Lebanon and Syria – As an End of Hostilities Nears, What’s Next for Their Economies?

Monday, November 5, 2018
Opinion by Jean AbiNader

Iran seeks to consolidate its wartime investments into post-war business opportunities. With conflict areas winnowing down to pockets in the southwest, northeast, and northwest of Syria and its fortunes diminishing due to increased sanctions from the US and others, Iran is striving to claim rewards from a grateful Assad regime. It has signed several contracts over the past two years that give it a dominant role in the reconstruction of the power sector and other infrastructure sectors that may eventually put it in competition with Syria’s other benefactor, Russia.

As an article in Defense One puts it, beyond economic benefits, having a dominant role in Syria’s economy feeds into its strategy to become a powerful regional player and extends its strategic depth, making it less vulnerable to land-based interventions. It writes, “In bolstering Syrian leader Bashar al-Assad, the Islamic Republic has secured the future of one of its primary client states and afforded it an opening to shape Syria’s reconstruction. For Iran, a country whose ongoing economic struggles are likely to worsen under renewed sanctions, this is a much-needed opportunity.”

It mentions too that Iran needs to placate the foreign militias it has brought to Syria, many from Afghanistan with their families; but it is hard-pressed to do so without additional finances in light of the current and anticipated sanctions. So, the article points out, recognizing this vulnerability gives the US an opportunity to further ratchet up pressure on Iran in Syria and interventions elsewhere, perhaps forcing it to draw back from its extensive presence in many parts of the country.

The article argues for a new US containment policy in Syria vis-à-vis Iran to exacerbate Iran’s weakness, and notes that this will only succeed if it can bring Russia along, which may at times see Iran as a spoiler for the spoils of Syrian reconstruction. It notes, “The administration is rightly looking to leverage President Trump’s rapport with Russian President Vladimir Putin to influence Iran’s moves in Syria. But Russia’s ability to shape Tehran’s behavior is limited.” How that plays out in the coming months and years will have significant regional consequences as Turkey is also concerned with the continuing role of Iran in an Assad-lead Syria.

Iran has already signed key contracts to rebuild Syria’s electricity and telecoms sectors, so those opportunities may help mitigate the sanctions regimes. As Al-Monitor put it, “Iran is one of the most significant parties bidding and concluding agreements to reestablish the electricity sector and wants to take advantage of coming opportunities that also include mining and telecommunications.” On several of the proposed projects, Iran is in direct competition with Russia for contracts, for example, in rebuilding the electricity grid in Latakia where Russia has its largest presence.

At this point, with Western countries sitting out any projects in Syria unless a political settlement is within sight, Iran is rebuilding several sections of the electric power network to help Syria deal with its power shortages. One point that is not addressed is how Syria is financing these deals and how its indebtedness to Iran and Russia will influence its policies absent a political transition in the country. It is not clear if the Assad regime is even concerned about the debt burden on future generations as it must deal with the significant destruction of much of its infrastructure let alone the needs of the population for housing, health care, social services, and jobs.

Ironically, the amount of revenue Iran will derive from its reconstruction efforts in Syria is not significant considering the comparative sizes of the two economies. The article quotes Osama Kady, head of the Syrian Economic Task Force, who mentions that “Even though Iran is struggling financially, the Iranian GDP in 2016 amounted to $404.4 billion, while the Syrian GDP didn’t exceed $60.04 billion before the revolution in 2011. [Syria’s] GDP has now sunk to $11.9 billion. In other words, the return on Iranian projects in Syria is very marginal for the Iranian economy, but such projects serve as political and media messages used by Iranian decision-makers to achieve a better Iranian position in the world.”

He also noted the comparative advantage of Western companies in terms of quality may also play a part in reconstruction efforts if international financing becomes available. He notes that the question then arises as to “The efficiency, continuity, and environmental friendliness of the Iranian and Russian manufacturers, who can’t compete with German, US, or Canadian manufacturers.”

Lebanon’s economy continues to struggle without infusions from the CEDRE donors. It bears repeating for the leadership in Lebanon that its economy is in deep trouble. Even though there is a consensus on the need to promote economic growth through broad reforms, it remains to be seen if the alarms are sufficient to influence the upcoming government.

The Carnegie Endowment for International Peace recently published an article on its Sada website that provided the latest details on the failing economy. Annual growth is less than 1.5%, while debt is growing at 7.5% as of May 2018. If annual growth does not ratchet up significantly with a concurrent drop in the debt’s growth rate, “Lebanon will not be able to pay off this debt through economic growth alone.”

“Moreover, as Lebanon fails to pay down its public debt—which amounted to $81.5 billion as of February 2018—interest payments on the debt are rising and further widening the fiscal deficit, currently estimated to be over 8.5% of GDP.” Lebanon’s three most critical sectors: construction, tourism, and remittances, are slowing down dramatically, depriving the economy of their traditional vitality.

For example, newly registered building permits have dropped almost 24% compared to the same period in 2016. “Facing such pressures, Sayfco—one of the largest Lebanese real estate companies, with projects worth an estimated $2 billion—went bankrupt in May 2018.” Remittances from Lebanese working in the Gulf, which make up nearly 20% of Lebanon’s GDP, have fallen some 7% in 2017. Given that tourism from the Gulf, particularly Saudi Arabia and the UAE, the biggest regional component in that sector, has dropped by 21.1% and 32.2% respectively over the past year, that sector is also suffering.

The article concludes: “For now, the political elite appears to be more concerned with securing prominent appointments on the next cabinet, however long it takes, rather than speeding up the process so they can get to work fixing the economy.” Once the government is formed, it will be telling if it moves proactively or in its traditional souk approach to righting the economy.