Recent Economic Developments, and
Economic policy of the Government of Lebanon
Lebanon has endured 32 years of conflict and war, from December 1968, when Israel attacked the Beirut International Airport, until May 2000, when they attacked the electricity infrastructure. Its southern territory was invaded in 1978 by Israel and, from June 1982 to 1984-85, Israel made a second, large-scale invasion, including the capital Beirut.
Following the end of 17 years of conflict in the country, the Lebanese economy entered into a phase of reconstruction and recovery from the massive destruction and dislocation brought by the war, and the continued Israeli occupation of the Southern part of the country and its massive attacks in 1993, 1996 and 2000 on civil infrastructure. The damage inflicted upon physical and human capital stocks, and the prolonged uncertainty and destruction to the economy, both implied that massive reconstruction was required, which in turn implied a higher than normal level of government expenditures, resulting in high budget deficits. In turn, this generated a sharp rise in the public debt and an increasing debt service. The budget deficit peaked in 1997 at 25% of GDP following a series of deficits over 15% of GDP. As a result, net public debt reached substantial levels, amounting to 119% of GDP at end 1998. In addition, payment arrears of the State to the private and public sectors amounted to US$ 1.5 billion.
Monetary policy, based on a nominal exchange rate anchor, managed to reduce and stabilize the inflation rate. Inflation has been reduced from more than 120% in 1992 to less than 1% in 1999. Exchange rate stability and the resulting monetary stability have allowed Lebanon to attract substantial capital inflows, generating balance of payments surpluses despite continuous current account deficits, and increasing international reserves of the Central Bank of Lebanon.
The rising cost of capital, associated with high public sector borrowing requirements, has also contributed to a “crowding-out” of private sector investments and to an erosion in the international competitiveness of the Lebanese industrial, agricultural and tourism sectors.
The Lebanese economy had to cope with significant external economic challenges. The country suffered from regional instability in the form of foregone domestic and foreign investment due to perceived security and political risks. Also, the Asian crisis and its effects on the emerging market countries, the drop in oil prices (1997-1999) and the resulting slowdown in the Gulf economies are factors that adversely affected the Lebanese economy.
These domestic and external factors contributed to the growth-rate slowdown experienced since 1996. From 1993 until 1995, growth rates were high due to a boom in the real estate sector and to high levels of public investment in infrastructure. Real growth rates peaked at 8% in 1994, but slowly tapered off to 4% in 1996, 3% in 1998, and about 1% in 1999.
2- Economic Program of the Government
By the end of 1998, facing the economic challenges in terms of (1) slow growth, (2) high budget deficits, (3) weakened international competitiveness, and (4) widening social disparities and increased poverty, the Government moved simultaneously along three fronts, with a comprehensive set of economic reforms and measures aiming at:
- Implementing fiscal consolidation and a financial reform of the public sector, in order to achieve a sustained reduction of the budget deficit and of the public debt.
- Promoting economic growth and competitiveness through structural reforms, the upgrading of productive sectors, and more openness of the economy.
- Addressing social issues and achieving a balanced regional development within Lebanon.
The successful integration of these policies would allow Lebanon to attain high real growth rates, improve socio-economic conditions throughout the country, and achieve an internationally competitive economy.
2.1- The fiscal consolidation program
In order to achieve a sustained reduction of fiscal imbalances, and higher economic growth, the Government of Lebanon is implementing a Five?Year Fiscal Adjustment Program (FYFAP) that aims at reducing the budget deficit from 15.8% in 1998 to 4.5% in 2003. Addressing the discrepancy between government expenditures and revenues, is accompanied by a policy goal of reducing the gross public debt from 119% of GDP at end?1998 to 96.3% in 2003.
The FYFAP is to be achieved through four main reforms: modernization of the tax system, rationalization of public expenditures, privatization, and improved debt management. The program commits the government to modernizing the tax system through introducing a value?added?tax (VAT) in 2001, intended to gradually replace customs revenues, and reforming income and property taxes. Furthermore, additional measures are being instituted such as a series of fiscal reforms that will simplify the tax code, modernize tax administration, and widen the tax base. The revenue system will reward compliance and simplify procedures for tax declaration. The program also aims at rationalizing public expenditures.
