LEBANON: ECONOMIC IMPACT OF PARTITION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000800240001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: August 12, 2010
• Sequence Number: 1
• Publication Date: June 29, 1983
• Content Type: MEMO

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VWashington. D. C10505
DIRECTORATE OF INTELLIGENCE
a
LEBANON: Economic Impact of Partition
Under the very poor security conditions that exist now
and mould remain after a parttiat Israeli withdrawal,
Lebanon's economy will continue to stagnate. Economic
recovery remains tied to foreign troop withdrawal and the
establishment of poZiticaZ and security conditions conducive
to private-sector investment.
Israel will continue to try to export its agricultural
products to Beirut and route third-country goods to Lebanon
via Israel's port of Haifa at the expense of Beirut's
treasury and the farmers of the occupied south. We expect
this to occur regardless of whether Israel partially pulls
back its forces. The goals of Israel's economic penetration
are to ensure that politically powerful groups in Beirut
have a financial interest in maintaining close poZiticaZ and
economic ties with Israel and to erode their resistance
should Israel decide to prolong its occupation. 0
As Zong as Syria remains committed to undermining the
GemayeZ government or Israel occupies a large chunk of
Lebanese territory we do not believe that the Arab Gulf
states will grant Lebanon significant financial
assistance. The Saudis and other Arabs may impose a partial
economic boycott of Lebanon if they believe Israeli-made
goods are entering their markets through Lebanon.
GemayeZ will continue to press for US economic aid to
finance large budget deficits and may appeal to the US to
halt Israeli penetration of Lebanese markets. Unless a
25X1
T zs memoran um was prepared by Arab-Israeli
Division, Office o Near Eastern and out szan naZysis, with a
contribution from Geography Division, Office of 25X1
Global Issues. Information as of 27 June 1983 was used in
preparation of this paper. Comments and queries are welcome and
should be addressed to Chief, Arab-Israeli Division 25X1
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stable peace breaks out in Lebanon--an unlikely development-
-US aid may ameliorate living conditions in Beirut but will
not start the ball rolling toward a general
reconstruction. Domestic confidence in a safe and stable
future is both the necessary and the sufficient condition
for rapid economic revival in Lebanon. 0
Current Economic Situation*
Economic activity in Lebanon has remained low since the end
of the fighting in September 1982 in contrast to past years, when
the economy has rebounded during intervals of relative calm.
Farming has probably been the hardest-hit sector. The summer's
fighting in the south and in the Bekaa Valley--where agriculture
is king--destroyed many crops in the fields and since then
agriculture has remained depressed:
-- The continued presence of large Syrian and Israeli
occupation armies in the fields has precluded normal
farming operations.
-- The departure of many Egyptians, Syrians and Palestinians
from the south since June 1982 has left farmers short of
field labor.
-- Zahlah--the city in the Bekaa Valley that is farmers'
major source of key agricultural supplies--is a Christian
community surrounded by the Syrian army and Lebanese
Moslems; travel in and out is dangerous. 0
Israeli farm goods have captured a substantial share of the
Beirut market from the south's Shia farmers despite a public
Israeli pledge in late 1982 that Israel would not export to
Lebanon goods that competed with local products. President
Gemayel's failure to stem the flow of Israeli produce into Beirut
aggravates Shia suspicions that Gemayel cares little for their
fate and would welcome the permanent partition of Lebanon. Trade
with Israel has long been illegal under Lebanese law }~,
accordance with the Arab economic boycott of Israel. u
Exports have suffered as some Arab states briefly banned the
import of some Lebanese goods earlier this year. The Arabs--
including Saudi Arabia and Jordan--have claimed and Embassy
reporting tends to corroborate that some Israeli products were
mislabeled as Lebanese to evade the Arab boycott of Israel.
* Our trade and national income statistics are estimates;
Lebanon's Statistical Office closed down in 1975 and never
reopened.
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Finally, travel on Lebanon's roads is hazardous and often
impossible. The Israeli Defense Forces (IDF) frequently close
the Sidon-Beirut road--the principal north-south route
altogether. Truck travel over the Damascus-Beirut highway, the
main farm export route, is also severely restricte~y the
various forces that control different segments.
Lebanon's small industrial sector has taken a beati
eight years of recurring hostilities (see appendix).
only two or three
factories of Lebanon's once-flourishing textile industry still
operate. Electricity transmission and distribution systems have
been heavily damaged and power outages are frequent. The US-
owned Medreco oil refinery in the south--one of Lebanon's two--
suffered about $4 million worth of still-unrepaired damage in the
1982 fighting accordion ~o a company official, although it is
still operational.
