Similar to Hong Kong, Lebanon is a small, service-based and open economy. It is one of the freest economies in the Middle East, with few restrictions on imports as well as other business operations. Lebanon has long been the major trading and financial post in the region, particularly serving the Levant markets on the eastern shore of the Mediterranean Sea. Lebanon's growth momentum mainly comes from the service sector, particularly tourism, finance, real estate and trade-related services.

Driven by strong exports and tourism, as well as a recovery in construction activity, the International Monetary Fund (IMF) expects the Lebanese economy to grow by 5% in 2004. According to industry sources, funds from the Gulf Co-operation Council (GCC) countries to Lebanon have risen dramatically after the 9/11 terrorist attacks on the US. GCC investors find it safer to put part of their investment portfolio in Lebanon. Many Arab investors acquire properties in Lebanon, including hotels, resorts, car parks, retail stores, shopping malls, and commercial and residential premises.

On the other hand, many Lebanese reside in foreign countries, both inside and outside the region. A lot of these overseas Lebanese have established their own businesses, and maintain close ties with their home country. While some of them help Lebanese companies develop overseas markets, others source goods from overseas suppliers for Lebanese companies, including co-operating with Lebanese companies to re-export goods to the Levant countries.

Since Lebanon's production of many consumer goods is rather weak, there is a great demand for imports, including consumer electronics, electrical appliances, footwear, household items, toys and watches and clocks. With a young population, technological products, such as computers, digital cameras and audio-visual equipment, are much sought after. Consumer goods are normally sold through mom-and-pop stores on the main streets, and increasingly hypermarkets.

To succeed in the Lebanese market, Hong Kong exporters are advised to watch out for market competition as strong competitors, both domestic and overseas, strive for bigger slices of the market. Offering the right products to Lebanese consumers is thus essential. Among others, the youth is a booming segment. But limited by its population, the domestic market of Lebanon is quite small. Exporters should expect to receive orders of small quantity. In addition to the country's domestic market, there are also opportunities for Hong Kong exporters to make use of the connections of Lebanese companies to develop other markets in the Middle East, such as Syria.

Introduction

Located in the middle of the eastern shore of the Mediterranean Sea, Lebanon naturally lies at the crossroads of Africa, Asia and Europe. Compared with some other Middle East countries, Lebanon looks more cosmopolitan. On the back of its strategic location, Lebanon has long been the major trading and financial post in the region, serving the countries of the Levant¹. Lebanon's role to facilitate regional trade and finance was however greatly undermined by the outbreak of civil war from 1975 to 1990. The civil war devastated Lebanon's major infrastructure, and caused great human casualty. Shortly after the civil war, the Lebanese government started restoring not only the social order of the country, but also its economic vigour. Despite a relapse in the late 1990s, Lebanon's economy is now on the way to realising its economic potential.

Economic Development

Macroeconomic Environment

On the back of an expansionary fiscal policy, Lebanon's economy grew at an average annual rate of 6.5% from 1991 to 1996. However, the geopolitical uncertainties, particularly over Israeli attacks in 1996, undermined the confidence of both local and foreign investors in the late 1990s. Investors also started expressing concerns on whether the government was able to rectify Lebanon's swelling fiscal deficits. As a result, Lebanon fell into recession in 1998.

With the government's commitment to exercise tight fiscal discipline, Lebanon's economic health has started improving in the past few years. After growing by 2% in 2002, Lebanon's economy expanded by 3% in 2003. Driven by strong exports and tourism, as well as a recovery in construction activity, the International Monetary Fund (IMF) expects the economy to grow by 5% in 2004. High economic growth is expected in the coming years, mainly due to the expansion of foreign investment in the service sector, particularly tourism, finance and real estate.

Foreign Direct Investment

Lebanon is one of the freest economies in the Middle East, without foreign exchange controls and restrictions on movements of capital and profits. According to industry sources, funds from the Gulf Co-operation Council (GCC)² countries to Lebanon have risen dramatically after the 9/11 terrorist attacks on the US. GCC investors find it safer to put part of their investment portfolio in Lebanon. Many Arab investors acquire properties in Lebanon, including hotels, resorts, car parks, retail stores, shopping malls and commercial and residential premises.

