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WORLD TRADE WT/L/283 5 November 1998 ORGANIZATION (98-4313) Original: English LEBANON – REQUEST FOR OBSERVER STATUS Communication from Lebanon The following communication has been received from the Minister of Economy and Trade of Lebanon. _______________ On behalf of the Government of Lebanon, I have the honour to submit the application of the Government of Lebanon for observer status in the General Council of the World Trade Organization (WTO) and its subsidiary bodies. In this connection, I would like to state that it is the intention of the Government of the Republic of Lebanon to apply for accession to the WTO agreements in the near future. In the meantime the observer status would help the Government of Lebanon familiarize itself with the WTO and its rules and procedures. In accordance with the rules of procedure of the General Council, I am enclosing herewith memorandum on the foreign trade regime of Lebanon. I should like to request you to place this application and the accompanying documents before the General Council at its meeting. WT/L/283 Page 2 AN OVERVIEW OF LEBANON'S ECONOMIC POLICY AND FOREIGN TRADE REGIME I. INTRODUCTION A. THE COUNTRY 1. The Republic of Lebanon covers an approximate area of 10,452 sq. km2 and is bordered to the North and East by Syria, to the South by Israel (with Israel still occupying 10% of Lebanon's southern territory) and to the West by 225 km of Mediterranean coastline. The country's main cities are Beirut (the capital), Tripoli, Sidon, Tyre and Zahle. The population is estimated at 3.62 million, excluding some 200,000 – 240,000 Palestinian refugees; the population growth rate is estimated at 3.2%. The literacy rate is of 86.4%, among the highest in the Arab world, and while Arabic is Lebanon's official language, French and English are widely spoken. 2. The country has only 13% of its land covered by forest and woodland and compared to other countries, Lebanon's arable land is relatively small, extending over around 26% of the territory. There are around 10,000 hectares of permanent pastures. Lebanon's agricultural sector accounts for only 8% to 10% of GDP. Although agriculture employs around a fifth of the country's population, it no longer provides sufficient income for many of Lebanon's farmers. 3. Accounting for 17% of GDP, the country's industries are concentrated in and around central Lebanon, 44% being in the Beirut area and Mount Lebanon, and 19% in the North. The coastal cities, Beirut, Tripoli and Sidon have large ports and are mainly engaged in commerce and other services. B. THE ECONOMY 4. Eight years after the end of the civil war, Lebanon is re-emerging as a vibrant center of regional economic activity and now appears to be well on the way to recovery from wartime ravages. An ambitious reconstruction programme is well underway to endow the country with a modern infrastructure and improve its productivity. 5. However, the most serious problem on the economic front today is the Government's need to control the budget deficit, and in 1997, the net domestic debt to annual GDP ratio stood at around 67%. 6. After weeks of intense debate during October 1997, the cabinet approved an "austerity" budget for 1998 designed to reduce the budget deficit from an estimated equivalent of around 18% of GDP in 1997 to near 12% in 1998 (see Annex 5)1. In absolute terms, the Government is trying to keep expenditure for 1998 at roughly the same as the $5.16 billion estimated for 1997. A little over 40% of this has been allocated for debt-service obligations. 7. Banque du Liban forecasts predict that real GDP growth will slightly rise to 4% in 1998 (compared to 3.8% in 1997). However, consumer price inflation will suffer a 1% rise, reaching 7% in 1998. 8. In order to increase revenue, the Government has moved to introduce a number of improvements in its administrative and financial structure. Consequently, tax collection procedures have been modernized, a new system for customs duties has been adopted, property tax collection 1 Annexes 1-6 are available in the Secretariat (Council Division, Room 2025) for consultation. WT/L/283 Page 3 procedures have been reviewed, and income tax collections have been re-examined with the help of the Canadian Government. 9. The Government hopes the measures will help lift revenue for 1998 to nearly L£5 trillion from 1997's L£4 trillion revenue. It has envisaged an increase of some 10% in customs duties - its largest single source of revenue at nearly 60% of the total. 10. The most significant element of the Government's budget plan is the cabinet's agreeing to finance, and for the first time, most of the shortfall by overseas borrowing, raising some $2 billion to be repaid over 30 years, $106 million in Eurobonds and $400 million in foreign currency from local banks. 