The Economy

Lebanon’s economy and markets are best described at the dawn of the new millennium by a private and liberal economic activity and openness to abroad with perfect capital and labor mobility. The private sector contributes to around 75% of aggregate demand, a well-diversified sector that covers the totality of economic sectors and is a major pillar for growth and recovery. The Lebanese economy is also a typical open economy with a large banking sector equivalent to more than 2.5 times its economic sector and providing an important support to aggregate demand.

Within this business environment, Lebanon is a country:

– that has today reconstructed its infrastructure, with 80% of the basic infrastructure rehabilitated using the best technologies

– that has revised basically most of its business laws and regulations,

– that has a reputable banking sector with high financial standing, strictly regulated by the Central Bank,

– that has initiated a process of domestic capital market development and accessed frequently international markets,

– and that has recently launched in-depth growth-oriented measures aimed at stimulating the economy.

Major Sectors of the Economy

Lebanon’s liberal economy is based on competition and private ownership. Services and banking sectors predominate, representing 70% of the country’s gross national product. Agriculture constitutes 10% and the industrial sector constitutes the remaining 20%.

* Services

The Lebanese economy is based primarily on the service sector, which accounts for approximately 60% of GDP (down from approximately 70%. in the 1970’s). Major subsectors are commerce, tourism and financial services. Other components include health care and higher education.

* Commerce

The Port of Beirut plays an important role in Lebanon’s commercial activities. After World War II, Beirut became the most important Arab port on the Eastern Mediterranean serving the Arab world. A free-port area for re-exports added to Beirut’s success. During the conflict, the Port of Beirut virtually closed down and related commerce ground to a halt.

Work has been completed on the reconstruction of the Duty Free Zone at the Port of Beirut to restore its pre-war capacity and a project for the rehabilitation and expansion of the Port of Beirut is underway.

* Tourism

The strategic position of Lebanon, its mild climate and natural beauty, consisting of snow-capped mountains, valleys and the Mediterranean Sea, make it a natural tourist attraction. Apart from its privileged geographical and natural situation, Lebanon benefits from qualified and experienced human resources in the tourism industry.

Prior to the outbreak of the conflict, tourism (including hotels and restaurants) contributed approximately 20 per cent. to Lebanon’s GDP. This is notable given that, at that time, the international tourism industry was not as developed as it is today.

Significant private investment is currently being made in the modernization and expansion of this sector and international hotel companies have returned to Lebanon. Casino du Liban, which historically constituted a major tourist destination, reopened in 1996. Lebanon is the only country in the Arab world that offers skiing and related winter sports activities. The largest ski resort in the country has been expanded and modernized. The Government believes that, because of the return of peace and stability to the country and with the development of the necessary infrastructure, tourism will again contribute significantly to Lebanon’s economy. Lebanon’s tourism industry also relies on the large number of Lebanese living abroad, who return regularly to the country during the summer season.

* Financial Services

From the 1950s to the start of the conflict in 1975, Beirut was the region’s financial services center. At the onset of the oil boom starting in the 1960s, Lebanon-based banks were the main recipients of the region’s petrodollars.

Currently, the main financial services offered are commercial banking, investment banking and insurance. Despite the conflict and a crisis in the late 1980s involving a small number of banks, the commercial banking sector remains a centerpiece of the Republic’s service-oriented economy. The Lebanese banking sector witnessed unprecedented growth during the period from 1992 to the present. Total deposits with commercial banks increased from U.S. $6.5 billion at the end of 1992 to U.S. $33.9 billion at the end of 1999. In addition, since 1996, Lebanese banks have been successfully accessing the international capital markets. Specifically, since 1996, several banks raised over U.S. $2 billion on the international debt markets and three banks raised approximately U.S. $300 million through the issuance of global depositary receipts on the international equity markets. The banking system is seen as having a key role by being the entry point for capital inflows for the region’s development. At the same time the authorities are aiming at widening and deepening the financial sector by facilitating the establishment and evolution of, and providing a regulatory framework to, more diversified private financial institutions. Several investment banks, with capital raised offshore, have been established in Beirut and offer a variety of traditional investment banking services, including debt and equity raising and corporate finance advisory services. Several commercial banks have established investment banking subsidiaries offering similar services.

As part of the Government’s strategy of reestablishing Beirut as a regional financial services center, the Central Bank established in 1994 a central depositary, settlement and clearing agency, MIDCLEAR, which is a joint stock company organized under the laws of the Republic. The Government reopened the Beirut Stock Exchange in 1996.

