COUNTRY REPORT. Lebanon. May The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

Transcription

1 COUNTRY REPORT Lebanon May 2000 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising conferences and roundtables. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) /2 newyork@eiu.com Hong Kong The Economist Intelligence Unit 25/F, Dah Sing Financial Centre 108 Gloucester Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-line databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office London: Jan Frost Tel: (44.20) Fax: (44.20) New York: Alexander Bateman Tel: (1.212) Fax: (1.212) Hong Kong: Amy Ha Tel: (852) / Fax: (852) /7638 Copyright 2000 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

3 Lebanon 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for Political forecast 9 Economic policy outlook 10 Economic forecast 13 The political scene 19 Economic policy 25 The domestic economy 25 Economic trends 28 Foreign trade and payments List of tables 11 International assumptions summary 12 Forecast summary 19 Government finances, annual 20 Five-year fiscal adjustment programme 23 Government finances, monthly 26 Economic indicators 28 Balance of payments 29 Eurobond issues 30 Direction of trade 31 Merchandise trade by commodity List of figures 6 Foreign trade 6 Interest rates 13 Gross domestic product 13 Lebanese pound exchange rate

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5 Lebanon 3 May 9th 2000 Summary May 2000 Outlook for The political scene Economic policy The domestic economy Foreign trade and payments Lebanon s outlook is in the balance, heavily dependent on the management and circumstances of Israel s planned withdrawal from the south this year. The pull-out is likely to be carried out without an upsurge in violence, but if it takes place without a peace deal first being signed between Syria and Israel, the border will remain insecure and the risk of a sudden increase in violence will persist, undermining local and international confidence. Flagging support for the incumbent prime minister, Salim al-hoss, is likely to prompt the installation of a new government later this year; Rafiq Harriri and Najib Miqati are possible successors to Mr Hoss. Whoever takes office will be required to work with Syria, which is set to remain the major powerbroker. Economic policy will focus on the government s efforts to restore order to its finances, but high debtservice costs, political weakness and slow growth will make it difficult to meet fiscal targets. Weak domestic demand and tight monetary policy will keep inflation low, and the government will support the exchange rate within its current trading band. The trade-driven current-account deficit will remain high, but should be funded by continued investment and debt inflows. Israel has confirmed to the UN that it will withdraw from Lebanon by July 7th, but suspicions persist that it will continue to hold pockets of Lebanese territory to enhance its security. Lebanon has claimed the withdrawal as a triumph, but Syrian-inspired warnings that guerrillas will carry out cross-border attacks unless Israel reaches a comprehensive peace agreement have sapped confidence. The 2000 budget has been passed in line with the government s medium-term fiscal adjustment programme. However, outturn figures for 1999 suggest that it will continue to be difficult to meet revenue and expenditure targets. Plans to introduce value-added tax (VAT) appear to be on track, but privatisation has fallen behind and no sales seem likely this year. The government claims that real growth reached 1% in 1999, but most indicators suggest that the economy contracted, or was stagnant at best. Unemployment and net emigration have risen as domestic economic activity has fallen. The trade and current-account deficits eased in 1999, largely because of a fall in import spending. The balance of payments generated a surplus over the year, despite a fall in capital inflows. Editor: Simon Williams Editorial closing date: May 1st 2000 All queries: Tel: (44.20) london@eiu.com Next report: Full schedule on

6 4 Lebanon Political structure Official name Form of state Legal system National legislature Electoral system National elections Head of state National government Main political organisations Republic of Lebanon Parliamentary republic Based on the 1926 constitution (with amendments incorporated in 1990) and the Civil Procedure Code, the Criminal Procedure Code and the Penal Code Under the electoral law of July 16th 1992, the unicameral National Assembly has 128 seats equally divided between Muslims and Christians Universal direct suffrage over the age of 21 August-September 1996; next election due by August-September 2000 The president, currently Emile Lahoud, who was elected in November 1998 for a six-year term by the National Assembly. Under an unwritten agreement, the president must be a Maronite Christian The prime minister is chosen by the president after consultation with parliamentary deputies; the government is then chosen by the designated prime minister and the president. Ministers need not be members of the National Assembly, but are responsible to it. The prime minister must be a Sunni Muslim. The current government was appointed in December 1998 Hizbullah (Shia), Amal (Shia), National Liberal Party (Christian), National Bloc (Christian), Kataeb Party (largest Christian party), Progressive Socialist Party (mainly Druze), Syria Social Nationalist Party Key ministers Parliamentary speaker Central bank governor Prime minister, foreign & emigrant affairs minister Deputy prime minister, interior minister & rural affairs minister Administrative reform Agriculture, housing & co-operatives Defence Economy, trade & industry Environment & tourism Finance Health Information & refugees Justice Labour & social affairs Oil, water & electricity Post & telecommunications Transport & public works Nabih Birri (Shia) Riyadh Salameh (Maronite) Salim al-hoss (Sunni) Michel Murr (Greek Orthodox) Hassan Shalaq (Sunni) Suleiman Franjiyeh (Maronite) Ghazi Zeaiter (Shia) Nasser Saidi (Shia) Artur Nazarian (Armenian) George Corm (Maronite) Karam Karam (Greek Orthodox) Anwar Khalil (Druze) Joseph Shaoul (Maronite) Michel Moussa (Greek Orthodox) Suleiman Taraboulsi (Catholic) Issam Naaman (Druze) Najib Miqati (Sunni)

