Approved For Release sroanss-on-rorreconsinoo deh ee Const Secret <3) 25X1 Lebanon Handbook Secret Ne 93 No. 0606 Approved For Release 2002/05/16 : ClA-RDP79-00891A001000030001-9Approved For Release 2002/05/16 : CIA-RDP79-00891A001000030001-9 WARNING his document contains information affecting the national ciense of the United States, within the meaning of Title sections 793 and 794, of the US Code, as amended. Its uansmission or revelation of its contents to or re- ceipt by an unauthorized person is prohibited by law. Approved For Release 2002/05/1 1A-RDP79-00891001000030001-925X6 Approved For eden 1A001000030001-9 TABLE OF CONTENTS INTRODUCTION 1, GEOGRAPHY Location and area Climate Natural resources Human resources Il, ECONOMIC BACKGROUND Growth rates and trends Income distribution tae Main sectors of theeconomy —. . Transportation and communications Government finance and economic poticy Foreign trade Balance of payments Il], POLITICAL SITUATION AND TRENDS Historical summary Structure of thegovernment . . . Political dynamics. Page UO ANNS oun IV. SUBVERSION VI. ARMED FORCES Defense organization Manpower, strongths and capabilities Defense budget Logistics Lebanon i Nov 71 Approved For Release 2002/06iH& 5 RI-RDPT9-00891A001000030001-9 25X41 25X1 25X1Approved For Releas« 11 A001000030001-9 Vil, FOREIGN RELATIONS VII, US INTERESTS map Lebanon ii Nov 71 25X1 Approved For Release 2002S 1€10IS-RDP79-00891 A001000030001-9Approved For Ser geteetoueret e aaeae at annul onacOna INTRODUCTION Lebanon practices a precarious balancing act to maintain its unity and independence. Located at the economic and cultural crossroads of the eastern Mediterranean, the country is divided almost evenly between Chris: tians and Muslims, each group with numerous sects, and each tending to operate in its own social and economic milieu, Political power is allocated within the parliamentary system on the basis of religion. Stability has depended on the willingness of each religious community to avoid contro- versy, an approach that tends to leave some sorious domestic problems in abeyance, The desire to avoid trouble extends to foreign policy; Lebanon has viewed itself as a bridge between the West and the Middle East, neutral in great power matters and beyond the range of intraArab squabbles and ‘Arab Israoli wars, Lebanon's national character and behavior derive in large measure from the country’s position at the juncture of major air, sea, and land communi- cations routes, Here Arab invaders, Christian crusaders, missionaries and educators, and later the French Mandate authorities all brought their influ ence to beer. In addition, Lebanon has historically sorved as a refuge for religious minorities escaping persecution in their own countries. It was during French rule, from 1920 to 1943, that Christians became predominant socially, politically and economically. Although Muslims claim that they now outnumber the Christians, the division of power which resulted from the census of 1932 has not been altered, and there is no indication of sufficient pressure to force a new census within the near future. The country’s economic reliance on external developments provides additional pressure for policies of compromise. Lacking natural resources— Lebanon has no oil or other minerals and: only a third of its land is arable—but favored by its location, the country has turned to international trade and services. It has occupied a profitable position as commercial middleman between the West and the Middle East, and as banker for the Arab world, although this latter enterprise has been undermined since the 1966 Intra Bank collapse. In addition, the terminals of the two major oil pipelines of the Arab Middle East are located there, By and large, the Lebanese have been able to make a success of their unusual situation, Of all the Arabs, the Lebanese are the most urbanized and the best educated, with the largest middle class and the highest standard of living. Domestic and foreign affairs are conducted under the terms of an Lebanon iti Nov 71 Approved For Release 1A001000030001-9 25X1 25X1Approved For Revue cnnaitelilnnereconyacowoonesooors unwritten compromise—the National Covenant—which rests on the recogni- tion by each religious group of the tenuity of its own position in society and ‘of the overriding importance of avoiding major conflicts. The convenant provides for proportional representation of religious communities in the Chamber of Deputies and far division among them of public offices and political influence, The president of the Republic, for example, is always @ Maronite Christian, the prime minister a Sunni Muslim, and the president of the Chamber a Shia Muslim. Conducting national affairs on the basis of compromise and evasion of conflict has its drawbacks, For example, although some prograss was made in the 1960s, the government has yet to take strong and effective action to correct imbalance in the economy or to deal with economic inequities that keep the majority of Muslims