Outlook for 2011-12

• The political scene is facing serious disruptions over the impending issuance of indictments by the Special Tribunal for Lebanon (STL)-the impact of which could lead to civil conflict or a collapse of the government.
• The prime minister, Saad Hariri, commands a majority in parliament but lacks the power to push key decisions through the cabinet. Given this, and the importance of ensuring relative consensus, policymaking will be hard.
• The international responses to Iran's nuclear programme and relations with Israel and Syria will remain the key foreign policy considerations.
• Fiscal reform is needed to reduce the large public debt stock, as the costs of debt servicing weigh heavily on the budget, but progress will be slow at best.
• The fiscal deficit is forecast to widen to an average of L£5.2trn (US$3.5bn, or 7.7% of GDP) in 2011-12 as delayed spending is implemented.
• Real GDP grew by an estimated 7.5% in 2010 and growth is forecast to continue in 2011-12 at an average of about 6%, driven by the services sector but constrained by the large fiscal deficit and high cost of private credit.
• The current-account deficit is forecast to narrow to 14.5% of GDP in 2011 and further to 8.3% of GDP in 2012, as services revenue rebounds.

Monthly review

• Hizbullah, a Shia-supported political and military organisation, withdrew its members and allies from the cabinet, prompting the collapse of the government.
• A Syrian-Saudi deal on political stability in Lebanon has broken down. However, any move away from support for the STL would risk Lebanon losing the support of the US or its European allies.
• The cabinet met in December for the first time in a month but was unable to reach any significant decisions. Hizbullah has been trying to get the cabinet to debate the issues surrounding the STL in order to discredit the investigation.
• The political impasse has meant that the budgets for 2010 and 2011 have still not been passed. The energy minister, Gebran Bassil, warned of an "electricity catastrophe" this summer if financing to increase supply is not approved.
• The first licensing round for offshore hydrocarbons exploration in the Mediterranean will be held at the end of 2011. Lebanon has been pressing the UN for support in delineating its maritime border with Israel.
• Growth forecasts for 2011 by several major international financial institutions remain positive, but all reflect concerns over potential for political disruptions in the wake of upcoming STL indictments.

The Economist Intelligence Unit's core scenario is that the political scene will remain turbulent in 2011-12, but that, despite serious downside risks, the main parties will manage to avoid a full-scale conflict, although their disputes will continue to be heated. The government led by Saad Hariri, the prime minister, will struggle to make progress on policymaking given the ideological and personal divisions between and within its two major factions. Mr Hariri's "March 14th" movement and its allies are backed by the US, Saudi Arabia and France; the opposition coalition, "March 8th", is backed by Iran and Syria. Relations between the factions are partly influenced by changing relations between these external powerbrokers. The president, Michel Suleiman, who is not aligned with either faction, is a key powerbroker.

Mr Hariri's Future Movement and other parties aligned with March 14th hold only 15 out of the 30 cabinet seats, but a two-thirds majority is required to make decisions of "major national importance". March 8th holds ten seats and, with the support of one more minister, would have the power to block key decisions or even, potentially, to bring the government down. Five cabinet ministers appointed by Mr Suleiman hold the casting votes. The government may make progress on some economic issues but is unlikely to address seriously Lebanon's most divisive political issues or its sectarian power-sharing system, which politicians often sidestep for fear of sparking renewed conflict in a country that experienced civil war in 1975-90. Public expectations of the government are low, not least because of extensive corruption and because many Lebanese believe that the real decisions about their future are taken outside the country.

March 14th is unlikely to have the confidence or power to disarm Hizbullah, a Shia political-military movement that dominates March 8th, whose supporters took to the streets with weapons in May 2008 when March 14th last threatened to curb Hizbullah's autonomy. Since then, however, Walid Jumblatt, the main leader of the minority Druze community and previously one of Mr Hariri's key allies, has reconciled himself with Hizbullah and Syria, which is an indicator of Syria's renewed influence in Lebanon. Mr Hariri has sought to improve his relations with Syria, but some of his supporters have expressed the suspicion that Syria is exploiting these overtures to sow further divisions in March 14th.

