LEBANON ECONOMIC MONITOR A GEO-ECONOMY OF RISKS AND REWARD Spring 2016 Global Practice for Macroeconomics & Fiscal Management, GMFDR MIDDLE EAST AND NORTH AFRICA REGION The World Bank lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Preface The Lebanon Economic Monitor provides an update activities in Lebanon, including e-copies of this on key economic developments and policies over publication, please visit www.worldbank.org.lb the past six months. It also presents findings from recent World Bank work on Lebanon. It places them To be included on an email distribution list for in a longer-term and global context, and assesses this Lebanon Economic Monitor series and related the implications of these developments and other publications, please contact Nada Abou Rizk changes in policy on the outlook for Lebanon. (nabourizk@worldbank.org). For questions and Its coverage ranges from the macro-economy to comments on the content of this publication, please financial markets to indicators of human welfare contact Wissam Harake (wharake@worldbank. and development. It is intended for a wide audience, org) or Eric Le Borgne (eleborgne@worldbank.org). including policy makers, business leaders, financial Questions from the media can be addressed to Zeina market participants, and the community of analysts El Khalil (zelkhalil@worldbank.org). and professionals engaged in Lebanon. The Lebanon Economic Monitor is a product of the World Bank’s Lebanon Macro-Fiscal Management (MFM) team. It was prepared by Wissam Harake (Country Economist), Samer Matta (Economic Analyst) and Zeina Hasna (Economic Analyst), under the general guidance of Eric Le Borgne (Lead Economist) and Auguste Kouame (Global Practice Manager). Thomas Farole (Lead Economist at GPSJB) and Wissam Harake (Economist at GMF-MENA) authored the Special Focus on industrial zones, while Victor Mulas (Senior Operation Officer, Innovation Labs), and Michael Minges (Senior ICT Consultant) with Elene Allende (ICT Consultant) authored the Special Focus on tech startups. May Ibrahim (Senior Executive Assistant) provided Arabic translation, Nada Abou-Rizk (Program Assistant) provided French translation and Zeina El Khalil (Communications Officer) print-produced the report. The findings, interpretations, and conclusions expressed in this Monitor are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its Preface | 1 The World Bank lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Table of Contents Preface......................................................................................................................................................... 1 EXECUTIVE SUMMARY................................................................................................................................ 6 ‫الملخ�ص التنفيذي‬............................................................................................................................................... 9 Résumé....................................................................................................................................................... 10 Recent Economic and Policy Developments.......................................................................... 12 Output and Demand...................................................................................................................................... 12 Poverty and Labor.......................................................................................................................................... 15 Fiscal Policy.................................................................................................................................................... 16 External Sector............................................................................................................................................... 17 Money and Banking....................................................................................................................................... 18 Financial Markets........................................................................................................................................... 19 Prospects................................................................................................................................................. 22 SPECIAL FOCUS.......................................................................................................................................... 25 Industrial Parks and Special Economic Zones in Lebanon.............................................................................. 25 Abstract.......................................................................................................................................................... 25 Introduction................................................................................................................................................... 25 Industrial Sector Performance – the Macro-Economic Case for Intervention................................................. 26 Growth........................................................................................................................................................... 26 Macro-economic imbalances......................................................................................................................... 27 Spatial Industrial Policy Instruments – An Introduction to Industrial Parks and SEZs..................................... 29 Industrial Parks and SEZs in Lebanon............................................................................................................. 32 Constraints to Manufacturing in Lebanon – Is there a Case for Spatial Industrial Infrastructure?................... 34 Some Messages for Industrial Zone and SEZ Development in Lebanon......................................................... 37 Treat land as a strategic resource................................................................................................................... 37 Select sites carefully, prioritize, and pilot....................................................................................................... 37 Establish a careful collaboration with the private sector................................................................................. 38 Go beyond basic infrastructure...................................................................................................................... 38 Avoid reliance on excessive fiscal incentives.................................................................................................. 39 Consider the opportunities for policy experimentation.................................................................................. 40 Avoid proliferation and ensure coordination.................................................................................................. 41 Tech Startup Ecosystem: The Case of Lebanon.............................................................................................. 42 Abstract.......................................................................................................................................................... 42 Introduction................................................................................................................................................... 42 Tech Startup Ecosystem................................................................................................................................. 43 Markets.......................................................................................................................................................... 44 Spaces............................................................................................................................................................ 46 Business Environment and Support................................................................................................................ 49 Networking.................................................................................................................................................... 50 Funding.......................................................................................................................................................... 51 Impact............................................................................................................................................................ 54 Conclusions................................................................................................................................................... 54 Recommendations......................................................................................................................................... 56 References..................................................................................................................................................... 59 DATA APPENDIX......................................................................................................................................... 60 Selected Special Focus from Recent Lebanon Economic Monitors........................... 61 SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON................................................... 64 Table of Contents | 3 The World Bank List of Figures Figure 1. A deceleration in economic activity in 2015.............................................................................. 13 Figure 2. … despite a rebound in tourism, which nonetheless remains below pre-crisis levels …. .......... 13 Figure 3. Retail trade stabilizes................................................................................................................. 13 Figure 4. … as the real estate sector regresses.......................................................................................... 13 Figure 5. Consumer sentiment is volatile.................................................................................................. 14 Figure 6. Poverty rate highest in the Bekaa and North 2011/12. .............................................................. 14 Figure 7. Fiscal deficit widens in 2015... .................................................................................................. 17 Figure 8. … as debt- to-GDP rises............................................................................................................. 17 Figure 9. Regression in capital inflows exacerbated in 2015... ................................................................. 17 Figure 10. ... inducing a decline in gross foreign reserves at BdL ............................................................... 17 Figure 11. Inflation at a historical low in 2015............................................................................................ 18 Figure 12. Private lending slows….............................................................................................................. 19 Figure 13. Lebanese banks’ sovereign debt exposure increases in 2015... ................................................. 20 Figure 14. ... while deposit growth decelerates.......................................................................................... 20 Figure 15. New deposits at commercial banks affected by regional crisis.................................................. 21 Figure 16. Falling risk premium on Lebanese Eurobonds translated into narrowing spreads…................... 21 Figure 17. Value added for the industrial sector in Lebanon and the world, average for 2000-2015 (Percent of Nominal GDP, current $US)...................................................................................................................... 27 Figure 18. Value added for the industrial sector in Lebanon and comparable countries,............................ 27 Figure 19. Real GDP growth highly volatile................................................................................................ 27 Figure 20. ... reflecting output gap volatility............................................................................................... 27 Figure 21. Exports of merchandize goods for Lebanon and comparable countries, average for 2010-2015 (Percent of nominal GDP).............................................................................................................................. 28 Figure 22. The current account balance for Lebanon and comparable countries, average for 2010-2015 (Percent of nominal GDP).............................................................................................................................. 28 Figure 23. Share of medium- and high-technology activities in manufacturing value added....................... 29 Figure 24. Industrial zone locations............................................................................................................ 33 Figure 25. Top obstacles identified by Lebanese manufacturing establishments*....................................... 35 Figure 26. Unemployment among university educated and education levels among MENA startup founders .................................................................................................................................................. 43 Figure 27. Unemployment among university educated and education levels among MENA startup founders .................................................................................................................................................. 43 Figure 28. Cellphone and internet penetration, 2014................................................................................. 44 Figure 29. Cellphone and internet penetration, 2014................................................................................. 44 Figure 30. Tertiary school enrollment and quality of business schools....................................................... 45 Figure 31. Tertiary school enrollment and quality of business schools....................................................... 45 Figure 32. Beirut Digital District................................................................................................................. 46 Figure 33. Doing business and business constraints, 2015......................................................................... 48 Figure 34. Doing business and business constraints, 2015......................................................................... 48 Figure 35. Broadband pricing and speeds, 2015......................................................................................... 49 Figure 36. Broadband pricing and speeds, 2015......................................................................................... 49 Figure 37. BDL Circular 331, 22 August 2013............................................................................................ 51 4 | Table of Contents lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD List of Tables Table 1. Macroeconomic impact of a 20 pp of GDP fall in remittances................................................... 24 Table 2. Summary of requirements of different forms of industrial parks infrastructure.......................... 31 Table 3. Assessment of electricity constraints identified in Enterprise Surveys (2013)............................ 35 Table 4. Investment groups funding Lebanese startups........................................................................... 52 Table 5. Examples of successful Lebanese startups................................................................................. 52 Table 6. Lebanon tech startup ecosystem SWOT.................................................................................... 55 Table 7. Lebanon: Selected Economic Indicators, 2013-2018................................................................. 60 List of Boxes Box 1. A Simulation for the Economic Impact of Lower Remittances.................................................... 24 Box 2. Lessons learned from international experiences with industrial parks and SEZs........................ 30 Box 3. Provision of off-site infrastructure in Thailand........................................................................... 38 Box 4. A tale of two programs in India.................................................................................................. 39 Box 5. China’s industrial parks - infrastructure ++.............................................................................. 39 Box 6. Using zones to pilot reforms...................................................................................................... 40 Box 7. The conflicts of multiple and overlapping zone regimes - the case of Vietnam......................... 41 Box 8. Creativity meets technology...................................................................................................... 53 Box 9. World Bank tech ecosystem support for Lebanon...................................................................... 56 Box 10. A Central Bank Keen About Tech Startups................................................................................. 57 Box 11. Rapid Tech Skills Training for Employability............................................................................... 58 Box 12. Municipal governments as catalyzers of entrepreneurship ecosystems..................................... 58 List of Key Abbreviations Used bps Basis points H1, H2: First half of the year, second half of the year. 3mma: Three-months moving average pp Percentage points Q1 (Q2, Q3, Q4): First (second, third, fourth) quarter of the year qoq: Quarter-on-quarter sa: Seasonally adjusted saar: Seasonally adjusted, annual rate yoy: Year-on-year lhs, rhs: Left hand side, right hand side (for axis of figures) Table of Contents | 5 The World Bank EXECUTIVE SUMMARY I. The geo-economy presents Lebanon with of the one-off measures that boosted revenues challenges associated with being a nexus for in 2014 (e.g., collection of telecom arrears). As a regional fault lines and risks from its dependence result, the overall fiscal deficit is estimated to have on capital inflows. Despite markedly improved widened by 0.7 percentage points (pp) of GDP in security conditions since the start of 2015, anxiety 2015, while the primary surplus, which excludes over regional turmoil and potential spillover effects interest payments, is estimated to have shrunk by persist. All the while, Lebanon continues to be, by 1.2 pp of GDP. On the external accounts, a broad far, the largest host of Syrian refugees (in proportion contraction in imports, driven by lower oil prices to the population). In addition, the economy’s and a cheaper euro, is estimated to have induced dependence on its diaspora to finance internal and a 3.5 pp of GDP narrowing of the current account external imbalances exposes Lebanon to economic deficit. This, however, was more than offset by and political conditions beyond its influence. Despite lower capital inflows adversely affecting the net these challenges and risks, the political process foreign assets’ position of the country. As a result, remains impaired with the vacant presidency foreign exchange reserves at Banque du Liban (BdL) completing its second year with uncertain prospects declined by 5.4 percent to US$ 30.6 billion by end- of a near-term resolution. On the other hand, a 2015. Less supportively, falling oil prices, along with short-term solution has been found to the garbage the depreciation of the euro, induced price deflation crisis that has left piles of trash uncollected on the in 2015, which at 3.7 percent held down nominal streets across the country since summer 2015. GDP growth, driving the debt-to-GDP ratio higher by 3.1 pp in 2015 to reach 148.7 percent. II. In 2015, improved security conditions have been more than offset by a deteriorating IV. The growth outlook remains subdued as political environment, leading to a further the Syrian conflict, the domestic political impasse, slowdown in an already sluggish economy. Bank and some of the negative effects of falling oil prices staff revised downward the 2015 real GDP growth provide significant headwind. In contrast to the to 1.5 percent from two percent forecast in fall former drags on growth that have been present for 2015. A resurgent tourism sector and sustained the past couple of years, the negative impact of low private lending continued providing a much needed oil prices are a new development for 2016. As fiscal push to the economy. The real estate sector, on the buffers in the GCC countries erode and spending other hand, acted as a drag, with registration fees cuts ensue, remittances to Lebanon and services and cement deliveries contracting in 2015 by 9.4 exports to the GCC (e.g., consulting services) are percent and 8.6 percent, respectively. expected to decelerate. This will impart further strain on the balance of payments that is already III. The decline in oil prices has so far had under pressure due to lower inflows. Consumption, net positive effects on the Lebanese economy, which is partially driven by remittances, will also be freeing up resources to improve both internal negatively impacted, offsetting the initial increase in and external balances. Fiscally, lower oil prices real purchasing power that resulted from lower oil helped lead a decline in transfers to Electricité prices. Overall, we project that growth will inch up du Liban (EdL) in 2015. This, however, was more only marginally to 1.8 percent this year, helped by a than offset by lower revenues due primarily to lack continued resurgence in tourism. Over the medium 6 | Executive Summary lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD term, we expect real GDP growth to be around 2.5 percent. The return to potential output growth critically hinges on a resolution of the conflict in Syria as well as a marked improvement in the political situation in Lebanon. V. Spatial industrial policies, most notably the development of industrial parks and special economic zones, offer Lebanon a viable tool to support increased investment and competitiveness in the industrial sector (Special Focus #1). Under suitable conditions, industrial zones have proven successful in various locations and industries across the world. Benefits can include, the concentration and specialization of infrastructure, regulatory facilitation and specialized customs, trade and financial regimes. VI. The geo-economy also presents an opportunity in the form of tech startup ecosystems, where communities of entrepreneurs interact, becoming a viable source for high-skill job creation in Lebanon (Special Focus #2). Information and Communications Technology (ICT) has dramatically reduced the cost of innovation and market access, allowing small tech entrepreneurs to compete with established businesses. Lebanon’s tech scene is becoming increasingly attractive driven by the example of successful startups that have tapped regional and global markets. Additionally, innovative initiatives by the country’s central bank in facilitating venture capital financing have been notable. Executive Summary | 7 ‫‪The World Bank‬‬ ‫واالت�صاالت ب�شكل ملحوظ في تقلي�ص كلفة االبداع والنفاذ �إلى‬ ‫ما �سمح لأ�صحاب المبادرات ال�صغار في مجال التكنولوجيا‬ ‫ال�سوق‪ ،‬م ّ‬ ‫بمناف�سة الم�ؤ�س�سات القائمة‪ .‬وفي هذا ال�سياق‪ ،‬تزداد جاذب ّية قطاع‬ ‫را �إلى المثل الذي ت�ضربه الم�ؤ�س�سات‬ ‫التكنولوجيا في لبنان نظ ً‬ ‫النا�شئة الناجحة التي ا�ستفادت من الأ�سواق االقليم ّية والعالم ّية‪.‬‬ ‫�إلى ذلك‪ ،‬تجدر الإ�شارة �إلى المبادرات الإبداع ّية من قبل الم�صرف‬ ‫المركزي من �أجل ت�سهيل تمويل ر�أ�سمال ا�ستثماري‪.‬‬ ‫| ‪8‬‬ ‫الملخ�ص التنفيذي‬ ‫‪lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD‬‬ ‫الملخ�ص التنفيذي‬ ‫ة لذلك‪ ،‬انخف�ض معدل احتياطي النقد الأجنبي‬ ‫في البلد‪ .‬ونتيج ً‬ ‫ينطوي االقت�صاد الجغرافي في لبنان على تحديات‬ ‫‪ .i‬‬ ‫في م�صرف لبنان المركزي بن�سبة ‪ 5.4‬بالمئة‪ ،‬ليبلغ ‪ 30.6‬مليار‬ ‫را �إلى موقعه الجغرافي في قلب ال�شروخ والمخاطر‪،‬‬ ‫عديدة نظ ً‬ ‫دى هبوط �أ�سعار النفط‬‫دوالر �أميركي في نهاية العام ‪ .2015‬كما �أ ّ‬ ‫ية الداخلة‪ .‬بالرغم من‬ ‫ب�سبب اعتماده على التدفقات الر�أ�سمال ّ‬ ‫انكما�ش في الأ�سعار بمعدل ‪ 3.7‬بالمئة‬ ‫ٍ‬ ‫وانخفا�ض قيمة اليورو �إلى‬ ‫تح�سن الظروف الأمن ّية منذ بداية العام ‪ ،2015‬تبقى الم�شاغل �إزاء‬ ‫ّ‬ ‫ما �أبط�أ نمو الناتج المحلي الإجمالي ورفع معدل‬‫في العام ‪ ،2015‬م ّ‬ ‫ً‬ ‫الظروف االقليم ّية و�آثار انت�شار الأزمة المحتملة قائمة‪ .‬وال يزال‬ ‫الدين �إلى الناتج المحلي الإجمالي بن�سبة ‪ 3.1‬نقطة مئوية في عام‬ ‫حد كبير‪� ،‬أكبر دولة م�ست�ضيفة لالجئين ال�سور ّيين (ن�سب ً‬ ‫ة‬ ‫لبنان‪� ،‬إلى ٍ‬ ‫‪ 2015‬ليبلغ ‪ 148.7‬بالمئة‪.‬‬ ‫كانه)‪� .‬إلى ذلك‪ ،‬يعتمد االقت�صاد اللبناني على المغتربين‬ ‫�إلى عدد �س ّ‬ ‫ما يعر�ض البلد‬ ‫اللبنانيين لتمويل االختالالت الداخل ّية والخارج ّية‪ ،‬م ّ‬ ‫را �إلى النزاع ال�سوري‪،‬‬ ‫ة نظ ً‬ ‫تبقى �آفاق النمو محدود ً‬ ‫‪ .iv‬‬ ‫�إلى ظروف اقت�صاد ّية و�سيا�س ّية ال ُيمكنه ال�سيطرة عليها‪ .‬وفي �ضوء‬ ‫ية‬ ‫ية‪ ،‬وظهور بع�ض الآثار ال�سلب ّ‬ ‫ية المحل ّ‬ ‫وا�ستمرار المحنة ال�سيا�س ّ‬ ‫ة‪ ،‬فالفراغ‬ ‫هذه التحديات والمخاطر‪ ،‬تبقى العمل ّية ال�سيا�س ّية م�شلول ً‬ ‫تجاه مُعاك�س للنمو‪ .‬في‬ ‫لتدهور �أ�سعار النفط‪ ،‬ما يع�صف في ا ّ‬ ‫الرئا�سي يطوي عامه الثاني من دون تبلور �أي بريق �أمل ّ‬ ‫للتو�صل �إلى‬ ‫مقابل الأعباء ال�سابقة التي تُثقل كاهل النمو والتي كانت قائمة‬ ‫حل ق�صير الأمد لأزمة‬ ‫التو�صل �إلى ٍّ‬ ‫تم ّ‬ ‫ل و�شيك‪ .‬من جهة �أخرى‪ّ ،‬‬ ‫حّ‬ ‫را‬ ‫وً‬ ‫منذ ب�ضعة �أعوام‪ُ ،‬يعتبر الوقع ال�سلبي لتراجع �أ�سعار النفط تط ّ‬ ‫مته‬‫قمامة في ال�شوارع في البلد بر ّ‬ ‫دت �إلى تراكم ال ُ‬ ‫النفايات التي �أ ّ‬ ‫دات المالية في دول مجل�س‬ ‫جديدً ا للعام ‪ .2016‬مع ت�آكل الم�ص ّ‬ ‫منذ �صيف ‪.2015‬‬ ‫قع �أن‬ ‫التعاون الخليجي والتخفي�ضات في الموازنة الناجمة عنه‪ُ ،‬يتو َّ‬ ‫تتراجع الحواالت المال ّية �إلى لبنان و�صادرات الخدمات �إلى مجل�س‬ ‫ية تدهور‬ ‫تح�سن الظروف الأمن ّ‬ ‫في العام ‪ ،2015‬قابل ّ‬ ‫‪ .ii‬‬ ‫ما يفر�ض مزيدً ا من‬ ‫ال‪ ،‬خدمات ا�ست�شار ّية)‪ ،‬م ّ‬ ‫التعاون الخليجي (مث ً‬ ‫ما �أدّى �إلى تباط�ؤ �أكبر لالقت�صاد الك�سول‪ .‬وقد‬ ‫البيئة ال�سيا�سية‪ ،‬م ّ‬ ‫ة لل�ضغوط‬ ‫ال�ضغوط على ميزان المدفوعات الذي هو �أ�ص ً‬ ‫ال عر�ض ً‬ ‫ّ‬ ‫�أعاد البنك الدولي النظر في توقعات النمو الفعلي لإجمالي الناتج‬ ‫ب�سبب انخفا�ض تدفق الإيرادات‪ .‬كما �سيت�أ ّثر اال�ستهالك القائم‬ ‫قعات خريف‬ ‫توجه تراجعي‪ ،‬مقارن ً‬ ‫ة بتو ّ‬ ‫المحلي للعام ‪ 2015‬وفق ّ‬ ‫ب�شكل جزئي على الحواالت المال ّية �سل ًبا‪ ،‬في مواجهة الزيادة الأول ّية‬ ‫ر انتعا�ش‬‫العام ‪ ،2015‬ليكون النمو بن�سبة ‪ 1.5‬في المئة‪ .‬كما ا�ستم ّ‬ ‫في القدرة ال�شرائ ّية الفعل ّية الناجمة عن تراجع �أ�سعار النفط‪.‬‬ ‫القطاع ال�سياحي وا�ستدامة القرو�ض الخا�صة في منح االقت�صاد‬ ‫قع �أال يزداد النمو �سوى ب�شكل هام�شي ليكون بن�سبة‬ ‫وب�شكل عام‪ ،‬نتو ّ‬ ‫كل قطاع العقارات عب ًئا على‬ ‫االندفاع الالزم‪ .‬ومن جهة �أخرى‪� ،‬ش ّ‬ ‫‪ 1.8‬في المئة في هذا العام‪ ،‬بدعم من قطاع ال�سياحة الذي ي�شهد‬ ‫االقت�صاد‪ ،‬مع تق ّل�ص ر�سوم الت�سجيل وعمل ّيات ت�سليم الإ�سمنت‬ ‫قع �أن يبلغ نمو �إجمالي‬ ‫ال‪ .‬على الأمد المتو�سط‪ ،‬يتو َّ‬ ‫انتعا�شا متوا�ص ً‬ ‫ً‬ ‫بن�سبة ‪ 9.4‬و‪ 8.6‬في المئة على التوالي‪.‬‬ ‫الناتج المحلي الفعلي حوالى ‪ 2.5‬في المئة‪ .‬ويعتمد العائد على نمو‬ ‫والتح�سن‬ ‫ّ‬ ‫الإنتاج المحتمل ب�شكل كبير على ت�سوية النزاع في �سوريا‬ ‫حتى يومنا هذا‪ ،‬كان لتدهور �أ�سعار النفط �آثار �إيجاب ّ‬ ‫ية‬ ‫‪ .iii‬‬ ‫الملحوظ في الو�ضع ال�سيا�سي في لبنان‪.‬‬ ‫�صافية على االقت�صاد اللبناني‪ ،‬مع تخ�صي�ص الموارد من �أجل‬ ‫دى‬ ‫ية‪ .‬على الم�ستوى المالي‪� ،‬أ ّ‬ ‫تح�سين الموازين الداخل ّ‬ ‫ية والخارج ّ‬ ‫ية‪ ،‬وب�شكل خا�ص تطوير المناطق‬ ‫ود ال�سيا�سات ال�صناع ّ‬ ‫تز ّ‬ ‫‪ .v‬‬ ‫هبوط �أ�سعار النفط �إلى انخفا�ض في التحويالت �إلى �شركة كهرباء‬ ‫ية الخا�صة‪ ،‬لبنان ب�أدا ٍة قابلة لال�ستمرار‬ ‫ية واالقت�صاد ّ‬ ‫ال�صناع ّ‬ ‫لبنان في العام ‪ .2015‬لكن‪ ،‬قابل ذلك انخفا�ض في االيرادات‪ ،‬يعود‬ ‫ية في القطاع ال�صناعي (تقرير‬ ‫من �أجل دعم اال�ستثمار والتناف�س ّ‬ ‫ب�شكل �أ�سا�سي‪� ،‬إلى �إجراءات ا�ستثنائ ّية رفعت االيرادات في العام‬ ‫خا�ص ‪ .)1 #‬على �ضوء ظروف م�ؤاتية‪� ،‬أثبتت المناطق ال�صناع ّية‬ ‫أخرات االت�صاالت ال�سلك ّية والال�سلك ّية)‪.‬‬ ‫ال‪ ،‬جمع مت� ّ‬ ‫‪( 2014‬مث ً‬ ‫دة مواقع و�صناعات عبر العالم‪ .