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Last Updated: Monday, 24 July 2006, 22:06 GMT 23:06 UK
Lebanon economy reels as attacks continue
By Jorn Madslien
Business reporter, BBC News

In just two weeks of sustained Israeli attacks, the Lebanese economy has been knocked so far back it may never fully recover.

Man cries after the bombing of a telecoms complex north of Beirut
Gains from years of rebuilding have been wiped out in two weeks

Almost all the war-torn country's bridges and 80% of its major roads have been crushed. Airports and ports, telecoms sites and TV towers, schools and hospitals have been bombed.

"The effect on the economy is going to be very, very drastic," says BLC Bank's chairman, Shadi Karam.

The damage to the country's infrastructure so far amounts to more than $1bn (540m), economists estimate.

Yet the total cost could be much larger.

Much of the $50bn that has been injected into the country during the last decade to rebuild it after the 1975-1989 civil war may have been wasted if the onslaught also brings about the collapse of Lebanon's still fragile democracy, along with any faith in the nation's new beginning.

Despair

Rebuilding the infrastructure will prove a huge task. Restoring the confidence of the international community could prove an even greater challenge.

Mdeirej bridge
Rebuilding the infrastructure may prove easier than restoring confidence

Traders at the Beirut stock exchange, which has been closed for two weeks, are still talking tough, insisting that the market will pick up once the bombs stop falling.

Yet, hard on the heels of the thousands of fleeing tourists and expatriates, investors were among the first to depart.

Eye witnesses tell stories of how construction sites that until recently were abuzz with builders have gone quiet, their foreign backers loath to pay for the construction of office blocks or shopping centres that could soon go up in smoke.

Nobody now dares hope for a quick return to the early 1970s, when Lebanon was still a Middle Eastern banking and trading hub.

The tourism industry has also been paralysed.

Hoteliers' and tour operators' high hopes for the arrival of more than 1.6 million tourists this year have turned to despair.

A ceasefire overseen by UN peace keepers would not suffice to bring the tourists back; few would want to lie on beaches patrolled by blue berets.

No reforms

Economic growth of 6%, as seen recently, is no longer possible.

Fleeing tourists are helped by a soldier from the United Nations Truce Supervision Organization (UNTSO)
Tourists are unlikely to be mollified by the presence of blue berets

Optimists talk of 2%, perhaps 3% growth, though even such modest targets could be further downgraded if the current conflict continues.

With foreigners and investors fleeing and growth stalling, the government is set to lose out on $600m in earnings and the economy will suffer a $2bn hit, according to Lebanese economist Marwan Iskander.

This is not small fry, given that the country's gross domestic product in 2005 amounted to just less than $24bn.

"We are talking fairly enormous losses here," says Mr Iskander.

Consequently, Lebanon will find it increasingly hard to service its $35bn debts, and the government will probably have to shelve its plans for economic reform, which were supposed to include the privatisation of its power and telecoms sectors, tax rises and tighter government purse strings.

"Forget reforms for the moment," says Mr Karam of BLC Bank. "We will not be in the mood for a while, possibly not for a long time to come."

Donations needed

Until that day, anybody but the most gung-ho investors will look elsewhere in the world for returns.

Indeed, even the Lebanese government will find it harder to borrow money on the international financial markets, where renowned credit rating agencies have downgraded its outlook for Lebanon's ability to repay debts.

After they understood that Israel will stick to its macroeconomic policies, the markets started to return to prior levels
Bank of Israel governor Stanley Fischer

Giant cash injections from the international community remains Lebanon's only real hope of a relatively swift recovery.

"We will definitely need $3bn in assistance in the very short term in the nature of donations rather than loans," says Mr Iskander.

"Much depends on the speed with which reconstruction can proceed, which depends on the speed and size of assistance."

In the past, donor countries have actively used their contributions as levers to ensure economic reform is carried out, though such conditionality may not be practical now.

"I hope the mood in the donor countries, which was not to give Lebanon a penny unless it reforms, will tone down," says Mr Karam.

As is often the case in the world of economics, self-interest rather than altruistic arguments are most likely to win over the donors.

Growth in the global economy could slow dramatically as a direct consequence of the spike in oil prices, that has itself partly been caused by the regional crisis.

Last week, US Federal Reserve Chairman Ben Bernanke said "the increase in energy prices is clearly making the economy worse off both in terms of real activity and in terms of inflation".

For the international community, bailing out Lebanon as part of efforts to calm the situation in the Middle East, could prove a more tempting option than allowing the situation to escalate and thus cause a lengthy, global economic downturn.




SEE ALSO
Lebanon's fragile economy suffers
17 Jul 06 |  Business

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