LEBANON: PARIS III AND ECONOMIC REFORM PLANNING

C O N F I D E N T I A L SECTION 01 OF 03 BEIRUT 003726

SIPDIS

SIPDIS

NSC FOR ABRAMS/DORAN/MARCHESE/HARDING

E.O. 12958: DECL: 11/28/2016
TAGS: ECON EFIN PREL PGOV LE
SUBJECT: LEBANON: PARIS III AND ECONOMIC REFORM PLANNING
CONTINUE


Classified By: Ambassador Jeffrey D. Feltman for reasons 1.4 (b) and (d
).

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


1. (C) A team at the Ministry of Finance is actively planning
the GOL strategy for Paris III, designing an economic reform
framework amidst a hostile political environment, and seeking
to transform their plan into a sustainable economic policy
structure. The reform plan should be final in early
December. Lebanon's greatest needs are debt relief and
long-term technical assistance programs. The team identified
niche areas where increased U.S. assistance would be most
helpful. Finance Minister Azour wants to have the IMF
involved in the reform process. End Summary.

A STRATEGY AND A VISION
AMIDST POLITICAL DETERIORATION
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2. (C) Finance Minister Azour, in a November 21 meeting that
was cut short by news of the assassination of Industry
Minister and MP Pierre Gemayel, told the Ambassador, DCM and
emboffs that planning for the Paris III donor conference
continues, both in Paris and in Beirut. It includes
political consultations with Lebanese opposition figures.
The most helpful message the United States could disseminate,
Azour told us, is that the USG believes that the donor
conference will move ahead. The documents provided by the
GOL to French coordinator for Paris III Jean-Pierre Mr.
Jouyet detailed an updated GOL five-year fiscal reform
program. (Note: Our Ministry of Finance interlocutors
provided us a copy of the 35-page program of statistics and
measures was was given to Jouyet. The plan has a five-year
perspective. Azour said that PM Siniora has already seen it,
and it will be circulated to Cabinet members for their
comment. End Note.)


3. (C) The program was written by an interagency team from
the Ministry of Finance, Ministry of Economy and Trade, the
Central Bank, the Council for Development and Reconstruction,
and the Prime Minister's Office. Political problems have
focused attention elsewhere, but the MOF is progressing with
its reform program, taking internal comments, exchanging
notes with donors, and consulting regularly with the
international financial institutions, and with the finance
ministers of the Gulf Arab states. The Cabinet has reviewed
the program once since the July-August war. It is an updated
version of the reform program presented in late March of this
year.


4. (C) Azour is seeking a major turnaround, from crisis to
high growth, through phased aid with immediate impact and
donor supervision of reforms, including by the IMF. The
program calls for reducing debt to a sustainable level over
five years but does not explicitly detail how that would be
achieved. Improved tax collection and tax increases would
build revenues over the same period, as would increased bill
collection for utilities. The plan would also stem
expenditures via a civil service hiring freeze, production
efficiency in the heavily subsidized power sector, and the
closure of the Fund for the Displaced and the Council for the
South which together spend USD 350 per year. The plan also
details public finance and financial sector laws pending in
Parliament, privatization plans for the telecom and power
sectors, and reform of the pension system. It projects
increased efficiency in expenditures to improve the quality
of GOL social services.


5. (C) Azour is rushing to translate his program into policy
before a change in government. He hopes to turn the program
into a vision and strategy for the future, through a policy
document approved by the Cabinet with reform tools embedded
in various ministries and sectors. This would translate into
an economic policy able to transcend changes in government,
and reforms less dependent upon political will to proceed.
In addition to the overall economic plan presented to Jouyet
in mid-November, a sectoral plan will be ready in early
December. The sectoral plan will be the basis for a seminar
with the relevant ministries and outside experts. Like the
overall plan, these sectoral plans will go to the Cabinet for
approval and become policy. A special social agenda, a
supporting program of governance laws to improve the

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efficiency of government services, and a ten-year growth and
economic vision statement will go through the same cabinet
approval process.

TOP REQUESTS FOR PARIS III:
DEBT RELIEF AND TECHNICAL ASSISTANCE
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6. (C) At a second meeting on November 24 the Finance
Ministry team working on Paris III, including World Bank
detailee Bassam Ramadan and the six-person UNDP Economic Unit
led by Rola Rizk, clarified their primary goal for the
conference to the DCM and econoffs. The objective is to
reduce the debt-to-GDP ratio within 5 years to a point where
it remains on a overall downward trend even if in some years
the budget surplus is small or negative. The document they
provided to Jouyet predicts a drop in the debt-to-GDP ration
from 181 percent to 144 percent in 5 years, and officials
indicated that even this will require grants and low interest
rate loans.


