Lebanon’s new cabinet unlikely to save economy

Lebanon’s new cabinet unlikely to save economy
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The newly formed coalition is unlikely to solve the many challenges facing Lebanon. As the Syrian crisis continues to take its toll on the economy, Lebanon must shift its short-term focus to maintaining and developing its banking and energy industries.

Lebanon’s interim Prime Minister announced the formation of a cabinet last week, ending a nearly eleven-month political deadlock that left the government unable to properly address its growing economic and security issues. Tammam Salam’s 24-member cabinet represents the country’s deeply divided political factions, with members from both Western-backed coalitions and Iranian-backed Hezbollah and its allies.

The cabinet faces the daunting task of dealing with the ever-growing influx of Syrian refugees, who now account for one-fifth of the Lebanese population. Although the new cabinet ensures important government posts are filled in the short-term, it is unlikely to have the time or the cohesion to address Lebanon’s toughest issues. A new government will be formed again after President Michel Suleiman’s six-year term ends in May.

Lebanon’s religion-based power sharing system drives much of the country’s political instability. According to Lebanon’s constitution, the President must be Christian, the Prime Minister must be Sunni Muslim, and the Parliament Speaker must be Shiite Muslim. While each faith represents roughly a third of the Lebanese population, the sectarian grounding of the government pits different religious groups against each other at times of war and crisis – much to the detriment of the economy.

Disagreements over the crisis in Syria have killed dozens in Lebanon over the past few months, as pro- and anti-Assad groups have taken to the streets. According to the Institute of International Finance, the worsening security situation and spillover from the Syrian crisis depressed economic growth to a mere 0.9 percent in 2013.

GDP Impact of Political Turmoil

Political turmoil has significantly dampened GDP growth. Source: Institution of International Finance

Before the start of the conflict three years ago, Lebanese industries exported many of their goods through Syria. The crisis has blocked access to key land routes, causing Lebanon’s trade deficit to widen by 2.5 percent in 2013, a drop of more than $480 million.

According to the World Bank, decreased state revenues coupled with increased government expenditures will widen Lebanon’s fiscal deficit to an estimated $2.6 billion over the next year. The simple formation of a cabinet is unlikely to mediate the Syrian crisis and the financial toll it has taken on Lebanon’s economy. Lebanon does, however, have key industries and opportunities that have not entirely fallen victim to regional externalities.

Bright spots in banking and energy

While most economic indicators trend downward in Lebanon, the banking system has remained resilient and profitable. Despite the political turmoil, the balance sheets of Lebanese commercial banks have expanded significantly. Total deposits in Lebanese banks grew 7.4 percent in 2013, while growth in the private sector stood at 9.7 percent, according to data from the Institute of International Finance.

Lebanon has even made progress toward meeting Basel III requirements. Basel III is a voluntary regulatory standard on bank capital adequacy, and offers minimum levels of capital reserves intended to counter the risk of a run on the bank. In 2013, Lebanon set its minimum core Tier I ratio at 6.5 percent, well above Basel III’s current requirement of 5.5 percent. The banking sector is also performing above Basel III’s minimum total capital ratio of 8 percent, with Lebanon’s banks requiring 10 percent.

The Lebanese government also hopes to take advantage of an estimated 25 trillion cubic feet of natural gas located off the coast in the Mediterranean Sea. ExxonMobil and other key energy firms expressed interest in exploratory drilling last year, but the deadlocked parliament failed to pass legislation required to begin the bidding process.

“Natural gas potentially provides a means to reduce oil product imports and boost power generation capacity,” according to Catherine Hunter. The Syrian crisis has limited overland gas deliveries, causing Lebanon to rely on more expensive energy imports via its Mediterranean ports.

A new cabinet brings some hope that Lebanon’s exploration rights auction will proceed on schedule. The first blocks are set to be sold in April. And while potential offshore development could help stabilize Lebanon’s access to energy, the auction has been subject to regional criticism.

Israel claims that a portion of the area Lebanon is seeking to explore is part of its “exclusive economic zone,” creating a greater Lebanese-Israeli dispute over their maritime border. The disputed region, which covers over 300 square miles, may potentially contain the exploratory zone’s most significant hydrocarbon resources.

If Lebanon can work to mediate the dispute over its maritime border, while maintaining the strength of its banking sector, then there is hope for its economy to improve. The significance of these key industries greatly outweighs that of the newly formed cabinet.

The greater issue of dealing with the impact of the Syrian crisis, however, will likely wait until after the formation of yet another new government later this year.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.