Lebanon: Impact of the Syrian war’s next stage

Lebanon: Impact of the Syrian war’s next stage

The Syrian Civil war is nearing its end game. This article, part four of a five-part series on the regional impact of this news, examines the current economic obstacles and opportunities for Lebanon.   

Part 4: Lebanon

Lebanon and Syria are neighbours with a dynamic relationship and a complicated history. Economically, Lebanon has bigger and more important trading partners. However, Syria still matters immensely given its status as Lebanon’s only friendly direct neighbour, with Israel being the only other country it shares a border with. Lebanon’s place on the Mediterranean sea allows it to utilize shipping lanes and establish trade relationships with European and North African counterparts. It is reliant on Syria for land trade and trucking products to the Arabian peninsula. Lebanon also has the closest port city for much of Syria, including Damascus.

Since 2014, Lebanon has hosted roughly 948,000 Syrian refugees as registered by the UNHCR. They are present throughout the country but are concentrated mainly in Bekaa, Beirut, and a couple other areas. During the conflict many of the wealthier Syrians moved to Lebanon and purchased property and homes in the country, bolstering the real estate market.

Syria’s economic impact on Lebanon

In 2010, 3.1% of Syria’s exports, amounting to roughly $375 million, went to Lebanon. Lebanon, a country of roughly 4 million people in 2010, was the 11th biggest importer of Syrian goods at that time. Generally, Lebanese trade with Syria has fluctuated from year-to-year since 2010 as it still remains an important trade partner and a lifeline for the Assad regime. Lebanon’s annual GDP growth from 2007 – 2010 hovered around 9%. However, in 2011 it dropped to 0.9% and has not surpassed 2.5% annual GDP growth since then, due in large part to the conflict on its border. Lebanon has a staggering amount of public debt and its poverty rate has risen by almost two-thirds since 2011.

As previously stated, Syrian roads and trucking routes are critical for Lebanese exports to the Gulf and for regional trade, in general. Since many of these routes were no longer available due to the conflict, Lebanese traders had to shift operations and ship more of their goods via the Mediterranean Sea. This made trade more inefficient and time-intensive, causing profit margins to shrink. The Syrian conflict’s impact on the Lebanese economy has not been positive.

Lebanon’s political relationship with Syria

Relations between the two have been fragmented since the earliest days of independence from France. Syrian troops occupied much of Lebanon for 30 years beginning in 1976. Furthermore, it was suspected of playing a role in the assassination of former Lebanese prime minister Rafiq al-Hariri in 2005.

However, in recent years the Assad regime and elements of Lebanon’s government, notably the political/military group known as Hezbollah, have grown closer. Hezbollah or their aligned-politicians won 70 of 128 seats in the 2018 Lebanese parliamentary elections, further entrenching its role in the political system. Both the Assad regime and Hezbollah are highly influenced by Iran and supported by Iranian proxy forces. For much of Hezbollah’s existence, it has relied on Iran for military, political, and financial assistance. While the Assad regime has Iran to thank for its own survival throughout the current civil war.

Hezbollah has 7,000 to 10,000 troops stationed in Syria supporting the Assad regime. On April 30, 2013, Hassan Nasrallah, leader of Hezbollah, stated that friends of Syria would not let the country “fall into the hands” of the United States, Israel, or jihadi groups. He later added Syria “is our battle, and we are up to it.” Hezbollah is deeply invested in Syria remaining under Assad’s control. It receives the majority of its goods from Iran via land routes through Syria, which grew more important recently as Turkey cracked down on Hezbollah shipments through its territory.

Lebanon’s Economy Today

Generally, the economy is facing many challenges, notwithstanding the conflict happening on its border. Unemployment, especially within the youth bracket, is high and public finances are weak. Outside parties like the World Bank, European Bank for Reconstruction and Development, and Saudi Arabia have pledged economic assistance and loans for Lebanon’s Capital Investment Plan. However, the economy still needs to implement difficult structural reforms to reduce its debt and tackle rising poverty.

The services sector, especially banking, dominates the Lebanese economy. This sector has always been held up by the large Lebanese diaspora that has for many years poured remittances back into the country. This was attracted by high-interest rates and confidence in the country. Instead of putting this money to use by investing in various businesses, these deposits have primarily been used to offset national debt. The banking sector will continue to rely on deposit inflows. The United States and partners have also increased pressure on the Lebanese banking sector, making it clear that support for sanctioned entities or individuals in Syria would lead to penalties.

As of September 2015, 41% of bank lending was to real-estate related sectors. The Central Bank of Lebanon (BdL) has policies in place to stimulate investment and lending to the real estate sector. This includes subsidized loans for middle-class households and recently lowered bank reserve requirements. However, all of this means that the Lebanese economy is significantly exposed if the real estate market sees a downturn. There are signs of positive things to come, not limited to the de-escalation in regional instability. However, Lebanon also faces high public debt, rising poverty, and a government that will have difficulty pushing through tough reforms.

