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Month: February 2019

Latest Business Reports: UNCTAD Issues Recommendations; Lebanon Still Showing Strength Supporting En

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Anyone who wants to keep current on economic and financial happenings in Lebanon should subscribe to the work of the Economic Research & Analysis Department (ER&AD) of Byblos Bank. On a weekly basis, the Department looks at economic indicators, capital markets, and the latest business news with a detailed perspective that is very helpful. It also publishes a country risk weekly bulletin with regional and global statistics in sufficient detail to gladden the heart of any analyst! The most recent issue contains useful news for those wanting to know how Lebanon’s economy is doing.

UNCTAD Investment Climate Report

The latest Investment Policy Review by the UN Conference on Trade and Development (UNCTAD) assesses current investment climate in Lebanon. The assessment was done at the request of the Lebanese government, which is preparing to launch significant investment promotions for proposed CEDRE-funded projects. The ER&AD summary said that the review encompassed “several areas of the policy framework that affect local and foreign investors, including land registration, taxation, competition, governance, and the environment, among others.”

With Lebanon’s continuing efforts to engage the Lebanese overseas communities, and billions of dollars at stake in reforms required by international donors, the Hariri government and its Ministry of Foreign Affairs and Emigrants want to demonstrate that significant efforts are underway to identify obstacles and remedy them.

For anyone who has tried to purchase, transfer, or sell property in Lebanon, the hurdles can be enormous and costly, according to UNCTAD. It recommends that the government simplify and make transparent regulations for titling property. As with other needed reforms, the review calls for an electronic database of property registration to make clear what steps are required for domestic and foreign buyers, whose purchases fall under a different set of regulations.

Another area that can benefit from digital reformation is tax collection and compliance, which is “weak” in Lebanon. Although there are laws on the books, the enforcement of the levies is uneven, subject to corruption by public officials, unclear, and in many cases obscure as well. Investment codes for investors are similarly opaque in many cases and subject to manipulation. To counter these weaknesses, the review “encouraged authorities to conduct to assess the relevance of incentives [for investors], to introduce guidelines on transfer pricing, and amend the investment law to make incentives automatic, based on predetermined, clear, and objective criteria.”

Others areas of concern are the lack of mechanisms to promote competition (and restrict monopolies), and the perception that corruption is “one of the most significant deterrents to business in the country.” The review went further and “noted that understaffing and the lack of transparency in the judiciary affect the enforcement of contracts.” A major concern is the impact on public contracts, bidding procedures, and the need for a legal and institutional framework to fight corruption.

Lebanon’s Entrepreneurship Environment

Another contradiction Lebanon shares with countries in the region and Africa is that it has an active entrepreneurial class that has little effective support from the government, which would not be a problem except that start-ups and expanding companies need to have access to financial and legal expertise if they are to succeed and generate jobs. As reported in the recent RE&AD Lebanon summary, Lebanon placed 35th among 54 countries worldwide and fifth among the 12 economies in the Middle East and North Africa (MENA) region in The 2018 Global Entrepreneurship Monitor.

Lebanon’s score of 4.65 points (with 10 being the highest ranking), was similar to the MENA average but lower than the global mean of 5.0 points. While this placed Lebanon above Bulgaria, Russia, and the Dominican Republic, it ranked lower than Egypt, Columbia, and Uruguay. In the availability of financing for entrepreneurs, Lebanon came ahead of France, South Korea, and Italy, and third in the Middle East and Africa behind Qatar and Israel. Looking at the indicator of government support for entrepreneurs globally, Lebanon placed ahead of Greece, Bulgaria, and Puerto Rico, and behind Peru, the UK, and Madagascar.

What is especially interesting is that the ranking for how colleges, business schools, and vocational centers provide education on entrepreneurship. Lebanon scored well, behind only Qatar, Madagascar, and the UAE among Middle Eastern and African countries, and ahead of Canada, Slovenia, and Russia among all countries ranked. Hopefully the positive indicators reflect a sound basis for growing the economy in Lebanon, especially with the implementation of reforms called for under the CEDRE funding regime.

