Lebanon - iuj.ac.jpmobile-phone operators!and make public expenditure more efficient. • We expect the fiscal deficit to widen to L£4.6trn (US$3bn), or 13.3% of GDP, in 2008 before

Country Report

Lebanon

November 2007

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Lebanon 1

Monthly Report November 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Lebanon

Executive summary 2 Highlights

Outlook for 2008-09 3 Political outlook 4 Economic policy outlook 5 Economic forecast

Monthly review: November 2007 9 The political scene 11 Economic policy 14 Economic performance

Data and charts 15 Annual data and forecast 16 Quarterly data 17 Monthly data 18 Annual trends charts 19 Monthly trends charts

Country snapshot 20 Political structure

Editors: Keren Uziyel (editor); David Butter (consulting editor)

Editorial closing date: November 15th 2007

All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: To request the latest schedule, e-mail [email protected]

2 Lebanon


Executive summary

Highlights

November 2007

• Our central scenario is still that the government and opposition, assisted by international mediators, will agree on a compromise presidential candidate, but the atmosphere of brinkmanship means that downside risks are high.

• In the longer term, rising tensions driven by deep and unresolved divisions between the various sectarian groups over access to political influence and economic resources are likely to result in further outbreaks of violence.

• Lebanon will remain an arena for proxy conflict between Iran and Syria on the one hand, and the US, France and the Gulf Arab countries on the other.

• The government will have trouble implementing its comprehensive economic reform plan, the aim of which is to privatise state assets!notably, the two mobile-phone operators!and make public expenditure more efficient.

• We expect the fiscal deficit to widen to L£4.6trn (US$3bn), or 13.3% of GDP, in 2008 before narrowing marginally to around 12.2% of GDP in 2009.

• Domestic demand is expected to revive slowly, with real GDP growth rising to a still weak 1.2% in 2008, before increasing to 2.3% in 2009 on the back of rising private consumption and fixed investment.

• A continued widening of the trade deficit will be increasingly offset by tourism inflows, worker remittances and aid, causing the current-account deficit to narrow gradually to around US$3.3bn (13.4% of GDP) in 2009.

• Despite ongoing high-level international mediation, the government and opposition have been unable to agree on a successor to the current president, although the names of several compromise candidates have been suggested.

• The continuing political deadlock has led to growing public anxiety and a reported surge in the demand for weapons.

• A sharp rise in government revenue in the first three quarters of 2007 led to a narrowing of the fiscal deficit, despite continued strong spending growth.

• The government has published its draft budget for 2008, which envisages further tightening of policy, with tax increases and spending cuts.

• The telecommunications regulator has set February 1st 2008 as a deadline for applications to purchase licences for the two mobile-phone networks.

• Data for tourist arrivals in the first three quarters of 2007 suggest the sharp decline seen following the July-August 2006 conflict with Israel has eased.

• Leading banks reported strong profits for the first nine months, mostly built on income from overseas operations in the booming Gulf Arab countries.

Outlook for 2008-09

Monthly review

Lebanon 3


Outlook for 2008-09 Political outlook

The Economist Intelligence Unit expects ongoing political volatility in Lebanon over the outlook period. There will be continued quarrels between pro- and anti-Syrian forces within the country, fuelled by long-standing grievances between the various sectarian groups over access to political influence and economic resources!with many Shia Muslims and some sections of the Christian community claiming that they have been disenfranchised. Lebanon will also continue to reflect divisions in the wider region, and could become a proxy battleground in the growing confrontation between the US and Iran. Rising tensions driven by deep and unresolved national divisions are likely to result in occasional outbreaks of violence, and further political assassinations are a strong possibility. Although all sides remain eager to avoid a recurrence of the 1975-90 civil war, it remains possible that external interference or an inflammatory incident, such as the killing of a popular leader, could ignite a more serious confrontation.

According to the constitution, the National Assembly (parliament) must choose a new president by the time the term of the incumbent, Emile Lahoud, expires at midnight on November 23rd. Although the anti-Syrian "March 14th" govern-ment has a parliamentary majority, the constitution is usually interpreted as requiring a two-thirds quorum to be present to vote on a new president, allowing pro-Syrian opposition forces (led by Hizbullah, a Shia group) to block the candidature of a pro-March 14th president. Equally, however, the opposition coalition"s preferred candidates (headed by Michel Aoun, the Christian leader of the Free Patriotic Movement and a former army commander who won a majority of the Christian vote in the 2005 parliamentary election and has since made a controversial alliance with Hizbullah) will be strongly resisted by the government. Our central scenario is that the two sides, assisted by international mediators, will agree on a compromise nominee, who is likely to emerge just before the constitutional deadline. However, the atmosphere of brinkmanship means that downside risks are high. If there is no agreement on his successor, the pro-opposition president, Mr Lahoud, might appoint a parallel government. In that case, an intensification of violence would be highly likely, endangering the country"s long-term political stability.

Despite ongoing divisions, on balance we expect a March 14th cabinet under the current prime minister, Fouad Siniora, to remain in place until the May 2009 parliamentary election, given strong international support from the US, France and the Gulf Arab countries. However, internal divisions and political uncertainty will continue to constrain the government"s freedom of action. The extent of Lebanon"s co-operation with the international tribunal to investigate the 2005 assassination of a former Lebanese prime minister, Rafiq al-Hariri, is likely to remain a controversial issue. Attempts to mediate between the various parties by France and the Arab League, among others, will come to little. We therefore expect further delays to planned political and economic reforms.

Domestic politics

4 Lebanon


There are also likely to be renewed confrontations between pro-government forces and other groups!including not only opposition supporters but also foreign-backed Islamist militant cells.

