Grace Kassab  /  AP
In this photo taken Jan. 18, 2011, couples dance tango in an art lounge in Beirut, Lebanon. The political crisis in Lebanon is threatening to derail economic progress after a year that saw 7 percent economic growth, a record number of tourists and bank deposits among the highest in the Middle East. (AP Photo/Grace Kassab)
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updated 1/22/2011 11:00:49 AM ET 2011-01-22T16:00:49

The political crisis in Lebanon is threatening to derail economic progress after a year that saw 7 percent economic growth, a record number of tourists and bank deposits among the highest in the Middle East.

Lebanon's Western-backed government collapsed Jan. 12 after Hezbollah and its allies resigned from the Cabinet in a dispute over a U.N. court investigating the 2005 assassination of former Lebanese Prime Minister Rafik Hariri.

The court, which is widely expected to accuse the Shiite militant group, filed a sealed draft indictment Monday, touching off a process many fear could ignite new bloodshed nearly six years after the massive truck bombing along Beirut's waterfront that killed Hariri.

"This is a very deep and troubling crisis in Lebanon," said Lebanese economic analyst Kamel Wazni. "The continuation of this crisis with the absence of any political resolution any time soon will have its implications in terms of growth and in terms of development."

Still, Lebanon is accustomed to managing in crises. Street protests and violence have been the scourge of this tiny Arab country of 4 million people for years, including a devastating 1975-1990 civil war and sectarian battles between Sunnis and Shiites in 2008.

In the days after the government collapsed, many Lebanese carried on as normal, packing the city's restaurants and nightclubs. But as the crisis drags on, the streets are growing quieter; in recent days streets normally clogged with traffic have been free of cars.

Cesar Touma, 38, says his pub in the Hamra neighborhood was doing well until the government collapsed.

"The day the Cabinet resigned, one client came in," Touma said, standing outside his pub and smoking a Cuban cigar.

One of the negative signs came on Tuesday when Standard & Poor's Corp. lowered Lebanon's sovereign outlook to stable from positive over the country's political uncertainty.

On Saturday, right-wing Christian leader Samir Geagea, a strong ally of caretaker Prime Minister Saad Hariri, warned that a government formed by a pro-Hezbollah prime minister that doesn't include Hariri supporters would be catastrophic for Lebanon.

"Can anyone imagine what will happen to the Lebanese pound?" he asked.

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Geagea said Lebanon, like the Gaza Strip after it was taken over by the militant Palestinian Hamas group in 2007, would be isolated and ostracized by the international community and Arab world, with the exception of Syria.

Hariri, the son of the slain statesman, has refused to give in to Hezbollah's demands to break cooperation with the Netherlands-based tribunal investigating his father's assassination. Efforts by outside regional powers to mediate a resolution and bring the sides back into a unity government have failed.

Despite the uncertainty on the political scene, Lebanon's free market economy has always been a strong asset. Decades-old banking secrecy laws turned this tiny country into the region's Switzerland, attracting clients from around the Arab world who prized the anonymity its banks afforded.

Central Bank governor Riad Salameh said this month that bank deposits increased 10 percent in 2010 to reach $110 billion or about three times the country's gross domestic product.

Salameh said this week during the monthly meeting of the Association of Banks in Lebanon that the central bank's foreign currency reserve — about $31 billion, or nearly 90 percent of Lebanon's GDP, will help keep the Lebanese pound stable.

The bank has pumped hundreds of millions of dollars in the past weeks to protect the pound.

"The economic conditions will deteriorate if this period extends," said Finance Minister Raya al-Hassan. "Our conditions are still good at this time because of the huge (foreign currency) reserves at the Central Bank."

Two of the main sources of foreign currency are tourists and remittance from tens of thousands of Lebanese working abroad, mainly in oil-rich Persian Gulf states.

The World Bank estimated in November that for 2010 there would be about $8.2 billion worth of remittances coming into Lebanon. A record number of more than 2.1 million tourists visited Lebanon last year, a 17 percent increase from 2009.

Tourism generates up to $7 billion a year, according to the Minister of Tourism.

Since 2006, Lebanon has been able to bring its debt-to-GDP ratio from 180 percent to about 130 percent.

Touma, the Lebanese pub owner, returned home last year to start a business after working in the food and beverage sector in the Persian Gulf state of Qatar.

"I came back because I believe in Lebanon," he said.

But, he added, the country always manages to surprise him: "Working here is like walking in a minefield."

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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