BEIRUT: Lebanon’s economy is taking a beating from both domestic and regional instability, analysts say, as growth is slowed by high inflation, a sharp fall in tourist numbers and a freeze in decision-making at government level. This is the first time since 2004 that the Lebanese economy has faced a combination of domestic uncertainties and regional instability, Nassib Ghobril, head of Economic Research and Analysis at Byblos Bank Group, told The Daily Star.

“Those two converging factors are hurting economic activity [in the country],” Ghobril said, adding that the economic downturn started to unfold gradually in the last quarter of 2010, but the collapse of the government in January accelerated the decline.

For three months, Lebanon has been without a functioning government, making it harder for the country to withstand the effects of the regional unrest and meet the general domestic demands of the country.

Economic and financial indicators for January 2011 showed that the economic shock that followed the collapse of the Lebanese Cabinet and the ensuing political standoff was similar to the shock dealt by the assassination of Prime Minister Rafik Hariri in 2005 and the 2006 War, according to a study by the International Monetary Fund.

Economic growth in Lebanon was projected at 2.5 percent for 2011 compared to 7.5 percent in 2010, according to the IMF, making it the fourth slowest-growing economy in the Middle East and North Africa region. Tunisia and Egypt, two countries whose economies have been rocked by unrest, were projected to grow at 1.3 percent and 1 percent respectively.

Louis Hobeika, an economic analyst and professor, blamed “the lack of leadership” and the halt in the decision-making process within the caretaker government for the worsening economic conditions in Lebanon.

Hobeika believes that even a caretaker government has all the necessary authority to step in and protect the economy in times of crisis and should take on the responsibility of safeguarding the interests of the country.

“I can’t accept a caretaker government that [just] stands and watches,” Hobeika added.

On Jan. 25, Prime Minister-designate Najib Mikati was appointed to form a new Cabinet that would replace caretaker Prime Minister Saad Hariri’s toppled government. Ministers loyal to the Hezbollah-led March 8 coalition resigned from Hariri’s Cabinet, forcing its collapse.

Tensions between the March 8 alliance and the March 14 coalition, which Hariri leads, increased substantially after the fall of Hariri’s Cabinet.

The IMF report predicts that Lebanon’s economic slowdown will likely continue “if political tensions do not abate immediately.”

The Lebanese government posted a LL536 billion ($3.5 billion) increase in its budget deficit from last year, amounting to 30.7 percent of total government expenditure, according to figures from the Finance Ministry.

Consequently, caretaker Finance Minister Raya Hassan warned that any government subsidies and the LL5,000 tax cut on gasoline prices would increase burdens on primary spending.

Some economists feared the regional political turmoil and the Cabinet’s failure to address urgent economic matters have dampened the appetite of potential investors in the country.

Hobeika said Lebanon was no longer attracting as many investments as in the past as a result of a number of security incidents in recent months, including the kidnapping of seven Estonians in March in the Bekaa Valley, the church bombing in Zahle only a few days later, and the rise in illegal construction on public property.

A decline in the tourist industry is already visible, with recent statistics pointing to some unfavorable trends.

The number of airport passengers (arrivals, departures, transit) totaled 1,024,664 in the first quarter of 2011, marking a 4.5 percent decline from 2010. The number of flights also declined by 1.3 percent year-on-year, according to IMF figures.

Beirut hotels saw a sharp fall in visitor numbers, averaging 43 percent in terms of occupancy rates in the first two months of 2011, compared to 73 percent during the same period last year.

The trade and tourism sectors had been suffering a decline which started in the first quarter of this year, head of the Lebanese Franchise Association Charles Arbeed said last week.

The current economic situation threatens the ability of medium and small businesses to operate in times of high inflation, Arbeed added.

However, small- to medium-sized businesses in Lebanon take into consideration “the maximum risk factor,” which protects against major financial losses, especially in a country with a history of political stalemate.

“Politics is subject to change at any time and war can erupt at any time, that’s why we study any project, analyze properly and always have a contingency plan,” Richard Azzam, group manager at Integrated Services Co., ISCO, said.

ISCO postponed an exhibition planned to be held in Kuwait showcasing Lebanese industrial products as ISCO costumers were hesitant to attend due to diplomatic issues between Kuwait and Iran.

“Our customers were advising us to postpone while others were showing hesitancy or concerns regarding the situation in the region,” Azzam said, adding that there were some financial losses as a result of postponing the exhibition until November.

Azzam also expressed his optimism about the regional situation, and said: “I’m sure when stability comes back, business will boom again.”

Meanwhile, the political unrest in the region has helped send oil prices soaring in Lebanon, disrupted the flow of exports and imports and led to an increase in the euro-to-dollar exchange rate, which has a significant impact on Lebanese exports to Europe.

Ghobril warns of the effect of regional unrest which has already resulted in the decline of capital flow and deposit growth from Lebanon’s regional investors. In addition, Lebanon lacks the productive capacity to attract capital inflow from the Gulf Corporation Council.

“The infrastructure is not ready to meet demands [of multinational companies] in terms of advanced telecommunications or Internet speeds or cost of telecoms or electricity or office space that they look for … We are not ready to be positioned on the radar,” Ghobril said.

Adding to such worries, inflation in Lebanon rose to 6.5 percent in 2011, the sixth highest in the region, according to IMF figures, and the rise in commodity prices prompted fiery reactions from labor unions and citizens who demanded that the Cabinet be formed immediately.

The National Federation of Trade Unions and Workers had called for protests last week “to confront the conspiracy against the poor,” the federation said in a statement.

It called on labor unions to protest in front of gas stations, fuel-distributing companies, and the Finance and Energy and Water ministries.

Labor Confederation chief Ghassan Ghosn told the paper that many heads of industries had already prepared to take their demands of better wages to the street amid the high rise of inflation and the continuous rise in gasoline prices.

“We considered that there are many pressing issues. However, the priority lies in adjusting the minimum wage in the face of the high levels in the prices of commodities,” Ghosn said, adding that the steps that had been taken would continue until they reach the level of a general strike, which is expected to take place on May 19.