Euro-Med Agreement & Lebanon

[Chief]

1.EU policy towards Lebanon

Lebanon and the European Community first established contractual relations in 1977 by signing a Co-operation Agreement between the European Economic Community and the Lebanese Republic, which entered into force in November 1978. Lebanon is one of the EU’s long-standing partners in the framework of the Euro Mediterranean Partnership. The 2002 Association Agreement sets out in more detail the specific areas in which the objectives of this Partnership can be developed bilaterally. EU-Lebanon relations should enter into a renewed and more intense phase with the inclusion of Lebanon in the European Neighbourhood Policy, covering a much wider spectrum of fields of cooperation.


1.1 The Euro Mediterranean Partnership

EU relations with Lebanon are based on a partnership relation within the Euro – Mediterranean and Middle East area, which is of vital strategic importance and a key external relations priority for the EU.

The Euro-Mediterranean Partnership launched at the 1995 Barcelona Conference between the European Union and its originally 12 Mediterranean Partners, namely Israel, Morocco, Algeria, Tunisia, Egypt, Jordan, the Palestinian Authority, Lebanon, Syria, Turkey, Cyprus and Malta, established a policy with ambitious long-term objectives. Libya currently has observer status at certain meetings. Since the enlargement, in May 2004, the co-operation covers 35 countries, the EU of 25, including Cyprus and Malta and the 10 Mediterranean Partners. The three main fields of activity are (a) political and security partnership, (b) economic and financial partnership, and (c) partnership in social, cultural and human affairs. On 28 November the 10th anniversary of the Barcelona Deceleration was celebrated in a summit in Barcelona.

Main principles of the Barcelona Declaration

• Establish a common Euro-Mediterranean area of peace and stability based on fundamental principles including respect for human rights and democracy (political and security partnership).
  
• Create an area of shared prosperity through the progressive establishment of a free-trade area between the EU and its Partners and among the Mediterranean Partners themselves (economic and financial partnership).
  
• Develop human resources; promote understanding between cultures and rapprochement of the peoples in the Euro-Mediterranean region as well as to develop free and flourishing civil societies (social, cultural and human partnership). The Euro-Mediterranean Partnership comprises two complementary tracks, the bilateral and the regional agenda.
  
• The framework for the bilateral agenda is the Association Agreement.
  
• The regional agenda is implemented through a number of regional working groups on a range of policies including trade, customs co-operation, and industrial co-operation.

1.2 The EU-Lebanon Association Agreement


The EU-Lebanon Association Agreement was signed on 17 June 2002. Ratification of the Agreement is approaching the end and it is expected that it will enter into force during the first months of 2006. Based on respect of democratic principles and fundamental human rights, the Association Agreement provides a framework for political dialogue, co-operation in economic policy, including approximation of laws and application of Community standards to support Lebanon’s efforts to achieve sustainable economic and social development and the gradual establishment of a free trade area, as well as close co-operation in the social field particularly promoting the role of women and a better understanding amongst cultures. Co-operation to counter terrorism is covered in a separate exchange of letters between Lebanon and the EU. The Agreement commits both parties to further liberalisation of bilateral trade in various sectors.


An Interim Agreement on trade and trade related matters allowed the trade and trade-related contents of the Association Agreement to enter into force on 1 March 2003 and formally triggered the start of the 12 year transition period to free trade, one of the fundamental planks to the Euro-Mediterranean Partnership. With the entry into force of the Interim Agreement the concessions on trade in Lebanese agricultural and processed agricultural exports took immediate effect. A Protocol to the Interim Agreement which adapted its technical provisions to take account of the enlargement of the EU from 15 to now 25 countries will soon be signed by the EU and Lebanon.


Under the current contractual relationship a Co-operation Council and a Co-operation Committee were established. The Co-operation Council met for the third time in February 2004 in Brussels, while the Co-operation Committee has not yet been convened. A new institutional structure will be established under the Association Agreement - an Association Council, an Association Committee and a number of sub-committees.

1.3 European Neighbourhood Policy


In response to enlargement in May 2004, the European Commission adopted the “Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours” Communication of 11 March 2003 (European Neighbourhood Policy), setting out a new framework for relations with the Southern Mediterranean, Russia and the Western Newly Independent States (NIS) – countries who do not currently have a perspective of membership but who will soon find themselves sharing a border with the Union.


