Lebanon: Facing Economic Ruin

By John T. Haldane

Since the beginning of the tragic civil war in Lebanon in 1975, an estimated 100,000 have died and additional tens of thousands have been wounded or become refugees in their own country. Lebanon's civil war also is bringing the once-proud nation closer and closer to economic collapse. Exacerbated by the Israeli invasion of 1982, which wreaked terrible havoc on both the population and the economic infrastructure, economic deterioration continues with no end in sight.

Gloomy Predictions

An International Monetary Fund (IMF) report issued earlier this year stated somberly that while 1985 had been a bad year for the Lebanese economy, 1986 was likely to be considerably worse. Previously the IMF had been optimistic, in view of the Lebanese Government's promise that it would reduce expenditures and regain control from the country's armed militias of such revenue sources as customs and excise taxes. The IMF also assumed that the Banque du Liban (Central Bank) would be able to build up foreign currency reserves and slow depreciation of the Lebanese pound. Instead, according to Lebanese political leader Marwan Hamadi, "besides the enormous human casualties and destruction, the country finds itself on the brink of total economic bankruptcy."

Lebanon's location as the traditional gateway to the Middle East and its flourishing economy had made it the banking center and entrepot of the Arab world. Thousands of affluent Arabs from Iraq, the Arabian Peninsula, Egypt, and Sudan spent the entire hot summer in the mountains of Lebanon. Beirut's laissez-faire reputation as a center of fine restaurants, superb beaches and skiing, learning and culture brought in many other Arab, European and American visitors.

Beirut: State of Anarchy

Today, however, Beirut exists in a state of anarchy. The Government is practically powerless. Homes are robbed or expropriated by gunmen. Cars are stolen in broad daylight under the gaze of policemen. Banks have private guards armed with machine guns to protect them from robbery. The Government has acknowledged 225 bank robberies in the last 16 months in Beirut.

More than 100,000 Europeans and Americans lived in Beirut before the civil war, when the city was known as "The Paris of the Middle East." Now most resident foreigners are in fact returned Lebanese emigrants. The few dozen Western residents remaining in Beirut, along with a handful of brave foreign correspondents, risk their lives each time they venture into the streets. The American University of Beirut, long the leading bastion of Western culture in the Middle East, continues its brave efforts to hang on, but its staff is but a fraction of what it was in the late 1960's. Twenty-one teachers and students, 13 of them Lebanese, have been kidnapped so far this year.

Economic Situation Deteriorating

Eighty percent of Lebanese industry has been destroyed as a result of the 11 -year civil war and Israeli bombings. Unemployment in Lebanon has passed 40 percent. Inflation has reached a record high of more than 60 percent, mostly because of the need to import food products and other basic consumer goods. Import prices have tripled as the foreign exchange value of the Lebanese pound falls. The nation presently has one of the highest ratios of public debt to income in the world, as well as one of the highest fiscal deficits as a proportion of national income.

Victor Kassir, Minister for Economy, Commerce, Industry, and Energy, reported in July that the Lebanese pound, once one of the five strongest currencies in the world, has become one of the weakest.

The Government of Lebanon has survived financially over the past few years mainly by borrowing from the private sector. Total public debt increased by more than 30 percent in 1985, reaching about $3 billion at the end of the year. Meanwhile the value of the Lebanese pound fell by over 50 percent.

While the Banque du Liban has maintained its foreign exchange reserves at about $1 billion, the treasury has failed to hold its revenue base. Actual revenues last year are believed to have been only a fraction of the budgeted figure of $1 billion. Historically, the bulk of revenue has come from customs duties, but the creation of militia-operated ports has effectively reduced official customs levies to a trickle. So many illegal ports have been built by both Christian and Muslim militias that the Ministry of Finance now estimates various private armies are diverting more than $10 billion in taxes and duties from the central treasury. To make matters worse, the armed militias—Maronite Phalangist, Shia "Amal," Druze, Palestinian, pro-Syrian and pro-Israeli—now levy direct taxes on shopkeepers and businessmen.

Lebanon faces yet another serious financial loss in workers' remittances from the Gulf states. As a result of the sharp drop in world oil prices, several countries have cut back on the expatriate work force and many skilled Lebanese workers have lost their jobs.

Rebuilding Lebanon

Dr. Nasser Saidi paints a gloomy picture in a paper entitled "Economic Consequences of the War in Lebanon," saying that continuous warfare has destroyed most of the economy's productive capacity. If Lebanon is to return to some semblance of its pre-war state, he says, it must achieve 1) a permanent political settlement ensuring operation of the legal and judicial system that protects property rights and individual safety; 2) massive domestic investment of foreign aid and domestic savings; and 3) a major reform of the system of taxation and a limit on the growth of Government spending.

Despite differences among the country's communal leaders, all have publicly agreed on the need to preserve Lebanon's free market system. Although none of the Lebanese power brokers has called for a drastic restructuring of the economic system, unless they get their political act together soon, there won't be any free market system left to preserve.

Meanwhile, Lebanon continues to suffer a serious "brain drain." The leading Lebanese daily, An Nahar, estimates that 860,000 Lebanese emigrated between 1974 and 1984 as a result of insecurity and economic difficulties caused by the war. This exodus from a nation with a population of only 2.7 million included doctors, engineers, businessmen and skilled technicians. The majority were young, between 18 and 25 years old. The newspaper reported that 75 percent of those who left were Christian, ten percent were Druze and about seven percent Sunni. This has led some demographers to estimate that Christians now make up about 40 percent of the population. Some experts predict that by the year 2000 Lebanon's population probably will reach six million, with Muslims outnumbering Christians by three or even four to one.

Although future economic recovery is possible when political stability is achieved, the road will be hard. Some estimates indicate that Lebanon's real economic output is some 40 percent below that of 1974. Lost income because of the hostilities is set at $6 billion. Costs of reconstruction are estimated at $20 billion. For tiny Lebanon the challenge is almost overwhelming.

An article on "The Lebanese Civil War" in the American Educational Trust's The Arabs: Atlas and Almanac summarizes the problem: "This tragically fragmented state will not be reconstructed through either the overt or covert actions of outside powers, but only through agreement among its own contending groups. When the Lebanese people themselves learn this lesson, their ordeal may finally come to an end."

John T. Haldane is a specialist in Middle Eastern affairs who served as a Foreign Service Officer in Baghdad, Cairo, and Beirut, and as an international economist at the Departments of Commerce and Treasury.