7. (C) The second goal is targeted, medium-term technical
assistance programs aimed at maintaining momentum for
economic reform, as well as IFI and donor involvement, which
will transcend likely changes in government. Ramadan passed
econoffs a proposal for a Technical Assistance Trust Fund for
Capacity Development with 17 priority areas where medium-term
technical assistance programs at the relevant ministries
would support continuous progress toward stronger programs
and more efficient and effective GOL services. The areas
prioritized for technical assistance include:

--Public financial management
--Government effectiveness
--Public procurement
--Donor coordination
--Banking
--Private sector development
--Trade facilitation
--Agriculture and irrigation
--Housing
--Water and sanitation
--Environment
--Education
--Gender
--Health
--Labor
--Pensions and health insurance
--Creation of a social safety net

FUND INVOLVEMENT
AND CONDITIONALITY
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8. (C) Our MOF interlocutors said Paris III will take place
with the active involvement of the International Monetary
Fund (IMF). Long-term technical assistance programs from the
IMF are ongoing in Lebanon. A formal IMF program is still a
possibility, according to MOF officials, but would require a
request from the GOL, strong international assistance, and a
phased structure to ensure reforms are implemented. Azour is
now trying to obtain guarantees from the IMF that if asked
for a program the IMF would say yes, before he brings a
proposal for a program to the cabinet. He also wishes to
reassure the IMF that the GOL will have plans prepared ahead
of making that request. Nevertheless, it is unclear if in
the end Azour will decide to request a program at all.


9. (C) Any conditionality at Paris III must be realistic.
The GOL will be able to point to some progress, including the
passage of bills currently before parliament, before it
closes its session in late December. The timing for telecom
license sales will not be right until the market value rises
from its low just after the war, but the GOL will be able to
point to key steps made in the preparation process. World
Bank technical assistance programs are ongoing in debt
management and pension reform, and IMF assistance programs
continue on tax and expenditure reform.

PRIORITY AREAS FOR U.S. ASSISTANCE
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10. (C) Debt service is the largest part of government
expenditures, about 38 percent, and reducing the debt to GDP

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burden is a critical need identified by the IMF. Aside from
direct cash contributions there is little U.S. aid available
that can reduce government expenses, and some items, such as
defense equipment that will require maintenance, can actually
increase required spending.


11. (C) Salaries and subsidies to civil servants and the
military are the second largest expenditure at about 28
percent. The military pension system averages about 115
percent of salary, among the highest in the world. The GOL
spends a lot of money supporting private services through
subsidies to the military and civil servants. Such subsidies
can be used at private schools and hospitals, indicating that
improving public services could decrease GOL spending.
Providing technical expertise to establish a social safety
net would help the GOL save money over the long run. A
two-to-three year program of technical assistance on health
care finance might be particularly useful. Technical
assistance to help reduce government spending on special
subsidies to the military would further cut costs. Creation
of a social safety net would make possible the reduction and
reallocation of civil service personnel.


12. (C) Treasury transfers to the Lebanese electric utility
EDL and other entities make up another 20 percent of
expenditures. Technical assistance that would improve EDL
efficiency would reduce this cost.


13. (C) Miscellaneous expenditures make up 9 percent, and
technical expertise to improve the transparency and
efficiency of GOL spending would help. Capital expenditures
make up just 5 percent. MOF officils said that if fonors
would waive the requirement for a local partner, take on 100
percent rather than the customary 80 percent of the costs,
and pay for items such as expropriation of land, such steps
could reduce the GOL's capital expenditures.

COMMENT
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14. (C) The UNDP technical assistance program, which pays the
salaries of key advisors to several ministries, seems to be
responsible for most reform progress to date, as well as
drafting the current economic program. By enabling the
ministries to hire on contract and at competitive salaries
qualified and motivated professional advisors who cannot be
fired and replaced at will, the UNDP technical assistance
program has created an effective group with the influence to
push for reform despite any change in government. Given the
success of this program, additional investments in medium- or
long-term technical assistance programs seem an excellent way
to support economic reform. End Comment.
FELTMAN