ON a hill overlooking the old Serail of Beirut stands a tastefully restored Ottoman clock tower and a red tiled government building. Inside, the economists, project managers and planners of the Council for Development & Reconstruction (CDR) are drawing up the blueprint for Lebanon's future as a prosperous upper middle income country.

The CDR is the nerve centre of Lebanon's reconstruction programme and has prepared a comprehensive economic plan which has the goals of restoring real gross domestic product (GDP) to its pre-civil war (1974) level by 1995 and doubling real GDP per capita from 1992 to 2002.

The first three years from 1992 are covered by a national emergency reconstruction programme that is now well under way, with dozens of contracts already awarded to international consultants and construction firms (see below). The whole 10-year programme is entitled Horizon 2000. This involves a total public expenditure of $11,700 million (at constant 1992 prices), comprising $10,200 million of physical investment, mainly in infrastructure, $300 million in investments in institutions and planning and $1,200 million of grant and credit support to the private sector.

The professionalism of the CDR staff and the local and international consultants helping with the plan is strikingly impressive. However, it requires a great leap of imagination to envisage the changes that will supposedly be effected by this massive investment programme. The Lebanon of the early 1990s is a chaotic and ramshackle place in which the gulf between the super-rich who have prospered outside the country and the majority whose living standards have plummeted during the war years is all too apparent.

The infrastructure projects are now starting to produce benefits in terms of better electricity, water and telephone services. However, little effort is being made directly to redistribute income to the less well off. In fact, the government's fiscal policy entails doing just the opposite. Corporate and personal income taxes have been cut to a maximum rate of 10 per cent, and charges for utilities are being steadily increased.

Revenue boost

Finance Minister Fouad Siniora says the government has been obliged to follow this policy because there is no way ahead but through cutting the budget deficit. The government hopes that the lower tax rate will result in higher tax receipts because of increased investment and a decrease in tax evasion. Revenues will also be boosted by increased customs receipts as imports continue to rise. The deficit is now about 30 per cent of GDP. Horizon 2000 is based on bringing the budget into approximate balance by 1995 and producing current surpluses from 1996 onwards. These surpluses are intended to constitute the principal source of financing for public recovery expenditure as well as debt service requirements.

Siniora says that the state is not in a position to deal with issues such as creating employment. He says there are now 160,000 public-sector employees, and the government estimates that 40,000 people a year are entering the job market. Employment levels in the public sector are regarded as being well in excess of requirements for an efficient economy, and it is hoped that private investment will create the jobs needed to absorb the labour surplus. 'The lifeboat of the Lebanese economy is the private sector,' Siniora says.

At present, the state's budget revenues, totalling £Leb 2.2 million million, are largely absorbed by the £Leb 1.55 million million public-sector wage bill. A further £Leb 900,000 million will be required for debt servicing in 1994, meaning that the budget is already in deficit before sectoral spending has been included.

The target of a balanced budget in 1995 will clearly be difficult to attain. The resistance of important segments of the workforce to these tight fiscal policies is growing, and the government has faced a series of strikes, including a one-day stoppage in May by 70,000 teachers.

Impact

The impact of the private sector in plugging the gap in the government's finances has been shown clearly in the balance of payments. The balance of payments, defined as the net change in foreign assets of the banking system, showed a surplus of $1,138 million in 1993. The surplus for commercial banks alone was $703 million. Dollar deposits with Lebanese commercial banks have risen by some $3,000 million over the past two years, and now stand at almost $7,000 million.

The key to the future of the recovery will be the ability of the government to keep its fiscal policy on track and the continued commitment of the private sector to pour finance into the country. This in turn depends heavily on political stability. The first few months of 1994 have seen a slight erosion in confidence, but Lebanon's supporters in the international financial community remain optimistic. IMF board member for the Middle East, Abdel-Shakour Shaalan, summed up the prospects for the future in a mid-May interview with the Beirut daily Al-Safir. 'I believe that despite the positive developments that have happened, the excess in expectations was a negative factor....It is vital that economic expectations should be realistic. The process of repairing what has been destroyed in the economic, financial and monetary structure of Lebanon over 16 years of war requires a much longer period than one, two or three years.'

Shaalan said he still remains optimistic because of the success the government has had in stabilising the exchange rate, the positive balance of payments situation and the good prospects for lowering inflation. He said inflation was about 10 per cent in 1993, and the IMF expects it to come down to about 4 per cent in 1997.

The CDR and the government of Prime Minister Rafiq Hariri have made a rapid start to the reconstruction programme. It appears that the momentum may be slowing, but the sheer volume of work already in train shows that it has by no means stopped.