Lebanon faces huge obstacles to recovery and reconstruction

Wednesday, August 16, 2006
Lebanon faces huge obstacles to recovery and reconstruction
By Agence France Presse (AFP)
Stuart Williams

BEIRUT: Lebanon has a dauntingly steep path to climb toward reconstruction and a chance, though no guarantee, of recovering from the economic devastation caused by Israel's offensive, economists said Tuesday. Traditional oil-rich allies in the Gulf have raised hopes by pledging $800 million to rebuild infrastructure, but problems such as high unemployment and a shattered private sector could mar any recovery. "I think that it all depends on how the conflict will end. I don't believe that it has ended. If we can come out with the start of a real process it will only be a blip," said Khaled Zaidan, head of securities at BankMed. "But it would be very difficult to retain financial and human capital as well as attract necessary additional human capital if there is no clear signal or enough confidence that this war will not be replicated."

The economic destruction wrought by the Israeli offensive is indisputable. Almost a million people were displaced, industry came to a grinding halt and the nascent tourist industry, which had been heading for a boom year, was left in tatters. Economist Kamal Hamdan estimated that almost $3 billion worth of direct losses were caused by the Israeli offensive, with one third in infrastructure and most of the rest in housing and commercial buildings. Indirect losses, based mostly on heavy losses in the tourist sector and idled industry may exceed another $2 billion dollars, he warned. "There will be no positive growth for the second year in a row. This is very bad for a country like Lebanon with serious macroeconomic and financial imbalances," he said.

Lebanon's public debt has spiraled to $38.8 billion, or 170 percent of GDP, since the end of its 15-year-long Civil War in 1990. With the premises of many businesses, especially in south Beirut, completely destroyed, "unemployment could reach in the very short term 20 percent," a problem accentuated by 10-15 percent of the displaced not being able to return home in the near future, Hamdan said. But for all the gloom, rays of light have emerged. The banking system remains liquid, with the Central Bank still holding solid foreign currency reserves, bolstered by Kuwaiti and Saudi injections, after it used an estimated $1 billion to support the pound during the offensive.

Moreover, with the cessation of hostilities, government bonds have recovered and a bullish mood has returned to the local stock market. The share price of heavyweight Solidere, a giant property company, is climbing. While the service sector - especially the tourist industry - has been dealt a heavy blow by the offensive, some help could come from growth in construction as aid comes in to rebuild the thousands of destroyed homes.

King Abdullah of Saudi Arabia, a traditional economic ally of Lebanon, gave $500 million in aid to help rebuild, while Kuwait granted $300 million. The government said Beirut's airport, put out of action by Israeli air strikes, could re-open in a week if security guarantees are given. However, two-and-a-half months will be needed for it to become fully operational. The flow of aid funds, particularly from friendly nations such as Saudi Arabia and Kuwait, bodes well for the future," BLOM Bank analyst Nicolas Photiades said in a research note. Zaidan of BankMed says that for all the destruction Lebanon is still in better shape than it was just after the 1975-1990 Civil War, but that rebuilding will take a major and sustained international effort. "You can't put a band-aid on the problem. Lebanon needs a Marshall Plan-type program. You need to have something of that magnitude," he said, referring to the US plan to put Europe back on its feet after World War II. Hamdan said a social priority must be to give construction jobs to those who lost homes and became unemployed - especially in the bombed-out Shiite suburbs of south Beirut - in order to build a better Lebanon. "Despite all the dangers, if we get a political consensus there is hope we will be able to build a better way of life in the more underdeveloped areas," in the south and the capital's suburbs, he said.