TFLE01: LEBANESE ECONOMY DEVASTATED BY AIR

UNCLAS SECTION 01 OF 04 BEIRUT 002422 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ELA STATE PASS USTR TREASURY FOR MNUGENT USDOC FOR 4250/ITA/MAC/OME NSC FOR ABRAMS/DORAN/SINGH E.O. 12958: N/A TAGS: PGOV EFIN ECON EINV LE SUBJECT: TFLE01: LEBANESE ECONOMY DEVASTATED BY AIR STRIKES AND BLOCKADE (SBU) Summary. A week of Israeli air strikes and a naval blockade has devastated Lebanon's economy, destroying key infrastructure and displacing hundreds of thousands of Lebanese. Damage to public and private infrastructure is estimated to exceed USD 500 million, and the Lebanese economy could suffer GDP losses of USD 500 million for each week the fighting continues and in the near aftermath of the conflict. Total losses to the Lebanese economy are likely to exceed USD 6-7 billion, as the air strikes occurred during peak periods for both the tourism and construction sectors. The demand for dollars remains high, although Central Bank Governor Riad Salameh states that the Central Bank of Lebanon has sufficient foreign currency reserves (although insufficient banknotes). Several factories have been hit in recent days, and petroleum supplies are in danger of running out soon. There has been a strong demand for foodstuffs, as GOL officials tell the population that there are sufficient supplies of wheat, flour, and diesel. Food supplies are larger than expected, as many traders imported additional quantities in recent months in anticipation of strong summer demand. The Beirut Stock Market remains closed for the week after dropping 15 percent on Friday July 14. End Summary. ECONOMIC POTENTIAL CRIPPLED ESTIMATED BILLIONS IN LOSSES -------------- ¶2. (SBU) Estimates vary at the extent of economic damage to Lebanon of the Israeli air strikes, but it is clear that the damage will be extensive. Prime Minister Siniora told the press on July 18 that the economic cost to Lebanon of the Israeli air strikes would be in the "billions of dollars". Private economist Charbel Nahas told the Embassy on July 19 that the GOL had tasked the Council for Development and Reconstruction to do an assessment of economic damages. Nahas said he would be among the team of 30 experts that would be responsible for estimating economic damages. The team would look at four major areas--damage to public properties, damage to private properties, human losses, and economic losses and lost revenue. Nahas provided the Embassy with his rough estimates for losses during the first week of the crisis; according to Nahas, damage to public property is roughly USD 250 million so far and damage to private property is roughly USD 350 million. He estimated that total economic loss since the crisis began would be roughly USD one billion. Because the strikes hit during the high point of tourist season and in the middle of greater than average construction activity, Nahas estimates that the Lebanese economy will suffer roughly USD 500 million per week as long as the conflict continues and in the near aftermath. Nahas estimated that the economy was now operating at 50 percent of its normal mid-July activity. ¶3. (U) On July 18, the Chairman of the Association of Lebanese Banks Francois Bassil estimated the losses to the Lebanese economy of USD 6-7 billion, nearly one-third the total GDP of Lebanon. Finance Minister Jihad Azour told the press on July 17 that direct losses from the Israeli air raids could be estimated at USD 500 million, excluding lost earnings. Azour's estimates are far lower than other leading economists; economist Marwan Iskandar declared on July 17 that physical damage may be estimated at USD one billion while lost earnings may be estimated at USD 1.4 billion. TOURISM INDUSTRY DECIMATED -------------- ¶4. (U) The tourism sector was expecting its most profitable year ever, as Beirut hotels and restaurants were completely full on July 11, the day before the current crisis started. Tourism Minister Joe Sarkis stated that lost tourist earnings for the remainder of the tourist season could reach USD 4.4 billion and the livelihood of half a million people who earn a living from tourism is directly threatened. On July 18, Minister of Economy and Trade (MOET) Sami Haddad estimated that the tourism industry will lose USD six million in revenues during 2006. Tourism Ministry Director General Nada Sardouk said many businesses dependent on tourist revenue BEIRUT 