Category Archives: Lebanon

The Wrap: Egypt Factories Shutdown, Syria War Economy Thrives

  • EGYPT 

– Egypt’s central bank held a bumper auction on Wednesday, selling $1.3 billion from its foreign reserves to cover strategic imports such as wheat, meat and cooking oil.  As the country grapples with an economic crisis, the central bank’s foreign currency sales are an attempt to keep the pound strong and reassure the nation that the government can afford basic commodities.

But as Patrick Werr, economics reporter at Reuters writes:

Despite the sales and a more expensive dollar, businesses have racked up hundreds of millions in unfulfilled requests for foreign currency, forcing them to turn to a black market that has mushroomed in recent months.

The pound has depreciated on the black market, showing that a strengthening pound on the official market isn’t as accurate as the central bank may want to convey. 

More than 600 factories have shut down in Egypt in recent months, the country’s trade minister said in an attempt to correct a statement from the minister of manpower Kamal Abu-Eita, who announced a few weeks ago that more than 4,500 factories had closed in Egypt. The latter figure had come from a Centre for Trade Union and Worker Services report released earlier this year, but the methodology was questioned.

The fact that the new trade minister Mounir Fakhry Abdel Nour is trying to downplay the number of closures is not a very good sign, but it’s an even worse signal that he’s questioning the figures of his colleague. 

Either way, even at just 613 factories, that is a big blow to Egypt’s industrial sector, one of the major backbones for the economy. Though the Morsi administration and the caretaker government before that had discussed investing money to re-open factories, nothing ever came to fruition.

Many of these factories are hit by multiple problems including power cuts, strikes, poor security, and difficulty securing loans in credit markets where they are squeezed out by an indebted government.

  • SYRIA 

– Syria’s war economy has created a thriving underground black market, this fascinating Reuters report explains.

As state buyers face growing problems trying to purchase food from foreign suppliers because funds are frozen in bank accounts abroad, middlemen and small companies working with shipping agents are finding ways to do profitable business, operating from neighbouring countries such as Lebanon.

That is even more important at a time when Damascus has had to cancel a number of tenders to buy wheat, sugar and rice. It’s part of a growing shift in the way Syria trades with neighbouring economies, especially rewarding for those willing to take the risk. 

– 400 litres of mazut (or heating oil) are promised for each Syrian citizen as regime insists it has enough fuel to cover domestic demand, Syrian News reports. 

Though Syria doesn’t produce a lot of oil, it relies on imports to keep up with demand. But the war has severed ties with many of its fuel providers including oil traders in the European Union and dramatically impaired the ability to buy fuel because of dwindling reserves. Rolling power cuts and oil shortages now plague Syrians, forcing many to turn to the expensive black market.

Unfortunately, promises by the Assad regime that it will provide more fuel to Syrians are rarely fulfilled.

Economic Impact of US Intervention in Syria

As the world awaits the decision of whether the US will intervene in Syria’s bloody civil war, the price that country is paying is growing day by day.

Hundreds of thousands of people have been slaughtered and cities that were once cultural capitals have been annihilated. Inflation is at triple digits, GDP has literally halved and the jobless rate has quintupled.

But the key question today, and the one that President Barack Obama has brought to US Congress, is whether military-led intervention will serve as an overdue punishment and warning to Bashar Al Assad and his regime, or whether it will simply deal a final blow to the country as the Syrian regime’s allies retaliate aggressively at the expense of innocent civilians.

While it is the humanitarian cost that is the number one consideration here, the economy, even in its current state, is still a lifeline for thousands of Syrians. The global economic impact of an escalation of the civil war is also a factor that is being mulled because of the ripple effect on global markets.

Based on interviews with half a dozen senior economists focused on Syria, Rebel Economy has put together a list of the key economic impacts of US military-led intervention in Syria:

Higher Oil Prices

Although Syria is not a major oil producer, many expect the oil price to spike, mainly because Western intervention in Syria is likely to lead to a bigger regional conflict involving major oil producers and two strong allies to the Assad regime, Iran and Russia.

More than two years into Syria’s civil war, Assad is settling his bills for Russian arms orders to try to shore up ties with his most powerful ally, this Reuters investigation reveals.

Oil prices have already hit an 18-month high, but if the civil war escalates with military strikes the oil price is expected to spike further, playing havoc with global markets as the cost of production soars.

Some oil analysts are estimating that Brent Crude could rise above $120 per barrel as a result of a military strike, while some, including those at Société Générale, see prices climbing to $150 per barrel in the short-term.