in_less lucrative occupations like farming Nevertheless, the major crisis of 1958 was a clear indication of the dangers of altering Lebanon's delicate political balance too drastically. What was basi- cally @ Christian attempt to grab a larger share of power developed into an ‘open insurrection, which ended only after the United States put troops ashore near Beirut and helped to restore equilibrium. ‘Asa quideline for international relations, the National Covenant stresses the country’s special character as an Arab state with ties to Western civiliza- tion. Lebanon's friendship with the West, particularly the United States, is long established, but the balance implied in the covenant has also led to the country’s neutrality in the East-West struggle. The covenant further pro- scribes strict neutrality in Arab disputes, but the pressure of events, particu- larly since 1967, has made it increasingly difficult for Lebanon to remain aloof. The passions of the Arab-Israeli conflict and the growth of the fedayeen movement have thrust themselves on unwilling Lebanose leaders. They could threaten Lebanon's detachment and even its domestic stability. Like other members of the Arab League, Lebanon does not recognize Israel, It upholds the economic boycott of that country and favors the raturn of Palestinian Arabs to their homeland, but it has little desire for renewed hostilities against Israel, Lacking in military strength and basically conciliatory in foreign policy, Lebanon did not participate in the 1967 ‘Arab-Israeli war. Growing impatience among other Arabs with Lebanon's neutrality, and increasing use of Lebanese territory by Palestinian com- mandos as a base of operations threaten to draw the country into @ more direct confrontation with Israel, The commando issue hes also eggravated tensions between the Christians, who desire continued neutrality, and Mus. lims, who ate torn between their wish to avoid domestic conflict and their ‘emotional attachment to their Arab “brothers.” Lebanon iv Nov 71 Approved For Release 2002/0 16C GIASHUP 79-00891A001000030001-9 25X1 25X1Approved For Release 2002/95¢46 ROAFRDP79-00891A001000030001-9 The next decade is likely to bring further tests of Lebanon's delicate social and political balance. As a result of the 1967 war, tourism and investment have declined, At the same time, the agricultural and industrial sectors continue to lag behind the commercial and financial sectors, and unemployment and rising costs of living have encouraged social unrest. So far the government has managed to contain increased socialist and Arab nationalist political activities and the efforts by the recently legalized Com- munist Party to exploit them. Its ability to continue to do so depends, however, on the willingness of major religious groups to compromise, on avoidance of direct involvement in regional events, and on some measure of outside economic assistance for social and economic reform, Lebanon v Nov 71 25X1 25X1Approved For Release 2002/05/16 : CIA-RDP79-00891A001000030001-9 Approved For Release 2002/05/16 : CIA-RDP79-00891A001000030001-9Approved For Release 2002/05/85: RIB‘RDP79-00891A001000030001-9 1, GEOGRAPHY Location and area Lebanon is a small mountainous country nestled on the eastern edge of the Moditorranean Sea, Bordered on the north and east by Syria and by Israel on the south, Lebanon lies on the main transportation and trade routes linking the Middie East with the West. Beirut, the capital and principal port, lies 230 nautical miles from the northern end of the Suez Canal, 896 miles trom the Bosporus, 1,925 miles from the Strait of Gibraltar, and less than 2,000 miles from the major industrial and trade centers of Western Europe, Roughly rectangular in shape and comprising some 4,000 square miles of territory, Lebanon is slightly more than half the size of New Jersey. The maximum north-south length is about 130 miles, and the maximum east- west distance is about 50 miles, Lebanon is generally divided into four geographical regions, running from north to south. From the sea eastward they are: the coastal plain, the Lebanon Mountains, the Biqa Valley and the Anti-Lebanon Mountains, The coastal plain is narrow and sloping, never exceeding a width of 8 miles. The country’s principal cities and a majority of its people are located along the coastal plain, which boasts @ number of shallow, curved bays that provide Lebanon with its ports and harbors. The Lebanon Mountains rise abruptly from the coastal plain with few transitional foothills. The mountains extend the entire length of the country, cross-hatched by numerous steep, east-west, valleys which dissect the western slope, These valleys have been a traditional safe haven for minorities seeking refuge from political and religious persocu- tion, The Biga Valley is a narrow, semiarid plain wedged between the Lebanon and Anti-Lebanon Mountains, which produces most of the coun. try’s vegetable and cereal crops. It is some 80 miles long and varies in width from § to 16 