‬وت�شمل االمتيازات‬ ‫نجاحها في ع ّ‬ ‫در ازدياد العجز المالي العام بن�سبة ‪ 0.7‬نقطة‬ ‫ونتيج ً‬ ‫ة لذلك‪ُ ،‬يق َّ‬ ‫وتخ�ص�صها‪ ،‬والت�سهيالت النظام ّية‪ ،‬والجمارك‬ ‫ّ‬ ‫كز البنى التحت ّية‬ ‫تر ّ‬ ‫در تق ّل�ص‬ ‫مئو ّية من �إجمالي الناتج المحلي في العام ‪ ،2015‬بينما ُيق َّ‬ ‫المتخ�ص�صة‪ ،‬والنظم التجار ّية والمال ّية‪.‬‬ ‫ّ‬ ‫الفائ�ض الأولي الذي ي�ستثني ت�سديدات الفوائد بن�سبة ‪ 1.2‬نقطة‬ ‫مئو ّية من �إجمالي الناتج المحلي‪ .‬بالن�سبة �إلى الح�سابات الخارج ّية‪،‬‬ ‫ة على �شكل نظم‬ ‫كل االقت�صاد الجغرافي فر�ص ً‬ ‫ي�ش ّ‬ ‫كما ُ‬ ‫‪ .vi‬‬ ‫در ب�أنّ التق ّل�ص الوا�سع في الواردات‪ ،‬الناجم عن انخفا�ض �أ�سعار‬ ‫ُيق ّ‬ ‫بيئي ل�شركات تكنولوجيا نا�شئة‪ ،‬حيث تتفاعل مجموعات �أ�صحاب‬ ‫ً‬ ‫ّ‬ ‫النفط وتراجع �سعر �صرف اليورو‪ ،‬قد ولد انكما�شا في عجز الح�ساب‬ ‫را لخلق فر�ص العمل العالية المهارة‬ ‫ت�صبح م�صد ً‬ ‫المبادرات‪ ،‬ف ُ‬ ‫الجاري في العام ‪ 2015‬بن�سبة ‪ 3.5‬في المئة ‪.‬ولكن بمقابل ذلك‪� ،‬أثر‬ ‫في لبنان (تقرير خا�ص ‪� .)2 #‬ساهمت تكنولوجيا المعلومات‬ ‫انخفا�ض تدفق ر�أ�س المال ب�شكل �سلبي على �صافي الأ�صول الأجنبية‬ ‫الملخ�ص التنفيذي‬ ‫‪| 9‬‬ The World Bank Résumé I. La géo-économie confronte le Liban à des l’économie libanaise, libérant des ressources défis associés à son emplacement géographique, pour améliorer les soldes internes et externes. au cœur des lignes de faille, et aux risques liés à sa Sur le plan financier, la baisse des prix de pétrole dépendance aux flux entrants de capitaux. Malgré a contribué à une diminution des transferts pour le l’amélioration significative des conditions de sécurité compte d’Electricité du Liban en 2015. Toutefois, cela depuis le début de l’année 2015, les préoccupations a été plus que contrebalancé par une dégradation quant aux circonstances régionales et à l’impact d’un des revenus en raison, essentiellement, du manque éventuel débordement, persistent alors que le Liban de mesures exceptionnelles qui avaient augmenté continue, et de loin, à être le pays hôte qui accueille le les revenus en 2014 (p. ex., collecte des arriérés de plus grand nombre de réfugiés syriens (relativement télécom). En conséquence, le déficit financier global à sa population). En outre, la dépendance de devrait s’être creusé de 0.7 points de pourcentage l’économie libanaise sur sa diaspora pour financer (pp) du PIB en 2015, alors que le surplus primaire les déséquilibres internes et externes expose le Liban excluant le paiement d’intérêts devrait avoir à des conditions politiques et économiques hors baissé de 1.2 pp du PIB. Concernant les comptes de son contrôle. Malgré ces risques et ces défis, le externes, une large contraction des importations processus politique demeure paralysé par la vacance due essentiellement à la baisse des prix de pétrole et présidentielle pour une deuxième année consécutive, du taux de change de l’euro devrait avoir provoqué sans solution imminente qui pointe à l’horizon. Par une baisse de 3.5 pp du PIB du déficit des comptes ailleurs, une solution à court terme a été trouvée pour courants. Toutefois, cela a été plus que contrebalancé la crise des déchets qui ont laissé des tas d’ordures par la baisse des flux entrants de capitaux qui affecte non collectés dans les rues à travers tout le pays négativement la position nette en avoirs étrangers depuis l’été 2015. du pays. En conséquence, les réserves en devises étrangères à la BdL se sont rétractées de 5.4 pour II. En 2015, une amélioration des conditions cent pour atteindre US$ 30.6 milliards vers la fin de de sécurité a été plus que contrebalancée par l’année 2015. Sur une note moins encourageante, la un environnement politique en détérioration, baisse des prix de pétrole, ainsi que la dépréciation ralentissant davantage une économie déjà atone. de l’euro, a provoqué une déflation de prix en Les employés de la Banque Mondiale ont revu à la 2015, qui, à 3.7 pour cent, a maintenu à la baisse la baisse la croissance réelle du PIB en 2015 de 1.5 croissance nominale du ratio dette-PIB plus élevé de pour cent contre des prévisions de deux pour cent 3.1 pp en 2015 pour atteindre 148.7 pour cent. durant l’automne 2015. Un secteur touristique renaissant et des prêts privés soutenus continuent IV. Les perspectives de croissance demeurent à apporter l’élan nécessaire à l’économie. Par faibles en raison du conflit syrien, de l’impasse ailleurs, le secteur foncier a constitué un boulet pour politique locale et de certains impacts négatifs l’économie nationale, avec les frais d’enregistrement de la chute des prix de pétrole. Outre les anciens et les livraisons de ciment se contractant en 2015 de boulets au pied de la croissance traînés durant les 9.4 pour cent et de 8.6 pour cent, respectivement quelques dernières années, l’impact négatif de la baisse des prix de pétrole représente un nouveau III. Jusqu’à présent, le déclin des prix de développement pour l’année 2016. Alors que les pétrole a eu un impact positif significatif sur amortisseurs fiscaux dans les pays du CCG s’érodent 10 | Résumé lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD et que des réductions budgétaires s’en suivent, l’exemple de jeunes entreprises à succès qui ont tiré les transferts vers le Liban et les exportations de parti des marchés régionaux et globaux. En outre, il services vers le CCG (p. ex. services de consultation) est à noter des initiatives innovatrices lancées par la devraient se ralentir, ce qui exercerait, sans banque centrale du pays qui consistent à faciliter le doute, une plus grande pression sur la balance financement du capital de risque. des paiements qui est déjà confrontée à maintes contraintes en raison du déclin des flux entrants. La consommation, partiellement orientée par les transferts, sera également affectée d’une manière négative, contrebalançant ainsi la hausse initiale du pouvoir d’achat réel résultant de la baisse des prix de pétrole. En général, la croissance ne se concrétiserait que d’une manière marginale de 1.8 pour cent par an, soutenue par une réémergence continue du secteur du tourisme. A moyen terme, la croissance réelle du PIB devrait être de 2.5 pour cent. Le retour à une éventuelle croissance de la production repose largement sur une résolution du conflit en Syrie, ainsi que sur une nette amélioration de la situation politique au Liban. V. Les politiques industrielles spatiales, particulièrement les parcs industriels et les zones économiques spéciales, dotent le Liban d’un outil viable pour soutenir la hausse des investissements et la compétitivité dans le secteur industriel (Centre d’intérêt spécial #1). Dans des conditions appropriées, les zones industrielles se sont avéré une réussite dans plusieurs endroits et industries à travers le monde. Les avantages comprennent la concentration et la spécialisation des infrastructures, la facilitation réglementaire et les douanes spécialisées, ainsi que les régimes financiers et de commerce. VI. La géo-économie représente également une opportunité sous forme d’écosystèmes de jeunes entreprises de technologie où des communautés d’entrepreneurs interagissent, devenant une source viable pour la création d’emplois hautement qualifiés au Liban (Centre d’intérêt spécial #2). La Technologie de l’Information de la Communication (TIC) a réduit, d’une manière significative, le coût de l’innovation et de l’accès au marché, permettant aux petits entrepreneurs de technologie de faire la concurrence avec les entreprises déjà établies. Le secteur de la technologie au Liban devient de plus en plus attrayant, mené par Résumé | 11 The World Bank Recent Economic and Policy Developments 1. Lebanon at the nexus of regional fault perception of corruption and incompetency. In lines suffers geo-economic tremors. While security March 2016, a short-term resolution was reached, conditions have improved markedly since the start of involving two new landfill locations that has finally 2015, anxiety over regional conditions and potential allowed the removal of trash accumulations which spillovers prevail. The direct Russian intervention on have acquired international notoriety. Additionally, the side of the Syrian government has affected the intermittent supply of electricity and water compound balance of power but did not resolve it definitively failures to deliver basic government services. All the to the government’s favor. This naturally translated while, Lebanon remains the largest host of Syrian into increased confidence by proponents of the refugees (in proportion to the population); according Syrian government in Lebanon (March 8 alliance) at to the UNHCR, as of January 31, 2016, the number the expense of its opponents (March 14 alliance). of registered Syrian refugees was 1.1 million, which Similarly, the equally unexpected announcement of represents 24.5 percent of the total Lebanese Russian partial withdrawal from Syria, has reversed population.2 This represents the highest refugee-to- this effect, causing confusion all around. Meanwhile, population ratio in the world, and despite significant the Kingdom of Saudi Arabia has recently taken strain on already weak public finances, the country measures that could negatively impact Lebanon’s has received limited international assistance. economy and its citizens. These include the formal cancelation of a belated three billion dollar weapons grant, which was promised three years ago. In addition, the Kingdom, along with other Gulf countries, issued warning for citizens against visiting Output and Demand Lebanon. 3. Despite a near-complete absence of 2. Perceived endemic corruption , the 1 economic reforms in the face of large shocks, real failure of key government services and the GDP growth since 2011 remained positive, albeit annulment of the democratic process continue to sluggish and below potential.3 While traditional erode State structure. A vacant presidency is close drivers—real estate, construction, finance and to ending its second year with uncertain prospects tourism—have suffered greatly from the regional of a near-term resolution, while the self-extending turmoil, support for the economy has originated from parliament persists to elude an agreement on a new other sources, including, Syria-related economic parliamentary election law. The breakdown in the political process is augmented with a failure of key government services; the garbage crisis that has left 2  This takes into consideration the suspension of new piles of trash uncollected on the streets across the registration as per Government of Lebanon’s instructions country since summer 2015, has been characterized starting 6 May 2015. Accordingly, individuals awaiting to be by nontransparent deals aimed at finding short- registered are no longer included. term solutions that have so far only reinforced the 3  National accounts data since 2011 are World Bank staff estimates based on our coincident economic indicator (for details, see Matta, S. (2014) New Coincident and Leading Indicators for 1  Le Borgne and Jacobs (2016), Lebanon: Promoting Poverty the Lebanese Economy, World Bank Policy Research Working Reduction and Shared Prosperity, Systematic Country Diagnostic, Paper No. 6950), pending final GDP estimates from CAS for World Bank, Washington DC. 2011 to 2015. 12 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Real GDP Growth (%) BTA - Fransabank Retail Trade (nsa, real) 12 10.3 110 10 9.3 9.1 Retail trade index 100 8.0 90 Poly. (Retail trade index) 8 7.5 80 70 6 Points 60 3.9 50 4 3.4 40 2.7 2.0 2.2 30 1.7 1.6 1.8 1.5 2 1.1 20 0.9 10 0 0 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 FIGURE 1. A deceleration in economic activity in 2015 … FIGURE 3. Retail trade stabilizes ... Source: Lebanese authorities and WB staff calculations. Source: BTA-Fransabank. Tourism Sector (sa) Real Estate Sector 160 90 Thousand of m2 Thousand of 150 tons 80 2000 700 140 1800 130 70 600 1600 120 500 Thousand 60 1400 Percent 110 1200 400 100 50 1000 800 300 90 40 600 200 80 Tourist arrivals (lhs) 30 400 70 Construction Permits 100 200 60 Beirut hotel occupancy rate (rhs) 20 Cement deliveries 0 0 May… May… May… May… May… Feb-16 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Oct-11 Oct-12 Oct-13 Oct-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Apr-12 Apr-13 Apr-14 Apr-15 Jul-15 Oct-15 Apr-11 Jul-11 Jul-12 Jul-13 Jul-14 FIGURE 2. … despite a rebound in tourism, which FIGURE 4. … as the real estate sector regresses. nonetheless remains below pre-crisis levels … Source: Lebanese authorities and WB staff calculations. Source: Banque du Liban. activity in Lebanon4, private consumption, in addition economy, focused specifically on the ICT, industrial to periphery sectors such as pharmaceuticals5 and and agriculture sectors, offers untapped possibilities the ICT sector; the percentage of individual using using local resources and talents that will enhance the internet jumped from 52 percent in 2011 to 74.7 sustainable growth and generate much needed percent in 2014, while fixed broadband subscriptions employment. almost trebled to reach over 1.1 million persons, and mobile-cellular telephone subscriptions expanded 4. In 2015, improved security conditions have by 127 percent over the same period.6 Nonetheless, been more than offset by a deteriorating political this remains insufficient to regain pre-crisis growth environment, leading to a further slowdown in rates or even reach potential output. The geo- an already sluggish economy. Real GDP growth in 2015 is estimated at 1.5 percent7, compared to 4  Positive economic impact and contribution of Syrian nationals 1.8 percent in 2014 (Figure 1). The tourism sector in consequence of the war in Syria has been expounded on in the Spring 2015 issue of the Lebanon Economic Monitor. regained impetus in 2015, albeit from low levels, with 5  According to Société Générale de Banque au Liban, 7  This is a World Bank staff estimate based on our coincident in its EcoNews, No. 36, publication in September 2015, economic indicator. Bank staff revised downward the 2015 real pharmaceutical output and capacity have increased significantly GDP growth to 1.5 percent from 2 percent forecast in fall 2015 over the past five years following a series of new investments in due to a sharp and unexpected decline in economic activity in the industry geared mainly towards export markets. Q3 2015. Data updates also led to a slight revision in 2014 GDP 6  Source: International Telecommunication Union (ITU). growth from 2 percent to 1.8 percent. Recent Economic and Policy Developments | 13 The World Bank Growth Rate of Consumer Confidence Indices Poverty Rates (nsa, yoy, %) percentage (% of head count) 40 60 35 50 Byblos/AUB 30 40 ARA (3mma) 30 25 20 20 10 15 Percent 0 10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Apr-11 Apr-13 Apr-12 Apr-14 Apr-15 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 -10 -20 5 -30 0 Nabatieh Bekaa Lebanon South Lebanon Lebanon -40 Beirut Mount North -50 -60 FIGURE 6. Poverty rate highest in the Bekaa and North FIGURE 5. Consumer sentiment is volatile. 2011/12. Source: Byblos Bank, ARA Marketing Research and Consultancy and Source: Lebanese authorities and WB staff calculations. BdL. tourist arrivals increasing by 12 percent, compared 5. From the demand side, private to a 4.1 percent rise in 2014 (Figure 2). At around consumption and the external sector drove growth 1.5 million tourist arrivals, this marks the highest in 2015. Improved security conditions and lower oil level since 2011. The hotel occupancy rate also rose, prices helped partially offset the negative impact on but by a less impressive 4.5 percentage points (pp), consumer sentiment caused by the deteriorating suggesting that the additional tourist arrivals are for political climate. The three-month-moving average the most part Lebanese expatriates who refrained for the Byblos/AUB consumer confidence index8 from visiting in earlier years due to security conditions. rose by 12.8 percent in 2015, while the ARA index Moreover, after falling sharply since end-2012, the increased by 18 percent (Figure 5), but both remain retail index appears to have stabilized (Figure 3); the highly volatile. Moreover, private lending toward loss of higher purchasing power consumers (i.e., consumption and real estate purchases continues to the gulf tourist) has been partially replaced by the expand, albeit at a decelerated rate, motivated by a large contingency of displaced people (i.e., Syrians, BdL stimulus package in 2015; commercial banks’ Iraqis). On the other hand, evidence point to a sharp claims on residents grew by 6.4 percent (yoy) by decline in the real estate sector, a traditional driver January 2016, compared to 9.5 percent in January of the economy; construction permits and cement 2015. Anecdotal evidence suggests that private deliveries both underwent respective contractions of demand is also supported by Syrian investment and 8.9 percent (yoy, for the period January-November) consumption, concentrated in the informal sector; and 8.6 percent in 2015, compared to respective 4.8 as the Syrian turmoil endures, Syrians in Lebanon percent expansion and 5.4 percent contraction in the are gradually shifting their economic role from being corresponding periods in 2014 (Figure 4). Periphery mainly consumers reliant on handouts to income sectors have also maintained much needed support earners, albeit for many, confined within the informal to the economy in 2015. A sharp 56.7 percent growth sector. This includes the establishment of micro and in exports of pharmaceutical products, one of few small businesses that sell goods (including those export categories to have experienced any growth originating in Syria) at lower prices targeting the in 2015, suggests that the local pharmaceutical industry continues to be a positive contributor to GDP. Prospects are encouraging for the industry as it stands to benefit from reforms initiated by 8  The Byblos Bank/AUB CCI comprises two sub-indices: the the Ministry of Health that allows the substitution Byblos Bank/AUB Present Situation Index and the Byblos Bank/ of cheaper generic drugs for brand-name drugs in AUB Expectations Index. The former represents consumers’ prescriptions. opinion about current economic conditions, while the latter reflects consumers’ outlook about the future of the economy. 14 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Syrian community (ILO, 20149). However, Lebanese Syrian refugees economically active (ILO, 2014),11 by businesses, which are not able to compete at those end-2014 the labor supply in Lebanon is estimated prices are negatively impacted. The external sector to have expanded by 50 percent (IMF, 201412). has also been a positive contributor to real GDP The majority of Syrian refugees are low- to semi- growth due to falling merchandize imports and a skilled workers, engaged primarily in construction, tourism-led rise in exports of services that offset a agriculture, and personal and domestic services. contraction in merchandize exports. This resulted in In 2013, the average monthly income of employed a narrowing of the trade deficit in goods and services. Syrian refugees was LBP 418,000 (US$ 278), about Public investment, on the other hand, lagged in 38 percent below the official minimum wage (ILO, 2015 due to the political paralysis. Investment as 2014). The vast bulk of refugee employment, a whole remained weak; the BLOM purchasing regardless of the level of education attained, managers’ index (PMI)10 continues to be in a state focused on the informal sector (ILO, 2015)13. It is of contraction, averaging 48.5 in 2015, compared to unclear to what extent low-skilled refugees have 47.6 in 2014. been competing with Lebanese nationals since, even prior to the crisis, the low-skilled labor market was dominated by foreigners (e.g., Syrians, Bangladeshi, Ethiopians, Filipinos). As such, it is more likely that low-skilled foreign labor in Lebanon, including other Poverty and Labor Syrians who were present before 2011, will bear the brunt of the competition from refugees. This 6. About 27 percent of the population can explain the lack of significant tensions between in Lebanon were poor according to the most the refugees and host communities, considering the recent household budget survey in 2011/12. The sheer number of refugees. highest poverty rates were in North Lebanon and Bekaa regions, while the largest poverty count was 8. Employment growth has been observed in the most populous Mount Lebanon concentrated in low productivity activities as region (Figure 6). The unemployment rate was about higher productivity have not grown proportionally. 9 percent, based on the same household survey, Over the past decade, trade accounted for about which predates the impact of regional hostilities, 47.3 percent of all new employment, public and including the influx of refugees. Poverty rates were private services for 34.7 percent and construction significantly higher for workers employed in the for nearly 10 percent (ILO, 2015). Thus, relatively agricultural and construction sectors who are paid low productivity activities dominated employment on weekly or daily basis. growth, while growth in productive activities such communications, financial services, agriculture 7. In view of their protracted presence, and manufacturing was marginal. Moreover, Syrian nationals have de facto become part of the since foreigners labor dominated low skilled (less labor market. With around half of the working age productive) activities, high GDP growth rates have not translated into significant job creation for the Lebanese. In fact, the long-run employment-growth 9  International Labor Organization, 2014, Assessment of the Impact of Syrian Refugees in Lebanon and Their Employment Profile. 11  International Labor Organization (2014), Assessment of the 10  The PMI is an indicator that is based on a monthly survey Impact of Syrian Refugees in Lebanon and Their Employment of business conditions in the Lebanese private sector. It is a Profile 2013. The study surveyed the employment profile of composite index calculated as a weighted average of five refugees and the impact of their economic participation on the individual sub-components: New Orders (30 percent), Output host communities’ livelihoods. Data was collected from 400 (25 percent), Employment (20 percent), Suppliers’ Delivery households, which included a total of 2,004 individuals. Times (15 percent) and Stocks of Purchases (10 percent). A 12  IMF (2014), Article IV Consultation and Selected Issues, value of the PMI above 50.0 signals an improvement in business July, Washington DC. conditions from the previous month, while a drop in the PMI below the 50.0 threshold indicates a slowdown in business 13  ILO (2015), Towards Decent Work in Lebanon: Issues and activity (BLOM Bank, 2013). Challenges in Light of the Syrian Refugee Crisis, Beirut, Lebanon. Recent Economic and Policy Developments | 15 The World Bank elasticity is estimated to be 0.2 (World Bank, 201214), 2015 further held down nominal GDP expansion, much lower than an estimated MENA average of 0.5 which was already subject to anemic growth, forcing (IMF, 2014). the debt-to-GDP ratio higher. 11. Two sizable Eurobond issues by the Ministry of Finance highlight large financing needs. The government continues to primarily Fiscal Policy finance the fiscal deficit by issuing Treasury bills and Eurobonds. In February 2015, the government raised 9. In 2015, the overall fiscal balance is US$ 2.2 billion through a dual-tranche Eurobond estimated to have widened slightly, while a issuance.15 This was followed by another Eurobond primary surplus was maintained. The overall fiscal issue in November for the amount of US$1.6 bln, deficit widened slightly to an estimated 7.3 percent intended to swap bonds maturing in January 2016 of GDP, compared to 6.6 percent of GDP in 2014 as well as for additional financing.16 The stock of (Figure 7). This small relapse is led by the primary debt outstanding remains mostly in local currency, balance (i.e., excluding interest payments), which whereby, by end-2015, 62 percent of gross public is estimated to have shrunk by 1.2 pp to reach 1.4 debt is denominated in LBP. percent of GDP, albeit remaining in surplus for the second year in a row since 2011. The declining 12. Longstanding structural bottlenecks in primary surplus was driven by a fall in revenue public finance are important manifestations of collection, specifically, non-tax revenues; a 2.2 pp the perceived endemic corruption and political decline in total revenues to 21.6 percent of GDP malfunction, impeding the development of the in 2015 was led by a contraction in both telecom country. Since 2005, budgets have not been ratified transfers and treasury revenues; the fall in the by parliament due to discord regarding accountability former was due to the lack of one-off measures, over previous fiscal accounts. Moreover, none of the which in 2014 included the collection of telecom post-war budgets were voted within the constitutional arrears that helped improve the fiscal balance. The period and the last officially closed fiscal accounts slowdown in economic activity has induced a general are those of 2003, although those from 1993 till softening in total revenues compared to the previous 2003 need major adjustments. Spending has been decade’s average of 23.4 percent of GDP. On the conducted largely through treasury advances and ad- expenditures side, primary spending is estimated hoc measures in times of pressures. This leaves fiscal to have fallen by 1.5 pp to reach 27.3 percent of policy without an anchor. Even prior to 2005, fiscal GDP in 2015. This is a key benefit of lower oil prices, policy has been missing a medium-term perspective. which effected a decline in transfers to structurally The lack of proper oversight and extra-budgetary loss-making Electricité du Liban, the state-owned entities that receive significant government funding power company, from around 4.6 percent of GDP in help entrench a culture of non-transparency and 2014 to around 2 percent of GDP in 2015. encourage corruption in fiscal affairs. 10. Price deflation and sluggish growth helped thrust the debt-to-GDP ratio higher. Total public debt is estimated to have reached 148.7 percent of GDP (US$70.3 bln) by end-2015, compared to 15  Despite it being one of the largest issues by the government 145.6 percent of GDP at end-2014 (Figure 8). This and occurring during a period of regional turmoil, it was comes despite a primary surplus for the second year oversubscribed. The issue consisted of two tranches: US$ 800 million for a maturity of 10 years at 6.2 percent and, significantly, in a row. Instead, price deflation at 3.7 percent in US$ 1.4 billion for a 15-year maturity at 6.65 percent. 16  This came in the form of a three-tranche issue, consisting 14  World Bank (2012), “Republic of Lebanon—Good Jobs of (i) US$ 500 mln maturing in 2024 at an interest rate of 6.25 Needed: The Role of Macro, Investment, Education, Labor and percent, (ii) US$ 500 mln maturing in 2028 at 6.65 percent and Social Protection Policies”, December, Washington DC. (iii) US$ 600 mln maturing in 2035 with a 7.05 percent yield. 16 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Central Government Finances Net Foreign Assets’ Position (NFAP) (% of GDP) 35 3.5 20,000 4,000 30 3.0 15,000 3,000 25 2.5 10,000 2,000 20 2.0 5,000 1,000 US$ mln US$ mln 15 1.5 Percent Percent 0 0 10 1.0 2010 2011 2012 2013 2014 2015 -5,000 -1,000 5 0.5 0 0.0 -10,000 -2,000 2009 2010 2011 2012 2013 2014 2015 2016p -5 -0.5 -15,000 -3,000 -10 -1.0 -20,000 -4,000 Total Revenues Total Expenditures -15 Budget Deficit Primary Balance (rhs) -1.5 Capital inflows Trade balance Change in NFA (rhs) FIGURE 9. Regression in capital inflows exacerbated in FIGURE 7. Fiscal deficit widens in 2015... 