Lebanon's Economy

Historical Overview

| Introduction |
| Civil War and Partial Recovery, 1974-82 |
| Invasion and Trauma, 1982-87 |
| Balance of Payments |
| Government Revenues |
| External Debt and Foreign Exchange |
| Inflation |
| The Budget |
| Summary |


As the Lebanese state fragmented, so too did the national economy. Many observers have argued that because of this fragmentation, there was not one economy in the late 1980s, but several. Areas held by some militia groups, most notably the Maronite Christian heartland controlled by the Lebanese Forces, appeared well on their way to becoming de facto ministates. These militias were successfully usurping basic functions of government such as taxation and defense.

Despite the fragmentation, there were still some shreds of the official economy. In late 1987 the main port of Beirut and Beirut International Airport were subject to intermittent government regulation. The Central Bank (also cited as Bank of Lebanon or Banque du Liban) maintained sizable financial reserves, although these declined sharply in the mid-1980s. There were spiraling budget deficits as the government attempted to reestablish the credibility of its security forces and maintain at least some social services.

Measuring the government's impact, however, was another matter. Although the government's financial role in the economy was growing, its role in the daily economic affairs of the Lebanese people was declining. The importance of the official economy in the late 1980s depended on where one lived and how one felt politically. But the economic collapse could not be separated from the human tragedy. For example, two of the most salient facts of life in Beirut in February 1987 were the collapse of the Lebanese pound to less than one-hundredth of a United States dollar and the request by Palestinian religious authorities for a ruling on whether or not it would be permissible for the besieged refugees in the camps at Burj al Barajinah and Shatila to eat their dead. In a country where violence had become endemic, where some 130,000 people had been killed and a further 1 million--a third of the population--had been injured, calculating the impact of the central government on the economy would be impossible.

In the years that followed the outbreak of the 1975 Civil War, political developments dominated economic affairs. Improved security conditions--such as from late 1976 to early 1978, or from September 1982 to January 1984--yielded considerable economic benefits, as relative peace enabled the recovery of commerce. Peacekeeping forces--Syrian, Israeli, United Nations, United States, and West European--brought with them favorable economic conditions in the communities where they were stationed. But the positive effects were frequently shortlived. For example, when Syrian troops entered Beirut in February 1987 (the first time a recognized power had attempted to enforce its authority in the capital since the February 1984 collapse of the Lebanese Army), there was a brief flurry of guarded economic optimism. The upswing of the Lebanese pound lasted only three weeks. But overall instability was the norm from 1975 to mid-1987, and it became clear that nothing short of a total change in the country's political and security structure--in effect, the end of sectarian partitions and militia rule--would lead to any sustained revival of what had once been one of the world's most vibrant economies.

By 1987 Lebanon had entered an era where reliable statistics on the state of the economy were usually absent. Lebanese economists were sometimes able to compile a few indicators, but the numbers were often based on incomplete data. But even without complete statistics, the downward trend of the national economy was obvious.

Bearing testimony to this trend, the Lebanese National Social Security Fund reported in May 1986 that 40 percent of the 500,000- strong private sector work force was unemployed. Industry was running at barely 40 percent of capacity, and per capita income was down to around US$250 a year in 1986, five times lower than eleven years earlier.

In 1985 estimates of the gross domestic product varied from Lú30 billion to as high as Lú48.3 billion. In either case, GDP was no more than half of what it was in real terms in 1974.

Although the collapse of GDP began with the start of the Civil War, the fall of the Lebanese currency began much later. On the eve of the war, it required only Lú2.3 to buy a United States dollar. Currency values declined over the next several years, but it was not enough to destroy the basic Lebanese confidence in the pound, which was backed by substantial holdings of gold and foreign exchange. Whereas in 1981 the exchange rate had averaged Lú4.31 to the dollar, by the end of 1982, with the new government of President Amin Jumayyil (also spelled Gemayal) in office, the exchange rate was back to Lú3.81 to the dollar.

