Lebanon Real Estate Newsletter Vol. 3, Issue 11 - November, 2007

The Lebanese economy is showing distinct signs of improvement and resilience, though still under pressure from long-running political instability, according to a report by the International Monetary Fund (IMF).

The report, released in mid-November, said real growth of gross domestic product for the year should register between 2% and 3%, with the annualized inflation rate coming in at around 5%.

Lebanon should continue to receive financial inflows at a sustainable pace, allowing the central Banque du Liban to maintain international reserves at the current level or even achieve a modest further build-up, while state borrowing from the bank should decrease by the end of the year, the IMF said.

The study cited the government's work to privatize the country's two mobile networks next year, sales that, if they go through as scheduled in February, should generate around $6bn.

While the IMF report gave a generally positive picture of developments in Lebanon, it placed some important conditions on future progress. Foremost was the need for some degree of political stability, or at least continuity, allowing the economy to rebuild. A more stable environment would be required for the advancement of the reform process and the implementation of reforms.

Though the government of Prime Minister Fouad Siniora has managed to pass through a number of economic reforms, they were deemed illegal by then President Emile Lahoud, who refused to ratify cabinet decrees. Lebanon will need all arms of the state to work together in some measure of harmony to smooth the path for further progress.

While the IMF said the economic recovery following the conflict with Israel in the summer of 2006 has maintained momentum, it warned, "economic prospects continue to be hostage to political envelopments".

The continued support of international donors is key to prolonged economic recovery, the IMF report said. The Paris III summit in January saw foreign countries and aid agencies pledge $7.6bn in loans and grants, though there have been delays in disbursing these funds.

"Inflows of external donor support of the government have continued to fall short of expectations, with few of the resources pledged at the January 2007 Paris III conference having been received by the government to date," the IMF said.

In part, this can be attributed to wariness on the part of donors over the uncertain political situation, which has not been improved by the repeated failure of parliament to find a consensus candidate to replace Lahoud, whose term of office expired on November 23.

Not all agree with the IMF's assessments, especially as most of the facts and figures were provided by state agencies.

Zuhair Berro, the president of price watch lobby group Consumer Lebanon, said the current and projected inflation figures did not reflect the reality on the ground. Prices of commodities have increased by around 10% in the third quarter of 2007, according to a study by the group, well above the rate suggested by the IMF.

"Some of these reports want to glorify the government with misleading facts," Berro said in an interview with local press on November 28. "We are living in this country and we know how prices and inflation are moving."

Another to take a less than positive view of developments in Lebanon was Standard & Poor's (S&P), which on November 27 gave a "B-" grading with a negative implications credit watch on the country's long-term sovereign foreign and local currency ratings.

Lebanon had briefly been on S&P's credit watch during the conflict with Israel last year. This time, the move has been prompted by the political situation and the failure to find a new head of state, which the agency warned could result in the creation of parallel administrations.

"This would probably hinder policy-making and therefore raise serious concerns over the government's administrative capacity to service its debt, which [...] would at least hit 173% of GDP by end-2007," the agency's statement said.

With Siniora's government supposed to stand down after a new president is named, an issue that in itself poses deep divisions, there is a degree of uncertainty over the future and the incoming government's commitment to the economic reform process. While Siniora is expected to continue in the top job, backed by the team that has held office since last year, no guarantees can be made at this juncture.

Some of the improvement in the economy is due not so much to government initiatives but to the absence of active conflict during the past few months. A return to factionalism, parallel administrations or the threat of civil war could quickly undo what progress has been made.