Engineering and Construction Sector

A final bit of good news. Although one of Lebanon’s most important sectors, it is one that is riddled with a lack of transparency, corruption, influence by politicians, and outdated procurement processes. The government recently signed an MoU with the Lebanese Contractors Syndicate of Public Works and Buildings and with the Orders of Engineers & Architects of Beirut and Lebanon “to launch an electronic system for the classification of contractors, and of engineering and consultancy firms in Lebanon.”

Bringing a degree of transparency into this sector is one of the conditions following the CEDRE conference so as to rationalize qualifications and streamline decision-making. The agreement is for a unified electronic system to be used by government agencies and departments to classify engineering firms in 12 categories to limit favoritism in the tendering process. “Also, the electronic system aims to promote transparency and to ensure the effectiveness of the evaluation of companies, as well as the quality standards in engineering projects.” It will replace a system going back to 1966!

Hariri Calls on Parliament to Implement CEDRE Related Reforms during Ministerial Statement Debate

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In last week’s debate running up to the adoption of the ministerial statement, the surreal quality of Lebanon’s political culture again took center stage. There were charges and countercharges regarding the respective roles of former (assassinated) president Bashir Gemayel and Hezbollah in Lebanese affairs, while some members claimed that the CEDRE projects are a plot to keep Syrians in Lebanon by providing employment for them. This, of course, conveniently overlooked the fact that for 20 plus years, some half million Syrians in Lebanon have worked in agricultural and construction jobs that many Lebanese shun.

Other anomalies peppered the debate such as the role of pro-Syrian minister Saled al-Gharib, responsible for the refugee portfolio, who “has vowed to do whatever it takes to push Syrian refugees back into their country,” according to The Arab Weekly. Members accepted a watered-down reference to a controlled and safe return for the refugees, which placed an emphasis on the Russia plan for repatriation and reconstruction, largely a smoke and mirrors proposition at this point. Another complicating rumor that diverted attention was that the Syrian regime had issued a “terrorist list” that included Prime Minister Saad Hariri, Lebanese Forces head Samir Geagea, and Druze leader Walid Jumblatt.

Undeterred, Prime Minister Hariri began the debate with a comprehensive and strong statement that challenged those who put narrow interests above what is good for Lebanon. In some of the strongest passages, referring to proposed reforms, he said:

Here I want to ask. Who is against a modern law for public tenders? Who is against the development of customs, the facilitation of the business environment that attracts investments from abroad? Who is against the computerization of all state administrations to reduce squander and corruption and facilitate the lives of citizens? Who is against the restructuring of the public sector? Who among you is against the reduction of budget deficit? And most importantly, who among you believes that the infrastructure in our country does not need any rehabilitation or development?

It is important for me today to emphasize that the country has a real opportunity, and we have a clear program that needs a workshop in which everyone participates. Whether we like it or not, this is our country, and we are all partners in the good and bad days. We have a clear program, and we have responsibilities in the government and parliament to turn words into actions.

In this regard, he was joined by two of Lebanon’s national leaders in emphasizing the importance of fighting corruption. Hezbollah’s Secretary-General Sayyed Hassan Nasrallah gave a speech, noting “the real battle today is against financial corruption and administrative waste,” and stressing that Hezbollah is adamant on fighting this battle, which as he said, “started in the Parliament sessions devoted to discussing the ministerial statement and giving confidence to the government.” Referring to the $ 11 billion dossiers, Nasrallah vowed to “pursue it till the end,” according to Al Masdar News.

Samir Geagea took a similar tone in an interview with Asharq Al-Awsat noting that “The priority at the moment, however, must be the economy. Statements about combating corruption must be translated into practical steps,” he said. He emphasized the importance of first approving the state budget, “which he described as a ‘leaky bowl’ that has been spilling its contents for 30 years.” Geagea concluded that “As long as the leaks remain, the squandering of funds will continue. We must therefore, plug this hole if we are serious about tackling the budget.”

So the work begins. Various committees and working groups have assignments related to implementing or passing reform legislation called for under the CEDRE program. In a meeting this week, Hariri presided over a meeting with the Minister of Finance Ali Hassan Khalil, the World Bank Regional Director Saroj Kumar Jha, the President of the Council for Development and Reconstruction Nabil Jisr, Hariri’s Advisor Nadim Munla, and representatives of Arab, European, and international financial institutions. Discussions focused on the necessary steps to accelerate the implementation of the CEDRE conference decisions, in particular, ensuring that projects are started on a timely basis reflecting the new laws passed by the government and conforming to international standards.