Tensions are rising over the UN Special Tribunal for Lebanon (STL), which is due to issue indictments-possibly against Hizbullah members and perhaps in early 2011-in relation to the 2005 assassination of Mr Hariri's father, Rafiq, a former prime minister. The expectation of indictments against Hizbullah members has increased political tensions substantially. For its part, the Shia party will continue doing everything it can to undermine the STL and advance its argument that Israel was responsible for killing Mr Hariri, and potentially also for forging telecommunications data that may seem to implicate Hizbullah. Even if Lebanon manages to steer away from the brink of renewed sectarian conflict, through regional mediation, sporadic smaller-scale armed exchanges between factions are likely in Beirut (the capital), Sidon and Tripoli.

The main parties suffered some losses in the May 2010 local elections, which also saw the re-emergence of a number of non-aligned figures, although these changes are unlikely to have a significant impact on national politics. The next parliamentary election is not scheduled until 2013, by when the political landscape may have altered considerably. It is possible that the government could fall as a result of tensions over the STL, although this may not lead to an early election.

There is a serious risk of another confrontation with Israel in the medium term, and allegations that Hizbullah has received deliveries of medium-range ballistic missiles have increased the tensions. However, neither Israel nor Hizbullah appear to have an appetite for another conflict in the immediate future, following the costly war in 2006, and the southern border is generally quiet apart from daily Israeli reconnaissance overflights and a brief clash in August 2010 over the trimming of trees along the border. That said, both sides could plausibly escalate a future incident to deflect attention from sensitive domestic issues (the STL for Hizbullah and pressure on Israel to make concessions to the Palestinians). The international response to Iran's nuclear programme could have important ramifications for Lebanon. Although the dispute is likely to be addressed through political means, including sanctions, the risk of a US or Israeli attack on Iranian nuclear facilities cannot be ruled out. In such a scenario, Hizbullah would almost certainly be drawn into the conflict, either if it retaliated against Israel after an Israeli strike on Iran, or if Israel pre-emptively attacked Hizbullah to weaken it before attacking Iran or as an alternative to attacking Iran directly. Relations with Syria will remain critical. Syrian troops occupied Lebanon until 2005, and the Lebanese factions remain deeply divided in their attitude towards Syria. Formal diplomatic ties were established for the first time in 2009, and Syrian influence appears to be increasing, but the relationship remains dynamic and could become strained if the STL issues indictments implying Syrian involvement or if Syria overplays its hand.

Political tensions are currently undermining economic policymaking, but if it can move beyond the current impasse, the government might make some progress on economic and social policy, possibly including much-needed reforms to and investment in the dysfunctional electricity sector-although even here the past record encourages pessimism. It might even make progress on reducing the structural deficit (a result largely of the high cost of servicing the massive public debt). However, corruption and patronage permeate the political system, and many politicians have their own interests in maintaining a bloated public sector. Privatising state enterprises will remain a highly sensitive issue owing to ideological differences and vested interests, as well as to questions about the likely transparency of any sales of state assets. The economic debates will be complicated by political divisions between March 14th, which controls the Ministry of Finance, and March 8th, which has the energy and telecoms portfolios-and which is currently withholding vital telecoms income from the Treasury. Long-discussed plans to sell the two state-owned mobile-phone operators and restructure the heavily subsidised state-owned electricity provider, Electricité du Liban, will be deferred beyond 2012.

Banque du Liban (BdL, the central bank) is regarded as an effective regulator, although the government's dependence on commercial banks for financing does raise some concerns about the authorities' ability to scrutinise them. Arguably, the BdL has become the central pillar of economic management in Lebanon, given the political paralysis that often afflicts economic ministries. The strong demand for Lebanese debt securities is partly attributable to the stability of monetary policy under the central bank governor, Riad Salameh. His tenure is up for renewal in the coming months, and were there to be any politicisation of his reappointment, investors might be more wary of Lebanon's economic policymaking.

The budget deficit is forecast to remain large, adding to Lebanon's debt burden, with debt interest payments accounting for roughly one-third of government spending. The deficit narrowed to an estimated 5.4% of GDP in 2010 owing to tax revenue growth from a booming economy at a time of reduced expenditure, partly because of the time lag in payments for fuel and partly because of delayed expenditure resulting from the failure to pass a 2010 budget. In 2011-12, as delayed spending is implemented and revenue growth slows, the deficit is forecast to widen once more, to an average of 7.7% of GDP, which is L£5.2trn (US$3.5bn).