00002422 002 OF 004 gathered at the Ministry of Tourism on July 13 and July 14 "shouting and crying" about lost revenues. She said Hizballah is pushing the tourism sector towards bankruptcy and wondered who will compensate the industry for its lost revenues. KEY INFRASTRUCTURE DESTROYED -------------- ¶5. (SBU) Crucial economic infrastructure has been hit and hit often by Israeli strikes. The runways of Beirut International Airport, the Kleyate Airport near Tripoli and the Riyaq Military Airport in the Biqa Valley have been severely damaged as a result of repeated shelling. Multiple air strikes have also damaged Lebanon's three major seaports of Beirut, Tripoli, and Jamil Gemajel. A major focus of the Israeli air campaign has been the dismantling of the road network that links southern Lebanon to Beirut and the rest of Lebanon. According to preliminary estimates, at least 38 roads have been cut off and 42 bridges have been destroyed, with others partially destroyed. The Beirut-Damascus international road has sustained severe damage and repeated shelling. Side roads that link up with the Beirut-Damascus road have also sustained repeated shelling, making the journey to enter Syria from eastern Lebanon more difficult. The El Qaa (Lebanon)--Homs (Syria) road in northeast Lebanon has also been repeatedly shelled and is now closed. The only viable road exit from Lebanon now is the road network north of Tripoli linking to Syria. ¶6. (U) Destroyed bridges include the new Qassimieh bridge linking Sidon to Tyre, five bridges in Nabatieh, three bridges in Dammour, the two bridges of Hadid linking Bqosta in the South to Alman in the Chouf, the Hajje bridge in Maamarieh, the Namlieh bridge in Dahr-el-Baidar, the new bridge at Mdayrej on the Beirut-Damascus international road, and bridges that link the airport to the southern suburbs. Several important public building have been destroyed, including the Mayss al-Jabal Hospital and several schools in Kounin. DEMAND FOR DOLLARS -------------- ¶7. (SBU) Demand for dollars remains high, although at a lower rate than July 17 and 18. The Central Bank of Lebanon reportedly injected USD 300 million into the exchange market on July 18, bringing the total amount of its intervention to USD 1.2 million since the start of events. Dollar bank notes are in short supply and the closure of Beirut International Airport has prevented the shipment of dollar bills into the country. Banks have taken a number of operational measures to counter the problem, including: placing a withdrawal limit of USD 1000-2000, issuing travelers checks, and encouraging traveling clients to use their credit cards. Exchange dealers are selling the dollar for 1600 Lebanese pounds, compared to the official rate of 1512 - 1514 Lebanese pounds to the dollar. Central Bank Governor Riad Salameh told the press on July 17 that the Central Bank of Lebanon (CBL) has the means to meet increased dollar demand in the market. Salameh said the CBL now has about USD 13 billion in foreign currency reserves. ¶8. (SBU) Audi Bank Head of Foreign Exchange Fouad Dibo told us on July 18 that Audi Bank was allowing its Lebanese clients to withdraw up to USD 1000 and was encouraging its clients to withdraw Lebanese pounds. He said that the bank's money courier Mecattaf had no way of bringing in dollars to Lebanon. According to Dido, there is currently no flight of capital but an outflow of dollars in cash. Dido said that, theoretically, if 50,000 persons departed Lebanon carrying USD 1,000 each that would be an outflow of USD 50 million, but he expects many Lebanese are now hoarding dollars now and will redeposit them back into the banking system when the situation calms down. ¶9. (SBU) According to the Chairman of BLC Bank Shadi Karam, "Despite the negative situation, the demand for dollars in BEIRUT 00002422 003 OF 004 the past few days was far less than when former Prime Minister Rafik Hariri was assassinated" on February 14, 2005, but Karam and other bankers warned that if the security situation continues to deteriorate dollar notes could "dry up". FACTORIES HIT, RECOVERY WILL TAKE YEARS -------------- ¶10. (SBU) Air strikes on July 17 and July 18 disabled or completely destroyed several privately owned factories in Lebanon. Wajid al-Bisri, the Vice President of the Association of Lebanese Industrialists (ALI),confirmed that the country's largest dairy farm, Liban Lait in the Biqa