Chapter Two Literature review The below chapter consist of presenting the already existent literature that tackles the economic status of the country

Chapter Two
Literature review
The below chapter consist of presenting the already existent literature that tackles the economic status of the country, while taking into consideration the role of BDL. Moreover, similar examples such as Greece will be highlighted. Hence, this section will help us in understanding the importance of BDL, it strategies, and the stability of the Lebanese currency. Having said that, the chapter will include strategies that can be implemented to help the BDL cope with the ongoing crisis happening in the country. The chapter covers numerous aspects from definitions and theoretical frameworks, to detailed backgrounds about various components in the economic sector in Lebanon that led to this situation.

The following chapter covers economic stressors and major stressors – not as literal definitions per say but rather economic stressors and major stressors throughout will mean an understanding behind what. This is fundamental as it is the base of the research that is reflected towards.
Internal and External Stressors that affects the Lebanese economy
Lebanon is a country located in the Middle East, located on the eastern shore of the Mediterranean Sea, with its capital Beirut; Lebanon is considered one of the world’s smallest countries. The Lebanese Republic is Western Asia, neighboring Syria to the north and east as well as Israel to the west. Lebanon has a very liberal market that enjoys a laissez faire commercial culture than depends on competition in addition to private ownership. The service market in Lebanon consist of 70% of the gross national product of the country, where the rest represents the agricultural sector. (CIA World Factbook, 2016)
The main growth sectors in the Lebanese economy include the touristic sector as well as the banking sector. Mineral resources in Lebanon are few; however, there is a big deposit of iron, building stone and material, high quality sand for manufacturing glass. Leading industries in Lebanon include the manufacture of food products; cement, bricks, and ceramics; wood and wood products; and textiles. Many of the country’s industries were harmed by the civil war, and its effects on the textile industry were especially severe. The civil war caused big harm in many of the countries industries and due to the occupation of the Israelis in the south caused the increase of the presence of Israeli products in the Lebanese market which severely affected Lebanon’s economy. Although some of the country’s large complexes were unharmed, Beirut’s industrial belt was razed; in addition, Israel’s occupation of the Lebanese south led to an influx of Israeli goods that also harmed Lebanese industries. The construction industry initially played a significant role in the postwar reconstruction that began in the early 1990s; recurrent violence in the late 20th and early 21st centuries, however, caused further damage to Lebanese industry and infrastructure. (CIA World Factbook, 2018)
As a country Lebanon have always had a free-market economy with no restrictions to international and foreign investments. However; the environments of the investments sometimes suffer from complicated customs procedures, taxes and fees are high, corruption in the actual system can lead to arbitrary licensing and favorable decisions. Before World War I, Lebanon and Syria’s currency was the Turkish pound. After the downfall of the Ottoman Empire in 1918, the Turkish pound was replaced by an Egyptian currency produced by a British institution. After Syria and Lebanon were granted authoritative command, the French granted a commercial bank; Bank De Syrie the authority to issue its own new currency; namely the new Syrian currency. At first the two countries had the same currency which was the French franc based Lebanese-Syrian currency, due to the fact that Banque de Syrie was Syria and Lebanon’s official bank which was later renamed to Banque de Syrie et du Liban. Two years before the expiry of the banks 15-year period, it was granted an additional 25 years of service with authority to issue Lebanon’s first own currency separate from the Syrian’s but could still be used in both countries and vice versa for the Syrian currency in Lebanon. After Lebanon’s independence in 1943, an agreement was made with France separating the national currency from the unstable French franc. A council was formed to set the main rule and draw up the money and credit codes as well as setting the future laws for Lebanon’s central bank, the Banque du Liban (BDL). The legal currency in Lebanon now is still the Lebanese pound. (BDL, 2018)
Over the years, various wars stifled the nation’s growth and reduced it from a Middle Eastern center point and growing banking hub to a nation that is at the brink of another major war or severe economic strife. The wars have affected the economy of the country, however despite the hostile crisis Lebanon passed in, the economy increased with a 9 % growth in the time of global financial crisis that happened in 2007 and 2008. (CIA World Factbook, 2016)
This was only achieved due to the extra restrictions created by the central bank of Lebanon to limit the effect of the global recession. For this reason, the economy continued to increase despite the global risks and the Israeli- Hezbollah war in 2006, making the Lebanese economy one of the largest in the world. On another hand, the GDP per capita of the Lebanese citizens is $15,330, making their citizens one of the 60th richest around the world. Moreover, the World Bank stated that around 30 % of the Lebanese population is considered poor since they live on less than $ 2.5 per day. When it comes the governmental debt, it is increasing further because of the limited privatization rate. (Economy Watch, 2010)
Lebanon’s economy has always been known for its ups and downs, like any other country; the first main sector that gets affected is the financial and economic sector. Along the years and following a series of unfortunate events that shook the country; Lebanon always strived for fast recovery, a recovery that coasted the country a large amount of money; money the country did not have at that time. Due to the civil war that accrued between 1975 and 1990 the economic infrastructure of the whole country was seriously damaged and the banking hub as well as Lebanon’s overall position in the Middle East where jeopardized. Lebanon had to rebuild most of the physical damage caused by the world as well as the economical; the main way for that to happen was threw borrowing large amounts from domestic banks which led the country straight to a huge debt. This was not a onetime solution, the same situation kept on happening and the countries only option at that point was to borrow more each time in events like the international donor conference during the 2000s, and the Paris donor conference in 2007 following the war of 2006. (Britannica, 2018)
