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French Version

War added $1 billion to public debt, finance minister says

Government will seek additional loans

Lebanon's public debt is expected to rise to $41 billion by the end of the year as a result of the Israeli bombardment and continued air and naval blockade, Finance Minister Jihad Azour said on Wednesday.

Azour said the cost of business and trade activity during the war was $50 million per day.

"The war and blockade has an enormous impact not only on the infrastructure and volume of businesses but the finances of the government as well," Azour told The Daily Star.

Israel's relentless bombing of the country's infrastructure and the eight-week blockade dealt a severe blow to all segments of the economy, which was finally recovering from the blow it took following the assassination of former Prime Minister Rafik Hariri in 2005.

Azour said that the government will come up with a global approach to the problem which will focus on ways to cut the size of the public debt through additional soft loans.

Indirect losses from the war, Azour said, total far more than the direct losses, which he put in the range of $3 billion to $3.5 billion. Some business groups have estimated the value of indirect losses at more than $7 billion, but Azour said that figure's accuracy is questionable.

The Tourism Ministry said that the sector lost more than $2 billion in expected revenues during the summer season.

Azour said the money and assistance pledged to Lebanon at the August 31 Stockholm donor conference and commitments from Saudi Arabia and Kuwait amount to more than $2 billion.

Apart from these pledges, the Finance Ministry received a total of $103 million in cash from governments, multilaterals, companies, individuals, embassies and organizations.

The Finance Ministry is expected to publish a detailed report on all assistance received by NGOs and other groups.

Part of the massive medical and food donations that were airlifted, transported by trucks and shipped by UN agencies was sent to the Higher Relief Committee that was set up by the government during the war.

"The country's GDP fell by 7-8 percent and if the blockade continues we fear that it may be higher," Azour said.

He added that the government wants to have a viable economic program and for this reason it was important to draw up a new plan.

"The economic draft program which was introduced a few months ago will be revised due to the new developments."

Azour said that before the war, the Finance Ministry had estimated that the public debt would reach $40 billion in 2006. Now the debt will hit $41 billion, he said.

"We expect to loose $150 million in revenues a month due to the blockade," Azour said. Beirut port represents the bulk of the government's customs and VAT revenues, he added.

He said that the Finance Ministry will attend the International Monetary Fund meeting in Singapore in September with a clear plan for financial assistance which will be mainly aimed at cutting the size of the debt.

The government of Prime Minister Fouad Siniora was hoping to obtain $7 billion in soft loans from the donor states before the war broke out. The minister declined to say if the government will seek more soft loans from the donor states.

"Our expectation before the war broke out was that Lebanese exports would go up by 50 percent this year," Azour said. "The GDP has fallen by 7-8 percent in one month and a half."

Lebanon's GDP is a little more than $18 billion.

Azour stressed that government spending is expected to rise considerably after the government decided to draft more recruits for the army and security forces.

"In addition, the government is financing the deployment of 15,000 Lebanese soldiers in the south."

He added that the big primary surplus the Finance Ministry achieved before the war has allowed the government to finance many operations during the conflict.

"Our primary surplus up to June of this year was five times higher than in the same period of last year," he said.

"It is very important today not only to think of rebuilding the infrastructure. We have to think globally on how to reactivate the economy and how to generate growth."


Losses from the 34-day war: how to evaluate and minimize them

Commentary by Nohad Baroudi
The war inflicted upon Lebanon was a tragedy of considerable proportions. A personal tragedy for practically each member of our national community whose life was disrupted and whose ambitions were frustrated. A tragedy for a nation that was, before being engulfed by violence and destruction, set upon a path of sustainable progress, well-placed to benefit from the rapid development enjoyed by the Arab world consequent to the rise in oil prices.

The 34-day war caused both immediate and future losses.

Immediate losses are evaluated for both production and capital.

Production losses are best estimated in terms of GDP (Gross Domestic Product), which summarizes the flow of revenue from all business and government activities during the year. The state of the economy on August 14 as compared to July 11 suggests that GDP growth initially forecast for 2006 (5 percent) would be replaced by "negative" growth of the same order, thus a net loss in GDP of some $1.8 billion, as indicated below.

Capital losses reflect the damage inflicted to property (physical capital) and to people (human capital).