Much of the government's foreign debt is held by local banks, and debt servicing is in effect a form of government support to the banks-which means that Lebanon is unlikely to face contagion from debt crises elsewhere, despite having a large structural deficit and one of the world's highest debt/GDP ratios. In turn, the banks' heavy exposure to the government, and the high interest rates on offer, encourages them to keep buying government debt.

The economy's high level of dollarisation and the currency's peg to the US dollar mean that Lebanese pound interest rates tend to track US rates, but with a strong positive differential, reflecting perceptions of higher political risk and the sovereign's heavy indebtedness. The BdL aims to keep deposit rates stable in the near term in order to ensure adequate liquidity, but rates could begin to rise once monetary tightening resumes in the US in 2012. The premium of pound deposit rates over equivalent dollar rates will continue to support inflows and an ongoing de-dollarisation of deposits.

Heavy government borrowing and limited price-competition suggest that commercial banks' prime rates will remain prohibitively expensive for many small enterprises, although the BdL has reduced reserve requirements for some types of local-currency loans to stimulate lending to priority sectors.

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Economic growth in Lebanon is closely correlated with growth across the Middle East and North Africa, which is forecast to average of 4.3% a year in 2011-12. Although this is lower than the region's annual average growth rate of 5.8% in 2005-08, it is reasonably strong in comparison with other regions recovering from the global recession, in part because of strong oil prices, which are projected to average US$82/barrel (for Brent Blend) over the forecast period. After a period of strong tourism-driven growth, we forecast that real GDP growth will ease slightly to a still-respectable average of 6% in 2011-12, underpinned by investment in construction and demand in the region for Lebanon's services exports (which account for more than half of GDP). Much of the tourism boom and its knock-on benefits have been focused on the Greater Beirut area, and infrastructure constraints need to be overcome if this is to be extended more widely. The economic impact of political instability or violence could be severe, as was witnessed in 2006 when the economy grew by only 0.6%. Domestic private consumption and investment growth will be constrained by the cost of credit, and government consumption growth will remain positive but will be curbed by the need to contain the already large fiscal deficit.

Tourism, banking and construction will remain the key drivers of growth. A strong performance in these sectors is the main reason why the economy expanded by 7.5% in 2010. Tourist arrivals increased by 64% year on year in 2009, to 1.9m, and it's clear from data to date that 2010 was also another year of strong growth. Tourism indirectly supports about one-quarter of jobs and generates much of the demand that supports the booming construction sector. Banking is vital to the economy and has also been protected by strong inflows of deposits and interest income from government debt. There are questions about the quality of official GDP data, and timely economic indicators outside the three key sectors are in short supply.

After a sharp drop in 2009, because of lower world commodity prices, inflation picked up slightly in 2010 to an estimated average of 3.9%. In 2011-12 inflation is expected to fall to an annual average of 3.6% as a weakening euro has a deflationary impact on import prices. (France, Italy and Germany together provide one-quarter of imports.) There are serious questions about the reliability of data from the Central Administration of Statistics.

The Lebanese pound is expected to remain pegged to the dollar within a trading band of L£1,501-1,514:US$1. The dollar, and thus the pound, is likely to strengthen against the euro over the forecast period owing to investor concerns about sovereign debt problems in the euro zone and to expectations of interest-rate rises. The BdL is strongly committed to defending the peg, aided by its ability to influence interest rates, high levels of assets and strong support from local commercial banks-which, as the holders of the largest part of Lebanon's foreign debt, have much to lose if the peg were to collapse. Nevertheless, in the longer term substantial imbalances in the public finances and external accounts could leave the peg vulnerable.