With its ancient and multicultural centers such as Tire, Sidon, and Byblos Lebanon was known to be the site of the oldest settlements in the world. In 1926, Lebanon became a republic and in 1943 it achieved its independence from the French colonization. Lebanon is known to have many Arab characteristics but has its own attributes that differs it from other Arab neighbor countries. Known for the layout of its coast and series of mountains, popular for its diverse religious groups and political thoughts, Lebanon is one of the most populated countries in the Middle East compared to its size, it has always served to be the center of culture of the middle East. Although the county seems to offer a number of positive characteristics, that does not hide the fact that the country has been suffering from instabilities and drastic changes in economy, tourism and social life, struggling to define its position among its Arab neighbors, Israel, and Palestinian and Syrian refugees living in the country and damaging its status and future. In 1990, as the civil war in Lebanon came to an end, the country started to gradually get back some of its political stability with the help of supporting countries but at the same time kept on being held back each time the country came close to recovery due to the intervention of external nonsupport which led to Lebanon being a battlefield in more than one situation. (Britannica, 2018)
The Taif agreement was a contract that came to set the ground rules right after the ending of the civil war and bring Lebanon back to political normalcy. One of the points included was a time frame for the Syrians army troops to withdraw. It was signed and agreed upon towards the end of 1989. The agreement’s main purpose was to establish a good relationship between Lebanon and Syria for the benefit of both countries and it positioned Lebanon as a country with its own Arab identity. Countries that participated and had a say in this agreement were mainly Saudi Arabia, Egypt, Syria, France, and the United States. (Krayem H., 1995)
Mutual coexistence was also one of the main purposes of the agreement, encouraging equality politically and socially by transferring some power away from the Maronite Christian community which was the majority before the end of the civil war. It also stated that any national and non-national militia needs to be disarmed. Hezbollah was given an exception to stay armed in the south as a privilege and was called a resistance force rather than militia for protecting the lands from future invasions. (UN, 2018)
Lebanon is a multiparty republic with parliamentary system government. According to the Taif agreement the parliamentary seats are divided equality between Christians and Muslims which replaces the old ratio that favored Christians. The president of Lebanon; that has to be a Christian Maronite is elected by a two-thirds majority of the national assembly for a time of 6 years. The premier has to be a Sunni Muslim and the speaker of the national assembly a Muslim Shiaa. The political system in Lebanon is a blend of secular and traditions. The country claimed to support liberal and democratic institutions, but on the other hand barely had any instruments and tools to show civil polity. Whether is the political parties, parliamentary blocs, groups that put pressure and corruption are all part of failing to serve the larger national purpose of the society. Palestinian refugees enjoy limited rights in the country and do not have a place to participate in the Lebanese government. (Britannica, 2018)
The heart of most internal conflicts in Lebanon is communal tension, something that neighboring countries has been using as an excuse to intervene along the years. A large number of Palestinian refugees exists in Lebanon; they represent a tenth of Lebanon’s entire population. Most of Palestinian in Lebanon has limited legal rights but their presence and actions have always affected the countries stability. One of the wars that took place in Lebanon is the civil war that happened between 1975 and 1990s where neighboring countries such as Israel, Syria and Palestine used as a battlefield to deal with their own conflicts. In 1990, the war was stopped by creating the Taif agreement is a cooperation between the citizens, militias, leaders and political groups to be able to live together on the same land. This was the only formula to stop the war, as well as to regain the stability in the country, and to build the economy. (Krayem, 1996)
However, Syrian troops moving in, Israeli troops invading again and again, after years of invasion Israel finally pulls out in year 2000. That withdrawal of the Syrian troops that took almost 5 years to actually happen after the retreat of the Israelis was said to be the cause of the assassination of former Prime Minister Rafik Hariri. An assassination that Lebanese opposing groups blamed Syria for. That caused even more tension in the country and its region. The UN were demanded to remove all armed groups in Lebanon including the militias of Palestine and the military of Hezbollah, the group that controls almost the whole southern part of Lebanon. After the military of Hezbollah abducted two Israeli soldiers in July 2006, Israel started a nonstop military war on Lebanon as a response, which dragged Lebanon into a demolishing war that lasted 34 days. It shook the country and wrecked its stability once again. (BBC, 2015)
More than $25 billion of destruction was estimated in the war, thus the government needed to have assets to reproduce at high loan fees. Intrigue installments disintegrated incomes prompting huge financial deficiencies. The GDP started to grew in 1992 and achieved 180% of growth in 2006, driving Lebanon to receive somberness measures as a component of IMF exchange conditionality. Government endeavors in 2007 to reduce the obligation trouble prevailing with regards to bringing down the proportion to 146% in 2009 and it right now waits at around 140. (BLOM Invest, 2016)
As of late, an average cost for basic items pay increment for people in general area, concurred in 2012, was evaluated to convert into a yearly increment in government use adding up to US$564 million. This will add to the nation’s ceaseless spending shortage. Requests for pay scale increments for general society division representatives proceeded in 2014 with a few exhibitions, quite by government funded teachers. Under terrible political and institutional conditions, the private segment, which adds to 80% of Lebanon’s GDP winds up noticeably incapacitated. For sure, the genuine GDP development rate dove in 2013 to around 1.5%. Received in 2012, the expansion in least wages for the private part from LL 500,000 to LL 675,000 (around $450) put extra weight on business owners.

