Crunch time for Lebanon

The Lebanese economy is under increasing strain, not least because of the 1.5 million Syrian refugees who have entered the country but also because pleas for international help are falling on deaf ears. Published in The Middle East, 3 November 2014

The Lebanese delegation that arrived in Washington DC in early October for the annual meetings of the World Bank and IMF was faced with a tough task. The country is in desperate need of assistance to help it cope with the impact of the Syrian civil war, including more than 1.5 million refugees that have flooded across the border over the past few years. But trying to persuade other governments to help Beirut through a crises that it has no control over has proved to be difficult. As is often the case, kind words are far easier to garner than hard cash.

The World Bank estimates that the Syrian civil war has cost the Lebanese economy as much as $7.5 billion and that the country needs $1.6 billion just to maintain basic services for its citizens and all the refugees it is hosting. Yet to date, just $30 million has been donated to the Lebanon Syrian Crisis Trust Fund that the World Bank set up earlier this year, with Finland, Norway and France so far the only ones to have provided any actual aid.

Lebanese officials have not hidden their disappointment at the attitude of the outside world. “The support we were expecting from donor countries has been very much below what Lebanon would have expected,” said Alain Bifani, director general of Lebanon’s Ministry of Finance, at a press briefing in Washington DC on 9 October.

The region can ill-afford to see Lebanon fall into a spiral of instability once again, but the lack of financial support being offered to the country suggests that many governments do not see such an eventuality as being a serious risk. Perhaps one reason for the hands-off attitude of potential donors is that, although Lebanon has had a torrid recent history, its economy has also proved remarkably resilient. It has never defaulted on its debts, for example, and the well regarded central bank, the Banque du Liban, has managed to keep the Lebanese pound stable throughout the current crisis.

Nonetheless, pressures are mounting and they are not limited to the Syrian refugee crisis. There are also some headache-inducing domestic problems. The country has not had a president since May when Michel Suleiman’s term ended, because members of the country’s parliament have been unable to agree on a candidate. That in turn has meant that a new electoral law has been delayed and parliamentary elections –scheduled to take place in November – had to be postponed.

 And yet despite all the problems the economy is still growing, albeit slowly. The IMF estimates that Lebanon’s gross domestic product (GDP) will grow by 1.8% this year, slightly up on the 1.5% achieved last year. That is still far below the longer-term average but, considering what is happening in all its neighbour states, it is not as bad as it might be.

Some of the growth comes as a result of the refugees themselves. The money they are spending on food, housing and other goods and services is helping boost domestic consumption levels. The flip side is that they are also putting extra strain on electricity and water networks and other public services, something that is putting the government’s finances under great strain.

The Lebanese economy has a few areas of strength that appear to be holding firm. The most important of those is the resilience of the banking sector, which continues to attract high levels of deposits both from domestic savers and from the Lebanese diaspora – deposits grew by 7.7% in the 12 months to the end of July, boosted by resident and non-resident deposits alike.

The strength of the banking system was one of the main reasons why the ratings agency Standard & Poor’s affirmed Lebanon’s rating at B- in October. That is at the lower end of the ratings scale and puts Lebanon a par with the likes of Egypt and Belarus, but at least S&P decided that Lebanon had a stable outlook.

The strength of the financial system means that banks can continue to support the government by buying government debt directly and also buying certificates of deposit issued by the central bank, Banque du Liban, which also buys government debt, providing vital underpinning to what would otherwise be very shaky government finances.

When it comes to the private sector, the situation is decidedly mixed, notwithstanding the strength of the country’s banks. The construction sector is doing relatively well, particularly for developers targeting local buyers with smaller and medium-sized properties rather than the luxury apartments many of them preferred to build before. On the other hand, political instability has discouraged tourists from visiting the country and put off many private investors too.

Such considerations mean Lebanon’s economy is unlikely to do anything but underperform for the foreseeable future. The IMF predicts it will grow by 2.5% next year, which would be among the worst in the region. Only Iran, Iraq and Kuwait are expected to grow at a slower rate and the expected regional average is 3.9%.