It is reported that Arab investors bought more than 2.03 million square metres of land in Lebanon from August 2001 to March 2004. These investors largely came from Saudi Arabia, Kuwait and the United Arab Emirates (UAE). For example, a UAE conglomerate, Al Habtoor Group, invested an amount of US$ 150 million in developing the Metropolitan City Centre Beirut, a comprehensive complex of 115,000 square metres in Beirut.

Evidently, Lebanon is one of the major recipients of foreign direct investment (FDI) in the Middle East. FDI in Lebanon expanded successively during the period of 1993 and 2000, from merely US$ 7 million to US$ 298 million. After a decline in 2001, Lebanon's FDI returned to the growth track in 2002.

Growth Pillars

Lebanon is not endowed with abundant natural resources. With an educated labour force, human resources are the major assets of the country. Compared with other countries in the region, the private sector plays a more important role in Lebanon's economy. In addition to certain giant enterprises, there are numerous small and medium enterprises in Lebanon.

Be that as it may, the service sector is the lifeline of Lebanon's economy. In 2002, services accounted for two-thirds of Lebanon's GDP, while industry and agriculture took up shares of 21% and 12%, respectively. Looking forward, the service sector will remain the growth engine of Lebanon's economy. In particular, growth momentum is seen in tourism, finance, real estate and trade-related services.

Tourism: Tourist arrival in Lebanon rose by 51% from 1999 to 2003, attributed mainly to an increase in Arab tourists. A number of Arab tourists prefer travelling to Lebanon by reason of the perceived anti-Arab sentiments in many overseas countries as well as the appreciation of the euro, which makes it expensive for a vacation in Europe. Among all tourists to Lebanon in 2003, 43% of them came from Arab countries, while those from Europe, Asia and North America accounted for 26%, 13% and 12% of the total, respectively.

Arab visitors will continue to be a lucrative market segment for Lebanese tourism. According to the World Tourism Organisation, GCC nationals and expatriates living in the GCC spent around US$ 30 billion on travel and accommodation abroad. The per capita expenditure of Arab travellers is substantially higher than that of the European. In view of the booming tourism, some overseas investors, particularly those from GCC, acquire or develop hotels and resorts in Lebanon. For instance, Gefinor Rotana Hotel in Beirut is the property of Rotana Hotel Group based in the UAE. It is estimated that Lebanon's tourism industry currently employs over 40,000 people.

Finance and Banking Services: Finance and banking have long been an important industry in Lebanon. Compared with other economies in the region, Lebanon's banking sector is rather developed, efficient and better regulated. In addition, Lebanon's banking secrecy laws offer incentives for overseas investors to deposit funds in Lebanon, particularly from the wealthy Arab families in the region. Currently, a total of 53 commercial banks (including foreign banks like HSBC and Standard Chartered Bank) operate in Lebanon. The industry employs over 15,000 people.

Evidently, Lebanon succeeds in attracting overseas investors to park their funds in its banks. It is reported that funds from Syria amount to US$ 50 billion, accounting for 20% of Lebanon's total bank deposits. The Lebanese government is making efforts to further strengthen Lebanon's status as the region's financial hub, serving the countries of the Levant and beyond. For example, Banque Audi became the third Lebanese bank to receive approval from Syria to operate in Damascus in July 2004.

Trading and Trade-related Services: Lebanon has an educated, multilingual and commercially-minded workforce. It is used to being a trading hub, serving the Levant markets on the back of its strategic location and ties with overseas Lebanese. Partly owing to the outbreak of the civil war, many Lebanese left the country and settled in foreign countries, both inside and outside the region. Yet, a lot of the overseas Lebanese maintain close ties with their home country. While some of them help Lebanese companies develop overseas markets, others source goods from overseas suppliers for Lebanese companies, including co-operating with Lebanese companies to re-export goods to the Levant countries.