According to data from the IMF, Lebanon's structural current-account deficit in 2009 widened substantially to 21.9% of GDP (from 13.8% of GDP in 2008) as services credits fell, despite higher tourist numbers. However, given that Lebanon itself does not directly publish current-account data, and the IMF's series have frequently been revised upwards, some of the substantial capital flows-which create a positive overall balance of payments-might in reality be current flows. In 2010 the services surplus widened, and the current-account deficit narrowed to US$7.3bn (19.3% of GDP), despite a larger trade deficit, as higher oil prices and tourism-driven growth pushed up the import bill. Further tourism growth in 2011-12, combined with rising remittances, will narrow the deficit further, to an average of 11.4% of GDP. Lebanon's current-account deficit in 2010 was more than covered by capital inflows, leading to a substantial gross balance-of-payments surplus, and this pattern will be repeated over the forecast period. The main concern is the risk of capital flight in the event of a major political shock, which could create financing difficulties-but under such a scenario, Lebanon would probably receive support from its external allies.

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As this report was going to publication, Hizbullah, a Shia political-military group, pulled its members and allies out of the cabinet after the government failed to respond to a request to hold a cabinet meeting to address matters related to the Special Tribunal for Lebanon (STL), a UN body investigating the 2005 assassination of Rafiq Hariri, a former Lebanese prime minister. Hizbullah's walkout comes as an attempted Syrian-Saudi deal on political stability in Lebanon foundered, probably over disagreements about how the prime minister, Saad Hariri (a son of Rafiq), should deal with the STL. Hizbullah and its allies in the "March 8th" opposition bloc (which include the Free Patriotic Movement, led by Michel Aoun, a Christian former general, and Amal, a Shia-supported political party) held ten seats in the cabinet and the "March 14th" governing coalition, led by Mr Hariri, held 15. Andan al-Sayyed Hussein, one of the five cabinet ministers appointed by the president, Michel Suleiman, also resigned. The resignation of 11 members of the cabinet will mean Mr Hariri will be forced to establish a new government through consultations with parliament, a process that is likely to take months. The collapse of the government does not inevitably mean Lebanon's political factions will turn to outright violence in a bid for control. There have been heightened tensions and a political impasse in the country for several months with a government in place; there is little reason to expect that the absence of a government will make the situation any worse.

The focus of political activity in late December and early January was the STL. The investigation has focused on the hypothesis that Syria and Hizbullah were implicated in the attack. The UN body is expected to issue indictments in early 2011, including against some senior Hizbullah figures. As this point draws closer, tensions have increased further.

Hizbullah has stepped up its actions against the STL since it emerged in mid-2010 that members of the group were likely to be indicted. In December it launched an array of political efforts. It sought to force the president, whose role is nominally above day-to-day politics, to rule against the STL. It also tried to force the issue onto the cabinet agenda with the implicit threat that it would bring down the government if the cabinet did not discuss the tribunal. It also tried to drag the weak judiciary into the investigation. In a televised speech on the eve of the Shia religious festival of Ashoura in mid-December, Sayyed Hassan Nasrallah, the leader of Hizbullah, told those Lebanese supporting the investigation to step aside, allowing his party to confront the STL directly.

Hizbullah's actions further blocked political and economic policymaking. All attention was focused instead on trying to resolve the stand-off between the March 8th and the March 14th blocs. Rather than hold direct negotiations between themselves, the political groupings turned to regional and global powers to resolve their domestic issues. However, this added the complication of the political agendas of the countries that play a role in Lebanon's politics: Syria, Saudi Arabia, Iran, France and the US. Saudi Arabia, which had close ties to Rafiq Hariri, has long sought justice for his killing, but has become increasingly pragmatic, recognising the risk to civil peace in Lebanon were the indictments to lead to trials. In December it continued direct negotiations with Syria over the issue, although progress slowed when the Saudi king, Abdullah bin Abdel-Aziz al-Saud, was hospitalised. Saad Hariri has already come close to absolving Syria of responsibility for killing his father, putting the country's need for domestic peace above his need for personal justice. It was reported in early January that Syria and Saudi Arabia were close to reaching an agreement that would resolve the STL issue as part of a wider agreement that would lead to the creation of a new Lebanese government came, but on January 11th Mr Aoun announced that any deal had collapsed, prompting members of March 8th to deliver an ultimatum to the prime minister to convene a cabinet meeting.

Saudi Arabia's desire for a stable Lebanon means that it has to balance the need to broker a deal with Syria, which may require undermining or rejecting the validity of the STL, and the importance of maintaining its long-standing alliance with the US, which will continue to press for the legitimacy of the investigation.