The program also includes the privatization of the main public services, through the development of a clear legal framework. Thus, in May 2000, Parliament adopted the privatization law, which sets the framework for privatization. The Government has also prepared laws to regulate the various sectors. The Parliament ratified the law regulating the water resource sector. The law on the Electricity sector has been approved by the Council of Ministers, while the law on telecommunications is being finalized. The privatization law establishes a Higher Privatization Council headed by the Prime Minister and provides that the proceeds from privatization will be exclusively used towards public debt repayment. Most importantly, the privatization program aims at improving the efficiency of state?owned enterprises, introducing new technologies, creating jobs, and making privatized firms more efficient and the rest of economy more competitive. Privatization is expected to attract foreign investment, expand share ownership, develop capital markets, and allow the Government to focus on public spending for educational, social programs and regional economic development. The government has already agreed on a strategy to privatize various sectors, which include telecommunications, the power sector, transport, water and a number of other state-owned companies, such as Middle Eastern Airlines (MEA).
Finally, the program includes the improvement of public debt management through strengthening the institutional framework of the Debt Management Unit at the Ministry of Finance, developing new debt instruments, and reforming the local debt market with a view to increase depth and liquidity in the secondary market. It is to be noted that, since 1994, the Republic has been successful in accessing financial international markets by issuing Eurobonds. In so doing, it has been able to establish a pool of international investors, willing to invest in Lebanese securities and, at the same time, to reduce the cost of borrowing from the domestic market. The Lebanese Republic is among the few sovereigns who have never defaulted on, or rescheduled, any debt obligation.
The outcome of 1999 showed that initial progress has been achieved. The 1999 fiscal deficit was reduced to 14.2% of GDP, despite wage and salary increases, allowing a decline of about 200 basis points in nominal interest rates, and a decline of more than 6% in yields on two-year Treasury bills in the secondary market. On the other hand, the Budget and Treasury deficits have been respectively contained at 38% and 42% of expenditures, well within targets. In addition, through law No.95 of June 1999, the Ministry of Finance has been paying state arrears to the private sector, up to LL 700 billion, by handling 3-years Treasury bills to creditors.
On the other side, the Central Bank continued its monetary policy of maintaining currency stability, geared towards reducing and stabilizing the inflation rate. Government policies have succeeded in restoring the balance of payments surplus. After a deficit of US$ 488 million in 1998, a surplus of US$ 261 million was achieved in 1999, and the Central Bank foreign currency reserves reached a historical record of US$ 7.5 billion.
2.2- The economic development plan
The other challenges, namely slow growth, weak competitiveness, and social issues have also been addressed in the 5?year development plan of the government (FYDP), which covered existing and proposed public investment projects in an aggregate amount of U.S.$6.3 billion approximately. This plan aims at strengthening and building engines of growth at the micro-economic level, while improving living conditions throughout Lebanon. The FYDP is the first step to formulate an action plan to up-grade the competitive environment for Lebanese enterprises and define a vision for the future development of the Lebanese economy, while prioritizing public expenditure projects to achieve acceptable provision of public facilities and social services within targeted public spending levels.
The FYDP has three objectives:
- To promote economic growth and competitiveness. The government of Lebanon is committed to liberalizing trade with its Arab neighbours, by implementing the Greater Arab Free Trade Area, with the European Union through the Euro-Mediterranean Partnership Agreement, and, to joining the World Trade Organization. Therefore, the ability for Lebanese enterprises to compete in the new global economy represents the key to the future development of Lebanon.
- To improve living conditions throughout Lebanon’s regions, particularly that of the disadvantaged populations, especially in the South, North and Bekaa areas, by prioritizing expenditure projects to meet international standards of public facilities and social services.
- To ensure an on-going analysis and review of the FYDP, since the success of the latter lies in a regular reviewing and updating process during the implementation period, so as to ensure its full efficiency and relevance.