* Construction

Prior to the conflict, the property sector had always been important, with a substantial portion of the activity concentrated in Beirut, where the housing needs of the city’s rapidly increasing urban population had to be met. Beirut saw an almost uninterrupted boom from the late 1950s to the early 1970s, when it expanded dramatically, eventually to house half of the country’s population. Mountain towns and villages close to Beirut favored by tourists, such as Aley and Bhamdoun, also experienced a boom.

The post-conflict era has witnessed a significant construction boom. Real estate prices have risen steeply, especially for prime property, but have recently stabilized. The boom has been fuelled by a mixture of local, expatriate and Gulf Arab funds. With respect to residential property, it has been concentrated mostly at the upper end of the housing market. As the stock market has resumed its operations only recently, land and construction have been viewed by many as attractive investment opportunities. Construction projects are financed mainly by equity investments. In 1995, construction activity accounted for 9.2 per cent. of GDP, a significant increase from approximately 4.5 per cent. in 1972. Since 1996, this activity has slowed, as witnessed by decreasing cement deliveries and number of construction permits.

* Industry

In 1995, the industrial sector (mainly production of cement, furniture, paper, detergents, cosmetics, pharmaceuticals, batteries, garments and processed foods) accounted for 17.3 per cent. of GDP, an increase from 15.9 per cent. of GDP in 1972. Virtually all industry is privately owned.

Exchange rate and price stability coupled with the gradual fall in Lebanese Pound interest rates have contributed to a better environment for investment and growth in industry. Infrastructural bottlenecks resulting from the conflict are being addressed as improvements in roads, telephones and electricity supply are realized. IDAL is in the process of establishing free industrial zones in several areas around the country. The Government provides various incentives for the establishment of industrial facilities in Lebanon, including fiscal incentives in the form of reduced customs duties and tax exemptions.

From 1993 to December, 1999, the International Finance Corporation (“IFC”) carried out 31 investment and financing projects in Lebanon in an aggregate amount of U.S. $316 million, with an additional U.S. $256 million raised by the IFC through loan participations. Investments during 1999 included loans to three companies for U.S. $50 million. As of December 31, 1999, U.S. $237 million representing IFC loans, loan participations and equity investments had been disbursed and remained outstanding.

* Energy

Lebanon has no known fossil fuel resources. Apart from relatively modest hydroelectric resources and the import of 50-100 megawatts of electricity semi-annually from Syria, all energy needs are met with imports of petroleum products, which represented over 4.2 million TOE (tonnes of oil equivalent) in 1995. Two state-owned refineries (one in Tripoli and one in Zahrani) are currently non-operational. The power sector accounts for about one-third of fuel imports.

Lebanon’s energy sector is dominated by the state-owned Electricité du Liban (“EDL”). EDL is a vertically integrated utility with approximately 900,000 customers. Lebanon’s energy production facilities include three thermal power stations, two gas turbine stations in each of Baalbek and Tyre and seven hydroelectric stations. In addition, two new combined cycle power plants have been constructed. Besides its own plants, EDL purchases power from four independent hydroelectric power producers and sells wholesale to four private distributors. EDL is also the majority shareholder in the previously private-owned Kadisha company, a thermal and hydro power producer and distributor to about 100,000 customers in North Lebanon.

The power sector sustained severe physical damage to all its production transmission and distribution facilities during the conflict. EDL also incurred financial losses resulting from low tariffs, high technical and non-technical losses, including widespread illegal connections, and loss of control over its commercial operations. EDL has been regaining control over its operations. Following the rehabilitation of existing plants, tariffs were increased significantly, and, commencing in 1996, steps are being taken to address billing and collection weaknesses as well as non-technical losses. The program for the rehabilitation of the Republic’s energy sector is further described under “Reconstruction—Electricity Generation.”

The Israeli attacks on power stations near Beirut in June, 1999 and February, 2000 resulted in damages estimated at approximately U.S. $40 million. Required repairs to the power stations as a result of the latest attacks have been substantially completed.

* Agriculture

Approximately one third of the Republic is arable. The most fertile areas are located along the coastal strip and in the Bekaa valley. The diversity of the Republic’s topography and climate enables cultivation of a wide variety of vegetables, fruits, industrial crops and cereals. In 1995, agriculture contributed approximately 12 per cent. to the Republic’s GDP, as compared to approximately 9.9 per cent. in 1972. Food and agricultural exports, which include forestry products, provide about 10 per cent. of merchandise export earnings.

For more information on the Lebanese Economy, please visit the website of the Ministry of Economy and Trade in Lebanon.

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