The US remains staunchly supportive of the UN investigation. In December it publicly rejected any Saudi-Syrian initiative that would resolve domestic Lebanese political issues at the expense of the STL. Maura Connelly, the US ambassador to Lebanon, said in a statement: "The Special Tribunal for Lebanon ... cannot be stopped by any bilateral or regional agreement."

French efforts to reach a negotiated resolution remained limited. In mid-December Bashar al-Assad, the Syrian president, travelled to Paris for a summit with Nicolas Sarkozy, the French president, but the outcome of the meeting was inconclusive. A new element in December was a more direct role played by Iran, Hizbullah's main supporter. For the first time, Ayatollah Ali Khamenei, Iran's supreme leader, took a public position on Lebanon's politics. After a meeting with Sheikh Hamad bin Khalifa al-Thani, the emir of Qatari, in December, Ayatollah Khamenei was quoted as saying that any STL indictment would be "null and void". His comments were seen as offering further support to Hizbullah, but caused anger among March 14th supporters because of his perceived interference in domestic politics.

At the STL base in the Netherlands, officials held an unprecedented press conference in December during which they insisted that the investigation had not been politicised.

In the Lebanese capital, Beirut, Hizbullah continued to try to bring the STL issue onto the cabinet agenda. Since its formation in November 2009, the coalition government of Mr Hariri has managed to remain intact by avoiding discussion of the STL. Hizbullah's efforts were intended to bring down the government. It sought to do this by demanding that the cabinet discuss the issue of the "false witnesses" to the STL because its says their evidence was not credible. These "false witnesses" are more than 30 people said to have provided misleading statements to the STL and its predecessor, the UN International Independent Investigation Commission. If the cabinet voted on the issue, it would split, bringing down the government. To prevent this, Mr Suleiman and Mr Hariri have sought over recent months to keep the issue off the cabinet agenda. In the end, Hizbullah forced it onto the agenda of a December 15th cabinet meeting, but there was no discussion, nor a vote. It was the first cabinet meeting since November 10th, with reportedly more than 300 items on the agenda, including vital issues such as the 2010 budget, renewing the tenure of Riad Salameh as governor of Banque du Liban (the central bank), plans to restructure the electricity sector and a series of senior security appointments.

By early January it was expected that the STL would issue its indictments sometime in the first quarter. In mid-December, in an interview with the BBC, Michael Williams, the UN special co-ordinator for Lebanon, said that he did not expect any indictments to be issued before February.

Lebanon is ranked 86th out of 167 countries surveyed in the Economist Intelligence Unit's democracy index. It is one of only three in the region classified as a "hybrid regime" (the Palestinian Territories and Iraq are its peers, while Israel is classed as a "flawed democracy"). Most countries in the region are categorised as "authoritarian". Its highest score is for the electoral process category, where it scores 7.92 out of ten, reflecting universal suffrage, relatively free nationwide elections for the presidency, parliament and municipal authorities, the freedom of citizens to form political parties and the fact that opposition parties have a realistic chance of participating in government-all factors that are absent from many other countries in the region.

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However, the score is constrained by the lack of transparency over the funding of political parties, the risk that election results could be disputed and the restrictions on the ability of some citizens to hold certain public offices (depending on the confessional group they belong to). The weakest score is for the functioning of government category, reflecting widespread popular cynicism about politics, politicians and voting, as well as the limited authority of the state in the south of the country, parts of the north and the Palestinian camps. Although opposition parties may have a realistic prospect of coming to power, the same few leaders have dominated the political scene for many years, and their foreign backers play a significant role in determining their alliances, leading much of the public to take a sceptical view of party politics.

Trust in government is limited

The current political impasse in the country has raised concerns about prospects for social unrest, and risks to the state of democracy. Public trust in politicians is already limited, partly because of widespread corruption. Moreover, Lebanon has a more vibrant and independent private sector than many of its regional peers, and the government is less likely to be held responsible for a slowdown in growth than its counterparts in more state-driven economies, such as those in the Gulf. Political participation could even increase if rising global unemployment means fewer young Lebanese have the option of emigrating.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indices.

