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Cablegate: Tfle01: Lebanese Economy Devastated by Air

VZCZCXRO4454
PP RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ
DE RUEHLB #2422/01 2001510
ZNR UUUUU ZZH
P 191510Z JUL 06
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 4702
INFO RUEHEE/ARAB LEAGUE COLLECTIVE PRIORITY
RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/USCENTCOM SPECIAL HANDLIN MACDILL AFB FL PRIORITY

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

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