MGLE01: FINANCE MINISTER UPBEAT ABOUT ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 03 BEIRUT 001712

SIPDIS

SIPDIS

STATE PASS USTR
NSC FOR ABRAMS/DORAN/WERNER/SINGH

E.O. 12958: DECL: 05/30/2016
TAGS: EFIN ECON EINV LE
SUBJECT: MGLE01: FINANCE MINISTER UPBEAT ABOUT ECONOMIC
PROGRESS

Classified By: Ambassador Jeffrey Feltman. Reason: Sections 1.4 (b) a
nd (d).


1. (C) Summary. On May 30, Ambassador and Econ/Commercial
Officer met with Finance Minister Azour to discuss the status
of GOL economic reform efforts. Azour was upbeat as a result
of the Lebanese economy's encouraging macroeconomic
indicators and what he described as the positive reception he
received at the World Economic Forum on the Middle East in
Sharm el-Sheikh, Egypt. Citing the successful (and
unexpected) uncapping of the price of gasoline as evidence,
Azour was optimistic that the GOL could push forward further
reforms in the near future, as well as deregulation of the
telecom sector. The GOL is now working closely with
consulting firm Booz Allen to gain public "buy-in" for
further economic reform. Azour would like to continue to
push forward on future reforms concerning health, social
security, and electricity. He told the Ambassador that the
long-awaited 2006 Budget would be released during World Cup
matches next month in order to lessen the public relations
impact of proposed tax increases. Musing that autumn timing
might be best, Azour told the Ambassador that Lebanon still
"needed" a donors' conference. He urged the international
community to continue to stress that Lebanon now has an
opportunity to improve its economic situation and the moment
may not last. End Summary.


POSITIVE WORLD ECONOMIC FORUM MEETINGS
--------------


2. (C) Azour told the Ambassador that he had productive
meetings at the World Economic Forum on the Middle East in
Sharm el-Sheikh, including sessions with Treasury Secretary
Snow, Treasury U/S Adams, the Vice Prime Minister and
Minister of Finance of Russia, the Deputy Minister of Finance
of Japan, and supportive non-Core Group Gulf Finance
Ministers from the United Arab Emirates, Kuwait, Qatar, and
Bahrain. Azour discussed the recent positive macroeconomic
developments in Lebanon with forum participants. Azour
believes that Lebanon's GDP growth will reach five percent
for 2006 if there are no major political or security
problems, such as additional fighting in the South. Public
finances are also in good shape, according to Azour. When
the Ambassador asked Azour if the Liban Cell compensation
case had hurt the GOL's financial situation, Azour said that
the major damage had been done to Lebanon's image, and there
wasn't a significant financial impact on the GOL.

POSITIVE GOL DECISION TO
UNCAP PRICE OF GASOLINE
--------------


3. (C) After the Ambassador complimented Azour on the recent
GOL decision to uncap the price of gasoline -- a major reform
that passed the cabinet unexpectedly, and without controversy
-- Azour said uncapping the price allowed the GOL to avoid
the need for petroleum subsidies. Azour explained that in
the event that the international oil price would fall
substantially (below 21,400 Lebanese pounds or USD 14.27 for
a 20-liter container),the price would stabilize at more or
less the current level and the GOL would get additional
excise tax revenue. According to Azour, low income Lebanese
will not be disproportionately hurt by the increased gas
prices, as only 12 percent of low-income residents have cars.
The increased costs for the poor would primarily be from the
increased transport cost of goods. Azour said the GOL was
looking at ways to compensate for the increased fuel costs
for truck drivers. He added the GOL was also looking at ways
to improve public transfers or even provide direct transfers
to the most affected members of the population. He told the
Ambassador that the GOL may have learned a valuable lesson
from the freeing of gasoline prices in that potentially
difficult measures should not be publicized before
implemented.

AZOUR OPTIMISTIC ABOUT
TELECOM DEREGULATION
--------------


4. (C) Azour told the Ambassador he was optimistic about
the possibilities of deregulation in the telecom sector. He
said Requests for Proposal (RFPs) had already been sent to

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investment banks for licenses and the corporatization of the
fixed lines. When the Ambassador asked if the GOL needed a
functioning Telecommunications Regulatory Authority (TRA) to
begin deregulation, Azour assured the Ambassador that
deregulation could begin before a TRA board is in place.
(Note: We are following up with the Ministry of
Telecommunications for details on the telecom deregulation
plans. End note.)

GOL WORKING ON NEW
MARKETING STRATEGY
--------------


5. (C) Azour said the GOL is now working closely with the
consulting firm Booz Allen on a marketing strategy for the
economic reform agenda in order to gain public "buy-in."
Azour acknowledged that GOL tactical mistakes in marketing
the reform agenda may have been made during periods of
political deadlock and others had moved to take advantage of
these slips. He stated that some of the leaders of the
majority may have given in too easily to public pressures
that threatened to change the government. He said the GOL
was committed to changing the dynamic of the economic reform
debate and raising the expectations of the public on the need
for reform. When the Ambassador asked Azour if he has strong
allies for reform in the GOL, Azour said that he and Economy
and Trade Minister Haddad had started discussing the reform
agenda with key leaders in the governing majority, including
a recent meeting with Druse leader MP Jumblatt. While Azour
and Haddad knew that they had to reach out to opposition
figures like Michel Aoun as well as trade unions and business
organizations, they only belatedly recognized the need to
explain their plans more carefully to their own allies.

BUDGET TO BE RELEASED
DURING WORLD CUP
--------------


6. (C) Azour said that he would like to keep up the
pressure on the GOL to address health, social security, and
electricity issues in the near future. He promised the
Ambassador that he would give the Embassy a list of what
reforms the GOL had achieved during the last year. When the
Ambassador asked Azour about the 2006 budget, Azour said that
he was planning on releasing the budget during the World Cup
matches next month in order to minimize attention to the tax
increases that he has planned. According to an impact
assessment by the Ministry of Finance, the two percent
proposed Value Added Tax (VAT) increase would cost roughly
USD eight per month for a family with a monthly income of USD
1000; he said this expense would be made up through further
social safety net compensations. Azour said that 90 percent
of the tax revenues from the two percent proposed increase in
the tax on interest would come from just 2,000 bank accounts.
According to Azour, GOL efforts would also reduce several
indirect taxes, as well as streamline tax management and
administration.

CONSENSUS DIFFICULT,
BROAD-BASED "BUY-IN" ACHIEVABLE
--------------


7. (C) Azour stated that the GOL would never achieve
consensus on any economic reform and that the GOL was now
working on receiving broad-based "buy-in" from political and
social groups. When the Ambassador asked if the GOL needed a
Shia "buy-in" in order to move forward with reform, Azour
said that many of the recent demonstrators were not aware of
the issues involved in the economic debate and that the
positions of Hizballah and Amal often shift when public
sentiment shifts.

LEBANON NEEDS A CONFERENCE
--------------


8. (C) Azour, in response to the Ambassador's question,
said that the GOL needed a Beirut donors' conference. Azour
added that he did not see a possibility of having the
conference before September. Azour told the Ambassador that
he and his colleagues in the international community should
continue to stress that: (1) Lebanon now has an opportunity
to improve its economic situation and the moment may not
last, and (2) the current reform document is a minimum of

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what Lebanon will present in terms of credible reform
measures.
FELTMAN