The pound, however, began depreciating rapidly in the aftermath of further Beirut clashes in early 1984 and the withdrawal of the Multinational Force (MNF) of peacekeeping troops from the capital. Although there was widespread currency speculation, the Central Bank could do little to investigate this problem became of Lebanon's tough banking secrecy laws.

Between January and December 1984, the pound lost just under half its value against the dollar, while in 1985 the trend gained speed, resulting in a further 60-percent erosion in value. The Central Bank was widely criticized, especially by the commercial banks, for failing to act decisively to halt the pound's slide. But even greater criticism was directed against commercial bankers and leading politicians, who were constantly accused of speculating against the national currency.

By 1986 the country was on the verge of hyperinflation as the pound lost almost 85 percent of its already shrunken value during the course of the year. On February 11, 1987, the currency crashed through the psychologically important barrier of Lú100 to the dollar and continued its fall. By August the pound was trading at more than Lú250 to the dollar. Compounding the problem was that these events occurred after a year in which the dollar had fallen sharply against most major international currencies.

The fundamental principle of the Lebanese banking system had been a freely convertible pound. Citizens were free to hold foreign currency accounts in their banks, and remittances received from friends and family living abroad could be processed with relative ease through banking channels. As the pound began its decline, the importance of foreign currencies (particularly the United States dollar) grew, and a "twin currency" economy emerged. Complex systems were soon set up to circumvent the banking system, not for fear of governmental interference but to prevent the loss of deposits or of letters of credit through bank robberies. In the twin currency economy, foreign cash and drafts on bank accounts held outside the country became increasingly common. It became impossible, however, to calculate how much foreign cash was entering the country once transfers began to bypass the banking system. But it was clear that most people were not receiving enough to retain their pre-1975 living standards.

By 1987 ordinary Lebanese were living in a very strange economy. Public services functioned according to the ability of the government to pay staff, the ability of different groups to tap into utilities (with or without official permission) and the ability of local groups (with or without official help) to keep services operational. The costs of basics, such as gasoline, home fuel oil, and cooking gas were all subject to government price restraints, yet prices could double or triple in times of shortages, as roads between refineries, gasoline pumps, and fuel depots were cut. People found the government price controls ineffective, and the struggle to secure vital goods and commodities reflected not so much a free market as a free-for-all. By 1987 a dozen years of conflict had shown them that economic control, as well as political power, came from the barrel of a gun.

By the late 1980s, years of conflict had distorted the economy. Total GDP was down, but the proportion of GDP contributed by the government was up. The national currency collapsed, and the country began sustaining balance of payments deficits. One commentator noted that 1986 marked the first time since the Civil War started in 1975 that Lebanon had suffered economic hardship to such an extent that it had affected the middle classes as well as the traditional urban poor. Another observer argued that Lebanon, once the model of modernity in the Middle East, was being threatened with "de-development."

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Civil War and Partial Recovery, 1974-82

Lebanon traditionally has had a dynamic economy. In the years leading up to the Civil War, the country enjoyed high growth rates, an influx of foreign capital, and steadily rising per capita income. Although imports were often five or six times greater than exports, earnings from tourism, transit trade, services, and remittances from abroad counterbalanced the trade deficit.

In 1973 (the last prewar year for which detailed figures were available in late 1987), GDP at current prices totaled US$2.7 billion, compared with just US$1.24 billion in 1966. In 1974 GDP rose to around US$3.5 billion because of an increase in the value of the Lebanese pound. Per capita GDP rose from around US$560 in 1966 to US$1,023 in 1973 because productivity increased faster than population growth and because the Lebanese pound gained ground against the dollar.

The Lebanese economy was healthy in the years leading up to the Civil War. The service sector grew fastest during this period. Commerce grew at almost the same rate and by 1973 accounted for almost one-third of GDP. The growth of commerce had important implications because customs duties were a major part of government revenues, sometimes amounting to nearly half of the government's total income. The Lebanese pound was strong, credit was easy, and there was a balance of skilled and unskilled labor. Internal markets were protected, and Lebanese industry was finding increasingly useful outlets abroad, notably in the Persian Gulf countries.