The category indices are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

The main focus in January has been the legislative backlog resulting from political tensions and, in particular, the continued inability of politicians to approve the 2010 and 2011 budgets, a situation that is undermining fiscal management. The deadlock has also caused growing concern over energy issues, with important legislation awaiting approval. Speaking in January, Gebran Bassil, the energy and water minister, said that Lebanon faced a "major electricity catastrophe" in the summer of 2011 if emergency plans he drafted to improve the reliability electricity production were not approved as a priority. There have been persistent problems with Lebanon's electricity sector as a result of years of underinvestment, politicisation and over-manning at Electricité du Liban (EDL), the hugely inefficient state power producer and distributor. The country has not enjoyed 24-hour state-supplied electricity since before the 1975-90 civil war. In recent years, successive administrations have provided some stability by restructuring debt and providing huge subsidies of some US$1bn a year to fund oil purchases, but even at the best of times most areas suffer routine rolling blackouts. Rapid economic growth averaging at least 7% after 2006, coupled with an annual increase in tourist numbers of more than 20%, has sharply increased demand, making this situation worse, with EDL unable to come close to meeting demand. In the summer of 2010, for example, even parts of the capital were down to less than eight hours of state-supplied power a day, and the situation was far worse in other areas. This has increased dependence on private-sector generators, raising private-sector costs.

Mr Bassil proposed a comprehensive US$5bn plan in late 2010 to reform the sector, ranging from building new generating stations to overhauling management (November 2010, Economic policy). Within this, there was an emergency plan that included hiring 250-mw power-generating barges as an interim measure to increase supply over the next three years. However, because of the political tensions, the cabinet has not addressed this issue. In January Mr Bassil said that further delays would prevent the plan being put into action in time. "We are heading for a big electricity disaster this summer if the plan I presented to the cabinet is not implemented immediately," he told a press conference.

New official figures were released in December showing that electricity production reached 9.47bn kwh in the first nine months, up by 5.8% on the same point in 2009, but still well below demand. State subsidies to EDL were reported to be US$1.01bn in the first ten months of the year. This was 22% lower than in the same period of 2009, but disguised an accumulation of new debts after the Beddawi power station in the north of the country was converted in late 2009 from being run on oil to being run on natural gas. Payments to Kuwait Petroleum Corporation and Sonatrach of Algeria for oil supplies were said to be US$949m in the first ten months, down by 22% year on year, reflecting the reduction in demand, but it was reported that no payments had yet been made to Egypt for natural gas.

Another factor undermining EDL is its inability to collect bills, mostly from individuals and groups that enjoy political protection as well as, anecdotally, from whole swathes of the country controlled by Hizbullah and Amal. Mr Bassil said in January that bill collection had improved in 2010 after a concerted campaign. However, in December EDL workers came close to striking after a regional executive was severely beaten up by a customer whose electricity supplies were cut off due to his failure to pay bills. Collection officers have called for protection from the army, but this has made the issue a political matter, ensuring that there is little hope of a dramatic improvement in collection in the short term.

First licensing round for gas exploration is due to be held in late 2011

In December Gebran Bassil, the energy and water minister, said that the first round of licensing for offshore gas exploration would take place in late 2011. Lebanon is one of the few Middle Eastern countries with no proven hydrocarbons reserves. However, a large discovery of offshore gas by Israel in the eastern Mediterranean basin, reported in June 2010, created huge new interest in the sector. (September 2010, Economic policy). Legislation was rushed through parliament in August 2010, authorising the state to issue licences for offshore exploration, and enshrining production-sharing agreements. In December Mr Bassil said that an announcement about the requirement for companies to qualify and details of tendering for exploration licences would be made in November 2011. He released no other details.

Before exploration work can begin, Lebanon needs to clarify its maritime boundaries, identify blocks, supply data to investors, select bidders and authorise drilling. In December attention remained focused on defining its maritime boundaries with Israel, Cyprus and Syria, none of which were previously defined. Lebanon is technically at war with Israel, and is looking to the UN to clarify the location of its boundary. Ali al-Shami, the foreign minister, wrote to the UN secretary-general, Ban Ki-moon, asking him to "exert every possible effort to prevent Israel exploiting Lebanon's maritime hydrocarbons resources which fall within its exclusive economic zone". Michael Williams, the UN special co-ordinator for Lebanon, said in early January that there may be scope for UN discussion over border delineation.

