With a real gross domestic product (GDP) growth of 9 per cent in 2009, Lebanon, together with Qatar, recorded the fastest economic growth in the region.

The strong growth was a reflection of the country’s newfound stability. Following the signing of the Doha Agreement of 2008, which put an end to armed fighting between supporters of Lebanon’s majority and minority coalitions and enabled elections to take place in 2009. The improved political situation led to a significant growth in tourist arrivals, which rose by 39 per cent in 2009, the largest increase of any country in the world, according to statistics from the World Tourism Organisation.

The main issue for Lebanon’s economy will be privatisation of telecoms and reform of the electricity company

Mohamed Abu Basha, economist, EFG-Hermes

There was no significant fall off in remittance payments from nationals overseas as many had anticipated. Remittances in Lebanon are among the world’s highest, estimated at 20 per cent of GDP in 2008 by the World Bank

Reconstruction

“At the outbreak of the global crisis in September 2008 we were concerned that, since a lot of Lebanon’s economic activity depends on the inflow of remittances and tourism revenue, bank deposits would decline,” says Nassib Ghobril, head of economic research and analysis at the local Byblos Bank. “But the effect has been the complete opposite. Bank deposits have increased, tourism has increased and remittances have not declined significantly.”

Beirut’s principle challenge remains managing its enormous debt pile, created by the vast borrowings required to rebuild the country after its 15-year civil war, which ended in 1990, and after the month-long conflict between Hezbollah and Israel in 2006, which caused an estimated $3.2bn of infrastructure damage. Beirut’s debt was 152.1 per cent of GDP in 2009.

Many economists see economic reform and privatisation of state-owned assets as vital to allow Beirut to reduce its debt pile and continue on a path of sustainable growth.

In the aftermath of the Israeli invasion in 2006, the Lebanese authorities, with assistance from the international community, developed a comprehensive structural reform programme, called the Paris III agenda.

But so far, little has been delivered. Many of the proposed reforms have not materialised, owing to continuing political stalemate and renewed religious and political conflicts. The absence of political consensus has created a road block to government efforts to reform the economic system and privatise state assets.

Under Paris III, privatisation of Lebanon’s major state-owned firms, particularly in the power and telecoms sectors, would provide Beirut with much-needed revenue to service some of its debt, as well as reduce public spending

“If the politics remain stable, the main issue for Lebanon’s economy will be privatisation of telecoms and also reform of the electricity company, because it is eating a lot of the government’s financial resources,” says Mohamed Abu Basha, an economist at regional investment bank EFG-Hermes. “Whether it is through privatisation, or just through reform of the companies, change is needed.”

Lebanon’s power supplier, Electricite du Liban, requires urgent reform. At present most areas of the country receive only 12-16 hours of power a day. It is estimated that the government is subsidising up to $1bn in losses by the utility every year.

Privatisation of Beirut’s telecoms sector is also part of the Paris III reform package, and is seen as an important step in reducing the debt burden. The privatisation of the two state-owned mobile phone operators has been in discussion for a number of years, but the inability of successive governments to achieve consensus has meant there has not yet been an agreement to sell off the companies.

The planned sale of the mobile networks is part of a wider plan to reinvigorate the telecoms sector, which will include an overhaul of the country’s fixed-line network. The body that currently runs the country’s fixed-line network is to be renamed Liban Telecoms, and 40 per cent of the firm is to be sold off to strategic investors.

Implicit guarantees

The formation in December last year of a new government, led by Saad Hariri, has opened a window of opportunity for Lebanon to move forward with economic reform. The new government has reaffirmed its commitment to implementing the Paris III reforms and investing in infrastructure.

Beirut faces large debt repayments, but it has never defaulted on payments or bonds. According to Edward Gardner, an economist at the IMF, the economy appears to benefit from “a perceived implicit guarantee” from international donors that they will not let Lebanon fall into financial crisis.

However, the composite nature of Lebanon’s political system, in which a number of factions are competing for power, means that achieving agreement on the way forward still remains a significant barrier to progress.