7 Lebanon 5 Economic structure Annual indicators a 1999 a Real GDP growth (at 1994 prices; %) Nominal GDP (at market prices; US$ m) 11,118 12,993 14,957 16,736 18,347 Consumer price inflation (av; %) Population (mid-year; m) b Merchandise exports fob (US$ m) 816 1, c 677 c Merchandise imports fob (US$ m) 6,722 6,992 7,058 6,526 5,725 Trade balance (US$ m) 5,906 5,972 6,341 5,864 5,048 Current-account balance (US$ m) 3,595 3,401 3,814 3,324 2,359 Reserves excl gold (US$ m) 4,533 5,932 5,976 6,556 c 7,726 d Total external debt (US$ m) 2,966 3,996 5,036 6,601 c 8,446 Exchange rate (av; L :US$) 1,621 1,571 1,539 1,516 c 1,508 c April 28th 2000 L 1,513:US$1 Origins of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Services 68.8 Private consumption Industry 29.8 Government consumption 15.7 Manufacturing 19.5 Fixed investment 26.7 Agriculture 14.0 Exports of goods & services 10.4 GDP at factor cost e Imports of goods & services 53.8 GDP at market prices Principal exports fob 1999 % of total Principal imports cif 1999 % of total Food products 20.2 Food products 19.8 Jewellery 14.2 Electrical goods 14.7 Chemical products 12.6 Vehicles 9.9 Metal products 11.7 Minerals & mineral products 9.8 Electrical products 10.8 Chemical products 9.3 Textiles 8.1 Jewellery 7.4 Main destination of exports 1999 % of total Main origin of imports 1999 % of total Saudi Arabia 10.5 Italy 10.9 UAE 8.0 France 9.6 France 7.7 Germany 8.9 US 6.2 US 8.1 Syria 4.8 Switzerland 7.1 Kuwait 4.4 UK 4.4 a EIU estimates. b Break in series. c Actual. d End-November. e Total does not sum in source.

8 6 Lebanon Quarterly indicators Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Financial indicators Exchange rate L :US$ (av) 1,524 1,519 1,513 1,509 1,508 1,508 1,508 1,508 L :US$ (end-period) 1,521 1,516 1,511 1,508 1,508 1,508 1,508 1,508 Interest rates (%) Deposit (av) Discount (end-period) Lending (av) Treasury bill (av) M1 (end-period; L bn) 1,763 1,893 1,954 2,052 1,998 1,962 2,075 2,261 % change, year on year M2 (end-period; L bn) 35,174 37,034 38,566 40,139 40,845 41,642 43,124 44,825 % change, year on year BDL stockmarket index (end-period; Jan 1996=100) Foreign trade & reserves (US$ m) Exports fob Imports cif 1,760 1,727 1,761 1,823 1,542 1,493 1,618 1,554 Trade balance 1,604 1,571 1,606 1,628 1,407 1,339 1,439 1,345 Reserves excl gold (end-period) 5,677 6,175 6,423 6,556 6,673 6,458 6,915 7,726 Sources: IMF, International Financial Statistics; Banque du Liban, Monthly Financial Market Data.

9 Lebanon 7 Outlook for Political forecast International politics Lebanon s political and economic outlook for the forecast period is in the balance, heavily dependent on the impact of Israel s planned withdrawal from the area of south Lebanon it has occupied since 1978, and the prospects for an increase in violence if it does so without first securing a peace treaty with Syria. For many years Syria the dominant power in Lebanon has encouraged local guerrilla groups to attack Israeli forces in Lebanon as a means of pressuring Israel to withdraw from the south, and, more importantly, from the Golan Heights, occupied by Israel for over 30 years. Should Israel withdraw from southern Lebanon without also agreeing to hand back the Golan to Syria, many fear that Syria will support continued guerrilla attacks across the border to maintain pressure on Israel. If such attacks occur, Israel has promised massive and disproportionate retaliation against those responsible, raising the prospect of destruction in Lebanon, and even the start of an Arab-Israeli war if Israel attacks Syrian targets in Lebanon or beyond. These fears have created a deeply pessimistic atmosphere in Beirut in recent months and have badly damaged domestic and international confidence in Lebanon s future. While the EIU recognises the basis for such an outlook, we do not believe that a sustained upsurge in cross-border violence is the most likely scenario. Our projection rests on a number of assumptions. First, we continue to believe that there is a strong chance that the Israeli withdrawal will not be unilateral after all. Although talks between Israel and Syria have been on hold since January, the gap between the two sides is deep but not wide, and it remains in the best interest of both parties to reach a settlement. With both Syria and Israel aware of the heightened uncertainties a unilateral withdrawal would bring, there is a strong possibility that the July 7th deadline will prove to be a deadline which draws the two sides to the negotiating table. Should this not occur, we expect Israel to make good on its undertaking to the UN and the Israeli electorate and withdraw from the occupation zone it currently occupies. Israel s requests for an international force to be inserted to secure the border are unlikely to be fulfilled, leaving its northern border prone to attack. However, we believe that this would only lead to an increase in violence if Israel failed to withdraw fully. Rumours that the withdrawal will, in fact, prove to be a redeployment to more easily defended strategic positions have already begun to circulate, with some indications that Israel may be seeking to blur the international boundary and continue to occupy pockets of Lebanese territory. Under such circumstances, Hizbullah the militia which has been at the forefront of the campaign against Israel would continue its attacks, prompting punitive Israeli responses. At this stage, however, it is unlikely that Israel will fail to pull out fully. Israel has made great play of its readiness to make a full withdrawal, and to break this commitment would leave it open to international and regional condemnation. It would also provide a pretext for continued guerrilla attacks something it is keen to avoid.