The Gulf Arab states, the US and France will continue to provide extensive political and economic assistance while the current government remains in power. However, opposition leaders will retain the backing of Iran, as well as of Syria (which in effect exercised control over Lebanon until 2005 and has a strong interest in the outcome of the Hariri tribunal). Any escalation in tensions between the US and Iran could destabilise the southern border with Israel. If Hizbullah gains a greater role in the Lebanese government, a renewed confrontation with Israel would also become more likely!with the UN peacekeeping force deployed in the south unable to act as an effective buffer.

Economic policy outlook

Continued political tensions will make it extremely difficult for the government to implement its comprehensive economic reform plan. The plan focuses on the privatisation of state assets!notably, the two mobile-phone operators!and greater efficiency in public expenditure. However, it is rejected by much of the opposition. If this economic restructuring is postponed, it will be extremely difficult to address Lebanon"s long-term structural fiscal deficit, which is mainly driven by the costs of servicing the country"s extremely large public debt burden, and has been exacerbated by a series of political crises since early 2005. Moreover, a lack of progress on reforms could prevent disbursement of some of the US$7.6bn in conditional financial aid and soft loans pledged at the "Paris III" donor conference in early 2007. Overall, Lebanon"s fiscal imbalances are expected to persist over the outlook period, and a major political crisis could cause the situation to deteriorate more rapidly than we currently forecast.

We estimate that total government revenue in 2007 will have risen by almost 19% to around L£9.7trn (US$6.5bn), as increases in value-added tax (VAT) and customs revenue more than offset the other tax losses resulting from ongoing political tensions, with further assistance from an influx of foreign grants. However, the rising cost of servicing the large public debt stock and ongoing reconstruction costs will have caused spending to grow by an even stronger 20%, to around L£14.2trn, pushing the fiscal deficit up to nearly L£4.5trn (or 13.4% of GDP). Assuming that at least some of the planned tax reforms are implemented towards the end of 2008, revenue from VAT and customs should rise further over the outlook period, especially in 2009. Combined with slower expansion in government spending, we expect this to restrain growth in the fiscal deficit, which we forecast will widen to L£4.6trn (13.3% of GDP) in 2008 before narrowing marginally to around 12.2% of GDP in 2009.

Over the outlook period, the government should be able to contract new loans to continue to finance the fiscal deficit. This is based on the assumption that the political situation does not degenerate into sustained violence; that a government backed by the Gulf Arab countries and the US remains in place; and that the economic reform programme makes sufficient progress to fulfil the

Policy trends

Fiscal policy

International relations

Lebanon 5


conditions attached to promised international assistance. With more than US$5bn in Eurobonds due to mature over the outlook period, the key factor determining the sustainability of the public finances remains the willingness and capacity of the local commercial banks to extend new finance and to roll over foreign debt. This depends on investor sentiment (both domestic and foreign) towards Lebanon. A marked deterioration in confidence could cause bank deposits to move away from Lebanese pound assets (or leave the country altogether), compromising local banks" capacity to meet the state"s borrowing requirement.

Lebanese interest rates have historically tended to track US rates, owing both to the currency peg to the US dollar and to the economy"s high level of dollarisation (which stood at 73% of total bank deposits in August 2007). Despite a rise in US rates in 2006, however, interest rates on Lebanese local-currency deposits fell on average, largely because of the large inflows of foreign currency (particularly from Gulf countries), mainly in the form of foreign direct investment (FDI) during the first half of the year, and recon-struction aid thereafter. Continued inflows, together with a drop in US rates, are estimated to have forced Lebanese rates down slightly in 2007, despite the political situation.

In 2008-09 we forecast that Lebanese rates will remain broadly in line with the US, dipping slightly in 2008 before rising again the following year. However, any sustained political deterioration could raise the risk premium, pushing rates up sooner than currently projected. Such longer-term uncertainty could also cause a drawdown on the foreign-exchange reserves held by Banque du Liban (the central bank). These reserves remain at extremely high levels (equating to around a year of import cover), and the ease with which the economic authorities maintained financial stability in 2006-07 enhanced confidence in their capacity to protect the currency. Nevertheless, a prolonged and severe crisis could still put serious pressure on the pound"s peg to the dollar.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2006 2007 2008 2009

Real GDP growth World 5.3 5.0 4.6 4.7

OECD 3.1 2.5 1.8 2.6

EU27 3.0 2.7 2.1 2.3

Exchange rates ¥:US$ 116.2 117.6 105.3 96.3

US$:� 1.256 1.361 1.445 1.328

SDR:US$ 0.680 0.652 0.626 0.646

Financial indicators � 3-month interbank rate 3.08 4.12 3.83 4.00

US$ 3-month Libor 5.19 5.33 4.72 4.89

International assumptions

Monetary policy

6 Lebanon


International assumptions summary (% unless otherwise indicated)

2006 2007 2008 2009

Commodity prices Oil (Brent; US$/b) 65.3 70.0 69.5 63.8

Gold (US$/troy oz) 604.5 674.0 705.0 618.8

Food, feedstuffs & beverages (% change in US$ terms) 16.1 20.6 6.6 -2.5

Total non-oil commodities (% change in US$ terms) 31.2 16.6 1.7 -7.4

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

We estimate that global GDP growth (measured using purchasing power parity exchange rates) will have fallen slightly to around 5% in 2007. It is projected to continue to slow, averaging around 4.6% over the outlook period, as growth rates drop sharply in many OECD countries (especially the US) and the non-OECD economic boom also slows. The average price of the benchmark dated Brent Blend will be little changed in 2008, compared with 2007, at around US$70/barrel, but will fall to a still strong US$64/b in 2009. Moreover, geopolitical risk factors, combined with strong growth in consumption (especially in Asia and the Middle East), could keep prices higher than currently forecast, for longer. The dollar will continue to weaken against other major currencies in 2008, pushing up the cost of (non-dollar-denominated) imported goods for Lebanon!although this will be partly offset by the expected decline in the price of non-oil commodities in 2009. However, the dollar"s relative weakness will assist the recovery and competitiveness of Lebanese exports to the euro area and elsewhere.

