SILVER LININGS

Lebanon 2018 | ECONOMY | REVIEW

Lebanon looks to be leaving the doldrums behind as growth begins to, albeit slowly, pick up following the darkest days of the Syrian civil war.

Though Lebanon's economic growth has been anemic since the start of the Syrian war in 2011, tumbling from 10.1% in 2009 and 8% in 2010 to merely 0.9% in 2011, in 2017 it inched up to 2% from its nadir of 0.8% in 2015 and has crawled along at that pace ever since. If anything, the difference between 2017 and 18 and the darkest of the Syrian war years (2013-2015)—many times at which it looked as though Daesh would expand its haven from Ras Baalbek and the Palestinian refugee camp of Ain al-Hilweh into the rest of the country—now seems starker than ever. Meanwhile, though its public debt levels remain amongst the highest in the world, and the private-sector bank deposits upon which its anomalous economy depends are troublesomely on the wane in the past two quarters, 2018 has been a positive year in many respects for the country.

For starters, in late March its parliament passed a budget for only the second time in 14 years (after 2017's “landmark" budget was passed), amounting to some USD4.8 billion. Under considerable international pressure to enact key economic reforms, parliament pushed the budget through in an effort to boost investor confidence ahead of the much-anticipated Paris Cedar Conference in April. Though hosted by French President Emmanuel Macron, in attendance were most of the key European and Gulf nations that prop the tiny state's USD48-billion economy when push comes to shove. Also present were the World Bank and the European Bank for Reconstruction and Development, both of which Lebanon solicited to help fund a list of 280 infrastructure projects on the sidelines of the Cedar Conference. Though Lebanon initially received uncharacteristically tepid tenders from key Arab states (Saudi Arabia, the UAE, and Kuwait) in contrast to those from the UK and France, Beirut still left Paris with pledges of USD11 billion in soft loans and grants, a billion of which came from Riyadh alone. Though Saudi Arabia turned off the generally generous taps back in February 2016 to protest Hezbollah's ever-encroaching stranglehold over Lebanese political life, its brief kidnapping of Prime Minister Saad Hariri in November 2017 sent the Lebanese economy into a momentary tail-dive.

Within days of Hariri's “resignation," more than USD2 billion fled the country—the equivalent of over 4% of GDP—and many banks were forced to cold-call Lebanese living abroad with offers of higher interest to bring their cash back into the country. One bank offered as much as 6% on deposits over USD1 million, and rates for high deposits in local currencies reached upward of 10.5%. Though the central bank (BDL) weathered the storm under governor Riad Salamé's dexterous handling—the same man who has seen Lebanon's central bank through every financial crunch since 1993—there is probably some truth to the notion that Riyadh's contribution to the Cedar Conference in April was, in part, a compensation of sorts.

Taken together, Beirut hopes the much-needed cash injection will serve as a catalyst to kick-start private-sector growth and wean the economy off its two biggest cash cows: banking and remittances. After all, the biggest thing keeping the country and currency in line are massive inflows of foreign currency each year—whether dollars, euros, dinars, pounds, nairas, or riyals, the record USD43 billion in foreign reserves the BDL is currently sitting on are the sole thing keeping the Lebanese pound's peg to the dollar afloat (at 1,500/1).
As long as the remittances flow, Lebanese banks are happy to gobble up government debt, though Hariri's brief resignation brought foreign deposit growth to 3.8%, its lowest in 30 years and slowest since the end of the civil war. And while remittances have repeatedly 'saved' the country, they have also given the government free rein to spend irresponsibly: at 150% of GDP, Lebanon's foreign deficit is now the third largest in the world, second only to Japan (253%) and Greece (180%). As things stand, 70% of Lebanon's national budget already goes toward financing its debt and paying government salaries. Add another 10% spent on electricity subsidies to compensate (in small measure) for the country's criminally insufficient grid, and very little is left for health, education, infrastructure, or, god forbid, start-up incubators.

This is part of the reason the IMF warned in February that if urgent reforms were not taken immediately, Lebanon's debt-to-GDP ratio could increase to 180% by 2023, the ratio Greece reached at its darkest hour in 2012. Nevertheless, April's coup seems to have bought the government some time. And if Nadim Munla, a senior adviser to Prime Minister Hariri, is right, it will help cover a very fair chunk of the USD1.5 billion he predicts the government will need to spend per year in the coming decade. All the same, despite the deft maneuvering of Salamé and other top negotiators in Paris, the government still hired McKinsey in January for a costly six-month consultancy project to help it reinvent the essentials of the economy away from banking and remittances—the two things keeping it afloat—toward a brighter, more diversified, but yet-to-be-defined future.

Whatever the case, try they must: with youth unemployment at 35% and overall unemployment at 24%, according to Economy and Trade Minister Raed Khoury, and a trade deficit of USD11.77 billion (USD13.89 billion) in imports compared to USD2.12 billion in exports), the economy could do with more than a shake up. Whether the IMF's prescriptions will do the trick—chief of which is choosing and then gradually scaling toward a debt-to-GDP ratio through tax hikes and expenditure cuts—is far from clear. In the short term, they would likely destabilize a country on the edge since April 13, 1975; yet, with nearly half of government spending spent on servicing loan repayments, something must be done. The easiest means of plugging the shortfall, of course, is simply growth—which oddly is only the third of the IMF's recommendations (after “strengthening Lebanese banks' buffers").

Part of the difficulty lies in the Lebanese pound's peg to the dollar, which has been both a blessing and a curse over the years. When the US Federal Reserve raised its rate by a quarter point after its meeting in mid-June, this put undue pressure on the BDL to follow suit in order keep attracting deposit inflows. This has been a particular worry since last year, when growth in deposits dwindled to around 3%, which, when adjusted for inflation, rounds down to nearly zero. However, as Farouk Soussa, Chief Middle East Economist at Citibank, told the Financial Times, every point the BDL raises rates raises the government's cost of debt servicing by 7%—already the world's highest at 49% of the government's yearly budget.

All the same, April's triumph was followed by yet another in May: the country's first parliamentary elections in nine years. Though broadly interpreted as a marginal victory for Hezbollah and its allies—most notably by the 'victors' and those who loathe them (Israel, US)—it would be more accurate to describe it as a loss for Saad Hariri's Future Movement, which lost 15 seats, compared to Hezbollah's gain of one. However democratic, Hariri's loss of influence does not bode well for the country's short-term economic health: as the premier conduit to Saudi Arabia, the country's chief economic wetnurse since the Taif Agreement of 1989, his remains a crucial voice in times of economic crisis. Which is why, in the long run, however unhealthy, it is best to rely on the millions of individual Lebanese and their annual remittances: however greener the economic shores in their place of residency, their dollars are far less likely to abandon the country in times of need.