U.S. Chamber Overview of Lebanon

Size of Internal Market:

• GNI Per Capita (Atlas Method): $6,180 (2005 est) 1
• Purchasing Power: $21.45 billion (2006 est.)
• Population Below Poverty Line: 28% (1999 est.) 2

Freedom of Access to the Market: Lebanon has a free-market economy and a strong laissez-faire commercial tradition.3 Lebanon welcomes foreign investment, although with some restrictions, particularly in real estate, insurance, media companies, and banks. Residents and non-residents may hold foreign exchange accounts, but approval from the central bank is required to purchase treasury securities, money market instruments, and derivatives, and some credit operations are prohibited. All foreigners must obtain a license from the government to acquire real estate. There are no restrictions on payments and transfers.4

Another valuable asset is Lebanon's strong entrepreneurial culture. With no country-specific U.S. trade sanctions against Lebanon, the United States enjoys a strong exporter position with Lebanon, generally ranking as Lebanon's fifth-largest source of imported goods.5 More than 160 U.S. businesses currently operate in Lebanon. Since 1997, several U.S. companies have opened branch or regional offices, including Microsoft, American Airlines, Coca-cola, FedEx, UPS, General Electric and Pepsi Cola.6

Labor Force and Raw Materials: Lebanon has a labor force of 1.5 million people and an additional one million foreign workers. Unemployment is estimated at 20 percent, but in the absence of reliable statistics, some estimate it could be as high as 25 percent.7

The official language is Arabic, while other common spoken languages are French, English and Armenian. The literacy rate of the population is 87.4 percent, with the male literacy rate at 93.1 percent and the female literacy rate is only at 82.2 percent.8

Though Lebanon is characterized by many attractive factors, the quality of its workforce remains its most distinguished feature. Seventy percent of the total population is less than 29 years old. Vocational teaching and training cover Business and Accounting (15%), Electronics, IT and Mechanics (32%), Restoration and Managerial Assistance (9%). Specialization areas at university level include Science (12%), Business (13%), Engineering and Technology (10%), and Law (15%).

The primary sector makes up about seven percent of GDP; the main agricultural products of Lebanon are citrus, grapes, tomatoes, apples, vegetables, potatoes, olives, tobacco, sheep and goats. The secondary sector makes up approximately 21 percent of GDP, with industries being banking, tourism, food processing, jewelry, cement, textiles, mineral and chemical products, wood and furniture production, oil refining and metal fabrication. Services make up the remaining 72 percent of GDP.9

Protection from Currency Devaluation: While it is difficult to predict currency devaluation as the causes are not entirely evident, Lebanon's history of political strife left the economy unstable with high inflation, which in turn exhausted the foreign exchange reserves and destabilized the macroeconomic situation ultimately leaving the currency unsound. However, more recently, stabilization has brought inflation down from 15 percent in 1990 to 0.3 percent in 2005, which helped replenish foreign exchange reserves and maintain macroeconomic stability.10 The government also has maintained a firm commitment to the Lebanese pound, which has been pegged to the dollar since September 1999.11 As long as the government maintains the pegging of the currency on the dollar, investors do not risk losing from their dollar investments in Lebanon.

Sustaining a healthy macroeconomic environment, and thus a stable currency, is contingent upon the reduction of the fiscal deficit. By the end of December 2005, the fiscal deficit reached approximately 8 percent of GDP, a ratio that is not sustainable. Despite the great deficit in the trade balance, Lebanon exhibited surpluses in the current account through the regular and sustainable money transfers by Lebanese immigrants and those working or investing abroad.12

Investors' perceptions are also an important indicator of the future of the Lebanese pound, for if investors feel anxious and suddenly pull out their investments, the Lebanese pound risks a devaluation. The Lebanese government has made several improvements in its investment climate in order to attract FDI. Investment promotion has come in the form of fiscal incentives and facilitation services through the new Investment Development Law. However, while the investment climate in Lebanon has improved significantly over the past few years, the challenge lies in continuing the momentum.13

Remittance of Dividends, Interest, Royalties and Technical Assistance Payments: Lebanon has established ideal conditions for conducting business with policies such as a free foreign exchange market, full currency convertibility policies, no restrictions on the inward or outward movement of capital, and banking secrecy.14 Lebanon's financial sector is one of the region's most liberal and sophisticated. There are few restrictions on domestic bank formation and few barriers to foreign banks. Financial regulations are transparent, and credit is allocated to all investors on market terms. There are no restrictions on the transfer of money into or out of the country. Furthermore, there are no restrictions on the remittance of profits abroad. Hard currency can be taken out of the country and there are no reporting requirements.15

