The polarisation of Lebanese politics in the wake of the Israel-Hizbullah war been illustrated by rival mass rallies presenting starkly contrasting visions for the country’s future. The larger event was staged by Hizbullah on September 22nd, with the Shia party’s leader, Hassan Nasrallah, making his first public appearance since the August 14th ceasefire; two days later, thousands of Christians gathered beneath a huge statue of the Virgin Mary at Harissa, north of Beirut, for a rally to commemorate the civil war dead of their former militia, the Lebanese Forces (LF).
Mr Nasrallah acclaimed what he described as Hizbullah’s victory in the recent war. He said that the party had succeeded in replenishing its military stocks within days of the ceasefire, and now possessed more than 20,000 missiles, despite having fired an estimated 4,000 at Israel during the 34-day conflict. It was widely reported before the war that Hizbullah’s arsenal included 13,000 missiles–Mr Nasrallah’s new figure, if true, would suggest either that there had been a major resupply efforts over the past few weeks, or that the pre-war stocks were higher than generally thought.
Mr Nasrallah made clear that there was no question of Hizbullah giving up its weapons under the current political conditions. He said that, in the absence of a “strong, just and capable” state, Hizbullah’s weapons provided the only effective means of protecting the Lebanese people from Israeli aggression. He called for the formation of a government of national unity, presumably including a larger quotient of seats for Hizbullah, which is represented by two ministers in the present government of Fouad Siniora, the prime minister. He also referred to the need for a “fair” electoral system, although he did not spell out whether this should entail reviewing the formula set out in the 1989 Taif agreement for apportioning seats on the basis of religious sect, or whether he meant ironing out kinks in the existing system.
Mr Siniora’s government is based on the solid parliamentary majority held by the March 14th movement, which gathers together the political inheritors of Rafiq al-Hariri, the former Lebanese prime minister who was assassinated in February 2005. This bloc of Sunni Muslim, Christian and Druze parties holds 72 of the 128 seats in parliament. The Resistance and Development Bloc, which includes Hizbullah and the other main Shia party, Amal, has only 35 seats; the remaining 21 are held by the Free Patriotic Movement (FPM), a mainly Christian party led by Michel Aoun, a former commander of the army and a political ally of Hizbullah.
Evidently Hizbullah, even with the support of Mr Aoun, does not have the wherewithal to bring down Mr Siniora’s government by strictly parliamentary means. However, it is in a position to exert popular pressure for the formation of a new administration, one of whose tasks could be to revise the electoral law in such a way as to provide more scope for Hizbullah and the FPM in an early election.
Mr Nasrallah’s speech has given rise to fears among other groups in Lebanon that Hizbullah’s ambitions go further than addressing imperfections in the (Syrian-designed) parliamentary system. Mr Geagea, who was released from jail in 2005 on the basis of a political amnesty, after serving 11 years of a murder sentence, criticised Mr Nasrallah for his failure to uphold the Taif agreement and for his insistence on maintaining an autonomous military force. He also claimed that Hizbullah was complicit in the efforts of Syria to reassert its control over Lebanon. This marked a significant shift in tone on the part of Mr Geagea, who had hitherto been much more circumspect in his comments about Hizbullah–the only Lebanese political figure previously to have attacked the Shia party in this vein is Walid Jumblatt, the leader of the minority Druze sect. Mr Nasrallah has always maintained that he has no quarrel with other sects in Lebanon, and that Hizbullah’s weapons (unlike those of former warlords like Mr Geagea and Mr Jumblatt) have never been, and never will be, turned on other Lebanese. However, the verbal sparring between the Hizbullah leader and Mr Geagea has an ominous ring.
Hariri is not forgotten
Lebanon’s fragile national unity is set to undergo a fresh test, with the imminent publication of the fourth instalment of the UN commission of inquiry into the Hariri assassination. Recent moves by the UN to set up a tribunal for the Hariri murder trial suggest that the commission is getting close to issuing formal charges, which is bound to ratchet up the tensions between Syria’s enemies and allies in Lebanon.
INTERNATIONAL RELATIONS: Economic policy outlook
POLITICAL STABILITY: The Economist Intelligence Unit’s core scenario is that the political scene will remain turbulent in 2011-12 but, despite serious downside risks, the main parties will manage to avoid a full-scale conflict, although their disputes will continue to be heated. The government led by Saad Hariri, the prime minister, will struggle to make progress on policymaking given the ideological and personal divisions between and within its two major factions. Mr Hariri’s “March 14th” movement and its allies, are backed by the US, Saudi Arabia and France; the opposition coalition, “March 8th”, is backed by Iran and Syria. Relations between the factions are partly influenced by changing relations between these external powerbrokers. The president, Michel Suleiman, who is not aligned with either faction, is a key powerbroker.
ELECTION WATCH: The main parties suffered some losses in the May 2010 local elections, which also saw the re-emergence of a number of non-aligned figures, although these changes are unlikely to have a significant impact on national politics. The next parliamentary election is not scheduled until 2013, by when the political landscape may have altered considerably. It is possible that the government could fall as a result of tensions over the UN Special Tribunal for Lebanon (STL), which is investigating the assassination of Rafiq Hariri, a former prime minister, although this may not lead to early elections.
