Lebanon - Economy
The 1975-91 civil war seriously damaged Lebanon's economic infrastructure, cut national output by half, and all but ended Lebanon's position as a Middle Eastern entrepot and banking hub. Peace has enabled the central government to restore control in Beirut, begin collecting taxes, and regain access to key port and government facilities. Economic recovery has been helped by a financially sound banking system and resilient small- and medium-scale manufacturers, with family remittances, banking services, manufactured and farm exports, and international aid as the main sources of foreign exchange. Lebanon's economy has made impressive gains since the launch of "Horizon 2000," the government's $20 billion reconstruction program in 1993. Real GDP grew 8% in 1994 and 7% in 1995. Real GDP grew at an average annual rate of less than 3% per year for 1997 and 1998 and only 1% in 1999. During 1992-98, annual inflation fell from more than 100% to 5%, and foreign exchange reserves jumped to more than $6 billion from $1.4 billion. Burgeoning capital inflows have generated foreign payments surpluses, and the Lebanese pound has remained relatively stable. Progress also has been made in rebuilding Lebanon's war-torn physical and financial infrastructure. Solidere, a $2-billion firm, is managing the reconstruction of Beirut's central business district; the stock market reopened in January 1996; and international banks and insurance companies are returning.
However, the government nonetheless faces serious challenges in the economic arena. It has had to fund reconstruction by tapping foreign exchange reserves and boosting borrowing. Reducing the government budget deficit is a major goal of the LAHUD government. More importantly, the stalled peace process and ongoing violence in southern Lebanon could lead to wider hostilities that would disrupt vital capital inflows. Also, the gap between rich and poor has widened in the 1990s, resulting in grassroots dissatisfaction over the skewed distribution of the reconstruction's benefits and leading the government to shift its focus from rebuilding infrastructure to improving living conditions.
Lebanon's inability to attract significant foreign aid to rebuild after the civil war slowed its recovery effort. The government began to accumulate debt which by 2001 was $28 billion which coincided with weak economic performance. Unemployment was estimated at 14% for 2000 and 29% among the 15-24 year age group, with preliminary estimates of further increases in 2001. Still, the government is committed to consistant economic growth and has identified three key reforms that will stabilize the country: To engage in fiscal consolidation and structural improvement in public sector finances, focus on Monetary, financial, and price stability, and to use the private sector as the engine of growth.
The government also has maintained a firm commitment to the Lebanese pound, which has been pegged to the dollar since September 1999. In late 2000, the government substantially reduced customs duties, adopted export promotion schemes for agriculture, decreased social security fees and restrictions on investment in real estate by foreigners, and adopted an open-skies policy, with positive effects on trade in 2001. Nonetheless, the relative appreciation of the Lebanese currency has undermined competitiveness, with merchandise exports falling from 23% of GDP in 1989 to 4% in 2000.
In 2001, the government turned its focus to fiscal measures, increasing gasoline taxes, reducing expenditures, and approving a value-added-tax that became effective in February 2002. Slow money growth and dollarization of deposits have hampered the ability of commercial banks to finance the government, leaving more of the burden to the Central Bank. This monetization of the fiscal deficit has put enormous pressure on Central Bank reserves, mitigated only slightly with the issuance of new Eurobonds over the past 2 years. The Central Bank has maintained a stable currency by intervening directly in the market, as well as low inflation, and succeeded in maintaining investors' confidence in debt. It has done so at a cost, however, as international reserves declined by $2.4 billion in 2000 and by $1.6 billion in the first half of 2001.
In 2002, the government put primary emphasis on privatization, initially in the telecom sector and electricity, with continued planning for sales of the state airline, Beirut port, and water utilities. The government pledged to apply the proceeds of sales to reducing the public debt and the budget deficit. In addition, it projected that privatization will bring new savings as government payrolls are pared, interest rates decline, and private sector growth and foreign investment are stimulated. The government also is tackling the daunting task of administrative reform, aiming to bring in qualified technocrats to address ambitious economic programs, and reviewing further savings that can be realized through reforms of the income tax system. The Lebanese Government faces major challenges in order to meet the requirements of a fiscal adjustment program focusing on tax reforms and modernization, expenditure rationalization, privatization, and improved debt management.
The U.S. enjoys a strong exporter position with Lebanon, generally ranking as Lebanon's fourth-largest source of imported goods. A number of U.S. companies have also opened office in Lebanon including Microsoft, American Airlines, Arthur Andersen, Coca-Cola, FedEx, UPS, General Electric, Parsons Brinckerhoff, Cisco, Eli Lilly, and Pepsi Cola.