11. Imports have mushroomed since the return of political and economic stability, and have grown from $2,578 million in 1990 to $7,456 million in 1997. The nature of imports reflects the needs of a country in the middle of reconstruction. Major imports include machinery and electrical equipment, vehicles and mineral products. II. GLOBAL DEVELOPMENT STRATEGY 12. Emerging from 15 years of civil war, Lebanon today is embarking upon a major programme of reconstruction and development to take it into the 21st century. With this in mind, Lebanon now faces the challenge of expanding and diversifying its economic activity. Free Zones 13. As part of this effort, the Lebanese Government is establishing areas of free trade status. These zones will help Lebanon become an all important center for international trade and industry. The Free Zones are being handled by the Investment Development Authority of Lebanon (IDAL) to attract private investment into Lebanon. These free zones are intended to facilitate and increase trade flows throughout the region and provide an ideal manufacturing base for export-oriented industries and services; the Free Zones will launch a new era of commercial exchange into a region of growing markets and exciting business prospects. 14. 15. Lebanon's Free Zones include: (i) The Airport Free Zone, which will provide international and local businessmen with a high quality, facility for warehousing, trade and light industry. The free zone is located at the entrance of the airport which is only 4 km away from Beirut and benefits from 150,000 km2 of built up area available within the perimeter of Beirut International Airport; excellent road access airside/landslide; (ii) the Quleaat Free Zone, located at 25 km North of the city of Tripoli, covering an area of 450,000 km2; (iii) the Riyak Free Zone, covering an area of 360,000 km2, located North-East of Riyak Airport, 8 km East of Zahle, with access to an international highway system linking it to Beirut and Damascus. Lebanon's current existing Free Zones are: (i) The enterprising port of Beirut Free Zone, which was successfully reopened after the war; (ii) the Salaata Free Zone; WT/L/283 Page 4 (iii) the Port of Tripoli Free Zone. 16. The benefits of the new Free Zones projects are: first class infrastructure, utilities and telecommunications; ready to use warehouses, factories and offices for long or short term leases at reasonable prices; light manufacturing and industrial parcels; easy and rapid distribution network to the Middle East and Europe; "One-stop-shop" to process government formalities, recruitment and training of staff, information and advice; minimal regulations; 100% foreign ownership permitted; exemption from corporate and personal income taxes, simplified government procedures, no restriction on the transfer of capital and profits, commitment to banking secrecy, commercial regulations which do not discriminate between foreign and Lebanese investors. Agriculture 17. To alleviate years of neglect in the agricultural sector due to the war, several programmes are currently under way, such as the important Agricultural Infrastructure Development Project (AIDP). Furthermore, in response to agriculture's need for rehabilitation, government policy has been a mixture of mainly short term interventions, short term protection of certain products (see Annex 2) and attempts to open up export markets. The Government's long term policies in the sector are focused on the Green Plan (established in 1963), a government agency initially intended to encourage land reclamation, develop agricultural infrastructure and fight the cultivation of illegal crops. Over the years, it has developed into a semi-autonomous body, and with funding for the majority of new agricultural projects channelled through it, the Plan also provides assistance in cash and kind. Manufacturing Industry 18. Lebanon's manufacturing sector has always lived in the shadow of other, better known local industries, such as tourism and financial services. The vast majority of industrial units are small-scale businesses that are often closer to workshops than industrial ventures, and firms with fewer than 10 employees accounted for around 90% of the total in 1995. At the top end of the market, a small number of larger firms are active in cement and other building materials, food and beverage production, clothing and paper. With the exception of the petroleum industry and the state tobacco firm, all of Lebanon's industrial sector is in the hands of private firms. With alternative indicators such as exports, imports of industrial machinery and company formation taken into account, the manufacturing sector shows signs of recovery from the war; furthermore, recent capital increases by some of Lebanon's major firms have shown that investors are still willing to commit funds to manufacturing industry. Another asset for the future growth of the country's manufacturing