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Amid government deadlock in Lebanon, economy reels

Essential economic reforms stalled as Lebanon's split government continues to haggle.

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Lebanese lira bills at Lebanon's Central Bank in Beirut. (Ramzi Haidar/AFP/Getty Images)

BEIRUT, Lebanon — It’s been almost three months since Lebanon’s government collapsed and parliament, in an emergency vote, appointed Najib Mikato to be the country’s new prime minister.

The transition, however, did little to halt the political haggling — and resulting government deadlock — that has plagued the country for years. Now, caught in the middle of the endless negotiations is the country’s economy, which some analysts say has begun to whither.

But will it die?

“Lebanon is entering a perfect storm in which political instability is combined with regional uncertainty,” said Nassib Ghobril, the chief economist for Byblos Bank, referring to the uprisings sweeping the Arab world.

Lebanese politicians have been at odds since 2005, following the assassination of former Prime Minister Rafik Hariri. Politically, the country is split into two factions — the pro-Western March 14 movement and the pro-Iranian March 8 group. That split, and the ongoing jockeying for power, has delayed the enactment of economic reforms considered essential to Lebanon’s future development.

“Several laws have been in limbo since 2001; some have not even been discussed by Parliament,” Ghobril said.

Although no official figures have been released, analysts believe the country’s economy has contracted between 3 and 5 percent since last year. That slowdown has already begun to affect the country’s balance of payments, which fell into negative territory in January with a deficit of $771 million.

Lebanon has in the past leaned on its banking sector, which boasts deposits of $110 billion and makes up 35 percent of the country’s $39 billion GDP. But in the face of the government paralysis, the banking sector might soon be in jeopardy.

“The mandate of Central Bank Governor Riad Salameh is coming to an end in June. The current caretaking government does not have the capacity to reappoint him, which may hold serious implications for the sector if nothing is done,” Ghobril said.

Among the other reforms waiting to be enacted are changes to the country’s telecom sector. Lebanon has one of the oldest telecom infrastructures in the world, which has resulted in some of the highest mobile phone charges in the region. Lebanon also has the slowest internet in the world, according to the website speedtest.net, and lacks broadband capacity.

Liberalizing the industry would reduce Lebanon’s massive debt, analysts said, by allowing the country to sell of its interests.

Other essential reforms are relegated to the energy sector. The country still lacks around the clock electricity, for instance. The population is forced to spend between $1.5 billion and $2 billion a year for alternative sources of electricity that are sold by the private sector.

“The energy sector is massively inefficient and costs the government about $1.5 billion yearly, which weighs heavily on the national debt,” said Marwan Mkhael, chief economist at BLOM Bank, which is headquartered in Beirut, Lebanon’s capital.

Major reforms are also needed to improve Lebanon’s infrastructure and to make it easier for businesses to open and operate in the country.

“Other laws that have been delayed center on pension reforms, laws that govern capital markets and the insurance sector, which are all essential to the economy,” Ghobril said.

Tension between the two rival political factions has also delayed passage of a new oil and gas law. The stalled oil and gas reforms would create a sovereign wealth fund, overseen by a special administration that would comprise both technocrats and specialists.

Lebanese politicians, however, are predictably squabbling over who should be appointed to these two essential bodies, which are considered major cash cows.

“The development of the sector may cure the problem of the Lebanese debt (if the existence of gas reserves is confirmed),” Mkhael said. “But the country is in need of an efficient government that will rise to face these many challenges.”

Lebanon, a small country that, in addition to its political crises, is also haunted by a staggering $55.3 billion debt, is also heavily dependent on its tourism industry to help prop up its economy.

But the country’s economic slowdown, coupled with the political instability that has consumed the Middle East region since January, has led to a 13 percent drop in the number of tourists coming to Lebanon.

“Lebanon is considered by European tourists part of the wider Middle East region, which makes it a less attractive destination due to the unstable political situation,” Mkhael said.

The number of Arab tourists, which accounts for about 45 percent of Lebanon’s visitors, has decreased significant as pro-democracy revolutions continue to sweep through the region.

“If no solution to the deadlock (on forming a government) is found rapidly,” Ghobril said. “We might miss out on the summer season.”

http://www.globalpost.com/dispatch/news/regions/middle-east/lebanon/110412/economy-government-balance-payments