III. Economic Trends and Outlook

Major Trends and Outlook

Under the leadership of Prime Minister Rafiq Hariri and his team of
professional advisors, Lebanon embarked on a path towards economic recovery.
Efforts center on currency stabilization, budget deficit reduction and an
ambitious reconstruction program.  Lebanon aims to regain its role as a
regional financial center with the rebirth of the Beirut stock market,
targetted for year end 1994.

According to government of Lebanon (GOL) statistics, the rate of growth of GDP
(in constant terms) reached ten percent in 1993, exceeding estimated
population growth of 2.7 percent, according to GOL data.  Per capita GDP rose
to about USD 1626 --about 7.7 percent at constant 1992 prices.  This growth
resulted mainly from a 62 percent increase in private investment and
substantial capital inflows.  Consumption increased by 12 percent and
inflation reached only 15 percent, compared to 131 percent in 1992.  The
Lebanese pound (ll) strengthened 7.4 percent, closing at ll 1680 to the dollar
by the end of June 1994.  Foreign reserves at the Central Bank of Lebanon
(cbl) rose by 47 percent to about usd 2.8 billion.

The government's efforts to reduce the budget deficit reflected positively on
state finances.  The public sector deficit--which reached 56.2 percent of
expenditures in 1992--shrank to 40 percent in 1993.  This reinforced
confidence of the private sector in the state's policies, stabilized the local
currency and led to a decrease in interest rates.  This confidence was
reflected in the capital inflow for purchase of shares in "solidere," the
company for reconstruction and development of the Beirut downtown commercial
center.  The government succeeded in attracting nearly usd 1 billion, while
the capital required was USD 650 million.  The government plans to capitalize
on this success and hopes to relaunch the Beirut stock market by the end of
1994.

Public confidence in state policies is vital since the government has already
embarked on a USD 12 billion, ten-year program (1993-2002), for recovery and
balanced development known as "Horizon 2000."  The ambitious target is to
double per capita GDP by the end of the period.  About USD 1.7 billion has
already been committed by 16 donors through 1996.  The Council for Development
and Reconstruction (CDR), the government's executive body for rebuilding, has
already awarded contracts worth over USD 3 billion.

The economic and commercial outlook for 1994-95 is optimistic.  The government
expects robust growth in income, consumption and investment.  Inflation is
expected to moderate.  Capital inflows induced by a growth in demand are
expected to offset Lebanon's trade deficit.


Principal Growth Sectors

Construction and Real Estate:  The construction sector performed very well in
1993-94, although construction is moderating.  Engineering construction
permits and cement deliveries both rose dramatically in 1993.  The recovery is
mostly evident in Mount Lebanon.  Construction costs have been slightly rising
in dollar terms, and are expected to rise further as demand picks up with the
startup of the reconstruction of the Beirut downtown center.  Real estate and
construction attracted a large share of new private investment.  Arab
investment in the real estate sector (including solidere) reached an estimated
USD 1 billion in 1993.

Industry:  The industrial sector is still trying to recover from the impact of
Lebanon's 17-year civil war.  The lack of adequate infrastructure, rising
costs of services, and scarce bank credits are slowing recovery, although
imports of industrial machinery have started to pick up.  The IFC, a World
Bank agency, has allocated a credit line of USD 45 million to small and medium
enterprises to be disbursed through local banks.  Another USD 45 million will
soon be signed.  In addition, the IFC granted a USD 6 million soft loan to a
local tile/sanitary ware factory to expand its production capacity.

Agriculture:  The agriculture sector also suffers from labor shortages, lack
of bank facilities and rising costs of services.  The government is
subsidizing sugar beets, wheat and tobacco and has succeeded in reducing
lucrative but illegal drug production in West Biqa' and Ba'labak-hirmil.
Several multilateral donors are financing agricultural and livestock projects.
The U.N. drug control program has started the first phase of the
Ba'labak-hirmil integrated development project, but additional funding is
necessary.

Trade and Services:  Increased demand translated into increases in GDP and
imports.  The growth in consumption and investment is expected to be satisfied
both by domestic production and imports in nearly equivalent shares in
1994-95.  Lebanon has traditionally been an importing country, with Italy,
France, Germany and the United States as its major suppliers.  Lebanon's main
export markets are the Arab countries.  Lebanon's trade deficit is more than
offset by capital inflows, resulting in balance of payments surpluses.
Customs revenues--a principal source of government income--have gradually
picked up as collection and enforcement improve.  The largest share of
Lebanon's customs receipts are collected at Beirut harbor and airport.

Activity at Beirut harbor picked up in 1994 as the government developed port
infrastructure.  The reconstruction of the harbor's bonded customs zone--which
was completely destroyed in the civil war--has also started.  Activity at
Beirut International Airport (BIA) also grew in 1993.  The government has an
elaborate, ambitious plan to modernize and develop bia to accommodate six
million passengers per year.

Banking:  Improving economic and financial conditions in 1993 led to favorable
monetary and banking activity.  The consolidated balance sheet of commercial
banks and customer deposits increased considerably.  The de-dollarization of
bank deposits has started.  The exchange rate for the Lebanese pound remains
stable and Lebanese pound deposits carry high yields.  The share of foreign
deposits to total deposits dropped from 70.3 percent at year end 1993 to 62.7
percent in the first quarter of 1994.  Recently, the CBL and 22 commercial
banks (representing over 80 percent of Lebanon's banking activity) joined the
SWIFT (Society For World Interbank Financial Transfer) network.  Monetary
authorities are working hard on developing financial markets and instruments
in order to channel savings into productive sectors.