Traffic at the principal Lebanese port of Beirut has dropped
sharply in recent months. The port operators have confirmed to
US officials that the reexport trade is down, demand for
industrial imports is low, and seaborne exports are even more
depressed. Many of the imports that are entering Lebanon come
through Israel--Tel Aviv permits Lebanese to import goods duty-
free via Israel's port of Haifa. The US Embassy estimates that
roughly 35 large and medium size trucks leave the border each day
carrying both Israeli exports and third-country goods from Haifa
northward into Lebanon.
A surge of optimism about Lebanon's political prospects
after the arrival of the multinational peacekeeping force in
September sparked a wave of rebuilding inside Beirut,
particularly in the ravaged no-man's land known as the Centre
Ville that has been largely uninhabited since the civil war.
Most of the rebuilding, however, was either the minor repairs
needed to make homes habitable and small businesses operational
or limited to clearing away rubble to ready buildings for
eventual major repairs. Few businessmen felt confident enough
about the future to invest the major. sums necessary to create new
enterprises.
The government's financial picture brightened somewhat early
in 1983 although the deficit remains very high. Customs revenues
rose after President Gemayel closed down several of the "illegal"
ports operated by the principal Christian militia, the Lebanese
Forces and directed ships to the government-controlled Port of
Beirut. Similarly, the new perception in West Beirut after
Gemayel took control there in February that the government was
able to impose penalties for non-payment of taxes has boosted
income tax receipts, according to the US Embassy. Nonetheless,
Beirut's writ still runs only in a very small section of Lebanon,
and it is unable to collect taxes or customs duties in areas
under Syrian and Zsraeli control (see map). Customs duties
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continue to be evaded by the rerouting of Lebanese imports
through Haifa.
Expenditures have not fallen commensurately with the decline
in the government's area of control. In a bid to retain the
allegiance of the civil servants, the government has continued to
keep them on the payroll even though most ministries have barely
functioned for years and many employees show up only to pick up
their paychecks.
By contrast, Lebanon's foreign exchange indicators remain
strong. Through eight years of turmoil, Lebanon has never come
close to a balance-of-payments crisis. Although the Lebanese
pound fell sharply in the four months immediately following the
invasion, by October, the pound had regained almost all of the
ground it had lost--rising sixteen percent at a time when most
other currencies were declining against the dollar--and the
Central Bank resorted to dumping pounds on the market to slow the
pound's rapid rise. By February 1983, the pound was stronger
than it had been since 1980. ~~
Official gold and foreign exchange holdings alone afford
Lebanon well over a year's worth of import coverage. Primarily
because of the speculative rise in the pound and continuing
inflows of remittances, official foreign exchange reserves at the
end of February 1983 totaled $2.3 billion. The government also
holds 9.2 million ounces of gold--worth about $4 billion at
current market prices. Local bankers agree that the private
sector also has substantial liquid assets--both domestic and
foreign--that could be mobilized to support reconstruction.
Worker remittances, which compose about 40 percent of GNP and are
by far Lebanon's largest foreign exchange earner, are reportedly
holding steady.
We believe Lebanon's banking sector remains fundamentally
sound, although local bankers report that private-sector loan
demand is currently virtually non-existent. The banks remained
open even through the worst of the Israeli bombing of Beirut, and
very little, if any, capital flight from Lebanon seems to have
taken place since the war. ~~
Outlook
President Gemayel is immersed in his political and military
problems and Embassy reporting has emphasized that economic
revival is among the least of his concerns. He is unlikely to
fund a major reconstruction program anytime soon and probably
reasons, as do many of his finance officials and the private
sector, that if and when political and security issues are
successfully resolved, economic recovery will follow of its own
accord. The remainder of this paper outlines the economic
consequences of a variety of political/security developments,
highlighting the impact of de facto partition.
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Partial Israeli Withdrawal
It seems increasingly likely that as Syria continues to
refuse to withdraw its forces Israel will unilaterally pull out
of the mountain districts just south of Beirut and remain in the
Bekaa and southern Lebanon indefinitely (see map).
We expect that the IDF, citing security problems, would
expand its current restrictions on commmerce and agriculture that
would keep the south's economy depressed. The US Embassy reports
that merchants in Sidon--the major city in southern Lebanon--
recently went on two general strikes to protest Israeli
transportation restrictions and other perceived injustices. The
strikes provoked a short-lived Israeli attempt to retaliate by
closing the shops of some of the activists.