On 1 May 2004, the enlargement of the European Union took place with the accession of ten new Member States bringing changes to the EU’s political geography and offering new opportunities to deepen existing relations between the Union and its neighbours to the East and to the South. The Union is determined to further develop partnerships with its neighbours to mutual benefit, promoting security as well as stability and prosperity. The EU’s external borders will not become new dividing lines but the focus of enhanced co-operation.


The European Neighbourhood Policy sets ambitious objectives for partnership with neighbouring countries based on commitments to shared values and political, economic and institutional reforms. Partner countries are invited to enter into closer political, economic and cultural relations with the EU, to enhance cross border co-operation and to share responsibility in conflict prevention and resolution. The Union offers the prospect of a stake in its Internal Market and of further economic integration. The speed and intensity of this process will depend on the will and capability of each partner country to engage in this broad agenda. The policy builds upon the existing framework of co-operation. In its Decree of 27 January 2005, the Lebanese Government welcomed the European Neighbourhood Policy initiative.


As a first step for Lebanon’s inclusion into this policy, the Commission adopted a Country report Lebanon in March 2005 which provides an assessment of bilateral relations between the EU and Lebanon. The report reflects progress under the Cooperation and Interim Agreements, and describes the current situation in selected areas of particular interest for this partnership: the development of political institutions based on the values – democracy, the rule of law, human rights – enshrined in the Agreement, regional stability and co-operation in justice and home affairs, and economic and social reforms that will create new opportunities for development and modernisation, for further liberalisation of trade and for gradual participation in the Internal Market. The report provides guidance for the preparation of a joint Action Plan and serves as a basis for assessing future progress in the Union’s relations with Lebanon.

During a visit to Lebanon on 29-30 September 2005 Commissioner Ferrero-Waldner laid the foundations for a deeper relationship between the EU and Lebanon through the ENP. It was agreed that negotiations should begin as soon as possible, for an EU-Lebanon Action Plan under the Neighborhood Policy. The Plan will not only support Lebanon’s own programme of democratic reform, but help to boost its economic prospects through new opportunities to access the European single market. The Commissioner’s visit was followed by further talks between the Commission and Lebanon in October 2005 during which the modalities for the forthcoming negotiations were discussed and agreed.

2. EU Financial Co-operation

More specific information on Co-operation Programmes and projects funded by the EU in Lebanon can be found on the website of the Delegation of the European Commission.

2.1 Overview

Lebanon is one of the Mediterranean beneficiaries of community assistance through MEDA (bilateral and regional programmes). The EU (Community, Member States, European Investment Bank, EIB) is Lebanon’s leading donor.


The total amount of funds committed under MEDA I (1995-1999) bilateral assistance was €182 million while under MEDA II (2000-2006) the total amount allocated is €74 million.


Projects and programmes under MEDA I focussed mainly on economic transition and reform, the rehabilitation of public institutions, industrial modernisation and balanced social development. In terms of macro-financial assistance, Lebanon benefited from a structural adjustment facility of €50 million signed under MEDA I to assist with its economic transition and stabilisation, including the introduction of VAT. The Industrial Modernisation Programme (IMP) has been the most important and comprehensive private sector development intervention.

The Country Strategy Paper 2002-2006 adopted by the EU for Lebanon in December 2001 sets out EU perspectives for its objectives, policy response and the strategic framework for co-operation with Lebanon. Under MEDA II the four main priorities of EU financial co-operation with Lebanon, as set out in the strategy are 1) support for the economic reform process with a focus on promoting the effective implementation of the EU-Lebanon AA; 2) support for sustainable development and poverty alleviation, including support for environment protection, 3) support for human resource development, and iv) improving the human rights situation.

The National Indicative Programme (NIP) 2002-2004 for Lebanon amounts to €80 million. The NIP for 2005-2006 involves total funding of €50 million focusing on four main priorities: i) support for European Neighbourhood initiatives and promotion of the implementation of the AA ii) support for the knowledge economy (vocational training, Tempus, scientific co-operation) iii) strengthening the competitiveness of the private sector, and iv) water reform and environment. In addition to the ongoing support to the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA), a special regional programme for Palestinian refugees was made for an amount of €20 million for Lebanon, Syria and Jordan, of which large parts are to be used for support in Lebanon to tackle the problem of poverty and poor social and living conditions faced by Palestinian refugees in Lebanon, and elsewhere in the region.

