Untitled Document

ECONOMIC REVIEW

Prior to the 1975 civil war, Lebanon had one of the most developed economies in the region, dominated by a large services sector, a growing industrial sector, and a small agricultural sector. Beirut became the banking and financial center of the Middle East, and the oil boom of 1973 provided the economy with an additional boost, as Arab capital inflows grew and remittances from Lebanese working in the Gulf States increased sharply. The ensuing civil war and Israeli invasions brought an end to this economic heyday. In the period between 1975 and 1990, Lebanon’s economic life was defined by the civil war and the Israeli invasions in 1978 and 1982. The services sector interests were relocated overseas, and the industrial and agricultural infrastructure was devastated. The degree of destruction caused by the internal rifts made the intervention of the state in economic matters necessary. The public sector contribution to Lebanon’s GDP before 1975 was only 12 percent, but by 1991 public expenditure accounted for more than half of the GDP.

Since 1992, however, Lebanon’s economy has made significant gains. An $18 billion reconstruction program named Horizon 2002 was launched in 1993 by Prime Minister Hariri, and Lebanon’s GDP grew by about eight percent in 1994 and seven percent in 1995. Israel’s 1996 Grapes of Wrath military operation stunted economic activity, but in the period between 1992 and 1998, annual inflation dropped from 170 percent to six percent, and the foreign exchange reserves increased from $1.4 billion to close to $6 billion.

The financial sector in Lebanon is also being revived. The Lebanese stock market reopened in January 1996, and international banks and insurance companies have begun to return. Progress has also been made in rebuilding Lebanon’s physical infrastructure. Solidere, a $2 billion Lebanese property firm, is focusing on broad-based reconstruction, from the development of public squares and parliament buildings to the installation of modern infrastructure, including roads, public utility spaces, and marine works.

Solidere is also managing the reconstruction of Beirut’s central business district.

In order to finance these reconstruction programs, the government has had to tap foreign exchange reserves and boost borrowing. As a result of the increasing debt, in October 1998, the government approved an austerity budget designed to reduce the deficit from around 18 percent of GDP in 1997 to about 12 percent by 1998. A draft budget released in April 1999 continued these policies, increasing corporate and income taxes and raising duties on a range of consumer items, although spending on wages and salaries increased. The government is trying to keep expenditures near the 1997 level of $5.16 billion. About 40 percent of this total was allocated to debt-servicing obligations, with a majority going towards domestic debts.

Since 1990, the Lebanese government had been funding the budget deficit through Lebanese pound treasury bills for which interest rates range between 12.7 and 16.7 percent. The switch to external financing is designed to increase the liquidity in the economy and reduce the cost of servicing the debt.

Due to an increased concern over fiscal policy and turmoil in the international money markets, the Central Bank has had to intervene more heavily to support the Lebanese pound. Reserves excluding gold, which had reached a high of about $7.4 billion at the end of June, fell $1.7 billion in the period between August and October 1998, but went up again to $ 9.5 billion(1999-2000). At the end of 1998, economic growth was around 3.0 percent, due to an improvement in investments, especially in the construction and tourism industries.