Antagonism toward other IDF moves will harden local anti-
Israeli sentiment. In contrast to the IDF's frequent closures of
the Sidon-Beirut road, the Embassy reports that the highway
connecting Israel and Sidon is rarely blocked, leading many
Lebanese to suspect that closures of the Beirut road are part of
an Israeli campaign to force the south to direct its trade to
Israel. The IDF also detains some Lebanese trucks carrying
produce north to Beirut, frequently holding them in the ho~ n
until the produce is spoiled, according to the Embassy.
Local anger is heightened by a recent Lebanese press report
that IDF will not permit any merchandise to enter Israeli-
occupied areas from Beirut or elsewhere in Lebanon unless the
Israeli military commander in Sidon has given prior approval.
Moreover, earlier this year the head of the Chamber of Commerce
in Sidon announced that he would begin to compile a list of
Lebanese businessmen violating Lebanese law by trading with
Israel. Shortly afterwards he was summoned to the headquarters
of the Israeli military government and instructed to desist.
We believe the main goal of Israeli economic penetration--
selling its own exports and promoting Haifa as an alternate
import route--is to ensure that politically powerful groups in
Lebanon have a financial interest in maintaining close political
and economic ties with Israel and to erode their resistance to
permanent trade relations. Israel probably recognizes that those
segments of Lebanese society that profit from the Israeli moves--
importers of manufactured goods and consumers in Beirut--are 25X1
primarily politically influential Christians and Sunnis. By
contrast, the farmers in the south who are suffering from the
Israeli restrictions are mostly domestically powerless Shia.
Although some Christians and Sunnis still refuse to violate
the Arab economic boycott by trading with Israel, we believe that
this sentiment would decline over time, as the advantages of an
Israeli connection--such as duty-free imports and inexpensive
produce--become apparent, and the real costs of continued
opposition--such as merchants' strikes--mount. Shia farmers in
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the south, however, would derive no financial advantages from the
situation and would be unlikely to reconcile themselves soon to
it. Virtually all the bilateral trade consists of Israeli
exports to Lebanon, and while Israel might eventually extend some
trade preferences to Lebanese wanting to export to Israel but
these would probably be strictly limited.
If a partial Israeli withdrawal were perceived as a lasting
partition, in which any renewed hostilities between Syria and
Israel were unlikely to spread to Beirut, we believe Lebanese and
foreign investors would follow much the same pattern in the
Beirut area that they have since the onset of civil war in 1975;
transit, service and tourist businesses would rebuild if it
appeared to the perenially optimistic Lebanese that the Beirut
government would be able to enforce peace and security in the
territory under its nominal control. Similarly, the government
might go ahead with more of the Beirut-area reconstruction
projects drawn up by its Council for Development and
Reconstruction (CDR). ~~
We think it unlikely that Gemayel's army could secure the
area left to his government without the continued presence of a
sizable MNF contingent. If security were not assured, nervous
entrepreneurs would continue to put off large-scale reinvestment,
and low loan demand would likely force closure of a few of
Beirut's many small banks, though the banking industry would not
be seriously undermined. Lebanese and foreign confidence in the
stability of the banking system continues to be high. The past
eight years of intermittent warfare have not prompted major
capital flight, and we do not believe that renewed violence is
likely to do so. To replace private sector loan demand, the
banks could continue to lend fairly large sums to the government
and would probably seek international borrowers more
aggressively.
Beirut would look to western donors such as the US and
domestic borrowing to finance continued budget deficits.
Domestic revenues would remain low since most of Lebanon would
still be beyond the reach of Gemayel's taxmen and the depressed
economy and competition from Haifa port would keep customs
receipts low. Large-scale aid from the Gulf states would be
unlikely to materialize, primarily because of the continued
Israeli presence, but also because the Arabs are facing their own
financial problems. Nor would the World Bank be likely to take
the lead in financing reconstruction projects. Bank officials
have already indicated that they would be very reluctant to do so
unless the central government was in control of all Lebanese
territory. ~~
Critical balance-of-payments problems would be unlikely,
however. Beirut's foreign debt is very low, and we doubt that
the crucial inflow of remittances would decline. These funds are
devoted mainly toward covering the living expenses of local
relatives, and barring Beirut's complete and prolonged breakdown
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into chaos, we do not believe that many expatriate Lebanese will
move their families out of Lebanon.
A Boycott?
