How the war on Syria left its mark on Lebanon's economy

The war in Syria, now in its sixth year, has deeply affected Lebanon's social and economic sectors.

al-monitor Syrian refugees stand beside hanged clothing at a compound housing Syrian refugees in Sidon, southern Lebanon, Feb. 3, 2016.  Photo by REUTERS/Ali Hashisho.

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lebanon crisis, lebanon banks, lebanese tax policy, lebanese-syrian relations, economy, banks, banking & finance

May 13, 2016

The economic and social impact of the Syrian crisis — now entering its sixth year — is one of the most critical issues facing Lebanon. The total number of displaced Syrians who took refuge in Lebanon since the outbreak of the conflict in March 2011 stands at 1.5 million, equivalent to about a quarter of Lebanon's population. This has strained the public financial capacities and the provision of environmental services in Lebanon. The crisis is also expected to increase rampant poverty among the Lebanese and widen the income inequality gap.

In particular, estimates indicate that as a result of the Syrian crisis, about 200,000 Lebanese nationals fell into the clutches of poverty. It is also estimated that about 300,000 Lebanese citizens have become unemployed, and most of them are unskilled young people, which is without a doubt a result of the harmful effect of the low cost of Syrian workers.

Moreover, one can no longer reach the Lebanese territories by land. The ongoing war in Syria, which entailed a state of insecurity, risks and potential losses, caused a 60% drop in land transportation from Jordan, Iraq and beyond. This raised the pressure imposed on land and air freight capacities, leading to a rise in transportation costs.

Furthermore, Lebanon is plagued by its internal Sunni-Shiite division in light of the dominant and influential roles of Iran and Saudi Arabia. This division is specifically affecting Lebanon at the following levels:

On the political level: The presidential election has been postponed for the last two years.

On the economic level: The private and government institutions have not registered any efficient performance or growth.

Tourism, especially from the Gulf states, has dropped. This is attributed to instructions from the Gulf governments and local authorities to their citizens to avoid traveling to Lebanon due to safety concerns, although the issues in Lebanon are purely political and have nothing to do with security.

In light of an economic sector registering a performance below its potential, inflation fell sharply in 2015 to 3.4% and the financial deficit slightly increased, mainly due to the absence of revenue-related measures that had boosted the economy in 2014.

Moreover, some specialists expect to see a drop in the ratings of the Lebanese banking sector in 2016. A recent report by the International Monetary Fund expected a 2.5% recovery in economic activity 2016, which is contrary to the expectations of many Lebanese analysts, who projected a negative growth or no growth at all.

The political issue with the Gulf Cooperation Council (GCC) countries adds to the pressure on the Lebanese economy. Some GCC countries had terminated the service and the residency permits of Lebanese employees and immediately deported them.

It should be noted that if the freezing of international bank transfers from GCC countries to Lebanon — especially remittances from Saudi Arabia, estimated around billions of dollars — continues, the Lebanese economy is bound to face a major challenge.

Fear prevailed over the Lebanese investment market overall. This led investors to search for new destinations and companies to move abroad, thus resulting in a huge wave of Lebanese investments in Cyprus. Numerous exhibitions, meetings and plans for future investments in the island are being held. From a historical perspective, Cyprus often constituted a safe haven for Lebanese companies since the times of the civil war (1975-1990).

Overall, despite concerns about the economy in light of the current situation, depositors and investors in the local banking sector play a key role in maintaining the currency's strength, as well as the country's huge foreign exchange reserves, which still enhances the stability of the Lebanese pound.

As of March 2016, the World Bank support for Lebanon consisted of 15 active projects representing a total commitment of $900 million. These projects cover several sectors, including education, social protection, health, urban development, transport, water, environment, finance, the private sector and social services.

On another note, the Central Bank of Lebanon appointed BLOM Bank, Byblos Bank and Deutsche Bank to co-manage the launch of at least $1 billion in Eurobonds. Bankers said the launch should be completed at the end of April of this year. Moreover, Eurobonds were issued to replace some of the maturing bonds on April 22. In February 2015, Lebanon had issued $2.2 billion worth of Eurobonds. The issuance represented the republic's largest ever new cash market issuance.

Lebanese governments have pushed the domestic and foreign markets to finance the public debt to cover government expenses through the issuance of treasury bills and bonds.

Joseph Torbey, the president of the Association of Banks in Lebanon, recently said, "Banks would not have any problem financing the needs of the public and private sectors, as long as clients' deposits register an annual growth of $5 billion."

It is expected that the replacement of Eurobonds will continue as long as the government is unable to approve the 2016 budget and to implement the necessary financial reforms.

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