Lebanon's Economy


| The State of Industry |
| Cement |
| Electric Power and Petroleum Refining |

The State of Industry

Lebanese industry expanded rapidly in the late 1960s and early 1970s. By 1974 industry accounted for an estimated 20 percent of GDP, up from 13 percent in 1968, and industrial exports amounted to 75 percent of total exports. This growth was characterized by a proliferation of small industries and was fueled by easy credit, a strong local currency, abundant and cheap supplies of skilled and unskilled labor, subsidized electric power, and trade protection at home and expanding markets abroad, particularly in the Persian Gulf countries.

By 1974 an estimated 130,000 people were employed in industry, and the total nominal capital of industrial establishments stood at around US$1.1 billion. The textile industry alone employed some 50,000 people. A further 20,000 were employed in the furniture and wood products industry and some 15,000 in the leather products industry.

Years of strife changed all this. In 1981 the Lebanese Industrialists Association reported a 25-percent decline in industrial capacity, and more than 70 percent of all industrial capacity was believed to have been idle for at least 500 days during the previous 6 years. Layoffs were heavy, with industrial employment in 1981 about half of what it was in 1974. The Union of Textiles Manufacturers estimated that in 1981 the industry employed only 12,000 workers and that less than half of the 1,200 prewar factories were still in business. One of the country's biggest factories, a knitting plant in the Beirut port duty-free zone that had once employed 10,000 workers, was destroyed. National Cotton Mill (Filature Nationale du Coton), the biggest weaving and spinning factory in the Middle East, laid off all but 450 of its workers. In Tripoli, Lebanon's largest compressed wood factory was closed in 1981, with the loss of 600 jobs. One of its problems was that it could not compete with the import of wooden products through the illegal ports.

Following the 1975-76 fighting, the government could no longer afford to try to revive the economy through export subsidies. Even when capital was available, industries were reluctant to use it to expand capacity or modernize machinery. One commentator noted that producers tended to concentrate on improving profits rather than productivity.

Civil strife and disorder continually hampered production, and the financial climate was rarely conducive to investment. The comparative calm of 1977-82 allowed considerable decentralization of Lebanese industry; and Zahlah, Shtawrah, Sidon, and the coastal strip under the control of the Phalange Party all enjoyed a limited economic boom. In the far north, remote villages in the Akkar region began to prosper because of their distance from the country's principal areas of conflict.

The collapse of business confidence that accompanied the political debacles of 1984 closed hopes for sustained recovery. The Central Bank's tight fiscal attitude limited the money available for investment. Capital investment in industry shrank rapidly in both real and nominal terms, which reflected pessimism over the future of Lebanese industry. For example, investment fell from US$147.4 million in 1980 to US$94 million in 1983. By 1984 investment was down to a meager US$34.9 million and to only US$10.6 million in 1985. In addition, industrial production fell 3.7 percent to US$250 million in 1984.

In April 1986, Central Bank governor Naim offered to allow the statutory reserves and treasury bonds held by specialized banks to be used as credit for industry. Although some industrial credits appeared to be available at reduced interest rates, it was clear that economic measures alone would not revitalize the nation's fragmented industries.

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Cement was Lebanon's biggest single industrial export in 1980, accounting for 15.5 percent of industrial exports. Sales to Syria at that time accounted for about 40 percent of all cement exports. In early 1981, however, exports to that country came to a complete standstill because the Syrians, then in the middle of a major program to construct their own cement works, could not reach agreement with the two principal Lebanese cement works on the terms and conditions of cement sales. Thus cement exports to Syria in 1981 totaled only L£34 million, down from L£119 million a year earlier. Overall cement exports dropped to L£201 million but recovered to L£227 million in 1982 as alternative export markets were found. Lebanon's principal cement works in 1982 were situated in the north, away from the fighting around Beirut, so the industry could continue exporting by sea from Tripoli and overland by truck.

In early 1983, when the country's political status showed signs of stabilizing, the Lebanese Cement Company (Société des Ciments Libanaises--SCL) secured a US$36 million syndicated loan to finance a planned US$79.3 million expansion program. Production was expected to increase to 250,000 tons a year, and unit costs were expected to decrease through a change in power supply from oil to coal (with the company running its own generating stations). The reported purchase of a 30- percent stake in the company's parent, Eternit Libanaise, by Prince Abdallah al Faisal, eldest son of the former king of Saudi Arabia, heightened international confidence in the industry's prospects.

But Syria's decision to terminate Lebanese cement imports, the return of instability, and difficulties in finding fresh export markets destroyed prospects for the revival of the cement industry. In July 1983, SCL laid off 300 workers at its Shikka works as it became clear that the industry faced disaster. By the end of 1983, the scope of the disaster was starkly apparent: total cement exports amounted to only L£27.5 million--an 88- percent drop from the 1982 level.

In the early 1980s, the Jumblatt family established the Siblin Cement Company, building a factory near Sidon to provide cement for the local construction industry. The Siblin plant, built with Romanian technical assistance and with a production capacity of 300,000 tons per year, was formally opened just before the Israeli invasion of June 1982. The plant was badly damaged during the fighting, and it was not until 1986 that work to get the plant back into commission could begin in earnest. A fresh injection of L£15 million in capital from local entrepreneur Rafiq Hariri made the company Lebanon's largest shareholding venture.

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Electric Power and Petroleum Refining

There were widespread problems confronting the power and refining industries in the mid-1980s. The two industries are closely related because Lebanon relies primarily on oil-fired stations for electricity. By 1984 approximately 71 percent of the country's electric power output came from oil. Although the overburdened power stations suffered continual maintenance problems, the country managed an impressive recovery in this sector following the 1975-76 fighting.