10 8 Lebanon A more likely scenario, therefore, is that the Israel will withdraw in full to the internationally recognised border. Under such circumstances, Hizbullah would almost certainly wish to discontinue its campaign against Israel. Despite its fondness for Islamist rhetoric, Hizbullah is a Lebanese nationalist group, and will have achieved its objectives once the south is free of Israeli troops. When their withdrawal is complete, Hizbullah will trade on its victory to boost its domestic political influence, rather than seek to engage in an unpopular, unwinnable war on Israeli territory. Many other local militias will adopt a similar approach, leaving only the rejectionist Palestinian groups which remain committed to the destruction of Israel and the liberation of Palestine as likely assailants. These groups are small and poorly armed, and lack the expertise, discipline and dedication of those that have forced Israel to withdraw. They also lack independence and would be unable to act against Israel unless ordered to do so from Damascus. How eager Syria will be to see attacks on Israel from Lebanon is the most difficult question to answer. Syria has warned that Palestinian groups will attack unless Israel agrees to a just and comprehensive peace, and is aware that if the Lebanon-Israel border becomes quiet, it will have lost its only effective lever to press for an Israeli withdrawal from the Golan. Nevertheless, it also has much to lose from a serious upsurge in cross-border violence, which could readily turn into attacks on Syrian positions in Lebanon or even Syria itself. Lebanon is a prime economic and political asset for the Syrian regime, and Syria wishes to protect it. The destruction of Lebanon s infrastructure would serve it little purpose, especially as Israel would face little international condemnation for its actions if it had withdrawn in full. A breakdown in order would also threaten Syria s political position something it is unlikely to risk. The risks however are all on downside, with each of our assumptions vulnerable to unexpected changes in circumstance such as a change of government in Israel or Syria or political miscalculation on either side. Moreover, without a Syria-Israel peace deal, even if our forecast proves correct and there is no upsurge in violence, the border will remain insecure, and fears of a sudden deterioration will persist. This is some way short of the peace and security that Lebanon was looking forward to at the start of the year, and leaves Lebanon exposed to the whims of its hostile neighbours for the rest of the forecast period and beyond. Domestic politics Domestically, Syria will remain the ultimate power-broker in Lebanon over the forecast period, while allowing Lebanon s domestic institutions to flourish. The authority over Lebanese affairs extended to Bashar al-assad, the son and heirapparent of the Syrian president, suggests that there is little prospect of these ties being voluntarily loosened, while Syria s control will be consolidated in the event of a peace deal being signed. The parliamentary election scheduled for August is unlikely to have any significant impact on the distribution of power in Lebanon. A new election law, passed in late 1999, will ensure that prominent sectarian leaders are returned to parliament, where they will compete for patronage and influence from the government and, ultimately, from Syria, consolidating Damascus s hold on power.

11 Lebanon 9 Of greater interest is the growing expectation that a new government will be appointed after the parliamentary election. The incumbent prime minister, Salim al-hoss, has lost much of the popular support he enjoyed when he was appointed in 1998, and his administration s perceived failure to address pressing economic problems or impose its political authority appears to have cost him the confidence of the president, Emile Lahoud. By virtue of Lebanon s confessional power-sharing structure, his replacement must be a Sunni Muslim, but who it will be is difficult to judge. The most obvious candidate is Mr Hoss s predecessor, Rafiq Harriri, who is widely known to desire a return to office. Mr Harriri a charismatic and domineering political player has strong regional and international connections, and would do much to revitalise foreign interest in Lebanon and reinvigorate the domestic scene. He has, however, had poor relations with the equally forceful President Lahoud in the past, and his ties with Damascus have also been strained. As a result, the position at this stage appears more likely to fall to the less controversial Najib Miqati, currently serving as minister of transport and public works. Mr Miqati s family is well-connected in Damascus, and he is regarded as an effective, if unflamboyant, politician. He might prove a better foil for President Lahoud, although his weak base within the Sunni community could make it hard for him to hold the post for long. Economic policy outlook Policy trends Fiscal policy The focus of economic policy throughout the forecast period will be the government s own finances, with officials forced to deal with the growing threat fiscal imbalances pose to Lebanon s macroeconomic stability. Successive budget deficits incurred during the post-war reconstruction phase have translated into a rapidly rising debt stock, which exceeded 130% of estimated GDP at end-1999 one of the highest levels in the region. The debt is expensive, with service payments equivalent to some 50% of recurrent spending, forcing the budget into deficit and driving up the debt stock and future servicing requirements still higher. To break this vicious and unsustainable circle, the government has unveiled a five-year fiscal adjustment programme (FAP), which will provide the framework for policy over the forecast period. To restore balance, the FAP places particular emphasis on raising additional revenue through direct and indirect taxation and the privatisation of state assets. With restraints on expenditure also in place, the FAP is designed to reduce the deficit and public debt stock to 8.3% and 115% of GDP, respectively, by the end of the forecast period, and to 4.5% and 96%, respectively, by Its likely success in pursuing these goals is open to question and will depend in part on how conducive the domestic and regional political environments are to authoritative decision-making, stability and business confidence. The government claims that one crucial measure the planned introduction of a value-added tax (VAT) in 2001 is on track, and a number of tax measures promised in the previous budget have now been brought into effect. However, there are a number of serious weaknesses in the FAP which are already being