In order to be able to respond to immediate needs of Lebanon after the 2005 parliamentary elections, the Commission has put together a new reform support programme of €10 million. It forms part of the €100.7 million already committed from the EU community budget for the period 2000-2006.


Lebanon participates in a range of Euro-Med programmes promoting people-to-people contacts and co-operation between civil society actors associations and NGOs. Lebanon is eligible for participation in the Community programmes Tempus, LIFE-Third Countries.


The European Initiative for Democracy and Human Rights (EIDHR) supports civil society initiatives aiming at promoting democracy and human rights. There is one national EIDHR project in Lebanon for an amount of €761,000. Lebanon will also benefit from activities of three regional projects under the EIDHR.


Grants under the MEDA programme are complemented by financing of risk capital and interest subsidies related to loans provided by the European Investment Bank (EIB). Since 1978 a total amount of €479 million in EIB loans has been committed for Lebanon. Priority sectors are productive infrastructure, private sector and environment. Resources made available for private sector support, in the form of long-term loans and risk capital facilities, are managed by the EIB and play a key role in contributing to the financing of private and financial sector development. In the framework of the Barcelona Process, the EIB has strengthened its financial partnership with the Mediterranean Partner countries through the creation of a specialised instrument, the Facility for Euro-Mediterranean Investment and Partnership (FEMIP). Under FEMIP the annual volume of EIB lending to all partner countries will gradually increase. These resources are to support a much broader range of activities with priority given to private sector development.


Programming for the period 2007-2013 has started. A new instrument, the European Neighbourhood Partnership Instrument (ENPI) will replace MEDA from 2007 and will accompany the implementation of the ENP Action Plan.

For success stories see: Delegation of the European Commission


3. EU-Lebanon trade relations

Lebanon is a predominantly importing country characterized by substantial trade deficits, which are largely offset by net foreign income earnings, including capital inflows, remittances from the Lebanese diaspora and service earnings, namely tourism, banking and insurance. Deficits of the trade balance neared € 6 billions on average over the 2000-2004 period, with total trade with the world approaching € 8 billions annually. Bilateral trade with the enlarged EU, mostly industrial, exceeded € 3.7 billions in 2004, overwhelmingly accounted for by EU exports to Lebanon, mainly of machinery and transport equipment, chemicals, manufactured products and foodstuffs. The EU is Lebanon’s principal trading partner (50% of Lebanese imports and 20% of total exports), followed by the US, China and Syria. In the first semester 2005, due to the economic downturn following the killing of Rafik Hariri in February 2005 that affected tourism, trade, construction and the banking sector, the trade deficit increased by nearly 7% compared to the first semester 2004, mainly due to a significant surge in imports.


Concerning trade relations with the EU, pending ratification and entry into force of the Association Agreement, an Interim Agreement on trade and trade-related provisions was signed on 22 July 2002 and entered into force on 1 March 2003, today applicable to the enlarged EU. The Interim Agreement establishes the necessary conditions for progressive and reciprocal liberalisation of trade in goods with a view to establishing a bilateral FTA, and includes relevant provisions on customs cooperation, competition and protection of intellectual, industrial and commercial property. As a result, since 1 March 2003, Lebanese industrial and most agricultural products (within the limits of tariff quotas) enjoy free access to the EU market, while the progressive elimination of tariffs on imports to Lebanon will occur between 2008 and 2015.


Lebanon is one of the founding members of GATT in 1945, but withdrew in 1949. It is in the process of accession to the WTO, where it is observer since 1999, date at which Lebanon submitted an accession request. Lebanon submitted to the WTO Secretariat a foreign trade memorandum in May 2001, accompanied by a series of internal regulatory reform measures, such as the new customs law, in force since April 2001, which reduces tariff rates and establishes automated customs release procedures. The third Working Party meeting on Lebanon’s accession took place in July 2004, whereby Lebanon restated its commitment to eliminate all measures incompatible with WTO rules and to bring its trade regime in full conformity with the WTO upon accession. This commitment included a revised legislative action plan and goods and services offers. No Working Party meetings have since taken place, mainly due to the political situation. The next meeting could take place in the first semester of 2006, but no date has been fixed yet.


The negotiations for WTO accession can be a powerful incentive for the opening of trade in services in the country. Lebanon has so far tabled two offers proposals to the WTO, the latter one in June 2004. Lebanon has signed several bilateral liberalisation agreements, which partly contain general provisions on services. The service sector is dominant in the Lebanese economy, accounting for nearly 70 % of GDP. Major sub-sectors are commerce, tourism and financial services.

