After several years of relative stability and solid growth, political turmoil has returned to the Levant and is denting its economic prospects.

The collapse of Lebanon’s 14-month old unity government in January has plunged the country into a new political crisis. The Washington-based IMF is forecasting Lebanon’s gross domestic product (GDP) to grow by just 2.5 per cent in 2011, compared with 7.5 per cent last year and 8.5 per cent in 2009, the year the coalition was formed.

Government collapse in Lebanon

Najib Mikati was appointed prime minister-delegate on 25 January, but has so far been unable to achieve the political consensus required to form a cabinet. Combined with the wider regional unrest, the uncertainty is taking its toll on Lebanon’s economy. In February, exports were down 11.1 per cent and tourist numbers experienced a 13.4 per cent year-on-year drop in the first quarter. Hotel occupancy rates, meanwhile, averaged 47 per cent, compared with 69 per cent in the first quarter of 2010.

Also contributing to the uncertainty is the ongoing UN investigation into the assassination of former prime minister Rafiq Hariri and the expectation that political group Hezbollah will be indicted for his murder.

“Lebanon has not been able to take advantage of the window of opportunity that opened up after the financial crisis. Nothing has been done to reduce the borrowing needs of government or to implement structural reforms, whether they are economic, fiscal, administrative or legal,” says Nassib Ghobil, head of economic research and analysis at Beirut-based Byblos Bank.

Little has been done to … cut the country’s expenditure on the armed forces

The collapse of Lebanon’s government will further delay progress on vital economic reforms set out in the Paris III agenda, a comprehensive reform programme drawn up by the Lebanese authorities with the international community in the aftermath of the Israeli invasion in 2006.

The privatisation of state assets, particularly in the power and telecoms sectors, is crucial if Lebanon is to reduce its substantial debt pile. Beirut borrowed heavily to re-build the country after the end of its 15-year civil war in 1990, and the month long conflict between Hezbollah and Israel in 2006. In 2010, Lebanon’s debt was 161 per cent of GDP.

“Unfortunately there has not been any progress on privatisation to the point that privatisation has become a taboo word in Lebanon among most politicians. Reform has been paralysed because of the deadlock within government,” says Ghobril.

Beirut’s first challenge is to elect a government that is able to achieve a consensus and take action on the required reform programme.

Syria, meanwhile, has been rocked by the popular uprisings sweeping the Middle East and North Africa region since the start of the year. Its leadership is growing increasingly embattled and international pressure is mounting on the president to heed protesters’ calls for change. In an attempt to appease demonstrators, on 17 April, Syria’s President Bashar al-Assad pledged to lift the emergency law, which had been in place since his father Hafez al-Assad seized power for the Baath party in 1963.

Violent uprising in Syria

However, for many Syrians, the move towards reform was too little and too late. Protests have continued to spread throughout the country, growing increasingly violent. Government forces have deployed tanks to crush the protests and human rights groups say more than 1,000 people have been killed in the three months of violence.

Al-Assad’s father used the emergency law, which restricted public gatherings and allowed security forces to detain regime critiques, to govern Syria with an iron grip for almost 40 years. When Bashar assumed the presidency after the death of his father in 2000, it was seen by many as the perfect opportunity to introduce far-reaching political and economic reforms.

However, 11 years later not much has changed. Limited measures aimed at liberalising the economy have taken place, but little has been done to reduce the centrally planned economic policies and to cut the country’s expenditure on the armed forces.

The establishment of private banks in 2004 and the re-opening of the Damascus Stock exchange in 2009 are two reforms that Al-Assad’s government has introduced to develop the economy and improve the business environment, but there have been few other significant reforms.

Slower growth in Syria and Jordan

Syria’s GDP grew by 3.2 per cent in 2010, but the IMF predicts growth of just 3 per cent in its April 2011 report. With the security situation in the country worsening, the slowdown in the economy could be much more severe.

Last year, Syria recorded a trade deficit, with total imports of $20.5bn and exports of $23.5bn. Syria’s oil reserves, although always smaller than in neighbouring Arab countries, traditionally used to be the main driver of economic growth. However, in the past five years the country has become a net importer of oil. It is increasingly important for Syria to diversify its economy.

The current unrest is stalling plans that were under way to reform the economy. Syria was preparing to introduce VAT in 2011. But this is unlikely to be pushed through any time soon.

Damascus has long been the subject of international sanctions and the US and the EU have threatened to introduce fresh sanctions against the ruling regime if it continues the violent crackdown on protestors. This will only serve to worsen the economic outlook.

Across the border, Jordan also witnessed angry scenes in January, as protesters vented their frustrations over the lack of progress in implementing promised political and economic reforms. But swift action from the country’s popular ruler quickly brought the situation under control.

On 1 February, King Abdullah dismissed his cabinet and appointed Marouf Bakhit as prime minister to oversee “real political reform’’.

Eight days later, the prime minister swore in a new 26-member cabinet. The change of personnel has appeased protesters for now, but reform will need to be forthcoming if stability is to be maintained.

Jordan was hit hard by the global recession; economic growth slowed from 8.5 per cent in 2007, to 3.1 per cent in 2010. The Washington-based IMF is forecasting GDP growth to increase marginally to 3.3 per cent this year, but the regional unrest will prevent any stronger recovery.

Although King Abdullah has restored order domestically, oil prices have risen sharply in response to the Arab uprisings. As a country entirely dependent on energy imports, this puts Jordan in a precarious position. The tourism sector – a key source of income for Jordan – has also been affected by the unrest. The Petra Development and Tourism Region Authority reported a 26 per cent year-on-year drop in visitors to the ancient city in February.

“Rising oil prices puts pressure on the budget and the external balances. Any shock to the region or the country, itself, leaves Jordan very vulnerable” says Mohamed Abu Basha, an economist at Egyptian-based investment bank EFG-Hermes.

In 2010, Jordan recorded a trade deficit, as the recorded $12.2bn of exports could not match its $17.9bn per cent of imports. Its debt is close to 60 per cent of GDP and the IMF estimates that Jordan’s current account balance deficit of $1.5bn will drop further to $2.5bn in 2011.

Development programme for Jordan

Increasing the role of the private sector is crucial if Jordan is to achieve sustainable economic growth and cut debt. The government is looking to use public-private partnerships to undertake an ambitious infrastructure development programme, covering the power and water and transport sectors. Those plans received a major boost in May, when Jordan received strong interest from financial institutions for a proposed rail project.

On the other hand, Amman’s plans to become a uranium exporter could experience a setback following the nuclear crisis in Japan. Countries the world over are now reconsidering their commitment to atomic power after being reminded of how dangerous it can be when things go wrong. Governments will be wary to invest in nuclear power so soon after the disaster.

King Abdullah unhesitatingly dismissed his government in February to show his support for reform. But the same promises were made when the government was appointed in 2009. Jordan’s ruler will need to ensure that political and economic reforms are pushed through if he is to maintain control and lead the country to economic stability.