MGLE01: FORMER FINANCE MINISTER ON LEBANON'S

C O N F I D E N T I A L BEIRUT 001716

SIPDIS

SIPDIS

NSC FOR ABRAMS/WERENER/DORAN/SINGH

E.O. 12958: DECL: 05/31/2016
TAGS: ECON EFIN SOCI PGOV LE
SUBJECT: MGLE01: FORMER FINANCE MINISTER ON LEBANON'S
DEBT, POLITICAL CREDIBILITY


Classified By: Ambassador Jeffrey Feltman. Reason: Sction 1.4 (b).

SUMMARY
--------------


1. (C) Damianos Kattar, Lebanese Finance Minister during
the government of Najib Mikati in 2005, believes that the
present government must restore crebibility before it can
advance economic reform. He estimates that at least USD 15
billion of Lebanon's USD 38 billion national debt derives
from insider financial manipulation, Syrian theft, and
wasteful or fraudulent contracts. Until the mass of Lebanese
people, who had little to do with the accumulation of this
debt, receive an explanation, they will not support reform.
Kattar advocates a forensic audit of Lebanon's expenditures
going back to 1990. Such an audit is necessary to restore
government credibility in a country where people are in fact
ready to pay reasonable prices for reasonable services. On
the strictly political side, Kattar said that no Lebanese
government, including the present Hariri majority, can force
its will on the rest of the country. Everything in Lebanon
has to work by consensus, because so many interests, no
matter how small, can use the country's unusual institutions
to block whatever the majority might want to do. End
Summary.

WHERE DID THE MONEY GO?
--------------


2. (C) On May 25 Charge and Econstaff met with Damianos
Kattar, who served to reasonably good reviews as Finance
Minister in the 88-day government of Prime Minister Najib
Mikti during the first half of 2005. Kattar, in his
mid-forties, is now a consultant to a group of investment
bankers and divides his time among Geneva, Beirut, and Dubai.


3. (C) Charge asked Kattar if anyone knows how Lebanon
accumulated its national debt of USD 38-40 billion. Kattar
replied that this is an interesting question that he has been
looking into. Charge commented that the Government's
recently announced economic reform plan calls for an audit of
government expenditures back to 1990. Kattar said that is
not really the issue: what is needed is a "forensic" audit.
Any audit can simply verify that the government contracted a
service, received a bill, and paid it. The necessary
"forensic audit," by contrast, would analyze government
expenditures in the context of whether the government
received fair value for the contracts and expenses that it
incurred and eventually paid for.


4. (C) The gap, between what the government has spent and
what it should have received (or to the same effect, what the
government should not have spent in the first place),
amounts, in Kattar's conservative estimate, to about USD 15
billion of Lebanon's USD 38-40 billion debt.


5. (C) The biggest element of the gap derives, Kattar said,
from the government having paid to wealthy insiders
above-market interest rates on assets held in Lebanese lira.
The beneficiaries of these arrangements could collect the
inflated interest rates on Lebanese paper and deposits while
knowing (as insiders) that the government would not be
devaluing the Lebanese lira against the dollar for some
future period. As the government acted, principally in the
mid-1990's, to maintain the value of its currency against the
dollar but without declaring its policy as such,
well-connected figures in the government, and those attached
to them, reaped fortunes. Kattar said that four studies he
has seen on this issue estimate losses to the government
Qcm66. (C) Kattar assumed the most conservative figure of USD 6
billion for losses attributed to above-market interest rate
payments. He accounted for the balance of the approximately
USD 15 billion gap in unwarranted debt accumulation as
follows:

-- USD 2 billion, from the period after the 2002 Paris II
Donors' Conference. Commercial banks had given the GOL USD
3.7 billion in interest-free loans for a two year term as
their contribution to help the GOL in following up Paris II.
When the two year term expired, the Central Bank of Lebanon
swapped these bonds for new bonds carrying a ten percent
interest rate, when market rates were lower. Kattar said
this cost the Treasury an additional USD 2 billion.


-- USD 4 billion, in excess expenditures in southern
Lebanon, to redress political tensions, the effects of
Israeli occupation, and economic deprivation.

-- USD 1 billion, from unpaid taxes on Syrian workers'
earnings in Lebanon.

-- USD 3 billion, comprising Syrian-extracted revenues form
the telecom sector, ports, and airports during the
occupation.

Beyond these sums, which Kattar acknowledged were only rough
estimates, Kattar reminded us how the GOL has a long record
of contracting for services and purchases in corrupt and
non-transparent fashions. The extent of these losses, and
their impact on debt accumulation, can only be guessed at.
(Note: We offer as an example a report from the head of an
engineering firm which now has the municipal contract to
clean Beirut's sewer and underground culverts. He told us
that he won the contract with a bid 60 percent below that of
the company that had the contract for the previous five
years, and he is still making a 40 percent profit margin.
End note.)