The petrodollar boom that followed oil price increases by the Organization of Petroleum Exporting Countries after the ArabIsraeli October 1973 War led to a period of expansion for Lebanon. Lebanese banks became major channels for soaring Arab oil revenues. In addition, Arab, West European, and American bankers bought shares in Lebanese financial institutions to secure a share of the profits.

Economic development, however, was uneven. The government was so wedded to free enterprise that it essentially failed to reduce economic and social inequities in various communities. President Fuad Shihab (also cited as Chehab) made some effort to remedy these inequities by pursuing development projects in the traditionally neglected south and north. But the center of the country--Beirut and the central Biqa Valley--was riding a seemingly never-ending economic boom.

The impetus for socially oriented economic development declined under Shihab's successor, Charles Hilu (also cited as Helou), and disappeared entirely under President Sulayman Franjiyah (also cited as Franjieh). The consequences of economic neglect were felt in the late 1970s and the 1980s, as Shias, who had migrated from the south and the outlying reaches of the Biqa Valley, made their increasingly militant presence felt in Beirut, transforming the southern half of the city into a new, Shia canton, to rank alongside overwhelmingly Christian East Beirut and predominantly Muslim (i.e., Sunni and Druze) West Beirut.

The first nineteen months of the Lebanese Civil War (April 1975-November 1976) witnessed widespread destruction of infrastructure and services, mostly in Beirut. Industry sustained direct damage valued at between Lú5 and Lú7 billion. Indirect damage was valued at between Lú972 million and Lú2.23 billion. Some 250 industries, capitalized at Lú1 billion, were destroyed, and as much as one-fifth of industry's fixed capital was lost. After the first nineteen months of fighting, losses amounted to Lú7.5 billion (Lú6.2 billion sustained by the private sector and Lú1.3 billion by the public sector), according to the Beirut Chamber of Commerce and Industry.

Post-1976 recovery was limited, with industrial production approaching only two-thirds of prewar levels. Further clashes in l978 again hampered production. Although in 1980 industrial output in current financial terms appeared to exceed prewar levels, inflation had rendered such comparisons almost meaningless. In 1979 the newly established Council for Development and Reconstruction (CDR) unveiled a Lú22 billion reconstruction program to span five years, backed by Arab aid. Only some of the proposed reconstruction work was initiated, however.

Instability ruined the tourist industry. The Civil War included the notorious battle of the hotels, in which the Phoenicia, St. Georges, and Holiday Inn--all major luxury hotels--became fiercely contested militia strongpoints. A score of smaller establishments suffered the same fate, as fighting ripped through the heart of the capital. Because the hotels were close to the Green Line, which divided the warring factions, they were forced to remain closed for business when the fighting stopped.

After the war, there were indications that a less centralized industrial economy might emerge. The cities of Zahlah, Sidon, and Tripoli, for example, enjoyed a boom. But growth in these cities reflected fragmentation of the country as much as economic revival.

Lebanon's ability to export industrial goods was damaged by internal unrest and external pressures. The good reputation once enjoyed by Lebanese clothing manufacturers was undermined by imports of cheaper garments that were relabeled and reexported as "Lebanese." By the end of 1981, Iraq had halted all imports of Lebanese garments, and Egypt had frozen preferential terms for Lebanese industrial exports because of false labeling. Although the Egyptian and Iraqi measures were rescinded in 1982, they were symptomatic of the pressures that Lebanon faced throughout the 1980s.

Events elsewhere in the region also had an impact on Lebanon. A tripling of world fuel prices between 1973 and 1981 reduced the country's competitive edge. When Syria imposed restrictions on transit trade, freight forwarders found it increasingly uneconomic to ship goods to Persian Gulf destinations via Beirut. The prices of imported raw materials were higher than ever, while export markets were increasingly restricted. Thus, even before the Israeli invasion of 1982, the Lebanese economy was in bad shape.