When it comes to the oil price decrease since the past 2 years, several areas were affected in the country. The initial benefit is the lower fuel bills on its citizens and on the governmental budget, since the government pay 4.7 % of its GDP to keep the prices of the electricity steady. Moreover, it has helped the spending power of the consumer and the citizen. However, 16 percent of the Lebanese GDP comes from the Lebanese emigrants in the GGC region, thus the oil price in those countries can affect the sent supporting money entering the country.

Lebanon is generally a bringing in nation; with exchange adjust shortage displaying a consistent increment over the years. The Syrian emergency, refugees, put extra limitations on fares as Lebanon lost a primary exchanging course. Therefore, sends out diminished from $405 million in 2013 to $244 million in 2014, while the exchange shortage expanded from $16.797 billion in 2012 to $17.292 billion in 2013.98. (BLOM Invest, 2016)
Up until today, Syria has been suffering for almost 6 years from a civil war and its neighboring country Lebanon is accepting major numbers of Syrian refugees that are entering its boarders’ day after day. Lebanon is the only Arab country that has accepted more than 1.5 million refugees in its boarders. Along with this crisis, Lebanon has suffered from a presidential gap that lasted for 2 years, that has decreased the economic growth. In addition to that, several terrorist attacks hit the country every once and while especially on its boarders since one of the political parties in Lebanon is currently participating in the war in Syria.
The country suffers from different external threats that keep on hitting the economy leading to the destruction of the tourism sector. One of the major threats is Israel continuous wars and terrorization. Because of its geopolitical structure and location, Lebanon has accepted more a large number of refugees, Palestinians and Syrians. In addition to that, Lebanon was heavily impacted by the assassination of the Prime Minister Rafic Hariri in 2005 that followed with a series of other terror attacks on the country and war against Israel with Hezbollah in July 2006. This has resulted with a major drawback to the Lebanese economy that decreased the infrastructure and the growth. In 1982, Hezbollah was created as a political party to defend the country after the Israeli occupation entered Lebanon and took over the south. It is an Islamic resistance community created to liberate the land. Hence, the party was developed through a large number of Lebanese Muslim Shiite and grew ever since with the help of the Iranian and Syrian’s governments. Keeping that in mind, the military force was damaged due to the Lebanese civil war and the continuous fights that weakened the army’s strength pushing armed political groups such as Hezbollah to act as national defender of the country. Furthermore, Lebanon has welcomed more than 450,000 Palestinians refugees who are registered in the country by the UNRWA that are representing 10 % of its population. They are currently living in camps spread around the country for more than 50 years, and suffering from different drawbacks such as poverty, overcrowding, unemployment, to name a few. Lebanon does not have an oppressive Arab regime, however it consists of a system that is trying to accept the different nationalities, religious, and social diversity. The most chronical situation in the country that pushing the governmental spending’s to an increase is the Syria Crisis. More than 1.5 million Syrian refugees entered the country, and pushed the nation downwards even more. (CIA World Factbook, 2016)
In addition to that, Lebanon has remained without a president for almost 2 years and half and weakened the government to efficiently manage and support the Lebanese community and the refugee community is very little. Hence, the increasing political tension in the country between the diversified different parties in Lebanon, the increasing number of refugees, the non-existent protection from its army, unemployment, poverty and inflation, have led to an increasing rate of corruption in all its sectors.
When it comes to its economy, Lebanon has been suffering of more than 320,000 unemployed unskilled youth because of the Syrian refugees. These working hands were mainly employed in the retail sector of restaurants, small clothes store, super markets and much more. (World Bank, 2016) The shift in the percentage of employment in Lebanon was one of the first negative coping mechanisms that businesses employed to lessen the financial burden on themselves as sales dropped. Business owners tend to decrease their fixed cost through employing Syrian workers instead of Lebanese ones, since they accept low reduced salaries. This has led to a major inequality gap between the upper class and the working class. (Institute Des Finances, 2016)
Linking this to consumer expenditure, that began to fall in parallel as people were making less and thus had less to spend. On top of that, even before the onset of the Syrian clash and the inflow of extensive quantities of Syrian displaced people, destitution in Lebanon was noteworthy and provincial differences in living conditions were intense. It is assessed that about 27 percent of the Lebanese population, or 1 million individuals, were poor, living on not as much as USD 4 every day, and 8 percent, or 300,000 individuals, were amazingly poor, living on not as much as USD 2.40 every day. Neediness was essentially higher in a few locales, with the most astounding grouping of poor found in the North governorate (52.5 percent), taking after by the South governorate (42 percent) and the Beka’a (29 percent). The poor are for the most part thought among the unemployed and among laborers in agribusiness and development where one individual out of four specialists in farming or one individual out of five specialists in development is probably going to be poor. Over portion of Lebanese natives reviewed in May 2012 guaranteed they don’t have cash left in the wake of paying for essential needs and necessities, and 63 percent asserted not having the capacity to manage the cost of the fundamental necessities sooner or later indicating large amounts of helplessness to sudden stuns (Institute of Finance, 2016).
