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The real price of Lebanon's 'victory'

By John Sfakianakis - The Daily Star
Commentary by Tuesday, August 08, 2006

The Israeli military campaign in Lebanon has placed the country's economy under severe strain. However, the duration of the conflict and the terms of the truce will determine its real economic costs. If the conflict ends today, the cost of war would amount to more than $5 billion, which is 23.5 percent of the country's GDP. Only the cost of damage to the infrastructure has been estimated at more than $2.5 billion. The remaining costs relate to decline in overall output, loss of public income (VAT and customs revenue), fall in tourist inflow and loss of private-sector income due to a sharp downfall in business activity.

In 2006, the economy was expected to grow by more than 5 percent, from nearly zero growth in 2005 due to the political crisis that followed the assassination of former Prime Minister Rafik Hariri. The cost of financing major rebuilding projects will add to Lebanon's debt, which in April stood at $38.6 billion, or the equivalent of 183 percent of its GDP, one of the highest ratios in the world. If the war is protracted, Lebanon's chronic government debt stands the chance to catapult to new records. Even if Lebanon raises the finances to cover the reconstruction costs, the opportunity lost to invest limited funds on other development projects is huge. However, the most serious problem besetting the Lebanese economy is the unstable political structure. The lack of political consensus has left the government incapable of passing the budget since 2004.

One macroeconomic affect of the war would affect consumer prices. The land, sea and air blockade imposed by the Israelis forced most consumer goods and foodstuffs to disappear from market shelves within the first few days.

As the war prolongs, scarcity will lead to rampant price rises. Inflation was hovering below 4 percent prior to the war, down from nearly 120 percent in 1992. A protracted crisis in Lebanon would create pressure on the Lebanese pound, which the Central Bank is currently comfortably defending with around $13 billion in foreign currency reserves. On the first day of the fighting, it is believed that the Central Bank used $500 million to prop up the pound. Reserves may have been depleted by around $2 billion already.

In the short to medium term, unemployment is set to rise to nearly 20 percent from its current 10 percent. What is more worrisome is a possible workforce drain that might not permanently return to Lebanon after the end of the war, especially when the economies of the Gulf countries are booming and require skilled and unskilled laborers.

One of the immediate economic casualties of the conflict has been Lebanon's resurgent tourism industry, which accounted for 20 percent of its GDP.

Although Beirut was not able to establish itself as a regional air transit hub - a current aspiration of Israel - tourism had emerged as an important force for the real estate, construction and financial services sectors.

In mid-May, Tourism Minister Joe Sarkis said 1.6 million tourists - a 45 percent increase over 2005 - were expected to visit the country in 2006, generating some $2 billion in much-needed foreign currency. The majority of the tourists who visited Lebanon were Gulf Arabs who preferred it to Western destinations following the September 11, 2001, attacks. Due to the rise in oil revenues, Gulf Arabs invested large sums in real estate projects and in the equities market. It is believed that some $11 billion were invested only by Saudis over the past 10 years in the real estate sector. It is not clear if real estate prices might witness a beating this time because Lebanese tend not to sell during prolonged crises as demonstrated during the country's Civil War.

The destruction of infrastructure witnessed in Lebanon is sizeable. The post-Civil War reconstruction of Lebanon was the creation of Hariri. The launch of "Horizon 2000," the government's postwar reconstruction project, helped Beirut gradually reclaim its old title as the "Paris of the Middle East." The real estate boom that Lebanon witnessed since the early 1990s used cheap Syrian labor. Prior to the recent Israeli invasion, more than 300,000 Syrians worked in Lebanon. A prolonged war would deprive Syria of an important source of income through remittances. Though the reconstruction process lacked transparency, net capital flows during 1991-1996 still averaged $6 billion annually. The government did not pay enough attention to low-income housing, but it built highways, power stations and a new airport, and restored telecommunications, water and electricity networks. However, the Israeli attacks have damaged all these facilities in varying degrees. The attacks on Lebanese ports and the naval blockade have deprived the government of its most important source of revenue. Around 75 percent of the country's VAT and customs revenues come from Beirut Port, with VAT revenue amounting to nearly 37 percent of the government's income from taxes. The average total revenues from VAT and customs revenues are close to $2 billion a year. Beirut Port alone generates revenue worth more than $5 million a day.

Human toll beyond death and injury is often the most difficult to calculate. The minimum value of possible indemnities while considering compensation only for implicit life earnings per person would be more than $2 billion. Incomes will be squeezed further as destruction of houses and cars during war is not covered by insurance firms. Very few Lebanese have life insurance that includes a war clause. As a result, income distribution will be affected even more in a country that has historically witnessed high wealth disparity.

The United Nations Economic and Social Council for Western Asia reports that 25 percent of Lebanese families live on less than $620 a month, and more than 5 percent of families live in "absolute poverty," defined as less than $300 a month. The most recent invasion has displaced almost 1 million Lebanese, leaving them vulnerable to security threats, hardships in obtaining shelter, medicine, food, and other basic amenities. The cost of development of the various regions is also great as the bombed areas will suffer from inadequate services, infrastructure, schools and buildings.