Mr Bassil also announced that a US$350m gas pipeline is to be built along the Lebanese coast. At the end of December he said that 19 companies had been pre-qualified for the construction of the pipeline. The pipeline would run for 174 km and feed the main industrial areas of the country. By connecting to international gas networks, Lebanon would be able to diversify its source of energy away from a large reliance on Egyptian gas and source more from Russia or the Caucasus. However, notwithstanding the political risks of a major construction project in Lebanon, bidders for the pipeline may be hoping that the exploration of the Lebanese coast is successful in helping to attract more financing for the project.

The government estimates that GDP growth was strong in 2010 but forecasts that it will slow in 2011 as a result of rising political tensions. A quarterly survey of business confidence in the third quarter of 2010, produced by the central bank, found that companies remained confident, but less so than in 2009. Using its own measures, the survey recorded overall confidence at +11 in the third quarter of 2010, compared with +33 for the same period of 2009, with the indicator recording the balance between managers who expected an improvement in business and those who expected a decline over the following quarter. Inventory figures were reported to be unchanged over the period.

An array of GDP growth forecasts were issued during December and January by international and regional organisations, which mostly expected lower growth in 2011. Standard & Poor's, a credit rating agency, put GDP growth at 8.9% in 2010 and expected this to fall to an annual average of 5.8% in 2011-13. It said that tourism and financial services would continue to drive economic expansion, but that political instability could affect consumer and investor confidence. Merrill Lynch, a US investment bank, estimated full-year 2010 growth in Lebanon at 8%, expecting this to fall to 5.9% in 2011. It said that the economy had expanded by between 25% and 30% in the past three years as a result of strong expansion in tourism, construction and retail activity. Standard Chartered, a UK bank specialising in emerging markets, put full-year 2010 growth at 7% and forecast that this would fall to 6.5% in 2011. It attributed this continued strong activity to growth in tourism, construction and financial services. EFG Hermes, an Egypt-based investment bank, forecast GDP growth of 5% in 2011, but again said that this was subject to continued political stability. The Economist Intelligence Unit expects growth to slow in 2011, to 5.9%, down from 7.5% in 2010. The growth forecasts reflect a widespread anecdotal view among companies in Beirut that they are holding back from making investment decisions until the STL issue is resolved and expecting a clearer picture before the end of the first quarter.

In December the government released national accounts figures for 2009. These put GDP at L£52.65trn (US$34.9bn), with real growth of 8.5% in 2008. The figures suggested that in 2009 private consumption grew by 8.3%, compared with 9.5% in 2008, and public consumption rose by 8.6%, unchanged from 2008. Private investment grew by 38.1% in 2009, up from 20.4% in 2008. Public investment rose by 8.4% in 2009, compared with a decline of 5.9% in 2008. The figures therefore underpinned other indicators that have shown a strong rise in growth led by private-sector investment in recent years. The figures were the latest in a series produced with technical assistance from the Institut national de la statistique et des études économiques, the French national statistics office.

Corruption in Lebanon is routinely seen as a challenge by foreign and domestic companies. A survey by Transparency International, a non-governmental anti-corruption organisation, suggests that perceptions of corruption have worsened in the past three years. The annual Global Corruption Barometer found that 82% of respondents thought corruption had increased in Lebanon over this period, compared with a Middle East and North Africa average of 56%. Some 34% of respondents said that they had been forced to pay a bribe in the past 12 months to speed up government services including to departments responsible for permits, utilities, tax, customs and education as well as to the judiciary and the police. The political class was considered the most corrupt, extending from local political figures to parties and parliament. The least corrupt organisation was considered to be the army. The report surveyed 1,000 respondents using a local statistics firm. It reflects anecdotal evidence that political tensions since the assassination of Rafiq Hariri in 2005 have led to a significant deterioration in the functioning of government departments, and that rapid private-sector growth has put them under increased pressure, factors that have led to very high demand for services, allowing officials to ration their provision through corruption and bribe-taking. Few respondents to the survey had confidence in government efforts to tackle the issue, with more than half saying that these were ineffective given the current political climate.

