Global Arab Network | Lebanon: New year with political and social uncertainty

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Lebanon: New year with political and social uncertainty

Global Arab Network - - Ahmed Rashid

Tuesday, 03 January 2012 23:42

Global Arab Network - Lebanon has headed into the New Year much in the same way that it entered 2011, with a degree of political and social uncertainty, while events beyond the country’s borders also threaten to eat into hard-won economic gains. Yet this is a country that for decades has defied all economic logic and many financial indicators belie fears of a downturn, Global Arab Network reports according to OBG.

The year began with the political sphere in disarray. The March 14-led government was brought down after it vowed to continue cooperating with a UN-backed investigation into the 2005 assassination of former Prime Minister Rafik Hariri and 22 other people. The Special Tribunal for Lebanon (STL) has indicted four members of the pro-Islamist group Hizbullah over their alleged involvement in the bombing, allegations that the group strongly denies.

Though the government headed by then-Prime Minister Saad Hariri – son of Rafiq Hariri – was forced out of office in mid-January, it was not until June that Najib Mikati was able to fulfil the mandate issued to him by President Michel Suleiman in late January to form a new administration. That new government comprised a potentially uneasy mix of Hizbullah, the Free Patriotic Movement, the Progressive Socialist Party and other blocs supporting the March 8 coalition.

Though that unease has manifested itself on a number of occasions, with various factions at odds over privatisation, planned wage increases and Mikati’s decision in December to provide Lebanon’s share of the budget to the STL, Lebanon still had a government and a prime minister as the year came to a close.

However, that government will have to face growing public dissatisfaction over some of its policies, particularly those dealing with wage increases. Labour organisations have rejected increases to the basic wage and improvements to benefits proposed by the government as insufficient, while employer groups have called the pay raises excessive.

A range of labour organisations, including the union that represents teachers and the umbrella group the General Labor Confederation, called for strike action in December, after the cabinet scaled back planned wage increases announced in October. In late December, the cabinet hiked the minimum wage from LL500,000 ($332) to LL868,000 ($576).

The government justified the level of the pay increases by saying the national economy could not bear the weight of the higher outlays, while central bank governor Riad Salameh warned on December 12 that the increases would add 2% to inflation.

Despite these concerns, consumer inflation was running at 3.5% in the end of October, according to data issued by the Central Administration of Statistics (CAS), well below the 6% year-end level forecast by the central bank in June. However, consumer advocacy groups and other non-governmental organisations have queried the accuracy of the CAS’s figures, citing higher-than-announced increases in food and other basic commodities as factors in pushing inflation well above the central bank’s projected ceiling, which was briefly reached mid-year before prices began to ease.

The economy is also likely to suffer due to the continued unrest in neighbouring Syria, where the protests against President Bashar Al Assad and the subsequent crackdown on opponents of the regime have led to international sanctions being imposed on Damascus. These will likely hit Lebanon, as Syria remains one of its leading trading partners and also sits astride a number of key trade routes to Turkey and the Middle East, all of which have been disrupted. Should tensions in Syria escalate further, Lebanon could find itself on the sidelines of a civil war and even greater trade turmoil.

International ratings agency Moody’s in December cited instability in Syria as a prime reason for revising its outlook for Lebanon’s banking sector from stable to negative, though it emphasised that the banking system’s liquidity buffers and resilient depositor base will likely be maintained, thereby mitigating some of the downside risks.

A potential war in a neighbouring country is a sore threat to Lebanon’s tourism industry, which is already in the doldrums after a poor 2011, with arrivals and hotel bookings well down from the record highs of 2010. While there was some pick-up in the last months of 2011, numbers fell 25% year-on-year between January and September, a downturn attributed to the weakening European economy and growing political unrest across the region.

While tensions may be rising, so too is state revenue. In early December, the Finance Ministry announced there had been a 10.2% increase in revenue for the first eight months of the year, while the budget had posted a primary surplus of $1.5bn in that term, a result mainly attributed to earnings from the telecommunications sector. The total fiscal balance registered a deficit of LL2.103trn ($1.39bn) between January and September, compared to a shortfall of LL3.088trn ($2.04bn) in the same period in 2010, the ministry said in a statement.

These improvements may have prompted Barclays Capital to forecast an increase in Lebanon’s economic outlook for next year, with the investment bank predicting in early December that real GDP would rise by 3.6% in 2012 – double its estimate for 2011. However, Barclays did warn that the escalation of sanctions on Syria could intensify downside risks to growth prospects and seriously affect the Lebanese economy, while the government’s increased outlays could harm fiscal discipline.

Though the outlook for 2012 may appear troubling, Lebanon’s economy has a reputation for not only surviving but actually prospering when many of its neighbours are encountering difficulties. As long as the most dire predictions of open conflict in Syria and a full-blown recession in Europe do not come to pass, Lebanon should continue to make economic progress. (OBG)

Global Arab Network

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