006, even before the war between Hezbollah and Israel, the debt problem had grown worse. After the war, US$940 million in relief and early reconstruction aid was pledged to Lebanon on August 31, and was followed by the additional US$7.6 billion in assistance for reconstruction and economic stabilization, already mentioned, from the Paris Club.
The IMF signed an Emergency Post-Conflict Assistance (EPCA) program with Lebanon to support the government’s economic reform program in 2007, and a second EPCA for 2008–2009 to monitor the progress of reforms and to advise donors on the timing of aid delivery.
Support for Inward Investment and Imports
The Investment Development Authority of Lebanon (IDAL) was established in 1994 to spearhead Lebanon’s investment promotion efforts, and in 2001 Lebanon passed the Investment Development Law 360, which seeks to stimulate Lebanon’s economic and social development by regulating investment promotion for both foreign and domestic entities.
There is a wide range of development investment incentives, including exemptions from income tax and tax on the distribution of dividends. Further information can be obtained from IDAL.
GDP growth: 7% (IMF, 2009)
GDP per capita: US$13,100 (2009 est.)
CPI: 3.4% (2009)
Key interest rate: 10% (December 31, 2009)
Exchange rate versus US dollar: L£1.507.5 (fixed)
Unemployment: 9.2% (2007 est.)
Current account deficit/surplus: n/a
Population: 4,125,247 (July 2010 est.)
Source: CIA World Factbook except where stated