Lebanon

Lebanon has made progress toward rebuilding its political institutions and regaining its national sovereignty since the end of the devastating 16-year civil war, which ended in 1991. Under the Ta'if Accord--the blueprint for national reconciliation--the Lebanese have established a more equitable political system, particularly by giving Muslims a greater say in the political process while institutionalizing sectarian divisions in the government.

Since the end of the civil war, the Lebanese have formed six cabinets, conducted two legislative elections, and held their first municipal elections in 35 years. Most of the militias have been weakened or disbanded. The Lebanese Armed Forces (LAF) has seized vast quantities of weapons used by the militias during the war and extended central government authority over about one-half of the country. Hizballah, the radical Shi'a party, retains its weapons.

Foreign forces still occupy areas of Lebanon. Israel maintains troops in southern Lebanon and continues to support a proxy militia, the Army of South Lebanon (ASL), along a narrow stretch of territory contiguous to its border. The ASL's enclave encompasses this self-declared security zone and about 20 kilometers north to the strategic town of Jazzin. Syria maintains about 25,000 troops in Lebanon based mainly in Beirut, North Lebanon, and the Bekaa Valley.

Syria's deployment was legitimized by the Arab League during Lebanon's civil war and in the Ta'if Accord. Citing the continued weakness of the LAF, Beirut's requests, and failure of the Lebanese Government to implement all of the constitutional reforms in the Ta'if Accord, Damascus has so far refused to withdraw its troops from Lebanon.

The 1975-91 civil war seriously damaged Lebanon's economic infrastructure, cut national output by half, and all but ended Lebanon's position as a Middle Eastern entrepot and banking hub. Peace has enabled the central government to restore control in Beirut, begin collecting taxes, and regain access to key port and government facilities.

Economic recovery has been helped by a financially sound banking system and resilient small- and medium-scale manufacturers, with family remittances, banking services, manufactured and farm exports, and international aid as the main sources of foreign exchange. Lebanon's economy has made impressive gains since the launch of "Horizon 2000," the government's $20 billion reconstruction program in 1993.

Real GDP grew 8% in 1994 and 7% in 1995 before Israel's Operation Grapes of Wrath in April 1996 stunted economic activity. During 1992-98, annual inflation fell from more than 100% to 5%, and foreign exchange reserves jumped to more than $6 billion from $1.4 billion. Burgeoning capital inflows have generated foreign payments surpluses, and the Lebanese pound has remained relatively stable.

Progress also has been made in rebuilding Lebanon's war-torn physical and financial infrastructure. Solidere, a $2-billion firm, is managing the reconstruction of Beirut's central business district; the stock market reopened in January 1996; and international banks and insurance companies are returning.

The government nonetheless faces serious challenges in the economic arena. It has had to fund reconstruction by tapping foreign exchange reserves and boosting borrowing. Reducing the government budget deficit is a major goal of the LAHUD government. The stalled peace process and ongoing violence in southern Lebanon could lead to wider hostilities that would disrupt vital capital inflows.

Furthermore, the gap between rich and poor has widened in the 1990's, resulting in grassroots dissatisfaction over the skewed distribution of the reconstruction's benefits and leading the government to shift its focus from rebuilding infrastructure to improving living conditions.