2015… Source: MoF and WB staff calculations. Source: BdL and WB staff calculations. Debt to GDP ratio (%) Coverage Ratio Gross Foreign reserves at BDL (excl Gold, US$ bln) 80 190 Total Imports (US$ bln) 40 Coverage Ratio (months of imported goods, rhs) 14 70 180 60 35 12 170 50 30 US$ bln 10 Percent 160 40 25 US$ bln 150 8 Months 30 20 20 140 6 15 10 130 4 10 0 120 2 5 2016p 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0 0 Gross Public Debt Nominal GDP Debt to GDP (rhs) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016p FIGURE 10. … inducing a decline in gross foreign FIGURE 8. … as debt- to-GDP rises. reserves at BdL Source: BdL, CAS and WB staff calculations. Source: BdL, Lebanese Customs and WB staff calculations closure of the last remaining Syrian routes, through External Sector which they could access the GCC market. On August 10 2015, the government agreed to subsidize the cost 13. Lebanon’s current account balance of exporting goods to Arab countries through the sea, improved in 2015 but remains a source of over a period of 7 months.18 Despite this, volumes considerable risk. The current account deficit exported showed a yoy decline of 23.6 percent during decreased by an estimated 3.5 pp in 2015, reaching the period September-December 2015, compared to 23.2 percent of GDP; a deficit that remains among the a yoy contraction of 10 percent for the period May- largest in the world, exposing the country to significant August 2015. Remittances in 2015 is estimated to have refinancing risks. The improvement is a result of a 4.4 held at 3.4 percent of GDP, not yet seriously impacted pp decline in total imports to around 65.7 percent by low oil prices, but lower than the previous decade’s of GDP. This is entirely due to a large contraction in average of 6.1 percent of GDP due to sluggish global the value of merchandize imports, encompassing a conditions. broad range of goods and driven by lower commodity prices, especially fuel products17, and the depreciation 14. For the fourth consecutive year, a of the euro. Meanwhile, in May 2015, exporters of shortfall in capital inflows led to a deterioration merchandize goods were severely afflicted by the in Lebanon’s net foreign asset position. The 17  The average price for crude declined by almost half in 2015. 18  The total subsidy amount was set at US$14 million. Recent Economic and Policy Developments | 17 The World Bank economy is structurally and heavily dependent on Drivers of 12 - Months Headline Inflation capital inflows to finance its current account deficit.19 Food and non-alcoholic beverages Clothing and footwear Owner occupied Alcoholic beverages, tobacco Actual rent Water, electricity and gas Furnishings, household equipment Health In 2015, the deceleration in capital inflows has been 4 Transportaion Education Headline Communication Other 3 more pronounced than in the previous three years, 2 1 with inflows regressing by 25.4 percent. This more Percent (%) 0 -1 than offset an improving trade balance, draining -2 the economy of around US$ 3.4 billion in foreign -3 -4 assets, compared to a depletion of US$ 1.4 billion in -5 -6 2014 (Figure 9). Since 2012, leading sectors towards -7 Sep-15 Dec-14 Dec-15 Oct-15 Nov-15 Feb-15 Feb-16 May-15 Jun-15 Mar-15 Jan-15 Jan-16 Apr-15 Jul-15 Aug-15 which the majority of foreign capital has traditionally gravitated have suffered a significant decline in activity, becoming a less attractive destination for FDI FIGURE 11. Inflation at a historical low in 2015. (e.g., real estate, tourism). However, net FDI in 2014 Source: CRI and CAS. (the latest available full-year data) grew by 30 percent to US$ 1.2 billion (2.6 percent of GDP), equivalent to 2.6 percent of GDP, and the first such increase since gross foreign reserves at BdL remain large, equivalent 2010. Nevertheless, it remains well below pre-crisis to 11.7 months of imports (Figure 10). levels, where between 2000 and 2010, FDI averaged 9.5 percent of GDP. The presence of Syrian refugees has partially compensated for the overall loss of inflows since 2010; international aid targeting Syrian refugees provides additional support to the balance Money and Banking of payments.20 Support is also generated by the wide spread between domestic and international interest 16. In 2015, Lebanon’s inflation rate reached rates that reached an average of 415 basis points a record low in the post-war period. Headline (bps) during January-October 2015.21 CPI inflation is estimated at -3.7 percent in 2015, undergoing a 4.9 pp decline relative to 2014. The 15. A decrease in gross foreign reserves at the deflationary trend cut across most categories central bank mirrored lower inflows. Gross foreign (Figure 11), reflecting the decline in the global exchange reserves at BdL fell by 5.4 percent to prices for energy, food and commodities as well as reach US$ 30.6 billion by end-2015. In the previous an appreciating effective exchange rate given the two years, the deceleration of capital inflows did country’s peg to the dollar. The continued negative not reflect on gross reserves, as banks repatriated output gap has also weakened prices as evident foreign assets in search of higher yields in the face from a low core inflation (excl. fuel and food), which of globally depressed rates. This resource, however, averaged 0.1 percent. Moreover, with the influx of is exhaustible and subject to a reverse dynamic upon Syrian refugees sharply lower in 2015 than in 2014, normalization of global interest rates. Nonetheless, supply-side factors that previously pushed inflation upwards (e.g., the sudden and massive increase in 19  The current account deficit has averaged 17.8 percent of housing demand), has waned off. GDP during the past ten years. 20  Inflows to Lebanon have also included international 17. Exchange rate stability, a negative output aid targeting Syrian refugees, albeit via various international organizations and not through the government, which continues gap and price deflation constitute the motivations to appeal for assistance. A United Nations Development Program for the central bank for expansionary monetary (UNDP) study assesses the impact on the Lebanese economy of policy in 2015. The dollarization rate—a key gauge international humanitarian aid delivered via UN agencies to the Syrian refugees in Lebanon. It estimates that this aid, estimated of confidence in Lebanon—registered 65 percent at over a billion dollars between 2012 and 2014, has a multiplier by January 2016, a decrease of 84 bps from January effect that added 1.3 pp to 2014 GDP growth. 2015. Simultaneously, real GDP growth continues 21  This is the interest rate differential between the 3-month to lag behind the 1993-2014 average rate of 4.4 Lebanese T-bill and the 3-month LIBOR. 18 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Commercial Bank Loans to the Private Sector packages) as well as the financial sector’s stabilizer Loans to non-residents Loans to residents of last resort, multiplying the financial burdens on 120,000 Total Loans to private sector BdL. The resulting banking-sovereign feedback loop, 100,000 however, is a source of significant macroeconomic 80,000 risk (Le Borgne and Jacobs, 201624). LBP bln 60,000 40,000 19. Lending to the resident private sector 20,000 continued to expand in 2015, albeit at a 0 decelerated rate. The stock of commercial banks’ Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 credit to the private sector increased by a sluggish Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Jul-11 Jul-13 Jul-12 Jul-14 Jul-15 3.4 percent (yoy) in January 2016, compared to 4.3 FIGURE 12. Private lending slows. percent (yoy) in January 2015 (Figure 12). However, this comes with a couple of caveats. First, with a Source: BdL and WB staff calculations. deflationary environment, the change in real private lending was larger. Second, this conceals diverging dynamics; while claims on non-residents contracted percent, and well below potential, generating a by 2.4 percent (yoy) over the same period, those negative output gap.22 These, along with record on residents grew by 6.4 percent (yoy). Part of the price deflation, allowed the BdL to extend its loan growth in credit to residents, which nonetheless subsidy program in 2015 for the third year running,23 signaled a deceleration from 9.5 percent (yowy) with an additional injection of US$ one billion. growth in January 2015, was related to the BdL’s These packages have been vital for buttressing the stimulus packages. The deceleration possibly reflects real estate sector by boosting domestic demand declining marginal returns to the stimulus package as after demand from Lebanese expatriates and foreign the pool of viable borrowers shrinks. Going forward, buyers dropped sharply. authorities need to exert scrutiny and caution to risks associated with the over-leveraging of households. 18. To maintain the peg, BdL ensures banks In precaution of such risks, BdL introduced in 2014 offer attractive dollar spreads to finance the a number of macroprudential measures.25 current account. Under sustained severe fiscal needs and a banking sector balance sheet that is over three times GDP, the BdL ensures that banks keep attracting foreign deposits and that the public sector gross financing needs are met. For the former, BdL Financial Markets introduced various subsidized refinancing schemes as well as new certificate of deposits for the 15- 20. Lebanon’s banking sector is liquid, year, 20-year and 30-year tenors, lengthening the profitable and well regulated, but highly exposed maturity structure. As to public finance, BdL bids to the public sector. Banks are well capitalized on the TBs primary market and acts as a buyer on and resilient owing to prudent investments and the secondary sovereign debt market. In absence of conservative regulation by BdL and the Banking government, the central bank has been the principal Control Commission. In 2014 (latest available), the regulator of private demand (i.e. the stimulus tier one capital-to-risk-weighted-asset ratio was 22  For a more in-depth analysis on the output gap, please 24  Lebanon: Promoting Poverty Reduction and Shared refer to Box 1 in the Fall 2015 issue of the Lebanon Economic Prosperity, Systematic Country Diagnostic, World Bank, Monitor. Washington DC. 23  This program was launched by the BdL in 2013 and 25  To limit leverage risks on the consumer side and the fallout continued in 2014 in the amounts of US$ 1.46 billion and US$ impact on banks, in 2014, BdL instructed banks to require a 800 million, respectively. While the real estate sector has been minimum down-payment of 25 percent for any car or housing the principal beneficiary, BdL’s subsidized loans also targeted loan and to limit the value of the loan such that the monthly start-ups and venture capital (relatively nascent in Lebanon), installment does not exceeding 45 percent of family income (35 with yet undetermined effect. percent for a housing loan). Recent Economic and Policy Developments | 19 The World Bank Lebanese Commercial Banks Sovereign Exposure Deposits at Commercial Banks (nsa, yoy %) (% of total assets) 70 25 60 66.5 60 59 20 66.0 50 Resident deposits 58 Non-resident deposits 57 65.5 40 Total deposits (rhs) 15 Percent Percent Percent Percent 56 65.0 30 55 10 54 64.5 20 53 Commercial Banks exposure to sovereign risk 5 64.0 10 52 Deposit Dollarization rate (rhs) 51 63.5 0 0 Oct-12 Oct-13 Oct-14 Oct-15 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Apr-13 Apr-12 Apr-14 Apr-15 Jul-12 Jul-13 Jul-14 Jul-15 May-10 May-11 May-12 May-13 May-14 May-15 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 FIGURE 13. Lebanese banks’ sovereign debt exposure FIGURE 14. … while deposit growth decelerates. increases in 2015… Source: BdL and WB staff calculations. Source: BdL and WB staff calculations. 12.8 percent, which was double what is required with the deposit-to-total liabilities ratio31 at 83.2 by Basel III. The liquid asset-to-total deposit ratio,26 percent by January 2016. However, there has been an indicator of short-term liquidity, stood at 70.3 in a discerned slowdown in deposit growth, with January 2016, compared to 68.5 in January 2015. total private sector deposits at commercial banks Moreover, banks’ profits continue rising while non- increasing by 5.1 percent (yoy) in January 2016, performing loans (NPLs) are low and return on equity compared to 6.9 percent a year earlier; resident and is in the double digits.27 Nonetheless, commercial non-resident private deposits increased by 5 percent banks are highly exposed to sovereign credit risk (yoy) and 5.3 percent (yoy), respectively, undergoing as they are a large investor in public debt.28 In fact, respective declines of 0.8 pp and 6.4 pp compared Lebanese banks’ sovereign debt exposure29 increased to January 2015 (Figure 14). slightly from 57.3 percent end-2014 to 58.4 percent at end-January 2016 (Figure 13). In an attempt 22. With global interest rates lingering at toward diversification, banks expanded regionally, record lows, the Lebanese banking system an effort that has been severely compromised by the continues to be an attractive destination for recent regional upheaval.30 depositors. Non-resident deposits have been a vital factor in the stability of the banking sector, and in 21. Deposit growth decelerates. Commercial fact the whole economy, constituting 21 percent of banks’ balance sheets continued to grow, rising by total private deposits (end-January 2016). Attracted 6 percent (yoy) in January 2016, compared to 6.9 by interest rate spreads32, new private deposits at percent in January 2015. Deposits constitute the commercial banks33 have averaged a significant principal funding source for commercial banks, 7.8 percent of GDP annually since 1994. In fact, between 2003 and 2010 total new private deposits 26  Liquid assets consist of commercial banks’ deposits with (TD) averaged 19.4 percent of GDP, while non- central bank, Treasury Bills in LBP held by commercial banks and Eurobonds held by commercial banks. 31  This is the ratio of total private and public sector deposits at commercial banks to commercial banks’ balance sheet. 27  There has been some deterioration in profitability and NPL ratios since the beginning of the Syrian crisis in 2011. 32  The main interest rates that matter in this arrangement are the international dollar rate, a local rate on dollar deposits 28  Interest income, as obtained from BilanBanques, amounted and a local rate on LBP deposits. A spread between the local to 66.15 percent and 66.31 percent of total consolidated banks’ and international dollar rates attracts deposits in dollar, while a income in 2013 and 2014, respectively. spread between LBP and local dollar rates encourages deposits 29  The sovereign debt exposure is computed as a ratio of in local currency. Nonetheless, like much of the country, commercial banks’ aggregate investment in Treasury bills, Lebanon’s banking system is highly dollarized (65 percent Eurobonds and deposits at BdL relative to total assets. dollarization rate). 30  Expansion of Lebanese commercial banks in Turkey 33  New deposits are calculated as deposits minus interest continues, however, helping to increase profitability. paid on the previous year’s deposits. 20 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD New Deposits (% of GDP) Lebanon's Sovereign Spreads in Historical Perspective 25 New non-resident deposits Total new deposits 550 200 20 500 175 450 150 400 125 15 350 100 Percent 75 300 bps bps 50 250 25 10 200 0 150 -25 Lebanon-Composite Spread (rhs) 100 -50 5 EMBIG Lebanon (lhs) 50 EMBIG composite (lhs) -75 0 -100 Oct-13 Oct-14 Oct-15 Jan-13 Jan-14 Jan-15 Apr-13 Apr-14 Apr-15 Jul-13 Jul-14 Jul-15 0 199 200 201 4-2 3-2 1-2 002 010 015 FIGURE 15. New deposits at commercial banks affected FIGURE 16. Falling risk premium on Lebanese Eurobonds by regional crisis. translated into narrowing spreads. Source: BdL and WB staff calculations. Source: JP Morgan and WB staff calculations. resident new private deposits (NRD) averaged 15 2015-February 2016 period also declined by 13.9 percent (Figure 15). These ratios have declined percent, compared to the previous year. sharply since, due primarily to the regional turmoil, and secondarily, to the unsustainability of such high levels. During the crisis period of 2011-2015, however, TD and NRD shares of GDP fell to 5 percent and 4.3 percent, respectively. Despite this deterioration, Lebanon’s financial sector retains key advantages. To begin with, exceptionally low global interest rates preclude competitive alternatives in international markets. Furthermore, non-resident deposits, which are largely sourced from Lebanese expatriates, are resilient to shocks due to the diaspora’s familiarity with the country’s political and security volatilities. Additionally, the BdL has demonstrated its readiness to be the ultimate guarantor of the financial sector via its large foreign exchange reserves, and good crisis management overall. 23. Spreads on Lebanese Eurobonds turned negative in 2015 and early 2016, whereas the stock market index fell slightly (Figure 16). The negative EMBIG spread likely reflects an improvement in the overall security conditions along with a worsening of macroeconomic fundamentals in key emerging economies. Amid a global stock market selloff, the Beirut Stock Exchange BLOM Index declined by 5 percent (yoy) in February 2016, while market capitalization fell by 5.8 percent to reach US$ 11.1 billion, equivalent to around 24 percent of 2015 GDP. Average monthly trading value over the February Recent Economic and Policy Developments | 21 The World Bank PROSPECTS 24. The regional turmoil, especially the war 26. The conduct of monetary policy is likely in Syria, poses serious security threats in Lebanon to become more challenging due to conflicting and the recent relative clam is not a guarantee of objectives. BdL, whose primary objective is to stability. A key assumption underlying projections for maintain the stability of the peg to the dollar, is the Lebanese economy regards the Syrian conflict and expected to become confronted over the short to its spillovers. World Bank staff projections assume medium term with challenges to its expansionary that current conditions hold, i.e., spillovers continue policies (secondary objective) from a number of to be contained without precluding the occurrence of factors. First, expected normalization of global occasional serious security events. Relative to our Fall interest rates will ultimately require domestic interest 2015 issue of the Lebanon Economic Monitor, real rates to increase in order to maintain exchange GDP growth for 2016 is estimated to be 0.7 pp lower rate stability. Second, the enthusiastic response to at 1.8 percent, reflecting the prolonged political crisis BdL initiatives (subsidized loans) has helped boost in the country. Over the medium term, we expect economic activity but, after several years of such real GDP growth to be around 2.5 percent. The lending, more attention will need to be paid to return to potential output growth critically hinges the issue of household leveraging and repayment on a resolution of the conflict in Syria as well as a capacity. The expanded use of macroprudential tools marked improvement in the security and political shows that BdL is vigilant to these risks. Hence, while situations in Lebanon. monetary policy has been one of the few effective countercyclical policy tools during the ongoing 25. Absent significant structural reforms on period of sluggish growth, it will likely become less either revenue or spending, Lebanon’s public potent economic stimulant going forward.   finances are projected to remain structurally weak. The overall fiscal deficit is expected to continue 27. While Saudi measures so far could widening over the medium term. Current spending negatively impact confidence and increase is projected to grow as a result of increased debt political tensions, they remain economically servicing due to pass through from higher global manageable. Gulf travelers no longer top the list interest rates (i.e., US. Federal Reserve Board-related) of Arab visitors to Lebanon. In fact, in 2015, Iraqis and higher oil prices that will reflect on transfers to comprised 40 percent of Arab tourists, followed EdL. Moreover, assuming political paralysis eases by by Jordanians (16.2 percent) and Egyptians (15.7 2017, we expect some limited public sector wage percent), whereas Saudi nationals comprised only increases as well as higher transfers to municipalities. 9.9 percent34. Admittedly, the spending power of In addition, and despite the expected return of Gulf tourists is over-proportional to their numbers, positive inflation in 2016, the trend for debt-to-GDP but the sharp decline in the quantity over the past ratio based on current policies and real GDP growth few years limits the negative impact of the travel rates, remains unsustainable and is expected to bans. notably worsen once global dollar interest rates start normalizing (a pace which is expected to start with a 28. The main threat to the economy emanates tightening of policy rates by the U.S. Federal Reserve from the possibility of mass dismissal of Lebanese Board). 34  Source: BLOMINVEST Bank, 2015: Another Recovery Year for the Lebanese Tourism Sector, February, 2016. 22 | Prospects lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD expatriates from the Gulf countries. In addition to the human factor, where many Lebanese have made the Gulf countries their home for decades, the impact on remittances presents macroeconomic challenges in the short- to medium-term. In a simulation exercise of such a shock (Box 1), GDP growth would be expected to be 2.1 pp lower in the first year, driven by contracting private consumption. This would arrive at a time of already sluggish economic activity causing a contraction in the real GDP growth. In addition to growth effects, financing needs would also increase, which would reflect on the debt-to- GDP ratio. 29. Geo-economic risks can be hedged with geo-economic return. Lebanon’s exposure to risks associated with the regional turmoil is significant and growing. A particular concern is macroeconomic risk emanating from the country’s dependency on inflows to finance persistent and sizable twin (fiscal and current account) deficits. The geo-economy offers untapped possibilities using local resources and talents that will go some way in mitigating this dependency. In this issue of the Lebanon Economic Monitor, we expound on two such prospects. The first is a project that was recently launched by the Ministry of Industry for the development of industrial zones across the country. The second is the clustering potential for the ICT sector. Both are important sources of job creation for skilled labor, an outcome that has evaded post-war Lebanese growth. They would also be a step toward sustainable growth since such sectors are less prone to external shocks compared to Lebanon’s traditional drivers—tourism and real estate. Furthermore, human and financial capital can be tapped locally, while the export market is a realizable potential, enfeebling the dependence on capital inflows and lessening balance of payments risks. Such a vision is necessary for Lebanon to exit a socially and economically bankrupt model, whereby human capital is exported in return for inflows that finance rent-seeking activities that aggravate imbalances. Prospects | 23 The World Bank Box 1. A Simulation for the Economic Impact of Lower Remittances. This box presents an analysis on the economic implications of a large decline in remittances, given the possibility of mass termination of contracts for of Lebanese expatriates from the Gulf Cooperation Council (GCC) countries. This has become a primary concern fueled not only by rumors but also small scale dismissals of Lebanese expatriates primarily from the UAE. To do so, the World Bank’s macro-fiscal framework is used to simulate one such “termination” scenario, which is then compared to the baseline scenario* that does not assume a mass dismissal. In those simulations, the main channels through which lower remittances will impact the Lebanese economy are through (i) more stressed balance of payments and (ii) a decline in private consumption as expatriates tend to support their families living in Lebanon.** To explore the relationship between remittances and consumption, we run three different Autoregressive Distributed Lag (ARDL) models, each with a separate dependent variable that proxies for private consumption: VAT revenues, cleared checks and the number of new passenger car sales. In each of these regressions, our main explanatory variable is the amount of remittances sourced from the quarterly bulletins of Lebanon’s central bank, the Banque du Liban (BdL). In addition, we control for economic activity using the World Bank Coincident Indicator Index. To perform our analysis, we use quarterly data between Q1-2009 and Q4-2014, where all the variables are transformed into log terms after being seasonally adjusted. In summary, our estimation results suggest that a one percent increase in the q-o-q growth of remittances, is associated with a statistically significant 0.08 (0.16) percent increase in the q-o-q growth of VAT revenues (number of new passenger car sales) with a four- (two-) quarter lag. On the other hand, when using cleared checks as a dependent variable, the remittances’ coefficient is found to be statistically insignificant. To quantify the impact on private consumption, we take the average of the two significant coefficients, such that a one percent increase in the growth of remittances is associated with a 0.12 percent increase in private consumption growth. Consequently, a large drop in remittances’ inflows in 2016, which in this simulation we assume it to be at 20 percent of GDP, will lower our baseline private consumption growth projection by 2.4 pp of GDP. Given that private consumption accounted for an estimated 85 percent of GDP in 2015, a 20 percent decline in remittances is estimated to induce a 2.04 pp fall in the projected GDP growth, relative to the baseline. Under the termination scenario, GDP growth would be expected to be reduced by 2.1 pp, 0.7 pp and 0.3 pp in 2016, 2017 and 2018, respectively, compared to the baseline (Table 1 below). In addition, and compared to the baseline scenario, lower remittances will reduce the growth of VAT revenues relative to GDP by 0.3 pp, 0.5 pp and 0.3 pp in 2016, 2017 and 2018, respectively, driving an equal widening of the fiscal deficit. In parallel, lower remittances will have an adverse impact on the current account balance, which is projected to deteriorate beyond the baseline projections by further one pp of GDP, 0.8 pp of GDP and 0.5 pp of GDP over the next three years. Gross reserves are also expected to be negatively affected over the medium term. Finally, and due to lower growth and larger financing needs, debt as a ratio of GDP will increase, compared to the baseline scenario, by an additional 6.7 pp, 9 pp and 7.2 pp in 2016, 2017 and 2018, respectively. Table 1. Macroeconomic impact of a 20 pp of GDP fall in remittances. Termination Scenario: Induced Change Macroeconomic Indicator 2016 2017 2018 Real GDP growth (pp) -2.1 -0.7 -0.3 Overall fiscal balance (pp of GDP) -0.3 -0.5 -0.3 Primary fiscal balance (pp of GDP) -0.4 -0.5 -0.5 Current account balance (pp of GDP) -1 -0.8 -0.5 Remittances (pp of GDP) -0.5 -0.6 -0.6 Gross reserves (months of imports) -0.7 -0.8 -0.8 Debt-to-GDP ratio (pp) 6.7 9 7.2 * The baseline scenario in this simulation is what is used to generate the forecasts in this issue of the LEM. ** “The literature tends to emphasize that remittances increase family consumption and are not invested in productive assets” (Bouhga-Hagbe, 2006, p. 5) 24 | Recent Economic and Policy Developments lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD SPECIAL FOCUS I. Industrial Parks Introduction and Special Economic 30. Lebanon’s industrial sector has lagged, both on a regional and global comparative Zones in Lebanon35 basis. Lebanon’s macroeconomic structure is one that is heavily based on services at the expense of industry and agriculture. This exposes the country to a number of vulnerabilities, including volatility in growth and sizable macroeconomic imbalances that Abstract subject the economy to the risk of forced adjustment. It also acts as a drag on technological upgrading and Lebanon’s industrial sector in Lebanon has productivity growth in the economy. lagged, both on a regional and global comparative basis. Lebanon’s macroeconomic structure, 31. In this context, Lebanon may stand to being heavily dependent on tourism and real benefit at the macro level from policies that estate at the expense of industry and agriculture, reinforce the competitiveness of the industrial renders the economy vulnerable to political and sector. More specifically, an enhanced industrial economic shocks. In this context, Lebanon needs sector will generate a growth dividend as total to focus on its industrial potential and provide factor productivity responds positively to increased solutions to the numerous constraints hindering physical and human capital. Additionally, more its industrial establishments from functioning at exports and larger FDIs will strengthen the country’s their full capacity. One possibility to strengthen balance of payments, whose imbalances threaten the industrial sector is via spatial industrial the exchange rate and expose Lebanon to the risk of policies, most notably, industrial parks and a sudden stop. special economic zones (SEZs), which support increased investment and competitiveness in the 32. Aside from much needed transversal industrial sector. Special care should be allotted reforms, including to the investment climate and to fiscal incentives which evidence suggest are trade among others, spatial industrial policies ineffective and might instead lead distortions – most notably the development of industrial such as the relocation of existing businesses to parks and special economic zones (SEZs) are the zones rather than the establishment of new increasingly seen as offering potential to support business. Under suitable conditions, industrial increased investment and competitiveness zones have proven successful in various locations in the industrial sector. This note provides a and industries across the world which make them high level overview of the potential relevance of an attractive tool in Lebanon. such spatial instruments in Lebanon, along with some messages for design and implementation. 