In 2007 ongoing political tensions delayed Lebanon"s economic recovery from the July-August 2006 conflict between Israel and Hizbullah and its aftermath. Despite a recovery in government consumption, private-sector consumption remained sluggish, limiting growth in overall domestic demand. Trade volumes recovered only slowly, with much of the growth representing transshipment (especially to neighbouring Syria and other Arab countries) rather than going to feed Lebanon"s own economy. Overall, we estimate that real GDP will have grown by just 0.3% this year.

Domestic demand is expected to revive slowly in 2008-09, assuming that the political situation does not deteriorate substantially. Ongoing tensions will mean that tourists may be slow to return to the country, limiting growth in the vital services sector (with construction and real estate both remaining heavily tourism-dependent). Export volumes are also expected to expand only modestly. We therefore forecast that real GDP growth will rise to a still weak 1.2% in 2008. In 2009 we project that rising private consumption and fixed investment will push growth up further, to about 2.3%.

Average annual consumer price inflation remained relatively strong at 4.2% in the first half of 2007, owing to continued political uncertainty, as well as to shortages related to the rebuilding of economic capacity in the wake of the July-August 2006 war. We estimate that inflation will have averaged around 5.6% over the year as a whole, pushed up by imported inflationary pressures,

Economic growth

Inflation

Lebanon 7


especially from oil prices. These pressures are expected to persist in 2008 as the dollar!and, by extension, the pound!continue to weaken. Petroleum imports will remain costly over the outlook period, despite continued subsidies, and a planned increase in the VAT rate in 2008 may push up consumer prices in the months immediately following its implementation. As a result, inflation is expected to average 4% in 2008, before falling back to around 3.5% the following year.

The Lebanese pound is pegged to the dollar within a trading band of L£1,501-1,514:US$1, and we expect the exchange rate to remain fixed over the outlook period. The central bank is strongly commited to defending the peg, and will be assisted by its relatively wide scope to influence interest rates, high levels of assets and strong support from the country"s commercial banks!which, as the holders of the largest part of Lebanon"s foreign debt, have much to lose if the peg collapses. Nevertheless, the prominent role played by foreign-currency depositors exposes the banking sector to shifts in international sentiment that could see a rapid drain of liquidity if serious concerns over the value of the pound were to precipitate a large-scale withdrawal of foreign-currency deposits. In the longer term, substantial imbalances in Lebanon"s public finances and the external accounts could also leave the peg vulnerable.

Owing principally to the small size of its manufacturing sector, Lebanon"s visible trade deficit tends to be extremely large (averaging US$5.6bn in the five years to 2006). In 2007 import spending will have grown fairly strongly, partly because of the demand for inputs for rebuilding after the 2006 Israel-Hizbullah conflict. Despite a recovery in transshipments, export earnings will have expanded more slowly, resulting in a widening of the trade deficit to an estimated US$6.9bn. Investors in export-oriented industries will remain cautious over the outlook period, although import spending is also expected to grow more moderately. Consequently, we project that the trade deficit will continue to widen, to US$7.4bn in 2008 and further to US$7.7bn in 2009.

In recent years the economy has depended on earnings from the services sector (especially tourism) to offset the trade deficit. However, these credits will have remained depressed in 2007, as they are strongly dependent on perceptions of political stability. At the same time, rising services debits on the back of expanding import volumes will have caused the current-account deficit to widen sharply, to an estimated US$3.7bn (nearly 17% of GDP). Given the ongoing political uncertainties over the outlook period, growth in tourism-dependent services credits is forecast to remain slow. The provision of promised international financial assistance could also be delayed!although substantial remittances from the rising numbers of expatriate Lebanese workers will continue to boost the current transfers surplus. These inflows should just offset the widening trade deficit, causing the current-account deficit to narrow gradually to around US$3.3bn (13.4% of GDP) in 2009.

External sector

Exchange rates

8 Lebanon


Forecast summary (% unless otherwise indicated)

2006 a 2007 b 2008c 2009c

Real GDP growth -1.1 b 0.3 1.2 2.3

Consumer price inflation (av) 4.0 b 5.6 4.0 3.5

Consumer price inflation (year-end) 7.2 b 4.0 3.9 3.1

2-year Treasury bill rate 8.7 8.8 8.9 8.9

Government balance (% of GDP) -11.5 b -13.4 -13.3 -12.2

Exports of goods fob (US$ bn) 2.8 3.1 3.2 3.3

Imports of goods fob (US$ bn) 8.5 10.0 10.6 11.0

Current-account balance (US$ bn) -1.5 -3.7 -3.7 -3.3

Current-account balance (% of GDP) -7.0 b -16.8 -15.9 -13.4

External debt (year-end; US$ bn) 32.1 b 34.7 36.2 36.9

Exchange rate L£:US$ (av) 1,507.5 1,507.5 1,507.5 1,507.5

Exchange rate L£:¥100 (av) 1,297.1 1,282.4 1,432.3 1,566.2

Exchange rate L£:� (year-end) 1,989.4 2,155.7 2,095.4 1,952.2

Exchange rate L£:SDR (year-end) 2,267.9 2,382.0 2,375.6 2,310.2

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

Lebanon 9


Monthly review: November 2007

The political scene

Political life in Lebanon has been dominated by attempts to find a suitable successor to the current pro-Syrian president, Emile Lahoud, before his term ends on November 24th. The Lebanese parliament is required to elect a replacement (the president is traditionally a Maronite Christian). The pro-Western cabinet, which controls 68 of the 128 seats in parliament and has the backing of some Sunni, Christian and Druze leaders, is at loggerheads with pro-Syrian forces over the choice of a candidate. (Syria was the traditional powerbroker in Lebanon but had to withdraw its military forces from the country in mid-2005 after it was implicated in the assassination of a former Lebanese prime minister, Rafiq al-Hariri.) Pro-Syrian political groups, particularly (but not exclusively) Hizbullah, a Shia political party and militia, have made it clear that they would boycott a vote on an unacceptable candidate, and, even if constitutionally elected, the choice of such a candidate would trigger extra-parliamentary activities by their supporters that would further destabilise the country.

