Business Notes: Lebanon’s Economy Not on Life Support, Yet; Preparations on for Second Round of Ener

Wednesday, September 12, 2018
Opinion by Jean AbiNader

There are mixed assessments of Lebanon’s economy ranging from desperation to optimism, and depending on one’s choice of indicators, any judgement can be justified. The only real consensus seems to be that the Central Bank (BDL) is the glue that holds Lebanon’s economy together, so when Riad Salame, the Governor speaks, it’s smart to pay attention.

In a recent CNBC interview, he challenged reports that Lebanon’s economy has been greatly weakened by a shrinking GDP fed by lower rates of tourism, remittances, and investment, the lack of a government, and the continued impact of border closures and Syrian refugees. However, Salame acknowledged that “faster progress in political reconciliation and economic transparency as crucial to meeting the country’s desperate need for better infrastructure, investment, and private sector job creation.”

He specifically mentioned that Lebanon needs to implement the reforms pledged at the CEDRE conference in Paris in April at which international donors pledged $11 billion in grants and loans largely on the basis of conditions related to accountability and transparency. Salame said that “The economy needs fresh infrastructure to create growth and jobs. People are hopeful that this will be coming if there is a government.” At 152%, Lebanon has the third largest ratio of public debt to gross domestic product (GDP) in the world. The International Monetary Fund has warned that Lebanon needs “an immediate and substantial fiscal adjustment” to make its public debt sustainable.

Despite warnings from the IMF and others, public debt continues to grow. Until now, the BDL has kept the government afloat by selling high interest short-term bonds to local banks, a policy now in jeopardy due to the economic slowdown. The Economist Intelligence Unit was straightforward in its evaluation. “With sluggish growth, predicted at 2 percent for the year, rising global interest rates, and an influx of more than a million Syrian refugees overwhelming the country’s outdated infrastructure, many fear crisis on the horizon. Political and security concerns stemming from the Syrian war and turmoil between Saudi Arabia and Iran — whose rivalry often sees tiny Lebanon caught in the crossfire — have knocked tourism, real estate, and foreign investment to their lowest levels in years.”

Although the BDL has more than $44 billion in assets, not including gold, which covers more than two years of imports, given the low growth rate, its policy of offering high returns on short-term loans is no longer sustainable. As Salame concluded, “The political situation, the security situation, this is a region where you have political issues and wars going on. We don’t know where this will end up.”

Energy is a sector that many see as Lebanon’s financial savior, yet even its development is not as straightforward as it should be. From threats emanating from Israel’s interests in exploiting nearby blocs, to the need for laws spelling out legal guidance for concessions and a sovereign wealth fund to manage revenues, much needs to be done in advance of the second round of bidding scheduled for the end of 2018.

Just this past week, Speaker Nabih Berri voiced concern that Total, the French oil and gas firm that is the lead company on the first award, announced its intention to postpone exploration in Block 9, which borders Israel’s maritime zone and contains waters claimed by both sides. “Total was supposed to start operation in 2019 but has postponed it till the spring of 2020,” said Lebanon 24, a local news agency.

A recent article on Executive highlighted the challenges. “Over the past few years, there has been a tendency toward big announcements over adopting a more pragmatic and prudent approach. This included premature announcements of the launch of the first licensing round—despite an incomplete framework—and of key milestones afterwards. The key takeaway from the first licensing round—from the local perspective and the handling of the tender—is that there is an order for things. Hopefully, both the legal and institutional framework will be complete and fully functional by the time Lebanon officially launches its second offshore licensing round. Stability and the ability to anticipate the regulatory framework are vital for investors in the sector, and are the first key to the success of a licensing round.”

So often, media coverage of the energy sector tend to make it seem that the bonanza awaits, when it is only this last month that “The Lebanese government approved a number of laws to ensure proper management and transparency of the oil and gas sector including the right to access to information law and petroleum tax law. More laws are needed to promote confidence in the Lebanese petroleum investment climate and ensure transparency toward the public.”

Maybe the reason the recent bills passed was, as Energy and Water Minister Cesar Abi Khalil said, they are largely guidelines, not legally binding but as indicators of what interested parties might anticipate when binding legislation is finalized. The importance of this step is useful in that, as Minister Abi Khalil said, “It combines everything in one law, with a clear text.” In addition, a parliamentary subcommittee is studying draft legislation to establish a sovereign wealth fund for proceeds from oil and gas exploration.

While politicians differ on how to carve up Lebanon’s economic and political resources, there should at least be a consensus on how to create value as opportunities arise. But as the lack of official movement on CEDRE reforms, government formation, and consolidation of needed energy sector legislation indicate, it is still too often played as a zero-sum game.