35  The authors are Thomas Farole (Lead Economist at GPSJB) and Wissam Harake (Economist at GMF-MENA). Special Focus | 25 The World Bank 33. Special care should be allotted to fiscal and Herzegovina, El Salvador, Georgia and Jordan.36 incentives which evidence suggest are ineffective For the most part, this comparison holds for the as a source of differentiation, with the end result manufacturing sector as well. As such, effective merely an increasing ‘race to the bottom’ and investment in industry and manufacturing has a transfer of rents from governments to private potential for higher-than-average returns due to low investors. In general, fiscal incentives should not be starting levels. excessive and should be well targeted and consistent with the national economic/industrial strategy that 35. As it stands, the structural composition the government is pursuing. This is so as to not of the Lebanese economy is not conducive for cause distortions whereby the incentives lead to job creation, even during robust growth periods. relocation of existing businesses to the zones rather While real estate and construction exert a sizable than the establishment of new business. Moreover, influence on the aggregate economy, combining to these fiscal incentives are bound to cause additional account for an average of 17.1 percent of real GDP transfer of resources from the more taxed, less between 2004 and 2011, they employed an average privileged majority to the less-taxed elite. of only 7.8 percent of the Lebanese workforce between 2004 and 2009. The real estate sector, in particular, has accounted for anywhere between 50 and 70 percent of total gross fixed capital formation since 1997. The disconnect between robust activity Industrial Sector in real estate and job creation also holds true for the region at large; a World Bank study37 showed Performance – the that while the real estate sector accounted for around 33 percent of FDI inflows to the Middle Macro-Economic Case for East and North Africa (MENA) region, it contributed to only 5 percent of job creation between 2003 and Intervention 2011. In comparison and over the same period, manufacturing accounted for a much lesser 20 percent of FDI inflows to MENA but generated 55 percent of the employment. Growth 36. The high dependence on the real-estate 34. Between 2000 and 2015, value added in and tourism sectors also renders the economy the industrial sector averaged 17.4 percent of vulnerable to exogenous shocks. In Lebanon, nominal GDP, compared to 68.3 percent and 4.9 hotels, restaurants and domestic trade (wholesale percent for the services and agriculture sectors, and retail) combined to account for an average respectively. The industrial sector in Lebanon of 16.8 percent of GDP between 2004 and 2011. performs poorly both globally (Figure 17) and compared to various relevant groupings (Figure 36  Comparator countries were chosen from the Find My Friends World Bank database using the following filtering 18); as a percentage of nominal GDP, value added criteria: (a) middle (lower and upper) income countries, (b) in the industrial sector in Lebanon significantly lags emerging and developing countries as classified by the IMF, (c) the MENA average, is below the bottom 10 percent non commodity countries, (d) countries with a population of between two and eight million, and (e) countries that have an group of countries, and in the lower 20th percentile agricultural sector whose value added is less than 10 percent of upper middle income countries, of which of GDP. This generated the following group of countries for Lebanon is a member. Instead, it is comparable with Lebanon: Bosnia and Herzegovina, Bulgaria, Georgia and Jordan. However, we substitute El Salvador for Bulgaria to low income countries, where the agriculture sector provide broader regional representation. Moreover, El Salvador, dominates. Lebanon’s industry also ranks lowest along with Bosnia and Georgia is a post-conflict country, making it particularly relevant for Lebanon. relative to a group of comparator countries: Bosnia 37  World Bank (2011), Investing for Growth and Jobs, Middle East and North Africa region, pages 30-34. 26 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Real GDP Growth (%) 12 10.3 10 9.3 9.1 8.0 8 7.5 6 3.9 4 3.4 2.7 1.7 2.0 2.2 1.8 1.5 2 1.6 1.1 0.9 0 FIGURE 17. Value added for the industrial sector in FIGURE 19. Real GDP growth highly volatile … Lebanon and the world, average for 2000-2015 (percent of nominal GDP, current $US). Source: World Development Indicators, Find My Friends. Source: Lebanese authorities and WB staff calculations. Output Gap (percent of potential output) 20th Precentile Upper Middle Income 80th Precentile Upper Middle Income 45 30 35 20 Mena Average 30 28.9 15 26.6 26.7 24.6 25 22.2 22.8 10 20.4 20 17.4 17.8 5 15 Percent 0 10 2015p 2016p 2017p 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 5 -5 0 -10 Output gap production function Leb Bos El S Ge Jor Low Low Ipp Bot ano nia alv org dan er m tom n and He ado r ia inc om er m idd idd 10 -15 Output gap HP_100 rze e... le in le in gov com com ina e... e... -20 Output gap HP_6.25 -25 Output gap HP_400 FIGURE 18. value added for the industrial sector in Lebanon and comparable countries, FIGURE 20. ... reflecting output gap volatility. average for 2000-2015 (percent of nominal GDP, current $US). Source: World Development Indicators, Find My Friends. Source: Lebanese authorities and WB staff calculations. This leaves the economy highly susceptible to Macro-economic imbalances political and security shocks. Deteriorating security and political conditions have a disproportionately 37. Lebanon suffers from persistent and negative impact on these sectors, compared to significant macroeconomic imbalances, especially manufacturing and industry, thus generating sizable fiscal and current account deficits, elevating significant volatility in economic activity between the risk of forced adjustment. For the time period 2000 and 2014 (Figure 19). In an estimation exercise 2010-2015, exports of goods from Lebanon averaged for potential output for Lebanon,38 we see that post- 11.2 percent of GDP, ranking lowest amongst war period is characterized by a heavy fluctuation comparator countries and relevant groupings (Figure for the output gap39 (Figure 20). 21) and driving one of the most acute current account deficits in the world (Figure 22). 38. As a result, Lebanon is structurally and 38  World Bank, Lebanon Economic Monitor, Fall 2014. heavily dependent on capital inflows to finance 39  A positive output gap in this case denotes that the economy its imbalances. Since 2012, however, leading is ramming above potential, while a negative output gap sectors towards which the majority of foreign capital indicates that it economic activity is below potential. Special Focus | 27 The World Bank 20th Precentile Upper Middle Income 80th Precentile Upper Middle Income 20th Precentile Upper Middle Income 80th Precentile Upper Middle Income 45 45 40 40 30 30 35 35 30.6 30.6 30 28.8 30 28.8 23.8 24.9 25.2 24.9 25.2 25 20.1 25 23.8 20.1 Mena Average 19.2 Mena Average 19.2 20 17.2 20 17.2 15 15 11.2 11.2 10 10 5 5 0 0 Leb Bos El S Ge Jor Low Low Ipp Bot Leb Bos El S Ge Jor Low Low Ipp Bot ano nia alv org dan er m er m tom ano nia alv org dan er m n and ado ia inc n ado ia inc er m tom r om idd idd 10 and om idd idd 10 He e... le in le in He r e... le in rze com rze le in gov com gov com com ina e... e... ina e... e... FIGURE 21. Exports of merchandize goods for Lebanon FIGURE 22. The current account balance for Lebanon and and comparable countries, average for 2010-2015 comparable countries, average for 2010-2015 (percent of (percent of nominal GDP). nominal GDP). Source: World Development Indicators, Find My Friends. Source: World Development Indicators, Find My Friends. had gravitated (e.g., real estate, tourism) suffered maximized by focusing on Lebanon’s comparative a significant decline in activity, becoming a less advantages in high value-added sectors (a knowledge attractive destination for FDI. Net FDI in 2014 (the economy). latest available full-year data) registered US$ 1.2 billion, equivalent to 2.6 percent of GDP, compared 40. Industrial parks and SEZs may also to an average of 9.5 percent of GDP between 2000 offer a strategy to mitigate macroeconomic and 2010. This has forced Lebanon to become more vulnerabilities via a number of channels. As dependent on short-term capital inflows, exposing it with the potential productivity gains noted above, further to a sudden stop scenario. exploiting these gains depends on the degree to which these instruments facilitate competitiveness 39. Industrial parks and special economic and (especially) attract FDI. zones in theory offer the potential to address both growth and macroeconomic vulnerability issues 1. In raising net exports, the current account deficit linked to weak industrial sector performance. can be lowered. To the degree that they attract new investments – 2. An increase in FDI will strengthen the balance of particularly from foreign enterprises – that introduce payments, providing exchange rate support. new technologies to the domestic economy, 3. In decreasing dependence on short-term inflows, industrial parks and SEZs support growth both FDI helps lower the risk of a sudden stop. through an accumulation of physical capital as well as an increase in total factor productivity (TFP) (Wang, 41. Jayanthakumaran (2003)41 undertakes 2013).40 An indicator of productivity is the share a cost-benefit analysis for SEZs in South Korea, of medium- to high-technology in manufacturing; Philippines Indonesia, Malaysia, Sri Lanka currently, for Lebanon this share is about half of and China. The author finds that SEZs lead to an the OECD average, and ranks about half-way in the increase in foreign exchange earnings and raise region (Figure 23). Moreover, the shift in economic taxes and other revenues. Achieving such outcomes activity toward the more resilient industrial sector, in Lebanon could contribute to lower the persistent will help establish a more diversified economy, and large fiscal deficit. enabling Lebanon to better absorb the shocks to which the country is frequently exposed. This can be 40  Jin Wang, (2013), The economic impact of Special 41  Kankesu Jayanthakumaran (2003), Benefit-Cost Appraisal of Economic Zones: Evidence from Chinese municipalities, Journal Export Processing Zones: A Survey of the Literature, Development of development economics, v. 101, March 2013, p. 133-147. Policy Revue, 2003, 21 (1): 51-65. 28 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD long featured in the toolbox of both industrial and regional development policymaking. At one of the spectrum is support to clusters, which may or may not have an explicit infrastructural component. Spatially targeted industrial infrastructure covers a wide spectrum of instruments ranging from basic industrial parks to export processing zones (EPZs) to large-scale special economic zones (SEZs) that operate on a city-region scale. 44. What all these zone types feature in FIGURE 23. Share of medium- and high-technology common is the spatial concentration of firms and activities in manufacturing value added. infrastructure. As further features are added to this core infrastructure, usually to overcome constraints Source: UNIDO industrial statistics, 2014. to the operating environment for businesses, the nature of the offering widens (Table 2). The features include the following: Spatial Industrial Policy • Concentration of infrastructure: The foundation Instruments – An of all zones is the provision of industrial infrastructure that is targeted to a defined spatial Introduction to Industrial area. The rationale is three-fold. First, the spatial targeting allows governments to concentrate Parks and SEZs scarce resources where they can have the biggest impact. Second, it allows for more 42. Industrial parks and SEZs should be seen effective planning of industrial development, within the context of spatial industrial policy reducing negative externalities of congestion and – i.e. as instruments that aim to improve the environmental damage that may result from less environment for investment and productivity in planning development. Finally, they offer the specific locations. There are several reasons why potential for exploiting positive spillovers that it may be appropriate to take an explicitly spatial results from co-location of firms, particularly approach to industrial policy, for example: within related and supporting industries (i.e. clusters), including the development of deep, • to unlock latent agglomeration potential specialized markets for labor and suppliers, as well as information spillovers and coordination • to maximize the positive externalities that may potential. accrue form existing agglomerations • Specialized infrastructure and services: • to offset negative externalities that may exist Industrial parks often offer specialized services from existing market outcomes, distortions or to firms operating in the facilities, particularly government failures (e.g. pollution, congestion) where zones are designed to support specific clusters. Such services typically involve access • to concentrate infrastructure investment, policy to public or ‘club goods’ which benefit all reform, and/or other support where there are firms but which no individual firm (particularly barriers to delivering it on an economy-wide SMEs) would invest in alone. These may include basis. common effluent treatment facilities, common processing facilities, design and testing facilities, 43. Spatially targeted industrial support has etc. More generalized services like engineering, Special Focus | 29 The World Bank Table 2. Summary of requirements of different forms of industrial parks infrastructure. Clusters Industrial parks Export processing zones Special economic zones Basic infrastructure ü ü ü ü Specialized infrastr. and services ü ü ü ü Regulatory facilitation ü ü ü ü Regulatory simplification ü ü Specialized trade regime ü ü ).Multi-user (indust./commer./resid ü Independent governance ü Note: dark blue shading indicates standard feature; light blue indicates a feature that exists in some cases human resources (labor recruiting and training), it is common for zone programs to establish and financial services, may also be offered a specialized customs regime. Such a regime particularly in zones catering to foreign investors typically involves an environment allowing for and/or where such services are unavailable from duty-free imports of inputs to the production local markets surrounding the zones. process and no restrictions (quotas, duties, etc) on exports. It may also allow firms to operate • Regulatory facilitation: While many basic outside normally rules with regard to operating industrial parks stop at the provision of with foreign currency, currency convertibility, infrastructure, many zones aim to facilitate the and repatriation of funds if these are unduly process of legal and regulatory compliance of restrictive. Note that some aspects of the tenants, including business registration and customs regime can be implemented in a basic licensing, obtaining construction and operating industrial park environment if the country has permits, and any required permits related a customs law that allows, for example, for the to labor (e.g. visas and work permits). Such operation of bonded warehouses and duty- facilitation is most common in EPZ and SEZ drawback mechanisms. arrangements, where the target tenant is most often a foreign investor with less experience in • Specialized fiscal and labor regimes: Common managing the domestic regulatory environment. to almost all EPZs and SEZs but not typically part of a basic industrial park program is a fiscal • Regulatory regime simplification: Beyond regime that provides a number of incentives facilitation, many zones seek to simplify and designed to attract investment. This may include liberalize regulatory requirements for investors reduction or elimination of corporate taxes, VAT, to reduce the regulatory burden of business and other taxes (e.g. local taxes); it may also establishment and operation. Simplification reduce or eliminate as well as labor contributions usually involves establishing a separate set of like pensions and social security and provide rules – a separate regulatory regime – for the subsidies for training and capital investment. zone and thus is almost never part of a standard Such a specialized fiscal regime is not typically industrial park arrangement. part of a basic industrial park program, although investors in an industrial park may qualify for • Specialized customs, trade, and financial many of the incentives if they are available regimes: In order to facilitate trade, particularly more broadly through the national investment in zones targeting export-oriented industry, regime. Finally, EPZs and SEZs often sometime 30 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Box 2. Lessons learned from international experiences with industrial parks and SEZ. • Comparative advantage: Successful industrial parks often cater to specific industrial clusters. Where zone initiatives have been successful is where the emphasis has been on: i) industrial clusters that are in line with national or regional comparative advantage; and ii) where they are clearly linked into a wider national industrial strategy. Examples include Bangladesh and many of the EPZs in Central America, which built infrastructure to support a specific global positioning in the apparel sector. By contrast, less success- ful zone initiatives in many parts of Africa have ended up catering to a diverse set of capital intensive sec- tors that mainly served to facilitate imports. • Strategic locations: Industrial parks and SEZs are most successful when they take advantage of strategic locations. This typically includes metropolitan regions and key trade-related infrastructure, but can also include locations with good access to immobile, strategic (typically, natural) resources. By contrast, many countries that have launched programs have attempted to use part of the program as a regional develop- ment tool, to attract investment into ‘lagging’ or peripheral regions. Many countries, including Turkey, Thailand, Russia, South Africa, and Bangladesh among others, have found that while industrial parks flour- ished in favorable locations, they languished in less favorable ones, even when additional fiscal incentives were on offer. • Critical infrastructure: While most zones offer infrastructure that is of higher quality than is typically available in the country, in some cases (for example in some zones in Nigeria, Ghana, and Senegal) infra- structure inside the zones is a mirror of the worst experiences in the country more widely, including water shortages, electricity failures, and health, safety, and environmental shortfalls. Thus, zone development must prioritize critical supporting infrastructure – both inside and outside the industrial park – along with or even ahead of the development of land and factory shells. This is what is referred to in China’s industrial parks as “five connections and a levelling” – power, water, telecommunications, roads, and ports, along with basic land preparation – as the fundamental infrastructural responsibility of governments in industrial zone development. • Regulatory simplification: Successful industrial parks not only offer facilitation through ‘one-stop’ investor services but actually simplify the requirements and procedures involved in business start-up, construction, and operations. This can be done through legal mechanisms that actual change the regulatory require- ments of firms operating within zones, as is the case in many SEZ programs. But it can also be achieved through concerted efforts to improve procedures within each relevant agency. In this regard, one can look to reforms in Chinese industrial parks to see an example of successfully married process reengineering and automation of business compliance burdens, resulting in significant reductions in administrative process- ing times – see, for example, the ‘Digital Beijing Initiative’ of the Zhongguancun e-Park in Beijing. • Role of the private sector: While many successful industrial zone programs have been led by govern- ment, commercial orientation and private sector participation in development and operation of successful zones is often critical to ensure speed of implementation, financial risk-sharing, technical expertise, and appropriate market signals. Fiscal, customs, and other incentives must be designed to attract the right kind of productivity-enhancing investments rather than short-term or rent-seeking investments. • Regulatory autonomy and coordination: While a number of regulatory models exist for overseeing industrial parks, the most effective approach tends to be establishing a single national regulatory author- ity (rather than individual zone authorities) that is independent from an individual ministry. This provides autonomy and minimizes political interference. Examples here include the industrial zone and free zone regimes in Thailand, Costa Rica, Dominican Republic, Jordan, Philippines, and Korea. It is also critical, in cases where more than one zone program exists, to ensure a formal mechanism exists to facilitate coordi- nation. • Local economy linkages: Particularly in SEZs and industrial zone initiatives targeting foreign investors, active efforts should be made to promote linkages between zone-based firms and the domestic economy, including suppliers and labor markets. Initiatives may include local supplier development, job training, and technology transfer programs. Regulatory improvements in the local economy outside the zones can also be critical to enable local firms to respond to the new opportunities offered by zone investments. Special Focus | 31 The World Bank established with a specialized regime for labor, investment and failure to attract sufficient investments allowing investors to benefit from access from have resulted in many zones being considered ‘white reduced regulatory protections42 and/or greater elephants’ (Farole, 2011; Saleman and Jordan, 2013). flexibility in bringing in foreign workers. Moreover, given the large investments in taxpayer money going into these programs, the payoff in terms 45. Specialized zone programs have a long of investment, job creation, and exports has too often history. The first modern industrial free zone was failed to materialize. established in Shannon, Ireland, in 1959. Before the 1970s, most zones were found in industrial countries. Since the 1970s, however, starting with East Asia and Latin America, zones have been designed to attract investment in labor-intensive manufacturing Industrial Parks and SEZs from MNCs. These zones became a cornerstone of trade and investment policy in countries shifting in Lebanon away from import-substitution policies and aiming to integrate into global markets through export-led 48. Lebanon has had a program of industrial growth. zones for several decades. An industrial zone strategy was developed by IDAL in 1995, which 46. The popularity of such regimes over recent aimed to support industrial development and decades stems from the catalytic role they have in a more balanced geographical distribution of supporting the growth of manufacturing exports industrial investment through the provision of in a number of places. Most notably, the success of specific infrastructure and financial incentives. China, and before that East Asia neighbors Taiwan, The Ministry of Industry was granted the right to Korea, and Japan, was based in part on using industrial establish industrial zones in 2005 through Decree parks to support the development of export-oriented #14283. Specifically this decree grants the right for manufacturing. In Latin America, the Dominican Ministry of Industry to establish and operate public Republic, El Salvador, and Honduras, among others, “industrial centers” throughout Lebanon. used zonas francas (“free zones”, generally using the EPZ model) to take advantage of preferential access 49. According to data from the Ministry to the U.S. market. Their zones generated large-scale of Industry, 131 industrial zones have been manufacturing sectors in economies previously established either by decree or a decision from a reliant on agricultural commodities. In the Middle Higher Council. Nearly half are in Beirut and Mount East and North Africa, EPZ and SEZ regimes played Lebanon, close to one-quarter are in North Lebanon, an important role in catalyzing export-oriented and the remainder are split between Bekaa and South diversification in countries like the Arab Republic of Lebanon & Nabatiyeh. The existing zones are largely Egypt, Morocco, and the United Arab Emirates. linked to location requirements defined around environment impacts of industries. Industries in 47. Despite these successes, however, it is Lebanon are split into five categories, in decreasing important to keep in mind that industrial parks, order of environment impact. Factories in the first 3 at least those involving specialized regimes like categories can only operate in industrial zones while EPZs and SEZs, have had a mixed record overall. those in the fourth and fifth categories can operate Many programs have suffered from controversial in industrial zones only if the zones pertain to their land acquisition and allocation practices, and delayed relative industry. 