sector is the existence of an educated and qualified workforce. Reconstruction 19. In the light of several damage assessment surveys and after consultation with the World Bank, an extensive $2.9 billion National Emergency Reconstruction Programme (NERP) was established. Furthermore, government planning activities culminated in 1994 with the production of the Horizon 2000 development programme. The Horizon 2000 programme was revised in 1995, forecasting total public investments of $17.7 billion (in 1995 prices) between 1995 and 2007. The basic aim of Horizon 2000 is to supplement the initial emergency works of the NERP with the rehabilitation and expansion of infrastructure and public facilities that would lay the foundations for future economic growth. The rehabilitation and expansion of the electricity network is one of the largest components of Lebanon's reconstruction programme. By Spring 1997, the rehabilitation of Lebanon's existing power plants, stations transmission lines and distribution networks was virtually complete and works were moving on to the expansion phase. Among the host of schemes presently under way, one project does, however, stand out clearly from the rest: the redevelopment of Beirut's city center, undertaken by the private Lebanese Company for the Development and Reconstruction of WT/L/283 Page 5 Beirut Central District (Solidere). Often taken as a symbol of the country's re-emergence, it is one of the largest real estate developments in the world. The road network 20. A $1.25 billion Road Rehabilitation Plan is concerned with the rehabilitation and maintenance of Lebanon's international, primary, secondary and local road network. The Arab Highway project is designed to connect Lebanon to its neighbouring countries and will run from Beirut to the Syrian border at Masnaa. The main economic purpose of the project, beyond its obvious political importance, is to facilitate the fast and efficient movement of goods to and from Beirut's port. The Beirut Peripherique Boulevard (BPB) is designed to connect the northern and southern coastal expressways, to improve the traffic flow into Beirut and to connect the Beirut road system with the Arab highway. Banking 21. Lebanon's banks have modernized and re-capitalised. Legislation liberalizing all capital movements and exchange transactions introduced in 1948, and the passing of a strict banking secrecy law in 1956 were two milestones in the history and evolution of the sector. Since the end of the war, the Lebanese banking sector has been undergoing a comprehensive process of restructuring and modernization. Though the effects of the conflict were substantial, general economic developments have worked in favour of the banks, which are still practically the only vehicles for channelling investments into the country. By all standards, Lebanon is well banked with a ratio of one branch per 5,600 population (compared to an average of one per 20,000 population in the region). Today, the challenge that this sector has to face is to become more actively involved in reconstruction. The Central Bank's Prerogative (see Annex 6) 22. The Bank essentially plays a supervisory role regarding banking operations. New legislation grants the Central Bank certain prerogatives such as: An auto-liquidation procedure enabling the Central Bank to purchase the assets of a bank in difficulty and indemnify the depositors up to the capital limit acquired by the Central Bank. Fiduciary agreements are governed by a new law (No. 520/96) granting the Central Bank supervision of financial companies and institutions established in order to carry out fiduciary activities. These companies need special authorisation from the Central Bank. Foreign fiduciary companies will be able to operate in Lebanon under the same conditions applied to Lebanese companies. Another law (No. 521/96) allows Lebanese banks to issue 30% of their shares to the public to be freely traded in the financial markets (on condition that at least 30% of shares remain Lebanese owned). This law also allows banks or financial institutions to issue obligations in any currency; the maximum amount is to be determined by the Central Bank of Lebanon. Insurance 23. Over the last three to four years, both the number of available insurance policies and the amount of premium income have grown steadily. Developments in products offered have been fastest in the health insurance and life markets. Motor insurance has also performed well and in the credit insurance sectors, policies have been issued for the first time. WT/L/283 Page 6 Telecommunications 24. Today, Lebanon's telecommunications system is on the verge of providing customers with a modern and reliable service for the first time in twenty years. With the Government awarding contracts worth millions of dollars to rebuild and upgrade the network, the private sector successfully introduced