While economic indicators - particularly the U.S. dollar to Lebanese pound exchange rate - remained stable during Israel's Grapes of Wrath operation, the Lebanese economy has continued to face structural weaknesses. This includes lower growth rates, a steady decline in investment, and an expanding public debt. Moreover, the Israeli attacks, by creating a climate of instability in the country, will reduce investor and consumer confidence in the future.
The growth rate for the first quarter of the year has been estimated at 3% in Bank Audi's Quarterly Economic Report. Bank Audi, which usually is optimistic in its economic forecasts, noted that a major source of declining growth in the first quarter was stagnation in public and private investment. Investment accounted for only 12% of the rise in the value added in GDP, against 60% in 1995. Consumption was also moderate and was adversely affected by declining confidence in the economy. According to the governor of the Banque du Liban (central bank), Riyad Salameh, the effects of Grapes of Wrath may lead to a 2% decline in the GDP growth rate this year.
The prime minister, Rafiq al-Hariri, took a major step in late April when he announced before European Union foreign ministers that Lebanon needed to spend $5bn in the next five years for reconstruction. This was the first sign of recognition that the government had made over-ambitious projections in planning its ten-year Horizon 2000 reconstruction plan. Horizon 2000 had outlined spending of some $13bn by the year 2002, and expected this to be partly financed by budget surpluses beginning in 1996. Mr. Hariri's revised figures suggest that, added to the $2bn already spent for reconstruction since 1993, total spending in the ten-year period will be cut in half to about $7bn.
The change in the government's reconstruction plan appeared to follow the general recommendations of a confidential World Bank report prepared in May 1995. The Hariri government had been unhappy with the report, which called for a cutback in government spending, and reportedly negotiated with the Bank a toning down of its final recommendations.
The writers of the Bank report stated that "the original Horizon 2000 in its entirety could not be undertaken by the Government alone without risking the failure of stabilization under the best of circumstances and strong fiscal adjustment efforts." The report, among other things, called on the government to identify a core investment program not exceeding $3.5bn for the period 1995-97. This program, the report added, needed to take into account "the social rates of return and [...] implementation and financing constraints." The government was advised to initiate the core investment program on the grounds that it represented "a realistic, implementable, and financeable investment program." A central proposal was to expand private-sector investment in infrastructure, as well as in public health and education.
The Bank report also focused on the public debt. It noted that "medium term fiscal adjustment went seriously off track in 1994 with the overall deficit more than doubling from the previous year, reaching an estimated 21 percent of GDP." It expressed special concern for the current deficit, which accounted for 12% of GDP.
The alarming growth of the public debt has continued unabated. The net domestic debt grew by 10.3% in the first quarter of 1996, rising from L[[sterling]]9,296bn to L[[sterling]]10,252bn according to Bank Audi. The great majority of the domestic debt - almost 99% - was due to the issue of treasury bills, the circulation of which increased by L[[sterling]]804bn in the first quarter of the year.
In April, the government's issue of $100m in Eurobonds was delayed by the Grapes of Wrath operation. The issue subsequently took place in May and was managed by Bank Parisbas. It took place on the same terms as a $300m issue in July 1995, which it continued, with the bonds having a coupon of 9.125%. The money is to go towards financing the return of the displaced and the rehabilitation of the electricity network. The foreign debt was estimated at just above $1.3bn at the end of 1995.
The government has continued to pursue a tight monetary policy. As the Israeli attacks came to an end in late April, the budget deficit was estimated to be running at 44% of expenditure since the beginning of the year according to the finance ministry. This was largely due to a 60% deficit in April alone due to the fighting. The government's target is to reach a deficit figure of 38% of spending for 1996. It is unlikely, however, that this will be met, and even the finance ministry's deficit figure must be treated with some caution.
In an effort to avoid a major confrontation with labor, the government increased private-sector salaries in May. The increase, which affects three brackets of salary earners, averages 11% across the board, and applies retroactively to the beginning of this year. Public-sector salaries are also scheduled to be raised later in the year once the government and parliament pass a revised pay scale for civil servants. The government's decision to raise private-sector salaries was done to forestall demands from the main independent labor confederation, the General Confederation of Lebanese Workers (GCLW), for a 75% increase in salaries, a doubling of the minimum wage to L[[sterling]]500,000 per month, and a resumption of the right to demonstrate against the government's social and economic policies. The GCLW rejected the salary increase, but it will be implemented anyway.