42 While specialized labor regimes were common in 50. In terms of fiscal incentives, the benefits traditional EPZs of the 1970s-1990s they are increasingly less common today, where zones are expected to adopt not just existing industrial zones receive are not specific ILO-compliant labor regimes but to ensure that the regimes in to industrial zones per se, but rather pertain to a the EPZs and SEZs do not differ substantively from those in the certain location and/or industry. For example: domestic economy. 32 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD • Decree-Law number 127 (dated September 16, 1983) provides tax incentives for factories establishing in or relocating to rural areas. • Decree-Law number 11991 (dated March 20, 1998) provides tax incentives for industrial establishments in or relocations to either rural areas or areas the Government wishes to develop (In Article 1 of this decree, the following areas were declared industrial: Nabatieh El Tahta (Province of Nabatieh); Majdel Anjar (District of Zahle); Hosrayel (District of Jbeil); and Taanayel & Chabrakiyet Tabet (District of Zahle). • Decree-Law number 3361 (dated July 07, 2000) considers the zones liberated from the Israeli occupation in South Lebanon, Nabatieh and Bekaa Valley as areas the Government wishes to develop. Industrial establishments in or relocations to these areas benefit from tax incentives. 51. Apart from suitable industrial classifications, MoI and Central Government do FIGURE 24. Industrial zone locations. not provide industrial zones with infrastructure, Source: IDAL (2013) connections to grid, or any further benefits beyond those mentioned in the decrees. However, local municipalities might contribute to this regard based on availability of financial resources and healthy • Terbol Industrial City – located in Bekaa in Terbol relationships with operating industrialists. As a result, while some industrial zones are endowed 52. The Ministry of Industry, in partnership with quality facilities, many of the existing zones with the United Nations Industrial Development lack basic infrastructure, including environmental Organization (UNIDO), has launched an initiative infrastructure (e.g. water and wastewater) to support to establish industrial zones across the country. industrial development. Moreover, most industrial MoI has so far identified three locations that will development continues to take place outside of the be utilized as pilot projects—Baalbek and Terbol in zones. Beyond these industrial zones, four private Bekaa, and Joun in Shouf. The ministry’s objective is industrial zones have been established43: to help improve the competitiveness of Lebanon’s industries via a number of mechanisms. To begin • Shakadif Industrial City – located in the South with, MoI will provide the necessary infrastructure near Jezzine (waste treatment, road linkages, power generation etc) that has so far been lacking in its classifications • Tebna Industrial City – located in the South near of industrial zones. The environmental setting is Sidon, Tyre and Nabatieh. particularly disposed to benefit, considering current operating conditions for industry. Additionally, • Dmoul Industrial Park – located in the South in in recognition that land prices are a principal Ansar impediment to competitiveness of industry in Lebanon, this initiative aims to offer long-term leasing 43  IDAL 2014, Lebanon’s Private Industrial Zones Special Focus | 33 The World Bank of municipal lands at very low prices to industries in Beirut and develop an industrial park to attract that relocate to the zones. Afore-mentioned space foreign and domestic investments on manufacturing and scale externalities will also be in effect. and related activities. The SEZ includes an extremely generous set of fiscal incentives44 53. The Ministry of Industry is developing in addition to labor regulatory incentives. Indeed, the master plans and feasibility studies for the provision of a 100 percent corporate tax exemption three mentioned industrial parks, with technical without time limits and a 100 percent exemption assistance by UNIDO and funding from the of withheld taxes and social security contributions Italian Government. The master plans will be for employees is almost unheard of these days, comprehensive, setting the ground for commencing even within the SEZ environment. The TSEZ Law infrastructure construction in the three locations. also includes the establishment of Tripoli Special These studies will cover legal/regulatory, financing, Economic Zone Authority as a distinct, autonomous financial and management aspects of the zones legal entity (reporting to the Prime Minister’s office) development and operations, and include market/ for oversight of the TSEZ program. demand assessments and the preliminary design of on-site infrastructure. The project findings, conclusions and recommendations will inform investment decisions by the government or private sector investors. It is expected that these activities Constraints to will pave the way for the allocation by the Council for Development and Reconstruction (CDR) of seed Manufacturing in funding for industrial infrastructure building, through bilateral contribution from the Italian government Lebanon – Is there a and other sources. In a second phase, these funds will capitalize on the present UNIDO ongoing Case for Spatial Industrial project outcomes and be utilized as a stimulus for encouraging private investments in industrial Infrastructure? infrastructure 56. In thinking about what role industrial 54. In addition to industrial parks, Lebanon parks and SEZs may play in supporting the also has established special economic zones, or competitiveness and sustainability of Lebanon’s ‘free economic zones’, which operate under the manufacturing sector, one of the most important office of the Prime Minister. The first of these, the lessons from global experiences of zone programs Logistics Free Zone, is based in Beirut and operated is to focus on the problems to be solved. What are by the Port of Beirut. This zone, established by law the constraints that are holding back investment by in 1995 but launched only in 2007, is designed the private sector (domestic and private) and what are under a ‘freezone’ model, which aims to attract the factors that drive up costs in the manufacturing foreign and domestic investment in trade-related sector and thus impede competitiveness? activities, including transport, transit, and logistics. It offers 100 percent foreign ownership and customs 44  This includes (i) 100 percent customs exemption on imported raw material; (ii) duty free export of finished goods; exemptions. (iii) duty free import of construction material, equipment, office machinery and spare parts; (iv) 100 percent exemption on VAT and excise tax for goods and services destined for exports; (v) 55. In 2008, the government passed a law for 100 percent exemption on corporate profit tax (provided that not the establishment of the Tripoli Special Economic less than 50 percent of the workforce is Lebanese and the value Zone (TSEZ), to be established on a 50-hectare of fixed assets or capital is greater than USD 300,000); (vi) 100 percent exemption on withheld tax on salaries for employees site adjacent to the Port of Tripoli in the North of of tenants and on social security contributions; (vii) 10 percent the country. This SEZ is expected to go beyond the exemption on building permit fees and built property tax; and trading and logistics role of the Logistics Free Zone (viii) 100 percent exemptions on shares and bonds issued by companies within TSEZ. 34 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD 57. Data from the most recent World Bank Enterprise Surveys (2013) can be instructive in understanding the constraints facing the sector. Overall, evidence from the survey suggests that currently, due the different investment climate constraints facing manufacturing sector in Lebanon, capacity utilization45 in food and non- food manufacturing is at 60 percent and 68 percent respectively and falling to 33 percent in Bekaa Valley. Unsurprisingly it is the small businesses most affected with capacity utilization at an average of 67 percent versus 82 percent for FIGURE 25. Top obstacles identified by Lebanese manufacturing establishments*. large firms. * Note: excludes ‘political instability’ and ‘corruption’ Source: World Bank Enterprise Surveys (2013) 58. As might be expected, political instability is far and the most important constraint identified by enterprises – close to 60 percent of 59. Looking at the issue of electricity in all enterprises identified political instability as more detail, Table 3 shows that Lebanon’s the single biggest obstacle they face. Corruption, manufacturing sector is particularly hard hit. too, stands out – it is identified as a major constraint Lebanese manufacturing firms face long wait to by more than 60 percent of establishment, although obtain electricity connections to their establishment as the top obstacle by less than 7 percent. Beyond – in the case of the food manufacturing sector an these two, however, inadequate access to quality, average of 130 days, compared with 56 days for affordable electricity stands out, particularly for all firms in Lebanon and just 13 days for firms in firms in the manufacturing sector, where it is Jordan. More importantly they face poor service. identified a major constraint by 70 percent of firms Manufacturing firms face on average more than and as the top obstacle by more than 16 percent. 300 hours per month of electricity outages – more Figure 25 shows that for manufacturing enterprises, than 10 hours per day – with cost impact equivalent once removing political instability and corruption, to more than 8 percent of annual sales. This is electricity is far and away the biggest constraint. almost three times the global average. As a result, Moreover, while access to finance and high taxes 86 percent of manufacturing firms own generators are second and third on the list, land issues are also and rely on them for around half of their power highlighted as a significant constraint. supply. This will have a significant cost impact on Table 3. Assessment of electricity constraints identified in Enterprise Surveys (2013). Avg hours of electricity Losses from electricity outages Days to obtain electricity Electricity identified outages per month (% of annual sales) connection as a major constraint All countries 16.6 2.6 32.0 32.0 Middle East & North Africa 114.4 4.7 41.1 40.5 Lebanon - all enterprises 262.6 5.7 56.0 55.1 Lebanon - manufacturing 331.5 8.1 84.7 69.8 Lebanon - food & manufacturing 323.4 6.6 129.9 77.6 Source: World Bank Enterprise Surveys (2013) 45  These estimates are at a 90% confidence level. Special Focus | 35 The World Bank production, particularly in key processing sectors 63. However, it is also clear from the like food, chemicals, and metals. assessment of enterprise constraints in the manufacturing sector that basic industrial parks 60. After removing political instability and alone may not be sufficient to overcome some corruption, land is the fourth biggest constraint of the competitiveness challenges, particularly facing Lebanese manufacturing establishments. for firms looking to compete in export markets. There are three main ways in which land impedes Indeed some of the constraints identified highlight manufacturing processes in Lebanon from operating the importance of going beyond simply infrastructure at their full capacity. The first way is through the provision, including the potential role for regulatory scarcity of empty and well-located land plots for regimes more common in SEZs. For example: industrial operations; the second is through the high prices of available land plots; and the third is • Corruption and links to regulatory environment: through the dominating incentive to engage in real While firms do not identify licensing and estate activities rather than manufacturing activities. permitting as a specific constraint, they do indicate high prevalence of requirements to 61. A survey carried out as part of the pay bribes for obtaining construction permits feasibility study for the Tripoli SEZ46 also (42 percent of firms report expecting to give highlighted electricity quality and pricing as the a bribe), obtaining electrical connection (17 most important constraint facing manufacturing percent) or an operating license (12 percent). firms. This survey, however, also identified access Such a situation could be attenuating in an to and cost of industrial land as the second biggest industrial zone environment with a dedicated constraint facing firms. ‘one-stop’ facilitation arrangement, and even more so in a regime which streamlined 62. The prominence of these infrastructure regulatory processes. related constraints suggests that industrial parks could play an important role in facilitating • Crime: More than 30 percent of manufacturing competitiveness, provided they can solve the firms in Lebanon identify crime, theft, and electricity problem. However, it is important disorder as a major constraint. A fenced- to note that setting up of an industrial zone will in industrial park environment would help not automatically resolve electricity constraints. shield firms from such risks through improved Substantial targeted investments will be requires to infrastructure and central security. ensure the industrial parks have access to sufficient electricity resources to support the type of industrial • Customs and Trade Regulations: While customs activities they are housing. Moreover, the problem and trade regulations are not identified as a with electricity in Lebanon is not one of access high priority constraint, they are still identified and quality alone. Rather, high prices are the most as major constraints by some 20 percent of significant constraint facing industrial users. In the manufacturing firms, and more than 35 percent current form, there is nothing in the industrial zone of all large firms in the country. A specialized or SEZ programs that would resolve the electricity regime, under an SEZ or EPZ model (like what pricing constraint. This would require either some would be in place in TSEZ) would mitigate fiscal incentive (subsidy) or deregulation (e.g. this constrain both through a more liberalized within the SEZ program) to enable private provision regulatory environment as well as the provision of electricity47. of on-site customs services. 46  USAID (2011) Feasibility Study for the Tripoli Special Economic Zone, Phase 1 Main Report, Sibley International. 64. In addition to these determinants of 47  And to make this viable for a private investor would likely competitiveness, there is also a strong argument require a mechanism to sell excess power back into the grid. to be made for investment in industrial parks This type of liberalization is common in many SEZs around the to mitigate serious environmental externalities world. 36 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD imposed by the industrial sector, including toxic available. A notorious example of this comes from emissions, effluent release, and groundwater India, where the 2005 SEZ Act, which the offered overuse and contamination, among others. Well- possibility to automatically convert agricultural land developed industrial parks can help support improved to much more valuable industrial land, resulted in environmental practices, in part through investment widespread land-grabbing and dispossession of in common-use infrastructure and services, and small farmers. The outcome was largely speculation, can also provide an opportunity for more effective with most developers sitting on the land and very enforcement of environmental compliance. little industrial development taking place.48 Keeping industrial zone development in the hands of the government, however, is not a foolproof solution. While it may dampen speculation it may also result in land availability driving projects rather than Some Messages for development being prioritized in the most strategic locations (see below). Instead, what is needed is Industrial Zone and SEZ a balanced approach that incentivizes owners of land (private or public) to engage in strategic Development in Lebanon development. In some countries, incentives and land use derogations for industrial parks are 65. Considering the key constraints holding linked with explicit development commitments – back competitiveness of Lebanon’s industrial landowners, and even developers on leased land firms, there appears at least to be a prima facie within zones, may forfeit their benefits or even face case for the use of both industrial parks and SEZs land repossession if they fail to undertake agreed to address different aspects of the investment upon investments within a specific time period. climate for different types of investors. However, This type of ‘use it or lose it’ approach is common spatial industrial infrastructure interventions are in many local zoning regulations around the world costly and often difficult to get right. In a resource and has been applied in economic zones in many constrained environment it will be important to countries, including Jordan and Rwanda. consider very carefully the scale and most appropriate design of interventions, as well as the mechanics of implementation. Bearing in mind the lessons Select sites carefully, prioritize, and pilot learned from global experience with industrial parks and SEZs, following are some messages for the 67. With at least 72 identified industrial government of Lebanon to consider in developing parks in the country, prioritization is a must, further these programs: particularly where the government is intending to lead development or even to support private sector development through basic or connective Treat land as a strategic resource infrastructure provision. Prioritization will require making choices about where zones are most 66. Given the shortage of quality industrial likely to attract sufficient volume of investment. land in Lebanon and the experiences to date Despite the interests in using industrial parks to with industrial parks, it is important that seek ‘balanced’ regional development, commercial Lebanon’s industrial parks programs treat land viability is most likely in locations close to larger as a strategic resources and carefully avoid metropolitan areas or key trade infrastructure. Pilots creating incentives that distort the efficient use of land. Indeed, economic zone programs around 48  See Mitra, S. (2008). ‘Special Economic Zones in India: White Elephants or Race Horses’. Available at: http:// the world are rife with examples of land speculation ssrn.com/abstract=969274; Levien, M. (2012). ‘The Land by private and public interests that exploit Question: Special Economic Zones and the Political Economy land designations and incentives that are made of Dispossession in India’. Journal of Peasant Studies, 39(3-4): 933-69. Special Focus | 37 The World Bank should focus on these more attractive locations in reasons why private sector participation should order to demonstrate proof of concept. be encouraged: i) financing and risk mitigation – given the significant investments required in many 68. Private sector-led investments may also industrial parks (particularly large-scale SEZs), confer obligations on public investment, so even private sector finance can play an important role to here the development of a clear national industrial mitigate risk; ii) technical expertise – industrial zone development masterplans should determine development and management is not an area where the staging of investments. Such an approach can most governments have expertise; therefore, private also help guide private investments to locate along sector participation in development and operations prioritized development zones or corridors (see can reduce implementation time and risk; and most example from Thailand in Box 3). importantly, iii) market signal – the willingness of the private sector to invest in industrial parks provides an important signal to indicate the commercial Establish a careful collaboration with the feasibility of zones. private sector 70. This last point may be particularly 69. The global experience of industrial zone important for Lebanon, as it seeks to prioritize development suggests there is no clear ‘best which locations are most likely to support practice’ when it comes to driving development commercially viable industrial parks. With a of zones through the public or the private sector. dynamic set of industrial entrepreneurs, Lebanon Some of the recognized success stories (e.g., China has the possibility to engage the private sector in and Mauritius) have been led mostly by the public a cooperative (public-private) approach to zone sector. In other parts of East Asia, both private development. Evidence from a recent program in (e.g., the Philippines) and public (e.g., South Korea India (Box 4) suggests that a carefully constructed and Taiwan) models have been successful. In Latin set of incentives can deliver highly successful results America, the turnaround of many zone programs through public-private cooperation. during the 1990s can be partly attributed to the dynamic role of the private sector. In Africa, both models have been tried and neither has been a Go beyond basic infrastructure success. What seems to matter is not so much who runs the program but how—their objectives, 71. The analysis of industrial sector incentives, and capacity. However, there are three constraints shows that infrastructure matters, but Box 3. Provision of off-site infrastructure in Thailand. Thailand’s industrial estates law guarantees provision by government and state-owned utilities of offsite infrastructure up to the entrance to an industrial estate, while the developer or factory owner, in the case of a private zone, must fund and carry out all onsite development. Thailand’s law, however, does not guarantee immediate provision of off-site infrastructure, and development of offsite infrastructure might not take place for several years according to various agencies’ and parastatals’ budgets and plans for development of roads, power lines, and water systems. The law does allow a private developer to accelerate the development schedule, especially for electricity and water, by providing immediate funding for the requested development, which is reimbursed over time once industrial estate tenants begin to purchase power and water and sanitation services. The option for private financing of offsite infrastructure in Thailand, together with the potential delays if government funds are required, provide a powerful incentive for developers to situate their industrial estates close to major roads, ports, power plants, and/or rail lines. Though free to do otherwise, developers will have to carefully weigh and incur the costs and delays of doing so. These costs, however, will be borne entirely by the private developer so will have little or no effect on approval decisions by government. Source: IEAT 38 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Box 4. A tale of two programs in India. In India, the government has strongly promoted the use of SEZs. Between 2005 and 2012, fully 580 SEZs were approved, but only 124 became operational, and most of those were IT office parks under 20 hectares. Many were speculative investments spurred by the ability of SEZs to make compulsory purchases of land ‘in the public interest’. Relatedly, a scheme for apparel industry parks offered generous grants of up to 75% of infrastructure costs, but ran into problems (with only two built in total): government picked locations, and the parks risk being ‘white elephants’. The parks were simply not relevant enough for the private sector. India’s more recent Scheme for Integrated Textile Parks (SITPs) has taken a more collaborative approach. Government doesn’t pick the locations, but instead invites prospective firms upfront, and then underwrites firms who collectively pick a location and construct common infrastructure. The firms themselves have to put in equity and take out loans for at least half the cost, and the government funds the remaining cost with grants. The grants are performance- based and come in 5-6 tranches as the firms complete the park and show they’re serious. Since 2005, about 40 of these parks are either under construction or operational. By 2013, private investments had reached four times the amount of government grant disbursals, and approximately 42,000 jobs had been created, at a cost of approximately R150,000 per job. The program has also had the effect of ensuring that developments take place only in the most attractive locations and avoids the problems of long-delayed investment or dormancy that was common in the SEZ program. This was achieved by requiring that to receive government grants, the group of private entrepreneurs looking to develop the park are required to form a special purpose vehicle (SPV). The grant is disbursed only after the SPV, procures and pays for the land at the chosen location. Thus, prospective investors have to put their own money at stake to buy the land – this helps ensure public investment flows to locations with demonstrated private sector financing in place. Source: Jordan, L. and Saleman, Y. (2013) Industrial parks where firms need it: A new way to attract investment, CIIP Note, World Bank, Washington, DC. it is also clear that infrastructure is just a part of are well tailored and don’t offer skewed incentives. the solution to the competitiveness challenges of Lebanon’s manufacturing sector. Industrial parks, even in their broadest form, cannot address all the Avoid reliance on excessive fiscal constraints. But a program that uses the tools available incentives to it, and coordinated with other interventions, has the potential to be effective. This may require a 72. Across the world, fiscal incentives tend to combination of regimes, including industrial parks be the area in which most effort and resources and SEZs (see below on coordination), provided they are committed to underpin and differentiate an Box 5. China’s industrial parks - infrastructure ++ China has had one of the largest and most successful networks of industrial parks, with more than 900 zones employing 40 million people*. Beyond the high profile SEZs, the success of China’s program has been the development of smaller-scale industrial parks, catering mainly to the SME sector. Such zones have included many highly specialized clusters (‘specialty cities’ focusing on specific products like footwear, toys, etc.) that link SMEs with each as well as upstream and downstream along the value chain. The recipe for these industrial parks starts with basic industrial infrastructure, but goes well beyond it. All industrial parks are provided with the standard ‘five connections and a levelling’, including energy, water, telecommunications, roads and ports, along with land preparation. They also typically include low cost factory shells, security, and often low cost (or free) workers accommodation adjacent to the factories. This is supported in most industrial parks with technical training and technology transfer facilities. Taken together, the offering helps overcome many of the barriers to SME investment and growth by providing a ‘plug and play’ environment that minimizes investment requirements and risks. * Stein, H (2009) “Africa, industrial policy and export processing zones: lessons from Asia” in Noman, A. Botchway, K., Stein, H and .Stiglitz, J. (eds) (2012). Good Growth and Governance in Africa: Rethinking Development Strategies, Oxford University Press: Oxford Special Focus | 39 The World Bank industrial zone or SEZ program. In the competitive as tools for infrastructure provision and use SEZs environment of investment attraction, governments simply as instruments of trade and investment make a fair argument that if their neighbors are policy. But countries that have had the most offering incentives it is difficult for them not to offer transformational success with industrial parks. But the something similar. However, the arguments against countries that have been most successful with SEZs fiscal incentives are pretty conclusive. Most research (see Box 6) used their zones expressly as a vehicle suggests that fiscal incentives are ineffective as a pilot policy reforms. Indeed, industrial parks (and source of differentiation, with the end result merely particularly SEZs, with their independent legal regime) an increasing ‘race to the bottom’ and transfer of rents are ideal for experimentation, not only because of from governments to private investors. In general, their enclave nature, but also because they have built- fiscal incentives should not be excessive and should in compliance mechanisms on the firms and investors be well targeted and consistent with the national operating in them (e.g. the ability to issue licenses, economic/industrial strategy that the government to monitor firms in a short timeframe, and ultimately is pursuing. This is so as to not cause distortions to revoke a license or terminate a lease). This latter whereby the incentives lead to relocation of existing benefit is relevant in Lebanon not just in SEZs but also businesses to the zones rather than the establishment in industrial parks. of new business. In addition, macroeconomic stability should not be compromised or aggravated. 