Aggravating the neediness and defenselessness circumstance in Lebanon is the feeble, and divided, furthermore ineffectively focused on the arrangement of open social security nets (SSNs) which throughout the years has had restricted effect on neediness mitigation and tending to inconsistencies. Government spending on social wellbeing nets earlier to the contention was just 1.3 percent of GDP (2010), one of the most reduced in the MENA locale. SSNs in Lebanon incorporate expense waivers, item endowments, and in-kind exchanges, and focusing on techniques extend from straight out to intermediary implies test to all inclusive. High rates of spillage to the non-poor, absence of an organized approach, frail limit of open organizations combined with the absence of dependable and predictable information, are key variables that hamper the viability of SSNs. The Ministry of Social Affairs (MOSA), as the principle government substance in charge of arrangement of SSNs and achieving somewhere in the range of 350,000 recipients every year, gives social administrations to particular classes of helpless gatherings, either through its Social Development Centers (SDCs), or through contracting of NGOs or social welfare establishments. Reflecting on the socioeconomic impacts and stressors on Lebanon, and linking to the Syria Crisis, “They are also draining the economy in terms of service provision and infrastructure. For example, people are digging wells for water and waste management in the Bekaa Valley; these are becoming rivers of sewage and affecting public health. The war in Syria has also affected trade flows in and out of Lebanon, further hitting the national GDP. More than 60 percent of Lebanon’s exports used to flow through Syria and Jordan to the Gulf and beyond — this is no longer possible” as explained by the Former Minister of Commerce in Lebanon. (Arabian Business, 2016).
On the other hand, since trade has now increased significantly with Turkey due to the shift of most Syrian factories to Turkey since it is still relatively cheap for them to operate, and with the increasing popularity for Turkish products over the years due to how cheap it is and yet has good quality, this has also opened another competitive door for the local market. As it stands everything is very expensive in Lebanon, where prices have risen and wages can cover the minimum, in parallel, as the Turkish trading doors have opened, the local market is further suffering as the competition coming from Turkey has reduced prices, which persons in an economic vulnerable state have been preferring to save money. (BLOM Invest, 2016)
Settlements constitute a critical wellspring of salary for Lebanon. In 2014, Lebanon got $7.7 billion, coming next set up in the Middle East and North Africa locale after Egypt, and possessing eighteenth position universally. Lebanon possesses the top position in the area and thirteenth position universally as far as settlements as a rate of GDP, which squared with 17% in 2013. Settlements are seeing a solid yearly development rate of 1.6%. While the effect of settlements on destitution lightening in Lebanon is presumably sizeable, additionally research is expected to evaluate whether these settlements are being diverted into the formal part in an approach to permit their speculation into open employments. (Arabian Business, 2016).

As far as remote direct speculation (FDI), unsteadiness in the previous couple of years have converted into a diminishing FDI drift, with FDI dropping from around $5 billion in 2010 to marginally under $3 billion in 2013. Notwithstanding the drop, FDI in 2013 represented more than 6% of GDP, fixing different nations in the MENA locale in relative terms. The greatest offer of FDI originates from European nations (45%) and Middle Easterner nations (31%). FDI is put for the most part in exchange/retail (31%), tourism (17%), administrations (16%) and development (11%), thusly adding to sizeable offer of work in Lebanon.100 A rising positive pattern identifies with FDI ventures that have begun to occur in gainful and high esteem included segments, for example, ICT. (Arabian Business, 2016)
As of late, an average cost for basic items pay increment for people in general area, concurred in 2012, was evaluated to convert into a yearly increment in government use adding up to US$564 million. This will add to the nation’s ceaseless spending shortage. Requests for pay scale increments for general society division representatives proceeded in 2014 with a few exhibitions, quite by government funded teachers. Under terrible political and institutional conditions, the private segment, which adds to 80% of Lebanon’s GDP winds up noticeably incapacitated. For sure, the genuine GDP development rate dove in 2013 to around 1.5%. Received in 2012, the expansion in least wages for the private part from LL 500,000 to LL 675,000 (around $450) put extra weight on business owners.

The economic growth did not exist since 2011, where the country was left with weak structural, political crises, and delays strained from one year to the next. Due to the lack of actual growth and reform, the economic system, the deposits from the large Lebanese diaspora, accompanied with negative remittances due to the GCC restriction on the country, the BDL is currently handling the load alone since 2011. The Lebanese economy has been suffering from a large fiscal deficit that reached around 10% of the country’s GDP and has been outperforming the growth ever since. Because of that, the Lebanese government has been piling up the debt that grew from 131% in 2012 to 146% in 2016. (BLOMINVEST Bank, 2017)
As indicated above., Lebanon suffered from an absence of the presidential vacancy for more than 2 years, and on October 2016, Michel Aoun was elected president. Ever since, the real GDP growth reached 1.8% compared to 1.3 % in 2015. This increase took place due to the enhancement in the real estate industry, tourism sector, private consumption. The situation created confidence to the economic market and eased the tension within the region. As indicated by the World Bank (2018), Lebanon’s economic prospects over the medium term are highly affected by geopolitical and security conditions, and those remain volatile. Projections assume that the Syrian war persists and that spillovers into Lebanon, while significant, remain contained. Based on this, we forecast growth over the medium term to remain around 2.5% annually.”