Domestic and international efforts intensified in October and early November to broker a compromise between the two main rival political groups!the "March 14th" anti-Syrian ruling coalition (named after the landmark rally that took place following Mr Hariri"s assassination), which looks to France, the US and Saudi Arabia to support its independence from Syrian hegemony, and the opposition, commonly known as the "March 8th" alliance (after another rally), which is led by Hizbullah, but also includes some influential Christian figures, and which sees Iran and Syria as Lebanon"s natural allies. However, leaders have remained unwilling to compromise over the choice of the new president, who is seen as able to determine Lebanon"s future political orientation. Even though the president"s powers are fairly limited, the outcomes of a plethora of other issues!such as the UN investigation into Mr Hariri"s killing, government authority and the state monopoly of arms (or lack thereof)!depend heavily on which candidate is chosen.

Having failed to agree on a candidate for yet another month, politicians looked to their regional and global sponsors in late October and early November for support. Despite a spate of shuttle diplomacy and offers to mediate by international bodies, no settlement on a compromise candidate capable of restoring a semblance of political stability could be found. A planned parliamentary vote to elect the new president has therefore been repeatedly postponed. With November 24th approaching, several potential candidates have emerged as possible compromise figures. Although many politicians feel assured a last-minute deal will be reached, each side appears to be waiting until the last moment to extract the maximum leverage. However, such optimism over a relatively benign conclusion to the crisis is not shared by the wider population, which has painful experience of the past failures of Lebanon"s

Despite intensive talks, parties fail to agree on new president

10 Lebanon


political class. Reports have grown of an inflow of weapons into the country, reflecting anxiety among individuals and communities about their security.

Beirut hosted a series of high-profile foreign delegations in October and early November seeking to end the deadlock, but all have left without making progress. In October these included the foreign ministers of Turkey, Egypt, France, Italy and Spain. There were also initiatives by Russia and the Vatican and, in November, a visit by an Arab League delegate. The Saudi ambassador to Lebanon, among others, has also been attempting to broker a deal. In addition, there have been efforts to bring together local politicians from rival camps, which, most notably, resulted in a meeting between Michel Aoun, the septuagenarian former general who sees himself as the March 8th candidate for president, and Saad al-Hariri, the son of the assassinated former prime minister and the leader of the March 14th group in parliament. The meeting took place in Paris, but also achieved little.

Meanwhile, countries seen as direct sponsors of the two groups have remained active in trying to resolve the crisis, but have discouraged compromise. For example, at the beginning of November, the US secretary of state, Condoleezza Rice, told journalists: "There is a lot of talk right now about compromise # That is fine, but any candidate for president needs to be committed to Lebanon"s sovereignty and independence # and needs to be committed to carrying on the [UN] tribunal." Syria"s involvement has been equally intransigent. In early October, the Syrian president, Bashar al-Assad, accused March 14th forces of treason against Lebanon. In an interview, he said: "It is impossible to build a relationship with some parties who in Lebanon ... are close to Israel, submit themselves to foreign countries # have tied their fate to the West # which signifies Lebanon will not know stability in the near future."

Given such a stand-off, the (Shia) parliamentary speaker, Nabih Birri, who is associated with the March 8th alliance, has repeatedly rescheduled the planned parliamentary session to vote for the new president: the original session, scheduled for September 25th, was postponed until October 23rd and then until November 12th. On November 10th, however, Mr Birri announced that the vote would take place on November 21st, just three days before the end of Mr Lahoud"s term. The move was made ostensibly to allow rival leaders a final chance to break the deadlock.

The names of a number of possible presidential candidates have been circulated. There are three serious declared candidates: Mr Aoun, and two moderates from the March 14th movement, Nassib Lahoud (a distant cousin of the president) and Boutros Harb. There are also a number of compromise names widely circulating, including Michel Suleiman, who is head of Lebanon"s military and could also be named interim president if parliament fails either to elect a president before Mr Lahoud"s term ends or to amend the constitution to allow for a direct election. Mr Suleiman visited Egypt in late October, and met the president, Hosni Mubarak. Although the army claimed that this was a "technical visit", it was unprecedented, and came amid reports that Egypt favoured Mr Suleiman as interim president with a two-year term, during which time he would oversee the passage of a new electoral law and a

Peace envoys fail to break the deadlock

Short list of possible candidates widely discussed

Lebanon 11


parliamentary election. Mr Suleiman is understood to have some support from the US, but he is regarded by the March 14th camp as too beholden to Syria. Jean Obeid, a former government minister, has emerged as another potential compromise candidate. Other possible candidates include Robert Ghanem, an MP, Riad Salameh, the governor of Banque du Liban (the central bank), and Michel Khoury, a former governor.

The continuing political deadlock has led to growing anxiety at a popular level, and, unsurprisingly, given the country"s history of civil conflict, a reported growth in the demand for weapons. There has been public debate of this issue for more than a year. In October, security forces arrested members of Mr Aoun"s movement who were found armed and undertaking "military training" on the northern coast.

In the past month both Hizbullah and Israel have carried out military exercises in southern Lebanon close to the Israeli-Lebanese border. Israel carried out major manoeuvres in Galilee and the Golan Heights involving 50,000 troops. Hizbullah"s military exercises south of the Litani river were unarmed but were the biggest that it had ever conducted. These actions and complaints from Israel have raised fresh concerns about the group"s military arsenal and its possible uses given its opposition to the administration of the prime minister, Fouad Siniora. The UN secretary-general, Ban Ki-moon, said in a recent report that most political parties were apparently preparing for the possible deterioration of the situation, and called on all of them "to immediately halt all efforts to rearm and engage in weapons training".