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Please see graphic below

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Please see graphic below

Land area

10,452 sq km

Population

4.2m (IMF estimate, mid-2008), excluding around 216,000 Palestinians living in refugee camps

Population in '000 by governorate administration (National Survey of Household Living Conditions, 2004)

Beirut (capital): 391

Mount Lebanon (Beirut environs): 1,502

North Lebanon: 769

The Beqaa: 471

South Lebanon: 401

Nabatiyeh: 221

Climate

Subtropical; cool in highlands

Weather in Beirut (altitude 34 metres)

Hottest month, August, 23-32°C; coldest month, January, 11-17°C (average daily minimum and maximum); driest months, July and August, 1 mm average rainfall; wettest month, January, 190 mm average rainfall

Languages

Arabic. English and French are widely spoken

Measures

Metric system

Currency

Lebanese pound (L£). Average exchange rate in 2008: L£1,507.5:US$1

Time

Two hours ahead of GMT (Lebanese summer time is three hours ahead)

Fiscal year

January 1st-December 31st

Public holidays

The dates of Islamic holidays are based on the lunar calendar and are therefore approximate. New Year's Day (January 1st 2011); Orthodox Armenian Christmas (January 6th); St Maroun's Day (February 9th); Prophet's birthday (February 15th); Easter (April 22nd-24th); Labour Day (May 1st); Martyrs' Day (May 6th); Resistance and Liberation Day (May 25th); Assumption Day (August 15th); Eid al-Fitr (August 30th); All Saints Day (November 1st); Eid al-Adha (November 6th); Independence Day (November 22nd); Islamic New Year (November 26th); Ashoura (December 5th); Christmas Day (December 25th)

Official name

Republic of Lebanon

Form of state

Parliamentary republic

Legal system

Based on the 1926 constitution (with amendments incorporated in 1990) and the Civil Procedure Code, the Criminal Procedure Code and the Penal Code

National legislature

Under the electoral law of July 16th 1992, the unicameral National Assembly has 128 seats, equally divided between Muslims and Christians

Electoral system

Universal direct suffrage over the age of 21

National elections

Next parliamentary election due in June 2013

Head of state

The president must be a Maronite Christian. Michel Suleiman was elected by parliament on 25th May 2008 for a six-year term

National government

The prime minister (currently Said Hariri) must be a Sunni Muslim and is chosen by the president after consultation with members of parliament. The cabinet is appointed by the prime minister and the president. Ministers need not be members of the National Assembly, but are responsible to it. Cabinet seats are customarily distributed on a sectarian basis

Main political organisations

Political parties tend to be weak and organised on a sectarian basis. The majority "March 14th" alliance is headed by the Future Movement (Sunni) with the Lebanese Forces (Christian) in loose alliance with the Progressive Socialist Party (Druze) and Phalange (Christian). The opposition "March 8th" grouping comprises Hizbullah (Shia), Amal (Shia) and the Free Patriotic Movement (Christian). The cabinet was formed in November 2009, five months after the June parliamentary election

Prime minister: Saad Hariri (Sunni Muslim)

Deputy prime minister: Elias Murr (Greek Orthodox Christian)

Key ministers

Culture: Salim Wardeh (Sunni Muslim)

Defence: Elias Murr (Greek Orthodox Christian)

Economy & trade: Mohammed Safadi (Sunni Muslim)

Education: Hassan Mneimneh (Sunni Muslim)

Energy & water: Gebran Bassil (Maronite Christian)

Environment: Mohammed Rahal (Sunni Muslim)

Finance: Rayya Haffar Hassan (Sunni Muslim)

Foreign affairs: Ali al-Shami (Shia Muslim)

Health: Mohammed Khalifa (Shia Muslim)

Industry: Abraham Dedian (Armenian Christian)

Information: Tarek Mitri (Greek Orthodox Christian)

Interior: Ziad Baroud (Maronite Christian)

Justice: Ibrahim Najjar (Greek Orthodox Christian)

Labour: Boutros Harb (Maronite Christian)

Public works & transportation: Ghazi Aridi (Druze)

Social affairs: Selim al-Sayegh (Maronite Christian)

Telecommunications: Charbel Nahhas (Catholic Christian)

Tourism: Fadi Abboud (Maronite Christian)

Parliamentary speaker

Nabih Berri (Shia Muslim)

Central bank governor

Riad Salameh (Maronite Christian)