Tourism and energy demands

Tourism and hospitality are another critical part of the services sector, with foreign tourists making up a large majority of tourism spending. According to research by Bankmed, 86% of tourism and travel spending in Lebanon can be attributed to foreign visitors. In a country where direct and indirect tourism and travel was responsible for 338,600 jobs and 19% of GDP in 2016, this is quite important. This sector has slowly started to pick up again since its biggest down year in 2014. The number of non-Arab tourists in the first eight months of 2017 increased by 11.8% year over year. Furthermore, Saudi Arabia is poised to end its travel advisory, in place since 2013, against going to Lebanon. Lebanon is poised to see a continued uptick in tourism and travel with greater political and security stability.

Lebanon is believed to have a significant amount of offshore natural gas reserves that are untapped. In 2018, it launched a search for those oil and gas reserves. It approved an exploration plan presented by an international consortium, with hopes that drilling for those resources will begin in 2019. In 2017, the state spent 13% of its primary expenditures, $1.3 billion, on subsidizing state power generation. The electric sector is itself responsible for 40% of Lebanon’s fiscal deficit. If Lebanon can find and extract energy in its own territory that could be a big boost for the economy and its domestic energy needs.

Opportunities to engage with Syria

Lebanese traders were very resilient in maintaining trade with Syrian partners, more so than many other neighbouring countries. This is likely due to the fact that Assad maintained control over much of the territory bordering Lebanon, including Damascus, for most of the conflict. Since many of the most powerful entities in Lebanon, like Hezbollah and its supporters, have strong relations with the Assad regime this worked in their favour. As Assad waged war on his people, many Lebanese traders were able to continue business relations.

Lebanese foodstuff exports to Syria increased since the start of the conflict. Syria will continue to rely on these imports since much of its agricultural industry has been damaged. Like Jordan, Lebanon too can play an integral role as Syria attempts to restart its agricultural industry and rebuild supply chains. However, as opposed to Jordan, agriculture is a very small part of the economy. Therefore, it will likely perform this role by being a through point for foodstuff that is imported from abroad.

If Syria begins to rebuild industry and the manufacturing sector it will find a Lebanese market that will likely be very interested in rejuvenating trade ties. These goods are easy for Lebanese traders to obtain, the historical ties exist, and relationships between businesses can be maintained due to the geography.

Opportunities to engage with the region

If the conflict continues to wind down and overland roads and a substantial amount of trade routes open again, it will be a boon for Lebanese exports to the Arab region. Exports to the Arab region were substantial and reportedly made up 20% of total Lebanese exports. As routes become safer, merchants will be able to move away from shipping goods via the Mediterranean Sea. Following that, the lower costs of overland transportation will kick in and profit margins will rise as will opportunities for more trade.

In terms of tourism, Arab visitors (excluding Syrians) to Lebanon made up 53% of tourists in 2010. Many of these tourists came through overland routes via Syria, which is now difficult to traverse. As this conflict winds down tourists from the region will have an easier time travelling to Lebanon and this will help tourist numbers to continue to rebound. The Nassib border between Jordan and Syria is now open and this means there are more travel options for people of the Gulf that want to go by land to Lebanon.

Conclusion

Lebanon is dealing with the impacts of massive refugee inflows, high levels of violence in a neighbouring country, and economic pressures from structural issues. The easing of conflict in Syria will help ease some of the conflicts plaguing the country and offer more opportunities for it to more effectively allocate capital. However, it will not be a massive game changer for Lebanon.

Before and during the war Lebanese banks had many subsidiaries that operated in Syria. Many of these banks experienced significant decreases in profit because of failed loans. This is a clear by-product of the conflict, which ravaged the business and investment environment of Syria. These banks will be able to begin re-investing in Syria and their loans will perform better than the years during the conflict. With Syria’s reconstruction estimated to cost in the tens of billions, there will be an enormous opportunity to allocate capital for projects that fit into an organization’s risk profile.

Lebanon’s tourism numbers will continue to rebound and bank subsidiaries operating in Syria will be more profitable. However, its energy issues, high public debt, and a fragile political system will continue to weigh on the country and its future. Changes in trade with Syria and opportunities for investment won’t have a major impact on Lebanon.

Tags: Assad, Lebanon, Syria

About Author

Alexander Werman

Alexander Werman is a Middle East analyst currently studying Arabic in Amman, Jordan and interning at The Jordan Times. He previously interned at the Middle East Security Initiative in the Atlantic Council, the U.S. Department of State, Search for Common Ground, and the American Foreign Policy Council. His research focuses on security challenges and governance in fragile states in the Middle East and North Africa. He graduated from George Washington University with a Master's in Security Policy Studies in May 2018.