Lebanon is party to a number of trade agreements with neighbouring countries in the region. Firstly, it is signatory to the Greater Arab FTA under the Arab League, which was launched in 1997 and has abolished industrial and agricultural tariffs on 1.1.2005, and endeavours to reduce non-tariff barriers in intra-Arab trade over time. Lebanon consistently abode by its tariff dismantling obligations under this regional liberalization endeavour. Lebanon also signed bilateral free trade agreements with Syria (in force since 1999), Egypt (since 1999), Kuwait (since 2000) and the United Arab Emirates (since 2001). Negotiations started to conclude similar agreements with Jordan, Bahrein and Saudi Arabia and are still ongoing. Trade cooperation agreements containing some preferential provisions exist between Lebanon and certain Arab countries, such as Iraq, Sudan, Jordan and Saudi Arabia. Lebanon expressed interest in joining the Agadir agreement establishing a sub-regional FTA between Tunisia, Morocco, Egypt and Jordan.

More information on trade relations with Lebanon is available on the website of DG Trade.


4. Country information


Lebanon is a presidential republic, independent since 1943, with a population of around 4 million. The Constitution dates from May 1926 and has been amended several times, most recently by the Charter of Lebanese National Reconciliation (Taëf Agreement) of October 1989 which ended 15 years of civil war.

4.1 Political background


Confessionalism is central to Lebanon’s political system, with a careful balance maintained between the 18 different sectarian groups in government, parliament and in the civil administration. According to the Taëf Agreement Christians and Muslims are represented on a 50:50 basis in the Parliament, the Council of Ministers as well as in all high ranking civilian and military posts. All sub-communities Alawi, Druze, Shia, Sunni within the Muslim community, and Armenian Catholic, Armenian Orthodox, Greek Catholic, Greek Orthodox, Maronites and Protestants within the Christian community are represented in a” proportional” manner within this overall ratio. The main political forces in Lebanon are Amal, Arab Socialist Baath Party, Hezbullah, Kataeb Party, Lebanese Communist Party, Lebanese Forces, Progressive Socialist Party, and Syrian Social Nationalist Party. The power sharing arrangement provides its own complex system of checks and balances. The inter-communal political competition maintains a large space for political dialogue and no leader or group can dominate. Broad consent is required to pass important government decisions, decrees, or laws.


Traditionally, the President is a Christian Maronite and the Prime Minister a Sunni Muslim. The current President, General Emile Lahoud, was elected in 1998 for six years. In a widely contested move, his term was extended in September 2004 for another three years through a constitutional amendment. The decisions to extend the presidential term was taken one day after adoption of UN Security Council Resolution 1559 (see below), which underscores the importance of free and fair elections without foreign interference and respect for constitutional rules, calls for the withdrawal of all remaining foreign forces from Lebanon, the disbanding and disarmament of all militias, and supports the extension of the control of the Lebanese government over all Lebanese territory.


As a consequence to the constitutional amendment, the Prime Minister at the time, Rafik Hariri, a prominent leader of the Lebanese Sunni community and key figure of the post-war reconstruction of Beirut, resigned from office. On 14 February 2005 Mr Hariri was assassinated in a devastating bomb attack in Beirut which killed 20 people and injured over 100 bystanders. The assassination of Mr Hariri triggered a profound political crisis, bringing hundreds of thousands of Lebanese to the streets that called in massive demonstrations for free and fair elections and a sovereign Lebanon free from Syrian presence.

Following a period of serious political crisis triggered by the terrorist attack and Mr Hariri’s death , and the resignation of his successor, Prime Minister Omar Karami, twice within three months, a new government under Prime Minister Najib Mikati succeeded to convoke parliamentary elections within constitutional deadlines. Following an agreement with the Government of Lebanon, the EU deployed an Election Observation Mission (EOM) for the Parliamentary elections, which were held on four consecutive Sundays starting on 29 May 2005. The Mission was led by José Ignacio Salafranca Sánchez-Neyra, Member of the European Parliament and Member of the EP Committee on Foreign Affairs. The Mission was composed of a core team of 11 experts, 26 Long-Term and 62 Short-Term observers. The overall amount spent was 1.9 million € from the European Initiative for Democracy and Human Rights programme. The Mission undertook a comprehensive analysis of the entire election process and provided an impartial; balanced and informed assessment of the entire election cycle. The final report of the EU EOM was presented in July 2005 to the Government

