Lebanese Economy | Anahon.com

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Lebanon has a free-market economy and a strong laissez-faire commercial tradition. The Lebanese economy is service-oriented; main growth sectors include banking and tourism. According to the Lebanese Ministry of Economy and Trade, Lebanon posted 5% real growth in 2004, with inflation running at 3%. There are no restrictions on foreign exchange or capital movement, and bank secrecy is strictly enforced. Lebanon has adopted a law to combat money laundering. There are practically no restrictions on foreign investment; however, the investment climate suffers from red tape, corruption, arbitrary licensing decisions, high taxes, tariffs, and fees, archaic legislation, and a lack of adequate protection of intellectual property. There are no country-specific U.S. trade sanctions against Lebanon.

Lebanon embarked on a massive reconstruction program in 1992 to rebuild the country’s physical and social infrastructure devastated by both the long civil war (1975-90) and the Israeli occupation of the south (1978-2000). In addition, the delicate social balance and the near-dissolution of central government institutions during the civil war handicapped the state as it sought to capture revenues to fund the recovery effort. Monetary stabilization coupled with high interest rate policies aggravated the debt service burden, leading to a substantial rise in budget deficits. Thus, the government accumulated significant debt, which by 2005 had reached $36 billion, or 185% of GDP. Unemployment is estimated at 18% officially, but in the absence of reliable statistics, some estimate it could be as high as 20-25%.

The government also has maintained a firm commitment to the Lebanese pound, which has been pegged to the dollar since September 1999. The government passed an Investment Development Law as well as laws for the privatization of the telecom and the electricity sector, signed the Euro-Med Partnership Agreement with the European Union (EU) in March 2003, and is working toward accession to the World Trade Organization (WTO). In order to increase revenues, the government introduced a 10% value added tax (VAT) that became applicable in February 2002 and a 5% tax that became applicable in February 2003.

In November 2002, Lebanon submitted a comprehensive program on its financing needs at the Paris II Donors Conference and succeeded in attracting pledges totaling $4.4 billion, including $3.1 billion to support fiscal adjustment and $1.2 billion to support economic development projects. To date, the government has received $2.5 billion, mostly used to retire or replace maturing debt, which carried an average cost of 13.5%. In return, the government issued donors 15-year dollar-denominated Eurobonds carrying a 5% coupon, with a 5-year grace period for repayment.

On the domestic front, the Central Bank of Lebanon (CBL) and commercial banks also contributed to the reduction of debt servicing costs. In December 2002, the CBL wrote off $1.8 billion in public debt it held and re-subscribed $1.8 billion in 15-year Eurobonds carrying a 4% coupon. Commercial banks subscribed 10% of their deposit base as of October 31, 2002 (about $4 billion) in 2-year treasury bills at zero percent interest rates. As a result of these combined efforts, about $10 billion was mobilized from local and international sources and used to replace high cost, short-term debt with lower cost and longer maturity debt. Paris II positively impacted financial markets and lowered interest rates.

As of the 2004 Article IV report, International Monetary Fund (IMF) directors welcomed recent positive macroeconomic developments but urged a more vigorous pursuit of macroeconomic stabilization and structural reforms, seizing the advantage of the positive momentum generated by the Paris II conference and the favorable international environment. Directors stressed that the attainment of debt sustainability over the medium term required further large increases in the primary surplus based on deep-seated revenue and expenditure reforms. Lebanese authorities acknowledged that much remained to be done to meet Paris II. IMF encouraged institutional reforms to solidify financial policies, starting with a phasing out of central bank financing of the government.

The U.S. enjoys a strong exporter position with Lebanon, generally ranking as Lebanon's fifth-largest source of imported goods. More than 160 offices representing U.S. businesses currently operate in Lebanon. Since the lifting of the passport restriction in 1997 (see below), a number of large U.S. companies have opened branch or regional offices, including Microsoft, American Airlines, Coca-Cola, FedEx, UPS, General Electric, Parsons Brinkerhoff, Cisco, Eli Lilly, and Pepsi Cola.