It is possible that in response to a partition and expanded
Israeli-Lebanese trade, Syrian President Assad would close
Syria's borders and airspace to Lebanon. A complete shutdown
would cut Lebanon's only overland transport route to the Gulf
states--which buy the great bulk of Lebanon's exports--and force
air traffic to detour over the Sinai. Such a move would make
economic recovery harder, but would not deal a major blow to the
economy as it stands today. If the economy did begin to recover
and the security problems associated with travel eased, some of
the additional export traffic could be rerouted through the port
of Beirut and a smaller share could economically be sent out by
air freight. ~~
We doubt that Damascus would close the border entirely;
Lebanon is a choice route for smuggling into Syria, which Syrian
officials have long tolerated and often directly profited from.
Damascus would probably continue to permit cross-border trade
from the towns and villages in northern Lebanon where Syria has
substantial support. The Syrians would be more likely to turn
back trucks carrying merchandise to or fro~irut, where
Christians control much of the commerce. I I
We think it unlikely that other Arabs would impose harsh
economic sanctions. When Sadat signed the Camp David accords,
the other Arabs did not take the critical steps of sending
expatriate Egyptian workers home or banning Egyptian imports, and
we do not believe they would take such drastic measures against
Lebanon now. An Arab blacklist of Lebanese firms trading with
Israel probably could not be enforced, especially in view of
Lebanon's strict bank secrecy laws and Israeli efforts to protect
the identity of their Lebanese trading partners.
A simple Arab boycott of Lebanese commodity exports, such as
was briefly imposed by Jordan and Saudi Arabia earlier this year,
would be more likely. If one were imposed, agriculture would be
hard-hit until other markets could be found. If the boycott also
extended to third-country exports transiting Lebanon on their way
to the Gulf, the transportation sector and government port
revenues would be severely hurt. ~~
No Withdrawal of Forces
If Israel, Syria, and the PLO do not withdraw from their
current positions, we expect continued military tension and
sporadic outbreaks of violence that could escalate into major
Syrian-Israeli hostilities. Economic activity would remain
depressed throughout the country. Major investment in Beirut,
the south, and the Bekaa Valley would be deferred as the private
sector's fear of further fighting would make it unlikely that
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entrepreneurs would risk their funds in building new plants,
although some small-scale rebuilding would continue. The south's
economy would continue to suffer from such anti-Israeli protests
as merchants' strikes and additional IDF restrictions on
commerce. ~~
What About War?
In the event of a Syrian-Israeli war, the business community
would abandon any hope of rebuilding until the shooting stopped
and the outlines of Lebanon's new political order emerged.
Fighting and troop movements would bring agriculture as well as
most other activity in the south and the Bekaa to a halt. The
Medreco refinery near Sidon would probably suffer major
additional damage--as it did in 1978 and 1982. If so, Medreco
would abandon the refinery, according to a company official.
Closure of Medreco would leave Lebanon with just one
operational refinery--in Syrian-controlled Tripoli. Both of its
pipelines are already closed. Although Lebanon could import all
the fuel it needs via the ports of Beirut, Tripoli, and Sidon, we
believe the dangers and restrictions associated with travel in
another war would seriously disrupt supplies 0essential
businesses such as hospitals and bakeries.
In the event of another war, the owner of Lebanon's freight
airline, Trans Mediterranean Airways (TMA), has told US officials
that he would move its base of operations from Beirut to an
airfield in Western Europe for the duration of hostilities. He
insists, however, that TMA would return to Beirut as soon as the
shooting stopped.
Restoring Full Government Control
Restoration of firm central government authority throughout
Lebanon would be the best of all worlds from an economic
standpoint, though it is unlikely to occur. In our judgment,
confidence in a secure future would induce Lebanon's wealthy
private sector and foreign investors to rebuild rapidly and take
advantage of Lebanon's highly-skilled workforce, sophisticated
banking system, and convenient location at the edge of the
European and Arab worlds. As long as Beirut avoided large-scale
trade and a formal peace treaty with Israel, we believe that
harsh Arab economic sanctions would be averted and some small-
scale Arab aid likely would be forthcoming.
The intense desire to remain in Lebanon voiced to US
officials by the owner of TMA is widely shared among Lebanese
businessmen, and in past intervals of peace they have followed
through on their commitment to return to and rebuild in
Lebanon. Their evident attachment to Lebanon is a primary reason
for our belief that should peace and stability return to Lebanon,
economic revival would follow swiftly.
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As political and military problems became somewhat less
urgent, Gemayel would focus more attention on rebuilding
'Lebanon's heavily damaged infrastructure. The CDR has drawn up
an extensive list of proposed rebuilding projects, funding for
which would likely be forthcoming from the Treasury if the
government~~ld restore its control and security to all
Lebanon.