two GSM networks through Build Operate Transfer contracts, with two companies operating the mobile telephone system, Cellis and Libancell. Forecasts predict that, by the end of 1998, current works are scheduled to have been completed, placing Lebanon's network on par with the best systems elsewhere in the Middle East. In 1994, a major contract for the rehabilitation and extension of the rest of Lebanon's Public Switched Telephone Network (PSTN) was awarded to Alcatel, Ericsson and Siemens. Since, substantial improvements in end-user connections have been felt. Furthermore, Lebanon's Internet community has been booming at an ever growing speed with already more than 16 Internet Service Providers (ISPs). Tourism 25. In 1974, just before the outbreak of the war, the tourism industry accounted for nearly 20% of GDP. Then came the conflict and more than any other sector of the economy, this sector was devastated. Today, encouraging signs of renewed foreign investment, mostly from Arab investors, leads many to be optimistic about the future of the sector. In the last five years, visits by Lebanese expatriates, tourists from the Gulf and other international travellers have grown rapidly. III. FOREIGN TRADE REGIME 26. Lebanon enjoys a very open trade regime where the role of the Government is limited to the prevention of abuse. This liberal business environment allows local and foreign businesses to invest freely in the country's many economic sectors. There are no restrictions on foreign exchange, repatriation of funds and capital transfers and virtually no discriminatory barriers against foreign imports. The general trend in local trade regulations is towards easier rules and internationally accepted standards. Therefore, major changes are expected to occur as Lebanon integrates the EU's Mediterranean Free Trade Area. (see Annex 4, Lebanon's Trade Partners 1997; Lebanon's Trade Statistics by Sections of the Harmonised Commodity Coding System (HS codes) for 1997). 27. To ensure a suitable climate for free enterprise or foreign direct investment, the Government is reactivating its range of commercial policies and plans of action, along with efficient legislative commercial measures, knowing that Lebanon's economic structure is particularly favourable to the private sector when compared to other countries in the region. Rehabilitation of the Customs System 28. The Government is currently undertaking a programme of rehabilitation and upgrading of the Lebanese customs system, which started with a large scale tariff reform in 1995. In January 1997, Lebanon introduced a new Customs Declaration form, which conforms to the international Single Administrative Document (SAD). This was a crucial step in the envisaged automation of Lebanon's customs system. It replaced the 23 different forms previously used. In 1994, the Government of Lebanon adopted the United Nations Conference on Trade and Development's Automated System of Customs Data Entry Plus Plus (ASYCUDA++), the second version of the system. The ASYCUDA++ is the system used for the computerisation of the Custom's revenue collection and for the gathering of statistics. The ASYCUDA++, applied in the port of Beirut since September 1997, has substantially simplified Lebanon's previous time-consuming customs clearance procedures. This system will also be introduced in the Beirut International Airport in June-July 1998, and will progressively expand to the other eight customs offices in the near future. 29. Some of the advantages of the ASYCUDA++ are: WT/L/283 Page 7 (i) Simplification of the procedures (2 to 4 steps, instead of the previous 10 – 12); (ii) standardisation of the declaration forms (1 instead of 23); (iii) normalisation of the information and codes; (iv) reduction of the number of required signatures; (v) improvement in the transparency of the customs system; (vi) acceleration of the process of data collection. Tariff classification 30. Since January 1996, Lebanon has adopted the revised Harmonized Commodity Description and Coding System, in accordance with the World Customs Organization in Brussels. Customs Duties 31. Lebanon's tariffs system is characterised by low average rates. Since the tariff system was simplified in 1995, Lebanon has among the lowest ad valorem taxes in the region. High tariffs are predominantly applied to luxury goods (see Annex 1). To support the country's reconstruction effort, duties on most types of capital equipment are set at a minimal tariff rate of 6%. Goods used for the development of Free Zones are exempt from customs duties. Labelling 32. Lebanese customs regulations require that some imported products, particularly pharmaceutical and foodstuffs, bear specific labels containing information such as (for example for foodstuffs): (i) The manufacturing and expiry date of the product; (ii) the product's country of origin; (iii) net weight; (iv) ingredients; (v) whether it contains added colouring or preservatives. 