Foreign Investment Overview
Foreign Investment in Lebanon
December 14, 2015
This article has been produced by the efforts of the following members:
Shervin Yousef-Zadeh – Researcher on the Lebanon Risk Assessment Team
Supervised by I. Jamie Arabi – Leader of the Lebanon Risk Assessment Team
Keywords: Investment overview, Lebanon, economy, politics
Political deadlock and regional instability have significantly constrained the opportunities that foreign parties have to invest within Lebanon.
In order to understand the impact of broader instability within both the nation itself and the region as a whole, it is crucial to first understand what kind of environment exists for foreign investors in the country.
The Government of Lebanon retains control over attracting and sustaining foreign investment; thus, instability within the government translates to a loss of investor confidence through the risk of foreign capital mismanagement. The Investment Development Authority of Lebanon (IDAL) was established in 1994 as a means of formalizing existing investment channels within the nation while simultaneously attracting outside investors. More importantly, IDAL serves as the direct connection between outside governments, individuals, and small to medium enterprises (SMEs) interested in investing in the nation and the President of the Council of Ministers, who exercises total authority over the actions and policies of the agency. With Lebanon’s current political deadlock, there has been no elected President since May 25 of last year, despite 30 attempts to elect one through parliamentary sessions. With ideology-driven political deadlock taking precedent over fiscal policy decision-making, legislation concerning public finances, IDAL’s incentive platforms, and private sector economic development will not be passed – or even discussed – anytime soon.
Investments in Lebanon have traditionally been complemented with competitive incentives at nearly every stage of the investing process. Foreign businesses benefit from the same rights and conditions as Lebanese businesses and face a relatively low minimum capital requirement of $20,000 USD in order to be formally recognized by the government. The nation has one of the largest tax holidays for foreign investors in the Middle East, allowing up to 10 years of tax exemption; this, coupled with the lowest statutory corporate tax rate in the region, makes the nation stand out as an investment destination based purely on monetary policy. Unlike many nations in the Middle East that set stringent performance criteria for external entities as a means of controlling a flood of foreign capital, Lebanon has no performance requirements once a business has been registered and licensed in accordance with IDAL policy. Incentives for businesses going forward are dependent upon the zone in which they operate, but include tailor-made incentive packages for larger investment projects. Clearly, the problem with foreign investment does not lie with the way in which foreign investors are formally treated. The informal costs of doing business, however, prove to be a significant hindrance for foreign parties.
Corruption and a lack of judicial oversight make sustained business activity in Lebanon incredibly costly. The International Finance Corporation, a member of the World Bank, ranked Lebanon 123rd out of 189 countries in its 2016 “Doing Business” Report measuring regulatory quality and efficiency. In other words, in order for an investor on the ground to ensure smooth business operations, it is not rare to have to pay off local officials, de-facto political groups, and competing businesses. This barrier to business can be attributed to issues that many countries in the MENA region are no stranger to: a weak judicial system with few resources to enforce laws in the business sector and poorly enforced intellectual property rights. While the government “generally aims to provide Trade-Related Intellectual Property Rights (TRIPS) intellectual property rights (IPR) protection”, such protection is not traditionally seen as a priority, and most likely will not be in the months ahead.
Despite the presence of a strong central bank with fiscally sound lending policies and significant national gold reserves, Foreign Direct Investment (FDI) in Lebanon shrunk by 23% in 2014. The nation’s debt-to-GDP rate is expected to exceed 140% next year while its GDP is set to see an abysmal 0% growth.
An employee of a state-funded infrastructure agency in Lebanon spoke out about the possible causes of declining investor confidence in the nation:
“[Investors] look at the political divide between the [Pro-Syrian] March 8 Alliance and the [Saudi Arabian-backed] March 14 Alliance, and they think a civil war will break out in the country. Even looking at the region, [Lebanon] is surrounded by unstable regimes that could break out into war with the nation.”
Despite political turmoil, a new stimulus package worth $1.5 billion USD is expected to be announced for 2016. The package will provide a much-needed kick to the Lebanese economy and spur activity within both the public and private sector. Banking in Lebanon continues to grow, with deposits up 6% in 2015. This, combined with the nation’s historically high mobility of capital, can make an investment in government bonds promising yet relatively risk-averse.
Although Lebanon’s level of debt seems alarming to the naked eye, investors should take some comfort in the fact that its national debt is centralized, with nearly 70% of it belonging to Saudi Arabia.
Moreover, Lebanon has seen gradual developments in the oil and natural gas sectors. Lebanon has disputed claims of approximately 30 trillion cubic feet of natural gas and 660 million barrels of offshore oil. While offshore exploration projects are at the mercy of the hampered government, the energy sector is nonetheless a strategic place to look for upcoming investment opportunities once the red tape is eventually removed. Oil and gas production may very likely increase in the coming months, but it is crucial to recognize the impending politicization of the sector by both leading coalitions and the impact that the ensuing instability would have on early investors.
Lebanon will continue to retain its reputation as an investment destination in the MENA region, but drastic changes in domestic political dynamics and regional power shifts will inevitably challenge the nation to further attract, sustain, and appease foreign investors.