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Invasion and Trauma, 1982-87

Lebanon, torn by its sectarian and political disputes, was further cursed by invasion and a seemingly endless intermingling of internally and externally inspired conflict from 1982 onward. Beirut suffered grievously between June 6, 1982, when Israeli troops first crossed the Lebanese border, and September 16, when they completed their seizure of West Beirut. Normal economic activity was brought to a standstill. Factories that had sprung up in the southern suburbs were damaged or destroyed, highways were torn up, and houses were ruined or pitted by artillery fire and rockets. Close to 40,000 homes--about one-fourth of all Beirut's dwellings--were destroyed. Eighty-five percent of all schools south of the city were damaged or destroyed. The protracted closure of Beirut's port and airport drastically affected commerce and industry. By 1984 the World Bank and the CDR agreed that Beirut would require some US$12 billion to replace or renovate damaged facilities and to restore services that had not been properly maintained since 1975.

In a December 31, 1982, national broadcast, President Amin Jumayyil called for the world to launch a new "Marshall Plan" to help reconstruct Lebanon. A series of conferences were held with major potential aid donors. A number of reconstruction projects were launched with support from the World Bank, the United States, and France. Roads began to be repaired, ports were cleared of debris, and schools and hospitals were built or rebuilt. But nothing was done on the grandiose scale Jumayyil had originally envisaged.

It became clear that Saudi Arabia and the Persian Gulf countries were not prepared to provide Lebanon with major reconstruction funds until the World Bank and other Western financial institutions had taken the lead in the reconstruction effort. And repeated breakdowns of fragile truces meant that from 1984 to 1987 there were no real opportunities for large-scale reconstruction efforts.

Still, financial and business circles were optimistic between September 1982 and January 1984 because Western-backed reconstruction plans seemed attainable under the presidency of Amin Jumayyil. But the mood did not last. Economic progress was insufficient to override the recurrence of sectarian strife, and the government seemed ineffective in reconstruction and reconciliation. When Beirut was again divided in February 1984, and the troops of the ill-fated MNF evacuated, a turning point was reached. From that point on, it became impossible to ignore the downward spiral of the Lebanese economy.

Foreign banks began selling and moving out. The decline of the Lebanese pound intensified, and hyperinflation set in. Public debt soared, and only drastic cutbacks in government purchases, which were virtually restricted to oil, ensured an overall balance of payments surplus in 1985. By 1986 the inflation rate was well over 100 percent. Government revenues from taxation and customs duties continued to erode. And one account declared that at the end of 1986 "currency speculation and black marketeering have become the principal areas of business activity." Economic control was falling into the hands of those who possessed hard currency. The militias' tight grip on customs revenues gave them increasing control over what was left of the national economy; and their strength increased as the central government's control over national finances weakened. Although the Central Bank was still the guardian of one of the highest volumes of per capita foreign assets in any developing country, the government's ability to use these assets to reconstruct the country's shattered financial system or national economy was doubtful.

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Balance of Payments

Before the early 1900s, Lebanon generally had a balance of payments surplus. After that, however, the balance of payments situation fluctuated considerably. In 1983 the Central Bank reported a deficit of US$933 million; a year later, the deficit was set at about US$1.4 billion. But in 1985 there was an overall current account surplus of US$381 million as Central Bank foreign assets rose and the government purchased fewer weapons. Progress was not maintained, however; by the end of May 1986, the Central Bank estimated a US$407 million deficit, comprising a US$583 million Central Bank shortfall and a US$176 million surplus at the commercial banks. Central Bank governor Edmond Naim complained that the shortfall was caused by pressure from the government to finance runaway public expenditure and a failure to do anything about the state's withering revenue base.

Public debt soared as the government's formal revenues sources- -taxes and customs receipts--dried up. In 1984 the government spent about US$1.6 billion more than it obtained in revenues. The deficit had to be financed by borrowing US$840 million from the Central Bank and by selling treasury bonds. In 1985 the situation deteriorated even further, and by August the Chamber of Deputies approved a budget based on US$611 million in government revenues. However, state revenues that year amounted to only US$224 million. The principal reason for the deficit was the persistent failure to secure receipts from customs duties. Public debt reached US$931 million by the end of 1986, and by the end of March 1987 it totaled US$883 million.

