BEIRUT // Lebanon’s economy has long depended on the Arab Gulf states.

Hundreds of thousands of Lebanese work there, sending their savings home to relatives. It is the main destination for exports — both human capital and produced goods — as well as the leading supplier of investment.

There is often a feeling that without the Gulf’s role, Lebanon’s beleaguered economy could not survive. But this relationship could be in trouble.

With global oil prices falling since 2014, the economic diversification plans touted by Gulf states are finally being put to the test. For the many Lebanese working in the Gulf, their livelihoods and billions of dollars in annual remittances, depend on the continued strength of these economies.

More immediate is the growing divide between GCC countries and the Lebanese government over the role of Hizbollah, with Saudi Arabia leading the charge against the group and economists fearing major economic ramifications on Lebanon.

Lifeblood of Lebanon

With low oil prices, the remittances received by Lebanon from workers in the Gulf are the biggest worry for many Lebanese.

“Remittances have basically been very important in sustaining the economy in the sense that we’ve always had a current account deficit … we import much more than we export. So those remittances have been able to sustain the economy,” said Simon Neaime, an economics professor at the American University of Beirut.

Since 2011, remittances received by Lebanon have averaged more than $7 billion (Dh25.7bn) annually, representing more than 15 per cent of the country’s total GDP. Most of the money was sent from the Gulf, where experts say between 300,000 to more than 500,000 Lebanese are currently working.

“Since we have nothing important to export ... it’s easy to export our children since we are not able to create sufficient jobs,” said Kamal Hamdan, an economist who heads Beirut’s Consultation and Research Institute. “There are many pushing factors in Lebanon that do not ensure good work conditions, not only in wage levels, but especially in terms of social benefits.”

Sending workers abroad has become a valuable source of income in recent years as Gulf states drew down their investments in Lebanon and Gulf tourists stopped visiting Beirut due to Syria’s war. But with low oil prices and Gulf countries facing their own potential economic problems, Lebanese working in the Gulf could now feel the pinch.

Weathering the storm

With remittances still growing last year, economists say that for now, falling oil prices have not had a real impact on Lebanon’s economy.

Ali Termos, an economics professor at the American University of Beirut who has conducted studies on the relationship between oil prices and remittances from the GCC, said that while there is a positive correlation between the two, it is not a strong one.

“We expect that when oil prices go down, there will be a drop in remittances, but this drop is not very significant,” he said. “Remittances are affected, they are slowing down.”

But low oil prices could hurt remittances further down the line partly due to the multiyear contracts signed by Gulf states currently building mega projects, Mr Termos warned. Such contracts will hold despite the oil-price drop and workers will continue to get paid until their contracts expire.

Already some Saudi companies that rely on foreign labour are struggling.

Major Saudi construction firms Saudi Binladin Group and Saudi Oger — the latter owned by the family of former Lebanese prime minister Saad Hariri — have had cash flow problems this year, and had to withhold salaries and lay off many workers.

Another reason the oil crunch has yet to be felt is that Lebanese work in almost every sector in the Gulf, including those outside the oil or construction industries. While oil remains the major moneymaker in the Gulf, its economies are developing beyond the oil industry.

Even if low oil prices further damage Gulf economies, Lebanese might still be able to weather it.

Nassib Ghobril, head of economic research at Lebanon’s Byblos Bank, said Lebanese in the Gulf weathered the recession in the late 2000s and may once again adapt to other changing economic realities.

“Even if some Lebanese lose their jobs, I don’t see them returning here necessarily. They could find jobs elsewhere,” said Mr Ghobril. “There are still [hundreds of thousands of] Lebanese working in the Gulf, not all of them are going to lose their jobs.”

Cashing in on cheap oil

For now, low oil prices may actually benefit Lebanon.

“There are more positive things from the drop in oil prices than negatives,” said Mr Ghobril.

Lebanon depends on imported oil for nearly all its electricity generation. Before the oil price crunch, oil represented about 24 per cent of its import bill and the country’s treasury was spending about $2bn a year on oil for power plants.

“When hydrocarbon prices drop, automatically the transfers of the treasury to EDL [the state-run electricity company] decline. Last year they declined by 46 or 47 per cent,” said Mr Ghobril.

He added that lower costs at the petrol station should also boost disposable incomes of Lebanese families.

Some workers may lose their jobs and remittances may drop eventually, but economists say Lebanon’s overall economy is better off saving money on oil.

“What we lose in terms of remittances, we compensate for in terms of trade and budget deficit,” said Sami Nader, an economist who directs Beirut’s Levant Institute for Strategic Affairs.

Elephant in the room

While low oil prices have not yet had a significant effect on Lebanon, the recent deterioration of diplomatic relations between GCC countries and the Lebanese government over Hizbollah could.

In February, Saudi Arabia cut $4bn in security aid to Lebanon, blaming Hizbollah for hijacking the country. GCC states — including the UAE — followed by imposing travel restrictions to Lebanon and downgrading diplomatic ties. Saudi Arabia has also levied sanctions on companies it says are tied to Hizbollah and threatened to deepen its actions against the group.

In December last year, president Barack Obama signed legislation that would impose sanctions on banks that knowingly do business with Hizbollah.

“US sanctions on Lebanese banks would definitely affect remittances and would also lead to capital flights out of Lebanon,” said Mr Neaime, the American University of Beirut professor. “Any sanctions, if they are applied, will have devastating consequences on the whole economy.”

So far, Lebanese banks appear to be complying with the US law. In June, a bank in Beirut was bombed, with some accusing Hizbollah of trying to intimidate the banks to keep their accounts open. But immediate fears over a deeper conflict over Hizbollah’s access to banks has calmed a bit since then as there has been no subsequent violence. After Riyadh pledged to punish anyone connected to Hizbollah, including sympathisers, many in Lebanon feared that Saudi Arabia and other Gulf states could begin mass deportations of Lebanese, particularly Shiites. So far, those fears have been unfounded. Still, Lebanon is waiting to see just how far Riyadh will go with its anti-Hizbollah measures.

Damage control

The cumulative effects of the schism between Lebanon’s government and the GCC, the actions against Hizbollah and concerns about Lebanon’s stability are enough to have an economic impact.

“The more you talk about something negatively, the more you shake the trust and the confidence in the sector,” said Mr Nader of the Levant Institute for Strategic Affairs. “This is the last thing Lebanon needs right now.”

Little progress has been made on repairing ties with the Gulf. The country’s foreign minister, whose party is allied with Hizbollah, has repeatedly refused to capitulate to Saudi demands and formally declare the group a terrorist organisation. Hizbollah’s leader continues to attack GCC states, while the GCC and the US continue to target Hizbollah and its finances.

Experts say more needs to be done to mend ties.

“Relations between Lebanon and the GCC — whether they are political, economic or financial or commercial — are essential for Lebanon and we need to maintain those relations and work on strengthening them to the benefit of both sides,” said Mr Ghobril.

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