A political shock throws Lebanon’s economy back into crisis

Al-Hariri’s resignation has sparked concern that Riyadh and its Gulf allies would expel Lebanese workers, as they did with Qatar, and stall investment plans

By Philip Issa  /  AP, BEIRUT

Wed, Nov 15, 2017 - Page 9

Just when things were starting to look up for Lebanon’s economy, a new political crisis threatens to send it crashing down again.

Lebanese Prime Minister Saad al-Hariri’s shock resignation could unravel the first steps in years toward injecting some cash and confidence in Lebanon’s anemic economy. Already, the crisis is putting at risk multibillion-dollar plans to rebuild decaying road and electrical and communication networks, and get the oil and gas sector moving.

Lebanon has long been buffeted by blows from the great-powers rivalry between Saudi Arabia and Iran. However, its economy sputtered on under a tacit understanding among the regional heavyweights and their local proxies that left Lebanon on the sidelines of that contest.

That might have changed on Nov. 4, when the Saudi-aligned al-Hariri announced his resignation in a televised statement from the kingdom’s capital, Riyadh, saying Hezbollah, Iran’s proxy in Lebanon, had taken the nation hostage.

It was an unexpected announcement from the prime minister, who formed a coalition government with the militant group less than a year ago.

Since then, the news has only gotten worse. Saudi Arabia, which feels it has been humiliated by Hezbollah’s expanding influence in Syria and Iraq, says it will not accept the party as a participant in any government in Lebanon.

Saudi Arabia, Bahrain, Kuwait and the United Arab Emirates all ordered their citizens out of Lebanon, and the Lebanese are wondering and worried about what is to come.

“We don’t know how things will escalate,” said Rida Shayto, an associate director at the pharmaceutical manufacturer Algorithm, which does half its sales to the Gulf.

The developments have stunned the Mediterranean nation, which once looked to Saudi Arabia as a pillar to its own stability. The kingdom brokered the Taif agreement in 1989 that ushered in peace for Lebanon after 15 years of civil war.

The kingdom has plowed decades of investment into Lebanon, opened markets to trade, and allowed generations of talented and ambitious Lebanese to work in its oil-based economy.

The concern now is that Saudi Arabia and other Gulf nations will throw out Lebanese workers, as they did with Qatar this summer in a rage over that nation’s perceived closeness to Iran.

About 220,000 Lebanese work in Saudi Arabia and send back close to US$2 billion in remittances each year, said Mounir Rached, a senior economic adviser to the Lebanese Ministry of Finance.

Lebanese are hoping Saudi Arabia will be too wary of the negative impact on its own economy from such a mass expulsion. Many Lebanese hold managerial positions, including in the kingdom’s all-important oil sector, and it would take time to refill the posts.

An expulsion would also undermine decades of Saudi efforts to cultivate ties with Lebanese Sunnis.

“I think those who are invested in Lebanon are not going to come and destroy everything that they did in terms of relationships and associations and credibility,” said Kamel Wazni, an economist and sometimes adviser to al-Hariri’s government.

However, the kingdom and its powerful crown prince, Mohammad bin Salman, who has made his name by dramatic — or reckless, as his critics put it — moves, cannot be seen as doing nothing, said Randa Slim, a Lebanese analyst at the Washington-based Middle East Institute.

“They have locked themselves into an escalatory path without giving themselves an exit,” she said.

The kingdom could expel Lebanese Shiites and Christians, she said.

Shiites are Hezbollah’s constituency and some Christian parties have allied with it.

They number 10,000 to 20,000 in Saudi Arabia, Rached said.

As it is, the biggest threat now is a retreat to the political paralysis that has crimped growth since 2011.

Lebanon, once a beacon of free market growth and joie de vivre living, was paralyzed for years over how to respond to the catastrophic civil war consuming its neighbor and trade partner, Syria.

Al-Hariri’s Future Movement, the largest party in parliament, wanted Lebanon out of Syrian affairs, while Hezbollah was sending its militias there to fight on behalf of Syrian President Bashar al-Assad. The political log-jam resulted in Lebanon not having a president for more than two years and no economic vision to attract investment.

Meanwhile, refugees poured into the country — more than 1 million of them, equivalent to a quarter of Lebanon’s population — depressing wages in service and labor sectors.

Al-Hariri became prime minister under a deal that broke the deadlock and allowed the election of a Hezbollah-friendly president. The political breakthrough also brought an end to the stagnation in economic policy. Lebanon passed its first budget since 2005, raising taxes and public salaries, and opening up two oil and gas blocks off its coastline for drilling in a bid to bring in some sorely needed investment.

That project and a US$21 billion investment plan to improve the nation’s woefully inadequate infrastructure are now on ice.

“The council of ministers will not be able to take a decision in the current conditions,” Byblos Bank chief economist Nassib Ghobril said of the gas and oil bills.

The government also needs to find revenues to service a public debt that has reached more than US$75 billion — 140 percent of the GDP, a debt-to-GDP ratio that is among the highest in the world.

A key factor for stability has been the strength of its currency, the pound, pegged at 1,500 Lebanese pounds to the US dollar since the 1990s.

For now, at least, experts believe that seems safe. The central bank holds US$43.5 billion in foreign currency reserves, enough to sustain the peg for one to two decades at the current pace of currency conversions.

There has been a flurry of transactions from Lebanese pound to US dollar among Lebanese accounts, bankers said.

However, as long as the US dollar stays circulating in Lebanon’s already largely dollarized economy, the peg will remain stable.

“I don’t have any concern about the stability of the exchange rate,” Ghobril said.