Political and security problems have always been a major concern in the country, where it is affected heavily from the internal and external conflicts. The net foreign asset suffered from a slowdown and was incapable to fight the increased fiscal and deficit. The World Bank stated in 2017 that “a frail macro-fiscal framework, underpinned by unsustainable debt ratios and persistent and sizable fiscal and current account deficits, within the context of a fixed exchange rate regime, exposes the country to significant foreign exchange and refinancing risks. The reliance on deposits to finance these imbalances could prove challenging based on recent commercial banks’ deposit growth data. Critical structural reforms in public finances, energy, safety nets and the business environment still elude the government, though some very important decisions have recently been made. In addition, the new parliament is working to pass its first official budget since 2005. Nonetheless, in the place of a sustained reform effort, the Central Bank activism is facing macro-financial risks.”
Furthermore, Lebanon’s budget was created last time in 2005, and for more than 13 years, the cabinet approved the annual budget. In 2005, the budget suffered from a lower deficit due to the lower public sector spending. This budget is one of the key major factor that will help the country avoid a Greek similar debt crisis. The government declared that major cuts will take place to be able to achieve a more than 2% growth. The Finance Minister Ali Khalil stated that “We preserved Lebanon through this budget and we distanced the country from the example of Greece’s crisis and there should be more reforms,” and the Prime Minister Saad Hariri indicated that the 2018 budget is a real budget. The IMF advised the government to implement real reforms or the debt to GDP will continue to grow to achieve 180% by the end of 2023 due to its geopolitical crisis. 20% of governmental Expenses cuts and increased revenues are expected to happen in 2018 by injecting funds in infrastructure and development projects. Moreover, other strategies are expected to take place such as public institutions closing. Moreover, BMI, a unit of the Fitch group stated that “Domestic and regional political challenges are weighing on the pace of recovery but absent deterioration, we should see growth accelerating above 2 per cent this year (our latest forecast is for 2.7 per cent expansion) supported by public infrastructure investment as well as trade and tourism recovery. We maintain our view that the Lebanese banking sector will remain broadly stable over the coming quarters, bene?ting from an improving macroeconomic outlook and robust support from the central bank. Lebanese banks will also continue to bene?t from a loyal depositor base, fueling liquidity in the sector and facilitating asset growth.” (The National Business, 2018)
Lebanon has been suffering from the public debt since the civil war creating a problem on the economic growth and development. As indicated by the Credit Libanais Report on Dissecting the Lebanese Public Debt: Debt Dynamics ; Reform Measures (2016), “the gross public debt stands at $71.65 billion (April 2016) with Lebanon’s debt to GDP ratio reaching an alarming 139% level, positioning it as the 4th highly indebted country in the world according to the CIA World Factbook. This debt figure excludes some sizeable amounts owed by the government to the National Social Security Fund, hospitals, and private sector contractors, among others which, if embedded in the calculation, would undoubtedly raise gross public debt to just above $74 billion”.

As stated by the Head of the Economic Research and Analysis at Byblos Bank, Nassib Ghobril, the public debt is a problem that affects the economic growth and increase the risk on local banks’ international credit ratings. Since the credit ratings is an indication of the worthiness of a country, firm or individual, this means that the government has a high risk of defaulting on their loans. This has been the reason for the increase of the interest rates of loans and loan rejections for the Lebanese individuals and future businesses. Hence, it is reducing automatically the employment rate, consumption, investment and finally the economic growth. (Economic Research Unit at the Ministry of Economy and Trade, 2009)
On the other hand, for the past 10 years, Lebanon attracted thousands of international tourists and boosted the travel and tourism sector, hence increasing the economy, income, employment as well as GPD. As stated by the World Travel & Tourism Council in the Bank Med report (2016) “the travel and tourism sector’s contribution to GDP in Lebanon fluctuated over the period 2010-2015 to reach USD 9,861 million in 2015, slightly increasing from USD 9,840 million in 2014 amid regional political tension and local security issues. During 2015, tourism’s direct contribution to GDP slightly increased by 2% reaching USD 3,606 million, while tourism’s indirect contribution to GDP witnessed a slight decrease of 0.6% to reach USD 6,255 million. As such, the total contribution of tourism to GDP has merely increased by 0.2%, displaying stability within the sector”.
However, the presidential absence along with the tense political situation of the country has restricted the tourism sector to grow. The total contribution of tourism to employment has dropped from 22.7 percent to 4.5 percent in 2015. Moreover, despite the internal security issues in the country such as bombing all over Lebanon, the number of passengers in the Beirut International Airport increased from 3.2 million in 2014 to 3.5 million in 2015. (Bank Med, 2016)
In specific, the tourist arrivals increased 12 percent in 2015, despite the political instability and as such the Arab tourists grew by 4.3 percent but it is still considered lower than 2010 year. Despite the increase tourist arrivals from different regions, the Arab tourist percentage was the lowest as seen below due to the banning from their governments to come to Lebanon because of the neighboring Syrian war and fear of terrorism attacks. According to Euro-monitor International and Travel Agencies (2015) “The travel ban comes on the heels of Saudi Arabia stopping US$4 billion in military aid to Lebanon last week. The Saudi decision was backed by the UAE, Kuwait and Bahrain. Security concerns and geopolitical tensions also plague Syria, Egypt and Turkey. Travelers from the UAE and the Arabian Gulf are expected to prefer destinations in Europe and the Far East over popular destinations in Egypt, Lebanon and Turkey.” Hence, the Arab tourists has decreased significantly from 2010.