12 10 Lebanon exposed. The government appears to have been too ambitious in its schedule for privatisation, which, contrary to the FAP, is unlikely to raise any funds in The impact of other tax measures has also been impeded by the political protection enjoyed by many of those that are to be taxed. The most worrying shortcoming is the impact of slowing economic growth on tax yields. The downturn in customs duty receipts over the first few months of 2000 (despite an increase in duty rates), due to a slump in demand, is symptomatic of what could prove a wider problem. This is particularly problematic given that the austerity measures the government is seeking to implement are likely to slow growth further in the short term, while confidence will slump should the Israeli withdrawal contrary to our expectations prompt an increase in violence. Plans to control spending also appear vulnerable. The government hopes, for example, to reduce the cost of its debt by lowering domestic interest rates and shifting a growing proportion of its debt to cheaper foreign-currency borrowing. However, recent and expected further increases in US interest rates are hindering this approach, undermining the government s capacity to meet its broader fiscal targets. It has also proved politically difficult for the government to attack spending on wages, and despite the austere goals of the FAP, overall spending is set to increase this year on last year s outturn. Monetary policy Monetary policy will remain tight over much of the forecast period, despite pressure from the Ministry of Finance for an easing of domestic interest rates, and the near absence of significant inflationary pressures, as the Banque du Liban (the central bank) acts to protect the Lebanese pound s US dollar peg. The exchange-rate peg remains a vital element of the government s macroeconomic stabilisation programme, and there is little evidence of any weakening of commitment. With rates on US paper expected to pick up over 2000 and remain high in 2001, the central bank will be unable to reduce Treasury-bill and other domestic rates if it is to maintain the positive differential on the US dollar. Any increase in regional political uncertainty would also damage confidence in the pound, making it more difficult still to reduce interest rates without undermining support for the currency. Economic forecast International assumptions The EIU s world outlook remains optimistic, with global growth expected to accelerate to 4.4% in 2000 at purchasing power parity (PPP) rates, from 3.3% in 1999, before easing to 4% in Growth will be driven over the first part of the forecast period by the US, although expansion outside the OECD will become increasingly important as the period progresses. One impact of the rapid expansion will be an increase in demand for oil, which, together with OPECled supply-side restrictions, will push the average price for the benchmark Brent blend up by 23% in 2000 to US$22/barrel. The price will ease slightly in 2001 to just under US$19/b. Average non-oil commodity and manufactured goods prices are also expected to pick up. In addition, as US inflationary pressures mount, we expect to see US interest rates rise, with 3-month commercial paper set to reach 6.3% in 2000 (from 5.2% in 1999), easing to 6.1% in 2001.

13 Lebanon 11 International assumptions summary (% unless otherwise indicated) 1998 a 1999 a 2000 b 2001 b GDP growth US OECD EU Exchange rates US$ effective (1990=100) :US$ US$: Financial indicators US$ 3-month commercial paper rate month private bill rate Commodity prices Oil (Brent; US$/b) Gold (US$/troy oz) Food, feedstuffs & beverages (% change in US$ terms) Industrial raw materials (% change in US$ terms) a Actual. b EIU forecasts. Growth Inflation In contrast to this bullish world outlook, Lebanon s growth prospects are poor. We believe that Lebanon fell into recession in 1999, and forecast that growth in 2000 will, at best, be an extremely modest 0.5%. Private consumption will remain weak, with mounting unemployment and poor private-sector confidence undermining demand. Foreign and domestic investment levels are likely to stay low until outstanding political risk issues are resolved, while heightened insecurity ahead of the planned Israeli withdrawal in July traditionally one of the most important months for the tourism industry will also have an impact on demand. The only positive sign for 2000 is an expected increase in remittances from expatriate workers in the Gulf, as growth in that region picks up. We expect overall growth to recover in 2001, but at 1.5% it will remain weak and well below government targets, held back in part by the structural demands of the government s debt-repayment programme. Even this limited expansion is heavily dependent on our assumption that the Israeli withdrawal is carried out relatively peacefully. Should this be disproved, growth will fall well short of this level. With demand expected to be weak and monetary policy tight, there will be little domestic inflationary pressure in An increase in import prices will generate some price growth, but tight domestic liquidity will prevent businesses from passing on their additional costs in full. Higher oil prices in 2000 and 2001 will have an impact, however, while the introduction of VAT will generate fresh inflationary pressure, which will be only partly offset by a reduction in customs tariffs. Although weak growth will again militate against any rapid rise in consumer prices, we expect inflation to average 3.5% in 2001, from around 1% in 2000.

