2009 Index of Economic Freedom

Quick Facts

Population:

• 4.1 million

GDP (PPP):

• $39.5 billion
• 0.0% growth
• 3.2% 5-year compound annual growth
• $9741 per capita

Unemployment:

• 20.0%

Inflation (CPI):

• 4.1%

FDI Inflow:

• $2.8 billion

Lebanon's economic freedom score is 58.1, making its economy the 95th freest in the 2009 Index. Its score is 1.9 points lower than last year, reflecting declines in five of the 10 components of economic freedom, particularly financial freedom. Lebanon is ranked 9th out of 17 countries in the Middle East/North Africa region.

Lebanon scores relatively well in trade freedom, fiscal freedom, and financial freedom. With a weighted average tariff rate of less than 5 percent, its trade freedom score is just above the world average. The top income and corporate tax rates are low, and the overall tax burden is low as well. The financial sector is relatively well developed for the region, with an array of private banks and services, but political instability is an enduring threat.

Ongoing challenges to overall economic freedom include business freedom, investment freedom, property rights, and freedom from corruption. Intrusive bureaucracy deters more vibrant entrepreneurial activity, and the generally burdensome regulatory regime deters foreign capital. Corruption is rampant, and fair adjudication of property rights cannot be guaranteed because the courts are subject to significant influence from the security services and the police.

Background Back to the top

Lebanon was a trading and international banking center until its disastrous 1975–1990 civil war, when Syria established a political stranglehold that continued until its withdrawal in 2005 after being implicated in the assassination of former Lebanese Prime Minister Rafiq Hariri. Prime Minister Fuad Siniora’s economic reform efforts have been set back by the Hezbollah-instigated conflict with Israel in 2006 and continued tensions between the Lebanese government and Hezbollah and other factions supported by Syria and Iran. A May 2008 agreement brokered by the government of Qatar installed Michel Suleiman, former head of the Army, as president. The possibility of renewed instability continues to discourage economic activity, particularly in the tourism and retail sectors.

Business Freedom 60.0 Back to the top

The overall freedom to start, operate, and close a business is limited by Lebanon's regulatory environment. The cost of starting a business is high. Obtaining a business license takes about the same as the world average of 18 procedures and 225 days. Closing a business is a lengthy and costly process.

Trade Freedom 80.8 Back to the top

Lebanon's weighted average tariff rate was 4.6 percent in 2006. Import bans and restrictions, quotas, restrictive licensing rules, subsidies, burdensome sanitary and phytosanitary regulations, corrupt customs administration, and weak enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Lebanon's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 91.7 Back to the top

Lebanon has low tax rates. The top income tax rate is 20 percent, and the corporate tax rate is 15 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, tax revenue as a percentage of GDP was 14.4 percent.

Government Size 64.1 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 34.6 percent of GDP. Plans for privatization were unveiled in early 2007, but progress has been minimal. Pre-election expenditures in the form of increases in the minimum wage and transfers to the state-owned electricity company threaten sound spending management, particularly as privatization stalls and the fiscal debt continues to widen.

Monetary Freedom77.3 Back to the top

Inflation is moderate, averaging 4.0 percent between 2005 and 2007. The government influences prices through state-owned enterprises and subsidies and controls the prices of bread, petroleum derivatives, pharmaceuticals, and electricity. Ten points were deducted from Lebanon's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign and domestic capital are legally equal with a few exceptions. Foreign investors must register with the government, and foreign investment is restricted in the real estate, insurance, media, and banking sectors. The passage of several laws to promote investment has led to some progress, but red tape and corruption, arbitrary licensing decisions, dated legislation, an ineffectual judicial system, arbitrary and non-transparent interpretation of laws, political instability, and other security concerns continue to serve as impediments. Residents and non-residents may hold foreign exchange accounts, money market instruments, and derivatives. Some credit operations are prohibited. There are no restrictions on payments and transfers. Foreign investors may own land, subject to a number of restrictions.

Financial Freedom60.0 Back to the top

Lebanon's financial sector has experienced a decade of restructuring and consolidation, but overall progress has been slow in recent years. The five largest commercial banks account for roughly 60 percent of total banking assets. The government retains no ownership in any commercial banks, and competition among the private banks contributes to improving efficiency. Regulations are fairly transparent, and credit is allocated on market terms for both domestic and foreign businesses. The insurance sector is moderate, and regulations have been passed to tighten supervision and establish minimum capital requirements because of small, undercapitalized firms that charge low premiums but rarely pay claims. Capital markets are relatively well developed.

Property Rights30.0 Back to the top

The judiciary is significantly influenced by the security services and the police. The government-appointed prosecuting magistrate exerts considerable influence over judges by, for example, recommending verdicts and sentences. Trials, particularly commercial cases, drag on for years. Although Lebanese law provides for some protection of intellectual property rights, enforcement is weak.

Freedom From Corruption30.0 Back to the top

Corruption is perceived as widespread and growing. Lebanon ranks 99th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007, down from 63rd out of 163 countries in 2006. Corruption is more pervasive in government contracts (primarily in procurement and public works), taxation, and real estate registration than in private-sector deals. It is widely believed that investors routinely pay bribes to win government contracts, which are often awarded to companies close to powerful politicians. Lebanon is again engaged in major reconstruction, which is particularly vulnerable to corruption.

Labor Freedom57.4 Back to the top

Lebanon's relatively rigid labor regulations impede employment and productivity growth. The non-salary cost of employing a worker remains high, and dismissing a redundant employee is relatively expensive. Restrictions on the number of work hours are moderate.