miles, The Anti-Lebanon Mountains and their southern exten: sion, Mount Hermon, rise to the east of the Biga Valley and parallel the Syrian border. This region consists predominantly of rugged terrain, poor soils and snow-capped peaks, Climate Summers on the coastal plain are hot and humid, with temperatures ranging from the low 70's at night to the tow 90's during the day, The winter months (December-May) are mild, dominated by 30 of the annual 36 inches Lebanon Nov 71 25X1 25X1Approved For Release 2002/05i#4 flflROP79-00891A001000030001-9 of rainfall, and punctuated by an occasional frost and a very rare snowfall. In the Lebanon Mountains daytime summer temperatures may equal those along the coast but the humidity is markedly lower: nighttime temperatures are much lower than those on the coastal plain. Precipitation on the western slopes averages 63 inches annually. Winters are quite cold and snowfall heavy. The Biga Valley receives a great deal less annual precipitation—an average of 25 inches—than the coast or the Lebanon Mountains, and has lower relative humidity and wider variations in temperature, Precipitation on, the Anti-Lebanon Mountains is scant and falls mainly in the form of snow, which covers the peaks @ majority of the year. ‘Natural resources Agricuture—Agriculture produces more than one third of Lebanon's exports, but generates only about 10% of the GDP. About one fourth of Lebanon’s 2,570,000 acres are cultivated, but approximately one half of the cultivated area consists of terraced slopes, making the use of mechanization and other modern methods almost impossible, Lebanon produces some agricultural surpluses including apples, citrus fruit, vegetables, and poultry, and agricultural items are responsible for 36% of total exports. Production is inadequate to feed the population, however, and foodstuffs account for 23% of imports, with cereals the largest item on the import bill Fuels and power—Oil is the hasic fuel used in Lebanon. No petroleum or coal deposits have been found in the country, but ail from Iraqi and Saudi Arabian fields flows through privately owned pipelines across Lebanon to terminals on the coast. The pipeline companies pay Lebanon approximately $14 million a year in transit fees and supply refineries located at each of the ‘wo pipeline terminal tank farms. Production of petroleum products gener- ally exceeds domestic demand in all major categories, although fuel oil is the only locally refined product exported in significant quantity. Imports of some specialized products are necessary. Electricity is the primary source of power in Lebanon. In 1970 the total installed capacity was 664,100 kilowatts and production was almost 1.4 billion kilowatt-hours. Development plans call for the construction of numerous dams and reservoirs to be utilized both for the production of electricity and for irrigation purposes. A 120,000 kilowatt thermal power plant, under construction at Jiyal about 10’ miles south of Beirut, was scheduled for completion by October 1970, An additional 250,000 kilowatts were to be added to this plant before 1973, Initiated in 1962, the rural electrification program was to be completed at the end of 1970, Lebanon 1-2 Nov 71 25X1 25X1Approved For Release 2002/05/#6(; Rif-ROP79-00891A001000030001-9 Metal and minerals—Construction materials and salt are the only min- erals exploited in significant quantities. Hard limestone and gypsum occur in abundance and output satisties all domestic consumption, In 1967, produc: tion of dolomite, kaolin, and silica sand was officially reported for the first time, but production probably actually began years earlier. Although iron core and phosphate deposits occur in Lebanon, no plans for their exploitation are known, The principal limitation on the potential iron ore production is the extremely poor quality of the ore, Human resources Despite the fact that no official census has been conducted since 1932, and further hampered by the fact that any official Lebanese estimate may have been influenced by a number of political pressures, US estimators put tho Lebanese population in January 1971 at 2,746,000. This figure includes more than 1 million people of Lebanese origin living overseas and does not account for foreigners living in Lebanon, including refugees, whose total was officially estimated at over 500,000 in 1968. The Lebanese population is composed of Arabs {93%), Armenians (5.9%), Jews (0.5%), Assyrians (0.1%), ‘and other minority groups (0.5%). By religion, the proportions officially accepted for political representation are as follows: Christians (54.9%), Muslims and Druzes (44.1%), Jews (0.5%) and other socts (0.5%). Based on the estimated 2,246,000 actual residents in Lebanon, the average population density is about 560 persons per square mile, the highest of any Middle Eastern country. Density varies widely from region to region, with the greatest concentrations in the urban areas along the Mediterranean coast. Lebanon has a larger urbanized population