Economic policy

Fiscal outturns for the first nine months of 2007 indicate an improvement in Lebanon"s fiscal position. However, the gap between total revenue and spending remained at more than 10% of forecast GDP, reflecting historical government weakness in controlling taxation and spending, a trend accentuated recently by slowing economic growth and rising political tensions. However, efforts by the government to raise revenue and squeeze spending appear to be reaping some positive results. Total budget revenue for the first nine months was L£6.56trn (US$4.35bn), up by 21.8% over the same period of 2006. This improvement reflected two factors: a low 2006 base, and improved collection (a long-term trend) in 2007 largely thanks to higher income from trade taxes, value-added tax (VAT) and mobile-phone networks. The conflict of mid-2006!which saw Israel blockade Lebanon"s main port and undermined much economic activity and tax collection!hit revenue in 2006, making figures for 2007 appear stronger. Nevertheless, there was also organic growth in tax collection in 2007; budget revenue in the first three quarters was 21.2% higher than in the same period of 2005, and 17.3% above the 2004 figure.

Customs duties were up by 34.2%, and VAT revenue by 24.9%, in the first nine months of 2007 compared with the same period of 2006. Income from trade has grown strongly, as Beirut re-establishes its transshipment role for goods to Iraq, Syria and the Gulf. Non-tax revenue, largely income from mobile-phone

Concerns over potential civil unrest

Fiscal revenue rises sharply and the deficit narrows

12 Lebanon


networks, was up by 31.7% to L£1.87trn. Total revenue was equivalent to 26.4% of forecast GDP, up from 22.8% in 2006 and 23% in 2005, reflecting improvements in collection. Efforts to contain expenditure had mixed results, but revenue growth has kept ahead of spending growth. Total budget spending reached L£9.30trn in the first three quarters of 2007, up by 11% over the same period of 2006. Major components of spending include debt service and support for Electricité du Liban (EDL), the loss-making state-owned power generator. Debt-service costs were L£3.6trn, up by 13.9%, and equivalent to 38.8% of total spending. All other expenditure!accounted for by salaries, pensions, ministerial and local authority spending!reached L£5.7trn, up by 9.2%.

Fiscal performance, Jan-Sep (L£ bn unless otherwise indicated)

2006 2007 % change

Total revenue 5,388 6,563 21.8

Tax revenue 3,630 4,165 14.7

VAT 1,163 1,453 25.0

Customs 699 938 34.2

Non-tax revenue 1,421 1,872 31.7

Total spending 8,377 9,297 11.0

Non-debt spending 5,215 5,697 9.2

Debt servicing 3,162 3,600 13.9

% of total revenue 58.7 54.9 -

Balance -2,989 -2,734 -8.5

Source: Ministry of Finance.

Overall, with revenue rising more sharply than expenditure, the deficit fell by 8.5% year on year, to L£2.73trn, in the first nine months of 2007. The deficit was equivalent to 29.4% of expenditure, the preferred local measure in the absence of timely GDP figures, or 11% of estimated GDP. Although this constituted an improvement compared with the first nine months of 2006, the deficit remains wide and will further increase the country"s heavy public debt burden.

In October the government published a draft budget for 2008, which envisages a further tightening of policy, with tax increases and spending cuts. Irrespective of the figures, presentation of the budget two months before the beginning of the year was a significant step forward, given the political chaos of the past two years, which has seen budgets presented well into the year to which they relate. Revenue is budgeted at L£8.37trn, up by 9% on the 2007 budget. Based on an annualisation of the nine-month revenue figures, the government can probably expect fiscal earnings of around L£8.75trn this year. This would suggest that the 2008 revenue forecast is too conservative. However, the new budget takes into consideration plans to sell off the mobile-phone networks in 2008, which, if accomplished (an unlikely event) would reduce non-tax revenue, explaining the apparently conservative projection. The most significant changes aimed at raising revenue are a rise in the VAT rate from the 10% to 12% and an increase in the tax on interest-bearing bank deposits from 5% to 7%. Given parliament"s track record of opposing all tax rises and the current political logjam, prospects for success are limited.

Draft 2008 budget includes planned tax increases

Lebanon 13


Government budgets (L£ bn unless otherwise indicated)

2006a 2007 b 2008b % changeRevenue (all treasury) 7,295 7,675 8,368 9.03Expenditure (all treasury) 11,877 11,840 11,475 -3.08 Debt-servicing 4,557 4,900 4,650 -5.10 Other 7,320 6,940 6,825 -1.66Balance -4,582 -4,165 -3,107 -25.40

a Outturn. b Draft budget.

Sources: Ministry of Finance; local press reports.

The government forecasts total expenditure in 2008 at L£11.48trn, down by 3.1% on the 2007 budget and 7.4% lower than the current projected outturn for the year based on nine-month figures. The government optimistically expects a sharp reduction in spending on EDL. Debt-service costs are also forecast to be 5.1% lower than in the 2007 budget, at L£4.65trn. The government hopes to accomplish this by restructuring some of its debt using inflow of foreign aid and by restricting spending. The state received pledges of US$7.6bn at the ""Paris III" donor conference in early 2007, of which US$3.6bn has so far been received, suggesting that Lebanon can expect further inflows in 2008. The government is also understood to have budgeted for a one-off payment, of up to US$6bn, from the sale of mobile-phone licences.

The draft 2008 budget sets a deficit target of L£3.11trn, 25.4% lower than the target for 2007. If achieved, the deficit would be equivalent to 27.1% of expenditure, or 9.1% of estimated GDP. However, despite a conservative tax revenue assumption, some of the targets, particularly that for the sale of the mobile-phone licences, appear unrealistic.