14 12 Lebanon Exchange rates External sector The most vulnerable element of our inflation forecast, however, is our assumption that the Lebanese pound will remain stable within its current trading band of L 1,501-1,514:US$1. Over the short term, this seems almost certain to be the case. Monetary policy is oriented toward maintaining the peg, while reserves of over US$7bn will allow the government considerable scope to support the currency should it come under pressure. We expect this to continue over the longer term as well, but there are downside risks. The country s external imbalances leave it heavily dependent on inflows of foreign capital, which would be deterred by any sharp downturn in the political or security environment. More pressingly, if the fiscal deficit continues to mount at the same speed as it has over the first part of 2000, the cost of service payments to the Treasury will become unsustainable, necessitating a rescheduling of domestic debt or a reduction in interest rates. This would in turn prompt a sharp loss of domestic and international confidence in the pound, opening the way for a forced devaluation. With domestic demand weak, import spending will remain low, while growth in Lebanon s most important export markets will feed some increase in export earnings. At some US$5.3bn in 2000 and 2001, the trade deficit will be some way below its historical average, although this remains an immense sum for an economy as small as Lebanon. Invisibles are expected to stay in surplus, as remittances from the large Lebanese diaspora continue to flow and tourism earnings remain high, bringing the current-account deficit down to some US$2bn in 2000 and US$1.87bn in At almost 12% of GDP, the shortfall is well above the regional average, but should be funded by continued capital inflows assuming that political unrest does not deter investment, or drive the cost of foreign debt too high. Forecast summary (% unless otherwise indicated) 1998 a 1999 b 2000 c 2001 c Real GDP growth (1994 prices) 2.0 b Gross fixed investment growth 1.0 Consumer price inflation (av) 3.8 b Exports of goods fob (US$ bn) a Imports of goods cif (US$ bn) a Current-account balance (US$ bn) 3.3 b % of GDP Total foreign debt (year-end; US$ bn) Exchange rates (av) L :US$ 1, ,507.8 a 1, ,502.0 L :S a L : 1, ,608.6 a 1, ,637.2 a Actual. b EIU estimates. c EIU forecasts.

15 Lebanon 13 The political scene The proposed withdrawal raises fears over instability The political scene has been dominated in recent months by the proposed Israeli withdrawal from southern Lebanon and the sharp deterioration in relations between Israel and Syria. The growing risk that the Israeli withdrawal will take place without a peace treaty being signed between Israel and Syria the dominant political force in Lebanon has heightened local fears of an upsurge in violence, undermining business and government confidence and halting what little momentum existed for reform. It has also confirmed to most Lebanese how little control they have over their own country s affairs, which continue to be determined by the actions of their powerful neighbours. In a letter to the UN Secretary-General, Kofi Annan, in April, Israel formally announced that it, and its proxy militia, the South Lebanese Army (SLA), would withdraw from southern Lebanon. The letter was the final confirmation of a process set in train during the 1999 election campaign of the Israeli prime minister, Ehud Barak, in which he undertook to withdraw Israeli forces from Lebanon within a year of taking office. In the note to the UN, the Israeli foreign minister, David Levy, said that Israeli forces would pull out of the zone in full accordance with Security Council resolutions 425 and 426, which demand an unconditional withdrawal of Israeli forces from Lebanon. No further details of the mechanics or timing of the withdrawal were released, although Israeli officials said that it would take place in one phase, and be complete by July 7th. The withdrawal will put an end to a 22-year occupation, and while it has provoked controversy in Israel, it has also gained considerable popular support. In contrast to other areas currently occupied by Israel, notably, the Golan Heights and the West Bank, Israel makes no claim to sovereignty over southern Lebanon, which it regards as a security buffer designed to protect northern Israel from guerrilla attack from Lebanon. An increasingly effective campaign, led primarily by the Islamist resistance group, Hizbullah, against Israeli and SLA forces in the occupied south, has dented claims that the occupation zone