than any other Arab country, with the great majority concentrated in the principal cities of Beirut and Tripoli, Including its suburbs, Beirut’s population exceeded 750,000 in 1966 and Tripoli had a population of about 165,000. Most of the remaining Lebanese live in small villages of from 100 to 160 families. Lebanon has the highest literacy rate of any Arab country—86%. The high degree of literacy, especially among young people, is a result of the rapid growth of educational opportunities. In 1967 Lebanese college stu- dents received degrees at a rate of 101 for every 100,000 citizens, a ratio surpassed by only one Middle East country, Israel. Most of Lebanon's one million employed are literate and have received at least a primary education. The level of productivity in Lebanon is generally higher than in the re- mainder of the Middle East, but attempts to improve productivity are limited basically to on-the-job training. Enrollment in technica! and Lebanon 1-3 Nov 71 25X1 25X1vocational schools remains unusually low, due at least in part to the national distaste for blue collar employment. Unemployment is relatively high but a number of unemployed are primarily seasonal workers, who can return to thoir villages for support when all else fails The average Lebanese is a shrewd businessman. He is well educated, aggressive, and has demonstrated an ability for financial dealing. Coupled with Lebanon's location at the crossroads between the Middle East and the West, these talents have made the Lobanese the most prosperous merchants, traders and financiers in the Arab world, But an economy based largely on international trade and finance is greatly affected by political upheaval, especially in the turbulent Middle East. Lebanon's major task will be that of diversifying its thriving yet unstable economy. Lebanon -4 Nov 71 Approved For Release 2002/06/61 RIB-RDP79-00891A001000030001-9 25X41 25X1Approved For Release 2002/05/16 : CIA-RDP79-00891A001000030001-9 Approved For Release 2002/05/16 : CIA-RDP79-00891A001000030001-9 i28X1 Arrovea roy anease 2G ds anerecosssagowooorsoors II, ECONOMIC BACKGROUND Growth rates and trends Until slowed by a series of political end economic shocks that began in late 1966, Lebanon's economy had achieved a substantial and relatively steady growth since the end of World War II, Despite the Sinai war in 1956 and the civil war in 1958, GDP* grew during 1954-66 at an annual average rate of about 5%. As population was growing at about 2.5% a year, per capita income made a substantial advance. Throughout this period, the balance-of- payments position was strong, foreign currency reserves were growing, and domestic price levels were relatively stable, From late 1966 through 1970, however, Lebanon experienced a series of upheavals: failure in 1966 of the largest Lebanese private bank, Intra Bank, the Arab-Israeli war in 1967, the Israeli raid on Beirut International Airport in December 1968, and clashes between the army and Palestinian commandos along with Israeli raids in 1969 and 1970. All of these events hampered economic activity, slowing real growth since 1967 to somewhat under 3% annually and nearly stagnating per capita income growth. Because of @ particular sensitivity to instability and uncertainty resulting from Lebanon’s role as the main entrepot and financial center of the Arab world, the service sector of the economy (including tourism, trade, and banking) was especially affected, Growth in the major goads-producing sectors of the economy was not adequate to offset the decline in the rate of growth of service activities. This condition highlighted the relatively minor role of industry and agriculture in the total economy, which the government is only gradually rectifying, The goverment has provided incentives to industrial development, and since 1967 industrial output and exports have been increasing very rapidly. The government also is increasing—very slowly— irrigation facilities for agriculture. By mid-1971, some of the problems plaguing the economy had eased, Tourism showed a sizable increase over 1970 rates; early indications sug gested that exports would be up; and bank deposits had risen, indicating some revival in public confidence in Lebanon's financial stability. On the negative side, however, unemployment remained at a relatively high level, and general economic activity was up only slightly. *in Lebanon, GDP does nor differ substantially from GNP. Lebanon Nov 71 Approved For Release 200d06) Felt GIA-RDP79-00891A001000030001-9 25X1Approved For Rel 1001-9 Income distribution Although Lebanon's per capita income of about $500 is one of the higher rates in the Arab world, the average is somewhat misleading, The Christian population is far more prosperous than the Muslims, who are predominantly peasants and whose average annual income probably is less that $75 a year. In addition, little prospect for change is apparent, since the tax system, like government policy in general, is designed to protect the interests of