The economic and social impact
of the Syrian crisis — now entering its sixth year — is one of the most
critical issues facing Lebanon. The total number of displaced Syrians
who took refuge in Lebanon since the outbreak of the conflict in March
2011 stands at 1.5 million, equivalent to about a quarter of Lebanon’s
population. This has strained the public financial capacities and the
provision of environmental services in Lebanon. The crisis is also expected to increase rampant poverty among the Lebanese and widen the income inequality gap.

In particular, estimates indicate that as a result of the Syrian
crisis, about 200,000 Lebanese nationals fell into the clutches of
poverty. It is also estimated that about 300,000 Lebanese citizens have
become unemployed, and most of them are unskilled young people, which is
without a doubt a result of the harmful effect of the low cost of
Syrian workers.

Moreover, one can no longer reach the Lebanese territories by land.
The ongoing war in Syria, which entailed a state of insecurity, risks
and potential losses, caused a 60% drop in land transportation from
Jordan, Iraq and beyond. This raised the pressure imposed on land and
air freight capacities, leading to a rise in transportation costs.

Furthermore, Lebanon is plagued by its internal Sunni-Shiite division
in light of the dominant and influential roles of Iran and Saudi
Arabia. This division is specifically affecting Lebanon at the following
levels:

On the political level: The presidential election has been postponed for the last two years.

On the economic level: The private and government institutions have not registered any efficient performance or growth.

Tourism, especially from the Gulf states, has dropped. This is
attributed to instructions from the Gulf governments and local
authorities to their citizens to avoid traveling to Lebanon due to
safety concerns, although the issues in Lebanon are purely political and
have nothing to do with security.

In light of an economic sector registering a performance below its
potential, inflation fell sharply in 2015 to 3.4% and the financial
deficit slightly increased, mainly due to the absence of revenue-related
measures that had boosted the economy in 2014.

Moreover, some specialists expect to see a drop in the ratings of the
Lebanese banking sector in 2016. A recent report by the International
Monetary Fund expected a 2.5% recovery
in economic activity 2016, which is contrary to the expectations of
many Lebanese analysts, who projected a negative growth or no growth at
all.

The political issue with the Gulf Cooperation Council
(GCC) countries adds to the pressure on the Lebanese economy. Some GCC
countries had terminated the service and the residency permits of
Lebanese employees and immediately deported them.

It should be noted that if the freezing of international bank transfers from GCC countries to Lebanon — especially remittances from Saudi Arabia, estimated around billions of dollars — continues, the Lebanese economy is bound to face a major challenge.

Fear prevailed over the Lebanese investment market overall. This led
investors to search for new destinations and companies to move abroad,
thus resulting in a huge wave of Lebanese investments in Cyprus.
Numerous exhibitions, meetings and plans for future investments in the
island are being held. From a historical perspective, Cyprus often
constituted a safe haven for Lebanese companies since the times of the
civil war (1975-1990).

Overall, despite concerns about the economy in light of the current
situation, depositors and investors in the local banking sector play a
key role in maintaining the currency’s strength, as well as the
country’s huge foreign exchange reserves, which still enhances the
stability of the Lebanese pound.

As of March 2016, the World Bank support for Lebanon consisted of 15
active projects representing a total commitment of $900 million. These
projects cover several sectors, including education, social protection,
health, urban development, transport, water, environment, finance, the
private sector and social services.

On another note, the Central Bank of Lebanon appointed BLOM Bank,
Byblos Bank and Deutsche Bank to co-manage the launch of at least $1
billion in Eurobonds. Bankers said the launch should be completed at the
end of April of this year. Moreover, Eurobonds were issued to replace
some of the maturing bonds on April 22. In February 2015, Lebanon had
issued $2.2 billion worth of Eurobonds. The issuance represented the
republic’s largest ever new cash market issuance.

Lebanese governments have pushed the domestic and foreign markets to
finance the public debt to cover government expenses through the
issuance of treasury bills and bonds.

Joseph Torbey, the president of the Association of Banks in Lebanon,
recently said, “Banks would not have any problem financing the needs of
the public and private sectors, as long as clients’ deposits register an
annual growth of $5 billion.”

It is expected that the replacement of Eurobonds will continue as
long as the government is unable to approve the 2016 budget and to
implement the necessary financial reforms.