33. Foodstuffs that are two months away from their date of expiry are prohibited from import. Violation of the labelling requirements are sanctioned under Article 358 of the Lebanese Customs Code and can lead to the re-exportation of infringing products. Monopolies 34. The only state trading enterprise with exclusive rights in any sector is the official tobacco importer, the Regie des Tabacs, which benefits from monopoly rights on the import and export of tobacco and tobacco products. However, it works with an open system, with no discrimination based on origin. WT/L/283 Page 8 Export Subsidies 35. Lebanon does not apply any export subsidies; however, some sectors of domestic production, such as raw tobacco and sugar beet (destined for the production of sugar) benefit from some government subsidies. Anti-Dumping Measures 36. Anti-dumping measures and the application of countervailing duties are regulated by Legislative Decree No. 31 of August 1967. The Ministry of Economy and Trade initiates investigations into illegal export subsidies or dumping at the request of the Customs Administration or any other interested party. Restrictions 37. Although Lebanon does not impose any import quotas, the country currently maintains a system of import (and very few export) licenses (see Annex 3). Goods affected by the trade licensing system are usually determined by the relevant ministry, such as the Ministry of Economy and Trade, Agriculture, Health, Internal Affairs and Environment. Under Articles 42/3 of the Customs code, import and export licenses are granted by the relevant ministry. Except for the Israeli boycott, the licensing regime is non-discriminatory. Prohibited Goods 38. Only a small number of products are prohibited. Lebanon specifically prohibits the import of: narcotics; arms and military equipment; cars older than eight years; products that are deemed to threaten public morals; products deemed to threaten public health; certain agricultural products. Temporary restrictions/prohibitions 39. In order to remedy the poor state of agriculture after years of war ravage, the Government put forward measures to help in the rehabilitation of the sector. These measures consisted in the introduction of an agricultural calendar (see Annex 2), in addition to limited import prohibitions (see Annex 3). First imposed in March 1995, the agricultural calendar aims to prevent the import of foreign produce at the time of the year when the Lebanese equivalent crops are in season. In February 1997, new import regulations were introduced, which propose a wholesale ban, as of October 1997, on the import of agricultural products that can be grown in Lebanon. Consequently, the import of a number of agricultural products today is officially prohibited or restricted according to the agricultural calendar. Depending on the product, licenses are available from the Ministry of Agriculture. However, many agricultural restrictions, particularly the seasonal ones, rely on the annual harvests and are subject to constant change. Trade Agreements 40. Lebanon is a member of the Arab League and has signed a number of bilateral trade agreements with some Arab states, Eastern European countries, Turkey and the European Community. Lebanon has signed the Arab Free Trade Agreement (AFTA) which came into effect in January 1998. This agreement implies a gradual 10% per year decrease in tariff rates, on import duties, taxes on agricultural and animal products, raw materials and other finished products of Arab origin. Other important trade agreements signed since the end of the civil war have been with Syria. For example, the Social and Economic Co-operation Agreement signed between the two countries provides for the abolition of customs duties on trade between them, free circulation of individuals, labour, goods and capital within their borders, as well as the co-ordination of labour and social security legislation and industrial policy. Thanks to latest agreements signed this year, which will WT/L/283 Page 9 reduce the tariffs at the rate of 25% per year, starting 1999, Lebanon and Syria will enjoy a zero level tariff regime between them by the year 2003. Lebanon is currently preparing itself to join the EuroMediterranean Agreement. Preparations to sign the Euro-Mediterranean partnership agreement include provisions for a gradual reduction of tariffs, as well as simplified licensing procedures and the virtual abolition of trade restrictions. Lebanon had already obtained, and since May 1977, some tariff reductions on the export of certain goods to Member States of the European Community. 41. Nevertheless, the effects on foreign trade of these agreements will be substantial. As regional trade becomes more liberal, Lebanon will be forced to restructure its production base and export orientations. __________