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Lebanon Review in 2010 - Politics and Economy Disconnect Continues

Wednesday, 19 January 2011 11:13

election_-_Lebanons_pro-Western_coalition

The year 2010 can be described as typical one for Lebanon, as the distinct disconnect between the nation’s politics and its economy continued . Despite political tensions and budget deadlock, the economy was booming, Global Arab Network reports according to OBG.

The new year opened with the long-running standoff between the March 14 bloc – led by Prime Minister Saad Hariri – and the March 8 coalition of Hizbullah and its allies no closer to a resolution. Throughout the year, Hizbullah refused to discuss legislation, including the 2011 budget, given the likelihood that its members would be indicted by the Special Tribunal for Lebanon (STL), established by the UN to look into the 2005 assassination of former premier Rafik Hariri. The conflict came to a head just days into the new year as 11 ministers – all members or allies of Hizbullah – resigned from the cabinet over the expected indictments on January 12, causing the collapse of the national unity government.

The deadlock in the political arena was in stark contrast to the free flowing movement of the economy throughout 2010. GDP expanded by an impressive 8.9%, according to a report by ratings agency Standard & Poor’s (S&P). The report, issued at the beginning of January, said that while the economy would slow somewhat in 2011 and beyond, GDP is expected to continue to grow by an average of 5.8% per year through 2013.

Despite the turmoil within the government, debt reduction was a notable achievement in 2010. By the end of October, the budget deficit as a proportion of GDP had shrunk to 6.7%, less than half that of a few years before, while public debt had also fallen to around 133% of GDP, down from 148% at the beginning of 2010.

Lebanon’s banking industry, long one of the mainstays of the economy, had yet another good year, reaping the benefits of a sound regulatory regime and solid management practices. By year’s end, the assets of Lebanon’s banks had increased by around 10%, reaching some $130bn, with deposits hitting $103.6bn as of the end of September, according to central bank figures.

Another sector of the economy to perform strongly was tourism, which experienced a record-breaking year with more than 2m arrivals. According to estimates issued by the Ministry of Tourism, receipts from the sector topped $8bn for the year, well above the $7.2bn earned in 2009, making it one of the largest single contributors to GDP.

More good news came in December, with figures released by the state’s statistics bureau showing that inflation had eased in November, the first time in four months that the consumer price index had fallen. According to the Central Administration of Statistics, the inflation rate was 4.3% as of the end of November, down from 4.9% the month before. The slowing rate of overall price increases was largely due to lower costs for food and clothing.

The biggest effect of the government’s collapse and the ensuing political uncertainty will be the continued delay of much-needed economic and structural reforms. Though somewhat constrained by its high level of debt, Lebanon has some urgently needed infrastructure programmes lined up, including work to improve logistics and electricity supply. The utility provider Electricité du Liban (EDL) needs to be restructured, as it currently operates at a loss. Meanwhile, the privatisation of state-owned mobile phone licences could bring in some $6bn or more.

Although the outlook for the economy is broadly positive, the uncertainty following the collapse of the unity government will make it harder for businesses and investors to make longer-term financial decisions, and there may well be knock-on effects for certain segments of the economy, especially tourism.

The country’s burgeoning trade deficit is another area of concern. Despite the strong performance of the country’s export industries, which saw overseas sales total $3.7bn over the first 11 months of the year, a 20.7% increase over the same period in 2009, the trade deficit was set to reach a record high in 2010, with imports jumping by 10.9% to $16.4bn. With expectations that oil prices will rise in the new year, Lebanon’s import bill could well spiral.

While political uncertainty continues to loom overhead, this is nothing new for the Levantine nation and the economy nevertheless looks set to maintain strong growth in 2011 and beyond, driven by ongoing expansion in key sectors, including banking, tourism and construction and real estate.

Global Arab Network

This article is published in partnership with Oxford Business Group

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Last Updated on Wednesday, 19 January 2011 11:28

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