Lebanese are particularly renowned for their creativity in sales and promotion. Some media and advertising companies in the region also prefer Lebanese and Lebanese companies for conducting marketing and promotion activities for them. Upon the regime change in Iraq, Lebanon emerges as one of the major suppliers of goods to Iraq. In the first quarter of 2004, Lebanon's exports to Iraq amounted to US$ 99 million, up 225% from the same period of 2003.

To boost exports and FDI, Lebanon is in the process of liberalising further its trade regime. (Lebanon's import regulations and duties are provided in Appendices 1 and 2, respectively.) Its application for the membership of the World Trade Organisation (WTO) is at the final stage, which is expected to be finalised by early 2005. In addition, Lebanon reached a free trade agreement (FTA) with GCC in May 2004, which would lift tariffs on Lebanese goods immediately and on services in stages. In June 2004, Lebanon signed an FTA with the European Free Trade Association (EFTA)³. The agreement covers industrial goods, fishery and agricultural products. Under the agreement, EFTA will start lifting tariffs on Lebanese goods in 2005. In return, Lebanon is due to eliminate tariffs gradually from 2008 to 2015. More importantly, Lebanon-EU Association Agreement was signed in 2002. Among other issues, the agreement grants tariff-free status to all Lebanese industrial and agricultural goods into the EU.

With strong government initiatives and tight bonds with overseas Lebanese, Lebanon has the potential to attract more multinational companies to set up regional headquarters to provide trade-related services for the neighbouring countries.

Lebanon's External Trade

Generally speaking, Lebanon's manufacturing sectors are quite weak, due to the relatively high production costs, including labour, land and electricity. Without oil endowment, electricity costs in Lebanon are almost the highest in the Middle East. An absence of strong manufacturing capacity has also led to deficits in Lebanon's merchandise trade. While its imports rose by an average annual rate of 3.7% in the period of 1999 and 2003, from US$6.2 billion to US$7.2 billion, the value of exports in 2003 was only about one-fifth of its imports in the same year.

Pearls, precious stones and metals are Lebanon's major export items, accounting for more than 30% of the total in 2003. Other major export items include electrical equipment (12% of the total), processed food (10%), and chemicals (8%) and base metals (8%). In terms of destinations, Switzerland is by far the largest buyer of Lebanese goods, taking up a 36% share of the total, followed by Iraq (12%), Syria (10%), UAE (10%) and Saudi Arabia (10%).

On the other hand, mineral products top Lebanon's import bill, accounting for 17% of the total in 2003. Other major items include electrical equipment (12%), chemicals (10%), vehicles and transport equipment (10%), base metal (7%) and processed food (7%). Europe is the major source of goods to Lebanon with Italy as the prime supplier (9% of the total), followed by France (8%) and Germany (8%). China is the top Asian supplier to Lebanon, accounting for 7% of the total. The US, for its part, constitutes 6% of Lebanon's total imports.

Hong Kong's Exports to Lebanon

Hong Kong continues to record a merchandise trade surplus against Lebanon. From 1999 to 2003, Hong Kong's exports to Lebanon declined by 35%, from US$ 68 million to US$ 44 million. In the first half of 2004, Hong Kong's exports to Lebanon rose by 12.6%. Nevertheless, it should be noted that many Hong Kong exports to Lebanon may be delivered from the ports on the Chinese mainland. Since such offshore trade has not been captured by ordinary export figures of Hong Kong, these numbers do not necessarily reflect the full picture of Hong Kong companies' sales performance in Lebanon. Evidently, China's exports to Lebanon rose rapidly in the past few years. From 1999 to 2003, China's exports to Lebanon increased by an average annual rate of 23.4%. In the first seven months of 2004, China's exports continued to surge by 49.2% from the same period last year. Not surprisingly, a certain amount of these export transactions were managed by Hong Kong companies.

Hong Kong's major export items to Lebanon are clothing and clothing accessories; pearls, precious and semi-precious stones; toys; watches and clocks; clothing; footwear; audio and video equipment; radios and computers.

