OVERVIEW: A CHALLENGING PERIOD
Despite the many challenges faced in 2012 as a result of regional upheavals, the financial crisis in Europe, and the spillover of the Syrian crisis, Lebanon was able to maintain its position as one of thetop leading destination for foreign direct investments, ranking 10th globally as per the 2012 World Investment. FDI to Lebanon are expected to hover at USD 3.5 Billion a slight drop from 2011 levelsafter having grown at a CAGR of 16% over the period of 2006-2011. Foreign and local investors sentiment with regard to investing in Lebanon remains strong, betting on the medium term prospects of the country and its strong fundamentals.
THE GOVERNMENT’S DUAL APPROACH
In an effort to avoid contraction in the economy and stimulate growth, the government developed a series of measures, with some yet to be implemented, aimed at raising aggregate demand. Efforts were equally directed at boosting aggregate supply that should have a longer lasting impact on economic growth and overall competitiveness. A series of targeted policy measures were developed to resolve particular bottlenecks, and achieve short-term results to retain confidence in the economy, while structural reforms were initiated for longer term influence and a deeper impact on growth. Examples of such reforms include investment in infrastructure, research and development (R&D), support to small and medium-sized enterprises (SMEs), among others. This is the approach adopted by many countries hard hit by the financial crisis, leveraging a period of downturn to work on long term measures.
A. TARGETED POLICY MEASURES
The government developed a series of measures aimed at supporting businesses, the industrial sector, in addition to steps related to innovation.
1. Tax cuts on industrial exports
The cabinet approved a draft law stipulating a 50% tax reduction on income generated from industrial exports. This initiative will provide much needed support to the Industrial sector whose share of GDP has dwindled over the past years (the sector accounted for around 15% of national GDP in 2004 while its share dropped to 7.5% in 2009) and which has been suffering from increasing input cost and reduction in competitiveness. This measure will primarily boost the sector’s export competitiveness and eventually lead to increased investments in machinery and equipment and more export-oriented production. Industrial exports hovered at 5.4 Billion USD by the end of 2011, a 13% increase from 2010 levels.
This law is yet to be implemented.
2. Tax exemptions for investment projects
The Investment Development Authority of Lebanon has introduced changes to the decrees regulating Investment Law No.360/2001. More specifically it has reduced the criteria needed by companies operating in the Industry, Agro Industry, Tourism, Telecommunication, Technology, Information Technology and Agriculture sectors, to benefit from fiscal incentives on their investment projects and more specifically from a full exemption on corporate income tax for a period that can run up to 10 years. These changes are pending final approval by the Council of Ministers and if implemented should play a role in stimulating local investment activity, stimulate investments in projects that foster transfer of technology, and increase investments and joint venture by foreign companies in high value added sectors.
3. Tax cuts for R&D spending
In an effort to stimulate investments in R&D activities and thus high value added activities, the Ministry of Industry initiated work on a draft law that would reduce by 50% income generated by companies engaged in R&D activities, providing an additional push in strengthening the supply side of the economy.
B. STRUCTURAL REFORMS
1. Investments in Infrastructure
In an acknowledgment of infrastructure’s pivotal role in affecting investment decisions, the government has dedicated significant efforts into upgrading its existing telecommunication network and providing telecom services at competitive costs.
Connection tothe IMEWE, an ultra-high capacity fiber optic submarine cable, has increased the country’s internet capacity by 700 additional Megawatts, allowing internet service providers and operators the necessary capacity to offer faster internet and 3G technology. As a result, the average mobile broadband speed has increased by 18 folds from May 2011 till May 2012 with prices declining by 40%. Household broadband speed has also increased by 15 folds with prices dropping by 80%. Sound broadband policies are key for faster GDP growth: a 10 percentage point increase in high-speed internet connections is shown to boost annual GDP growth in developing countries by 1.38 percentage points as per the World Bank econometric analysis.
