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