BDL role
Despite the above mentioned political and economic crisis hitting the country, Lebanon was able to keep its financial stability over the years. The banking sector, banks and financial institutions grew rapidly over the years and the deposits of the non-Lebanese residents have backed up heavily the imbalances of the macroeconomic situations, as seen in Figure 1. The low level of deposits inflows increased the urgency of macroeconomic reforms to reduce the financial pressures and re-increase the investors’ confidence. The Lebanese financial system is ruled by banks that consist of 97 % of the its system, handling 397% of the GDP, and the rest play a low role. As indicated by the International Monetary Fund (2017)
“Deposit inflows, attracted by high interest rates, exchange rate stability, and remittances of the large Lebanese diaspora, sustain macroeconomic and financial stability. Current account deficits are forecast to remain above 15 percent of GDP over the next five years; total external debt (including nonresident deposits) stood at 175 percent of GDP in 2015. With FDI having decreased in recent years, continued deposit inflows are the only significant source of capital inflows. The current slowdown in nonresident deposit growth led to declines in international reserves of just over 10 percent in the year up to May 2016, the first drop in 11 years.”

Figure 1 – Lebanon: Structure of the Financial System. Retrieved from INTERNATIONAL MONETARY FUND (2017)
Moreover, the BDL poses a key role in having confidence in the financial sector. For this reason, it maintains a fixed interest rate and low rate when acquiring government debt that is not absorbed by the commercial banks. In addition to that, the BDL issues long maturity certificates of deposit, upholds exchange rate, hold international reserves, decrease reserving requirements even support weak banks by facilitation the acquiring by stronger ones while protecting deposits. Having implementing these strategies have paved a successful way to manage upcoming risks in the country, however these limits have its limits. All of these strategies implementing have stretched the BDL’s balance sheet. (International Monetary Fund, 2017)
Having said that, we will compare the Greek situation and the reforms applied by the European Union to be able to have a concrete example on the BDL ability to cope with such crisis. To start with, since 2008, the European Union leaders have provided Greece with a large amount of sovereign debt and became a danger on the union. The Greek economy decreased by 25 percent because of the cuts on spending and increased taxes from the creditors. The debt to GDP ratio increased heavily and achieved 179 percent of the Greek government. To be more specific, Greece accept more than $294.6 billion euros in loans, and repaid only 41.6 billion euros. The crisis began in 2009 when the Greek government declared its budget deficit of 12.9 percent of the GDP, and counted more than 4 times of the European Union limit, that is 3 percent. At that time, Fitch, Moody’s and Standard & Poor’s the leading rating agencies decrease the credit’s rating that pushed the investors away. Because of this, the cost of future loans increased and the Greek government was not able to repay the debt. In 2010, the deficit was promised to be decreased to 3 percent in a span of time of 2 years. The Greek government assured its responsibility, however 4 months later the government warned that it might not be able to pay it. Following this declaration, the EU and the IMF provided them 240 billion euros in emergency funds in return for sever measures, in order not to lose Greece from the European zone. Hence they urge them to increase VAT taxes and the corporate tax rates to reduce the gap. In addition to that, these taxes should be the tool to decrease incentives for early retirement, increase worker contribution to the pension fund system. (The Balance, 2018)
Previously, several other European countries have followed this example to decrease its deficit and its debt, and they endured their own austerity measures to avoid bankruptcy such as Germany, Spain, Ireland, Portugal, Poland and Czech Republic. Unemployment rate increased to achieve 25 percent of the population and riots exploded in the Greek streets. In 2012, the Greek debt to GDP ratio increased to 175 percent which led to the inability to achieve 1.55 billion euros of payment. Due to that, banks closed and ATM withdrawal did not achieve more than 60 euros per day and hit the tourism sector heavily. This strategy limited the withdrawals of accounts, and helped the top four banks to raise more than 14.4 billion euros. It helped banks to return to their full functionality. Moreover, in 2016, the banks were still losing money that led to the payment of 7.5 billion euros to Greece by the European stability mechanism to pay the interest of the debts. The government privatized more companies and sold the non-beneficial and performing loans. The agreed bailout program will end in August 2018, however the unemployment rate decreased to 20 percent instead of 25 in 2013, the economy was enhanced by 2.5 and the government is expected to pay around 75 percent of the loan by the end of 2060. (The Balance, 2018)
