Analysis: Lebanon -- The forgotten key

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, April 21 (UPI) -- A day after he won a parliamentary vote of confidence Wednesday, 58-year old Rafiq Hariri, Lebanon's multi-billionaire prime minister, reluctantly formed a new, overtly pro-Syrian government with 30 ministers, only 11 of whom are new faces.

Lebanese Information Minister Michel Samaha was quoted by regional news agencies as saying: "The president indicated that the new government comes at a very sensitive time regionally. (It comes) in the shadow of pressures and accusations, which Israel is behind, targeting Syria and Lebanon to give up ... their principled stand that calls for resistance to occupation ... We must deal with ... the importance of internal solidarity and solidarity with our Syrian brothers so we face as one the challenges directed at us."


Syria, in other words, is merely securing its Lebanese flank, faced with mounting tensions and an increasingly unhappy United States. Hariri has formed five governments hitherto and has been serving as premier for nine out of the last 11 years. Like Italy's Silvio Berlusconi, Hariri owns various media, including the Future television channel, a radio station and a newspaper. His tentacle-like grip extends to banking, real estate, oil and manufacturing.


Hariri is credited with the reconstruction of Lebanon's infrastructure, reduced to rubble by 15 years of rabid civil war that ended in 1990. The conflict and its aftermath have plunged Lebanon into a massive usurious public debt amounting to 180 percent of its gross domestic product, or $31 billion. Lebanon spends half its budget -- about $3 billion -- on interest payments.

Threatened with a default, international donors pledged $4.4 billion in soft loans last November. The United States, Britain, Germany and Spain refused to pitch in without the seal of approval of the International Monetary Fund, withheld until recently. A month later, Lebanese banks have been "convinced" to purchase $4 billion of interest free two-year government bonds. This slashed the country's debt service by $400 million a year.

Following the Paris-II donor conference, gross foreign exchange reserves surged to more than $10 billion. Gross capital inflow -- at $3.2 billion -- was enough to cover the trade deficit and yield a balance of payments surplus of $2 billion. Add to this $45 billion in total bank deposits -- 70 percent of which are held in foreign currency -- and the Lebanese pound's strength against the U.S. dollar is explained. The price of Lebanese Eurobonds has jumped 20 percent in the last six months.


In its latest financial statements, Banque Audi, a local outfit, pegged 2002 GDP growth at 1.5 percent. Exports increased by 15 percent to slightly more than $1 billion -- though the Chamber of Commerce and the Ministry of Industry and Oil deem these figures wholly inflated. Construction still moves and shakes the economy with the number of square meters covered by permits up by 1-8th -- as is the number of international landings and departures. But activity in the Port of Beirut dropped, albeit marginally.

Lebanon is notorious for the glacial pace of its reforms. Market liberalization is peremptory. The country's 35-year-old import monopolies are yet to be scrapped. Much-needed privatization is stalled. The electricity utility and two mobile phone operators alone can fetch up to $5 billion.

Two austerity budgets in a row -- and the introduction of a value added tax in February last year -- did nothing to revive the flaccid economy. The tax administration and the judiciary are infamous hotbeds of venality and bloated inaptitude. Both the banking system and the business community are risk-averse and interest rates are still too high, despite recent reductions.

Still, left to its own devices, the country can gradually regain its position as the banking and commercial hub of the Middle East. With a deep-rooted mercantile culture, a well-equipped coastline, a polyglot, highly educated and high income population, private media and connections to all the nations of the region due to its multi-ethic composition, Lebanon is a natural economic anchor as well as the role model for a democratic, liberal and pluralistic Arab world. It is also the natural export route for Middle Eastern oil.


Alas, this is but a pipe dream. Lebanon is a puppet state, remote controlled by members of the Syrian secret services and some of its politicians. Anti-Syrian lawmakers and businessmen are harassed on a regular basis, often under the pretext of a security agreement between the two countries. In a notorious case, a television station owned by Gabriel Murr, a Christian candidate, was silenced last September on flimsy legal grounds.

Syria's pernicious influence is all-pervasive. The Central Boycott Office in Damascus -- set up by the Arab League in 1951 to blacklist all firms with operations or subsidiaries in Israel -- moved to renew its activities. Lebanon is one of its members. Such trade restrictions will do nothing to lure sorely needed foreign direct investment to its battered economy. But it can hardly be expected to resist Syrian pressure to comply.

Many denizens feel that Syria should emulate Israel and unilaterally withdraw from Lebanon its 20,000 troops and agents -- an "occupying force" according to U.S. Secretary of State Colin Powell. Others are still wary of their southern trigger-happy neighbor and regard Syrian presence as a kind of insurance policy. Israel again threatened war this past September over the diversion of water from the Wazzani, a border tributary of the Hasbani river.


The Hezbollah -- a militant, well-armed, trained, Iranian-sponsored, anti-Israeli and anti-American militia cum political party in the south -- would be only too happy to partake in future skirmishes. It receives $100 million annually from Iran and Syria in cash and in materiel.

In a patently suicidal interview on CBS television's "60 Minutes," Hassan Nasrallah, the leader of the Shiite Muslim militant group proffered this thinly veiled threat: "American policies in the region encourage this kind of retaliation, whether we agree with it or not ... I believe the continuation of American policy will make enemies of all Arabs and Muslims -- 1,400 million Muslims around the world. Lots of groups will surface, not necessarily al-Qaida. And they'll be impossible to bring to justice."

The war in Iraq, though mercifully shorter than feared, is an added burden. A fortnight ago, Mustapha Nabli, the World Bank's Middle East Chief Economist, warned of collapsing tourism (a mainstay of the Lebanese economy), surging oil prices (Lebanon is a consumer, though Syria a producer), faltering trade with Iraq (a crucial import destination and source of subsidized crude) and dwindling foreign direct investment. Central Bank first vice-governor and former economy minister Nasser Saidi believes that the conflict will shave 1 to 2 GDP percentage points off Lebanon's growth.


Lebanon's economy is heavily dependent on expatriate remittances. According to the Saradar Investment House quoted by the Lebanese Daily Star, these equal one seventh of its GDP and have been growing by a whopping one quarter every year. This, on average, is five times both the amount and growth rate of foreign direct investment in the country.

The entire banking system relies on these familial flows. Growth in remittances outweighed the increase in foreign currency deposits by 2-to-1 and amounted to more than triple the leap in non-resident foreign currency deposits. But a global slump -- and an Arab recession -- may send many Lebanese emigrants packing and render this fount of foreign exchange desiccated.

Desperate to extricate itself from the Middle East's surrealistic quagmire, Lebanon is looking to the European Union. Last June it joined the Euro-Mediterranean Partnership by signing an Association Agreement. It is thus eligible for free trade in industrial goods by 2010 and for cuts in tariffs and quotas till then. Lebanon runs a $3 billion trade deficit with the EU.

Nasser Saidi openly exhorts Arabs to resist U.S. hegemony by teaming up with the Europeans. He reminds the EU that the Middle East is the origin of one third of its energy needs. He is all for the much proposed Euro-Mediterranean Investment Bank in conjunction with the Greater Arab Free Trade Area and a World Bank-like EuroMed Investment guarantee Agency.


Saidi is representative of the philosophy of Lebanese civil servants and businessmen. But whether the EU is listening is another matter altogether. Patching up bruised relations with the United States may prove to be a higher priority and one that necessitates the sacrifice of Syria and its appendage, the nominally independent state of Lebanon.

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