NEED FOR CREDIBILITY
--------------


7. (C) Kattar said that, endless stories of corruption and
kickbacks aside, what the government must do, if it wants to
win support for economic reform, is establish credibility.
The masses of Lebanese people are aware of the country's
staggering debt, and many resent that they themselves gained
no benefits during the accumulation of the debt. Now,they
are being asked to tighten their belts to a redress a
situation that they see of other peple's making. Still,
Kattar said, people in the street are willing to pay higher
VAT taxes, and even high telecom charges, if they believe
that there is a reasonable relationship between what they are
being asked to pay and what they are getting. Kattar argued
that at this point, the government needs to talk forthrightly
about its accumulated debt if people are going to accept
measures to reduce the deficit. The government's case, he
said, will be all the tougher because the government includes
senior figures (notably PM Siniora and Central Bank Governor
Riad Salame) who had senior financial responsibilities while
the greater part of the debt was being run up. kattar had
complimentary words for current Finance Minister Jihad
Aziour, whom he said was the first Maronite minister not to
start off in office by criticizing his predecessor.
(Comment: At least not publicly. Privately, he should us
how Kattar, upon ending his tenure, had carefully re-arranged
the brass plate names of all Ministers of Finance, so that
Kattar's name would rest at the top of a column rather than
be near the floor. End comment.) He said that Azour has
done an excellent job in modernizing the Finance Ministry,
but may not have the salesmanship skills to market the reform
program.


8. (C) Kattar had some other ideas on moving the fiancial
situation forward. He suggested going back to the Arab
League which had pledged but never paid USD 2 billion at the
time of the 1089 Taif Accord. At the Fireidns of Lebanon
Conference in Washington, he said, there were pledges of
about USD 3 billion. Privatization of state enterprises will
bring in cash. He advocated setting up a Lebanese diaspora
fund called "Lebanon Hope" in which shares would be sold for
modest amounts. Finally, he said, the Lebanese Armed Force's
brass-heavy retired officer corpsm, with its generous
benefits, is a serious burden on the country's finances. In
the years to come, the military should cut well back on the
numbers of its officers in order to save heavy future pension
burdens. The money saved on the officer corps, he said,
should be put to use in training Lebanese teachers and
judges.

POLITICAL CONSENSUS
--------------


9. (C) Kattar said that outsiders should look at the
Lebanese political system as operating only by consensus, and
not by majority rule regardless of how the party affiliations
in Parliament may add up. He characterized the Sunnis and
the Shia as the two indispensable engines on either wing of
an airplane with, in theory, the Christians as the pilot and
Druse as the co-pilot. During the Syrian occupation, the
Alawites had acted as the pilot. But now that the Syrians

have left, there really is no pilot, given the compromised
status of Emile Lahoud. Among other issues, Lebanon needs to
regain its political footing by finding a Chritian president
who is endorsed by the Maronite Church, and accepted by all
communities. He said an old proverb is especially apt right
now: "Lebanon without Christians has no meaning, and Lebanon
without Muslims has no future."


10. (C) Kattar then argued that the "airplane" cannot fly
well with just one engine; both Sunni and Shia cooperation
are needed for the country to move forward. Accordingly, no
Parliamentary majority should think that it can impose its
will, through numbers, on those outside the majority. The
reason, he said, is that Lebanon's political institutions are
of such a nature that even modest minorities can block
effectively the actions that a large majority may wish to
take.

COMMENT
--------------


11. (C) Former PM Najib Mikati told us that he had made two
mistakes in setting up his short-lived "cabinet of
technocrats," which was largely well-regarded and oversaw an
important transition during a turbulent period. The two
mistakes: Minister of Labor Trad Hamadeh (who still occupies
that position, thanks to his fealty to Hizballah),and
Minister of Finance Kattar. Kattar, Mikati said, was smart,
but also lazy and vain, more interested in hearing himself
speak than in getting anything done. But often what Kattar
had to say was worth listening to, and we find him more
useful as an analyst who is no longer responsible for making
the Ministry work. Kattar may be right in that Lebanon must
now operate by consensus rather than majority/minority rule
-- that is certainly how the system works in practice
(despite the clear constitutional provisions for majority and
super-majority voting on many issues). But, in the long run,
a better system would be one based on multi-confessional
parties in which all sects have reasonable representation,
where a majority vote would not allow one confessional group
to claim discrimination, as is currently the case.
FELTMAN