74. In the Lebanese context, such potential In the case for Lebanon, fiscal sustainability has for experimentation may be particularly been a significant vulnerability since the 1990’s, important given the political space for reform at with revenue extraction based mostly on regressive the national level is so constrained. Thus, giving policies. As such, these fiscal incentives are bound local autonomy (with checks and balances) through to cause additional transfer of resources from the an industrial parks and/or SEZ program offers the more taxed, less privileged majority to the less- potential for the emergence of innovative solutions taxed elite. This should be considered in light of involving the public and private sectors. This could the fact that the decision to establish new viable involve, for example, approaches to combining businesses in SEZs or industrial parks depends more refugee and Lebanese labor, innovative skills on favorable market conditions and not so much on development programs, or incentives to promote fiscal incentives. formalization. It could also involve experimental programs that link fiscal incentives for upgrading technology and obtaining quality certifications Consider the opportunities for policy with support for facilitation export market access. experimentation One can also imagine using the industrial parks to pilot mechanisms to incentivize and enforce 73. Most countries use industrial parks simply environmental and social compliance. Box 6. Using zones to pilot reforms. China famously used their SEZs, particularly Shenzhen, to as experimental ‘laboratories’ for economic reforms that would have been politically risky to adopt on the national level. Sweeping reforms were introduced through Shenzhen, including the abolition of price controls, the introduction of the first labor contracts along with pensions and labor insurance, the privatization of SOEs, and opening up the banking system to foreign investment. Most recently, the government is piloting full flotation of the Yuan in the Shenzhen SEZ. Mauritius used their EPZ regime over several decades as a bulwark for reform, introducing labor reforms and gradually shifting the economy’s focus from import substitution to export promotion. Indeed, with its most recent ‘duty-free island’ initiative, it is clear that the reforms once started inside the EPZs have now encompassed the country. Source: Farole, T., Norman, M., and Kilroy, A. (2014) “Special Economic Zones and Cities: opportunities and benefits for South Africa”, World Bank Cities Support Program to National Treasury. 40 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Box 7. The conflicts of multiple and overlapping zone regimes - the case of Vietnam. Vietnam has embraced the concept of industrial zone development, creating an estimated 223 industrial and Export Processing Zones, 13 Coastal Economic Zones, 26 Bordergate Economic Zones, two High-Tech Zones and 600 small-and-medium-enterprise industrial parks since 1991. Vietnam’s wide range of zone types is however governed by a complex regulatory structure that crosses a number of national ministries and agencies and includes significant roles for subnational entities. At the highest level, the Ministry of Planning and Investment (MPI) is responsible for Export Processing Zones, Industrial parks, and (Coastal) Economic Zones; the Ministry of Trade has primary jurisdiction over Bordergate Economic Zones; the Ministry of Science over High-Tech Zones; and the Ministry of Agriculture over High-Tech Agriculture Zones. In addition, the SME industrial parks / clusters are regulated at the provincial level and do not report in to any ministry. Export Processing Zones were defined at Law as being ‘governed under central authority,’ yet the MPI is responsible for preparing master plans in consultation with provincial People’s Committees and are administered by individual EPZ Management Committees, while industrial parks are administered by Industrial Zone Management Boards. While a 2008 law aimed to simplify the network by creating single, provincial management committees for all types of SEZs, multiple exceptions were made and new complexities introduced. In the case of Vietnam competition across government Ministries, combined with a tendency to ‘decentralize the details,’ contributed to unnecessary complexity. Although this decentralization was effective in some respects (creating healthy competition amongst provinces), it also contributed to a proliferation of zones models. The regulatory differences between each are often small; the important difference being who controls them (the Prime Minister directly, various Ministries, provinces, etc.). This has led to a complex array of choice (and scope for bargaining) for investors, resulting in a politicized process, with many inefficient investments getting approval. Avoid proliferation and ensure coordination 75. Finally, as Lebanon pursues the opportunities to develop industrial parks and SEZs, careful coordination among ministries will be critical to success. As noted previously, various initiatives related to industrial parks and SEZs have been launched by, among others the Ministry of Industry, IDAL, the Prime Minister, and the Central Bank, as well as by the private sector (e.g. Association of Lebanese Industrialists). By and large these initiatives have been uncoordinated and not linked to any national industrial policy. This creates a risk of proliferation, overlaps, and even conflicts that could undermine the overall effectiveness of the initiatives. Special Focus | 41 The World Bank II. Tech Startup Introduction Ecosystem: The 76. A new type of digital entrepreneurship and innovation is emerging in urban areas in Case of Lebanon 49 both developed and developing economies. Various developments, particularly those led by Information and Communication Technology (ICT), have reduced the cost of innovation and market access substantially, allowing digital entrepreneurs to compete with established industries. Today a Abstract tech startup can be created with just a laptop and Internet connection. This has led to a surge of tech A new wave of entrepreneurship driven by startups in cities worldwide, where communities of small digital businesses is sweeping both entrepreneurs interact in urban environments. developed and emerging economies. Information and Communications Technology (ICT) has 77. Tech ecosystems also create new sources dramatically reduced the cost of innovation and of employment. Tech startups grow rapidly, and market access, allowing small tech entrepreneurs though many fail, overall job creation is increased.50 to compete with established businesses. Today, The Middle East and North Africa (MENA) region a startup can be created with just a laptop and could benefit from this trend for job creation. MENA Internet connection. This has led to the surge is characterized by high unemployment, particularly of tech startup ecosystems worldwide, where among young people with a university degree (Figure communities of entrepreneurs interact. Lebanon 26). Although the figure for Lebanon is one of the in particular can benefit from this phenomenon, lowest in MENA, still some 13 percent of the labor particularly for job creation. Tech startup founders force with a university education is unemployed. are predominantly young and have a college Traditional business models are failing to absorb degree, generating employment for educated this potential talent pool. If nations in MENA can youth. The innovation that startups generate also successfully harness the tech ecosystem, there helps make the tech sector more dynamic and could be significant job gains, given that tech startup sustainable. Lebanon’s tech scene is becoming founders are overwhelmingly college-educated increasingly attractive driven by the example of (Figure 27). One attraction is that small homegrown successful startups that have tapped regional and digital businesses can be started quickly with few global markets and the innovative initiative by resources. As the founder of an Egyptian mobile the country’s central bank in facilitating venture application startup notes: “We are lucky that we capital financing. The nation now needs to don’t need the support of anything except good leverage these developments by finding solutions wattage, as opposed to manufacturing goods or to constraints hindering the blossoming  of its opening a store. Those kinds of businesses need the tech startup ecosystem. support of the government.”51 50  Research into the United States job market found that job gains among young tech firms outweigh job losses from early- stage firm failures. See: Hathaway, Ian, 2013, Tech Starts: High- Technology Business Formation and Job Creation in the United States, Ewing Marion Kauffman Foundation Research Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2310617 51  Seligson, Hannah, 2011, Egypt’s Entrepreneurs Look 49  The authors are Victor Mulas (Senior Operation Officer, Beyond the Revolution, The New York Times, July 16, http:// Innovation Labs), and Michael Minges (Senior ICT Consultant) www.nytimes.com/2011/07/17/business/global/egypts- with Elene Allende (ICT Consultant). entrepreneurs-look-beyond-the-revolution.html. 42 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Unemployment Rate of Those With Tertiary Degree, 2013 Percentage of Tech Entreprenneurs With a University Degree, 2015 40% 37% 97% 93% 89% 89% 22% 13% Lebanon Egypt Iran Jordan Egypt Jordan Lebanon UAE FIGURE 26. Unemployment among university educated FIGURE 27. Unemployment among university educated and education levels among MENA startup founders. and education levels among MENA startup founders. Note: Data Lebanon refers to 2012. Note: Data is from a survey of 455 tech startup founders. Source: Adapted from Eurostat and WAMDA. Source: Adapted from Eurostat and WAMDA. 78. Tech startups can stimulate innovation in Lebanon and the rest of the world, the diaspora have Lebanon’s ICT sector. Lebanon’s Information and a huge impact on the country’s economy. In 2014, Communication (InfoComm) services sector had a remittances accounted for US$ 7.7 billion or 17 value added of LBP 1,978 (US$ 1.3) billion in 2013, percent of the country’s GDP, the highest ratio in contributing 2.8 percent of GDP, a ratio that has not MENA.53 varied much over the last decade (CAS 2014). It is dominated by communications services accounting for around three-quarters of ICT service revenue. Tech startups can help diversify the sector from traditional software development and retail trade of Tech Startup Ecosystem IT equipment into consumer-oriented applications and services. There is also great potential for 80. The tech startup ecosystem refers to exporting these services throughout the region. the elements that are important for nurturing small digital businesses so that they can scale 79. Lebanon has an entrepreneurial culture and eventually be acquired or become publicly with a diverse population that is prone to listed companies. Key ecosystem attributes innovation and where risks associated with include markets, the business environment, spaces, running a business is the norm. The country’s networking, and funding. Markets are needed for waves of emigration have given it considerable purchasing startup products and supplying labor; exposure overseas. The last forty years triggered an spaces where startups can work and network; ongoing exodus to North America, the Gulf States, the business environment including government Europe and Australia with over 600,000 Lebanese procedures and Internet access; networking for residing abroad in 2012.52 This makes Lebanon open startups to interact with each other as well as to new ideas and creates contact with other nations. mentors and investors and funding for startups to Many of the founders of the country’s leading tech scale. In most developed countries, the ecosystems startups have lived or studied abroad, exposing have generally evolved organically in urban areas them to global digital trends and triggering thinking on how these trends can be adapted to regional circumstances. Apart from creating a bridge between 53  The World Bank, 2014, Migration and Development Brief 23, 52  Migration Policy Centre, 2013, Lebanon, http://siteresources.worldbank.org/INTPROSPECTS/ http://www.migrationpolicycentre.eu/docs/migration_profiles/ Resources/334934-1288990760745/ Lebanon.pdf MigrationandDevelopmentBrief23.pdf Special Focus | 43 The World Bank Own Cellphone (% of population) Internet Use (% of population) 100 100 100 100 97 100 90 93 91 90 86 85 100 80 80 90 70 70 80 70 60 65 60 60 50 56 50 50 40 40 45 43 40 30 30 37 30 20 33 10 20 28 20 0 10 14 10 0 0 Other Smartphone Cellphone (% of population) FIGURE 28. Cellphone and internet penetration, 2014. FIGURE 29. Cellphone and internet penetration, 2014. Note: Data for Egypt, Jordan, Lebanon and Tunisia refer to Note: Data for Egypt, Jordan, Lebanon and Tunisia refer to population 18 and older. Data for Morocco refer to population population 18 and older. Data for Morocco refer to population residing in electrified areas. residing in electrified areas. Source: Pew 2015 and national ICT regulatory agencies. Source: Pew 2015 and national ICT regulatory agencies. clustering around innovation districts.54 The insufficient competition in its mobile sector. Under challenge for policymakers and other stakeholders a duopoly arrangement, companies manage the hoping to assist the ecosystem is identifying the mobile networks for the government with market proper balance, scope and dimension without share about evenly divided. Government control of interfering with the organic and often haphazard the sector has kept tariffs relatively high, repressing nature of innovation. growth and inhibiting innovation. 83. On the other hand, at 59 percent of the adult population, Internet usage in Lebanon is positioned between high levels in the Gulf Markets and the other MENA countries (Figure 29). The relatively high education level and inexpensive 81. In order to scale up, tech startups need fixed broadband tariffs have driven take-up. Mobile demand for their products as well as a source Internet is also popular with 56 percent of cell of labor. Most startup services are related to phone users having a smartphone. However only cellphone users and online audiences, so the size, two percent of Lebanon’s Internet users shop online dimensions and growth of the mobile and Internet with trust and payment concerns holding back the market are critical. On the supply side, established development of e-commerce in the country. ICT firms and the higher education system are the two most important suppliers of talent to the startup 84. Lebanon has the highest tertiary education ecosystem. ICT firms are also a possible funding enrolment rate in the Arab world (Figure 30). source and place of employment for failed startups. According to an opinion survey, the quality of the education system is assessed as one of the best 82. Mobile phone ownership was 85 percent in the region, ranking 28th out of 143 countries among Lebanese adults in 2014, one of the lowest (Figure 31). The challenge for the ecosystem is rates in the MENA region (Figure 28). The main not so much fresh talent as experienced workers. reason is that unlike most other countries, there is Startups sometimes find it difficult to recruit staff 54  Katz, Bruce, and Julie Wagner, 2014, The Rise of Innovation Districts: A New Geography of Innovation in America,” Brookings Institution Metropolitan Policy Program, http://www.brookings.edu/about/programs/metro/innovation- districts. 44 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD School Enrollment, Tertiary (% gross), 2013 How Do You Access the Quality of Business Schools? [1 = extremely poor – among the worst in the world; 7 = excellent – among the best in the world] Iran 58 7 0 Lebanon 48 18 17 20 6 Value Rank Jordan 47 43 40 5 5.3 5.3 4.7 60 MENA 36 4 3.8 80 3 Egypt 33 103 100 2 120 UAE 2 11 1 143 140 0 10 20 30 40 50 60 70 0 160 Egypt Iran Jordan UAE Lebanon FIGURE 30. Tertiary school enrollment and quality of FIGURE 31. Tertiary school enrollment and quality of business schools. business schools. Source: Adapted from World Bank and World Economic Forum. Source: Adapted from World Bank and World Economic Forum. with industry experience.55 Another issue is that workshops. The center also holds an innovation many university students aspire to comfortable jobs contest where students pitch their tech startup working for business or government rather than ideas for the chance to win US$ 15,000.59 A being their own bosses or taking a risk working for a number of startup founders are AUB graduates. startup. The country’s universities need to do more to promote entrepreneurship as a viable career.56 • Beirut Arab University (BAU): The Center for Entrepreneurship (CFE) was established in 85. Several Lebanese universities have September 201160. CFE aims to promote activities relating to entrepreneurship. There are entrepreneurship by identifying individuals with 31 private universities operating in Lebanon and one entrepreneurial potential, providing them with public university (Lebanese University).57 Most are relevant input and equipping them with pertinent based on French and American university models. skills. CFE offers counseling, training, funding, Some of the leading universities with programs in incubation and mentorship. The facilities include support of entrepreneurship and innovation include: a workspace, computer lab, access to databases and an entrepreneurship library. • Saint Joseph University (USJ): Berytech, involved in all facets of the ecosystem, was an initiative • Haigazian University: Launched a three-year of USJ, the largest private university. Two program on social entrepreneurship in 2012 incubators have been developed alongside its supported by USAID.61 campuses. 86. The Investment Development Authority • American University of Beirut (AUB): The 58 of Lebanon (IDAL) is actively encouraging Darwazah  Center for Innovation Management investments in the ICT sector. It offers incentive and Entrepreneurship carries out research, field schemes providing investors with work permits studies, benchmarks and organizes seminars and and establishment-fee reductions. There is also a proposal awaiting approval by the Council of 55  Talty, Alexandra, 2013, Beirut Has a Vibrant, Growing Tech Scene, Techonomy, May 28, Ministers that would allow startups to benefit from http://techonomy.com/2013/05/beirutyes-beiruthas-a-vibrant- 59 https://www.aub.edu.lb/news/2014/Pages/darwazah- growing-tech-scene/. contest.aspx 56  Sioufi, Maya, 2012, Emerging Entrepreneurs, Executive 60 http://www.bau.edu.lb/Library/Files/Uploaded%20Files/ Magazine, December 5, http://www.executive-magazine.com/ CFE.pdf business-finance/business/entrepreneurs-lebanon-developing. 61 National News Agency, 2014, Haigazian University 57 http://www.higher-edu.gov.lb/english/default.htm Organizes Social Entrepreneurship Competition, April 4, http:// 58 http://www.aub.edu.lb/osb/darwazah/Pages/home.aspx nna-leb.gov.lb/en/show-news/24635/. Special Focus | 45 The World Bank tax breaks and other incentives.62 According to IDAL, there are around 300 ICT enterprises in Lebanon and 4,421 people employed in the sector. 87. The country’s telecommunication operators have not been especially active in supporting the tech startup ecosystem. One reason may be that the sector structure is not particularly conducive to innovation and risk. Wired telecommunication operator Organisme de Gestion et d’Exploitation de l’ex Radio Orient (OGERO) is owned by the government whereas the two mobile companies operate the FIGURE 32. Beirut Digital District. networks through management agreements. None of Source: Adapted from http://beirutdigitaldistrict.com. the telecommunication operators plays an extensive direct role in the startup ecosystem nor does it appear that there is much job movement between them and Cisco assists the AMIDEAST Entrepreneur Institute, startups. which helps to train entrepreneurs active in the ICT field.63 Intel has sponsored a boot camp for aspiring 88. Berytech has been at the center of startups.64 Microsoft offers its startup-oriented Lebanon’s tech startup ecosystem evolution. It Bizspark software in partnership with Berytech.65 emerged from St. Joseph University in 2001 as a non-profit with several banks and large private companies as shareholders. A big believer in clustering, Berytech aims to enhance Lebanon’s ICT sector by supporting entrepreneurs in technological Spaces poles where they can interact with like-minded businesses and academia. The first pole was created 90. Workspaces are critical for participants at Mar Roukoz in 2002, next to the engineering in the tech ecosystem with their characteristics faculty of the university. Berytech Technology and varying according to different needs. Spaces range Health was launched in 2006, in Mathaf, adjacent from offices for established firms and organizations to the medical faculty and is aimed at entrepreneurs to co-working and flexible offices for startups as in the health field. Berytech’s latest venture is an well as specialized spaces such as incubators and urban cluster as one of the three partners in the accelerators. Ideally, groups of tech organizations Beirut Digital District (BDD) being constructed in should be nearby each other to leverage clustering the center of the city and a stone’s throw from the effects. This can happen organically or through main St. Joseph campus. The seven-story Berytech creation of special technological parks, zones or Digital Park opened in BDD in January 2013 and districts. houses accelerators, startups and established IT firms. Other Berytech initiatives include the 91. The Beirut Digital District (BDD) is a country’s first venture capital fund in 2009, which large redevelopment project in the Bachoura has invested US$ 6 million in 15 ventures. Berytech neighborhood in the center of the city that aims has helped launch over 90 startups, hosted over to become the heart of Lebanon’s tech ecosystem. 200 companies, trained over 3,000 entrepreneurs The project is a public private partnership between and created over 1,500 jobs. 63 http://amideast.org/lebanon/professional-development/ amideast-entrepreneur-institute 89. Some multinational IT corporations in 64 http://berytech.org/intel-and-berytech-partner-to-launch- Lebanon are supporting the tech ecosystem. first-ideation-camp-in-lebanon/ 62  http://www.bdlaccelerate.com/tag/startups/ 65 http://berytech.org/microsoft-bizspark/ 46 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD ZRE, a real estate firm, Berytech, and the Ministry open office space and a conference room. DigiHive of Telecommunications. BDD consists of several is operated by Berytech and located in Berytech new and renovated buildings covering three city Digital Park in BDD.69 In addition to workspace, blocks aimed at both established ICT firms and members have access to meeting rooms, access to startups as well as other organizations involved in Berytech’s entrepreneurship programs and use of the ecosystem. There are also plans for furnished a lab for product design and testing. It offers daily, apartments and a hotel as well as amenities such weekly and monthly memberships. as retail shops, exhibition spaces, an auditorium, gym, and kindergarten spread over the landscaped 93. Government incubators help to provide and pedestrian oriented area. The first building was support for entrepreneurs outside Beirut. They completed September 2012 and by June 2015 there employ traditional models of long term nurturing were three others including the Berytech Digital of entrepreneurs and small enterprises alongside Park (BDP) and the renovated BDD 1082. Another academic institutions or larger businesses and building will be ready next year and the flagship BDD are not characteristic of tech startup incubation, Hub complex is scheduled for completion in 2018. which is generally for a short period. The Business The existing buildings are fully occupied and already Incubation Association of Tripoli (BIAT) consolidates home to multinational and Lebanese IT companies, incubation services in Northern Lebanon.70 It startups, accelerators, venture capital firms and provides hosting facilities, business consulting, legal other entrepreneur-oriented institutions. By 2016, assistance, financing, marketing and mentorship 55 companies and 700 employees are expected to for companies. The non-profit organization was be working at BDD. established with the support of a European Union project at the Ministry of Economy and Trade of 92. A number of co-working spaces exist Lebanon. The South Business Innovation Centre providing an affordable option for startups to mix (SouthBIC) is located in Sidon with two outreach in an entrepreneurial environment. They are often locations in Tyre and Nabatieh.71 The Sidon location founded by the tech ecosystem community such has an industrial incubation facility designed to assist as tech firms, venture capitalists and entrepreneur companies with a manufacturing focus. SouthBIC support groups. Located in the Hamra neighborhood provides office space, mentoring, marketing and of Beirut, AltCity was founded in 2012 and offers financial training, as well as exhibition facilities for entrepreneurs co-working space, workshops and companies established in Sidon and the South of networking events. AltCity also runs an acceleration Lebanon, across all sectors. SouthBIC is funded by boot camp (see below). Coworking+96166 is the European Union. an initiative of MIT Enterprise Forum and Bader located in the Sursock Palace in Beirut’s Achrafieh 94. Lebanon has historically lacked acceleration neighborhood, launched by Hala Fadel of Leap facilities. Seeqnce ran a program in Beirut offering Ventures. The name is a play on Lebanon’s telephone seed funding and graduated eight startups in 2012.72 dialing country code. Coworking+961 offers fast It was cited as one of the ten best in MENA.73 Due Internet, mentorship, workshops, networking and to the security situation, Seeqnce discontinued the office services. One of its noteworthy alumni is face-to-face program and is now focusing on virtual Hind Hobeika, founder of Instabeat.67 Launched in acceleration through its Alice portal.74 2012 and located on the fifth floor of a downtown 69 http://blog.berytech.org/berytech-digihive/ Beirut office building, Cloud5 is operated by real 70 http://www.biatcenter.org/index.php/cms/services/7 estate firm Solidere with Wamda, Cisco, AMIDEAST, 71 http://www.southbic.org/services.php?item_id=4 Microsoft and MEVP as founding partners. 