A possible spillover into Iraq, OPEC’s second largest producer, would cut the volume of oil from the global market and raise prices. Iraq’s Kirkuk oil pipeline has already been targeted six times in August. This has forced Iraq to cut oil shipments from pipeline by more than half for September.

Foreign Currency Troubles

Pressure on foreign reserves will grow as energy prices rise, especially in countries dependant on imports. Some countries near to Syria are particularly vulnerable to foreign currency pressures, including Lebanon and Jordan whose currency reserves stand at near 10-year lows. This means they could have trouble covering the cost of imports if the conflict in Syria escalates.

And the lower reserves fall, the more currency depreciation is possible and the more pressure on imports.

In Syria, in the days following the US’ announcement of possible military intervention, the Syrian pound has taken a beating on the black market.

Here’s Professor Steve Hanke’s update. He’s a professor of Applied Economics at Johns Hopkins University:

The Syrian pound (SYP) has lost 24.07% of its value against the US dollar in the two days since Kerry’s announcement. Currently, the exchange rate sits at 270 SYP/USD, yielding an implied annual inflation rate of 291.88%. In countries with troubled currencies, there is no better measure of economic expectations than the black-market exchange rate. The recent deterioration in the SYP/USD exchange rate clearly indicates that Syrians are anticipating Western military intervention in the near term.

Trade Routes Disrupted

Analysts say it’s unlikely for key ports in the Gulf or cargo traffic through the Suez Canal to be disrupted as a result of military intervention, however perception is king.

Even the threat of increased disruption could send insurance rates skyrocketing and delay the passage of goods passing through Lebanon’s Port of Beirut.

Contagion effect

Aside from the impact on the oil markets and the major oil producers tied to Syria, many other countries in the region could see an adverse impact on their economies because of Syrian strife. Turkey for example, already suffering from a hard to manage current account deficit, could see it widen as political instability weakens the lira and raises oil prices.

And of course Israel has threatened aggressive action if attacked by Hezbollah or the Syrian army, which could impact both Lebanon and other countries in the region if the conflict escalated fast.

Overstating the impact?  

Despite all the above pointing to an Armageddon scenario, some still say that an intervention will do no more than dent the Syrian regime.

Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist, says the “regime is so boxed in economically and any major economic effects have already occurred – sanctions, the disrupting of production and trade routes, and so on – that the “limited and narrow” strikes will not be as debilitating as we may think”.

For one, though we mentioned above the impact of trade routes, in fact local reports from Lebanon suggest the Port of Beirut is doing much better than expected. The Daily Star reports:

About 2,200 such vehicles enter the port daily, twice the number at the start of the year, and the multicolored containers are stacked five high rather than three. While Lebanon’s growth has suffered during the two-and-a-half-year conflict next door in Syria, port traffic has risen as traders avoid risky overland transit. Domestic demand is also increasing as Lebanon absorbs 1.2 million Syrians fleeing their war-torn country.

Unlike Libya, which had little to no foreign support, Syria has the powers of Iran and Russia behind it arming it and financing the regime. The West’s reluctance and delay to intervene is also ultimately buying more time for the Syrian regime to replenish stocks, move somewhere new and high military assets.

It has also weakened the West against Syria, allowing the regime and its allies to calculate that any intervention will be short and not a major long-term threat, according to Abboud:

Regime allies are unlikely to cease financial and material support in the aftermath of intervention, regardless of whether the regime is perceived to be losing ground on the battlefield. Intervention will only strengthen the commitment and resolve of regime allies and supporters, particularly Iran and Hezbollah. If they can withstand the intervention, then the West’s only major military option will have been confronted.

What is clear is that even though the question of intervention is complicated and mired with complexities, the longer the West waits to decide, the more time the Syrian regime has to retaliate with strength.

Powerless In Lebanon

The Lebanese are veterans at coping with chronic power cuts.

The wealthy rely on expensive, privately-owned generators to pick up the slack, while the poor just learn to live with the humidity.

But in both cases, residents of Lebanon are not easily fooled by gimmicks that promise to end the country’s electricity problems.

The energy minister, Gebran Bassil, is regularly subject to attacks and ridicule for failing to improve the country’s creaking infrastructure.

The country was left in ruins after the 1975-90 civil war and aside from superficial building redevelopment projects and urban gentrification, little has been done to improve the core infrastructure. The country has not built a new power station in more than a decade and poor management, corruption, conflict and the recent influx across the border of hundreds of thousands of Syrian refugees has exacerbated demand.

So earlier this year, when the government said the country had made a deal with Turkey to moor a “power-ship”, essentially a floating power station, on Beirut’s coast to help boost electricity output, most were sceptical.