This bad situation started in 2001 when Greece shifts its currency to Euro. The country benefited for few years from the low interest rate and increased its investments and loans, however the country could not enter the Euro zone due to its continuous deficit budget. It was only applicable when the government lied about its budget. After years, the European Union discovered the lie but was not able to expel Greece in order not to weaken it Euro. Based on that, the crisis began to accelerate heavily in 2009 after the global financial crisis that affected them badly. Several options the Greek government can consider that consist of either staying in the European Union or leaving it. If Greece leaves the union, the country should start by changing its currency. This can be a feasible strategy since the government will hire new workers to decrease the unemployment rate and increase the economic growth. Also, it can print more of the “drachmas”, new currency, to decrease the euro exchange rate, hence decrease the debt, cost of exportation and increase tourism. Despite the positive growth that can happen, however foreign owners will decrease the value of the repayments, and some banks will suffer from bankruptcy. This could lead to a hyperinflation since the country relays heavily on importing food, energy and pharmaceutical products. This will create an unstable situation and foreign direct investment will shrink heavily and Greece will find itself in the same current situation unable to pay its debt. Because of that reasoning, the European Union has to impose austerity measures to provide the Greek government the ability to improve their public finances. These measure will increase exports, and lower the trade barriers. Moreover, it will require Greece to adjust their pension system for their citizens by cutting 1 percent of the GDP, and increasing pension contribution from citizens. (The Balance, 2018)
Keeping that in mind, it is expected for Lebanon to be the next Greek debt crisis. The IMF declared in 2018 “Lebanon’s debt is unsustainable under the baseline scenario. In the context of Lebanon’s low growth and rising global interest rates, debt dynamics will deteriorate further and public debt will increase rapidly to just below 180% of GDP by 2023 … A fiscal consolidation plan with front-loaded fiscal adjustment embedded in a credible budget is urgently needed.” Hence, the IMF declared the urgency for the Lebanese government to increase its taxes and cut the energy subsidies expenses. Moreover, analysts indicated that Lebanon’s situation might be more dangerous than the Greek one since there is very high risk to have a devaluation of the local Lebanese currency. (Global Finance, 2018)
According to Arabian Business (2018) stated that “The central bank needs to mitigate a slowdown in bank deposits, whose growth has helped support soaring public debt, the IMF said. It currently amounts to $79 billion, or 150 percent of gross domestic product, though the IMF said Lebanon will likely see it reach 180 percent in five years. That would put it where Greece stands now after the country underwent the world’s biggest debt restructuring in 2012. Japan is the only country with a bigger debt ratio, but it’s not at the mercy of external forces because its currency trades freely unlike dollar-pegged Lebanon or euro-member Greece.”
However, the despite the spreading rumors around the country of the possibility of bankruptcy, banks remain very confident. As per the vice chairman of Bank Audi, Freddie Baz (2018) stated that “Lebanon is not facing any technical bankruptcy. Even if debt is high, State-owned assets are higher, which maintains the country in a positive net equity position. Lebanon’s current revenues are not enough to finance its expenses, and that is largely due to the fiscal administration’s inefficiency. There is a budget revenue gap of $4.5 billion dollars annually, or 8% of GDP. At the same time, the primary revenue required to curb debt ratios represents 3.5% of GDP. If we are able to reduce the level of corruption and wasted resources, what is required from us is not huge.”
Having said that, the level of corruption in the country is very high, since Lebanon ranked 143rd out of 180 countries. The sever corruption happening in the social and economic development of the country has delayed the payment of debts. However, the real problem is the present politicians and decision makers who are not taking any action to help the Lebanese financial crisis. For this reason, as indicated above the government after 12 years decided to approve on a budget and cut expenses. This budget was created to be able to present to the donors in Paris in the CEDRE conference to be able to collect a large amount of money to help infrastructure projects increase and growth. (Global Finance, 2018)
Up until date, the Lebanese government has spent more than 10% of its spending on the Syrian refugees. Due to the increase pressure on the government in terms of deficit in the balance, increase debt, low level of investments, along with the unstable political situation, the government needed to increase its revenues. (European Parliament, 2017)
Since the country is about to go in a financial crisis and a high chance of variation of the current, urgent decisions need to be done. Hence, for this reason Paris conference’s aim to raise money for the Lebanese government. Based on the Article of Daily Star published on April 5, 2018, the country is hoping to get around $ 6 to $ 7 billion in terms of credit facilities and funds. The 2018 budget has almost double since the Syrian crisis happened and reached a deficit of $4.8 billion. Despite the fact that the Lebanese government has a high risk of crashing due to the high debt, it has increased the spending by increasing the public salaries and offered more than 26,000 new positions in the past 3 years. The IMF has warned the Lebanese government to act urgently upon this matter, since the country is importing much more than they are exporting. The monetary stability is in high risk and the Lebanese lira is expected to decrease in its value, which means the consumer purchase power will automatically decrease and the government can claim bankruptcy.
