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Lebanon's Economy in Peril Because of Instability

Among the big losers in Lebanon's current political crisis is the economy. The downturn started with the assassination of former Prime Minister Rafik Hariri and has grown worse as the political crisis has developed.

A nearly empty promenade along Beirut's Mediterranean coast. Normally, it is crowded with tourists from the Persian Gulf states and Europe at this time of year. Tourism, along with finance, is the mainstay of the Lebanese economy. Lebanon's economy is suffering from a month of political turmoil following the assassination of former Prime Minister Rafik Hariri.

Hamdi Chauk is director of the Civil Aviation Authority at Beirut's International Airport. "Well, certainly the unfortunate catastrophic accident that happened had made the direct impact to air travel to Lebanon, from and to Lebanon, the same week we had a drop of nearly 80 percent."

In the last six weeks the economy has lost 80 percent of its total growth rate in terms of gross domestic production for 2004.

The hardest hit have been businesses around the bombsite. The estimated 400 kilos of explosives did extensive damage to hotels, restaurants and caf├ęs in the area.

Khalil Abdel Sattar was knocked off his feet and cut by glass when the windows of his shop imploded from the bomb blast. "All Beirut is affected by this. Everybody: all merchants, our friends, they all say no business, no working. Maybe they are working between 10 to 20 to 30 percent business," he said.

The cost for some business owners has been enormous. The Palm Beach is a mid-size hotel adjacent to the bombsite. Manager Khalil Arab was hospitalized from the bomb. "Everything was damaged. Literally not one room was spared. The blast came from one side, the side of the explosion, and entered through the bay windows, broke up the aluminum, even the curtains, blasted open the doors and went through, exiting on the other side of the building, demolishing everything in its way. Not one single room or area was spared," he said.

Mr. Arab estimates the damage at about $1.1 million. His insurance company will not cover the costs. He has sent the entire hotel staff on paid vacation for two months while the hotel is renovated. The estimated loss of income is an additional $1-million. Mr. Arab says, "We are only hoping that by the summer, things will be getting back to normal and we will have the same clientele as last year. But for the next two or three months we know that business is going to be very, very slow."

Since the bombing, bank depositors have been scrambling to convert their savings in Lebanese pounds to dollars for fear the currency will collapse as it did during the civil war.

Kamal Hamdan is an economist with the Consultation and Research Institute. "The events have increased the rate of dollarization from around 68 percent of total deposit to 81 percent of total deposit. Which means that around 6-7 billion dollars has been transferred from Lebanese pounds to U.S. dollars."

The central bank is trying to control the situation by increasing interest rates on deposits in Lebanese pounds.

There has been better news this week. Cafe owners in the newly built downtown area say business is slowly coming back. But there is still a long way to go.