The Telecommunications Regulatory Authority (TRA), a new quasi-state body, has set February 1st 2008 as the deadline for applications to purchase licences for the two mobile-phone networks. Interested companies will be allowed to buy two-thirds of each network, with the award providing a 20-year licence to build, own and operate the network and provide mobile telecommunications services. The government will retain the remainder for a later public offering. The networks were originally established by private-sector companies in 1994, under ten-year build-operate-transfer (BOT) contracts, but were nationalised before the end of the term after a long-running dispute over state income from the operations. They now have some 1.1m subscribers out of population of 4m, and have provided the finance ministry with income of some US$900m a year.

Although successive governments have committed themselves to re-privatise the networks to raise a one-off lump sum to pay down the public debt stock, the president, Emile Lahoud, has opposed this, leading to a compromise, with the networks staying in state hands, but operated by foreign private-sector companies, Germany"s Detecon and Kuwait"s Zain (formerly MTC), under contracts expiring in mid-2008. The move by the TRA reflects the government"s renewed commitment to sell the networks!the lack of competition has kept prices high and subscriber numbers down. However, the sale requires parliamentary approval, which seems unlikely in the current political climate,

Telecoms regulator announces timetable for mobile sale

14 Lebanon


particularly as Hizbullah, which operates its own unauthorised mobile network, has said that it opposes the sales.

Economic performance

Data for tourist arrivals in the first three quarters suggest the sharp decline seen following the July-August 2006 conflict between Israel and Hizbullah has eased. The conflict halted virtually all travel for nearly two months and led to the evacuation of thousands of visitors. Some 766,980 people arrived in the country in the first nine months of 2007 for "tourism" purposes. This is 8% below the figure for the same period of 2006. However, this decline compares with a 34.7% year-on-year fall in the first half of 2007, indicating that the gap is closing, although visitor numbers are still far below the 1.3m seen in 2004, before the assassination of Mr Hariri and the ensuing political unrest.

Lebanon tourist arrivals 2004 2005 2006 2007

Year Year Jan-Sep Year Jan-SepNumber of tourists 1,278,503 1,139,524 833,385 1,062,635 766,980 % change, year on year 20.6 -10.9 -8.6 -6.7 -8.0

Sources: Ministry of Tourism; local press.

Direct and indirect income from tourism is one of Lebanon"s most important revenue earners. The two main sources of tourists are the Lebanese expatriate community and Gulf Arab countries. Both types of tourism have been hurt by the increased tension. In addition, a new UN report indicates that inflows of expatriate remittances reached US$5.72bn in 2006, equivalent to 25.2% of GDP, and reflecting Lebanon"s dependence on income from its diaspora.

Leading banks reported strong profits for the first nine months of 2007, generated mostly from overseas operations in the booming Gulf Arab countries. Bank Audi-Saradar Group reported consolidated net profits of US$140.3m, up by 10.3% compared with the same period of 2006. BLOM Bank reported income of US$147.6m, up by 11.4%, with Byblos Bank declaring a US$57.1m profit, up by 13.2%. Banking remains the only major sector enjoying significant growth in 2007, thanks to its geographic diversification in recent years to escape the subdued local economy.

Slump in tourism appears to ease

Banks remain the sole buoyant sector

Lebanon 15


Data and charts Annual data and forecast

P ro d uc t io n to rem o v e

2003a 2004b 2005b 2006b 2007 b 2008c 2009c

GDP

Nominal GDP (US$ m) 19,798.3 20,494.7 21,315.1 21,227.4 21,977.4 23,183.2 24,698.9

Nominal GDP (L£ bn) 29,846 30,896 32,132 32,000 33,131 34,949 37,234

Real GDP growth (%) 4.2 4.3 0.1 -1.1 0.3 1.2 2.3

Expenditure on GDP (% real change)

Private consumption 3.3 2.7 0.5 -8.0 1.0 2.0 3.0

Government consumption 3.3 3.0 1.0 7.0 4.0 3.5 3.0

Gross fixed investment 10.3 4.2 -1.0 -9.0 4.0 5.0 6.0

Exports of goods & services 6.9 12.0 2.0 -9.0 5.0 3.9 5.0

Imports of goods & services 6.1 4.0 1.5 -18.0 8.0 7.0 7.0

Population and income

Population (m) 3.9 4.0a 4.0a 4.1a 4.1 4.2 4.2

GDP per head (US$ at PPP) 7,950b 8,210 8,116 7,929 7,853 7,856 7,943

Fiscal indicators (% of GDP)

Public-sector revenued 22.3 24.3 23.0 25.7 29.4 28.6 28.6

Public-sector expenditure 35.5 34.1 31.8 37.1 42.7 41.9 40.8

Public-sector balance -13.2 -9.8 -8.7 -11.5 -13.4 -13.3 -12.2

Net public debt 168.2 175.0 180.6 190.2 198.7 198.2 191.7

Prices and financial indicators

Exchange rate L£:US$ (end-period) 1,507.5 1,507.5a 1,507.5a 1,507.5a 1,507.5 1,507.5 1,507.5

Exchange rate ¥:L£ (end-period) 0.071 0.068a 0.078a 0.079a 0.074 0.066 0.063

Consumer prices (end-period, %) 2.0 2.4a 2.5 7.2 4.0 3.9 3.1

Stock of money M1 (% change) 10.9 6.4a -2.6a 12.5a 9.0 8.0 7.0

Stock of money M2 (% change) 13.0 10.1a 4.5a 7.8a 9.0 9.5 11.0

Lending interest rate (av; %) 13.4 10.8a 10.6a 10.3a 10.2 10.0 10.4

Current account (US$ m)