IMF and Lebanon Share Common Ground in Combating Corruption

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The Arab Fiscal Forum, held before the annual World Government Summit in Dubai, featured a strong statement by IMF Managing Director Christine Lagarde commenting on the need for good fiscal management and governance including more effective efforts to combat corruption. Her remarks were echoed by Prime Minister Saad Hariri in several interviews at the same forum.

In her speech, Lagarde noted that despite the burdens of excessive public spending, lack of sufficient government revenues due to gaps in enforcement, and overall lack of strong controls over budgets and spending protocols, several countries are moving ahead to install better fiscal monitoring and administration. Interestingly, both oil exporters and importers are realizing the need for more professional and transparent controls due to the economic and fiscal stresses of past decades including disruptions caused by the Arab Spring, global recession of 2007-08, and the drop in energy prices over the past five years. For example, “Saudi Arabia, Kuwait, UAE, Sudan, Qatar, and Lebanon have all set up macro-fiscal units—a useful first step in strengthening the fiscal framework,” she reported; while Mauritania, Morocco, Jordan, and Lebanon are making great progress with medium-term public investment planning and execution.

IMF research indicates “that weak governance and corruption are associated with significantly lower growth, investment, FDI, and tax revenues—and higher inequality and exclusion.” These weaknesses exacerbate an already weak policy foundation that deteriorates, “because there is inadequate legitimacy and public accountability. Even worse, these cracks could also let corruption creep in. And you know so well, this is social poison—it feeds discord, disengagement, and disillusionment, especially among the young.”

In his remarks at a reception hosted by the Ambassador and Consul General of Lebanon in Dubai, Prime Minister Hariri was quite blunt in his assessment. “We sometimes failed the hopes of the Lebanese living abroad, because of our divisions and our problems, but fortunately we have formed this government. We now have a clear agenda to bring Lebanon back to the forefront and to change the laws that have been in place for fifty and sixty years…While there are known regional differences, these differences will not affect our internal situation, as we agreed to focus on the Lebanese economy and to carry out all the reforms set out in CEDRE, which have been inserted in the ministerial declaration.”

In an interview, Hariri noted the partnership with the World Bank to develop and adopt 14 laws “that contribute to transparency, fight against corruption, and access to information by the civil society and everyone who wants to invest in Lebanon. After CEDRE, we passed nine out of fifteen laws in the Parliament, some of which were approved, while the rest are mentioned in the ministerial statement.”

On the issue of corruption, Hariri pointed out that “Fighting corruption will be one of the most difficult things we will face in Lebanon, but since there is a political consensus, it will make it easier for the Lebanese.”

Needless to say, there are doubters, as reported previously, that the new/old leadership will pledge to make changes but in the end will act to protect their own, rather than the national, interests. On this point the prime minister said, “Then there will be a confrontation. We have a government and there is a political consensus on all programs in all fields, whether waste treatment, electricity or fighting corruption. If you had asked me five years ago if I could do all this, my answer would have been no. But today, I say yes because there is a will from all political parties, who realize now that this is our last chance. Either we make it or break it. For me, we have a chance, yes, we can implement it, yes, there is a political consensus, yes, all reforms must be done, and we have to start with reforms, not projects. We may start a project and be wasted [if reforms are not in place].”

The benefits of taking up this challenge are clear according to Hariri: “Fighting corruption and squander is one of the most important things we will face. Corruption is rampant in Lebanon and this is a fact we must face. We must also look at the mistakes and fix them. When we face corruption and squander, we create new employment opportunities for young men and women.”

Among the first steps will be implementing a transparent bidding process for infrastructure projects waiting to be started. Unless international investors, funders, and donor believe that Lebanon can reverse decades of corrupt practices, instill confidence in the government as a partner for the private sector, and build opportunities for inclusive and equitable outcomes, the country may find itself in a downward spiral that undermines the country’s fiscal and political stability.

What do the Lebanese Expect from their New Government?

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It appears that the negotiations in the ministerial committee have been concluded and a draft of the statement setting out the government’s priorities is set to be debated next week when President Aoun calls a cabinet meeting for final approval of the document. According to remarks by Information Minister Jamal Jarrah at a press conference following the meeting, there will be few objections to the draft as much has already been discussed in the preparatory meetings: “When each party was expressing its opinion concerning a certain point, it was keen on the country and to accelerate the completion of the ministerial statement and tackle the problems faced by the Lebanese on all subjects, including the restructuring of institutions and ministries.”

