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Political turmoil threatens stability of Lebanon’s economy

It's not easy running a business in Lebanon, and it's about to get even less easy.

Since the mysterious resignation of Lebanese prime minister Saad al-Hariri on Nov. 4, in Saudi Arabia, the Lebanese don't even know if they will have a government much longer. He is due back in Beirut by Wednesday, where he will reveal his intentions. Most Lebanese think he will not rescind his resignation, leaving the government without its popular unity leader.

The sudden political chaos means consumer confidence and investment spending, which had already been on the wane, will inevitably fall. "In Lebanon, confidence is almost exclusively determined by politics," says Nassib Ghobril, head of economic research and analysis at Lebanon's Byblos Bank. "And this crisis is just starting."

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The good news, such as it is, is that the Lebanese are survivors. They have endured civil war, political assassinations, Israeli invasions and long bouts of government instability for four decades. Even in times of peace, they live with epic corruption and state-run infrastructure – electricity, water and roads – that is somewhere between unreliable and non-functioning. Beirut's transportation system is virtually non-existent. Before the 1975-1990 civil war, Beirut was known as the Paris of the Middle East. That era is long gone.

Fouad Rahme, an investment banker who is adviser to the chairman of Al-Mawarid Bank and president of the Lebanon Business Association, said Lebanese businesses and families, are, by necessity, experts in the débrouillard system, using the French word for "resourceful."

The system means that communities and businesses invest in back-up systems for every necessity. Because the electricity often goes out and the water often doesn't run, groups of buildings will pay for diesel electricity generators and private water deliveries, using tanker trucks filled from private wells. Some neighbourhoods invest in private health clinics. "Sure, it adds costs, but you have to be your own crisis manager here," says Mr. Rahme. "The public sector isn't doing its job."

But resourcefulness doesn't mean Lebanese businesses can sail through political crises unharmed, and the one triggered by the missing Mr. al-Hariri will inflict damage, Mr. Rhame and Mr. Ghobril say.

Lebanon, with a population of about six million, is a small, strange economy that often runs counter to international trends. The country boomed during the 2008 financial crisis, when most of the Western world was seeing its banks fall apart and its economies fall into deep recession. Lebanon was saved by its healthy private banks and strong central bank. Deposit money flooded into the Lebanese banking system, lifting deposits from about $70-billion (U.S.) in 2008 to about $130-billion in 2009. Today, the figure is $169-billion, which is more than three times Lebanon's gross domestic product.

But the banks alone cannot keep Lebanon from economic crisis. The country is in a rough neighbourhood, wedged between Israel on the south, with which it has no diplomatic relations, and Syria on the east and north. Most of its exports, from manufactured goods to fruit and vegetables, were either consumed in Syria or passed through Syria en route to other markets. Since the start of the Syrian civil war in 2012, that Syria-bound export market has pretty much evaporated, and foreign tourist arrivals from everywhere have fallen substantially.

The collapse of oil prices in 2014 cut both ways. The fall sliced Lebanon's oil and natural gas bill in half – Lebanon imports most of its energy – but it also curtailed the remittances from the expatriate Lebanese in oil-producing countries. There are thought to be about 500,000 Lebanese in Saudi Arabia and the Persian Gulf states, and the money they ship home is crucial to the stability of the Lebanese economy. When oil prices fall, so do the remittances. According to the World Bank, remittances fell 2.3 per cent in 2016 over 2015, when $7.5-billion was sent back to Lebanon.

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Mr. Ghobril says the biggest problem with the economy is not the war in Syria or the near constant government instability – Lebanon stumbled along with no official budget between 2005 and 2016 – but a horrific lack of competitiveness due to corruption, rotting infrastructure, and a bloated and inefficient bureaucracy that gets more bloated by the year as politicians hire civil servants to try to buy votes. The bureaucracy does not even manage to conduct a national census. The last official one was done in 1932, during the French colonial era, which means everything from population growth to employment trends is pretty much a guess.

"All these wounds are self-inflicted," Mr. Ghobril says. "Politicians here like to blame external factors but, in reality, it's the structural weaknesses here that are the problem. Is the war in Syria really an obstacle to fixing roads in Lebanon?"

Lebanon's fresh political crisis, he says, will ensure that any structural reforms are delayed again, which in turn means that foreign investment will probably keep falling. If the government collapses because Mr. al-Hariri is finished as prime minister, the next budget will be put on hold and the passage of new anti-corruption legislation will lose any urgency.

With so much uncertainty, Lebanon's growth rates are being trimmed. Mr. Ghobril now expects 2017 growth of about 1.5 per cent, compared with about 2 per cent before Mr. al-Hariri announced his resignation in Saudi Arabia. If the political crisis is not fixed soon, Lebanon's growth rates could keep sinking. "The real damage could come next year," says Mr. Ghobril.

Lebanon's al-Hariri arrives in Paris as Macron plays mediator (Reuters)
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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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