Trade balance -4,794 -6,452a -6,118a -5,755a -6,901 -7,377 -7,736

Goods: exports fob 1,733 2,050a 2,278a 2,792a 3,099 3,223 3,288

Goods: imports fob -6,528 -8,502a -8,397a -8,547a -10,000 -10,600 -11,024

Services balance 2,974 1,474a 2,963a 2,903a 1,187 1,167 1,418

Income balance -3,436 -817a -177a 211a -198 -43 80

Current transfers balance 328 1,716a 1,062a 1,157a 2,218 2,568 2,933

Current-account balance -4,929 -4,079a -2,270a -1,484a -3,694 -3,684 -3,305

External debt (US$ m)

Debt stock 23,432b 28,443 29,004 32,109 34,674 36,174 36,876

Debt service paid 2,925b 4,211 2,733 3,322 4,282 5,492 5,868

Principal repayments 1,382b 2,534 896 1,180 2,000 3,149 3,441

Interest 1,543b 1,677 1,837 2,142 2,282 2,343 2,427

International reserves (US$ m)

Total international reserves 16,353 15,741a 16,624a 19,184a 19,398 20,403 21,915

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Banque du Liban data for 1993-97.

Source: IMF, International Financial Statistics.

16 Lebanon


Quarterly data P ro d uc t io n to rem o v e

2005 2006 2007

3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Central government finance (L£ bn)

Revenue 1,881.4 1,991.2 1,931.0 2,132.3 1,324.8 1,906.8 2,122.0 2,375.8

Expenditure 2,486.9 2,862.7 2,537.8 2,691.5 3,147.2 3,500.0 3,115.1 3,230.8

Balance -605.5 -871.5 -606.8 -559.3 -1,822.4 -1,593.2 -993.0 -854.9

Output

Coincident Indicator (end-period, 1993=100) 177.7 183.5 187.1 191.6 157.1 177.7 185.5 170.6

Coincident Indicator (% change, year on year) 4.4 5.0 12.4 9.4 -11.6 -3.2 -0.9 -11.0

Financial indicators

Exchange rate L£:US$ (av) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

Exchange rate L£:US$ (end-period) 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

Deposit rate (av; %) 8.2 8.1 8.0 8.0 7.9 8.0 8.0 8.0

Discount rate (end-period; %) 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0

Lending rate (av; %) 10.7 10.3 10.2 10.3 10.2 10.3 10.3 10.4

Treasury bill rate (av; %) 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2

M1 (end-period; L£ bn) 2,953 2,952 3,026 3,122 3,220 3,322 3,238 3,322

M1 (% change, year on year) -6.6 -2.6 11.3 9.7 9.0 12.5 7.0 6.4

M2 (end-period; L£ bn) 72,205 74,358 75,774 78,454 77,183 80,155 81,592 84,386

M2 (% change, year on year) 5.0 4.5 9.5 11.8 6.9 7.8 7.7 7.6

BLOM stockmarket index (end-period; Jan 22 1996=1,000) 1,005.8 1,309.4 1,566.4 1,517.7 1,330.3 1,184.2 1,219.1 1,187.6

BLOM stockmarket index (% change, year on year) 58.9 105.6 127.4 63.2 32.3 -9.6 -22.2 21.7

Sectoral trends

Construction permits (end-period; '000 sq metres) 853.8 1,071.1 1,535.6 982.1 466.2 775.4 602.2 869.3

Foreign trade & reserves (US$ m)

Exports fob 465 541 518 785 376 604 622 690

Imports cif 2,554 2,470 2,349 2,707 1,601 2,740 2,701 2,767

Trade balance -2,089 -1,929 -1,832 -1,922 -1,225 -2,136 -2,079 -2,077

Reserves excl gold (end-period) 10,580 11,887 11,900 12,964 13,784 13,376 13,099 13,011

Source: IMF, International Financial Statistics.

Lebanon 17


Monthly data P ro d uc t io n to rem o v e

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate L£:US$ (av) 2005 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

2006 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5

2007 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 1,507.5 n/a n/a

Deposit rate (%) 2005 7.1 7.0 8.5 8.9 8.9 8.7 8.3 8.1 8.0 8.0 8.0 8.1

2006 8.1 8.0 8.0 8.0 8.0 8.0 7.9 8.0 8.0 7.9 8.0 8.0

2007 8.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 n/a n/a n/a n/a

Lending rate (%) 2005 10.4 10.3 11.0 11.3 11.1 11.0 10.8 10.5 10.7 10.5 10.2 10.1

2006 10.1 10.3 10.2 10.4 10.2 10.2 10.4 10.0 10.2 10.4 10.2 10.4

2007 10.0 10.3 10.6 10.4 10.4 10.3 10.2 10.2 n/a n/a n/a n/a

M1 (% change, year on year) 2005 6.9 2.5 -2.0 -4.1 -7.0 -5.3 -0.7 -5.2 -6.6 -2.9 -2.7 -2.6

2006 -4.0 -0.5 11.3 10.5 8.1 9.7 11.2 10.2 9.0 8.8 13.0 12.5

2007 6.9 9.1 7.0 8.3 11.1 6.4 3.6 9.4 n/a n/a n/a n/a

M2 (% change, year on year) 2005 9.1 7.9 5.4 4.7 4.0 4.0 4.7 4.8 5.0 4.7 4.4 4.5

2006 5.8 6.5 9.5 10.7 11.2 11.8 8.1 6.2 6.9 9.2 9.4 7.8

2007 6.9 8.1 7.7 8.1 8.6 7.6 11.0 n/a n/a n/a n/a n/a

Total exports fob (US$ m) 2005 83.3 80.1 105.5 109.2 93.1 108.7 86.3 106.0 116.1 116.7 97.9 144.1