16 14 Lebanon can offer security. As the death toll has mounted and Israel has proved unable to counter the strikes either through its actions in the zone or through strikes against militia and civilian targets in Lebanon itself, pressure in Israel for a pull-back has mounted. Previous Israeli administrations resisted this pressure, in part because of genuine security fears, but also because Israeli leaders have felt the need to show some concrete gains either in the form of a peace treaty with Lebanon or the establishment of an effective border-security regime to compensate for the Israeli blood shed in Lebanon since These feelings have now been set aside, with Israel relying on threats of massive retaliation to assure its own nationals that security will be maintained. Resolution 425 (March 19th 1978) The Security Council, taking note of the letters from the Permanent Representative of Lebanon and from the Permanent Representative of Israel, Having heard the statement of the Permanent Representatives of Lebanon and Israel, Gravely concerned at the deterioration of the situation in the Middle East and its consequences to the maintenance of international peace, Convinced that the present situation impedes the achievement of a just peace in the Middle East: 1. Calls for strict respect for the territorial integrity, sovereignty and political independence of Lebanon within its internationally recognised boundaries; 2. Calls upon Israel immediately to cease its military action against Lebanese territorial integrity and withdraw forthwith its forces from all Lebanese territory; 3. Decides, in the light of the request of the Government of Lebanon, to establish immediately under its authority a United Nations interim force for Southern Lebanon for the purpose of confirming the withdrawal of Israeli forces, restoring international peace and security and assisting the Government of Lebanon in ensuring the return of its effective authority in the area, the Force to be composed of personnel drawn from Member States; 4. Requests the Secretary-General to report to the Council within twenty-four hours on the implementation of the present resolution. Resolution 426 (March 19th 1978) The Security Council, 1. Approves the report of the Secretary-General on the implementation of Security Council Resolution 425 (1978), contained in document S/12611 of 19 March 1978; 2. Decides that the United Nations Interim Force in Lebanon shall be established in accordance with the above-mentioned report for an initial period of six months, and that it shall continue in operation thereafter if required, provided the Security Council so decides.

17 Lebanon 15 Uncertainty persists over the impact of the pull-back The withdrawal has been claimed as a triumph in Lebanon, with the prime minister, Salim al-hoss, describing it as a glorious victory the first occasion on which an Arab army has forced Israel to retreat. However, overriding the public triumphalism, the planned withdrawal has provoked considerable scepticism and concern. While Israel has agreed to withdraw all of its land forces, for example, it has not undertaken to put an end to its routine air and sea incursions into Lebanese territory, which it appears to continue to regard as appropriate to ensure its security. There is also some confusion over the precise border line to which Israel intends to withdraw. Lebanon has made clear that it regards its border as the 1923 frontier agreed by the colonial powers, the UK and France. This corresponds to the 1949 border agreed between Lebanon and Israel as part of the armistice agreement following the 1948 war. However, while Israel says that it will carry out a complete withdrawal, there is scope for

18 16 Lebanon disagreement over the exact location of the international border. After 15 years of civil war, two Israeli invasions and repeated Arab guerrilla attacks from Lebanon into Israel, political conditions and security concerns have led to a blurring of boundaries for security and political purposes. Over recent weeks Israel has issued vague, and contradictory statements on the precise area to which it will withdraw, raising speculation that it might pull back to the military s so-called purple line. This essentially follows the 1923 (1949) border, but includes small parcels of Lebanese land held by Israel for "strategic" reasons, to control the high ground overlooking parts of northern Israel and southern Lebanon. The Lebanese government has warned that this would be unacceptable, while Hizbullah said in March that it would continue its attacks while Israel occupied one inch of Lebanese territory. Peace talks between Syria and Israel break down The most serious concerns over the Israeli withdrawal, however, have been generated by the breakdown of peace talks between Israel and Syria. When Mr Barak made his election pledge to withdraw from Lebanon, it is clear that he anticipated pulling troops out as part of a broader agreement with Syria that would have secured the frontier. Since establishing itself as the dominant power in Lebanon, and more markedly since the end of the civil war, Syria has encouraged and facilitated attacks by Lebanese groups on Israeli troops in the occupied zone. It has done so as a means of pressuring Israel into meeting Syria s terms for peace, with security in Lebanon being offered as a quid pro quo for a full Israeli withdrawal from the Golan Heights, which have been occupied by Israel since Over the second half of 1999 and early 2000 it appeared that such an agreement would be realised, with the two sides conducting several rounds of direct talks in public and private. However, negotiations broke down in January, and have yet to resume, despite discussions in March between the US president, Bill Clinton, and the Syrian president, Hafez al-assad, aimed at breaking the deadlock. Nevertheless, Mr Barak has pressed ahead with preparations for withdrawal, which he has maintained will take place by July, with or without a peace agreement with Syria. Israel has called on the international community to take what political and military steps it can to fill the vacuum left by withdrawing Israeli troops and ensure the security of the border. However, although Israel held discussions with the UN in February and March on contingency plans for its withdrawal, commanders of UNIFIL the small UN force currently in Lebanon have already made clear that they are in no position to secure the border. With memories still fresh of previous, disastrous attempts to intervene in Lebanon in the 1980s, there is little prospect of other troops coming forward to defend the frontier on Israel s behalf. France, which had previously suggested that, with others, it would be prepared to be part of a border monitoring and security force, made clear in March and again in April that it would not send troops unless the Israel withdrawal formed part of a broader agreement between Syria, Lebanon and Israel.