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Government Revenues

In the pre-Civil War days, receipts from customs duties accounted for nearly half of total government income. In 1984 customs receipts fell to US$69.4 million, barely one-third their 1983 level. The Ministry of Finance stated that customs receipts should be ten times higher than they were in 1984 to meet its targets for this revenue source. Instead, they fell further--to US$ 24.3 million in 1985. In 1986 total government spending was estimated at US$413 million against income of barely US$23 million. Of this already paltry sum, customs receipts amounted to just US$9.7 million.

In the mid-1980s, the government still had assets to cover its financial obligations. A November 1985 report listed as the nation's principal assets its gold reserves (about US$10 billion in foreign exchange reserves) and holdings in its Intra Investment Company. In addition, the report said, there were more than US$440 million in public sector deposits with the Central Bank, about US$200 million in secured debts owed to the state, and about US$86 million in various Central Bank assets. Against this, however, domestic public debt totaled US$2.5 billion, while foreign debt totaled US$200 million.

Some of the government's assets were unusual. By virtue of its Intra Investment Company holdings, the government had an important stake in the Casino du Liban, a famed nightclub at Juniyah. The casino also epitomized the way in which government had become dependent on militia deals to secure financing. In 1986 the casino reached an agreement with the Lebanese Forces (LF) militia under which the LF would close all illegal gambling houses under its control in exchange for a monthly income of US$1.2 million. At that time the casino's earnings were about US$2 million a month, of which 40 percent was paid in royalties to the government.

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External Debt and Foreign Exchange

Lebanon had many economic problems in the 1980s, but foreign debt was not one of them. As late as 1986, the total official foreign debt was estimated at no more than US$250 million. The Bank of International Settlements put the country's external bank indebtedness at US$1.7 billion at the end of 1985, a decline from US$1.78 billion in 1984 and US$1.8 billion in 1983. Of the 1986 total, US$356 million was short-term (one-year) debt. The Organization for Economic Co-operation and Development put total external debt, excluding International Monetary Fund (IMF) credits, at US$938 million at the end of 1984. Long-term debt amounted to US$481 million, and total debt servicing, excluding IMF credit, amounted to US$268 million.

Total foreign reserves greatly exceeded debt. Throughout the 1980s, the Central Bank maintained a tight grip on the country's gold reserves and tried to do the same with its foreign currency reserves. The government held 9,222,000 ounces of gold, officially valued on the bank's books at US$42.23 an ounce and ostensibly worth only US$389 million. In reality, however, it was worth at least US$3 billion.

In 1984 foreign exchange reserves, valued at US$1.9 billion in 1983, declined to US$652 million. In 1985 the reserves fell further to around US$300 million early in the year but recovered sharply to US$945 million in November. Then, at the start of 1986, there was a run on the Lebanese pound, and reserves plunged to US$300 million in March. The Central Bank attempted to counter falling reserves by forcing banks to increase their statutory reserves and take up subscriptions of treasury bills.

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Statistics from the General Labor Federation of Lebanon (ConfÚdÚration GÚnÚrale des Travailleurs du Liban) showed that for the first three months of 1985, there was a cost of living increase of 30 percent. The statistical directorate at the prime minister's office, however, put the increased cost for a single person living at subsistence level at 100 percent over the same period. The federation's statistics showed an 86- percent inflation rate in the 12 months ending June 1986, with food prices showing the highest increases. At the end of 1986, the federation estimated that during the first 10 months of 1986, the cost of living for a family of 5 had risen by 150 percent. Monthly expenditure on basic items--excluding education, rent, and medical expenses--had risen from Lú5,652 to Lú14,083. Overall, the federation estimated that 1986 had witnessed a 226-percent increase in prices. By March 1987, the federation was reporting a 250-percent inflation rate, with food prices having increased 300 percent over the previous 12 months.