2.3- Structural Reforms to boost private investment
The structural reforms in progress and envisaged by the FYDP aim at regaining the competitiveness of the Lebanese economy on both levels of the State and the private sector. The main components of these reforms rely on:
(a) Reform of State Institutions
The reform of State Institutions aims at increasing the efficiency of the government. The final objective is to establish transparency, accountability and the rule of law. This objective was set by the President of the Republic of Lebanon, General Emile Lahoud, when taking his office oath at Parliament. He also pointed out the respect of the environment, the social justice, and the better distribution of tax burden as major goals of the Lebanese new economy. In turn, the government’s priority was to reform State Institutions, which, in turn, reduces economic risks and make the government more productive and responsive to the needs of the private sector.
In this regard, the government is working on streamlining and simplifying procedures in order to lower transaction costs and to minimize opportunities for graft and corruption. A “one-stop-shop” has been established at the Investment Development Authority in Lebanon (IDAL), in order to assist investors in finalizing and simplifying required investment procedures.
The implementation of the trade efficiency project started in 2000, with a view to improve the efficiency of the trading system, redesign customs procedures, introduce electronic exchange of information, and establish a one?stop shop for all technical controls and trade licenses. In addition, the Government is reviewing and updating the legal framework (such as the preparation of a law on social security) in order to remove obstacles, which may deter or delay private investment and initiatives.
(b) International Commercial Strategy
The government of Lebanon is committed to liberalizing trade with its Arab neighbors by implementing the Greater Arab Free Trade Area and with the European Union through the Euro-Mediterranean Partnership Agreement, in addition to joining the World Trade Organization. Lebanon was awarded Observer Status at the WTO on 14 April 1999. Through these trade agreements, Lebanon can open access to new markets and create the appropriate framework to attract joint ventures with Arab and international firms. Therefore, the challenge remains in improving the competitiveness of Lebanese productive sectors regionally and internationally. The strategy of the government is to provide the private sector with the framework and necessary tools to successfully access the international markets. The main elements of this strategy include:
- Providing low-cost, medium?term financing by mobilizing external and internal funds, and subsidizing credits to productive sectors. In this regard, the Parliament approved the law on leasing as well as the law that established “Kafalaat”, a medium-term credit guarantee institution.
- Reducing costs of production, namely through tariff reduction on raw materials, as well as reducing the cost of electricity to industrial firms.
- Applying international norms and standards.
- Promoting exports by establishing an Export Promotion Board that will provide advisory and support services to exporters.
- Increasing technology transfers by encouraging joint ventures with foreign enterprises.
- Modernizing the legislative and regulatory framework.
- Promoting the IT industry, and developing Lebanon's telecommunication capacity leading to e?commerce and e?government.
(c) Modernization of the legal framework
Modernizing the legal framework, consisting of laws, regulations and decrees, will provide the “legal infrastructure” necessary for modernizing the State and its institutions, providing the private sector with an enabling framework and supporting economic development. A number of laws have been ratified by parliament to achieve this goal: the law on privatization (May 2000), the law on leasing (December 1999), the law on insurance industry (April 1999), law regulating brokers and dealers (June 2000), the establishment of a central depository and clearing company (October 1999), the law on securities accounts (October 1999), the establishment of an Arab securities settlement institution (October 1999). Draft laws on the capital markets, securitization, mutual funds and investment management, foreign exchange dealers and brokers are awaiting passage.
Other laws designed to improve the competitiveness of the economy and to attract investment include the law on intellectual property rights (June 1999), and draft laws on reforming social security, introducing the VAT, organizing and regulating electronic commerce, protecting industrial property rights, and establishing an export promotion board.
2.4- Public Investments
The Government of Lebanon has made significant steps towards sectoral reform. Below are summary notes that briefly present the status of these sectors, as well as the objectives and achievements of the government, which has undertaken to modernize the socio-economic infrastructure of Lebanon.