19 Lebanon 17 Hizbullah and the withdrawal Hizbullah (Party of God) has proved to be the most effective guerrilla movement to take up arms against Israel. Despite Israel s technological advantage and overwhelming fire power, the state has consistently failed to find a means of countering the group s tactical sophistication and discipline, or a way of stemming the defeats it has inflicted on Israeli forces. The strongest argument expressed in Israel against withdrawal from south Lebanon is that it will open the way for attacks inside Israel itself. However, while Hizbullah itself has said that it will continue its attacks if Israel does not withdraw fully from Lebanon, and has said that it will not offer the Zionist oppressor any security guarantees, there are strong reasons to believe that it will not attack across the border unless provoked. Despite its Islamist rhetoric about "liberating Jerusalem from Israeli control, Hizbullah is a Shia Lebanese resistance group. Its supporters are committed to the liberation of occupied southern Lebanon, rather than a broader campaign to destroy Israel or free Palestine for the Palestinians with whom the Shia community have in any case traditionally had poor relations. Furthermore, while Hizbullah is correctly described as receiving support from Iran and Syria, it is an autonomous movement, and not dominated by them. In the event that either state wanted the group to attack inside Israel, neither would be able to order it into action. Instead, when Israel withdraws and Hizbullah is able to claim its victory, it is likely to use its enhanced standing to bolster its position within the Lebanese political system, and establish itself in parliament as the primary Shia group in Lebanon s confessional system. While it is unlikely formally to lay down its arms, it will hold back from crossborder attacks, aware that these would generate massive retaliation against Lebanese targets, which would considerably damage the group s support at home and abroad. Hizbullah is also aware that its military effectiveness in recent years has rested on conducting operations in Lebanon territory which it knows better than its opponent and can move across with ease. It is unlikely to be so naïve as to believe it will be equally successful in Israel itself. Syria, meanwhile, aware that it will lose its most effective negotiating lever if Israel withdraws unilaterally, has stepped up its efforts to discourage Israel from doing so. It has made clear that it will not accept the insertion of additional international forces to protect the frontier, arguing that the UN cannot be called on to protect Israel until Israel complies fully with resolutions demanding its withdrawal from other occupied areas. The Syrian foreign minister, Farouq al-shara, described the planned withdrawal as suicidal, arguing that no Arab government could be expected to block or disarm fighters struggling for freedom a clear threat that Syria would neither fill the vacuum left by Israel s withdrawal or police the border on its behalf. Lebanon threatens Israel with Palestinian groups The comments have been echoed by the Syrian-backed government in Beirut, which has also warned that it will not step in to disarm Hizbullah and the other Palestinian and Shia groups which have been involved in the guerrilla campaign. Mr Hoss told reporters after Israel made its announcement to the UN that withdrawal would not spell an end to the Lebanese-Israeli conflict, which would only be resolved when Israel had withdrawn from all the Arab territory it occupied. The comments followed an earlier statement that Israel

20 18 Lebanon would have to take responsibility for security breaches along the border until it reached a just and comprehensive settlement with all Arab countries. The Lebanese president, Emile Lahoud, was more explicit still when he stated in March that Lebanon would not and could not prevent disaffected Palestinian refugees from trying to regain their homes in northern Israel, and that Israel would suffer continual Palestinian attacks if it withdrew unilaterally. How likely such attacks are to occur is open to conjecture (see Outlook for and box), but the fact that Lebanon should be seeking to discourage withdrawal from its territory to serve the needs of its neighbour, Syria, underlines how little independence Beirut enjoys from Damascus in critical foreign and security policy matters. That the government is more accountable on many issues to the presidential palace in Syria than to Lebanese voters has long been acknowledged, and even welcomed by some, who argue that the 35,000 troops Syria has stationed in the country have been necessary to maintain order in the post-civil-war period and allow reconstruction to take place. Confidence has been badly damaged, however, by the recognition that unless Syria signs a peace deal of its own with Israel before withdrawal, Lebanon could be used as the battleground for damaging proxy or even direct conflict between its neighbours for the foreseeable future. The reform programme loses momentum Impotent to influence these crucial developments, the government has lost support. Its promised programme of political reform has slowed as it awaits to see the fate its neighbours determine for it. The ageing prime minister has cut an increasingly sorry figure, weighed down by poor relations within the cabinet, a stagnating economy and a mounting public-debt problem which his administration has yet to remedy (see Economic trends). Rivals for Mr Hoss s position have stepped up their attacks, exploiting a widely held view that the prime minister has lost the support of President Lahoud and Syria, and is likely to be replaced following the parliamentary election later this year. A dispute over the signature of a death warrant for three convicted criminals for which Mr Hoss, a Sunni Muslim, delegated responsibility to the interior minister and deputy prime minister, Michel Murr, a Greek Orthodox was exploited by Rafiq Harriri (Mr Hoss s predecessor) to focus on the prime minister s perceived weakness and indecisiveness. The ensuing constitutional crisis over the apparent transfer of power across sectarian lines was also used to embarrass the prime minister within his Sunni community. President Lahoud s popular standing formerly strong, as a result of his firm nationalist credentials and success in reconstructing the Lebanese army has also waned, but his relationship with Damascus has ensured that criticism has remained muted. There have been some recent protests against Syria s role in Lebanon, led by Jibran Tueni, editor of the Lebanese daily Al-Nahar. In March Mr Tueni published a front-page open letter to Bashar al-assad the son of the Syrian president, who has taken an increasingly active role in that state s Lebanon policy alleging that Syria has used the Lebanese as vassals, violated the principles of sovereignty, dignity and independence and calling on it to withdraw. The commentary outspoken by standards of behaviour in Lebanon was followed a week later by a second public letter critical of Syria, and in late April by demonstrations in Beirut calling for a Syrian withdrawal.