Losses in physical capital concern the destruction of a significant part of the economic and social infrastructure, both public and private (roads and bridges, ports and airports, energy and water, telecoms, schools and hospitals, agriculture, factories, commercial institutions, offices, residential buildings, the environment, etc.). On the basis of available statistics (100 bridges, 500 kilometers of road, 5 million square meters of dwellings and offices, 9,000 firms, to mention only these), a figure of $3 billion is a plausible estimate.

Losses in human capital pertain to the inability of the work force to perform properly due to loss of life, permanent or temporary disability, displacement (appreciative figures: 1,000 dead, 4,000 wounded, 700,000 persons displaced internally, 225,000 persons out of the country). Such losses are reflected in the losses in production and have already been taken into account in the loss in GDP, which also includes (avoid double counting!) such other items as the loss in the proceeds from tourism and the negative effects of the air and sea blockade imposed by Israel.

So, nearly $5 billion for immediate losses. What about spillovers to the future?

Future losses may prove to be important. To grasp the seriousness of this problem, let us recall a simple economic concept: Production depends mainly on the availability of capital and labor. The more the physical capital is in good shape and the more the active labor force, the more the production, thus the more the GDP. Assuming that reconstruction financing would be fully made available (aid already received or pledged - Saudi Arabia, Kuwait, the Stockholm conference, and others - as well as aid in the pipeline, are hopeful indicators), it is the speed with which physical and human capital are rehabilitated that will determine the date of the restoration of GDP to the level originally expected for 2006 (GDP of 2005 plus 5 percent). And any undue delay will adversely affect the GDP for 2007 and beyond.

Let's look at a simple example to illustrate this last point:

Assume GDP for 2005 at $18.2 billion, GDP expected for 2006 (without the war) at $19.1 billion (5 percent growth) and for 2007 at $20.1 billion (another 5 percent growth). Assume also that the war would result for 2006 in a GDP reduction by 5 percent from the level reached in 2005, that is $17.3 billion, thus putting the opportunity loss at $1.8 billion, as mentioned at the beginning of these remarks. If we fail, during the remaining months of this year, to even partly catch up with the war loss, so that 2006 GDP would in fact end up at $17.3 billion, then the 2007 GDP (still assuming 5 percent growth) would not exceed $18.2 billion which, compared to the "no war" scenario ($20.1 billion), would result in an opportunity loss of ... $1.9 billion (an increase of 5 percent over the 2006 loss of $1.8 billion). And this opportunity loss would continue to rise exponentially for 2008 and beyond.

This is the bad scenario, but the worst-case scenario would be not to achieve 5-percent growth in 2007 as assumed, but no growth at all due to political and administrative bottlenecks that unduly delay physical and human capital rehabilitation, thus leading to an opportunity loss in GDP of $2.8 billion in 2007.

Worst-case scenario? Yes, but not very unlikely. Thus, the sooner we rebuild our physical capital and restore our human capital, the fewer losses we will incur in the future. For example (optimistic scenario), if we catch up with war losses in no more than six months and reach $19.1 billion (the no-war scenario for 2006) by mid-2007, and if the second half of 2007 witnesses an accelerated growth (say 7 percent instead of 5 percent in annual terms) due, among other factors, to induced effects on GDP by fresh injections of money for consumption purposes (the expenses alone of UNIFIL, which would have increased its staff from 2,000 to 15,000, justify this additional 2 percent growth), then the opportunity loss of GDP for 2007 would be $0.3 billion instead of the $1.9 billion predicted in the bad scenario and the $2.8 billion in the worst-case scenario.

Optimistic scenario? Not really, provided we put in place, on the physical capital rehabilitation side, a good structure for planning, execution and control - a super CDR (Council for development and Reconstruction), super-assisted by the main sources of external financing? - in order to expand as much as possible the absorptive capacity of the public sector, and provided we accelerate, on the human-capital restoration side, the return and reintegration of the active labor force, public and specially private, but this latter condition requires a prerequisite: confidence in the future of Lebanon.

The restoration of confidence in the future of the country, and the consolidation of confidence in the state, require urgent and effective actions taken by this government, which has the backing of Parliament and of the international community, at the political, security and administrative levels.

Actions at the economic, financial and monetary levels are also required. Let us not forget that the Lebanese economy is based on private initiative, and the private sector has been and still remains responsible for 85 percent of GDP.

Consequently, the reconstruction effort will not proceed steadily and the economy will not prosper until the private sector resumes its activities and investments (from both domestic and foreign sources) with vigor and intensity.

Nohad Baroudi is a former secretary general of the Council for Development and Reconstruction

Beirut 07-09-2006
Osama Habib
The Daily Star

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