Valley; a plastics factory in Tyre; a tissue paper factory in Sidon, and a paper mill and a medical supply company in Beirut's southern suburbs have been completely or nearly completely destroyed. According to Bisri, the industrial outlook will be "much worse that we can possibly imagine when the whole thing ends, but the direct damage from the attacks on the industrial sector alone will take years to recover from." In a July 17 letter to the Ambassador, ALI President Fadi Abboud appealed to the Ambassador to assist Lebanon in avoiding "any further destruction by Israel" of the Lebanese industrial base. Future Movement MP Nabil de Freige, a major shareholder of Liban Lait, told us that the dairy plant in the Baalbeck area of the Biqa Valley had been completely destroyed. He said there was no Hizballah presence around the USD 10 million investment, stating that there were "2,000 cows, not katyushas." PETROLEUM SUPPLIES, POWER LIMITED -------------- ¶11. (SBU) During a July 15 conversation, the Deputy General Manager of Mediterannean Oil Shipping and Transport Co. (MEDCO),told Econoff that Lebanon had a supply of petroleum for 10-12 days under normal circumstances. Chammas said that petroleum was being delivered at two to three times the normal rate, and he estimated that petroleum supplies could run out by the end of this week. Other sources have indicated that Lebanon may have as much as a 30-day supply of petroleum. Chammas is concerned that the remaining fuel supply could be hit by Israeli air strikes. Several petroleum stations have been targeted in the Israeli air raids. Petroleum storage facilities at Dora have so far avoided a direct hit from the Israeli air strikes, although shells have come close to the tanks. Lebanon's major oil and gas storage facilities were closed July 17 and 18 due to fears that they would become the target of Israeli shells. The closure has had a major effect on the supply chain, mainly affecting gas stations and bakeries. Fuel stations have established a rationing system of 20 liters. The Jiyeh power station, which provides one quarter of Lebanon's power, has become unoperational as a result of the Israeli shelling. HIGH DEMAND FOR FOODSTUFFS -------------- ¶12. (U) Demand for consumer goods remains high in areas that have received a large number of displaced persons. Supermarket shelves in Jbeyl, Kesrewan and Alley became empty at the end of the day on July 18. There continues to be adequate stocks of most food supplies in many areas not targeted by the bombings. The Beirut Traders Association's head Nadim Assi announced that there is enough food supply for the coming five months; traders had imported additional quantities of food in anticipation of a promising summer season. The trouble, however, is trying to get the food to where it is most needed, given security risks and damaged roads. Economy Minister Haddad has warned against any unethical increase in prices of consumer goods. He called on consumers to report complaints to the MOET. Haddad reassured citizens during a July 18 press conference that there are sufficient supplies of wheat, flour, and diesel. The Secretary General of the Federation of Bakeries Anis Bishara SIPDIS called on citizens not to buy bread in excessive quantities BEIRUT 00002422 004 OF 004 on July 17; Bishara said bakeries located in areas that were not shelled can produce enough bread for the existing population for a number of weeks. Consumers continue to purchase goods in excessive quantities despite reassuring calls from suppliers about sufficient existing stocks. Prices of agricultural products are on the rise as the Biqa Valley, Lebanon's major agricultural production area, becomes further isolated. Truck drivers are increasingly reluctant to transport goods from the Biqa. STOCK EXCHANGE CLOSED -------------- ¶13. (SBU) After dropping the maximum allowable 15 percent on July 14, the Beirut Stock Market (BSM) has remained closed on July 17, 18, and 19. BSM Chairman Fadi Khalaf told the Embassy that the BSM will not do any additional trading this week. He said that a decision was made on July 18 to close trading on the BSM until further notice. He said that on July 21 the BSM Committee, brokers, and listed companies will meet to decide if trading will resume on Monday July 24. Khalaf said BSM staff are reporting to work to handle internal business and offices were closing at 1 p.m. FELTMAN