We do not believe, however, that Beirut would ever regain
its pre-civil war status as the preeminent banking, service, and
transit center in the Middle East. In the eight years since the
outbreak of civil war in Lebanon, other banking centers in Amman,
Bahrain, and Kuwait have emerged and rapidly gained experience by
handling the huge financial flows resulting from the oil price
explosions of the 1970s. Other regional entrepots such as
Jordan's port of Aqaba have expanded to handle the reexport trade
that once was routed almost exclusively through Beirut. Thus,
even if the security problems that currently preclude Lebanon's
revival are solved, Beirut would hold a much smaller share of
Arab markets than it did before 1975.
Implications for the United States
President Gemayel may appeal to the US to pressure Israel
into cutting back its exports to Lebanon, eliminating Lebanese
access to Haifa and easing restrictions in the south.
Gemayel will probably increase pressure for substantial US
economic aid to his government if Lebanon is partitioned on a
semi-permanent basis, pleading absence of Arab aid, low economic
activity, and private sector unwi113.ngness to invest. Although
current US economic aid can ameliorate living conditions in and
around Beirut--the wealthiest part of Lebanon--it cannot spark a
general economic revival. The primary impact of US economic aid
would be to symbolize a US commitment to the government in
Beirut.
If peace and stability did break out, the Lebanese have the
funds and the entrepreneurial ability to rebuild their country
with little concessional foreign assistance. If and when the
government could enforce security throughout its territory,
Lebanon would offer profitable business opportunities for US
construetion,comnanies, banks, hotels, and other service
industries.
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APPENDIX
Impact of Eight Years of Fighting
The eight years of more or less constant fighting that
erupted with the civil war of 1975 have severely disrupted
Lebanon's prosperous and wealthy domestic economy (see chart
below). By the time the civil war ended in 1976, real GDP had
tumbled to just a third of its 1974 record. During the relative
calm of 1977, the economy rebounded to nearly three-quarters of
its 1974 level, only to sink again the next year when Israel
first invaded the south. The second Israeli invasion of 1982
aborted a vigorous recovery that began after resolution of the
Syrian missile crisis in 1981. We estimate that this year GDP
will reach less than half 1974 output, and the number of people
employed in industry will be less than a third of prewar
totals.
The only growth industry since the civil war has been labor
exports; the number of Lebanese working elsewhere in the world
more than tripled between 1974 and 1981, and the earnings they
sent back home may have reached $2.5 billion in 1981, thereby
compensating for much of the decline in personal income caused by
the destruction of the domestic economy.
Changes in Composition of GDP, 1974-80
millions of Lebanese pounds at 1974 prices,
IMF estimates
Sector
1974
1980
Agriculture
758
442
Industry, Water,
Electricity
1,449
765
Construction,
Transportation
1,002
637
Trade and other
services
4,928
3,061
Gross Domestic
Product
8,137
4,905
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Areas of Control
'`-.i Christian
_J Government
.. -
r:_-___~J Israeli
f.-1 Syrian
Likely limit of Israeli withdrawal
Economic Activity
...:~ Intensive agriculture
~ Oil pipeline
Cement
0 Food processing
Petroleum refining
Textiles
Boundary representation is
not necessarily authoritative.
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SECRET
SUBJECT: LEBANON: Economic Impact of Partition
1 - Kenneth W. Dam (State)
1 - Geoffrey Kemp (NSC)
1 - Howard Teicher (NSC)
1 - Nicholas Veliotes (State)
1 - Hugh Montgomery (State)
1 - George S. Harris (State)
1 - Paul Wolfowitz (State)
1 - Emil P. Ericksen (State)
1 - Miles S. Pendleton, Jr. (State)
1 - David Mack (State)
1 - Richard M. Miles (State)
1 - Dennis Murphy (State)
1 - Gary Dietrich (State
1 - Eli Bizic (State)
1 - (DTA)
1 - Col. Donald S. Kendall (Pentagon)
Internal:
1 - DDI
1 - Exec Director
1 - DCI/SA/IA
1 - NIO/NESA
1 - C/PES
1 - C/OGI
1 - OGI/G/NE
1 - PDB Staff
4 - CPAS/IMD/CB
1 - CPAS/ILS
1 - D/NESA
2 - NESA/PPS
1 - NESA/AI
2 - NESA/AI/L
DDI/NESA/AI/L
29Jun83)
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