the wealthy, and little is being done to spread the affluence of Beirut to the farming areas of the hinterlands. Main sectors of the economy The economy of Lebanon essentially centers around trade and service activities, which together generate over 60% of GDP. No other one sector generates more than 13% of GDP. Agriculture—Agriculture provides about half the population with at least part of its livelihood and produces more than one third of total exports, but it generates only about 10% of GDP. Poor soil, inadequate rainfall, and predominantly mountainous terrain severely circumscribe agricultural activ- ity. Farming practices vary widely; primitive methods are still in use on the many small farms. Approximately half the cultivated area consists of ter raced slopes, which make the use of mechanization and other modern methods almost impossible. On the larger farms in the plains and valleys, however, the use of modern agricultural equipment has increased greatly during the past decade, and the use of commercial fertilizers, pesticides, and herbicides is growing steadily. About one fifth of the cultivated area (640,000 acres} is irrigated, largely by small privately owned installation Because of traditional inheritance practices of dividing land among all male heirs, many landholdings have become fragmented. This poses serious problems to expanding agricultural output. Most farmers own their own land but many plots are 100 small to provide @ living, much less generate funds adeouate to buy fertilizers and other inputs or to allow the purchase of adjacent, high-priced land. In addition, fragmentation has inhibited private development of irrigation and drainage or mechanization, as some plots are s0 small that even animal-drawn implements are not practical Although some aid hes been extended, government attempts to help the farmer have been largely ineffective. The principal effort has related to some Lebanon We2 Nov 71 Approved For neuer oemoorespoemnrenmernrtosto:3 25X1 25X1land reclamation and expansion of irrigation. Two agricultural credit agen. Cies have been set up to provide low-cost loans. The varied topography, soil, and climate of Lebanon favor a highly diversified agriculture. For the most part, grains and pulses are grown on Aonirrigated land, while fruits and vegetables—Lebanon’s majar export crops~are grown on partly irrigated land, Oil industry—Lebanon has no indigenous supply of crude oil. With oil supplied to its refineries by pipeline from Saudi Arabia and Iraq, however, Lebanon is a net exporter of petroleum products, although imports of some Specialized products are necessary. Lebanon, acting as middleman, re-exports large quantities of imported refined products to neighboring Arab states, The continuing hostilities between the Arabs and Israclis subsequent to the June 1967 war led to the closure of the pipeline trom Saudi Arabia for lengthy periods in 1989 and 1970, thus reducing refinery output total somewhat. Even so, production has increased by 25% from 1965 through 1969, The pipeline companies pay Lebanon approximately US$14 million a Year in transit feos and supply refineries located at each of the two pipeline terminal tank farms. The refinery at Tripoli is owned by the Iraq Petroleum Company. Its capacity is 20,000 barrels per day. The Medrico refinery, near Sidon, is @ joint venture of Mobil and Caltex Oil companies; it has a capacity at 17,500 b.p.d, Manufacturing and construction—During the last decade, Lebanon has become the second most industrialized country in the Arab world, after the UAR, Manufacturing, however, accounts for only 13% of GOP and employs only 8% to 10% of the labor force, Almost all manufactures are consumer goods, primarily for domestic markets. Over half of Lebanon's industrial income stems from the manufacture and processing of agricultural products into food, clothing, leather goods, cigarettes, household furnishings, and beverages. The few large-scale industrial units include electric power plants, Cement factories, two oil refineries, and a fertilizer plant. To stimulate investment in manufacturing, the government has pro- vided tax exemptions for certain industrial concerns, has strengthened Leba- ese chambers of commerce, and has provided limited protection from foreign competition through preferential import licensing and protective teriffs. Low interest loans have also beon made available. Despite these Lebanon U-3 Nov 71 25X1 25X1Approved For Release 2002/05/18 REURADP79-00891A001000030001-9 moves, however, faster growth of manufacturing has been impeded by 2 shortage of long-term capital resulting from Lebanese preferences for invest- ment in trade, building, and other ventures that offer the prospects of a ‘quicker payoff. Industry is highly concentrated both geographically and financially. Most industrial establishments are located in the city of Beirut and its surroundings; some 70% of the industrial labor force is concentrated in this area, About a dozen Lebanese families control most