Lebanon needs huge aid inflow to repair war damage

BEIRUT (Reuters) – Lebanon will need billions of dollars in aid to recover from Israel’s war with Hizbollah, which has ruined many civil installations, hit tourism, forced businesses to close and forced hundreds of thousands to flee.

The war is not over yet, but economists say the country’s infrastructure has so far sustained $1 billion worth of damage after Israel bombed roads, bridges, ports and airports.

Beyond damage to bricks and mortar, the Lebanese pound has come under pressure, the stock market has temporarily closed, and tens of thousands of foreigners have fled the war.

 

Traders say the central bank spent $500 million last week defending the pound, though they add that the central bank has plenty of reserves to rely on and pressure is now declining.

Marwan Iskandar, a leading Lebanese economist, said the war could force many firms to close and cause the economy to shrink 2-3 percent. This implies about $2 billion in lost growth, not to mention some $600 million in lost government income.

Lebanon’s economy had been growing at a healthy 6 percent or so before the crisis broke on July 12 when Hizbollah guerrillas seized two Israeli soldiers in a cross-border raid.

“We are talking fairly enormous losses here,” Iskandar said. “We will definitely need $3 billion in assistance in the very short term in the nature of donations rather than loans. Much depends on the speed with which reconstruction can proceed, which depends on the speed and size of assistance.”

Even before the war broke out, Lebanon was struggling to cut a public debt above $35 billion, worth some 180 percent of GDP.

Lebanese politicians had bickered for months over a draft reform plan, which foresees privatization of the power and telecommunications sectors, higher taxes and lower spending.

Lebanon had hoped to present the reform program eventually to potential lenders at an international debt aid conference.

What was a high priority just two weeks ago has been knocked down the list by a growing humanitarian crisis.

SHELVING REFORMS

 

“The effect on the economy is going to be very, very drastic. Forget reforms for the moment. We will not be in the mood for a while, possibly not for a long time to come,” said Shadi Karam, chairman of BLC Bank.

“I hope the mood in the donor countries, which was not to give Lebanon a penny unless it reforms, will tone down.”

International credit ratings agencies have already cut Lebanon’s outlook due to the violence. Fitch has affirmed its current rating of ‘B-‘ but cut the outlook from positive to stable. Standard & Poor’s put its ‘B-‘ credit rating for Lebanon on credit watch with negative implications.

Those ratings are already far below investment grade and Fitch said the war’s impact would be worse than the slump after last year’s killing of former Prime Minister Rafik al-Hariri.

“The government will have to return to the market to borrow. You have to rebuild roads and bridges and get things in and out. Many private concerns in the Bekaa Valley and the south have also been destroyed,” said Karam.

Lebanese politicians had bickered for months over a draft reform plan, which foresees privatization of the power and telecommunications sectors, higher taxes and lower spending.

Lebanon had hoped to present the reform program eventually to potential lenders at an international debt aid conference.

What was a high priority just two weeks ago has been knocked down the list by a growing humanitarian crisis.

SHELVING REFORMS

 

“The effect on the economy is going to be very, very drastic. Forget reforms for the moment. We will not be in the mood for a while, possibly not for a long time to come,” said Shadi Karam, chairman of BLC Bank.

“I hope the mood in the donor countries, which was not to give Lebanon a penny unless it reforms, will tone down.”

International credit ratings agencies have already cut Lebanon’s outlook due to the violence. Fitch has affirmed its current rating of ‘B-‘ but cut the outlook from positive to stable. Standard & Poor’s put its ‘B-‘ credit rating for Lebanon on credit watch with negative implications.

Those ratings are already far below investment grade and Fitch said the war’s impact would be worse than the slump after last year’s killing of former Prime Minister Rafik al-Hariri.

“The government will have to return to the market to borrow. You have to rebuild roads and bridges and get things in and out. Many private concerns in the Bekaa Valley and the south have also been destroyed,” said Karam.