The government has tried to implement new financial strategies to increase its revenues. For this reason, the VAT has increased in 1%. Moreover, the growth in the country has increased by 4 %, against 12% in year 2010. However, despite the positive growth and increasing expected revenues, the government need to focus on implementing strategies to fight tax evasion. It is the main source that can get the government out of its debt by repaying $2 billion per year. In addition to that, the deposit growth in the commercial banks has decreased due to the increasing cost of public borrowing, which means the exchange rate is most likely to increase. In addition to that, the corruption in the country has placed Lebanon on one of the top leading corrupted places. The corruption in the country has decreased the amount of investment, amount of spending, loans, and increased inflation. (Daily Star, 2018)
As per the French Diplomatie (2018), the mission of CEDRE conference is to actually support the development and the strengthening of the Lebanese economy as part of a comprehensive plan for reform and for infrastructure investments as prepared by the Lebanese authorities and presented during the conference. The Lebanese government will seek loans to invest in infrastructure programs to be held in France and obtain $16 to $17 billion, where it is expected to cover more than 250 projects in the country over the period of 8 to 10 years. The funds will be divided over the reconstruction of the transportation industry, the improvement of water and sewage projects, electricity sector, and infrastructure and development projects. (Business News, 2018)
Until date, the Lebanese government raised more than $11 billion and expected to increase the amount to reach $17 billion. The raised funds are collected from the World Bank in terms of $4 billion in soft loans over 5 years, and the government of Qatar as well as the Kuwait Fund for Arab Economic provided $500 million each also over 5 years. Moreover, the European Bank for Reconstruction and Development promised $1,35 billion, European Investment Bank donated $980 million, whereas The Islamic Development Bank guaranteed $750 million. (Daily Star, 2018)
The rest were distributed between KSA ($1 billion), Italy ($147 million), Germany and turkey ($75 million and $200 million), USA ($115 million), France ($673), as well as UK ($170 million), Netherland ($367). However, the European Union promised to provide the Lebanese government with more than $183 million to support the revitalization of the Lebanese economy. This can only be done by providing the highly needed necessary reforms since the Lebanese government is highly corrupted. The Prime Minister of Lebanon indicated that these grants will provide the government with stability, growth and job creation in the region and not only Lebanon. He stated that it will be upon 4 pillars, the first two to increase investment in infrastructure in a macro-fiscal framework with sustainable debt, whereas the rest are to develop the productive sectors in the country. (Daily Star, 2018) However, the question remains if the Lebanese government is ready to receive such amount, since for more than 25 years the promised improvements were really low. For this reason, the public is really concerned since if the current government seeks $17 billion for 250 projects, and no results were made, this can increase the risk defaulting on its debt obligations in the future. (Al Nahar, 2018)
Having said that, the country is facing high risks especially when unpredicted crisis always take place such as the resignation of Saed El Hariri, the Israeli war in 2006, and the assignation of the PM Rafic Hariri. The recent resignation of Hariri outflew more than $2 billion since that day. The banks took immediate actions and started to offer more than 6% on deposits. (Arabian Business, 2018)
Based on the above, we can conclude that Lebanon is in a more sever situation that the Greece was facing in 2009. Since the country is expected to reach 180 percent of the debt to GDP ratio by 2023, the government need to undertake reforms to decrease this fiscal deficit. Due to the Syrian refugees, the sudden crisis taking places taking place such as resignation of the PM is putting the country in a political and financial uncertainty. The government need to start applying reforms to reduce the current 150 percent. According to the article IV consultation report developed by the Washington based lender indicated that “Without a significant reduction in the economy’s funding needs or an increase in deposit inflows (and given the global interest rate outlook), the Banque du Liban (central bank of Lebanon) will need to increase interest rates or use its sizable gross reserves to meet the funding needs of the economy.”
In addition to that, Lebanon is employing McKinsey and Co. to help the government in developing a healthy economy. The company will develop policies and procedures to help the country survive unexpected and upcoming political storms despite the high level of foreign reserves that accounts for $43 billion. This reserve will to be able to handle the pressure anymore especially since the country have several grey arears that are difficult to have strategic plan. (Arabian Business, 2018)
Based on the above, the Lebanese government need to implement reforms with the loans granted by the CEDRE conference. Previously the donors did not supervise the actual work done through the granted loans. For this reason, to be able to exist this financial crisis, a detailed overview of the CEDRE Conference and the Capital Investment Plan to Lift Lebanon’s Infrastructure will be discussed in details.

Source: BLOM Invest Bank, 2018
According to BLOM Bank (2018), six realities need to be taken into consideration that are aimed to be solved. The problems are the solid waste, the displacement of Syrians to the illegal sites that increased to cost on EDL by $313 million, the number of citizens that are not on EDL’s grid, fiber connection, environment degradation, quality of transport infrastructure as well as the water deficit.

The conference is aimed to improve the infrastructure network and enhance the economic growth, however, the Lebanese government is obliged to provide fiscal, structural and sectorial reforms. This will include on overview on the ongoing and new projects that are aimed to develop the efficiency of eight of Lebanon’s essential sectors Transport, Water and irrigation, Wastewater, Electricity (energy), Telecom, Solid waste, and Tourism, ; Industry. This will help the country in having a transparent and efficient government. It will create employment opportunities, enhance productive capacity, internal competitiveness and growth. The projects will go through 4 cycles, and each cycle will last 4 years. For the first cycle, Lebanon was granted the money to start enhancing the infrastructure.

The World Bank (WB) stated that “Investment in high-quality, sustainable infrastructure can provide basic services to households; lead to productive gains for industry; provide market access for agriculture; enable sustainable urban development; open corridors of trade for poor and landlocked countries to the global economy; and help progress towards a more climate-smart world.”
Hence, the infrastructure rehabilitation projects will ensure economic growth through operation, management, maintenance, conservation, and effective sustainable techniques. (BLOM Bank, 2018)
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