If the rebuilding of damaged regions takes time, regional disparities will add to already uneven economic development.

The cost of environmental damage is also enormous, with most of it resulting from the worst oil spill in the country's history. The leakage of more than 10,000 tons of heavy fuel from the Jiyyeh power plant due to repeated air strikes by Israeli warplanes on July 13 and 15 resulted in the pollution of as much as a third of the Lebanese coast.

Although Saudi Arabia and Kuwait were quick to announce aid packages for Lebanon - Riyadh pledged a $1 billion deposit in the Central Bank to support the economy and gave $500 million for reconstruction, while Kuwait announced $300 million in assistance - the greatest predicament of all is the leadership vacuum that continues to beset the Lebanese political scene and the resurgence of pro-Syrian groups within it. The violence will only add to the ambient sense of political hopelessness that will exacerbate the economic impasse in the country.

John Sfakianakis is a senior financial adviser at the Gulf Research Center in Dubai. THE DAILY STAR publishes this article in collaboration with the center.

UAE, Bahrain companies join hands to set up USD1 billion holding company to invest in infrastructure development & projects in Egypt

  In a significant development that will catalyse the growing economic partnership between Egypt, the UAE and the Kingdom of Bahrain, a consortium led by the National Holding (NH) of Abu Dhabi today signed a agreement with the Government of Egypt to set up a USD1 billion holding company to invest in developing the country's transportation infrastructure spanning roads, bridges, ports and rail networks.

Mr. Jawaan AL Khaili Chairman of National Holding and ADIH and the other is Mr. Tarek El Attar, Chief of General Authority of Roads, Bridges and Land Transportation in Egypt at the signing ceremony.Commenting on the partnership after the signing ceremony, the Minister of Transportation for Egypt, Eng. Mansour, said: 'The transportation sector in Egypt has stirred tremendous enthusiasm among the local and foreign investors and we are confident to draw in more investments to the country. Significantly, there is tremendous investor interest from the Arab world in this sector recently and we are looking at more partnerships.' (Right: Signing Ceremony).

The agreement is a pioneering initiative and this is the first time public and private sectors have joined hands to pursue development of infrastructure and projects in Egypt. The minister said the new holding company will also spin off subsidiary investment companies focusing on individual projects as it moves ahead with its investment strategy. These entities will be entrusted with the development of various transportation projects on the basis of Build Own Operate and Transfer (BOOT) system.

'We are confident that these projects will generate job opportunities in accordance to the vision of the President of Egypt, Mr. Hosni Mubarak, and in turn help in social and economic development in new cities in the country and Upper Egypt,' the minister added.

Commenting on the foray into Egypt, Mr. Jawaan AL Khaili Chairman of National Holding and ADIH, said: 'The economic partnership between Egypt and the UAE has kept apace with the growing bilateral relations between the two countries. The UAE is one of the largest foreign investors in Egypt and reportedly Abu Dhabi Investment Authority has invested some US$400 million in Egypt, spanning sectors such as telecommunications, cement, agriculture and finance.'

He said the depth of the UAE-Egypt relationship is also reflected in the building of Sheikh Khalifa City in Egypt. 'We are confident that our entry into Egypt will further strengthen relationship between the and Egypt with benefits to all,' AL Khaili added.

The Abu Dhabi-based National Holding was established in 1999 and has grown significantly managing various investments in the and the MENA region. NH owns significant stakes in North African companies such as Orascom Telecom Algeria and Citadel in Egypt. It is also a significant stakeholder in National Bank of Abu Dhabi, Abu Dhabi Islamic Bank, Abu Dhabi Commercial Bank, among others.

  AL Khaili added: 'The Ministry of Transportation's policy to support the partnership between the public and private sectors is indeed a great vision which will in turn catalyse development. Private sector has the experience and expertise in the latest management and operations systems and they can also raise funds which can be used under the directives of the ministry for developmental purposes.'

ADIH in a short span of one year has made a mark in offering sophisticated investment products focused in the region. The financial institution's investment portfolio includes Beirut Gate, The Lagoon in Bahrain and investment instruments such as Al Arabi Private Equity Fund and a German property fund. It had also participated in the private placement of Energy City Qatar raising US$100 million exclusively from the UAE market.

Commenting on the rationale of entering Egypt, Mr. Rashad Janahi, Chief Executive Officer of ADIH said: 'As a financial institution clued in to the economic indicators of the region, we are confident that investments in Egypt will be beneficial to our investors and stakeholders. We see tremendous economic growth prospects in Egypt as the country is in the midst of a growth trail with IMF predicting that the economy will grow at 5.3 per cent in 2006.'

GFH which is also a significant partner in the holding company is a leading Islamic investment institution based in Bahrain. GFH is the originator of various regional projects including Bahrain Financial Harbour and Al Areen development in Manama, Royal Metropolis in Jordan and Legends in the UAE. Recently, GFH also announced its foray into Morocco.

Both ADIH and GFH are also equity partners in the Prince Abdul Aziz Bin Mousaed Economic City in Saudi Arabia.

Courtesy: AME Info



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