Elections ended with a fourth round on 19 June and saw the anti-Syrian tripartite alliance (Hariri list and allies) winning a majority of 72 out of 128 parliamentary seats. Speaker of Parliament Nabih Berri was re-elected for his fourth term. The new Prime Minister Fouad Siniora served in all five of Rafik Hariri’s cabinets from 1992 to 2004, first as Minister of State, then as Finance Minister. The current government is composed of 24 Ministers including for the first time a Hezbollah member serving as Minister for Energy and Water. One woman is represented in the new Cabinet serving as Minister of Social Affairs.


UNSCR 1595


In order to investigate into the assassination of Mr Hariri, the UN set up an International Independent Investigation Commission (UNIIIC) under UNSCR 1595 which was adopted on 7 April 2005. An initial UN fact finding mission found Lebanon’s own probe seriously flawed and declared Syria with its troop presence, primarily responsible for the political tension preceding the assassination. Headed by German prosecutor Detlev Mehlis the UNIIIC became fully operational on 16 June with a three months mandate. The report of the investigation Commission was issued on 20 October 2005 pointing at the involvement of Lebanese and Syrian intelligence services in the assassination. The mandate of the investigation Commission was extended to 15 December. On 31 October the Security Council adopted Resolution 1636 which establishes measures against suspects (travel ban and assets freeze), and urges Syria to fully co-operate with the investigation team.


UNSCR 1559


Three elements are the core of UNSCR 1559 which was adopted on 2 September 2004: the withdrawal of Syrian forces from Lebanon; the restoration of Lebanese sovereignty and independence; and the disarmament of militias. On 25 April an expert team was dispatched to verify whether there has been full and complete withdrawal of all Syrian troops, military assets and intelligence apparatus as mandated by UNSCR 1559. On 26 April 2005 the UN Secretary-General presented his progress report on meeting the objectives of UNSCR 1559 concluding that all requirements have not been met by 26 April, but that parties concerned have made significant and noticeable progress towards implementation some of the provisions contained in the Resolution. Syria’s commitment to fully withdraw, and its letter of 26 April to the UN Secretary-General, is of particular importance. On 4 May the UNSC issued a Presidential Statement welcoming the significant progress made by the parties (Syrian withdrawal), but expressed concern about lack of progress on other requirements (disarming militias and government control over Lebanese territory).


On 23 May the Secretary-General submitted the report on the verification of the Syrian withdrawal to the Presidents of the UNSC. The report is quite positive on the withdrawal with two reservations. The mission concludes to the best of its ability that Syrian troops and military assets have been fully and completely withdrawn, with the exception of one border area (where the demarcation line is unclear). It also says that the withdrawal of Syrian intelligence apparatus has been harder to verify because intelligence activities are by nature often clandestine. Since some questions remained unanswered about a possible new Syrian presence the UN verification team had returned to Lebanon in June for further investigation.


The second progress report on the implementation of UNSCR 1559 was released on 25 October welcoming progress by the parties in implementing 1559 but stressing the situation of instability and volatility on the security front (14 bombings since last October). A number of requirements remain to be implemented, particularly the disbanding and disarming of Lebanese and non-Lebanese militias, the extension of government control throughout all of Lebanon, and the full restoration and strict respect for the sovereignty, unity, territorial integrity and political independence of Lebanon, most notably through the establishment of normal diplomatic relations and the demarcation of borders between Syria and Lebanon.


South Lebanon


The security situation in South Lebanon is fragile due to the simmering conflict at the frontier and the fact that the government has declined international appeals to deploy its army at the border, allowing Hezbullah to fill the security vacuum. The Hezbullah justifies its ‘resistance activity’ on the basis of Israeli occupation since the 1967 war of 12 square kilometres of land known as the Shebaa farms, which Israel regards as Syrian and therefore part of the occupied Golan whereas Lebanon claims that the farms are part of its territory.


Israeli troops withdrew from South Lebanon in May 2000. The UN ruled that UNSCR 425 had been implemented but Lebanon considered that the withdrawal of Israeli forces was incomplete as it did not include the Shebaa farms area in the South-East. Lebanon rejects the UN demarcation line as the international frontier with Israel. A 2,400-strong (UNIFIL) (United Nations Interim Forces in Lebanon) peace-monitoring force has been deployed in this contested border area in 1978 and continues to monitor the situation along the frontier with Israel. UNIFIL’s mandate was extended until 31 January 2006 by UNSCR 1614 of 29 July 2005. The reintegration of the former occupied zone is under way, with state services gradually returning after an absence of nearly 20 years. In January 2004 a German-brokered exchange of prisoners took place between Israel and Hezbullah.