of the larger firms (those with more than 50 employees). Foreign participation in industry is limited principally to petroleum refining and the production of plastics, fertitizor, aluminum and asbestos cement products. Government ownership is confined to utilities, such os the Beirut water and electricity works, the postal, tolephone, and telegraph services, the railroads, the tobacco products monopoly, and a factory for spinning natural silks. The building industry alone normally accounts for approximately 5% of GDP. After reaching a boom level in 1966, however, construction activity declined sharply, in large measure because of political and economic up- heavals. Construction, however, will receive some stimulus in the near future from government spending if planned major new development projects are initiated, Transportation and communications The development of transportation and telecommunication in Lebanon has been determined largely by the location of the country on the central art of the eastern Mediterranean coast and by the mountainous nature of the land, Much of the overseas commerce of Syria, Jordan, and Iraq passes through Lebanon, Beirut, a major port, is the shipping center for foreign ‘commerce and a modern trading post of the Arab world. Two other major ports, Tripoli and Sidon, serve as terminals for the oil pipelines from Iraq and Saudi Arabia, The railroad and highway systems follow similar patterns: each has a coastal route, a parallel route through the Biga valley, and a connecting route extending inland from Beirut. There are three rail and five highway connections with Syria, Highway transport is the principal internat mode in Lebanon and adequately serves present needs. The railroad system is barely adequate for normal requirements and could not carry heavy traffic for sustained periods. Most of the track and equipment is old and badly in need of replacement. Transloading operations are necessary in places because of Lebanon Wea Nov 71 ee ee eee 25X1 25X1Approved For Release 2002/05/18 .¢RADP79-00891A001000030001-9 ‘gauge changes, and snow from December through March frequently blocks the narrow-gauge lines across the mountains, Lebanon has no navigable. inland waterways. Most vessels calling at Lebanese maritime ports are of foreign registry. The nation’s merchant ma rine is composed of Lebaneso-owned and foreign-owned flag-of-convenience vessels engaged in international shipping not related to Lebanese traffic patterns, The international airfield at Beirut is a major interchange point for transworld carriers, and air transport plays an important role in the Lebanese economy, Telecommunication facilities are concentrated in the more densely populated areas and, although of high quality, do not satisfy requirements, The wire telephone system is the most important means of communication but, again, demand exceeds capacity. International radiotelephone connec- tions are adequate for most of the requirements for this service. Government finance and economic policy The Lebanese economy functions largely through the free play of ‘market forces, with only minor and reluctant government intervention. The policy of nonintervention has been pursued so assiduously by a succession of conservative governments that the state participates only minimally in ven- tures ordinarily considered tobe state responsibilities, such as transporta- tion, health, and education. The opportunity for substantial profits in a permissive atmosphere has been highly instrumental in establishing Lebanon as the principal commercial and financial center in the Middle East. Over the fast several years, however, the state has assumed some regulatory powers in such areas as banking and public utilities and has begun to finance infra- structure projects designed to stimulate end influence the direction of private investment, Over the past two decades, Beirut has become one of the world’s major financial centers. A relatively free economy and a free market in foreign exchange led to steady increases in the volume of financial transactions and the size and importance of the banking community. This freedom of opera- tion, however, led to abuses of acceptable banking practices and, ultimately, to a banking crisis with the failure of Lebanon’s largest private bank in ‘October 1966, Subsequently, the government increased its regulatory powers and implemented policies designed to maintain Lebanon's position in world financial markets. Lebanon We5 Nov 71 25X1 25X1Approved For Release 2002/05/16 A@NRADP79-00891A001000030001-9 The failure of Intra Bank and the subsequent collapse in June 1968 of Al Ahli, the second largest Lebanese bank, led to increased influence for Lebanon's foreign banking community. Foreign banks, primarily US (for ‘example, Chase Manhattan, First National City Bank, Bank of America), and European banks {including the London-based Moscow Narodny) have at- tracted a growing proportion of both demand deposits and investment funds, Lebanon's political