(a) Education Sector
Lebanon spends 9 % of its GDP on education, which is well above the international average of 5 %. The Government intends to increase the efficiency of the education sector, by increasing and ensuring the quality of education at subsidized private schools, and reducing the high unit cost of education in the public sector through the upgrading of teaching capacities. The FYDP focuses also on the establishment of vocational schools based on sector planning and on equipment for existing and new schools.
(b) Health Sector
Health expenditures in Lebanon, standing at 10-11% of GDP, are relatively high when compared with those of other similar countries. Yet, health standards of the population are only average for a middle-income country. The public sector finances about 20-23% of health expenditures, while out-of-pocket expenses amount to about 50%, with the difference financed by private insurance and the National Social Security Fund (NSSF). 75% of public spending goes towards reimbursement of private hospitals and other providers; 10-15% goes towards public hospitals and health care centers, while primary care and public health expenditures appear to account for to no more than 10 % of the health budget.
The health sector requires extensive reform, with a situation characterized by health care expenditures that grow at a faster pace than GDP, a rapid expansion of investment in hospital and health infrastructure and an increasing number of physicians. Therefore the Government is preparing a national health strategy that traces the reform plans capable to restore the long-term sustainability of the health sector. The strategy will define the role of the public and private sectors in delivering and financing of health services in Lebanon.
(c) Welfare services
The Government has a strong interest in establishing an effective social safety net, possibly comprised of both social assistance (cash or in kind transfers to vulnerable groups) and social insurance (health insurance, unemployment benefits, and pensions). Public expenditures on safety net programs are estimated at about 1 % of GDP, of which about half is channeled through the Ministry of Social Affairs (MOSA) for (i) Delivery of services to the most vulnerable groups by NGOs ( e.g. orphans, disabled and the elderly), (ii) Social Development Centers (SDCs), and (iii) social and health centers run in partnership with NGOs.
(d) Agriculture and irrigation
Budget expenditures on agriculture and irrigation are very low; 0.5 % of overall expenditures in 1993-96, compared with 4.9% of total expenditures in comparator countries. 20-30% of the population derives its income from agriculture. In order to define a comprehensive agricultural strategy that takes into account specific sectoral circumstances, in particular high production costs and limited land and water availability, the Ministry of Agriculture made a survey in 1999-2000.
Much of the irrigation infrastructure in Lebanon is old and has suffered from neglect during the war. The present irrigation program of the Government includes the 1999-2002 irrigation investment program of the Ministry of Hydraulics and Electric resources (MOHER) and of the Litani River Authority (LRA); it focuses on the rehabilitation of existing irrigation schemes and revolves around two major projects.
(e) Waste Management Sector
Management of Municipal Solid Waste (MSW) collection and disposal has been provided primarily by the private sector and financed by the Central Government (CG) whose spending is largely allocated to the non-capital costs for MSW services in Greater Beirut (population 1.68 million). Over the last five years, private sector participation in this field has revealed positive tangible results visible in improved environmental conditions. The Government policy is to pursue private sector provisions of MSW services on behalf of the municipalities, as this approach has proven to be more efficient.
(f) Urban Water & Wastewater Sector
Significant progress was made in restoring water and wastewater infrastructure damaged during the civil strife while meeting the rapidly growing demand for services in urban areas. The Government has also taken some early steps in addressing water quality problems and pollution, and has made the water sector a priority area. Government's efforts have concentrated on improving the system performance while leaving institutional reform to a later stage. Access to potable water in the country has improved considerably and a comprehensive scheme of network rehabilitation was initiated under the National Emergency Recovery Programme (NERP). Despite the Government's efforts, major investments are still required in order to establish a sustainable water resource management system. At the institutional level a new sector law was promulgated by Parliament during May 2000. It focuses the role of the MHER to policy, bulk water supply, strategic planning and regulatory functions, while it consolidates the number of
water servicing authorities from the current twenty two (22) to five (5) in order to improve efficiency. The newly created five regional water authorities would function as autonomous, commercial entities, retailing water services and strive to achieve self-sufficiency.