Palestinian refugees

There are around 250,000 Palestinian refugees in Lebanon, mostly living in one of twelve overpopulated refugee camps run by UNRWA (United Nations Relief and Works Agency for Palestine Refugees in the Near East). In addition, it is estimated that between 10,000 and 40,000 Palestinian refugees are not registered with UNRWA and are therefore receiving very limited assistance from it. Palestinian refugees face de jure and de facto discrimination as compared with other non-citizens, with regard to the right to own and inherit property, the right to work and social security, access to housing and social services, as well as the rights to effective remedies and are restricted from rebuilding or redeveloping refugee camps due to government-imposed restrictions.

The resettlement of these Palestinian refugees, whose presence is considered to be potentially destabilising to the delicate demographic balance, is a priority issue for Lebanon. There is a national consensus on the right of return of Palestinians as set out in UNGAR 194. Most Palestinian refugees are housed in twelve camps face poor living conditions and are barred from most forms of employment and economic activity. Only a few have been allowed to settle as legal residents. Pending a political solution to the Israeli-Palestinian conflict the Commission implements humanitarian and relief programmes with Non-Governmental Organisations and UNRWA. It aims to improve the economic, social and sanitary conditions of the Palestinian refugees in the camps of Lebanon and throughout the region. Despite tight controls on movements in and out of the camps, the worsening violence in the West Bank and Gaza has led to a number of armed attacks into Israel by Palestinian refugees wishing to support the Intifada. The Lebanese army has been partly effective in preventing such attacks.

Human Rights

Human Rights and fundamental freedoms form an integral and essential part of the framework governing relations between the European Union and its Mediterranean partners, both within the regional context of the Barcelona process/Euro-Mediterranean partnership, through the bilateral Association Agreements concluded or under negotiation with all the Mediterranean partner countries, as well as the European Neighbourhood Policy. In its country report under the European Neighbourhood Policy the Commission provides an assessment of bilateral relations between the Union and Lebanon, and describes, among other things, the current situation in selected areas of particular interest for this partnership, such as Human rights.

The European Initiative for Democracy and Human Rights (EIDHR) was established in 2001, following the MEDA Democracy Programme. These programmes mainly focus on supporting measures that promote democracy, the rule of law, civil and socio-economic rights and the protection of vulnerable individuals.

The Commission has established prices in the past honouring the names of personalities who stand for values such as Human Rights and Democracy or freedom of expression. The importance the EU attaches to Human rights is reflected in the creation of the Samir Kassir Prize for freedom of press, funded by the EU. Samir Kassir was a well-known and outstanding journalist and personality in Lebanon, whose name is inseparably linked with the notion of freedom of press and expression. He was killed in a bomb attack in June 2005 in Beirut. The dedication of a prize honouring his name and funded by the EU contributes to underlining the shared values which the European Union is promoting in its relations with the countries of the region, among others through the Association Agreements and in the framework of the European Neighbourhood Policy.

For a list of projects, please visit the website of the Delegation of the European Commission in Lebanon

Terrorism

Co-operation to counter terrorism is covered in a separate exchange of letters between Lebanon and the EU, attached to the Association Agreement.

A list of terror organisations was issued by the EU in December 2001 as part of measures taken by the Council in combating terrorism, supplementing restrictive measures against individuals and organisations set out in UN SC Resolution 1373. The EU list includes several individuals of Lebanese origin, but makes no reference to Hezbullah. The Lebanese Government has proclaimed its readiness to work with the EU in fighting terrorism, in line with its commitments under the exchange of letters on co-operation on counter-terrorism. Lebanon nonetheless underlines the legitimacy of resistance to foreign occupation.