left has voiced concern over this increasing foreign influence and has forced the adoption of legislation prohibiting the establish ment of additional branches by foreign banks. In 1969-70, the trend toward foreign participation in Lebanese banking has taken the form of partnerships with Lebanese banks, some of whom faced the threat of forced liquidation Under the new banking laws. The Lebanese banking system itself is nominally organized around a central bank—the Banque du Liban, established on 1 April 1964, it is the sole banker for the government but does not have any commercial banking functions, and its central banking powers are severely restricted by legal limitations on its ability to discount commercial paper from the banking sector. Prior to the Intra Bank crisis, tho central bank used its powers sparingly because of considerable opposition from the traditionally uncon- trolled financial community. Monetary policy, accordingly, was very limited. The budgetary process in Lebanon is far from orderly. Actual expendi- tures tend to be much less than budget appropriations, while collections usually exceed estimated revenues. Supplementary appropriations are a fre quent occurrence, and special laws often alter the appropriations originally budgeted. In addition, clear distinctions frequently are not made between current and investment expenditures. Most of the revenue received, however, appears to be spent on current administration, rather than on investment. A significant feature in the government budget estimates has been the growth of the national defense expenditures from 15% of the ordinary budget in 1964 to almost 24% in 1970, reflecting the continuing Arab-Israeli crisis and its pressures on the internal Lebanese security situation, The structure of the tax system is regressive; the primary sources of income are indirect taxes and excise taxes, while vast personal fortunes are untaxed. The Lebanese indirect tax rate can be ranked, on a per capita basis, among the higher rates in the world today. In periods of economic slack, these revenues fall drastically. Customs revenues declined by 18% in 1967 after the Intra Bank crisis and the June war. The government responded by Lebanon H-6 Nov 71 Approved For Relea: 25X1 25X1Approved For Release 2002/05/1 GF QUINT 9-00891A001000030001-9 imposing several new taxes—for example, a temporary surchage on income and property taxes, an increase in inheritance taxes, and a surtax on customs duties. The monetary unit of Lebanon, the Lebanese pound, is backed by gold and foreign exchange and is freely traded, There are no restrictions on current payments or capital transfers. Foreign capital is not subject to any special registration and may be imported and exported free of any fees, taxes, or restrictions. The Lebanese Government on 2 January 1965 adopted @ provisional official parity of LL 3.08 to the US dollar to be used in valuation of foreign assets and as the unit of account for government foreign ‘exchange operations, The free-market rate of the Lebanese pound has fluctuated mildly over the past few years from $1 = LL 3.05 in August of 1965 to $1 = LL 3.24 in January 1971. Little initial change from the January 1971 rate was apparent following the floating of the US dollar in ‘mid-August 1971 Foreign trade The trade sector of the Lebanese economy genorates about 30% of GDP, The lion’s sharo—estimated at over 20% of GDP—is obtained through foreign trade, espocially entrepot and transit trade. Lebanon usually has had a surplus in its balance of payments because of substantial earnings from services and transfers. Dependence on imports, however, has given rise to a continually growing deficit in commodity trade over two decades. Lebanese exports in 1968 were only 27% of imports, and the trade deficit increased from LL 1.1 billion in 1963 to LL 1.35 billion in 1968. The largest part of the deficit is with Western Europe (including the United Kingdom and Sweden) and the United States. Lebanon maintains a favorable trade balance ‘with most Arab countries, which, as a group, took 67% of Lebanese exports in 1968. Lebanon acts as a middleman to facilitate the movement of ‘commodities between Europe, Africa and Asia, Transit trade has increased so rapidly since the closing of the Suez Canal that, in recent years, it has beon ‘almost equal in value to merchandise imports. Lebanon's trade controls are minimal. They are applied largely for revenue purposes and to adjust trade to local needs. Continuous and heavy pressure, however, has been exerted by domestic manufacturing firms for tariff protection, while opposing pressure has ben forthcoming from the politically powerful merchant-importer group. In this delicate situation, the government has moved reluctantly by instituting import duties on items that compete with locally manufactured goods and by lowering or eliminating import duties on raw materials and equipment required by local manu- facturers. Lebanon ue7 Nov 71 several nessa pygppmonmasanlnowes 25X1 25X1