Lebanon: Anatomy of a Dysfunctional Economy

The Lebanese economy has always been traditionally dependent on foreign remittances, tourism, and banking. While remittance tend to remain relatively stable, even in difficult times, tourism in particular may set growth back this year.

Even before local political tensions in Lebanon escalated so dramatically, economic projections for 2012 were quite pessimistic.

This assessment is not about an interim trajectory and it is not related strictly to the weak performance of the various engines of the economy at a specific moment in time.

Rather, it has to do with the fundamentals of the country’s economic model which is dependent on remittances from Lebanese working abroad that feeds consumer demand.

This demand shrinks at certain moments as the economic structure remains fragile and the government insists on the principle of dissociating itself from vital issues, like electricity and public education, thus absolving itself from any responsibility toward engaging in essential reforms.

This abstention is a pivotal factor in the rise of popular tensions and in freeing up unemployed youth so they can devote themselves to acts of violence.

For example, only 5 percent of low-income families in Lebanon send their children to private schools while the percentage in Beirut is 70 percent, according to the International Labor Organization.

Disregard of what is needed to create employment opportunities and curb immigration and marginalization have led to a high level of unemployment among the youth, estimated at almost 22 percent, while the percentage in the general population is about 16 percent, according to UN and IMF figures.

That is how Lebanon’s economic model works and its transitory changes are explained through quantitative indicators while neglecting the underlying reasons for its deformities. Even the World Bank called on principal stakeholders to abandon their immediate interests because reform benefits everyone.

Narrowing down the spectrum of investigation to analyze the economic conditions and difficulties that the country is currently going through, the following conclusions are reached.

The current situation bears down on consumer spending. Shops sit idle and the tourism and financial services sectors slow down in an economy that is is so concentrated – two thirds of its output (more than 65 percent) is generated from tourism and financial services according to a study by Standard Chartered bank.

This bank, which specializes in developing countries, argued in its recently published review of Lebanon’s economic performance that economic activities so far have relied on strong domestic consumption, improved economic indicators compared to last year, and a stronger tourism sector.

On the other hand, growth remains “volatile and susceptible to political shocks,” according to the bank which points out that growth declined drastically last year in light of the geopolitical tensions in the region.

As a result of the turmoil in the region, tourism declined by nearly a quarter, which meant a drop in economic growth, given that the economy is highly dependent on this sector.

Despite this existing and ongoing economic fragility, there is one positive statistic. Remittances of Lebanese expatriates will not be affected much during this phase of regional troubles and difficulties in the global economy “based on recorded experience in previous years,” according to the IMF’s Deputy Director Nemat Shafik, in an interview she gave to Al-Akhbar recently.

Remittances which amount to nearly US$5 billion represent 13 percent of GDP, according to the IMF, and enable many Lebanese families to spend on basic goods and services including education.

Even with remittances staying the same, it remains to be seen whether this fragile model will survive this stage. Most international institutions’ forecasts for economic growth in 2012 are below that of the past year. The IMF for example estimates a 3 percent growth rate, while the investment bank EFG Hermes puts it at 2.5 percent.

Regardless of the numbers, which are often rendered imprecise by Lebanese economic activities, experts agree that the relative improvement in economic activity in the first quarter compared with the same period last year is due to strong domestic consumption and the relative growth in tourism. But as weapons appear on the streets, consumers lose faith and pessimism prevails.

These indicators in particular require confidence: confidence on the part of domestic consumers to spend their money on various goods, including durables and luxury items, and confidence on the part of tourists and other visitors, specifically those coming from the Gulf.

As a matter of fact, this year started with the lowest level of confidence among Lebanese consumers in five years, according to data by Bank Byblos and the American University of Beirut.

“Until now, there is no stagnation in consumption but merely a slowdown. Things however could get worse, if instability and political unrest increases,” says chief economist at Bank Byblos Nassib Gabriel.

The Lebanese economy stands on a number of pillars, the most important of which is consumer spending by households and the private sector which represent about 80 percent of the GDP.

But there are other indicators of the economy’s vitality within the model under which it operates. Perhaps the most important sector to look at in this context is banking. In spite of the difficult operating environment, banks registered a 3 percent combined budget growth in the first quarter of this year reaching US$144.7 billion.

But these institutions are not isolated islands, in Gabriel’s words, their activities, liquidity, and therefore their appeal to foreign capital are dependent on the performance of other sectors.

Turning to the tourism sector, the stakes are high, especially as the summer season rolls in. After recording a 25 percent growth in airport traffic last March, it is not clear yet what choices will potential tourists make regarding their summer vacations especially after Gulf countries advised their citizens not to travel to Lebanon.

The country is at a critical juncture, stuck in a superficial discussion that focuses on analysis of quantitative indicators while it awaits a reformist breakthrough and radical change in the workings of a system that forces 50 percent of every generation to emigrate.

This article is an edited translation from the Arabic Edition.