2006 95.9 111.0 136.4 153.0 189.0 178.8 68.8 57.0 123.6 117.6 146.5 136.4

2007 125.4 145.1 142.2 152.9 154.8 150.0 143.9 n/a n/a n/a n/a n/a

Total imports cif (US$ m) 2005 457.9 427.9 548.2 440.2 497.8 490.9 586.5 553.5 554.3 543.9 516.3 578.3

2006 425.9 509.2 623.3 563.2 650.3 582.1 398.6 178.1 485.6 565.1 652.4 600.0

2007 588.5 550.9 652.5 627.3 616.6 591.4 697.1 n/a n/a n/a n/a n/a

Trade balance (fob-cif basis; US$ m) 2005 -374.6 -347.8 -442.7 -331.0 -404.7 -382.2 -500.3 -447.5 -438.2 -427.2 -418.4 -434.2

2006 -330.0 -398.2 -486.9 -410.2 -461.2 -403.4 -329.8 -121.1 -362.0 -447.5 -505.9 -463.5

2007 -463.1 -405.7 -510.3 -474.5 -461.8 -441.4 -553.2 n/a n/a n/a n/a n/a

Foreign-exchange reserves excl gold (US$ m) 2005 11,964 10,953 9,803 9,912 10,008 10,526 10,685 10,950 10,580 11,604 11,560 11,887

2006 11,747 11,897 11,900 12,708 12,711 12,964 12,511 13,473 13,784 13,840 13,426 13,376

2007 13,584 13,606 13,099 13,303 13,077 13,011 13,414 n/a n/a n/a n/a n/a

Sources: IMF, International Financial Statistics; Haver Analytics.

18 Lebanon


Annual trends charts P ro d uc t io n to rem o v e

Annual trends charts

Budget balance(% of GDP)

Public debt(% of GDP)

Destination of exports, 2006(share of total) (share of total)

Origin of imports, 2006

Switzerland7.9%

Other48.3%

Saudi Arabia5.6%

Syria26.4%

UAE11.8%

Other62.1%

Syria11.4%

Italy9.6%

France7.6%

US9.2%

Source: Economist Intelligence Unit. Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.




-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0 World Middle East and North Africa Lebanon

09080706050420030.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0 World Middle East and North Africa Lebanon

0908070605042003

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0 Middle East and North Africa Lebanon

09080706050420030

50

100

150

200

250 World Lebanon

0908070605042003

Real GDP growth(% change)

Consumer price inflation(av; %)

Lebanon 19


Monthly trends charts P ro d uc t io n to rem o v e

Monthly trends charts

Interest rates(av; %)

Monetary aggregates(% change, year on year)

Foreign trade(US$ m; goods only)

Foreign-exchange reserves(US$ m)

9,500

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

JulAprJan07

OctJulAprJan06

OctJulAprJan05

OctJulApr2004

6.0

7.0

8.0

9.0

10.0

11.0

12.0 Lending rate Deposit rate

JulAprJan07

OctJulAprJan06

OctJulAprJan05

OctJulApr2004

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0 M2 M1

JulAprJan07

OctJulAprJan06

OctJulAprJan05

OctJulApr2004

-600

-400

-200

0

200

400

600

800 Balance Imports Exports

JulAprJan07

OctJulAprJan06

OctJulAprJan05

OctJulApr2004

Source: Economist Intelligence Unit.Source: Economist Intelligence Unit.

Source: Economist Intelligence Unit.Source: Economist Intelligence Unit.

20 Lebanon


Country snapshot

Political structure

Republic of Lebanon

Parliamentary republic

Based on the 1926 constitution (with amendments incorporated in 1990) and the Civil Procedure Code, the Criminal Procedure Code and the Penal Code

Under the electoral law of July 16th 1992, the unicameral National Assembly has 128 seats, equally divided between Muslims and Christians

Universal direct suffrage over the age of 21

Next elections due in November 2007 (presidential) and May 2009 (legislative)

The president, currently Emile Lahoud, was elected in November 1998 for a six-year term by the National Assembly. This was extended for a further three years in August 2004. Under an unwritten agreement, the president must be a Maronite Christian

The prime minister, who must be a Sunni Muslim, is chosen by the president after consultation with MPs. The government is chosen by the designated prime minister and the president. Ministers need not be members of the National Assembly, but are responsible to it. Cabinet seats are customarily divided on a sectarian basis.

Hizbullah (Shia), Amal (Shia), National Liberal Party (Christian), National Bloc (Christian), Kataeb Party (largest Christian party), Progressive Socialist Party (mainly Druze), Syria Social Nationalist Party

Prime minister Fouad Siniora (Sunni Muslim) Deputy prime minister & defence minister Elias Murr (Greek Orthodox Christian)

Administrative reform Jean Oghassabian (Armenian Christian) Culture Tarek Mitri (Greek Orthodox Christian) Economy & trade Sami Haddad (Protestant Christian) Education Khaled Kabbani (Sunni Muslim) Energy & water Vacant Environment Vacant Finance Jihad Azour (Maronite Christian) Foreign affairs (acting) Tarek Mitri (Greek Orthodox Christian) Health Vacant Industry Vacant Information Ghazi Aridi (Druze) Interior (acting) Ahmed Fatfat (Sunni Muslim) Justice Charles Rizk (Maronite Christian) Labour (acting) Hassan Sabaa (Sunni Muslim) Public works & transportation Mohammed Safadi (Sunni Muslim) Social affairs Nayla Moawad (Maronite Christian) Telecommunications Marwan Hamadeh (Druze) Tourism Joseph Sarkis (Maronite Christian)

Nabih Birri (Shia Muslim)

Riad Salameh (Maronite Christian)

Official name

Form of state

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political organisations

Central bank governor

Key ministers

Parliamentary speaker

Documents

Lebanon - iuj.ac.jpmobile-phone operators!and make public expenditure more efficient. • We expect the fiscal deficit to widen to L£4.6trn (US$3bn), or 13.3% of GDP, in 2008 before