Export Opportunities for Hong Kong Companies

Generally speaking, the potential of Lebanon's domestic market is limited by its population of 4.5 million. Still, there is a great demand for imported consumer goods as local production of many consumer goods is rather weak in Lebanon. For example, almost all toys in Lebanon are imported from China, either from Hong Kong or indigenous mainland companies. The same phenomena hold true for consumer electronics, electrical appliances, footwear, watches and clocks, and household items. But despite the absence of strong manufacturing capability, Lebanon produces quality clothing and jewellery items, particularly at the middle price segment. While 4,000 people are working in Lebanon's jewellery industry, there are 1,300 textile factories. Local-made furniture also sells well in Lebanon and its neighbouring countries. It is estimated that 50,000 people are employed by 3,300 furniture factories in Lebanon.

Meanwhile, Lebanon's consumers are quite polarised. The mass market prefers cheaper products from Asia, as many Lebanese people only earn a minimum wage of US$ 200 per month. With their wealth and established businesses inherited from the pre-civil war era, many Lebanese families however have remained rich. In addition, Lebanon's expatriates from North America and Europe also look for higher quality, branded items. By and large, Lebanese consumers are brand-conscious, and are willing to forego two or more non-branded items for a branded one.

When some Lebanese consumers cannot afford international brands, they will go for local brands. In the Middle East, Lebanese companies are famous for their marketing and promotional skills. Many of these companies have created popular brands in the local market. With deep influence of European traditions, Lebanon's consumers are fashion-conscious. They look for products with stylish design, which is particularly noticeable in clothing, clothing accessories and jewellery. Hong Kong's clothing and jewellery exporters are very familiar with European styles, and thus should have no difficulty in offering the right products to Lebanese consumers. Besides, Hong Kong's exporters of textiles, clothing accessories, precious stones and semi-finished jewellery could supply their goods to Lebanon's clothing and jewellery manufacturers. Although Lebanon's manufacturing base is not very strong, there are still opportunities for supplying machinery and equipment to Lebanese manufacturers, particularly to those who cannot afford expensive models from Europe or Japan.

Since more than half of its population is under 25 years old, Lebanon has a sizable youth market. Not surprisingly, there is a great demand for technological products that are sought after by the youth, including computers, digital cameras and audio-visual equipment. In addition, education is an important element in Lebanon. Lebanon not only offers quality education for local students, but also those from the Arab world. Students have a strong appetite for items like computers and stationery. As noted, real estate and tourism are booming in Lebanon. Building materials, furniture and builders' hardware are therefore in demand, though these imports have to compete fiercely with local production.

Apart from sourcing from Dubai, many Lebanese companies prefer buying directly from Asia, including Hong Kong and the Chinese mainland. Most trading companies in Lebanon are family-run businesses with fewer than 10 persons. Importers normally play the role of wholesalers as well, which distribute goods to retailers. Quite often, importers have their own retail shops, and provide goods directly to consumers.

In Lebanon, traders of the same industries (such as toys, clothing and furniture) often form their own trade associations, which are called syndicates. These syndicates provide networking opportunities not only among members themselves, but also between members and government officials, buyers and suppliers. They also promote the interests of their members by lobbying the government to ensure an environment conducive to business.

The major retail channels in Lebanon are mom-and-pop stores on the main streets. Accounting for almost half of the country's population, Beirut is the most important consumer market in the country. The most popular streets for shopping in Beirut include Marelias, Hamra, Verdun, Ashrafieh and Furn el-Shebback. Bargain shops could be found at Bourj Hammoud and Basta-Tahta. Higher-end stores are located in the downtown of Beirut, particularly the Solidere area. In addition, department stores (such as ABC and Metro Mall), and hypermarkets (such as Spinney and Bou Khalil) are other major retail channels.