Periodically, the government ordered wage increases, such as the 25- percent increase for all state employees enacted on January 1, 1986, but the increases did not keep up with inflation. In the anarchic circumstances of Lebanon, no amount of governmental action could resolve the underlying problem of inflation

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The Budget

The government of Amin Jumayyil had to face the seemingly insuperable problem of securing revenues and curtailing expenditures in 1987. Sectarian politics made the problem even more complicated. On the revenue side, the government lost its power to collect customs receipts because the militia forces controlled the unofficial, or illegal, ports. (Illegal ports are those not under the control of the Lebanese government; no official customs duties are collected at these ports.) Militia activity also hampered the government's ability to collect direct taxes and even to collect utility fees for electricity, water, and telecommunications. During good years, however, the government was successful at collecting revenues in some areas around Beirut. But in other parts of the country, and sometimes in the Beirut area, the militias were the only revenue collectors, imposing their own tax systems on areas under their control. This situation was extensive in the area controlled by the LF. The LF set up an organization in 1980 to supervise revenue collection from approximately eight illegal ports under its control. The LF also imposed levies on a variety of private retail establishments, from hotels and restaurants to gasoline stations and shops.

On the spending side, the biggest problem confronting the government throughout the 1980s was subsidies. It had long subsidized bread and sugar, and it was reluctant to remove these subsides, which benefited the poorest group. Instead, the government targeted fuel subsidies. In November 1985, Minister of Finance Camille Shamun (also cited as Chamoun) issued a decree abolishing state subsidies on gasoline. Prices at the pump almost doubled but were still less than US$1 per gallon. (The ministry still faced a cumulative deficit of US$365 million for fuel imports at the end of 1985, equivalent to about half the national budget. Actual fuel imports that year cost US$509 million.) The price increases triggered one-day general strikes throughout the country, but the collapse of international oil prices a few weeks later helped bring prices back down. The question of fuel subsidies, however, remained unresolved. In 1986 the IMF told the government that raising local petroleum prices would be the most effective way of curbing the runaway budget deficit. The Central Bank also pushed to abolish fuel subsidies, and it informed the Ministry of Industry and Petroleum that it would stop payments for oil imports unless the ministry took action to reduce the deficit on its oil account, which the bank predicted would reach US$55 million that year.

In January 1987, the government increased fuel prices by 72 percent, but prices were still far from realistic. Before the price increase, consumers paid about seven cents per liter for gasoline. After the increase, they paid twelve cents per liter--still less than half the price commonly found in the United States, a country with one of the lowest gasoline prices in the world. In effect, such prices meant that gasoline was rationed and that when it was available, there would be an illegal surcharge. The pricing system also fostered a flourishing trade in illegal petroleum exports. Nonetheless, in June 1987 the government again rejected the possibility of terminating state subsidies on petroleum products.

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Lebanon's economy is liberal and open, and traditionally heavily oriented toward services. Lebanon served historically as a haven for Arab capital and as a Middle East transit point and enjoyed a vibrant and largely unregulated private sector. Lebanon's banking and tourism sectors flourished between the Gulf oil boom of 1973 and the beginning of Lebanon's civil war in 1975 by serving regional needs. Real GDP growth was 6% per year from 1965 to 1975.

Despite the civil war and mounting government budget deficits resulting from an inability to collect taxes, Lebanon kept its currency stable and inflation rate manageable until the early 1980s. Expatriate workers' remittances, the flow of capital from abroad to support various militias, the PLO's economic activities, and the narcotics trade all contributed to a positive balance of payments.

Events in the early 1980s, including the Israeli invasion of 1982, conspired against the Lebanese economy, resulting in accumulated infrastructure damage, massive dislocations of the population, growing migration of people and capital, and the uprooting of the PLO bureaucracy.

Recession in the Gulf led to a sharp reduction in remittances. Beirut's prominence as a center for finance, commerce, and tourism faded away. A calmer security environment in 1986- 87, combined with a sharp depreciation of the Lebanese pound and a decline in labor costs resulting from inflation of 600%, produced a modest economic rebound. Growth was cut short by the general chaos of 1988-90.

Hostilities in 1989-90 in industrial and prosperous areas of Lebanon had a dramatic and negative impact on production and exports, triggered massive outflows of capital and people, and created circumstances resulting in the "dollarization" of the economy.