4.2 Macroeconomic Background


General


Lebanon is a small, service-based, upper-middle income country (2004: US$ 4000 per capita). The civil war and destruction during 1975-1990 led to a decline in the income level by two thirds due to the severe damage to infrastructure and physical assets in all principal sectors and disruption to private sector activity. Since 1992 all economic programmes have focused - with mixed results - on the dual task of achieving stability and supporting the economic revival via reconstruction. While economic growth was strong from 1991-1995, the increase in GDP slowed markedly since the mid 1990’s, also as a consequence of the high debt burden. In 2004 many indicators point to a strengthening in growth (4-5%), with strong export and tourism receipts, a recovery in construction activity and a catch-up effect from the impact of the Iraq war as driving factors. Inflation remained restrained in the past years (2004: around 3%) thanks to the exchange rate peg against the US$ and a moderate fiscal consolidation course.


The International Community and several EU Member States gave Lebanon some relief from its very high debt (178% of GDP) and economic problems during the Paris II donor’s conference in November 2002. 18 governments attended the Conference, as well as the heads of the EIB and World Bank, and IMF. Lebanon was urged to go further with its economic reforms, and to engage with the IMF, which is also a condition for EU macro-financial assistance. At this Conference, Lebanon announced a set of measures to reduce the debt burden and to bring about macro-economic restructuring, but reform implementation has been lagging.


The main challenge of the current government is to bring about promised reform. In a Ministerial declaration of July 2005 the government unveiled its priorities: the economic policy would target “the liberalisation of the economy and stimulation of growth”, “the implementation of Paris II commitments to contain the public debt” and “the fight against corruption and ineffectiveness in the public management”.

Real Sector Developments

Gross domestic product grew by 5% in 2004, a 10-year record high, based on an improved performance of the tourism industry and the growing importance of Lebanon as a regional trade hub. However, in the first semester of 2005, following the assassination of Mr Hariri, the Lebanese economy experienced a downturn. The economic sluggishness was observed across all sectors of activity. Recent data show, however, that this negative trend started to reverse.

Inflation increased slightly during 2004 to an average annual rate of 3% due to economic recovery and import price increases (real depreciation, higher fuel prices).

Despite the recent discipline progress, fiscal consolidation remains slower than promised at Paris II. The government deficit has decreased from 14.6% of GDP in 2003 to 8% in 2004, but still remains above their target Paris II levels (3.4% of GDP). The debt-to-GDP ratio remained at 180%. In the first semester of 2005, the fiscal deficit narrowed as a fall in debt-servicing costs offset the impact of higher non-debt spending and reduced revenue. In the absence of a 2005 budget law, the government continued to apply the rule of “the provisory twelfth”.


The external current account deficit declined to around 12% of GDP in 2004 from 13% in 2003. High export growth, in particular towards Iraq, and tourism receipts are outweighing strong import growth, related to high oil prices and increased domestic demand. In the first half of 2005, however, the trade deficit increased by nearly 7% compared to the same period in 2004 as a result of a significant surge in imports and a considerable decrease of exports. Gross capital inflows also dropped by around 35% in the first quarter of the year.


Sustained private capital inflows are financing the current account deficit. Although inflows related to Paris II slowed down, capital inflows in 2004 continued to be boosted by confidence effects, geopolitical factors and the need to recycle petro-dollars.

Fiscal management, monetary and exchange policy

Lebanon’s key macroeconomic challenge remains its high level of debt and its unsustainable fiscal policies. This indebtedness arose from large and persistent fiscal deficits, which have led to a vicious circle of an ever-increasing public debt stock and debt service burden. Following the November 2002 donors’ conference (Paris II), the government announced a three-pronged strategy in order to put the country back on a sounder basis based on strong fiscal measures, faster privatisation and international support. These policies resulted in some fiscal consolidation, albeit at a pace slower than expected. In 2004, stronger revenues and lower debt service costs have tightened the overall fiscal deficit to around 8% of GDP, while the primary surplus continued to increase. Although the total stock of gross debt is expected to decline to 178% of GDP in 2004, the debt burden remains substantial, continues to threat fiscal sustainability, and makes the Lebanese economy vulnerable to external shocks.


Despite progress, further efforts in fiscal consolidation are needed to restore fiscal sustainability. Donor support and domestic refinancing operations since Paris II have helped to alleviate immediate financing constraints, but the success of the strategy, in the medium-term, depends upon continued fiscal consolidation through sufficient primary surpluses and the realisation of substantial revenues from privatisation and securitisation. The lagging behind of key Paris II objectives is in part due to the fact that privatisation is proceeding more slowly than originally envisaged, meaning that the debt stock and related interest payments remain too high. Furthermore, expenditure side reform measures generated fierce political opposition and held the administration back from pursuing more substantial cuts.

Source