68 It offers 72 http://www.economist.com/node/21560243 66 http://www.coworking961.com 73 http://www.wamda.com/2011/09/meet-the-top-ten- 67 http://www.wsj.com/articles/arab-tech-startups-begin-to- accelerators-in-mena attract-u-s-venture-capital-1415705692?mod=e2tw 74 http://blogs.wsj.com/middleeast/2014/01/20/going-down- 68 http://www.solidere.com/cloud5/#/about the-tech-rabbit-hole-with-beiruts-alice/ Special Focus | 47 The World Bank Ease of Doing Business Rank, 2015 Top Ten Business Environment Constraints, Lebanon, 2015 World MENA (rhs) UAE Lebanon Egypt Jordan Iran 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 0 0 1 Political instabiity 58.0 20 2 Electricity 11.1 22 40 4 Corruption 6.7 104 Access to finance 6.6 60 112 117 6 130 Tax rates 4.4 80 8 Customs & trade regulations 2.1 Practices of the informal sector 2.0 100 10 10 11 Access to land 1.9 120 12 12 Courts 1.8 13 Tax administration 1.6 140 14 FIGURE 33. Doing business and business constraints, FIGURE 34. Doing business and business constraints, 2015. 2015. Source: Adapted from World Bank Doing Business and Entreprise Source: Adapted from Entreprise Surveys. Surveys. 95. Several initiatives have been launched Entrepreneurs.77 Speed invests US$ 30,000 or announced with the potential to significantly in startups in return for ten percent equity. increase acceleration for startups in Lebanon: Services offered include product development, mentoring, marketing, accounting, and legal • The UK Lebanon Tech Hub was launched in services. Speed will have two cycles per year April 2015.75 Created by Banque Du Liban and with the top teams eligible for follow-on the United Kingdom Government, the Tech Hub acceleration in Silicon Valley. offers a 2-year program of mentoring, networking and services for entrepreneurs free of charge. • A regional accelerator that recently expanded to The first cycle selected 45 Lebanese companies Beirut, Flat6 Labs78 is partnering with Arabnet.79 with high growth potential; 15 companies with For each startup selected, an investment of higher potential will have the opportunity to US$ 10,000-15,000 in seed funding is made participate in the second phase based in London. in exchange for a minor equity stake in the A new office for Lebanese entrepreneurs in company. Startups receive four months of London’s Tech City enables them to leverage the mentorship, training from industry experts, rich ecosystem resources of the city as a catalyst legal support and an office space. for global growth. • In 2016, the business school L’École Supérieure • In addition to its co-working space, AltCity des Affaires (ESA) announced plans for “Smart Bootcamp was launched in 2015.76 After a two- ESA”, an incubator and accelerator in Beirut. week introductory program, top startups can Project partners include BDL, the French go on to receive additional support including Embassy, the French Ministry of Foreign Affairs up to US$ 25,000 of seed funding in exchange and the Regional Chamber of Commerce and for equity (2-12 percent). The program aims to Industry of Paris and Ile-de-France. The program accelerate 30 startups a year. will be located on the ESA campus and last nine- months. Startups will be able to take advantage • Speed@BDD is an initiative of Middle of overseas networking opportunities through East Venture Partners, the Bader Young the Agence Universitaire de la Francophonie Entrepreneurs Program and Lebanon for 77 http://speedlebanon.com 78 http://www.flat6labs.com/location/beirut/ 75 http://www.uklebhub.com 79 http://www.flat6labs.com/press/flat6labs-announces-a- 76 http://www.altcity.me startup-accelerator-in-lebanon-in-partnership-with-arabnet/ 48 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Broadband Pricing per Month, 2015, US$ Average Internet Connection Speed (Mbps), June 2015 Price per month (US$) % GDP per capita $80 0% 8 $70.6 $70 0.7% 1% 1.2% 1.2% 7 $60 1.9% 1.9% 2% 2.4% 2.5% 2.2% 6 $50 2.5% 3% 5 $40 $30 $28.0 $27.2 4% 4 $20.9 $20 $15.9 5% 3 $10.7 $9.8 $10 $7.1 $5.4 6% 2 6.2% $3.5 $0 7% 1 0 Lebanon Egypt Jordan UAE FIGURE 35. Broadband pricing and speeds, 2015. FIGURE 36. Broadband pricing and speeds, 2015. Note: Fixed broadband pricing refers to advertised speeds of at least 1 Megabit per second (Mbps) whereas mobile pricing refers to at Source: Adapted from Akamai. least 1 Gigabit (GB) of data. Source: Adapted from operators. (AUF) and France Tech, a French government 97. In general, Internet affordability and initiative that supports startups.80 quality in Lebanon is poor compared to other MENA countries. Affordability of a monthly fixed broadband subscription is relatively good (Figure 35). However, Lebanon fares poorly compared to other countries in the region for mobile broadband Business Environment affordability and broadband speeds (Figure 36). One factor is that the telecommunication market structure and Support is outdated. The main fixed telecommunications is government owned Organisme de Gestion et 96. The business environment for Lebanese d’Exploitation de l’ex Radio Orient (OGERO) and tech startups could be improved. The country the two mobile companies operate the network on ranks 104th out of 189 countries in the World Bank’s behalf of the government. This problem has been 2015 Doing Business Report (Figure 33), down two recognized for some time but no action has been positions from the previous year. Areas relating to the taken. Reforms to increase competition through the startup tech environment include starting a business participation of the private sector are overdue. Lack (ranked 119), protecting minority investors (106), of public sector investment in ICT infrastructure enforcing contracts (110) and resolving insolvency and limited competition has negatively affected (136), all areas where Lebanon’s score is worse influenced network quality and pricing. The average than its overall rank. These impact the ability of Internet speed in Lebanon is 1.8 Megabits per startups to register their business in order to attract second (Mbps), lower than other MENA countries. funding and discourage risk taking if insolvency, Less than 10 percent of the available capacity of the inevitably common among startups, is not dealt with Internet cables is made available to the market.81  efficiently. Among the top ten business constraints, an exogenous factor, the political situation is ranked highest by some margin (Figure 34). Access to finance, which is often a concern among tech startups, is only reported to be an obstacle by seven percent of enterprises. 80 http://www.businessnews.com.lb/cms/Story/StoryDetails. 81 http://www.executive-magazine.com/economics-policy/ aspx?ItemID=5406 four-reasons-lebanons-internet-is-so-slow Special Focus | 49 The World Bank • The Banque du Liban Accelerate event in Networking November 2014 was one of Lebanon’s first international startup conferences bringing 98. Well-functioning tech ecosystems are together over 1,600 entrepreneurs, investors, characterized by continuous connections between and startup specialists from 25 countries.88 It entrepreneurs and other players facilitated by provided an opportunity for BDL to publicize its an active event scene. Many of the startup spaces recent policy allowing banks to invest in startups. mentioned above organize ongoing event programs to connect entrepreneurs with founders, experts and • The country’s tech ecosystem has also been investors. There are also a number of conferences, promoted abroad through events such as Startup competitions, workshops and other events Lebanon held in New York City in May 2015.89 connecting the Lebanese tech startup ecosystem: Organized by the American Lebanese Chamber of Commerce, the event brought together • Beirut based ArabNet hosts an annual tech leading Lebanese startups, the tech diaspora and conference in the city with dozens of speakers and international investors. A similar event was held side events.82 It also hosts competitions including in Singapore in September 2015. the opportunity for winners to participate in a free three-month startup program in Silicon Valley. 99. There are a number of other support According to its surveys of the competitions, over programs for startups in Lebanon: a third of finalists met investors, more than two thirds met new clients, and more than four fifths • Bader is an organization established in 2005 to received media exposure with the finalists creating promote entrepreneurship in Lebanon. It has a some 250 jobs across the region and collectively number of initiatives under its Young Entrepreneur receiving more than $7 million in funding.83 It was Program including scholarships, workshops, the initially an event company but now ArabNet also annual Networking 961 event for the startup has a portal with a directory of startup firms and a community, a StartUp Cup competition for quarterly magazine.84 best business model, and a creative awards competition for startups working in creative • Bader organizes the annual Networking 961 industries. Bader also works with local, regional conference as well as its StartUp Cup business and global organizations to establish partnerships model competition and another competition for and expand exposure for Lebanese startups. startups in the creative industries.85 Bader has also funded three startups. • The MIT Enterprise Forum for the Pan-Arab • Endeavor is a non-profit organization that Region, based in Beirut, hosts and supports mentors and helps accelerate high-impact various events such as the Euromed Roadshow entrepreneurs from around the world. It has and the ArabNet conference.86 chosen a number of Lebanese entrepreneurs for its program.90 • Wamda organizes MixNMentor events, several of which have been held in Beirut.87 • Lebanon for Entrepreneurs (LFE) was launched in 2013 by Lebanese diaspora organizations 82 http://communicateonline.me/events-awards/what-to- expect-at-arabnets-sixth-annual-beirut-conference Lebnet, LIFE, and SEAL.91 It aims to leverage the 83 http://communicateonline.me/events-awards/arabnet- diaspora’s contacts, particularly in Silicon Valley beirut-2015-to-boost-lebanese-startups#sthash.NzoTqJcK.dpuf 88 http://www.bdlaccelerate.com 84 https://startupdb.arabnet.me/?country=lb 89 http://startuplebanon.info 85 http://baderlebanon.com/programs/ 90 http://endeavor.org/entrepreneurs?country_ 86 http://www.mitefarab.org/events/ filter=Lebanon&industry_filter= 87 http://www.wamda.com/mixnmentor 91 http://www.lfepartnership.com 50 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD 10% 3% 75% Maximum amount of bank Total amount of bank capital Of bank investment insured capital that can be invested in that can be invested any 1 startup 80% 7 years 50/50 Maximum amount that can be Limit by which bank must sell Split between BdL and bank invested in the capital of a shares on any pro�its startup FIGURE 37. BDL Circular 331, 22 August 2013. Source: BDL. to assist Lebanese startups. LFE is one of the US$ 50 million IMPACT Fund with commitments partners in the SpEED@BDD accelerator that from four anchor banks.94 will send its top startups to Silicon Valley for additional mentoring. • In February 2015, Berytech launched Berytech Fund II with US$ 51.5 million in commitments from 19 banks and financial institutions.95 In addition, IM Capital, a Berytech subsidiary is managing US$ 15 million provided by the United Funding States Agency for International Development (USAID) targeting startups announced in April 100. A noteworthy development for startup 2015.96 funding was the central bank (Banque du Liban) Intermediate Circular No. 331 of August 2013 • In March 2015, Leap Ventures announced a $71 allowing banks to invest in Lebanese startups with million fund.97 up to 75 percent of the investment guaranteed (Figure 37).92 The ruling potentially makes available 101. Meanwhile local and regional equity around US$ 400 million assuming all banks invested investment funds have been active in Lebanon’s 3 percent of their capital. Some banks have already startup scene, providing over US$ 10 million been making investments in startups. This includes since 2010 (Table 4). BLC, which provided US$1.5 million to Cinemoz, a Lebanese video streaming service.93 Other banks 102. International crowd funding sites have that do not have the expertise to evaluate startups been used by some startups. Despite being based have been pooling capital into recently launched in Lebanon, crowd-investing platform Eureeca98 has venture capital funds that already exceed US$170 not made any investment in local startups. Zoomaal99 million for potential startup investment: 94 http://www.mevp.com/impact.aspx • In December 2013, Middle East Venture Partners, 95 http://berytechfund.org a Lebanese venture capital firm, announced its 96 http://im-capital.com/ 97 http://www.wamda.com/2015/03/leap-ventures-71m- 92 http://www.bdl.gov.lb/circulars/intermediary/5/37/0/ fund- Intermediate-Circulars.html 98 http://eureeca.com/Default.aspx 93 http://www.bankaudi.com.lb/GroupWebsite/openAudiFile. aspx?id=2454 99 https://www.zoomaal.com/ Special Focus | 51 The World Bank Table 4. Investment groups funding Lebanese startups. INVESTOR DESCRIPTION INVESTMENTS Berytech Fund Lebanese venture capital fund launched in 2008 investing in tech Lists 15 companies in portfolio including 12 startups startups. ü in Lebanon.* Middle East Venture Beirut headquartered venture capital firm founded in 2010 and Lists 19 companies in portfolio including seven Partners (MEVP) focused on early and growth stages investments primarily in the Lebanon-based startups. Middle East. Offices in Dubai and Silicon Valley. ü Bader Fund Its Building Block Equity Fund raised US$7.5 million dollars to sup- Has invested US$ 1.1 million in three Lebanese port small and medium enterprises. The fund is managed by Middle startups.** East Venture Partners. MENA Venture Angel fund established in 2010 and based in Dubai specializing in Lists 70+ companies in portfolio including two Investments (MVI) early stage investments throughout MENA. Lebanese startups.*** Wamda Capital Headquartered in Dubai, it is an early stage fund focused on the Lists 10 companies in portfolio including two based MENA region. in Lebanon.**** Source: World Bank research. * http://berytech.org/berytech_entity/fund/ *** http://mvi.vc/ ** http://baderlebanon.com/building-block-equity-fund/ **** http://staging.wamda.com/page/capital is a Lebanese crowd-funding (funders do not receive number of Lebanese startups particularly members equity) platform launched by Wamda, MEVP, HIVOS of the tech diaspora such as Georges Harik, one and Cairo Angels and Sawari Ventures. It mainly of Google’s first ten employees and Hala Fadel, a raises money for community development projects partner at Leap Ventures, of which some may have startup aspects. On the other hand, international crowd platforms have 103. The government loan program known as been used by several Lebanese startups. Roadie Kafalat provides entrepreneurs with low interest Turner used Kickstarter to raise $178,613100 while loans.102  There are different programs depending Instabeat raised US$ 56,374 on Indiegogo101 with on the nature of the business with a couple both exceeding their target amounts. Angel investors focusing on innovative startups of which several have been notable for providing seed funding to a have received loans from this facility. The EU has Table 5. Examples of successful Lebanese startups. Product Purpose Conception Status First legal music stream- Founded by Eddy Maroun Raised US$ 2.8 million in two rounds of Series A funding.* ing service in MENA. and Elie Habib in 2012. Swimming self-tracker Founded in 2011 by Hind Received seed funding of US$ 100,000; US$ 56,374 on a that attaches to goggles. Hobeika. crowd-funding platform; and Series A funding. In addition, Hobeika won US$ 50,000 at the MIT Arab Business Plan Competition.** Online food recipe Founded by Carole Hani, Received US$ 500,000 in venture funding in 2012 and ac- network. Hala Labaki, and Daniel quired by Japanese recipe portal Cookpad for US$ 13.5 million Neuwirth in 2010. in 2014.*** Source: World Bank research. * https://www.crunchbase.com/organization/anghami *** http://www.wamda.com/2014/11/japan-cookpad-acquire- ** http://www.instabeat.me/blog/2014/01/21/award-winning- lebanon-shahiya-enter-arab-world startup-funding-instabeat-product-delivered-worldwide/ 100 https://www.kickstarter.com/projects/roadietuner/roadie- tuner-the-ultimate-guitarist-tool 101 https://www.indiegogo.com/projects/instabeat#/story 102 http://kafalat.com.lb 52 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Box 8. Creativity Meets Technology. Some feel that tech is the natural extension of the creative industries: “..one should not forget the rich tradition in Lebanon as concerns the press, publishing, literary and musical production, publicity and marketing. The computer industry is but the continuation of this tradition of creativity using 21st century technical means” (a) Lebanon’s history of involvement with the creative industries—media, design and fashion—can have important linkages to the tech sector and be leveraged to widen the scope and appeal of the ecosystem. Berytech launched the Beirut Creative Cluster in 2012 as a support mechanism for creative industries, particularly media.(b) It aims to help entrepreneurs working in design, content and digital media through business development. It works closely with Beirut Design Week (BDW), the largest design festival in MENA, taking place in the city every year. The event brings together thousands of visitors “to strengthen the creative economies, develop entrepreneurship, and promote Lebanon’s innovative culture.”(c) BDW 2015 included a session on the maker movement and the use of digital fabrication for creating affordable designs. One of the speakers was Guillaume Crédoz a freelance architect and designer who founded FreshlyBakedToday, a 3D printing hub in a former bakery in Beirut’s Mar Mikhayel neighborhood featuring a workshop and gallery for digitally fabricated artifacts.(d) Crédoz launched MENA’s largest 3D printer during BDW, designed and built in Lebanon.(e) Incidentally, Crédoz’s 3D printers were used for the first model of Instabeat’s swimming monitor, nominated for a design award for wearable technologies.(f) Beirut has often been described as the region’s most fashionable city with over 40 fashion businesses.(g) Many of the country’s budding fashion entrepreneurs look to Lebanon’s Elie Saab, founder of a globally recognized fashion house, for inspiration.(h) Technology plays a growing role in the fashion value chain, linking textile producers to designers and merchandizers to consumers. Collaborations between the fashion world of designers, photographers, models and the entrepreneurs and web designers from the tech world can spur creativity: “Fashion and creative industries such as the textiles and clothing, footwear, and leather sectors, operate at the crossroads between arts, business, and technology. They are in a strategic position to link creativity to innovation at a time when culture-based creativity is an essential feature of business innovation in the new economy.”(i) The link between creative industries and tech is starting to have an impact. Beirut is considered the website design capital of the Arab world20 and fashion startup Mistile won the Pan Arab Web Award for best e-commerce site.21 If the ecosystem can successfully exploit the country’s creative tradition, Lebanon could carve a niche as MENA’s creative industry tech hub. (a) Salim Edde as quoted in: Hill, Stephen, 2008, Creative Lebanon A Framework for Future Prosperity, British Council, http://portal.unesco.org/culture/en/files/40735/12699563115lebanon-creative-lebanon-full-report.pdf/lebanon-creative- lebanon-full-report.pdf. (b) http://berytech.org/beirut-creative-cluster/ (c) http://beirutdesignweek.org/about/ (d) Anderson, Brooke, 2013, Bakery’ brings 3-D printing to the masses, The Daily Star, April 13, http://www.dailystar.com. lb/Culture/Lifestyle/2013/Apr-13/213551-bakery-brings-3-d-printing-to-the-masses.ashx#axzz2tqbZRChi. (e) Baghdadi, Alexis, 2015, Lebanon Builds the MENA’s Biggest 3D Printer, Arabnet, May 24, http://news.arabnet.me/ lebanon-builds-the-menas-biggest-3d-printer/. (f) Schaer, Cathrin, 2013, In Beirut, Where Fashion Lives Dangerously The New York Times, September 23, http://www. nytimes.com/2013/09/24/fashion/Beirut-Where-Fashion-Lives-Dangerously.html. (g) http://endeavor.uberflip.com/i/518538-endeavor-lebanon-fashion-study (h) http://ec.europa.eu/growth/sectors/fashion/index_en.htm (i) https://www.notjustalabel.com/editorial/london-meets-beirut Special Focus | 53 The World Bank played a supportive role in the program. Kafalat will trends and a better understanding of adapting also operate the World Bank US$ 30 million iSME products to wide audiences. Programme.103 There have been two successful exits, both in 2014. Food recipe platform Shahiya was sold 107. All of the products target wider regional to Japan’s Cookpad for US$ 13.5 million, just four or international markets, due in large part to years after launch and France’s Webedia acquired a Lebanon’s small size. To some extent, they all are majority stake in digital media company Diwanee for variations of popular digital products and services. US$ 5 million.104 Anghami’s (“my tunes” in Arabic) music streaming service is similar to popular global products (e.g., Spotify) but which for various reasons had limited popularity in MENA (e.g., geographical access restrictions, lack of Arabic music). Similarly Shahiya’s Impact (“appetite” in Arabic) recipe website targets regional consumers interested in Middle Eastern cuisine. 104. Given the elusive definition of startup, it Instabeat is aimed at global markets and is based on is difficult to estimate their number. According to popular self-tracking exercise devices such as Fitbit ArabNet105, there are currently 160 tech startups in exploiting the void in tracking swimming. Lebanon. Most of the startups are in the areas of software (23), mobile apps (18), ecommerce (16) and entertainment (13). It is estimated that among those, around 30 have received equity funding of some type. Conclusions 105. Several Lebanese entrepreneurs are 108. Lebanon’s tech ecosystem has arguably noteworthy examples of the tech ecosystem been one of the top performers in MENA model where promising startups receive rounds when measured in relative terms of startups of funding to grow their business and become attracting funding and adding jobs. Despite the established companies (Table 5). They are unsettled security situation, relatively poor Internet characterized by two interlinked factors underpinned connectivity and until recently, limited acceleration by Lebanon’s small market size: foreign exposure facilities, a number of Lebanese entrepreneurs, by having studied or worked overseas and targeting working out of home or co-working spaces, have regional and global markets. launched digital businesses, quite a few of which have obtained funding and some of which have 106. All of the founders have been abroad. The achieved significant regional and even global reach. founder of Instabeat spent a summer interning in Anghami has over five million users in the region for Germany and four months in Qatar participating in its streaming music service despite only launching in the Stars of Science TV reality show where she won 2012.107 Shahiya, started in 2010, is the world’s top third place.106 Founders of Anghami and Shahiya Arabic recipe website and was sold in 2014 for US$ studied in Europe and the United States. This has 13.5 million.108 Working out of co-working space, provided experience with regional and global digital Instabeat raised US$ 2 million for its swimming tracker and is now selling them online to natation 103 http://www.worldbank.org/en/news/press- release/2013/02/13/world-bank-loan-offers-new-hope-lebanon- enthusiasts around the world.109 unemployed-youth 104 http://corp.diwanee.com/Corporate-News/French-digital- 107 http://www.uabonline.org/en/events/conferences/ publisher-Webedia-acquires-majority-stake-and-injects-5- smallandmediumenterprises/655/1 million-Diwanee-Media-Company 108 http://baderlebanon.com/mevp-and-building-block- 105 https://startupdb.arabnet.me/ equity-fund-invested-shahiya-exits-for-13-5m/ 106 http://www.instabeat.me/blog/2014/02/03/passion- 109 http://www.wsj.com/articles/arab-tech-startups-begin-to- stories-hind-hobeika-founder-instabeat/ attract-u-s-venture-capital-1415705692 54 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Table 6. Lebanon tech startup ecosystem SWOT. Strengths Weaknesses ØØ Cultural affinity such as entrepreneurship ØØ Telecom environment ØØ Education ØØ Business environment ØØ Recent initiatives (BdL 331, BDD) and growth of entre- ØØ Small market preneurship support institutions ØØ Limited online shopping ØØ Diaspora ØØ Lack of maturity in ecosystem supportive elements (e.g., accelerators, VC, angels, etc.) ØØ Limited pipeline of entrepreneurs due to size of economy and attraction of talent by other regional hubs Opportunities Threats ØØ Regional and global markets ØØ Regional instability ØØ Brain drain ØØ Possible financial bubble due to oversupply of funds Source: World Bank research. 109. Recent private sector and government systems in the Arab world and is the most initiatives in support of the Lebanese tech liberal state in the MENA region, with a western ecosystem are unparalleled in MENA and if oriented, mainly private sector driven economy. successful, could transform Beirut into one of A multi-language society, Lebanon has a highly the leading innovation hubs in the region. BDD entrepreneurial mindset. Its huge diaspora is one is one of biggest tech-driven real estate projects in of its major strengths, as a link to other markets. the region and is unique in that unlike suburban Lebanese startups have also learned how survive tech parks, it is being built in the heart of the city. under difficult circumstances, an important skill.110 Several buildings have already been completed and are home to a range of established and new digital 112. The relatively low reliability and quality businesses as well as incubators, accelerators and of the country’s telecommunication networks venture capital funds. The BdL’s 2013 regulation are one of the main, and to some111, the primary allowing banks to invest in startups has triggered over barrier facing Lebanon’s tech ecosystem. The US$150 million of commitments for new venture need for increasing competition has already been capital funds. These developments are underpinned proposed within the country and needs to be enacted by among the highest Internet penetration in the so that other actions to enhance the ecosystem can region and the potential of global markets through have greater impact. the extensive Lebanese tech diaspora. Thus, many of the ingredients for a blooming tech ecosystem are 113. The business environment needs to be in place. more efficient and optimized for the tech sector. In 2015, Lebanon ranked 104th on the World Bank 110. It is useful to identify Lebanon’s strengths Doing Business index and it cannot aspire to being in the tech ecosystem space, address its a regional tech hub until the process of operating weaknesses, gauge the opportunities and assess a business in the country improves. This includes threats. facilitating registration, allowing it to be carried out online and reducing the time it takes for it to 111. A diverse historical heritage and liberal 110 http://www.bdlaccelerate.com/qa-with-mark-haidar/ society predisposes Lebanon to have a successful tech ecosystem. It has one of the best educational 111 http://muftah.org/problem-lebanese-startups-slow- internet-connection-speeds/#.VZWgumA7P2w Special Focus | 55 The World Bank Box 9. World Bank tech ecosystem support for Lebanon. The World Bank Group (WBG) has been actively supporting the tech startup ecosystem in Lebanon. It is currently implementing the iSME project to support equity investment for financially viable, new and existing innovative firms.