THE LEBANESE ECONOMY

The Big Lie

May 25, 2004

Lebanon’s economy is in desperate need for a major overhaul, with a lot of room to grow, and many Lebanese are finding it harder to make ends meet as their incomes remain too low compared to the country’s cost of living.  

However, the numbers coming for official and semi-official sources in the country show a wide gap between the official GDP at less than $18 Billion and the actual economic indicators, which present an economy several times larger. 

The questions that pose themselves are 1) How can there be such a wide gap in the numbers and 2) Why would the government insist on so drastically understating the size of the economy? 3) Why doesn’t anyone challenge those numbers? 

Comparisons to countries like Syria, Jordan, Egypt and eastern European countries with similar per capita incomes are designed to make the official number sound reasonable and acceptable. But, it does not take an economist to see that such comparisons have no relation to reality. The cost of living in those countries is a mere fraction of Lebanon’s, which is more comparable to the richest countries and even higher than many. 

A clear indication of the high cost of living in Lebanon is that the Lebanese even view costs in Paris and London as bargains and those who travel try to buy most of their needs from outside the country. 

Thus, even if Lebanon’s real economy amounts to three folds the official number or $12,000 pre capita, it will still represent a very low income to cost of living ratio, when compared to the more than $30,000 per capita in countries with comparable living costs. 

Furthermore, how can an $18 Billion economy consume well over $50 Billion of goods and services, save an average of $4 Billion and spend several other billions abroad? Worst yet, how can it do so year after year? Capital infusion from abroad does not explain this anomaly, as it is already included in the GDP and the estimated 46 billion would only account for a fraction of the gap. 

The personal income portion of the official GDP, estimated at about $13 Billion (70% of GDP), or $2,600 per capita, is below the level needed for basic subsistence. Given Lebanon’s cost of living, this income can barely cover the average cost of housing and leaves no funds for basic necessities such as food, clothing, schooling, basic home maintenance, automobile operations and other basic necessities. 

Consider the following numbers.

  • More than 500,000 students attend private schools, at an estimated annual cost of $1.5 Billion.

  • The education of more than 150,000 college students costs more than $1 Billion a year.

  • The estimated 1.5 million cars in Lebanon cost more than $3 Billion annually to operate and maintain.

  • More than 100,000 new cars enter the market every year at a cost of $2 Billion.

  • More than $5 Billion dollars is expended annually on maintenance, repair and new construction of residential and business properties.

  • More than 100,000 children of resident Lebanese are in colleges abroad at an annual cost of almost $2 Billion.

  • The more than 500,000 resident Lebanese travelers annually spend more than $2Billion on airfares and other travel expenses.

The above numbers alone exceed $16 Billion and are well above the official personal income of the Lebanese. And the Lebanese have not even begun to buy food, clothing, a bar of soap, a chair to sit on, or pay rent and utilities etc. Yet the Government wants us to believe that this is not only possible, but the Lebanese still manage to save an average of $4 Billion a year from the income they do not have. 

Incidentally, the $4 billion annual savings represents a saving rate 10 times higher than the world average of 2.5%, when compared to the official GDP, while the claim is that the Lebanese cannot make ends meet. 

THE REAL ECONOMY

Clearly, the official GDP reported at $18 Billion does not include all of Lebanon’s economic activity. Some reasons for lower numbers are evident in the following:

  • The Government’s inability to accurately assess company profits.

  • Companies minimize tax liabilities by under reporting work force and wages paid

  • A large numbers of independent operations with unknown incomes.

  • A large number of foreign companies and local companies with foreign operations.

  • A large volume of non-taxable and thus unrecognized income, including; interest earned, real estate and investment profits.

However, a simple look at other available data would clearly indicate economic activity several folds higher than the official numbers.

Three sets of official data; Wages, Personal Expenditure and Banking Data, converge to show an economy three times larger than officially stated. 

Wages

The official estimates of wages earned in the various economic sectors and the relative percentages of each sector from the economy produce a weighted average monthly wage of nearly $2,100. The Lebanese work force is estimated at between 1.3 and 1.5 million people, bringing the cumulative personal income to a range of $33 to $38 Billion. 

The Government further declares that the actual wages and work force are at least 1.5 times higher than official reports as most companies report lower wages or avoid reporting workers to reduce social security taxes owed. That would bring the personal income segment of the economy to over $50 Billion and puts the actual GDP at over $70 Billion (70% ratio of personal income to GDP). 

Personal expenditure

Personal expenditure further confirms those numbers as calculated from import/export, industrial production and agricultural production numbers. 

Official imports average more than $7 Billion annually, of which nearly $4.5 Billion is destined for retail sale in Lebanon. Actual costs at port including shipping and customs amount to more than $6.5 Billion. (This does not include the large amounts of products entering the country illegally.) Industrial Production is estimated at more than $4 Billion annually, of which $3.5 Billion are sold locally. Agricultural output is estimated at $3 Billion with more than $2.5 sold locally. Conservatively estimating retail value at twice the production or import costs brings personal expenditure on products alone to more than $25 Billion. 

World data puts consumer spending on services (housing, labor, utilities, entertainment, etc.) in a range of 50%-60% of total expenditures, or an additional $25-35 Billion. 

As such household expenditure in Lebanon comes to between $50 and $62 Billion and puts the GDP between $70 and $90 Billion, in line with the estimated personal income. 

Banking Data

Banking data are the most accurate numbers available in Lebanon and further confirm the economic activity levels above. Banking data put the value of checks annually cleared through Lebanese banks at close $30 Billion. Given that cash transactions make up more than half of all financial transactions in Lebanon, total transactions or total good and services exchanged in Lebanon would amount to over $60 Billion. 

Furthermore, bank deposits of resident Lebanese have been recently growing at $3 to $4 Billion a year, with growth in the mid-nineties reaching $5-$6 Billion. Growth in bank deposits is effectively the difference between earnings and expenditures, or in other words annual savings of the resident Lebanese. This amounts to a savings rate of more than 20% of the official GDP, (Mid-nineties rates will exceed 50% of GDP) which is unrealistic especially at a time when the official personal income is shown to be insufficient to sustain basic needs. 

International data shows that even more frugal wealthy nations have saving rates of 3-4% of GDP, with some like the US saving at a rate of less than 2% of GDP. At 3-4% the savings rate would confirm the estimates from the check clearing activity and findings above with an estimated economic activity in Lebanon well over $75 Billion, of which personal income is estimated at over $50 Billion. (70% of GDP). 

WHY THE DISCREPENCY AND SILENCE?

Without pointing any accusatory fingers, we pose the following questions for thought. 

Can anyone ask what happened to the money, if it did not exist in the first place? The Government cannot be derelict in its collection duty or “wasteful” in its spending if the economy cannot support any more funds than the declared revenue. 

Furthermore, the lower official GDP makes Lebanon’s debt level seem unmanageably high at almost 180% of GDP. That necessitates much higher interest rates on Government debt instruments.

Who is holding those instruments and benefiting from the higher interests?

Who is in position to accurately assess Lebanon’s economy and set the record straight?

Those in the know are very well aware that the debt burden is not nearly as ominous in light of the real economy and thus not a cause for concern for their investments.

Where else can they get such a secure high return on their money?

 Ziad Nassar