Given the importance of quickly dealing with the potential financial crisis, Jarrah noted that “We certainly have a difficult economic situation and our budget is suffering from a large deficit. Deficit reduction, economic development, fighting corruption, and stopping squandering are no longer a luxury, but an urgent necessity for the government. Today I see sincere intentions, and there is a decision from all parties to save the economic situation.”

While he did not address relations with Syria and Iran, or the role of Hezbollah, he did refer to the status of the Syrian refugees, which dominates much of the foreign policy discussion. “We did not mention the words political solution or voluntary return. We said the return to safe areas, and we adopted some words that will be approved by the Council of Ministers and we will talk about them in due time.”

Outside observers might draw some reassurance from his comments, but long-time analysts are skeptical that much will change given that the government is still composed of leaders who represent political parties best known for acquiring and distributing government posts to ensure constituent support.

As Maha Yahya of the Carnegie Endowment office in Beirut opined, “Lebanese consensus governments have become more about who gets what than about what needs to be done to place the country on a sustainable path. Moreover, key figures in the current government represent the same political factions long accused of exploiting public institutions and funds to amass political capital and pursue personal gain. In this context, it is difficult to imagine that there can be any real agreement among them on issues, let alone over reforms that would potentially undermine their interests. Most likely, as in past governments, there will be minimal discussion of the Lebanon’s strategic challenges and the tradeoffs needed to address them. Each minister will simply rule over his or her domain.”

This sense of skepticism was mirrored in an article by Sami Zoughaib of the Lebanese Center for Policy Studies, reflecting on data contained in a fall International Republican Institute (IRI) survey of Lebanese attitudes. “The highly touted—but rarely acted upon—promises of reform and bettering the lives of citizens featured prominently in electoral campaigns and in political party statements following the formation of the government. Now these promises need to be realized because public pessimism is high and a general feeling of concern for the future is being felt across the country.” Overall, 95% of respondents think Lebanon is heading in the wrong direction, with well-to-do urban Lebanese disagreeing with that assessment.

The Lebanese sense of pessimism has continued since the 2018 national elections as more than half of the respondents believe there has been a worsening of the economy related to infrastructure, corruption, electricity, employment, cost of living, water, and poverty. As corroborated in other polls, “Political party membership seems to correspond with lower reporting of economic concerns. Put more succinctly, members of political parties are less concerned about employment opportunities and the cost of living.”

It is challenging that even moving in the right direction on economic reforms is full of landmines as each party seeks to protect its interests rather than focus on national priorities. For example, Yahya points out that “Reforming the electricity sector, which is currently responsible for 40 percent of Lebanon’s fiscal deficit, requires broad agreement to forego lucrative arrangements that are personally benefiting leading politicians.”

As noted by a former World Bank economist, “With no common view of the national interest nor unified policy agenda, these leaders’ actions have focused on divvying up state sinecures, positions, and business among partisans and acolytes. In the collective Lebanese psyche this has ingrained a culture of dependency, influence peddling, and cronyism over the values of effort, productivity, and citizenry which the people of Lebanon have heralded throughout their history.”

This souk approach to public policy extends to foreign relations as many Lebanese political groupings are tied to the interests of outside forces. As Yahya observes, “Regional influence, especially Iranian influence, and the personal ambitions of some of the current cabinet members mean that there will be little agreement over what is in Lebanon’s best interests and how best to protect these from intense regional fires…It also comes at a time when sanctions against Iran, Syria, and Hezbollah are likely to be expanded, driving them all to seek new ways in Lebanon to relieve this pressure.”

As always, the test for the government is moving from the ministerial statement to an action plan with a timetable and implementation steps that address administrative reform, improved public services, a foreign policy focused on protecting Lebanon’s independence and territorial integrity, and economic reforms that enable Lebanon to move from stagnation and malaise to a more equitable, inclusive, successful society – a tall order. And as Yahya mentioned, “With the government in place, there is a sense of relief that the institutions are again operational and a hope that the policies needed to kick start some of the projects presented at CEDRE can be put in place.” That is the hope and the expectation…