* The key beneficiaries of the project are potential and existing entrepreneurs with new commercial ideas, many of whom would otherwise seek opportunity abroad, and existing SMEs that are on the verge of expansion. The project will finance the iSME funding program, which will provide concept grants to stimulate the generation of ideas and equity investment to support early stage growth. The project was ratified by Parliament in October 2014. The WBG also designed the Mobile Internet Ecosystem Project (MIEP), which despite its eventual cancellation, included in the preparation stages testing for the supported mechanism established in its design and the co-creation of the Mobile Innovation Hub (MiHub) with the ecosystems stakeholders, resulting in a neutral forum for the ecosystems to coordinate their actions and programs. The original MIEP objective was to strengthen innovation and entrepreneurship in the Lebanese wireless space.** Components included skills development, bolstering the mobile Internet industry through a Mobile Internet Hub (MiHub) and enhancing the enabling environment. The project was approved by the Council of Ministers but is pending Parliamentary ratification. In the meantime, the Ministry of Telecommunications and the Bank are developing actions to establish the MiHub and build a community of stakeholders. In addition to these activities, the International Finance Corporation (IFC) has engaged in one equity investment (US$ 2 million) in a Lebanese mobile software firm, Mobinets.*** * http://www.worldbank.org/projects/P127306/lb-innovation-sme-growth?lang=en ** http://www.worldbank.org/projects/P131202/lb-mobile-internet-ecosystem-project-miep?lang=en *** http://www.ifc.org/wps/wcm/connect/region__ext_content/regions/europe+middle+east+and+north+africa/ifc+middle+east+ north+africa+and+southern+europe/news/ifc+helps+create+jobs+in+lebanese+it+sector be competed from nine days to. There should be a country benefits from tech through hybrid solutions. one-stop shop for tech startups where all business One is by encouraging entrepreneurs to go abroad formalities are quickly completed in a single process for training and mentoring but providing incentives and where assistance is available. While it may for their return. Another is that even if startups be difficult to implement these changes across all do move offshore because of funding or market business sectors, it could be applied to the tech reasons, efforts should be made to maintain links sector as flagship project. in areas such as back office work or design work. A third would be facilitating startups going public 114. The security situation inhibits investment by strengthening links between the Beirut Stock and the attraction of foreign talent among other Exchange and the tech sector. BdL 331 has a limit things. Nevertheless, government should counteract of seven years for a bank’s investment in a startup. such perceptions with reality through a marketing This will mean that either startups will have to be campaign to promote Lebanon’s tech ecosystem. acquired or go public. Creating a public listing option For example, there are more than twice as many for startups on the BSE where both Lebanese and murders in the United States than Lebanon, which foreigners could purchase stocks in tech companies has the same rate as Israel, Jordan and Egypt.112 As would strengthen synergies with BdL 331 and would one foreign reporter notes: “Personally, I have never encourage startups to remain in the country. These felt in danger in Beirut.”113 kinds of hybrid solutions could create a new model for a globalized developing country tech ecosystem. 115. Brain drain will always be a threat particularly given the ease by which Lebanese assimilate abroad. Some startups will inevitably leave but the government needs to ensure the Recommendations 112 http://data.worldbank.org/indicator/VC.IHR.PSRC.P5 113 http://techcrunch.com/2015/04/03/beiruts-bright- 116. Fostering the development of a tech startup future-as-a-tech-hub-for-mena-if-its-politicians-will-allow- ecosystem requires an integrated approach. it/#.4ytfae:Szix 56 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Box 10. A Central Bank Keen About Tech Startups. Banque du Liban (BdL) is one of the most pro tech startup central bank in the world. Its Circular 331 is a groundbreaking initiative for pumping funding into the tech ecosystem. BdL’s partial tech investment guarantee has reduced the venture capital gamble particularly critical for Lebanon that has a high country risk rating.* BdL’s support does not stop there. An ardent supporter of the ecosystem, BdL has been active in other aspects of the ecosystem. This includes organizing networking happenings such as hosting the annual Accelerate event and collaborating with the overseas Startup Lebanon conferences. Lebanon’s central bank has also cooperated with others on the UK Tech Hub and Smart ESA acceleration facilities. In addition, BdL has published several reports on the country’s tech startup environment. The rational for BdL’s support is that the tech sector contributes to high value added and generation of wealth, driving economic growth in a sustainable way. * http://www.oecd.org/tad/xcred/crc.htm Ecosystems are communities with a variety of addressed at different levels. At the university stakeholders (e.g., academia, private sector, public level, the gap in practical education needs to be sector, financing entities, entrepreneurs, etc.) addressed. An example is apprentice programs interacting with each other. A policy program to between universities and industry where students support the development of the ecosystem requires develop real projects before graduation. At the an integrated approach that addresses the weaknesses middle and high school level, students can develop identified in the ecosystem (see SWOT analysis coding and hardware skills by introducing open above) and works with the ecosystem stakeholders. source programing and open hardware training This requires coordination of stakeholders and within the existing curriculum. Finally, rapid catalyzing actions from the government to address training programs, such as coding boot camps, these challenges. BdL has thus far acted as the main train non-technical university students, who may catalyzer for the ecosystem. Its initiatives go beyond be unemployed, with tech skills facilitating access addressing the financing gap through Circular 331 to the market (Box 11). with BdL supporting multiple areas of the ecosystem through the activities of UK Tech Hub, the Alt • Development of spaces so startups can scale City Bootcamp program, Startup Lebanon or the up and grow. Lebanon needs to develop a wide accelerators benefiting from Circular 331 (Box 10). variety of collaboration spaces and networking events, resulting in a cohesive community of 117. The following policy support actions could entrepreneurs. There are still gaps that need to complement the program of the BdL and address be addressed regarding space. Both early stage existing challenges: startups and scale startups lack affordable space beyond the accelerator and incubator programs. • Improvement of the Internet infrastructure, As the ecosystem expands, demand for both availability and quality of broadband and types of space will grow. reduction of prices. The major weakness of the ecosystem is the poor Internet connectivity in • Creation of homegrown mentorship and the country. This increases costs for startups and angel investment. Local mentorship and angel sometimes limits the possibility of expansion of investment will be key to provide sustainability the ecosystem throughout the country. Reform to the ecosystem. Research has shown that of the telecommunications sector into more mentors that come from within ecosystem (i.e., efficient market structure would allow for an local successful startups) are key for startups organic solution to this chronic problem. to succeed.114 Lebanon would benefit from policies to foster the retention and attraction of • Creation of a tech skills pipeline that prepares successful entrepreneurs to become mentors talent for entrepreneurship and feeds ecosystem growth. The skills pipeline must be 114 http://techcrunch.com/2015/03/22/mentors-are-the- secret-weapons-of-successful-startups/ Special Focus | 57 The World Bank Box 11. Rapid Tech Skills Training for Employability. Coding boot camps can result in rapid employability when a startup ecosystem is matured enough to generate employment. As tech startup grow, they require talent to support technical tasks. However, the costs of skilled talent or of in-house training can be prohibitive for startups. These are often basic tech tasks (e.g., web development, programing, etc.) that can be learnt in structured programs lasting a few months. Coding boot camps provide such structured programs. They are typically linked with the local demand to provide practical learning and address employers’ needs. In a mature ecosystem, such as New York, the employment rate of coding boot camps is over 90 percent. To understand the applicability of coding boot camps to employment in emerging countries, the World Bank is currently undertaking an activity on Rapid Skills Technology Training for Youth Employment. The activity’s goal is to identify the key success factors for rapid employability and to test this approach for low-income youths in Beirut as well as Medellin, Colombia and Nairobi, Kenya. Source: Rapid Skills Technology Training for Youth Employment, http://www.decodingbootcamps.org/about/ and angel investors as well as to develop the • Linkages to international talent and networks. culture of mentorship and angel investment Attraction of international talent and access locally beyond Circular 331 mechanisms. to international networks would reinforce the ecosystem and its supporting infrastructure. • Attraction of talent for support infrastructure. For instance, the Startup Chile115 proved to be a As the ecosystem ripens, support infrastructure successful mechanism to develop local startups (e.g., accelerators, training programs, through exposure to international top-notch talent investment, etc.) also needs to mature in attracted by the program. Startup Chile also served order to address the more complex needs and to create an international brand and a network of sophistication of startups. This will require talent for support infrastructure in Chile. high-level talent that understands the local ecosystem and can also provide internationally 118. To maximize the impact of Lebanon’s competitive training and mentorship to the new tech ecosystem on the economy, additional wave of startups. policies are needed to connect local industry and entrepreneurs and generate social innovation. Box 12. Municipal Governments as Catalyzers of Entrepreneurship Ecosystems. Municipal governments have the potential to catalyze local innovation through open processes for public and social challenges. An example is the activity developed by the World Bank and the Government of Chile in Gran Concepcion, a city of about one million inhabitants located south of Santiago, the capital of the country. The initiative introduced open innovation processes in the municipal government of Gran Concepcion by training officials in these methodologies and developing an open competition with university students to address social challenges in the transportation sector. The challenge included questions such as “how to improve the quality of public transportation?” or “how to foster the use of alternative modes of transportations, other than cars (e.g., bicycle, etc.)?” This resulted in startup projects addressing public transport challenges that were tested and adopted by the municipal government. More importantly, the activity served to kick-start the tech startup ecosystem in the city (which did not exist before) through continuing the process of open innovation for urban and local challenges. The city developed a local innovation hub and continues to develop competitions on public and social challenges creating additional batches of entrepreneurs and attracting university students into developing startups in the city. Source: Smart City Gran Concepcion, http://innovatingcities.org/chile/en/ 115 http://startupchile.org/about/ 58 | Special Focus lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Specific policy actions can help connect local industry org/culture/en/files/40735/12699563115lebanon- to entrepreneurs and develop innovations that creative-lebanon-full-report.pdf/lebanon-creative- increase the competitiveness of these industries. This lebanon-full-report.pdf. includes implementing open innovation processes with existing industry, labs to experiment with new Pew Research Center. 2015. Internet Seen as technological approaches to industry processes (e. Positive Influence on Education but Negative on g., digital manufacturing and creative industries), Morality in Emerging and Developing Nations. http:// and customized accelerator programs directed at www.pewglobal.org/2015/03/19/internet-seen- specific industries (e.g., a “fintech” accelerator for as-positive-influence-on-education-but-negative- the finance industry). Similarly, government can influence-on-morality-in-emerging-and-developing- leverage the tech startup ecosystem by introducing nations/. open innovation for service delivery and competitions for startups to address public challenges. Municipal Investment Development and Authority of Lebanon governments can act as catalyzers of a government (IDAL). n.d. “Information Technology Fact Book.” open innovation policy by presenting urban challenges and providing testing facilities and spaces Rouhana, Nicolas. 2014. “The Impact of Techno- for entrepreneurs. By leveraging open innovation Parks: Lebanon Case.” presented at the How-to through municipal governments, Lebanon can of Innovation, Technology & Entrepreneurship, expand the entrepreneurship ecosystem beyond Istanbul, May 26. Beirut, where it is currently mostly concentrated (Box 12). UK Lebanon Tech Hub. 2016. Writing the future for Knowledge Economy in Lebanon. WAMDA. 2015. Exploring Trends and Challenges to Scale for Startups in Egypt, Jordan, Lebanon and References the UAE. http://static.wamda.com/web/uploads/ resources/Four_Country_Report_-_Aug2611.pdf Banque du Liban (BDL). 2014. “Blueprints for Success.” World Bank. Data. http://data.worldbank.org ———. 2015. Lebanon’s Startup Ecosystem World Economic Forum (WEF). Network Readiness Roadmap. Index. http://reports.weforum.org/global-information- technology-report-2015/network-readiness-index/ Central Administration of Statistics (CAS). 2014. “Lebanese National Accounts 2004-2013: Comments and Tables.” http://www.cas.gov.lb/ index.php/national-accounts Endeavour. 2015. “Lebanon’s Fashion Design Ecosystem: Strengths and Weaknesses.” http:// endeavor.uberflip.com/i/518538-endeavor-lebanon- fashion-study. Eurostat. Database. http://ec.europa.eu/eurostat/ data/database Hill, Stephen. 2008. Creative Lebanon A Framework for Future Prosperity. British Council. http://portal.unesco. Special Focus | 59 The World Bank DATA APPENDIX TABLE 7. Lebanon: Selected Economic Indicators, 2013-2018.   2013 2014 2015 2016 2017 2018   Est. Est. Est. Proj. (annual percentage change, unless otherwise specified) Real sector Real GDP 0.9 1.8 1.5 1.8 2.3 2.5 Real GDP per Capita -0.1 0.8 0.5 0.9 1.3 1.5   Agriculture (share of GDP) 4.8 4.9 5.0 5.1 4.9 4.8 Industry (share of GDP) 22.1 23.2 22.5 22.9 22.9 22.9 Services (share of GDP) 73.2 71.9 72.5 72.1 72.1 72.3   Money and prices CPI Inflation (p.a) 2.7 1.2 -3.7 1.5 2.5 3.0 Money (M3, including non-resident deposits) 9.0 6.0 5.1 6.0 8.0 8.0             (percent of GDP, unless otherwise specified) Investment & saving Gross Capital Formation 30.4 31.2 27.6 27.9 29.0 29.0 o/w private 28.5 29.6 26.0 26.3 27.4 27.4 Gross National Savings 3.8 4.5 4.4 6.6 6.5 5.9 o/w private 15.7 15.6 10.1 12.3 13.6 13.1   Central Government Finance Revenue (including grants) 21.2 23.8 21.6 21.8 23.3 23.1 o/w. tax revenues 15.1 15.1 14.2 14.2 15.6 15.7 Total expenditure and net lending 30.7 30.4 28.9 29.2 32.0 31.9 Current 28.8 28.8 27.3 27.5 30.4 30.3 o/w Interest Payment 8.5 9.2 8.7 9.1 10.6 10.7 Capital & Net Lending (excl. foreign financed) 1.9 1.6 1.6 1.6 1.6 1.6 Overall balance (deficit (-)) -9.5 -6.6 -7.3 -7.4 -8.7 -8.8 Primary Balance (deficit (-)) -0.9 2.6 1.4 1.7 1.9 1.9   External sector Current Account Balance -26.6 -26.7 -23.2 -21.3 -22.5 -23.1 o/w Export (GNFS) 45.7 40.0 39.6 41.0 41.9 42.6 o/w Import (GNFS) 75.4 70.2 65.7 65.4 67.8 68.9 Remittances 5.5 3.7 3.4 3.0 3.0 3.0 Trade Balance (GNFS) -29.7 -30.2 -26.2 -24.4 -25.9 -26.3 Gross Reserves (months of imports GNFS) /1 /2 11.4 12.1 11.7 11.6 11.3 11.4   Total Public Debt Total Debt Stock (in million US$) 63,490 66,564 70,009 73,515 77,803 82,347 Debt-to-GDP ratio (percent) 143.1 145.6 148.7 154.1 157.3 159.7   Memorandum Items: Nominal GDP (in billion LBP) 66,861 68,939 70,980 71,914 74,541 77,739 GDP (in million US$) 44,352 45,731 47,085 47,704 49,447 51,568 Source: Government data, and World Bank staff estimates and projections /1Gross Reserves (months of imports GNFS) = (Gross Res. excl. Gold / Imports of Goods & Services)*12 /2 Total Imports using the BOP data from the Quarterly Bulletin of BDL 60 | Data Appendix lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD Selected Special Focus from Recent Lebanon Economic Monitors each of these measures based on the latest available Fall 2015 LEM: The year of data (generally 2011). Key challenges are highlighted; (i) low public spending on health which Great Capture hinders the Ministry of Public Health’s (MoPH) ability to adequately respond to the health needs Elite Capture and the Hollowing of the State: An of low income groups; (ii) high household out-of- Overarching Constraint to Lebanon’s Development pocket spending on health subjecting low income (Special Focus 1): Lebanon’s post-war governance groups to financial hardship; (iii) disproportionate endures systemic failures. Intuitionalised allocation of resources on expensive curative care; confessionalism intended as protection for the and (iv) emerging epidemiologic and population mosaic of communities in a country that lacks a trends associated with unprecedented influx of demographic majority has developed into pervasive refugees having significant implications on the elite capture and patronage system. This elite delivery and financing of the health sector. Despite commands the main economic resources, generating the challenges and prolonged periods of instability, large rents and dividing the spoils of a dysfunctional the MoPH embarked on several successful reforms state. In the process, the public sector has become that contributed to the resilience of the system in the increasingly governed by bribery and nepotism face of the crisis. practices, failing to deliver basic public services and incapable of resolving the most urgent needs. This has culminated in the comprehensive breakdown in the political process, with the three branches of government either vacant or effectively idle, and the Spring 2015 LEM: The only national plebiscite abrogated. This has triggered a series of protests and civil disobedience measures Economy of New targeting the ruling political class with emphasis on corruption and incompetence. Current conditions Drivers and Old are unsustainable, and without significant political and economic reforms, a widening and worsening Drags of socio-economic unrest is not unfathomable. The Trade Impact of the Syrian conflict on Lebanon Lebanon’s Health Sector: Modest Reforms despite (Special Focus 1): We explore the trade effect of the the Challenges (Special Focus 2): This special focus Syrian war on Lebanon up until the second half of provides an overview of the health sector in Lebanon 2014. A dissection of the data reveals that, so far, the and highlights both successes and challenges facing war seems to have affected neither merchandise nor the system. Lebanon’s trends in health outcomes, services exports at the aggregate level. At the same inputs and spending are analyzed over time and time the relative stability of merchandise imports is compared to a number of countries with similar likely a result of increased demand due to refugee levels of income and health spending, as well as to inflow being offset by higher transit costs through the averages for the Middle East and North Africa Syria as well as depressed Syrian production. A (MENA) region. Global comparisons are presented for gravity-type trade model confirms these findings, Selected Special Focus from Recent Lebanon Economic Monitors | 61 The World Bank suggesting also that Lebanese trade seems to have subsidies; and (iv) regional water establishments been less negatively affected by the Syrian war than (RWE) that severely lack management and financial other Syria’s neighbors. An empirical analysis using autonomy and are impeded by limited inter- micro level exporter data substantiates this finding. agency coordination and weak central government While Lebanese exporters to Syria have suffered from oversight. Moving forward, the Government must a drop in demand in the Syrian market (but less so than their Jordanian counterparts), other Lebanese exporters have started to export to Syria to fill the gap in Syrian production. Further econometric analysis suggests that Syrian refugees in Lebanon provide Fall 2014 LEM: important impetus to Lebanese services exports. Downside Risks Challenges in the Lebanese energy sector (Special Focus 2): The Lebanese electricity sector has Materialize been underperforming and in crisis for several decades, requiring urgent action to avoid further Towards an Effective Social Safety Net in Lebanon deterioration of the quality of electricity delivery. The (Special Focus): Lebanon’s social safety nets (SSNs) macroeconomic impact has been massive; accruing fail to protect poor and vulnerable Lebanese as debt on investments in and transfers to Electricité it consists of a multitude of small and poorly du Liban’s (EdL) amounts to 40 percent of Lebanon’s targeted programs that suffer from low coverage, gross public debt and is escalating rapidly as transfers high leakage, and limited benefit levels, while now account for over half of the fiscal deficit. large budgetary resources are expanded on Some of the measures needed to improve EdL’s universal subsidies which are pro-rich and crowd financial situation are well known, such as increased out other social spending. With poverty incidence investment, tariff reforms and corporatization of elevated and broadly unchanged for the past 25 EdL. Political and confessional obstacles, however, years, Lebanese citizens revealed in a World Bank have so far hindered any progress. (2014d) survey of country stakeholders that social protection ranked second in their development Water in Lebanon – Coupling Infrastructure with priorities. International experience reveals that Institutional Reform (Special Focus 3): Despite the carefully designed SSNs can help prevent shocks relative availability of water resources, the Lebanese from pushing vulnerable households into poverty, water sector has not achieved suitable levels of help tackle the problem of spatial pockets of poverty service provision and is not in line with the level of in slums and rural areas, and also can help break economic development reached by the country. The the cycle of intergenerational poverty. With these cost of inaction in the water sector is estimated at objectives in mind, in 2011 the Ministry of Social about 1.8 percent of GDP, or 2.8 percent of GDP if Affairs embarked on a modernization of Lebanon’s the cost of environmental degradation is included. SSN system, starting with the introduction of the Several factors have led to this situation and require National Poverty Targeting Program. The NPTP is sustained attention. These include: (i) low continuity the first means-tested targeting social assistance of water supply due to small storage capacity, large program in Lebanon. With the Syrian crisis pushing amount of water lost to the sea, growing demand for vulnerable households into poverty, the NPTP has water and deficiency of the existing water networks; been scaled up to cover more beneficiaries as part of (ii) unfinished reform agenda that contributed a three year emergency project to help mitigate the to institutional uncertainty and fragmentation impact of the Syrian crisis on Lebanese households. of functions particularly relating to wastewater Most recently, the institutionalization of the NPTP and irrigation; (iii) an irrigation sector that is into a permanent program with an annual budgetary characterized by inadequate water storage capacity, allocation has been proposed by members of lack of proper maintenance and a heavy reliance on Parliament, which if approved would constitute a 62 | Selected Special Focus from Recent Lebanon Economic Monitors lebanon economic monitor | A GEO-ECONOMY OF RISKS AND REWARD significant positive step forward in the effectiveness and 0.9 percent while growth in 2014 is predicted of Lebanon’s SSN system. to reach 1.5 percent. Aside from having a high degree of accuracy, both indicators are of relatively high (monthly) frequency and are available with a relatively small time lag (2-3 months), which make them ideally suited for economic analysts, investors, Spring 2014 LEM: A and policy makers alike. In contrast to the BdL-CI, the WB-CI points to a deceleration in economic Sluggish Economy activity during the first ten months of 2013, which, if sustained over a few more months, would warrant in a Highly Volatile a different monetary policy stance than the one based on the BdL-CI. This monetary policy example Environment highlights the critical importance of having accurate, high frequency, and timely economic indicators. A Sovereign Wealth Fund for Lebanon: Issues and Preliminary Recommendations (Special Focus 1): As Lebanon contemplates prospects of sizeable hydrocarbon discoveries, the country is in the process of designing an institutional framework to manage these resources. One such issue is the establishment of a Sovereign Wealth Fund (SWF), as required by the 2010 Hydrocarbon Law. This Special Focus provides an overview of the various types of SWFs that have been established across countries, draws lessons from these experiences, highlights some pitfalls, and presents preliminary recommendations for Lebanon as it moves towards establishing its SWF. Key among these recommendations is that the Lebanese SWF’s design should include (i) integration with the budget system, (ii) some (limited) flexibility in operational rules, (iii) no (or limited) earmarking but no extra-budgetary spending, (iv) coherence with country investment strategy, and (v) transparency and accountability. New Coincident and Leading Indicators for the Lebanese Economy (Special Focus 2): Weak economic statistics in Lebanon impede economic analysis and decision making. To remedy this, World Bank staff developed two indicators of economic activity for Lebanon: a coincident indicator (WB-CI) and a leading indicator (WB-LI). These indicators, which are based on an expanded NBER-Conference Board methodology, reveal promising statistical properties that should make them valuable coincident and leading (one-year ahead) indicators for the Lebanese economy. Based on these indicators, GDP growth for 2012 and 2013 is estimated to be, respectively, 2.2 Selected Special Focus from Recent Lebanon Economic Monitors | 63 The World Bank SELECTED RECENT WORLD BANK PUBLICATIONS ON LEBANON (for an exhaustive list, please go to: http://go.worldbank.org/8700A29QW0http://go.worldbank.org/5N4AMNJXV0) 64 | Selected Recent World Bank Publications on Lebanon 0.9375 cm The World Bank www.worldbank.org/lb