Lebanon: Time for Critical Reforms to Reboot the Economy

  • Articles
Lebanon: Time for Critical Reforms to Reboot the Economy

After more than two years of uncertainty, there is good news in Lebanon: The country has a new president, a national unity government and there’s hope for a better political environment to address long-standing issues.

Lebanon has long shown resilience to diverse shocks, and its dynamic financial sector has been a source of economic stability in good times and bad. But the transition to sustainable growth and prosperity won’t be easy. Long-standing macroeconomic imbalances and volatile security conditions constrain Lebanon, keeping it out of realizing its potential as a dynamic private-sector-driven, upper-middle-income economy.

Right now, chronic joblessness and poor infrastructure stand in the way, tempting many of Lebanon’s best and brightest to take their talents elsewhere.

Recent surveys indicate that companies have to wait nearly two months to be connected to the power grid once they’ve submitted an application. In Jordan, it takes less than two weeks. Once they are connected, Lebanese firms experience more than 50 power cuts each month. Each one lasts more than five hours on average. It’s very difficult for businesses to flourish in that environment.

Reliable transport is also lacking. Households also spend about 15 percent of their income just to fund their transport needs. The poor transportation infrastructure raises import and export prices, hurting Lebanon’s ability to be a regional trading hub.

At the same time, water supply services are inadequate to support a middle-income economy. Despite relatively high per capita water availability, there’s a severe deficit in the delivery of water services. More often than not, the poor are hardest hit – they spend up to 15 percent of their total household income on alternative water sources.

Confronting those challenges through a host of economic reforms and investment will help Lebanon catch up with its emerging market peers and pave the way for the private sector to contribute to inclusive growth and job creation.

The public-private partnership law currently being discussed in Parliament is one such reform. The law would increase private participation in infrastructure and help close Lebanon’s large electricity gap. A steady electricity supply is required for the transport sector to flourish.

Upgrading outdated ICT infrastructure is another necessity. Doing so would open up the Lebanese economy to technological innovations in the fast-paced world of global connectivity. Without such connectivity, Lebanon will miss the chance to create new services – like e-banking and e-health.

Investments in human capital also are crucial. Lebanon’s young people need to be given hope that they can be a catalyst for change. Graduates must have the skills employers need, while entrepreneurship skills need to be better integrated into the education system to motivate young people to initiate startups and create their own jobs. Greater private sector involvement in postsecondary and vocational training programs is one way to address the mismatch between workers’ skills and employers’ needs.

Finally, the time is ripe for reform to ensure that the country can regain competitiveness and attract both domestic and foreign private capital. The country has shown it can do this in a key sector – the financial sector – which was seen as a safe haven, even amid the global financial crisis. Building on these successes, it is now important to move to the next generation of reforms. Lebanon’s financial sector, which has been seen as a safe haven, must move to the next generation of reforms. These include enactment of the PPP law, deepening capital markets, increasing access to MSME finance by improving credit infrastructure regulations and facilitating judicial mediation, and implementing investment climate reforms that would help establish special economic zones in lagging regions.

Such a comprehensive reform program would help unlock the potential of Lebanon’s private sector and go a long way to putting the country back on the path toward sustainable and inclusive growth.

Mouayed Makhlouf is director for the Middle East and North Africa at the International Finance Corporation, part of the World Bank Group.

Source: The Daily Star

Author: Mouayed Makhlouf