Political tension in Lebanon curbs the economy

Yomna Abo Ouf, Sunday 5 Dec 2010

Economy in Lebanon on the edge and threatened by heated political tension

Tourism receipts in Lebanon are volatile, growth rates too. (Photo: Reuters)



Political tension, upcoming municipal elections, and the accusation by the Lebanese government and the US that Hezbollah were involved in the assassination of former prime minister Al Hariri  are factors that may lead to another downturn in the Lebanese economy.

Growing political tensions are taking their toll, "negatively affecting the economy, especially the tourism sector," Eric Motto, the IMF resident representative in Lebanon told Ahram Online. He said the IMF projects GDP growth at 8 per cent this year. "There is a risk that economic activity could further slow down,"  Motto claims. 

While the economy picked up despite the global recession, this was due to the large scale cash flow and foreign debts that contributed to supporting the Lebanese economy immediately following the presidential elections.

 "Tourism, the financial sector and labour transfers from abroad are inter-related fields", argues Simon Kitchen, a strategic analyst with EFG Hermes.

 As the same Lebanese citizens who work outside are those who deposit their money into the banks of Lebanon, and benefit from the high interest rates, they are an important part of the visitors to the country during vacation times.

Tourism alone comes after the financial sector in terms of its contribution to the Lebanese economy, contributing as high as 20 per cent of the GDP.

This was finally beginning to pick up and in February 2009 alone, visitors to the country hit a record 96,902 - almost double the same month a year earlier, reflecting the relatively stable condition of the political and economic atmosphere.

One year later,  the horizon looks less promising. This sector suffered most when Lebanon saw a series of violent attacks starting in 2006 with the bombing of two buses. The worst period was in 2007-2008 when the former prime minister Al Hariri was assassinated. Most of the violent attacks in Lebanon take place in the summer when tourism is at its highest.

As the sectarian split widens, worries about sustained growth deepen.

 "That was why Lebanon missed out the regional boom in the last decade," said Kitchen about the precarious political situation. 

Previous political conflicts have caused large losses, such as the Israeli attack on Lebanon in 2006, when infrastructure damages was around $2.5 billion, while indirect damage amounted to $700-800 million. Reconstruction of the country’s infrastructure pushed the fiscal deficit (excluding grants) to 9.7 and 8.5 per cent of the GDP in 2008 and 2009 respectively.

Regional political clashes caused trade to suffer. Tensions with Syria, one of the top trading partners, started after the assassination of Al Hariri.

"Lebanon suffered when Syria withdrew from Lebanese lands, as Syria was selling subsidised exports to Lebanon," said Saad Hafez,  an economics professor at the Institute of National Planning in Cairo.

 "Lebanon also lost one of its important markets in Syria, where Lebanese goods enjoy a competitive edge because of the low transportation costs due to their geographical proximity," he added.

Hafez pointed to the cheap labour that used to benefit Lebanon.  Hundreds of thousands of Egyptian, Jordanian, and Iraqi workers began to leave their jobs when  political instability threatened the economy.

So the economy has proved  vulnerable  to the political sphere, and it continues its downturn due to the internal conflicts. While economic indicators show some revival, the present political situation threatens the economy exposing it to another trough in the business cycle.

The political international sphere  affects the economy, especially if it interferes with the well-being of the Lebanese diaspora. "If Lebanese nationals working abroad are doing fine, then Lebanon is doing fine" stresses Kitchen.

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