The end of hostilities in 1990, the beginning of the process of national reconciliation, and the removal of internal barriers to the movements of goods and people produced a short- term economic boom in 1991. This high level of activity proved unsustainable, largely because of enormous state deficits, poor economic management by the government, public sector corruption, the unavailability of commercial credit, and the collapse of public confidence in the nation's leadership.

A large, retroactive public sector salary increase in late 1991, financed through the sale of Treasury bills, precipitated a crisis: >From January 1, 1992, to early October, inflation galloped to about 130%, and currency lost 180% of its value. The high cost of living became, and has remained, an issue of acute concern to the Lebanese public.

A surge of optimism swept across Lebanon with the advent of the Hariri Government in October 1992, amidst expectations that the billionaire businessman and his team of advisors would reform state finances and administration, embark on needed emergency infrastructure reconstruction, and attract foreign aid. Demand for Lebanese pounds jumped immediately, despite substantial intervention by the central bank to stabilize the exchange market (the pound was valued at the end of May 1993 at 1,740 to a dollar, after an early October 1992 low of 2,400 to a dollar). There was also evidence of deflation.

The Ministry of Finance has achieved remarkable advances toward closing the budget deficit, despite rigidities in debt servicing, the public sector payroll, and large subsidies to the electricity and telephone companies. The deficit in the first quarter of 1993 amounted to $104 million, compared to $550 million in the first quarter of 1992.

The absence of functioning services is a serious obstacle to growth. The Hariri Government has made infrastructure rehabilitation a centerpiece of its efforts, using the December 1991 emergency rehabilitation plan (ERP) as a blueprint. It calls for spending $2.3 billion in the next 2.5 years, primarily on rejuvenating the electricity, telecommunications, water supply, waste water, and solid waste management sectors.

The government has already begun pre-qualifying international firms for projects in those fields. The government has in hand commitments for over $900 million in allocated and non- allocated foreign assistance, almost entirely in the form of loans.

In February 1993, the World Bank signed an agreement to loan $175 million in support of ERP. Future aid, necessary for partial financing of an ambitious $13-billion, 10-year development plan revealed by the government in March 1993, will depend largely on the Hariri team's ability to point to a record of economic stabilization and well-managed use of current assistance flows for reconstruction.

Hariri's economic policy is firmly rooted in the principle that infrastructure spending and budget austerity will stimulate private-sector growth. The prime minister's advisers hope to develop more sophisticated capital markets to attract a portion of Lebanese capital held abroad, which amounts to tens of billions of dollars, institutionalize exchange rate stability, and help manage a debt burden which is bound to grow as ambitious rehabilitation plans proceed.

The formation of a private real estate company to rebuild the downtown commercial center of Beirut is a centerpiece of the Hariri team's strategy for hooking economic recovery to the engine of private sector investment. The company will expropriate property in the area and compensate owners with shares in the company. The company is to obtain capitalization equal to half of the estimated property value in the development zone, estimated at $4 billion. Gulf Arab businessmen have already committed about $500 million to the controversial project.

Lebanon may have experienced a modest balance of trade deficit in the first quarter of 1993, estimated by a private bank at $1.8 million. A large trade deficit was virtually eliminated by capital inflows. Gold reserves amounted to $3 billion, and foreign exchange reserves at $1.2 billion. Foreign debt may approach $700 million today, and domestic public debt exceeds $2.5 billion.

Another issue bringing increasing attention to Lebanon is its role as a major drug producing and trafficking country. In addition to traditional hashish production, opium is cultivated and processed into heroin in Lebanon, and Lebanese traffickers have become increasingly involved in the cocaine trade.

The dramatic expansion of drug activities in Lebanon can be traced primarily to the breakdown of central government authority. Because of the potential for huge profits from the drug trade, many militias in Lebanon, including known terrorist elements, are thought to be engaged in one or more aspects of the drug trade to finance their operations.

Since 1976, Syrian troops have occupied Lebanon's prime drug-producing area, the Biqa' Valley. They constitute the only formal security authority in this area.

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Federal Research Division - Library of Congress (Edited by Thomas Collelo, December 1987)

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