21 Lebanon 19 Syria s position remains strong The protests are isolated, however, confined to elements of the Christian Maronite community, and have shown no sign of seriously challenging the Syrian-backed political order. President Lahoud, Syria s choice of leader in November 1998, remains the major player and, through his control of the military, is in a powerful position. The army's budget the largest single item in ministerial expenditure has largely escaped significant cuts, despite enormous pressure on the finance ministry to reduce spending. With one soldier to every 15 civilians, Lebanon is now a more militarised society than its more powerful neighbour, Syria, where the ratio is one to every 20 civilians. Other prominent ministers known to have strong relations with Syria include the deputy prime minister, Mr Murr, whose son is married to President Lahoud's daughter, and the agriculture minister, Suleiman Franjiyeh, the grandson of the former president by the same name, who was a strong supporter of President Assad in the 1960s. Other important allies include Karam Karam, the minister of health, and Najib Miqati, the transport minister and a possible contender for the premiership in October. Economic policy Government finances, annual (L bn unless otherwise indicated) % change % change % change Actual Budget Actual over budget over actual Budget over actual Budget revenue 3,979 4,990 4, n/a Budget expenditure 6,640 8,395 7, , of which: debt service 3,352 3,900 3, , capital n/a n/a n/a 736 Balance 2,661 3,405 2, (% of expenditure) Additional revenue 470 n/a n/a Additional expenditure a 1,266 n/a 1, Total revenue 4,449 4, , Total expenditure 7,906 8, , Current n/a n/a 7,321 7, Wages, salaries & others n/a n/a 3,696 3, Debt service n/a n/a 3,625 3, Capital n/a n/a 1,131 1, Overall balance 3,457 3, , Ratios Overall balance (% of expenditure) Overall balance (% of GDP) b Overall balance as per five-year plan (% of GDP) a Almost exclusively capital expenditure. b EIU forecasts. Source: derived from Ministry of Finance reports.

22 20 Lebanon The focus is on the government s own finances Budget targets are missed in 1999 With regional political tension building, and government authority slipping, the prime minister, Salim al-hoss, has faced an uphill struggle trying to deal with Lebanon s deep economic problems. Under the weight of almost US$23bn in public domestic and international debt, and a still rising fiscal deficit, policy has inevitably focused on the government s own finances, which pose an increasingly serious threat to macroeconomic stability (see Outlook for ). Efforts to cut government consumption and raise taxation, however, have undermined growth in an economy which the EIU believes slipped into recession in This has not only damaged domestic and foreign private-sector confidence, but has inevitably impeded the government s efforts to raise revenue. Outturn figures for 1999 have confirmed the problems the government has encountered in seeking to ease the fiscal imbalance. Results for the year show that budget revenue (as opposed to total revenue, which includes additional revenue from outside the budget) rose by some 12% on the 1998 actual figure, reaching L 4.46trn (US$3bn), from L 3.98trn. The finance minister, George Corm, claimed that the increase in revenue reflected improved tax collection, and higher than expected customs revenue. Though encouraging, the outturn still fell some 10.5% below the budget target of L 5trn a shortfall that few countries would be able to accept. Similarly, while budget expenditure was restricted to L 7.2trn, some 14% below its projected level, it remained 8.4% higher than the previous year. With off-budget items also included, total government expenditure amounted to L 8.45trn L 500bn higher than in The breakdown of government spending also underlines the difficulty of the government s task in restricting expenditure to this level. Recurrent spending amounted to some 87% of total expenditure, of which almost one-half was made up of debt-service payments. Five-year fiscal adjustment programme Nominal GDP (L bn) 25,999 27,716 30,266 32,735 35,403 GDP (at 1998 prices; L bn) 24,999 25,749 26,779 27,984 29,383 Real GDP growth (%) Inflation (av; %) Interest rates on L Treasury bills (av; %) Interest rates on foreign-exchange debt (av; %) Ratios (% of GDP) Government revenue Government expenditure of which: interest payments Budget deficit Government debt (L ) Local currency Foreign currency Privatisation receipts (L bn) 0 2,054 1,900 1,000 1,000 Source: Ministry of Finance. The overall deficit rose to L 3.59trn in 1999, L 129bn above the 1998 outturn. As a percentage of total expenditure the government s favoured measure of the deficit this marked a fall from 43.7% in 1998 to 42.4%. As a percentage of