Before the Civil War, eleven major power stations, linked in a common distribution network, supplied most of the country's electricity. In 1974 Electricity of Lebanon (Electricité du Liban-- EDL), the state power organization, produced 1.7 billion kilowatthours of electricity, while smaller power companies produced a further 296 million kilowatt-hours. In this period, 41.5 percent of power was hydroelectric.

Heavy fighting in 1976 damaged several thermal power stations and transmission lines, so that hydroelectric power accounted for 70 percent of the country's total power output of 1 billion kilowatt-hours that year, 2.25 billion kilowatt-hours in 1980, 2.4 billion kilowatt-hours in 1982, and 2.8 billion kilowatts-hours in 1983. But this impressive increase masked severe strains on the system.

Israeli strikes against southern Lebanon in July 1981 damaged the Az Zahrani refinery, which provided fuel for Al Jiyah, the nation's biggest power plant. Electricity had to be purchased from Syria, but by then this was not a serious problem because most of the major Lebanese and Syrian power grids had been united under a project launched in 1977. Lebanon's ability to import electricity from Syria proved especially important after the 1982 Israeli invasion. During the invasion and siege of Beirut, the lines from Al Jiyah were completely cut. On several occasions after that, fighting in the Israeli-controlled area interrupted power transmission. At the end of 1983, all eight high-tension lines connecting the Al Jiyah and Litani power stations (at Jun and Sadd al Qirawn) with the national grid were out of service. The Zuq Musbih power station, located north of Beirut, had to fill the gap, but the supply had to be rationed.

Lebanon had long sought to expand power generation capacity. The European Investment Bank financed the installation of three 60- megawatt units at Al Jiyah and two 125-megawatt turbines at Zuq Musbih under a 1977 program. A 1981 expansion program, assisted by the European Community (EC), achieved additional increases in capacity at both stations. In late 1985, Austria agreed to finance construction of a new 75-megawatt steam turbine power station south of Tripoli. The plants, however, were frequently overloaded in the mid-1980s, especially when even one of them was out of service. Constant operation of the Zuq Musbih plant during troubled times in the south meant that regular maintenance could not be carried out.

EDL estimated in 1986 that the annual cost of meeting Lebanon's electricity demand for the next 7 years would be US$150 million. It was not clear where this money would come from. Throughout the Civil War, EDL had suffered from financial problems and had found it difficult to collect current and overdue payments from its customers. Illicit tapping of power lines cut into revenues, and the transmission and distribution system badly needed updating. Nonetheless, EDL continued to supply power to most of the country most of the time.

The government's problems in financing oil imports caused problems for the country's petroleum refineries at Tripoli and Az Zahrani. Oil supplies came primarily from Iraq and Saudi Arabia, but deliveries were erratic, coming sometimes by pipeline, sometimes by ship. Political considerations forced the line from Iraq to close in the early 1970s. The latter reopened but closed again in 1981. The Saudi Trans-Arabia Pipeline (Tapline) to Az Zahrani closed down in the mid-1980s.

Deliveries by ship posed problems. Refineries seldom had more than a few weeks' supply in stock and they had often only a few days' supply. The oil storage tanks in the East Beirut suburb of Dawra caught fire on at least two occasions in the 1980s during clashes. Some petroleum and products, however, entered the country through the illegal ports.

The Az Zahrani refinery, owned by a United States consortium, the Mediterranean Refining Company (Medreco), a joint venture between Mobil and Caltex, suffered from Israeli assaults and from its exposed position in Al Janub Province. It was on the fringe of Syrian-controlled territory and did not enjoy the protection of UNIFIL troops stationed nearby. Operating conditions of the refinery, located in guerrilla-held territory, were already difficult but became untenable as the area switched from Palestinian to Israeli control in 1982. The flow of oil from Saudi Arabia was constantly interrupted, largely because the Lebanese government failed repeatedly to pay its oil bills promptly. After years of problems, the company ended operations on September 30, 1986, handing over its assets to the Lebanese government without compensation.

In 1973 the Lebanese government had nationalized the oil refinery at Tripoli, formerly owned by the Iraq Petroleum Company (IPC). But unlike many Third World nationalizations, this move did not reflect any change in the country's fundamentally capitalist approach to business in general and foreign investment in particular. It was administratively necessary after Baghdad had nationalizated the much more important IPC installations within Iraq itself and after Syria had taken over IPC's trans-Syrian pipeline and terminal at Baniyas, Syria. IPC disputed the Tripoli takeover, and the Lebanese government offered compensation. The matter was referred to arbitration but remained unresolved in the late 1980s.

The Tripoli Oil Installation, as the new state concern was called, comprised a 35,000 barrel per day (bpd) refinery and a small spur of the old IPC pipeline through Syria. Until 1976 Iraqi crude continued to reach Tripoli via the refinery and was used primarily to meet domestic oil requirements. Normally, the refinery met about one-third of the country's gasoline requirements and about half of its other fuel needs. But in 1976, the Iraqis ceased pumping crude to the main Syrian export terminal at Baniyas and thus halted direct supplies to Lebanon. With the start of the Iran-Iraq War in September 1980, the pipeline was reactivated. Although Lebanon reached an agreement with Baghdad in November 1981 to reactivate the Tripoli spur, the deal collapsed when Syria announced the following April that it would not allow Iraq to use the pipeline. The Iraqis agreed, instead, to pipe 3,000 bpd of crude to Dortyol in Turkey and then ship it to Tripoli by tanker. Heavy fighting between rival Palestinian groups in late 1983 badly damaged the refinery. It was not until August 1984 that repairs were completed and production was resumed at an initial rate of 20,000 bpd. Iraq again agreed to provide crude by tanker, and between 1984 and 1987 the refinery ran on varying mixtures of Iraqi and Saudi crude.

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

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