To asses the strength of investor protection, it is necessary to analyze several indicators, including transparency of transactions, directors' liability, and shareholders' ability to sue officers and directors for misconduct. In terms of transparency, according to a 2006 index by Doing Business, on a scale from one to ten, where ten indicates greater disclosure, Lebanon is rated at 9, well above the OECD average of 6.3 and the regional average of 5.8. The power of shareholders to challenge a transaction is relatively average, falling above the regional average but below the OECD average. Overall, Lebanon's index of investor protection also falls above the regional average and below the OECD average.16

Property Rights Protection: Lebanon has a strongly developed and non-discriminatory legal framework that protects private property and grants Lebanese and foreigners equal rights.17 Existing intellectual property right laws cover copyright, patent, trademarks and geographical elements.18 Lebanon's 1999 Copyright Law largely complies with WTO regulations and needs minor amendments to become fully compatible. The law allows educational institutions and students to copy legitimately acquired software for non-commercial use. Registration of copyrights and copyright protection in Lebanon is not mandatory.19

Currently, the United States government is urging the Lebanese government to continue its efforts to address these problems and to ratify and implement the WIPO Internet Treaties. With respect to enforcement activities, the United States recognizes Lebanon's establishment of a specialized IPR police unit which is authorized to take ex-officio action against piracy and counterfeiting and encourages further development of this new initiative. The United States also urges Lebanon to ensure that prosecutors and judges issue convictions and impose deterrent sentences on criminal IPR infringers, as well as strengthen its patent laws. The United States will monitor the IPR situation in Lebanon closely, particularly under the GSP petition for inadequate copyright protection. 20

Export Potential:  Lebanon's geographic position, centrally located between Europe, Asia and Africa, opens the country to a wide variety of markets. Historically, Lebanon served as a regional banking center and an axis for Middle Eastern trade initiatives. Today Lebanon is rising again as a regional and international hub for trade, finance, services, culture, and tourism. 21

Lebanese exports total $1.782 billion f.o.b. (2005 est.) including authentic jewelry, inorganic chemicals, miscellaneous consumer goods, fruits, tobacco, construction minerals, electric power machinery and switchgear, textile fibers and paper. Lebanon's major export partners are Syria, the UAE, Switzerland, and Turkey.22

Lebanon imports a total of $8.855 million f.o.b. (2005 est.) of goods, principally petroleum products, cars, medicinal products, clothing, meat and live animals, consumer goods, paper, textile fabrics, and tobacco. Italy, Syria, France, Germany and the United States are Lebanon's main import partners. 23

The United States' position as the fifth-largest source of Lebanese imports creates a strong economic bind between the two nations. Since the lifting of the passport restriction in 1997, a number of large U.S. companies have opened branch or regional offices.24

In January 2002, Lebanon signed an association agreement with the European Union. Lebanon also has bilateral trade agreements with several Arab states and is working toward accession to the World Trade Organization. Lebanon enjoys good relations with virtually all of its Arab neighbors (despite historic tensions with Libya, the Palestinians, and Iraq), and hosted an Arab League Summit in March 2002 for the first time in more than 35 years. Lebanon is also a member of the Organization of Islamic Conference and maintains a close relationship with Iran, largely centered on Shi'a Muslim links. Lebanon is a member of the Francophone countries and hosted the Francophone Summit in October 2002. 25

Lebanon has already concluded many agreements to avoid double taxation with many countries such as France, Russia, Egypt, Syria, Pakistan, Romania and Iran. Similar agreements are under negotiations with other countries like USA, Japan, Canada and UK.