INTERNATIONAL RELATIONS: There is a serious risk of another confrontation with Israel in the medium term, and allegations that Hizbullah has received deliveries of medium-range ballistic missiles have increased the tensions. However, neither Israel nor Hizbullah appear to have an appetite for another conflict in the near future, following the costly war in 2006, and the southern border is generally quiet apart from daily Israeli reconnaissance overflights and a brief clash on August 3rd over the trimming of trees along the border. That said, both sides could plausibly escalate a future incident to deflect attention from sensitive domestic issues (the STL for Hizbullah and pressure on Israel to make concessions to the Palestinians). The international response to Iran’s nuclear programme could have important ramifications for Lebanon. Although the dispute is likely to be addressed through political means, including sanctions, the risk of a US or Israeli attack on Iranian nuclear facilities cannot be ruled out. In such a scenario, Hizbullah would almost certainly be drawn into the conflict, either if it retaliated against Israel after an Israeli strike on Iran, or if Israel pre-emptively attacked Hizbullah to weaken it before attacking Iran. Relations with Syria will remain critical. Syrian troops occupied Lebanon until 2005, and the Lebanese factions remain deeply divided in their attitude towards Syria. Formal diplomatic ties were established for the first time in 2009, and Syrian influence appears to be increasing, but the relationship remains dynamic and could become strained if the STL issues indictments against Syrian officials or if Syria overplays its hand.
POLICY TRENDS: Political tensions are currently undermining economic policymaking but, if it can move beyond the current impasse, the government might make some progress on economic and social policy, possibly including much-needed reforms to and investment in the dysfunctional electricity sector–although even here the past record encourages pessimism. It might even make progress on reducing the structural deficit (a result largely of the high cost of servicing the massive public debt). However, corruption and patronage permeate the political system, and many politicians have their own interests in maintaining a bloated public sector. Privatising state enterprises will remain a highly sensitive issue owing to ideological differences and vested interests, as well as to questions about the likely transparency of any sales of state assets. The economic debates will be complicated by political divisions between March 14th, which controls the Ministry of Finance, and March 8th, which has the energy and telecoms portfolios–and is currently withholding vital telecoms income from the Treasury. Long-discussed plans to sell the two state-owned mobile-phone operators and restructure the heavily subsidised state-owned electricity provider, Electricite du Liban, will be deferred beyond 2012.
ECONOMIC GROWTH: Economic growth in Lebanon is closely correlated with trends across the Middle East and North Africa, which is forecast to grow at an average of 4.5% a year in 2011-12. Although this is lower than the region’s annual average growth rate of 6% in 2005-08, it is reasonably strong in comparison with other regions recovering from the global recession, in part because of strong oil prices, which are projected to average US$82/barrel (for Brent Blend) over the forecast period. After a period of strong tourism-driven growth, we forecast that real GDP growth will ease slightly to a still respectable average of 5.9% in 2011-12, underpinned by investment and demand in the region for Lebanon’s services exports (which account for more than half of GDP). Much of the tourism boom and its knock-on benefits have been focused on the Greater Beirut area, and infrastructure constraints need to be overcome if this is to be extended more widely. Lebanon’s long-term growth potential is also constrained by political uncertainty and the high cost of financing for the domestic private sector (as banks extend most of their domestic credit to the government). Domestic private consumption and investment growth will be constrained by the cost of credit, and government consumption growth will remain positive but will be curbed by the need to contain the already large fiscal deficit.
INFLATION: After a sharp drop in 2009, because of lower world commodity prices, inflation will have picked up slightly in 2010 to around 3.5% on average. In 2011-12 inflation is expected to fall to an annual average of 2.9% as a weakening euro has a deflationary impact on import prices. (France, Italy and Germany together provide one-quarter of imports.) There are serious questions about the reliability of data from the Central Administration of Statistics.
EXCHANGE RATES: The Lebanese pound is expected to remain pegged to the US dollar within a trading band of LP1,501-1,514:US$1. The dollar, and thus the pound, is likely to strengthen against the euro over the forecast period owing to investor concerns about sovereign debt problems in the euro zone and to expectations of interest-rate rises. Banque du Liban (the central bank) is strongly committed to defending the peg, aided by its ability to influence interest rates, high levels of assets and strong support from local commercial banks–which, as the holders of the largest part of Lebanon’s foreign debt, have much to lose if the peg were to collapse. Nevertheless, in the longer term substantial imbalances in the public finances and external accounts could leave the peg vulnerable.
EXTERNAL SECTOR: According to data from the IMF, Lebanon’s structural current-account deficit in 2009 widened substantially to 22.9% of GDP (from 13.7% of GDP in 2008) as services credits fell, despite higher tourist numbers. However, given that Lebanon itself does not directly publish current-account data, and the IMF’s series have frequently been revised upwards, some of the substantial capital flows–which create a positive overall balance of payments–might in reality be current flows. In 2010 the services surplus will have widened, and the current-account deficit will have narrowed to US$7.2bn (20.2% of GDP), despite a larger trade deficit, as higher oil prices and tourism-driven growth will have pushed up the import bill. Further tourism growth in 2011-12, combined with rising remittances, will narrow the deficit further, to an average of 11.9% of GDP. Lebanon’s current-account deficit in 2009 will have been more than covered by capital inflows, leading to a substantial gross balance-of-payments surplus, and this pattern will be repeated over the forecast period. The main concern is the risk of capital flight in the event of a major political shock, which could create financing difficulties–but under such a scenario, Lebanon would probably receive support from its external allies.