LEBANON: HADDAD AND AZOUR URGE DUAL

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 002947

SIPDIS

SIPDIS

STATE NEA/ELA FOR ABERCROMBIE-WINSTANLEY/WILLIAMS/DONICK
NSC FOR ABRAMS/DORAN/MARCHESE/HARDING

E.O. 12958: DECL: 09/12/2016
TAGS: PREL EFIN EAID LE
SUBJECT: LEBANON: HADDAD AND AZOUR URGE DUAL
RECONSTRUCTION-REFORM FOCUS

Classified By: Jeffrey D. Feltman, Ambassador. Reason 1.4 (b) and (d).

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


1. (C) Ambassador and poloff met separately on September 11
with Lebanese Economy and Trade Minister Sami Haddad and
Finance Minister Jihad Azour to discuss the recent conflict's
impact on the Lebanese economic and financial situation.
Both expressed some frustration at the lack of clarity of the
GOL reconstruction effort. Jihad and Azour want to take a
global approach to Lebanon's issues, not just focusing on the
immediate reconstruction but also on a more general agenda of
economic reforms. END SUMMARY.

HADDAD ON RECONSTRUCTION: "ZERO COORDINATION"
--------------


2. (C) Haddad is obviously deeply frustrated by the lack of
coordination of the reconstruction effort, not just between
the GOL and the donor community but within the GOL itself.
Haddad complained that Prime Minister Siniora has formed a
"kitchen cabinet" of key advisers -- he mentioned the
ubiquitous Mohammad Chattah and Rola Noureddine, as well as
reconstruction gurus Ghassan Taher-Fadlallah and Nabil Jisr
-- whom he entrusts with greater responsibilities than his
actual Cabinet ministers. When the Ambassador asked Haddad
to explain the different reconstruction responsibilities of
Taher-Fadlallah and Jisr, Haddad just shrugged his shoulders
despairingly, later noting that the GOL reconstruction
coordination has been "miserable."


3. (C) Clearly bitter that he has been sidelined in the
reconstruction effort, Haddad said that he had proposed
himself to conduct the assessment on damages to housing, but
that Siniora had announced instead that this would go through
the notoriously corrupt, Walid Jumblatt-aligned Fund for the
Displaced and Nabih Berri-controlled Fund for the South.
Haddad claimed that he, Azour, and Minister for Social
Affairs Nayla Mouawad are trying to find a role for the GOL's
Hay'at al-Eskan (Housing Authority),with as yet no interest
shown from Siniora's office. (Comment: Based on our own
conversations with Siniora, we believe that he is trying to
find a role for the old Funds but without putting any donor
or additional GOL resources into them. End comment.)


4. (C) Haddad believes that the initial GOL estimate for
the cost of rebuilding private homes -- $843 million in the
South alone -- is slightly inflated, and that the total cost
to the GOL for repairs to both housing and infrastructure
throughout Lebanon lies between $2 billion to $2.3 billion.
Haddad does not think the GOL will need to intervene to
support the private sector at all as business will
resuscitate itself. However, he expects insurance premiums
to rise considerably following the conflict, and hopes to
find a way to defray some of the costs to businesses.


5. (C) Haddad noted that the Saudi, Kuwaiti, Qatari, and
Emirati finance ministers were in Beirut for meetings last
weekend, and that the Saudis have simply written a blank
check of $500 million and deposited this in the Central Bank
for the GOL to use as it pleases for reconstruction. The
other countries have -- perhaps wisely -- retained control
over their sizable donations.


6. (C) Azour agreed with Haddad's assessment that there is
little clarity as to the different roles of the key players
in the GOL reconstruction effort, though he is very firm that
all coordination of the donors' finances has to go through
his ministry. Azour also agreed with the Ambassador's
suggestion that Siniora convene a donor's coordination
meeting, though he is hesitant to get too many donors
involved, leading to added confusion. Azour's main concern
is "to make sure that what is promised is delivered and that
what is promised is what we need." For instance, he said he
had not been happy to learn that during the conflict 40
percent of the donations through the UN's flash fund for
Lebanon went towards the repatriation of Third Country
Nationals.

BEIRUT 00002947 002 OF 002



CORE GROUP SHOULD PUSH REFORMS
--------------


7. (C) Haddad remarked that prior to the conflict he and
Azour had presented a paper on needed reforms -- such as
privatizing telecom and Middle East Airlines and increasing
the gasoline tax -- which was rejected out of hand by the
Lebanese Parliament. Scarred by the incident, Haddad implied
that Saad Hariri and Walid Jumblatt had not provided him and
Azour enough support to get the reforms through. In
specific, Haddad said he confronted Telecom Minister (and
Jumblatt ally) Marwan Hamadeh on the privatization issue
during a Cabinet meeting. "Why has Hamadeh not moved on
this?" wondered Haddad, "It's an obvious win-win-win-win
situation. Even Syria, Iran, and Egypt have privatized their
phone networks."


8. (C) Haddad believes that, following the conflict, the
GOL could be ready to privatize telecom by the beginning of
2007, and suggests there should be a cap on the percentage of
shares belonging to any one entity. Asking for USG pressure
on Hariri and Jumblatt to support this reform, Haddad
suggested the Core Group meeting on 9/18 in Singapore should
not only focus on reconstruction, but also on getting the
Lebanese to "move our ass" on reforms. Haddad suggests that
the Beirut I conference -- proposed for mid to late November
-- also focus on both reconstruction and reform. Haddad also
believes that it is time for Lebanon to work with the IMF on
conditioning financial support on reforms (Lebanon has not
received previous IMF support).


9. (C) Azour also hopes to discuss reform objectives -- or
what he dubs "macroeconomic evolution" -- at the Singapore
meeting, and agrees with Haddad that Beirut I needs to have a
"global approach" and not simply focus on reconstruction. He
noted that he has asked for an IMF mission to come to Lebanon
following the Singapore meetings to discuss the post-war
reform agenda. He specifically suggested a gradualized
privatization program, a 2 percent increase in the VAT tax,
and a plan to reduce Lebanon's astronomical GDP to debt
ratio.


10. (C) In the immediate term, Azour believes the key is to
rebuild confidence in the Lebanese economy within the
financial markets and the business community. He claims that
foreign reserves did not suffer as greatly during the recent
crisis as they did following the Hariri assassination,
primarily because of a Saudi/Kuwaiti infusion of $1.5 billion
into the Central Bank last month. The loss in GDP is
estimated at about 7-8 percent however; whereas expectations
before the war were for growth of 6 percent for the year, the
prediction in now at negative 1 or 2 percent. Azour says he
also delayed debt payments by 20 days to avoid raising
interest rates or drawing on Central Bank money, but that he
plans to bring debt service payments back to their normal
timetable soon.
FELTMAN