The ship, the Fatmagül Sultan, was expected to deliver 188 mega watts (MW) of electricity daily, easing demand during the hot months when demand for power reaches 3000MW.

Under the $370 million, three-year deal agreed between Lebanon’s government and a Turkish energy company, Karadeniz Holding, the power generated by the ship would have made for a nice supplement to the 1,600 megawatts Lebanon already generates.

But, sure enough, within weeks of launch, the ship suddenly stopped working. There was a mismatch with the type of fuel used in the generators of the ship and the fuel Lebanese authorities supplied, according to local reports.

Whatever the problem, economists agree that the government’s approach to the decades-old electricity problem has been too simplistic. Samer Abboud, a visiting scholar at the Carnegie Middle East Center and political economist specialist explains more:

Rather than addressing the structural weaknesses of the grid and the need to update its provisional capacities, the government has consistently either ignored the problem or come up with costly and inefficient solutions such as the Turkish “power ship”.

That the ship went offline, even if it was brief, during the summer months – the peak season for electricity if you will – just highlights how deep the problems in provision really are.  So while this may have been a creative way to address a major problem, all that it did was expose the weaknesses in the grid and the incapacity of the existing power plants.  What Lebanon needs is sound investment in power plants and a capable grid, not “power ships” whose capacity is dependent on its connection to a weak grid.

Politics has predictably taken centre stage.

Mr Bassil, the energy minister, has been accused of colluding with various political factions to provide a better electricity output to parts of Lebanon that support his political group, the Free Patriotic Movement.

Batroun, Mr Bassil’s hometown in northern Lebanon, probably has “plenty of electricity”, said Imad Salamey, professor of Political Science and International Relations at the Lebanese American University.

“Electricity is being played out politically and government resources [have become] political buyout,” he said.

Despite the critical response to the first ship, Electricite du Liban (EDL), the state-owned power company that brokered the deal with Turkey is stuck.

It is heavily in debt and dependant on government subsidies, but as demand for power balloons, it has resorted to a short-term solution for a problem that needs a much more holistic approach.

It is now pushing ahead with a second Turkish “power ship” which is expected to arrive off Beirut’s coast any day now. Judging by the first ship’s performance, the second barge is unlikely to make much difference to the country’s electricity problems.

The electricity crisis has instead become a symptom of an even more mammoth problem: a stagnant government that is holding the country hostage because it can’t create budgets, implement policies or take on major projects. 

And a powerless government makes for a powerless state. 

Lebanon’s Economic Fragility

The scars of civil war still run deep in Lebanon after prolonged battles from 1975 to 1990.  

Beirut become synonymous with carnage and street fighting ruined large parts of the city.

Since then, huge reconstruction programmes have brought the country back to life and Lebanon has enjoyed periods of economic prosperity as a trading, financial and tourist hub.

But that is all threatened once again with recent events.

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Breakfast Wrap: Arab Spring Funding, IMF Speaks Out, Bikinis Allowed

More than a year and a half after the beginning of uprisings across the Mena region, which toppled dictators and liberated societies, Europe’s development bank has made its first investments in Morocco, Jordan and Tunisia and said it was preparing to invest up to 200 million euros (160.9 million pounds) by the end of the year in the region.

The European Bank for Reconstruction and Development (EBRD) also soon hopes to get approval from shareholders for investments in Egypt.  It’s not clear who these “shareholders” are.

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Morning Round-Up – Egypt & IMF, Sinai & Tourism, Saudi & IBM

International Monetary Fund to discuss loans in Egypt this month – IMF statement in our inboxes said:

“The IMF received an invitation from the new Egyptian government to visit Cairo. We expect the staff mission, which will be joined by Masood Ahmed, the Fund’s director for the Middle East and Central Asia, to take place during August to resume discussions on possible financial support for a homegrown economic program. The IMF stands ready to support Egypt and work closely with the authorities.”

Political obstacles that prevented an earlier agreement with the IMF have largely dissipated, but the economy is still fragile, which is confirmed by Egypt’s call to the IMF once again to renew discussions.

Egypt’s Rafah crossing with Gaza closed after attack – The impact from these attacks and similar incidents will put pressure on tourism revenues, which dropped by nearly a third last year, amid the worst stint of political instability in Egypt since the assassination of President Anwar Sadat in 1981.   On the same day, tourists had to cancel a Sharm El Sheikh trip because of protests in South Sinai.

Out in the dark – very detailed feature on Egypt’s electricity problems, Egypt Independent

Egypt May mobile subscriptions up 22pct

Lebanon’s hash growers protect their cannabis, which has apparently become a major source of income, by opening fire at police

Saudi’s Mobily awards IBM $280 million IT outsourcing contract