(g) Energy Sector
Lebanon has largely completed the rehabilitation and expansion of its power generation facilities. As the country gradually moves from the rehabilitation to the sustainable development phase, the key challenge will be to create a competitive market structure, and the enabling environment for meaningful private sector participation through legal and regulatory reforms and fundamental restructuring of the power sector. The focus is now shifting from infrastructure reconstruction to sector restructuring. The Government recognises the importance of such reforms and has begun earnestly on work aimed at developing the enabling environment.
The sector is heavily dependent on the Budget, EDL operations and investments being heavily subsidized. In view of the high government budget deficit, such subsidies are not sustainable. It is critical to reduce their budgetary impact as soon as possible. The Government would require donor's support in achieving its policy objective of efficient operations and development of the energy sector through effective dialogue of engagement and partnership. The development and implementation of a detailed reform strategy is expected to take 3 to 4 years and will require substantial technical assistance in a range of areas.
As a response to these challenges, the Government of Lebanon is embarking on a power sector restructuring strategy with a view to improve economic performance by increasing competition and installing efficiency-enhancing regulatory regimes. The Government of Lebanon plans to launch a sectoral privatisation program, and has started to develop a comprehensive strategy for power sector reforms, in line with international best practice. In this regard, the Council of Ministers has approved the draft law on Electricity that regulates the sector.
(h) Telecommunications Sector
Throughout the world, governments have taken measures to reform the telecommunications sector. Countries lacking modern telecommunications infrastructure cannot compete effectively in the global economy. In Lebanon, this sector has recently undergone encouraging institutional and market changes. International benchmarks of the Lebanese telecommunications system indicate that the country’s network is above the regional average. The Lebanese network has reached high penetration rates, especially in the mobile segment 15 lines per 100 inhabitants). The Government of Lebanon has implemented a rehabilitation and expansion investment program over the past few years. The suggested strategy includes the reshaping of the Government’s role in the sector, while fostering the commercialization and corporatization of OGERO, leading to its full privatization. The Government of Lebanon has prepared a draft law to establish a new, independent telecoms regulatory authority (TRA) in order to liberalize the sector and prepare its transfer to the private sector. The draft law gives the TRA the authority to (i) regulate the telecommunications sector by issuing orders and decisions that are binding to the operators; (ii) to promote competition in the sector by issuing licenses to new operators, by establishing an interconnection regime, by checking anti-competitive behavior, and by other mechanisms included in the law; (iii) and to allocate frequencies and manage the spectrum.
(i) Transport Sector
The Government of Lebanon accords a high priority to transport reconstruction in view of the critical role, which transport plays in Lebanon’s service economy, and the country’s potential role as a regional center for trade and services. Roads and highways figure among the key components of the FYDP. Completion of on-going projects under currently planned program would require $540m, including $350m in contracts already awarded. In addition, $110m in expenditure will be necessary for the high priority maintenance and rehabilitation program for the classified road network.
3- Concluding remarks
Lebanon is in the process of implementing major reforms within a long-term strategic vision that would increase the country’s competitiveness and foster employment opportunities, while improving social justice and the quality of life for its population. The strategy aims at striking a better balance between social empowerment, equity and market efficiency so as to raise the productivity of human resources and increase per capita income.
The latest developments on the geopolitical scene have opened new prospects and opportunities for Lebanon. This great challenge of rebuilding Southern Lebanon and achieving the socio-economic development all over the country necessitates strong and committed support from the international community. Moreover, the constraints to mobilize local resources to finance the required investments, confirm the necessity of substantial backing from the international community and international and regional financial institutions.
Up to now, Lebanon has not received its fair due of official aids in the region. This is clearly shown by the fact that 25% (US$ 1,351 million) of Lebanon’s debt comes from bilateral and multilateral assistance. Grants to Lebanon are also limited. To date, they amount only to about US$ 600 million. Finally, Lebanon foreign financing comes mainly from Arab and European sources, representing respectively 35% and 37% of total loans and grants.
Today, Lebanon is in the need of much larger financing from the international community, in order to be able to settle problems generated by the years of domestic turmoil and the Israeli occupation. Therefore, the Government of Lebanon calls for the mobilization of funds, assistance and continued coordination.
Selected Economic Indicators