Government Role in the Economy

Lebanon enjoys a free-market economy and a strong laissez-faire commercial
tradition.  In order to attract investment, the government has recently
reduced the income tax rate on individuals and corporations to a maximum of
ten percent, and on dividends to five percent.  The government is seriously
considering privatization of some public services.  It has succeeded in
awarding some contracts on a build/operate/transfer (BOT) basis.  In 1994, it
reduced the state's shares in three local medium and long-term development
banks to 20 percent in order to encourage private sector participation in
economic reconstruction.


Balance of Payments Situation

In the absence of reliable trade statistics, Lebanon calculates its balance of
payments based on the net foreign assets of the banking sector.  In 1993, net
capital flows registered a surplus of USD 4.2 billion which offset the trade
deficit and led to a surplus in the balance of payments of nearly USD 1.14
billion, compared to USD 53.7 million in 1992.  This is attributed to
increases in the net foreign assets of commercial banks and the central bank
of Lebanon (CBL).  In first quarter 1994, the balance of payments registered a
surplus of USD 472.3 million, mostly due to a rise in the CBL's net foreign
assets.  It is expected that gross capital inflows will amount to between USD
4.5 and USD 5 billion in 1994, induced by a growth in demand, and a balance of
payments surplus of USD 750 million to USD 1 billion is predicted.


Trade and Investment Barriers

Lebanon is a country of free trade.  Some goods, such as firearms and
munitions, need an import licence from the appropiate government authorities.
Lebanon adheres to the Arab League Boycott of Israel, although enforcement of
the boycott is selective. Various entities in Lebanon continue tto make
boycott requests in commercial documents which place U.S. firms in the
position of having to act affirmatively to stay within the requirement of U.S.
law.  In many instances, these terms will be deleted or disregarded to enable
exporters to transact business.  Advice on boycott and antiboycott related
matters is available from the U.S. Embassy in Beirut or from the Office of
Antiboycott Compliance in Washington at (202) 482-2381.

There are very few restrictions on foreigners wishing to invest in Lebanon.
For example, there is a ceiling on real estate acquisition by foreigners.  The
lack of adequate infrastructure and the restriction on the use of U.S.
passports in Lebanon are major obstacles for U.S. investment.  Moreover, the
absence of OPIC and Eximbank coverage (as of mid-1994) puts U.S. investors and
suppliers at a disadvantage vis-a-vis major Western European competitors.


Labor Force

There are no thorough and reliable statistics on labor.  As a result of the
civil war, heavy immigration led to shortages in all segments of the labor
force.  Today, Lebanese professionals are returning to Lebanon from abroad and
putting their expertise and capital at the service of the business community.
However, local unskilled labor is in short supply.  The construction sector,
agriculture, some industries, and households have resorted to foreign labor,
mainly Arab, Asian and African.  According to Ministry of Labor, nearly 35,000
foreigners held legal work permits in 1993 --a 45.9 percent increase over
1992.


Summary of Major Infrastructure Projects:

The Lebanese government has made considerable efforts to rehabilitate
infrastructure.

Electricity:  Lebanon's electric power sector was severely damaged during the
civil war.  Production capacity is between 500 and 600 megawatts.  Electric
power supply is rationed; industry, business and many residences rely on
private generators.  Rehabilitation of the power sector will cost over USD 260
million.  Contracts were concluded in mid-1993 with French, Italian, and
Korean companies.  Bouygues (France) was awarded a USD 50 million contract for
rehabilitation of power distribution outside greater Beirut; Clemessey
(france) won a USD 42 million contract for power distribution inside greater
Beirut.  A USD 66 million power generation project was awarded to Ansaldo
(Italy).  A USD 80.1 million contract was signed with Hyundai (Korea) for
power transmission networks.  The government is examining bids for a project
to construct two 450 megawatt power stations, one in Biddawi (north) and the
other in Zahrani (south).  U.S. companies are among those competing.

Telecommunications:  Lebanon's public telecommunications networks deteriorated
severely during the civil war.  Rehabilitation and modernization of this
sector is among the government's top priorities.  Contracts worth USD 80
million were signed with Alcatel (France), Ericsson (Sweden), and Siemens
(Germany) for electronic central switches and new electronic lines.  AT&T won
a USD 8.8 million project for the Lebanon-Cyprus undersea digital fiber-optic
telecommunication cable.  Motorola international, in joint venture with
detecon-siemens ag, and Telecom Finland International, will participate in
providing 250,000 cellular telephone lines on a build/operate/transfer basis.

Transportation:   An agreement in principle was recently signed with a
Lebanese/German joint venture group, CCC/Hochtief, for the development and
rehabilitation of Beirut International Airport worth about USD 490 million.
The Beirut port directorate announced a tender for a USD 126 million
rehabilitaiton and expansion of the Beirut Port and Free Zone area.
Rehabilitation of Beirut public transport, coastal highways, railroads, and
the highway from Beirut to the Syrian border are under study.

Environment: Contracts for solid waste collection and treatment were awarded
to Lebanese and French companies.  Galion USA provided compactors for garbage
trucks.  Other contracts have been awarded for rehabilitation of water and
sewage treatment plants.

Public Buildings:  The Lebanese government has announced the construction of a
conference center and a hotel in Beirut, Beirut sports city, and Beirut public
hospital.

The reconstruction of downtown Beirut is a key project essential for the
Lebanese economy.  The company for the reconstruction and development of
Beirut commercial center (SOLIDERE) was formed with a capital of USD 1.8
billion.  SOLIDERE's executive board was elected May 5. SOLIDERE will finance
part of the infrasturcture works but the Council for Development and
Reconstruction (CDR) will be the executing body.  The Societe Financiere du
Liban, owned by 46 local banks, began operation of a secondary market for
SOLIDERE shares in June 1994 under Central Bank supervision.  Prequalification
calls for the construction of downtown Beirut are expected to be announced by
Fall 1994.