Regulatory Burdens: Lebanon's aim is to reduce the regulatory burden on the private sector, especially small and medium businesses, through a comprehensive restructuring of the relevant private business registration procedures and a reduction in the cost and time of these procedures to encourage both local and foreign investment to the country.26

In order to launch a business, entrepreneurs can expect an average of approximately six procedures, well below the regional average of 10.3. The advantage of launching a business in Lebanon, as opposed to the rest of the region, is the minimum capital required as a percentage of GNI per capita, which is 56.5 percent while the region's average is 74.5 percent.27

Obtaining a business license is relatively simple, as the Investment and Development Authority in Lebanon (IADL) offers a recently established service that facilitates and streamlines the permitting and licensing process and allows investors to obtain the various permits and licenses they require with minimal time and effort. However, closing a business is very difficult.28

According to a 2007 assessment by AME, Lebanon's economy is the world's 77th freest economy. Lebanon is ranked ninth out of 17 countries in the Middle East and North Africa region, and its overall score is slightly higher than the regional average.29

Favorable Taxation and Tax Incentives: In order to attract initial investments, Lebanon grants temporary fiscal exemptions to new industries, self-financed investments, medium and long-term credit banks, and companies whose objectives are to reconstruct disaster areas. Offshore and holding companies in Lebanon, as well as income earned abroad, are exempt from regular corporate tax. Furthermore, full ownership of corporate entities by foreign investors is allowed. For the normal operating environment, Lebanon has low tax rates. The corporate tax rate depends on the type of company, ranging from a flat rate of 1,000,000 LBP for offshore companies to a maximum of 15 percent of profits. The tax applies to net income; therefore, all expenses are deductible from the gross income. Companies including joint stock companies and limited liability partnerships are taxed on income solely derived from operations in Lebanon. Companies are subject to a yearly lump sum tax: Joint-stock companies pay 2,000,000 LBP; limited liability partnerships pay 750,000 LBP; and other partnerships pay 550,000 LBP. There are no regional or municipal taxes on capital gain.30

In February 2002, Lebanon created a ten percent value-added tax in order to increase revenues. Distribution of dividends is subject to a 10 percent tax rate. Salaries and wages of employees are progressively taxed from a minimum of 2 percent to a maximum of 20 percent.31

Low Political Risk: After independence in 1943, Lebanon became a model for social and economic development in the Middle East, with impressive growth, high investment, and unmatched social indicators. In 1975, however, a 15-year civil war began ravaging the country, destroying physical infrastructure and housing, displacing large portions of the population, and weakening institutions.

Postwar social and political instability, fueled by economic uncertainty and the collapse of the Lebanese currency, led to the resignation of Prime Minister Omar Karami in May 1992, after less than 2 years in office. Former Prime Minister Rashid al Sulh, who was widely viewed as a caretaker to oversee Lebanon's first parliamentary elections in 20 years, replaced him.32

After the signing of the Ta'if Accord, which ended the civil war in 1989, and its implementation that began in 1991, Lebanon recorded a strong recovery.  The new Prime Minister, Fuad Siniora, pledged to carry out economic reforms within the country. The recovery after the civil war amid continued regional uncertainty underlined the resilience of the Lebanese economy, which relies on large amounts of short-term capital transfers from abroad. 33

Unfortunately, these efforts suffered a severe setback with the recent hostilities in July-August 2006. 34 The Hezbollah-instigated conflict with Israel greatly damaged the newly rebuilt Lebanese economy.

Predictable Macroeconomic Management: Since 1992, all economic programs 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 to 1995, due to the high debt burden the increase in GDP has slowed since the mid 1990's. The international community gave Lebanon some relief from its high debt (178% of GDP) during the Paris II Conference, which urged Lebanon to go further with its economic reforms and to engage with the IMF. At this Conference, Lebanon announced a set of measures to reduce the debt burden and bring about macroeconomic restructuring, based on strong fiscal measures, faster privatization, and international support.35 Despite the great deficit in the trade balance, Lebanon exhibited surpluses in the current account through the regular and substantial money transfers by Lebanese immigrants and those working or investing abroad.

Reliable Infrastructure Support: Lebanon embarked on a massive reconstruction program in 1992 to rebuild the country's physical and social infrastructure devastated by both the long civil war (1975-90) and the Israeli occupation of the south (1978-2000). Meanwhile, the delicate social balance and the near-dissolution of central government institutions during the civil war handicapped the state as it sought to capture revenues to fund the recovery effort.

By early November 1992, a new parliament had been elected, and Prime Minister Rafiq Hariri had formed a cabinet, retaining for himself the finance portfolio. The formation of a government headed by a successful billionaire businessman was widely seen as a sign that Lebanon would make a priority of rebuilding the country and reviving the economy. Although problems with basic infrastructure and government services persist, much of the civil war damage had been repaired throughout the country and many foreign investors and tourists returned by the early 21st century.36