In the long run, investment in high speed broadband communication networks must be accompanied by regulatory frameworks which support open access to networks and competition in the market. The appointment of a new board for the Telecom Regulatory Authority is underway and should re-activate the role of the regulatory body as a 1st step towards a more competitive market.
Another significant accomplishment at the level of infrastructure has been the government’s support for the establishment of digital zones. With the release of decree 6397/2011, the government has committed to providing state-of the-art infrastructure at low cost within specific digital zones so as to encourage the establishment of Technology and IT clusters. One such zone has already been established, the Beirut Digital District which now offers high end premises, fiber optic connection and reduced rates to companies in the fields of IT, Technology and Telecom. This zone is the first of its kind in Lebanon and should be followed by similar set-ups in other parts of the country.
2. Facilitation of Business Procedures
Another initiative which ought to improve investors’ experience in Lebanon is the simplification of procedures needed to open and operate a business. In an effort to speed-up such procedures, the Ministry of Tourism put in place a One-Stop-Shop within its premises to expedite the issuance of tourism-related licenses. This is a great step forward given that the tourism sector directly accounts for 10% of the country’s GDP and indirectly contributes to more than 30% of the country’s output. Other ministries will follow suit in opening OSS facilities.
The Ministry of Finance has adopted a similar approach by simplifying tax payment processes thus allowing investors greater ease in managing their interaction with government entities.
3. Business-Friendly Regulations
The presidency of the Council of Ministers has pursued its initiative in improving Lebanon’s Doing Business indicators co-jointly with the IFC. The reforms were concerned with the three phases of a business cycle: opening, operating and closing a business.
Requirements for opening a business in Lebanon have been revisited and most of the sections in the Lebanese Code of Commerce have been subsequently amended; work is continuous on revising remaining sections of the law. A pilot project for the automation of the Commercial Registry (CR) will equally be completed by year end, which will significantly reduce bureaucratic procedures and better streamline company registration procedures.
Effort is equally ongoing with regards to the modernization of the legal framework for secured lending transactions so as to allow for increased lending activities of SMEs. This will ensure that greater support is given to Small and Medium enterprises which are usually the drivers of innovation and growth in the economy.
Finally, particular attention has also been dedicated to restructuring insolvency procedures; whereby a law is currently being drafted to allow companies greater ease in closing down their businesses; a major drawback in Lebanon’s current business environment.
Ensuring the sustainable flow of investments to the country requires the presence of an adequate governance structure that not only secures a competitive environment but also actively strives to remove. In the 2012, the government issued a decree that stipulates the creation of a Lebanese Promotion Board to support and promote the tourism sector was approved. This board will be responsible to identify priorities to develop the sector and promote Lebanese tourism regionally and international.
In parallel, the Capital Markets Law enacted in 2011 resulted in the creation of the Capital Market Authority with its new board appointed in 2012 to better supervise and regulate the activities of capital markets in Lebanon. This will definitely have a positive influence on creating an appropriate investment environment and boosting confidence in the market
WAY FORWARD: LONG TERM STRATEGIES FOR STRUCTURAL TRANSFORMATION:
The chief concern for the government remains that of not only bringing quick fixes to the business climate. Rather, it lies in employing strategies that are capable of raising aggregate supply and fostering an environment conducive for innovation and long term growth. The government should therefore continue to invest in modernizing its infrastructure: plans for the telecom network, road conditions, and energy supply remain imminent. Also crucial is updating the regulatory framework. Lebanon currently ranks 11th out of 18 Arab countries with regards to its doing business indicators. Existing efforts should thus persist with regards to the modification and enforcement of Intellectual Property laws, the code of commerce, and e-commerce law. Finally, the government should pay particular attention to initiatives in R&D and Innovation, and focus on the promotion of small and medium enterprises. By building on Lebanon’s competitive advantages, these reforms will warrant a structural transition into a knowledge based economy and explore new sources of growth.