Lebanon's re-export business with the neighbouring countries, particularly the Levant markets of Syria and Jordan, as well as Iraq, presents another opportunity for overseas suppliers. Being well versed in trading business, some Lebanese traders are trilingual - Arabic, English and French. But as many of them in fact reside in other countries, such as the UAE (mostly Dubai), a substantial portion of the re-export business is conducted in the form of offshore trade, which is not captured in the nation's trade statistics.

Recommendations

Lebanon's economic recovery is expected to create opportunities for Hong Kong exporters. To assist Hong Kong companies in tapping the Lebanese market, a number of strategies are recommended below:

Watching Out for Competition: Lebanese traders are well connected with domestic as well as overseas suppliers. The biggest challenge to Hong Kong exports is products from low-cost suppliers, particularly the ones from the Chinese mainland. In addition, some Hong Kong exports, such as clothing and finished jewellery, have to face competition from Lebanese manufacturers. Similar to many other buyers in the Middle East, the prime consideration of Lebanese importers is pricing. An appropriate pricing strategy could make it more effective to explore the Lebanese market.

Offering the Right Products: To enhance the chance of success, Hong Kong exporters should offer the right products to target customers. For instance, the youth market is booming in Lebanon. For products like consumer electronics, clothes or watches, young consumers always look for modern style and innovative designs. In addition, the Lebanese market is rather polarised. While high-end goods will find their customers coming from a handful of wealthy families, entrepreneurs and expatriates in the country, value-for-money items will better serve the appetite of the mass market.

Willingness to Accept Small Orders: According to Lebanese importers, one of their major headaches is the minimum order requested by overseas suppliers. Normally, Lebanese importers wish to place small orders with assorted items. Some Hong Kong exporters find it difficult to entertain these orders as they fall short of the minimum. As such, Hong Kong exporters should be prepared to face the reality that they are unlikely to secure big orders in Lebanon compared to what they can receive in the established markets. In addition, they have to take into consideration that Lebanese importers will request assorted merchandise in small quantities. While this may create an opportunity for some smaller Hong Kong traders and manufacturers who are good at doing small trade, it may be less appealing to giant exporters who are more inclined to engage in volume trade.

Making Use of Lebanese Traders to Develop Other Markets: Although its role as the trading hub in the region has declined, Lebanon is still an access point to the Levant markets and Iraq. With its proximity to Syria, Lebanon is in a good position to offer services to Syrian companies. Capitalising on their ties with overseas suppliers and the overseas Lebanese, some Lebanese companies are sourcing goods from overseas suppliers for their clients in the countries of Levant, particularly Syria.

Appendix 1

Import Regulations of Lebanon

Trade Regime

Lebanon maintains a rather liberal trade regime, though it is yet to become a WTO member. With certain exceptions, most goods are free for importation into the country. Prohibited imports include firearms, narcotics, certain chemical products and toxic waste. Lebanon also enforces an economic boycott on Israel, under which imports of Israeli goods are prohibited.


Import Tariff and Other Duties

Lebanon adopts the harmonised system, which is currently used by most countries in the world. Import duties are applied on most imports. The ad valorem rates vary from zero to 70%, with most of them falling between zero to 5%. (Lebanon's import tariff rates on major Hong Kong exports are provided in Appendix 2).

Since November 1998, a local consumption duty has been separated from the import duty, and it has been applicable to certain types of goods, including tobacco products, fuels, cars, cement, lime and alcohol. This local consumption duty is applicable to both imports and locally produced products.

Since February 2002, a 10% value added tax (VAT) has been implemented in Lebanon. VAT covers the majority of imports, with some exempted goods such as food, medicine and publications.


Import Documentation

While licences are not required for the majority of imports, the following documents have to be prepared in order, and submitted to customs for import clearance:

• Customs declaration form
• Bill of lading
• Packing list
• Commercial invoice
• Certificate of origin
• Delivery order (to prove ownership of goods)
• Sales contract between importer and seller

Labelling Requirements

Labels should include the net weight of the product, production and expiry date, ingredients and country of origin. Languages used in the label could be Arabic, French or English. However, labels on food must be in Arabic.

Appendix 2